Albemarle (ALB) Q2 2020 Earnings Call Transcript

Albemarle (ALB -2.26%)
Q2 2020 Earnings Call
Aug 06, 2020, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Q2 2020 Albemarle Corporation earnings conference call. [Operator instructions] I would now like to hand the conference to your speaker today, Meredith Bandy, VP of investor relations and suitability. Please go ahead, ma'am.

Meredith Bandy -- Vice President of Investor Relations and Suitability

All right. Thank you, Joelle, and thanks everyone. And welcome to Albemarle's second-quarter 2020 earnings conference call. Our earnings were released after the close yesterday and you will find our press release, presentation and non-GAAP reconciliations posted to our website under the Investor section at www.albemarle.com.

Joining me on the call today are Kent Masters, chief executive officer; and Scott Tozier, chief financial officer. Raphael Crawford, president, catalysts; Netha Johnson, president bromine specialties; and Eric Norris, president, lithium, are also available for Q&A. As a reminder, some of the statements made during this conference call including our outlooks, expected company performance, expected impacted impacts of the COVID-19 pandemic and proposed expansion parents -- plans may constitute forward-looking statements within the meaning of federal securities laws. Note that the cautionary language about forward-looking statements is contained in our press release and that same language applies to this call.

Please also note that some of our comments today refer to financial measures that are not prepared in accordance with GAAP. A reconciliation of these measures to GAAP financial measures can be found in our earnings release and the appendix of our presentation, both of which are on our website. With that, I will turn it over to Kent.

Kent Masters -- Chief Executive Officer

Thank you Meredith, and good morning everybody. On today's call I will cover a high level overview of the current environment, give an update on our strategy and highlight some of the actions we are taking to improve the sustainability of our business. Scott will then review second-quarter financials, provide updates on our balance sheet and cost saving initiatives, and review our outlook. I want to reaffirm that the safety and welfare of our people is our highest priority at Albemarle.

Our core values are always define how we operate but even more so in the difficult situations we face today. During the pandemic, we have been able to continue to operate, because we care about the welfare of each other. We humbly acknowledge that this crisis is not about us but about everyone and we show integrity by doing the right thing. Thankfully the pandemic has not materially impacted our operations to-date.

I deeply appreciate the courage and continued support of the frontline essential workers in our communities and our dedicated Albemarle employees, who continue to ensure safe operations at our facilities and offices worldwide. At this point in time, we have had relatively few diagnosed individuals out of more than 5,600 global employees, using our exposure protocol we have traced the contact path for any confirmed case among employees and have isolated colleagues as needed. We are staying in close contact with impacted employees to monitor their welfare. We are grateful that previously diagnosed employees have recovered or are recovering as expected.

In areas where we are seeing unfavorable trends, such as Chile and parts of the U.S., we are extending work-from-home requirements for non-essential workers and working closely with our manufacturing sites to ensure safe operations can continue. At many of our locations non-essential employees have returned to work. We continue to be in close contact with site teams to support them and health -- in a healthy and safe return process. Our global cross functional COVID response team continues to meet weekly to mitigate the impact to our operations and manage the impacts to customer demand.

Turning to recent results. Yesterday we released second-quarter financials including net income of $86 million or $0.80 per share and adjusted EBITDA of $185 million, down 29% from prior year. However, I am pleased to say that these results were at the high end of our previous outlook. Thanks to better than expected performance in lithium and in bromine.

Our primary capital priorities continue to be paying dividends to shareholders, preserving our investment grade credit rating and maintaining our long-term growth profile. To that end, during the quarter we announced a dividend of $0.385 per share in line with the prior quarter and up 5% from last year. We continue to maintain adequate financial flexibility with liquidity of $1.5 billion and our previously announced cost saving initiatives are also on track. At a high level, Albemarle's strategy has not materially changed.

We will invest in and grow our lithium business and we will fund lithium growth with cash flows from our more mature businesses. Historically, we have actively managed our portfolio to generate shareholder value and will continue to do so. We will also maintain a disciplined approach to capital allocation. The difference is that the COVID-19 pandemic has pushed lithium growth out by at least one year, while also impacting near-term cash flow from our other businesses.

Our response is to broaden and accelerate our focus on operational discipline to continuously raise the bar on performance. And specifically, manufacturing excellence to drive best-in-class cost management and product quality with a relentless focus on safety, standard work, continuous improvement, and the application of gleam principles across our manufacturing operations. In business excellence to deliver exceptional value and service to our customers, and to capture profitable high value opportunities to tailor value propositions and optimize -- optimized business processes and resources, so customer facing, as well as back office. And capital project excellence to effectively manage capacity to demand through the use of standard reliable designs and discipline planning and process management.

We know that being profitable and doing what's right are not at odds with each other. We expect to do both well and our sustainability framework is our guide. In terms of our people and workplace, we continue to advance and promote inclusion and diversity across our organization. Last year, we added two highly experienced female Board members, currently 50% of our directors represent gender and racial diversity which broadens the range of perspective, experiences and insights we can leverage to benefit our organization.

Recent events of discrimination and violence against black citizens in our communities remind us that we need to work much harder to fight racism. As a result, we have introduced a multi-pronged strategy to refocus our inclusion and diversity efforts from the bottom up, as well as the top down. Current activities include the addition of a dedicated senior inclusion and diversity leader, unconscious bias training for leaders and incorporating inclusion and diversity into the onboarding process for all new employees. We are also focused on responsible natural resource management, water management is an important sustainability objective for Albemarle and to continue to grow it's imperative that we manage water efficiently.

One example of this is that our facility in Magnolia, Arkansas, one of the world's largest bromine and bromine chemical sites, Magnolia uses as an artificial Marsh as a unique water treatment facility. We are actively collaborating and engaging with our communities. Our lithium operations at the Salar de Atacama in Chile works closely with the local communities to promote environmental stewardship and foster the community's long-term development. We share a percentage of our revenue with local indigenous communities and more than 35% of our employees in the region are indigenous.

Finally, our sustainability business model helps create long-term value for all shareholders. For example, about 50% of our catalyst revenues are from products that reduce SOx and NOx emissions to produce cleaner transportation fuels. In 2019, the use of our catalysts prevented the release of about 10 million tons of sulfur into the environment. In the coming weeks we will publish an updated sustainability report to provide increase transparency and disclosure around these and other important topics as discussed at our investor day late last year.

We are excited about the progress we have made on sustainability, but we also recognize that sustainability is by its nature a long term journey. In 2021 and beyond, our focus will shift from setting the baseline on sustainability performance to goal setting and continuous improvement. With that as a backdrop, I will turn it over to Scott for more detail on our recent results.

Scott Tozier -- Chief Financial Officer

Thank you Ken, and good morning everyone. Albemarle generated second-quarter net sales of $764 million, a decrease of about 14% compared to the prior year. This reduction was primarily driven by reduced prices in lithium as expected coming into the year and reduced volumes in catalysts and bromine related to the COVID-19 pandemic. GAAP net income was %$86 million or $0.80 per diluted share.

The non-GAAP adjustments this quarter were primarily related to restructuring costs with adjusted earnings of $0.86 per diluted share. Lower net income was primarily driven by lower net sales partially offset by over $30 million in cost and efficiency improvements, corporate and GS&A were lower versus the prior year due to these cost savings initiatives. As Ken stated, adjusted EBITDA was $185 million, a decrease of 29% from the prior year, but at the high end of the guidance we gave in May. If you look at Slide 8 for a look at the EBITDA bridge by business segment, adjusted EBITDA was down $77 million over the prior year reflecting lower net sales, higher freight costs and lower equity income, partially offset by the cost savings initiatives.

lithium adjusted EBITDA declined by $15 million versus the prior year excluding currency, pricing was down about 14%, partially offset by cost savings initiatives, lower pricing reflects previously agreed battery grade contract price concessions, as well as lower market pricing. Adjusted EBITDA was also impacted by lower Callison equity income as our joint venture partner took lower volumes in the quarter. Bromine's adjusted EBITDA was down $8 million excluding currency. The decline was primarily due to volume reductions related to demand softness, partially offset by cost savings and efficiency improvements.

In catalyst, adjusted EBITDA declined $44 million excluding currency. Volumes were down 22%, while pricing was down just 4%. Lower volumes primarily reflect FCC volume declines caused by reduced consumption of transportation fuel, high fuel inventories and continued travel restrictions. HPC volumes were down due to normal lumpiness in order patterns, as well as some softness related to lower oil prices and reduced fuel demand.

Catalyst results were also impacted by a net $12 million correction of out of period errors related to inventory valuation and freight accruals. These errors occurred primarily in the first quarter of 2020 following the implementation of our ERP system. Our corporate and other category adjusted EBITDA increased $15 million due to improved fine chemistry services results and corporate cost reductions. As Kent mentioned, we ended the quarter with liquidity of about $1.5 billion including $737 million of cash, $550 million remaining under our $1 billion revolver and $220 million on other available credit lines.

Our short-term debt is comprised of commercial paper and the delayed draw term loan. We also have $441 million of senior notes due in late 2021. The investment grade market is open to us and we anticipate refinancing or rolling forward these debt maturities. The divestitures of FCS and PCS which is a portion of our catalyst business are ongoing, but progress continues to be slow due to COVID-19 pandemic related travel restrictions.

The potential buyers remain interested and both transactions are potential liquidity events as we get back to normal. Turning to Slide 10 for an update on our cost savings activities, as discussed last quarter, given the current economic environment, we are executing our downturn playbook to preserve cash. We continue to expect the short-term cash management actions to save the company about $25 million to $40 million per quarter. Examples of these short-term savings include things like, travel restrictions due to the COVID-19 pandemic, limited utilization of professional services and consultants, and actively managing our working capital.

As previously disclosed, our two biggest capital projects, La Negra III and IV and Kemerton are being slow walked to preserve capital. We have the optionality to accelerate or stop these projects depending on market conditions. At this point, we continue to expect full-year 2020 capital spending in the range of $850 million to $950 million, unchanged from our previous outlook and down 15% from our original outlook late last year. We are also temporarily reducing some production primarily in response to near-term demand weakness.

In catalysts we have idled one HPC production line and FCC production line that was idled in Q2 is now back up and running. In lithium, we plan to idle portions of our Silver Peak and Kings Mountain production facilities in response to short-term supply demand imbalances and excess inventory builds in the battery-grade channel. We remain committed to the long-term operation of these facilities and currently plan to restart them in early 2021. And finally, our accelerated 2020 sustainable cost savings initiative is on track to achieve cost reductions of $50 million to $70 million this year until we reach run rate savings of at least $100 million by the end of 2021.

These cost savings projects were already identified and under way when COVID-19 hit. For example, our lithium team has identified $11 million of annual savings related to operational excellence and supply chain optimization. We are leveraging lean principles at our plants to optimize efficiency. Bromine and catalyst both have projects aimed at reducing annual direct material costs by almost $7 million in total.

We are examining all upcoming contracts for additional cost savings. Depending on market dynamics that may mean qualifying new suppliers and diversifying supply or consolidating spend with fewer suppliers in exchange for better pricing. And at corporate, our global IT group is streamlining the number of software applications that they support to reduce costs and increase productivity resulting in a savings of about $4 million per year. Let's turn to our outlook for the third quarter on page 11.

Based on current order book and cost reduction actions, we expect Q3 2020 adjusted EBITDA in the range of $140 million to $190 million. Lithium's Q3 2020 EBITDA is expected to be down about 10% to 20% sequentially. We continue to see the impact of contract price concessions agreed upon in late 2019, as well as lower market prices. Q3 results are also expected to be impacted by continued low OEM automotive production, higher inventory in the battery chain and reduced demand in the glass and ceramics markets.

Bromine Q3 EBITDA is expected to be roughly flat sequentially, as we continue to see COVID-19 pandemic related impacts which began in late Q2. Stabilization in some markets like construction offset continued weakness in other areas including flame retardants and drilling fluids. Finally, catalyst Q3 EBITDA is expected to remain down about 50% to 60% from the prior year. FCC demand is expected to partially recover in the second half as travel resumes and global gasoline inventories continue to deplete.

Conversely, the HPC business is expected to be negatively impacted in the second half as refiners to first spending and push turnarounds into 2021 and 2022. Looking beyond Q3 2020 continues to be challenging with limited visibility for most of our businesses. We are staying in close contact with customers and suppliers, and reviewing various economic forecast as we continue to navigate through this uncertain environment. Albemarle benefits from strong business positions across a wide range of end-user markets.

About a quarter of our revenues are from transportation fuels, these revenues are largely tied to miles driven or fuel consumption. U.S. miles driven dropped off sharply in March with stay-at-home orders around the country and has rebounded since but remains well below our normal summer season. EIA forecast suggests that U.S.

miles driven won't return to 2019 levels until late next year. Electric vehicle sales are a key driver for our energy storage business. We look at a variety of auto production and sales forecasts including IHS markets forecast. IHS expects 2020 electric vehicle production of $3 million units, down significantly from now the pre-COVID forecast, but up about 20% from 2019.

Expected 2021 EV production of 5.2 million units is also down from previous forecasts, but represents a significant rebound from current EV production levels. Of course, ultimately, what matters is consumer behavior and automotive sales, and to that end, we are also encouraged by recent green incentives we have seen around the world which are supportive of EV demand. Many of our end-markets such as electronics, chemical synthesis and construction are driven by broader consumer sentiment and global GDP. Consumer sentiment is rebounding in all regions but remains below pre-COVID levels.

In 2020 GDP forecasts have stabilized but represent a fairly significant year-over-year declines. These forecasts and leading indicators helped gauge the outlook for end-use markets, but a variety of factors including order lags, inventory changes and regulatory changes could cause our own results to differ from the underlying market conditions. And of course, secondary waves of infection could also cause setbacks in demand. Nevertheless, we are cautiously optimistic that many of our end-use markets are at least stabilizing if not starting to recover.

Kent Masters -- Chief Executive Officer

Thanks, Scott. As we all know, economic conditions remain very challenging. Albemarle is an industry leader in all three of our core businesses. We believe in the long-term growth prospects of these businesses, but our immediate challenge is to manage through this crisis.

In the meantime, we will focus on controlling what we can control. That means first and foremost, working hard to keep our people safe. It also means building operational discipline to improve cost and efficiency to deliver exceptional value and service and to optimize our capital spending. We remain confident in our strategy and we will modify execution of that strategy to further position Albemarle for success.

Meredith Bandy -- Vice President of Investor Relations and Suitability

All right. Before we open the lines for Q&A, I'd like to remind everyone to please limit questions to one question and one follow-up to ensure that as many participants as possible have a chance to ask a question and feel free to get back in the queue for additional follow-ups if time allows. And with that, operator, please proceed with the Q&A.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from David Begleiter with Deutsche Bank. Your line is now open.

David Huang -- Deutsche Bank -- Analyst

Hi. This is David Huang here for Dave. I guess, first, you have just given the timing lag and probably some lower fixed cost absorption. Can lithium EBITDA be up sequentially in Q4?

Scott Tozier -- Chief Financial Officer

It's really going to depend 00 This is Scott. It's really going to depend on what the volume environment looks like in Q4. The team's done a great job on cost reduction. I am not expecting any incremental sequential cost reduction going in the fourth quarter at this point in time unless demand starts to decline further.

But at the end of the day, depending on fourth-quarter growth is going to depend on what the volume looks like coming out of our customers.

David Huang -- Deutsche Bank -- Analyst

OK. And then I guess if you have any early view on how your lithium prices could trend in '21?

Scott Tozier -- Chief Financial Officer

Obviously, I think it's trending in 2021

Kent Masters -- Chief Executive Officer

Yeah. So yeah, this is Kent. Yeah. So that's the magic question and it's going to depend on volume right, as volume comes back and the market gets tighter.

But we know there's inventory and the supply chain it's going to take a little bit of additional volume to work that off before price move. So that's the inflection that we are looking forward. But it's too early for us to call that.

David Huang -- Deutsche Bank -- Analyst

OK. Thank you.

Operator

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

Unknown speaker

Hi. This is Robin on for Joel. Thanks for taking my questions. If you describe the magnitude of the current LC inventory dynamic and if you could break it down both regionally and by end product versus feedstock if possible? Thank you.

Eric Norris -- President, Lithium

Hi, Robin. This is Eric Norris here. I will do this best I can, I don't -- I can't give you the granularity that you are asking. But we definitely saw during the second-quarter inventories continue to build in the channel.

This is because as we all know automotive services were shutdown for the second quarter. Our demand in the industrial sector has weakened and when those automotive producers reopened, we opened at lower rates. So that inventory rose to levels that are in excess of five months above normal levels for refined lithium products. That's largely almost entirely in the battery channel.

I mean there may be some inventories in industrial but that's being worked off, so it's really the battery channel. And most of the battery industry today is in Asia, so regionally it's going to be in Asia, although, some of that inventory is in suppliers hands as well, we talked about an action we are taking to reduce some of our inventory by idling facilities, but some of our competitors we believe may have excess inventories as well. So that would be -- it's hard to say where that might be, that might be in the region of Asia, that might be at their production sites. But that that's our view now and we are obviously watching very closely as we look toward a recovery to see that that peak can then begin to get drawn down as demand improves.

The question is of course as Scott indicated, visibility to that demand improvement at this point.

Unknown speaker

Great. Thanks for that. And just one quick follow-up, so can you just quantify the magnitude of the reduced production, is it about 2,000 tons or?

Eric Norris -- President, Lithium

Yeah. So the production were -- that we are talking about is for -- it's going to be down for us, call it, the beginning of September through at this point the end of the year depending on market conditions. So approximately four months of production on a plant that annually which really driven by our King's Mountain facility which produces hydroxide, what supplies that plant is Silver Peak, the carbonate that feeds it. So on an end hydroxide, that's end product hydroxide basis annualize you are talking about 4,000 tons, 5,000 tons a year and so it can be down for four months of that at this point.

Unknown speaker

Great. Thank you.

Operator

Thank you. Our next question comes from Mike Sison with Wells Fargo. Your line is now open.

Mike Sison -- Wells Fargo Securities -- Analyst

Hey. Good morning. Nice quarter. In terms of -- you used to have a nice slide talking about the potential demand for lithium up to 2025 and I think the base case was 1 million tons.

Can you sort of walk us through what you think that long-term potential is, has it changed materially or is about the same and how do you think that will work through over the next couple of years?

Kent Masters -- Chief Executive Officer

So I'll start with that and then Eric can fill in the details to the extent we can. So we have said and we still believe kind of a demand profile has been pushed out by about a year. So we -- and -- so we don't think kind the long-term demand is affected, but the curve has changed probably steepened but it's been pushed out a year during this. We continue to watch the forecast and how the EV penetration happens around the world to see if it changes that profile, but today we believe it's the kind of the curve four years, five years out.

The volume is the same. Curve is a little steeper to get there and starts about a year later.

Eric Norris -- President, Lithium

Yeah. There's not much to add to that comment but if you do look at Slide 12 you can see the steepness of that curve in the following way. We have said that the demand we thought would materialize in 2020 before the crisis, that growth has shifted a year originally we thought that would be 4.1 million vehicles, if you want to put on a vehicle -- electric vehicle basis and so that did materialize. We are looking at IHS has currently forecasting something closer to 3 million vehicles.

But if you look out for the next year, where we see the demand has shifted to, it's 5.2 million vehicles is what HIS. That's obviously higher than 4.1. So that's the point at which this curve is getting steeper. We believe that the stimulus measures that have been added on top of already measures that are there on the OEM, the CO2 reductions, now you have consumer based incentives in Europe that have been added on top of those are part of what's driving the steepness of that curve and allow us to stay on that projection we are going to detail modeling of it all the way after 2025 and it's right around that 1 million be met tons that we talked about for the industry driven by electric vehicles.

Mike Sison -- Wells Fargo Securities -- Analyst

Got it. And then Eric as a quick follow-up, the price concessions, how does that get negotiated, if I recall that was sort of our fourth-quarter event, right? So can you sort of walk through kind of the semantics of what will happened with those price concessions as you head into 2021?

Eric Norris -- President, Lithium

Yeah. You are right, Mike. It's a bit early to say what's going to happen. I can say this is, we are doing the same thing last year.

We are looking at a falling set of market prices last year and we are in a -- we are trying to figure out how we are going to approach the year and that's what led to the 2021 year concessions on these long-term agreements. If you sit here and look at 2021, the price in the market now is far lower than it was a year-ago. So that I guess would be the negative on this. The positive in that negotiation is what I just talked about is the steepness of that growth curve suspected or projected for next year which there are other indications that are that is happening if you look at some of the Korean automotive public releases about what they see, not the Korean automotive, excuse me, the Korean battery producers, what they are projecting for their second half of the year, they are already starting to see and believe they are going to start to see that leading edge of that demand in terms of demand for that product.

So that -- I can't tell you how the negotiation is going to play out in terms of the exact way price will look in 2021, as Kent said earlier, that's the big question. But I -- and those are the positives and negatives. Our LTAs have help, right, and we use them as part of the commercial negotiation use them as part of the commercial negotiation to find a good solution going forward that honors the spirit of inventory we have with them, right, with these customers. So we will be able to get more detail later in the year or earlier in the coming year.

Mike Sison -- Wells Fargo Securities -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Jim Sheehan with Truist Securities. Your line is open.

Jim Sheehan -- Truist Securities -- Analyst

Good morning. Thanks for taking my question. So could you talk about what downside and upside are from your segment guidance, so it looks like your full-year EBITDA, sorry, your full company third-quarter EBITDA guidance varies significantly from the segments. I am just trying to figure out either whether you have downsides and upsides baked in or is this coming from corporate and all other?

Scott Tozier -- Chief Financial Officer

Yeah. Jim, this is Scott. So if you look at the segments, for lithium we are expecting a range of being down sequentially by around 10% to 20%. So that kind of bounds what's happened there.

Most of that's going to be volume related overall for lithium. For bromine, it's relatively tight right now. They have got pretty good visibility into their order book at least through the end of August and so flat sequentially they could be down a little bit or up a little bit, but flat sequentially. And then catalyst is expected to be down between 50% and 60% on a year-over-year basis, really on the back of hydro processing orders and the timing of those, as well as the recovery of FCC on the back of increased fuel demand globally and so that kind of balance the range.

Corporate is pretty well bound in with the cost reductions that we have out there and the small business fine tuning services is doing well in the U.S., so.

Jim Sheehan -- Truist Securities -- Analyst

Thank you. And as it pertains to capital allocation, you have listed M&A in your slide on capital allocation. Maybe to talk about the pipeline what type of acquisitions you might be considering, what size and what region in the world or is that process really slowed down the same way that your asset sale process is?

Kent Masters -- Chief Executive Officer

Yeah. So we continue to look for those opportunities, but there are going to be bolt-on, nothing dramatic. And -- but I would say, it's probably fair to say that process has slowed down, but we continue to look for opportunities in the down market and that would probably most likely be around lithium conversion assets that were available in the markets where we find that attractive.

Jim Sheehan -- Truist Securities -- Analyst

Thank you.

Operator

Thank you. And next question comes from Vincent Andrews with Morgan Stanley. Your line is now open.

Unknown speaker

Hi. Thank you for giving us time. This is Andrew Castillo on for Vincent. I just had a quick question in terms of the technical grade, how much is that like in the demand down this year versus battery grade demand and how fast do you expect technical to come back and kind of what are the sign posts that we should be watching to track that?

Eric Norris -- President, Lithium

Yeah. It's a smaller market for us. I would say -- this is Eric speaking. I would say that the technical grade market, if you look at any industrial indicator for the recession, it's going to be representative what that technical grade market is doing.

I have seen some external statistics that say that the glass and ceramics industry is an example contracted by 25% in the second quarter. So that is -- that's not obviously inconsistent with what's happening economically around the world. So that's the auto magnitude of what we are seeing. It's a small part of our business, right? It's less than 20% of our sales overall and it's very mix, it's not just glass and ceramics there are other segments that are doing better than the in the glass and ceramics sector.

So we aren't seeing any sign of recovery in that yet. As we -- or as we roll here into the third quarter and that's what we expect in the fourth quarter again and that just comes on the head of what we talked about earlier, it's very murky and hard to tell at this point which is why we are cautious to give more detailed guidance on Q4.

Unknown speaker

Understood. Thank you. And then in terms of idling facilities, what is the cost of temporarily idling these and how quickly you can they both be taken down and brought back up. And I guess, just part of that, what is kind of the lowest that utilization rate that they can run at before it becomes unit cost derivatives.

Kent Masters -- Chief Executive Officer

So I'll take the cost of idling. It's relatively small. So these are smaller plants with a relatively small workforce. So really in total less than $10 million is actually idle the plant itself.

And Eric if you want to just talk about utilization and recovery?

Eric Norris -- President, Lithium

Yeah. We just told the workforce yesterday about this, right, and we expect to be fully idled or safely down by September the 1st. So that give you some idea of the down and then there will be comparable period to come up once we see the demand signals to come back up. It is -- I am sorry, second question I guess was utilization.

This is a fairly small part of our mix, but it's an important part of being able to supply 2021 we believe, provided recovery take through as we expected to. So it's on utilization basis. It's not a lot. But here is a point that I think is also implied in your question.

It is not -- this is product that given the weakness in the market while our contracts are being upheld, any opportunities outside of those, any opportunities in China, any opportunities in industrial markets is limited, for all the reasons we have discussed, because of the contraction in the marketplace. So this is product that would have gone to inventory. So there's not an EBITDA impact on our guidance associated with what of our guidance otherwise would have been associated with this. This is just a reduction in inventory and during this period of time of down, we will continue to make investments to prepare these assets to run full out when the recovery does occur which we again hope will be and anticipate will be in 2021.

Unknown speaker

Very helpful. Thank you.

Operator

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

Arun Viswanathan -- RBC Capital Markets -- Analyst

Great. Thanks. Good morning. I guess I just wanted to get your perspective on lithium markets.

I understand that your overall view is maybe even pushed out a year. But has there been any change in I guess how you are looking at supply demand, I mean, I appreciate that the automakers may not be coming back at full, but are they potentially coming back with greater focus on EVs and if so would that be a positive tailwind for you. So that's my question on lithium and then I have one more question on catalysts, if you could maybe just characterize how you are thinking about that business on the surface, it looks like there could be some structural impairment that could last for quite a while. I guess is that a fair characterization.

So, yeah, maybe you can just give your medium-term thoughts on both businesses? Thanks.

Kent Masters -- Chief Executive Officer

So again, I'll comment on that and Eric can fill if I miss piece on the -- on lithium. So as you said before, we really don't think it's changed the dynamic for the EV market long-term, so we kind of fundamentally believe in the EV market and the lithium demand that's going to go into that. So, the one thing that has happened I guess that is quite different is there incentives becoming -- becoming more incentives associated with electric vehicles and that's primarily in Europe. That's probably -- it's going to drive that a little differently than it was before.

So previously you didn't have the depth, but the curve was a year earlier, the demand coming out now, you have got a depth that comes back a little stronger primarily on those incentives and trying to figure out exactly what that curve looks like, we don't know. And regardless of incentives and the demand that's going to happen, I mean, consumers still have to buy cars and that's the fundamental thing we don't really know and I think the people forecasting that don't know as well. So, Eric, anything on top of that.

Eric Norris -- President, Lithium

No. Nothing to add other than you just -- you all have to be conscious of the fact that just like the impacts that happened in the second quarter aren't really hitting us until the third quarter. So to the recovery, just as I said, we have the Korean manufacturers out, saying, that they see a significant uptick in their sales. That's probably and hopefully related to these -- what's going on in Europe and there's obviously a corresponding lag, particularly with excess channel inventories there for it to come back and hit us.

So that's why in the longer term, we are pretty optimistic, but in the next six months it's very hard to say, very hard to say.

Kent Masters -- Chief Executive Officer

Yeah. And then on your catalysts question kind of the same approach. I will do a high level, Raphael, can fill in. But so oil prices are down and then the miles driven are pretty dramatic change and you could see on that slide, I think it was Slide 12, how dramatic that was miles driven and that's changed that.

We don't really see it changing the fundamentals of that business long-term, but it is going to take some time for that to come back. Before people go back to work and commute and maybe they don't commute as much as they did after this or maybe less miles driven, maybe more vacation by driving rather than flying, but then again, that's air travel. So we think that's been pushed out for some period of time, but peak oil probably it doesn't change. We knew that was coming in some period of time, has that been pulled forward by a little bit, we don't know that.

Most of the forecast say maybe a year, maybe not. So I don't think it fundamentally changes the business that we have, clean fuels continue to be important, our business is based on innovation around clean fuels, so we don't think it fundamentally changes it or structurally changes it. But it might change the dynamics of where our markets are geographically and which of our customers do better or do worse during this.

Raphael Crawford -- President, Catalysts

Yeah. This is Raphael, Arun. To add to that view, certainly, this is a time for our business to take action to mitigate the impact whether it would be, cost working capital, capital for the near-term, because it has -- COVID-19 has had an acute impact on our customers and suppliers to our customers. That being said, as Kent said, there is a bright future for refining catalysts when positioned correctly and our strategy is really all around positioning our business to take advantage of trends in emerging markets where fuel consumption will continue to grow beyond global peak gasoline, as well as the emerging chemicals applications from refineries where we already have a position of strength and we need to advance that.

So, with all of the challenges that COVID-19 brings, it is a great motivator for us as a company to stay on strategy and accelerate that strategy to be in more resilient spaces as we progress.

Arun Viswanathan -- RBC Capital Markets -- Analyst

Thanks.

Operator

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

Mike Harrison -- Seaport Global Securities LLC -- Analyst

Hi. Good mornings. Raphael, maybe kind of continuing on the catalyst discussion, can you talk about the FCC pricing outlook. I believe you saw a pricing in your catalyst business overall decline by 4%, not sure if that's pricing or mix, but are you seeing resilient FCC pricing and are you see any trading down as you look at your overall mix and catalysts.

Raphael Crawford -- President, Catalysts

Hey, Mike. Thanks for the question. So when we look at it, pricing does -- there has been some downward movement on price but not for the value-oriented products that are the bulk of our portfolio. So as you know in the FCC industry, you certainly have contracted business, you have business that's not contract and then there are trials and trials are a period of time within a contract, when a competitor can bring a catalyst into a refinery to test performance.

Trial pricing is lower, so to the extent that within our mix we have trials and we are pursuing trials with new refineries or refineries we don't have, yeah, that pricing is going to be lower than what we have typically seen. But for the business that's our core business on performance products that pricing has been stable and I would even think, if I looked at prior quarter and looking ahead as we are negotiating for contracts where we are demonstrating value or increased value we are able to gain on price. So I would say, it's sort of mix between trial pricing and contract pricing, and what we generate on value has the biggest impact on that.

Mike Harrison -- Seaport Global Securities LLC -- Analyst

All right. Thanks for that. And then on lithium, I was wondering if you can give a little more color on where you are seeing the greatest concern in terms of inventories in the lithium channel and in the battery channel. Is it with finished catalyst material and the battery makers, is it hydroxide, is it carbonate, it's probably mean maybe some more detail there?

Eric Norris -- President, Lithium

Hey, Mike. It's Eric here. So look it's I would say we have and you can sort of interpret this by the action we have taken with our plants, it's both hydroxide and carbonate. And it's with our customers, be the cathode customers or battery accounts and with -- we believe with suppliers in the channel.

We understand that there are probably potentially even some excess inventories from a cathode standpoint. So I mean you have an industry that during the second quarter screeched to a halt, right? Nothing was happening for depended on plant it could have been a month more in terms of the OEM closures. So it's in the battery channel and it's at various points in the battery channel. And so I think it's about the most color I can give you at this point in time.

Spodumene is -- there continues to be excess spodumene in China. Some of that is below grade spodumene, meaning below 6%. Some of that it's even the DSO variety which is just raw rock, it's not processed. And some of it by its purchasers just purchased the high prices for spodumene rock, so it's an economic in the current situation.

So there's this spodumene -- excess spodumene there is well. That is a lot more opaque and hard to tell exactly how much however.

Mike Harrison -- Seaport Global Securities LLC -- Analyst

All right. Thanks very much.

Operator

Thank you. Our next question comes from Matthew DeYoe with Bank of America. Your line is now open.

Matthew DeYoe -- Bank of America Merrill Lynch -- Analyst

Hi. I wanted to hit a little bit on the catalyst trial pricing issue. I mean, why are your trial price is lower, are refineries just kind of trialing lower quality products, is the way to temporarily lower costs. Do you see risk of these get adopted because refineries don't need better utilization rates right now that your higher FCCs would deliver?

Raphael Crawford -- President, Catalysts

Hey, Matthew. This is Raphael. The -- some of it has to do with just the dynamic that every market is down and every catalyst producer would like to look for new volume opportunities and the most accessible way to go and do that is to participate in trials. So I think the activity and the eagerness of the market around trials has increased and when in that competitive space, certainly, folks are -- and Albemarle included are willing to price lower than what we normally would, still at positive margin to participate in a trial to prove out value to a refinery over what they might already have with their current supplier.

That being said, with trials, I mean, you get in the door to some extent that trial sets a benchmark for future pricing. But most refineries understand that pricing and catalysts is very much tied to value and if you are generating value over time you are able to raise the price to what you are able to justify with your performance. Albemarle has been very good at doing that and where we participate in markets related to max chemicals, bottoms cracking which is really our strength within FCC, we are able to demonstrate value and capture price over time.

Matthew DeYoe -- Bank of America Merrill Lynch -- Analyst

OK. And then if I would have just circle back on the excess spodumene comment, I know there was a fair amount that's you mentioned below 6% and there is DSO. But how much excess spodumene out there that is above 6% and like a seasonable product. I think that was sized before at -- about three months to six months of excess inventory, is that still the case, is any of that have been worked down at all?

Eric Norris -- President, Lithium

I will have to go back to the kind of that again, the comment maybe for, it is incredibly opaque. And even to the point where sometimes inventory is counted twice depending on who you are talking to. So I really couldn't tell you. I can tell you that 6% -- the 6% spodumene that has been produced for integrated producers like Albemarle, our partner, and obviously, competitors as well Tianqi, potentially for some of the other producers that are integrated like Kemerton.

I doubt that they would be carrying a lot of excess inventories because we have been -- I am assuming that those competitors are doing the same thing that Albemarle is doing which is we are trying as a leader in the industry trying to assist the challenge by reducing inventories and we -- and the outputs as you can see from our equity income is substantially reduced from Talison is the big part of that actually is Tianqi and the challenges they have had. So it's -- that 6% which is very high quality rock that I think has been coming down. But as for the rest, the majority of which is below 6% or barely 6%, that's probably were more of the excess is, because that's a less economic product in today's market with today's prices.

Matthew DeYoe -- Bank of America Merrill Lynch -- Analyst

OK. I appreciate your -- the added detail. I know it's definitely opaque. So thank you.

Operator

Thank you. Our next question comes from Bob Koort with Goldman Sachs. Your line is now open.

Bob Koort -- Goldman Sachs -- Analyst

Thank you. Good morning. A couple of lithium questions, have you guys think about reconciling what seems to be some odd financial math when I guess in China we are seeing battery grade material under $6,000 you have got spodumene market prices under $400. And I think, Eric, you are talking about inventories might be bloated everywhere.

So can your competitors in China make money? Is there the risk that they try to liquidate those inventories more aggressively in a weak period? Do you see a bifurcated market as China different than Japan and Korea? Can you just give us a little color there?

Eric Norris -- President, Lithium

Well, on -- hey Bob. It's Eric here. On the first part of your question I would say that what you are seeing is, nothing has changed in the cost curves that we talked about. You can go back and look at the investor day, look at where we thought marginal cash costs are between $6 and $7 in that range.

That hasn't changed. There's nothing that's changed in that regard. And so, effectively at prices you are seeing in the China market now spot prices, the whole right hand side of the cost curve is underwater. They are not able to make money.

They lose money selling product. So I can't explain why that's happening other than it's a market that has gone through a compression that we talked about, because of the COVID crisis in second quarter and it's started working its way out as we go into the second half of the year. And you have lower cost producers particularly in the carbonate side and remember China is largely a carbonate market, who have lower cost positions, brine -based rock -- brine based carbonate has a much lower cost position are able to sell well below the cash cost of those who are rock-based producers in the region. So I think that's what's happening.

It sort of shows sort of the stress in the system. Will Chinese producers start to unload inventory? I think, potentially, in a desperation move, but I think at this point, most of that rock is sitting stationary until market values improve, at this point. You had a second part of your question, Bob, was about...

Bob Koort -- Goldman Sachs -- Analyst

Just wondering...

Eric Norris -- President, Lithium

Was there difference between China and elsewhere? Yeah. No. Yes. There's a difference.

Again, it's largely a carbonate market, more of the high nickel chemistry today that hydroxide base has made outside of China, some of it's -- maybe produced in China, but most of the demand for that is outside China. And of course, there are structural differences. There's VAT difference between China and inside and outside of China as well. But again, I don't know anything has changed other than the fact that we have had a demand crisis and that's really put pressure on the system.

Bob Koort -- Goldman Sachs -- Analyst

And Eric you mentioned that your LTAs have largely held I think in the last couple of quarters, you have talked about you want to sell to your customers in the manner that they want to buy in terms of contract dynamics. But what's your expectation for the desire for those LTAs, as you start to get to the exponential part of that demand curve, because it would seem the cathode folks are looking at this volatility and pricing and obviously resets on pricing, but then you have got some pretty dangerous implications for them if the industry curtails its expansion activity, where there may be a scarcity value sometime down the road. So I guess what I am asking is the game plan, do you think you will have a lot more LTAs at fixed prices two years and three years from now or a lot fewer because your customers are maybe moving away from that. Can you give me your sense of how this market develops from a very weak price period to a potentially very tight market in a few years?

Eric Norris -- President, Lithium

I don't think the security of supply and notion of that has changed. But we do see our contracts starting to evolve from there. Do you want to comment, Kent?

Kent Masters -- Chief Executive Officer

Yeah. And I would say, that security and how our customers look out a year or two and looking for guaranteed supply out in that timeframe is part of that dynamic. And we -- but we are seeing it as a portfolio with a percentage and they will be those long-term contracts, but with slightly different terms across the portfolio, some with guaranteed promises of supply a couple of years out and some without that and some more spot based and others more contracted with a formula that may indicate spot but not move with spot.

Eric Norris -- President, Lithium

Yeah. And what's happening now is I think you have put your -- sort of put your finger on it Bob is that, short-termism is an interesting strategy. Now it will save you some money, because spot prices are really low. But as you have also point out, capacity is being withdrawn from the market.

The economics to support expansion are not there today in the market for almost every producer except for the very lowest cost producers and there's a scarcity at some point it starts to shift. We think the supply chain particularly those most invested in the supply chain, all the way to the top of it, the automotive producers are increasingly focused and will become increasingly focused on this issue which is why I think there's always a value for security supply. And to Kent's point, we always want a portfolio. We are always going to want some of those price buyers, because that -- those -- that there is a value to that when the market goes up, right, in terms of what it means your EBITDA.

We don't want a majority of our business there but we will have some of it there.

Bob Koort -- Goldman Sachs -- Analyst

Great. Thanks for the insight.

Operator

Thank you. Our next question comes from Matthew Skowronski with UBS. Your line is now open.

Matthew Skowronski -- UBS -- Analyst

Good morning. Thank you for taking my question. Can you give us an update on when we should expect to see sales from La Negra III and IV and if you have changed your view at all about the timing of the ramp of additional capacity given the demand disruption you have seen this year?

Kent Masters -- Chief Executive Officer

Well, we had said last quarter, we have kind of slowed down the execution of those -- of our two big projects, La Negra III and IV and at Kemerton. And so that really hasn't changed. We have slowed that down basically because we see demand being pushed out at gap and we did that to kind of preserve cash but it also matches what we see s supply demand and obviously given the discussion you have seen today we are -- we have got our forecast and we have our view, but it's a bit of a shot in the dark. But we see volume to your question from La Negra III and IV our capacity coming on late next year and then a qualification period after that.

Matthew Skowronski -- UBS -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Chris Kapsch with Loop Capital Markets. Your line is now open.

Chris Kapsch -- Loop Capital Markets -- Analyst

Yeah. Good morning. Question is probably for Eric and slightly nuance follow-up to some of the stuff you have talked about. But just -- on the comments about excess inventory in the battery supply chain with hydroxide there's a limited shelf life given its hydroscopic nature and no such issue with carbonates.

So I am just wondering if your comments about inventories, if those -- if that dynamic is more pronounced for carbonate grades versus hydroxide grades. Maybe you got it just a little bit by suggesting that some of the excess inventories at cathode level, but just wondering given that a lot of these newly introduced EV models particularly in Europe are definitely deploying higher energy density cathodes that require hydroxide. I am wondering if there is a little bit of bifurcation in those dynamics?

Eric Norris -- President, Lithium

So you are right. Chris, this is Eric. There is sure shelf life for hydroxide which is -- but it's also a smaller market. So it's a more -- if we look at our customer base, the number of customers that they use hydroxide to a large degree and would have high inventory levels.

It's a more manageable group of folks to work with. And it's also the reason that the motivator for the idlings that we did and we announced to our employee yesterday in our release last night is driven first and foremost by the hydroxide. Carbonate is a bigger market and the shelf life considerations aren't the same. So you do manage them differently, because it's bigger, there's a lot of carbonate inventory out there too, right? The more people produce it and more people buy it.

So there's a difference in the way in which we manage it, but the challenges are the same and that they are elevated for both.

Chris Kapsch -- Loop Capital Markets -- Analyst

OK. And my follow up is and you have got it just a little bit with -- in response to Bob's question on your long-term agreements. But there's obviously this acquisition where there is acute near-term oversupply probably amplified by the COVID pandemic. But then the increasing steepness of the EV adoption curve a couple few years out.

So I am just wondering again probably looking at maybe the conversation around carbonate versus the conversations around long-term sourcing of hydroxide. Is there -- can you just provide any color on as some of those customers are looking for a little relief on the previously agreed to pricing floors. Is there still anxiousness about the ability to source a long-term basis hydroxide, is that -- and is that more noticeable with the conversation around hydroxide vis-à-vis carbonate? Thank you.

Eric Norris -- President, Lithium

I would say that that because the steepness in the growth curve that we -- that IHS is projecting and it's a guided post for us provided it happens when it does, that's also what our customers are seeing and it's driven largely by -- a big chunk of it is driven by Europe and that is also a big hydroxide opportunity that, yes, there is improbably increased, I don't know I think anxiety is the right word, but statement around from customers around, they are going to need more -- a lot more hydroxide in the coming year or so and they are banking on Albemarle to be able to bring Kemerton in particular online to meet that. Now, all of this is tampered about when, right? The steepness in that curve feels, right, based on what we are seeing, the timing of it is consumer spending driven. So we just keep a careful eye on that up and down the supply chain.

Chris Kapsch -- Loop Capital Markets -- Analyst

Fair enough. Thanks guys.

Operator

Thank you. This concludes the question-and-answer session. I would now like to turn the call back over to Meredith Bandy for closing remarks.

Meredith Bandy -- Vice President of Investor Relations and Suitability

Hi. Thank you all for your questions and participation in today's call. As always, we appreciate your interest in Albemarle and this concludes our call.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

Meredith Bandy -- Vice President of Investor Relations and Suitability

Kent Masters -- Chief Executive Officer

Scott Tozier -- Chief Financial Officer

David Huang -- Deutsche Bank -- Analyst

Unknown speaker

Eric Norris -- President, Lithium

Mike Sison -- Wells Fargo Securities -- Analyst

Jim Sheehan -- Truist Securities -- Analyst

Arun Viswanathan -- RBC Capital Markets -- Analyst

Raphael Crawford -- President, Catalysts

Mike Harrison -- Seaport Global Securities LLC -- Analyst

Matthew DeYoe -- Bank of America Merrill Lynch -- Analyst

Bob Koort -- Goldman Sachs -- Analyst

Matthew Skowronski -- UBS -- Analyst

Chris Kapsch -- Loop Capital Markets -- Analyst

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