Matthew K. Juneau - Albemarle Corp. Luke C. Kissam - Albemarle Corp. Scott A. Tozier - Albemarle Corp. John Mitchell - Albemarle Corp. Raphael Crawford - Albemarle Corp. Silvio Ghyoot - Albemarle Corp..

David I. Begleiter - Deutsche Bank Securities, Inc. Aleksey Yefremov - Nomura Instinet Robert A. Koort - Goldman Sachs & Co. Vincent S. Andrews - Morgan Stanley & Co. LLC P.J. Juvekar - Citigroup Global Markets, Inc. Kevin McCarthy - Vertical Research Partners, LLC James Sheehan - SunTrust Robinson Humphrey, Inc.

Dmitry Silversteyn - Longbow Research LLC Michael J. Sison - KeyBanc Capital Markets, Inc. Daniel DiCicco - RBC Capital Markets LLC Michael J. Harrison - Seaport Global Securities LLC.

Good day, ladies and gentlemen, and welcome to Q4 2016 Albemarle Corporation earnings conference call. My name is Sandra, and I'm your event manager. [Operator Instruction] I'd like to advise all parties this call is being recorded for replay purposes. And now I'd like to hand over to Matt Juneau. Please go ahead..

Thank you, and welcome to Albemarle's fourth quarter 2016 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 albemarle.com.

Joining me on the call today are Luke Kissam, Chairman and Chief Executive Officer; Scott Tozier, Chief Financial Officer; Raphael Crawford, President, Bromine Specialties; Silvio Ghyoot, President, Refining Solutions; and John Mitchell, President, Lithium and Advanced Materials.

As a reminder, some of the statements made during this conference call about the future performance of the company 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 our comments today regarding our financial results exclude non-operating, non-recurring, and other unusual items.

GAAP financial measures and reconciliations from those to the adjusted numbers discussed today may be found in our press release and page 4 in the appendix of our earnings presentation, all of which are posted on our website.

Note that our GAAP numbers in both the fourth quarter and the full year were significantly impacted by the sale of the Chemetall business. Now I'll turn the call over to Luke to summarize 2016 performance..

Thanks, Matt. In 2016, Albemarle continued its journey to becoming a high-growth specialty chemicals company focused on driving increased global energy efficiency through our leading positions in lithium and refining catalysts. First of all, from an operations standpoint, 2016 was the safest year in company history.

We had record low workdays missed due to injury, and our lowest-ever severity rating for lost-time injuries. In addition, environmental incidents at our plants were also at an all-time low. The focus on safe operations in spite of the amount of change that occurred in 2016 is a tribute to the quality and focus of our employees.

Our three core business units performed well in 2016, with each exceeding initial expectations. Adjusted EBITDA from our three GBUs increased by $96 million or 13% compared to 2015. Lithium and Refining Solutions both delivered strong double-digit adjusted EBITDA growth, 34% and 21%, respectively.

Bromine adjusted EBITDA increased by 2% despite the loss of a key contract that delivered more than $15 million of adjusted EBITDA in 2015. Importantly, this marks the third consecutive year of consistent, stable results in Bromine. Full-year combined adjusted EBITDA margin for our three GBUs was 33%, up 190 basis points from 2015.

Not only did our businesses generate strong earnings; those earnings translated into strong free cash flow. Our adjusted free cash flow for 2016 was $672 million, an increase of $166 million from 2015.

We also continued to focus our strategy by successfully divesting minerals and metal sulfides in early 2016 and the Chemetall Surface Treatment business in mid-December. Total net proceeds from these three transactions exceeded $3.4 billion, an aggregate multiple of 13.7 times trailing-12-month EBITDA.

Our team structured these transactions to be highly tax-efficient, leading to significant cash generation for Albemarle. As a result of the strong cash generation from both operations and divestitures, we were able to reduce debt and significantly strengthen our balance sheet.

Our gross debt to EBITDA after completion of the debt tender in February stands at about 2.2 times based on full-year 2016 adjusted EBITDA. Cash on hand as of mid-February was approximately $1.4 billion.

We have regained balance sheet strength and flexibility, which positions us to more quickly take advantage of opportunities to accelerate our business strategies. We announced a dividend increase of 5% just recently in February. This marks our 23rd consecutive year of dividend increases.

Our stock price increased by 54% in 2016, compared to increases of 9% and 10% for the Dow Jones Chemicals Index and the S&P 500, respectively, placing us in the top decile of performance against our industry peers.

We also expect to buy back $250 million of stock in a program that will be launched in the next several days and conclude by the end of June. Finally, in 2016, we strengthened and extended our leadership position in lithium.

First, we finalized two agreements in Chile, which position us to expand our lithium carbonate production capacity there from the roughly 24,000 metric tons produced in 2016 to over 80,000 tons by 2020.

In January of 2016, we secured an environmental permit that allows us to pump brine at an annual rate of over 80,000 tons of lithium carbonate equivalent annually. Then in December we reached a definitive agreement with CORFO that expands our total Lithium quota to a level that allows production at that same annual rate through the end of 2043.

Secondly, we acquired the spodumene conversion assets of Jiangxi Jiangli New Materials technology company in China and announced plans to expand these assets to a conversion capacity of 35,000 to 40,000 metric tons.

These moves, along with a planned greenfield spodumene conversion plant, will increase our overall capacity of lithium salts to over 160,000 metric tons on an LCE basis by early in the next decade.

Third, on the demand side, we have now secured about 80% of both our technical and battery-grade lithium salts business under three- to five-year long-term contracts. We remain confident in both the demand growth for lithium salts and our ability to meet that growing demand.

I'll discuss 2017 at the end of our prepared remarks, but clearly our 2016 financial and operational performance, combined with our portfolio actions and steps to strengthen our Lithium franchise, leave Albemarle well-positioned for another strong year in 2017. Now I'll turn the call over to Scott..

Thanks, Luke. We ended 2016 with strong performance and great momentum for 2017. Let me give you some of the details.

In the fourth quarter, we reported adjusted net income from continuing operations of $0.78 per diluted share, a decrease of 12% compared to fourth quarter 2015, excluding the year-over-year net impact of the divested minerals and metal sulfides businesses.

The decrease was driven primarily by a negative tax impact of $0.17 per share, lower Fine Chemistry Services business performance equivalent to $0.13 per share, and increased D&A and interest charges of $0.11 per share.

Note that our three global business units delivered $34 million of increased adjusted EBITDA in the quarter, roughly a $0.27 per share increase compared to fourth quarter 2015. For the full year 2016, we reported adjusted net income from continuing operations of $3.57 per diluted share.

Excluding the impact of the divested businesses and a large one-time non-cash foreign exchange gain from 2015 results, earnings per diluted share increased by 20% compared to 2015, with the increase driven entirely by increased business unit performance and productivity from our synergy program.

Corporate costs ended the year at just under $86 million, in line with our third quarter guidance. Our effective tax rate, excluding special items, non-operating pension, and OPEB items, ended 2016 at 20.8%, an increase from our prior guidance. The catch-up to adjust the full-year rate to 20.8% explains the increase in the fourth quarter tax rate.

The increased tax rate was related to the sale of the Chemetall Surface Treatment business and currency volatility, which created taxable FX gains in certain countries. Capital expenditures for continuing operations ended 2016 at $177 million, in line with our third quarter guidance.

Note that reported capital spending in our year-end financial statements is $197 million. The delta between the two numbers represents capital spent on the divested Chemetall business. Depreciation and amortization was $191 million in 2016, also in line with third quarter guidance.

At year-end, operating working capital improved to 27% compared to 29% at the end of the third quarter. All three GBUs saw strong year-end collections against receivables and effectively managed inventory in the quarter. In addition, our net payables increased as capital spending began ramping up to support our Lithium growth.

Luke has already noted that our adjusted free cash flow increased by $166 million in 2016. Even more impressive was the increase in net cash from operations from $361 million in 2015 to a record $733 million in 2016, driven by the performance of our businesses and a meaningful reduction in working capital.

Now let me turn to business unit performance for both the fourth quarter and the full year. Lithium and Advanced Materials had another strong quarter, led by the Lithium business. Fourth quarter net sales of $278 million increased by 30% compared to fourth quarter 2015. Similarly, adjusted EBITDA of $102 million was 32% higher than fourth quarter 2015.

Adjusted EBITDA margins were a strong 37%. For the full year, sales of $968 million and adjusted EBITDA of $363 million both increased by 16% compared to 2015. The Lithium portfolio continued to drive GB results in the fourth quarter, just as it did in the previous three.

Fourth quarter net sales were up 50%, and adjusted EBITDA was up 56% compared to the fourth quarter of 2015. Adjusted EBITDA margins were 43%, marking eight consecutive quarters with margins above 40%. For all of 2016, Lithium sales increased by 31%, and adjusted EBITDA by 34%, with adjusted EBITDA margins of 43%.

Volume growth for 2016 was an impressive 18%, with pricing improving by 14%. Essentially all the volume growth and most of the pricing improvement was driven by battery-grade products. Compared to the fourth quarter of 2016, PCS sales were down just under $5 million, and adjusted EBITDA was down $7 million.

Full-year adjusted EBITDA ended 2016 down $22 million. Continued competitive challenges that impacted both our organometallics and catalyst businesses and an operational issue at one of our catalyst manufacturing sites led to weaker-than-expected results in the fourth quarter.

Full-year results compared to 2016 were impacted by the fourth quarter issues, the SunEdison bankruptcy, and increased competition in our Curatives business as a competitor returned to full production after an extended outage in 2015.

Bromine Specialties' fourth quarter sales of $195 million and adjusted EBITDA of $47 million were up by 13% and 11% respectively, compared to the fourth quarter of 2015. For the full year, sales of $792 million and adjusted EBITDA of $227 million were both up by 2% compared to 2015. Full-year adjusted EBITDA margins of 29% were the same as in 2015.

We saw incremental improvement in our flame retardants business and better-than-expected demand in our clear brine fluids business in 2016. Strong cost management and productivity improvements were also important contributors to full-year performance.

Refining Solutions reported fourth quarter net sales of $193 million and adjusted EBITDA of $57 million, resulting in adjusted EBITDA margins of 30%. Compared to the fourth quarter of 2015, sales were down 4% and adjusted EBITDA was up 9%. Full-year Refining Solutions sales of $732 million were essentially flat compared to 2015.

Adjusted EBITDA was $239 million, an increase of 21% from 2015. Heavy Oil Upgrading or FCC catalysts performed as expected in 2016, with adjusted EBITDA essentially flat compared to the record year seen in 2015.

Clean Fuels Technologies or HPC catalyst significantly exceeded our initial 2016 expectations and drove overall business unit adjusted EBITDA improvement throughout the year. The Clean Fuels business benefited from both improved volumes and product mix, as we saw more typical buying patterns at refiners after a difficult 2015. Now I'll turn to 2017.

I'll frame the balance sheet items and foreign exchange, and then Luke will cover the business and overall company forecast. We currently expect our effective tax rate, excluding special items, non-operating pension, and OPEB items, to be approximately 22% in 2017.

As always, the rate can be impacted by changes in tax regulations around the world and by the regional mix of both sales and production, which almost never plays out exactly as budgeted. You should expect capital spending to increase significantly in 2017 compared to 2016.

We will ramp up spending from La Negra 3, our third lithium carbonate plant in Chile planned for early 2020 startup, and begin the 20,000 to 25,000 metric ton expansion of the Jiangxi Jiangli conversion assets in China.

As a result, you can expect capital to increase to $350 million to $400 million in 2017, with Lithium growth capital driving most of the increase. Our maintenance and continuity capital spend continues to be well-controlled and is again expected to be within our guidance range of 4% to 6% of revenues for all businesses.

Depreciation and amortization is expected to range from $175 million to $195 million in 2017. Corporate costs are expected to be between $85 million and $95 million. And note that the Lithium business will see additional costs in 2017 to position us for sustained growth over the next decade.

The royalties for the expanded and extended quota in Chile, additional personnel costs, and expenses related to the evaluation and development of potential new lithium resources will result in $60 million to $70 million of new costs in 2017 in that GBU.

Given the margin profile and growth expectations of our businesses, we expect to continue our history of strong cash flow generation from operations in 2017. However, working capital, which was a source of cash flow in 2016, is expected to use cash in 2017.

Operating working capital should remain at about 27% of revenue, but business growth, production timing, and the impact of certain strategic projects should lead to an increase in absolute dollars of working capital in 2017. The major increase in capital expenditures to capture growth in Lithium will also impact free cash flow.

Adjusted free cash flow is forecasted to be $200 million to $300 million in 2017. But reported free cash flow will be negatively impacted by a few one-time expenses. The largest of these are tax payments of approximately $275 million related to the divestiture of the Chemetall business.

Finally, estimating the risk of foreign exchange movements is always challenging and seems even more so in the current global environment. Our 2017 guidance is based on an average U.S. dollar to euro exchange rate of $1.06 and an average Japanese yen to U.S. dollar exchange rate of ¥115. We estimate that every $0.01 move of the U.S.

dollar against the euro and every ¥1 move against the U.S. dollar will impact adjusted EBITDA by $1.5 million to $2.5 million for the euro and $0.5 million to $1 million for the yen, respectively, on an annual basis. Now I'll turn the call back over to Luke to discuss overall expectations for 2017..

Thanks, Scott. In 2016, Albemarle met or exceeded our financial, strategic, and operational targets. The 2016 performance has positioned Albemarle for another outstanding year in 2017.

Based on the assumptions outlined by Scott, we expect 2017 net sales to be in the range of $2.8 billion to $2.95 billion, adjusted EBITDA of $800 million to $840 million, and adjusted earnings per share between $4 and $4.25.

We currently forecast earnings to be somewhat strong in the second half of the year compared to the first, primarily due to expected timing of volumes in Refining Solutions. Even with the $60 million to $70 million of additional expenses in Lithium, our forecasted 2017 adjusted EBITDA range represents an increase of 6% to 11% versus 2016.

The forecast results in adjusted EBITDA margins of 28% to 29%, an increase of about 20 basis points from 2016 at the midpoint of this range. Turning to each of our businesses. We expect another very strong year of earnings growth in Lithium, with adjusted EBITDA increase of greater than 20%.

Adjusted EBITDA margins are again expected to average greater than 40%. Volumes are forecasted to grow by about 10,000 metric tons, driven by an expected increase of about 40% in battery-grade salts. We also continue to see favorable pricing trends with overall pricings in Lithium forecasted to increase by 10% to 15% relative to 2016.

We expect to stabilize the PCS business at adjusted EBITDA levels similar to 2016. We have additional headwinds related to the SunEdison bankruptcy, but are countering those with actions to improve productivity of our asset and reduce our operating costs.

While the overall market outlook is for 3% to 4% volume growth, the competitive environment in certain product areas remains challenging. Refining Solutions should deliver adjusted EBITDA growth of a few percent compared to 2016.

Heavy Oil Upgrading demand continues to be strong, but the combination of turnarounds at our customers and competitive trials will have some negative volume impact, especially in the first half of 2017. We also expect the improved demand and mix in Clean Fuels Technologies that we saw in 2016 to continue into 2017.

However, the magnitude of that improvement will be significantly less than we saw in 2016. As already noted, we currently forecast a stronger second half of the year in Refining Solutions, but as always, timing of change-out in Clean Fuels Technologies could impact those actual results.

After a better-than-expected 2016, we expect Bromine to perform at similar levels in 2017. Modest demand growth in flame retardants and cost management should allow us to counter uncertain demand for clear brine fluids, cost pressures in certain raw materials, and weakness in products sold into the ag markets.

In closing, we delivered on all of our key commitments in 2016 and continued the transformation of Albemarle into a highly focused, high-margin company with strong growth prospects. In 2017, we expect to deliver strong earnings growth, led by Lithium business, and to position the company for continued outsized growth in the years to come..

Operator, we are ready to open the lines for Q&A. But before you do so, I would remind everyone to please limit your questions to two per person at one time so that everyone has a chance to ask questions. Then feel free to get back in the queue for follow-ups if time allows. Please proceed..

Thank you. Ladies and gentlemen, your question and answer session will now begin. Okay, we have some questions for you. Apologies for pronunciation. First name is David Begleiter, and from Deutsche Bank. Please go ahead. You're live in the call..

Thank you. Good morning.

Luke, on 2017, on lithium pricing, could you give a little bit more detail on just the battery grade pricing, how it ended in Q4, and what you're expecting for battery grade only in 2017?.

Yeah. I'm going to turn that over to John..

Hi, David. This is John. When we look at Q4 2016 versus 2015, the growth has come from about 50% volume, 50% price. As Luke mentioned earlier, going into 2017, we're looking across the portfolio, not just battery grade, of increase in pricing from about 10% to 15% in price.

However, when you look at the volume, most of the volume growth, that 10,000 metric tons that Luke mentioned, is going to be skewed towards the battery grade side as well. So a lot of the pricing is coming on the battery grade side..

And, John, can you just comment on what you're seeing demand-wise early in 2017, especially in China for battery-grade lithium?.

Yeah. So we've historically said that the demand for battery grade is driven by automotive penetration rates for battery electric vehicles and plug-in hybrids. Our model shows that to get to a 2% penetration rate by 2021, the overall global demand is about 20,000 metric tons per year. We've seen the market tracking to that.

We know that there have been some recent announcements in China about updating of policies; that was expected. We see continued strong demand out of China. And we don't see the demand profile changing much based on our expectations for 2017, and see about that 20,000 metric ton growth overall for global demand.

We do see acceleration in terms of new models of cars, as well as areas like electric buses also driving growth..

Thank you..

Thank you. Your next question – apologies again for pronunciation – this one's from Alex Yefremov. He's from Nomura Instinet. Please go ahead. You're live in the call..

Hi. Good morning. Thank you.

Could you provide us your expectations for the ramp of volumes at La Negra this year? At what point should we see some additional tonnage? And also what has been your operational experience so far with this expansion?.

So we're planning for approximately 10,000 metric tons of overall volume growth coming basically from the lithium salts. It'll come from a combination of the La Negra ramp-up, as well as hard rock to salt conversion in our new assets in China. We have two assets that came with that China acquisition. One is in Xinyu city and the other in Chengdu.

The Xinyu city operation can be ramped up more than it operated in the past. So it'll be about a 60/40 or 70/30 split, more heavily weighted toward La Negra, and we're ramping up capacity to meet the needs of our customer agreement.

So we want to make sure that we're living up to our commitments, and that's that customers that have signed long-term agreements with us have the products that they need to grow. So we'll be able to meet their demands..

Great, thank you.

And question on CapEx, a little bit longer term, would you expect your CapEx to continue to increase in 2018 from 2017 level as you kind of ramp your Lithium expansion activity?.

Yeah, Alex. This is Scott. So we expect a slight increase going into 2018, and probably right now, in the five-year view, you'll peak in the 2019 perspective from timing, really driven by the new greenfield spodumene conversion plant that we're looking at and the timing of exactly when that spend is.

And that's still in the design phase, so it's kind of hard to know. But that's what we're expecting right now..

All right. Thanks a lot..

Thank you. We have another question for you; again, apologies for pronunciation. This one is from Robert Koort, and he's from Goldman Sachs. Please go ahead. You're live in the call..

Thank you. John, I was hoping you might be able to answer a question about the challenges of bringing this capacity on. It seems like I remember Rockwood years ago talking about La Negra, too, and maybe there was a delay and some other issues.

But can you talk about the actual physical process or unit operations to get it into production? I read one of the start-up competitors has been having problems.

What is it that makes it so challenging? As an incumbent producer, should this give you an advantage, or is there something unique about each plant that makes its own challenges?.

Bob, this is John. First off, you have to look at both the resource side and then the conversion side, and the plants do have to be designed in a way to be able to handle the incoming – whether it's a brine concentrate or ore concentrate. And the characteristics of that brine concentrate or ore concentrate can change.

So there is some design consideration to be given to where the resource is coming from. Second, you have to design a plant to be able to meet a customer's specification. So we look at the cross-section of customers that will be supplied from a derivative plant, and we have to make sure that that plant can actually meet a tailored specification.

And these are not commodity-based plants; these are performance product plants. And then these plants have to actually go through a fairly rigorous qualification process. And so it is challenging.

It's challenging even for a company like Albemarle that has hundreds of scientists and hundreds of engineers to be able to meet an evolving product specification that has to withstand the test of 10 years of battery performance.

And so getting it right, making sure that those products are consistent, not just from a chemical and purity perspective, but there are a lot of physical characteristics around crystal structure and particle size distribution. So it's a complex product, it's a complex molecule, and it's evolving.

And it's evolving every year as battery companies are looking to improve the performance of the batteries..

Yeah, Bob. This is Luke.

What I would say is that gives companies like Albemarle, like SQM, I think an advantage over the others that you may read about coming into the marketplace, because we have a long history with that, we've got experience with it, and we also have the relationships with the customers to understand what that spec is going to be, not just when we bring the plant online but over the next decade.

So we design for that. We're going to be patient, and we're going to work to bring it online in the proper way for the sustainability long term of this Lithium business..

And for my follow-up, if I could, Jiangli, you mentioned there's some head space to increasing production.

I'm curious, as you got into the assets and took a look around, is there a need for a boost in CapEx to improve maintenance? Or was their inability to meet full capacity, a raw material issue? Give us some assessment of what you've seen at Jiangli..

So, Bob, this is John. First off, we had a longstanding relationship with those sites. So we had good insight in terms of the quality of the assets, the quality of the people. Certainly, Albemarle has a very high standard in terms of safety, in terms of process design. So we are investing in those assets.

But that was always part of the business case in terms of that acquisition. We understood the fact that those assets did have headroom, and we're doing a couple things. We are in the process of ramping up.

We're making sure that that product is qualified with our customers that are under long-term agreement, and we're improving the safety standards and the reliability of the facility. At the same time, as we've already previously announced, we're adding another train that will expand our Xinyu facility from 10,000 metric tons to 35,000 metric tons.

So there's a lot of work going on there. That work actually started many months ago. So we're really excited about that operation. It's going to have great quality product, battery-grade product. Our customers are going to be excited about it. And everything's going really well. Thanks..

Great. Thank you..

Thank you. We have another question for you. This one's from Vincent Andrews, Morgan Stanley. Please go ahead. You're live in the call..

Thanks and good morning, everyone. Just wondering if you can give us a bit of an update on your volumetric mix in Lithium between battery grade and standard grade. And just sort of maybe some modeling guidance on how that's going to evolve through 2017..

Okay. So this is John again. As I said earlier, the growth is mainly being driven by energy storage, particularly in the transportation space. And as we look at 2017, we're crossing the 40% threshold, where 40% of our LC demand is going to be going into the battery space..

Vincent, as you look – going forward the bulk, if not all – but I hate to say all because that's so definitive.

But the bulk of all the growth is in the battery space, okay?.

Okay. Thank you. And then just as follow-up, there's a lot of conversion about China in regards to production reform in a variety of different industries within and outside of chemicals.

Are you hearing any conversations about their bromine assets and any changes from a policy perspective there?.

Yeah. I'm going to turn that over to Raphael Crawford..

Vincent, this is Raphael. So, from a China perspective, we keep a close watch on the China market. There certainly are regulatory changes which have affected production among Chinese producers over the last 18 months. Most notably, there's been some regulations that came out that restricted production around the G20 summit.

There's a new resource tax that's affected Chinese production.

So there's been a series of regulatory pieces, but I think that in China the bigger driver of change within bromine availability in the local market is coming from the degradation of the bromine resources, which we think over the last 18 months has started to decline again after a period of stability for several years prior.

So we believe that's probably a bigger impact, Vincent, going forward than the regulatory impact in China..

Okay. Very helpful. Thanks very much..

Thank you. Next question – apologies again for pronunciation – P.J. Juvekar, and he's from Citigroup. Please go ahead. You're live in the call..

Yes. Hi. Good morning..

Hey, P.J..

So lithium is a small part of the battery cost; I think it's less than 5%.

If that's true, then why not take some more pricing on lithium if it's not going to impact the battery demand, or are you concerned about attracting more supply to the market?.

Yeah. So from a standpoint of what we're trying to do in Lithium – we've talked about this before. We're trying very hard to balance volume and price. We're doing that in a way – and I think your numbers are accurate on the cost of lithium carbonate in a battery. But we also understand that this is a long-term sustainable play.

Our customers are being asked to reduce prices every day to drive down the costs of batteries, and we are also – we're at 40% margins with great growth, both from a volume standpoint and from a price standpoint. Our shareholders are getting an excellent return on that business.

We're working with our customers, and we're at the infancy of an industry that we're really trying to be a leader in, and we believe that the approach that we are taking is the most sustainable and thoughtful approach, both for today and in the long term.

We've clearly articulated that with our shareholders as well as our customers, and we plan to stick to that path..

Thank you for that. And then let's talk about supply in lithium. There are two new mines coming online in Australia. You've talked about the challenges of bringing on new capacity, and then, on your Talison also, you talked about expanding that in the future. So just talk about supply a little bit..

I'm going to let John talk to you about that, P.J..

Yeah. Hi. P.J., it's John. As we look at 2017, there are a couple sources aside from Albemarle bringing on capacity. You have the continued ramp-up of the Argentinian brine source and Orocobre; that will continue to contribute some incremental tons into the market.

You have two Australian hard rock mines that are really exporting ore concentrate of different quality and standards into the Chinese market for conversion into various tech grade and maybe low-grade battery salt products for the Chinese market.

The combination of the Australian mines and the conversion capacity in China, the Argentinian source kind of ramping up, and Albemarle will certainly be able to cover the demand for 2017. And our view through 2020-2021 is that the market will continue to remain in balance.

There are certainly projects in addition to the ones that Albemarle are bringing on that will come on. We have a good view of those, and we think that the market will remain in balance through the midterm. With regard to our Talison mine in Greenbushes, Australia, that mine is really extraordinary in terms of ore quality and scale.

It is the best ore quality in the world. It is the largest resource in the world. And we have the ability to double the capacity of that mine. We're in dialogue with our joint venture partner, and we'll make the final decision on the timing of the mine expansion.

But just to give you an idea of the scale of that operation, it has the potential to be able to provide 160,000 metric tons of LCEs into the marketplace -just one mine in a global market that today is about 190,000 metric tons. And it has the best ore quality in the world and the lowest cost structure.

So we're really excited about Greenbushes, and you should be hearing some good stuff from us and our joint venture partner shortly about the expansion..

Thank you for your detailed answer..

Thank you. We have another question for you. This one's from Kevin McCarthy from Vertical Research Partners. Please go ahead. You're live in the call..

Yes. Good morning. I think you had indicated new costs in the Lithium business in a range of $60 million to $70 million.

Is that meant to represent your expected royalty payment, or are there other new costs embedded in there? And if so would you comment on what the likely split might be?.

Yeah. We've said previously when we did the royalty that the royalty would be less than $50 million in 2017. That's still accurate. We have additional costs related to personnel, as well as expenses that'll hit our P&L as it relates to testing and development of new resources to bring on into the future.

So it's the same split as what we've always said, Kevin..

Excellent. And then as a follow-up, you've been busy signing your Lithium customers up to three- to five-year contracts, now 80% I think for the combination of technical and battery grade.

Would you comment on pricing, risk, and opportunity as it relates to those contracts? For example, if we were to see a downturn in pricing at some point over the life of these contracts, do your customers typically have MFN provisions that would allow them to ask Albemarle to meet or release a lower price? What is the price risk or lack thereof that you foresee over that period?.

Hi. This is John. So each individual contract is negotiated separately. But in broad strokes, our agreements have a pricing provision that essentially provides us a floor for pricing.

So, in the event someone were to knock on our customer's door and say, hey, we have a great bargain basement price for a lithium salt, the customers cannot come back to us with a meet comp where we would have to reduce our prices.

There are, in some cases, fixed and variable portions of pricing, and it does give us some flexibility to adjust prices with market. But, as Luke said, we're taking a long-term view. We really value the partnerships with the customers.

We feel that there's an opportunity to collaborate on the next-generation advanced materials and performance materials that are going to go into this space and working together to bring energy storage to the transportation segment and making the grid more efficient.

But we do have good protection in terms of the downside and some good opportunities to move prices up if we feel the market warrants it and it's appropriate..

Yeah. Kevin, we get a lot of questions about the specifics of the contracts, and I'd caution everyone on the call not to get too caught up on the specifics of what we may be able to do with one contract or another contract.

What this does give us, though, is confidence in filling the assets for the capital that we are spending over the next three to five years. It gives us the confidence that we will have volume to be able to run through those facilities. We feel like we picked the right customers.

We also feel as though the pricing is such that we'll be able to maintain that 40% margin, which has been a target that we've talked about, and at the same time will allow us to get a significant and continuing improving return on the capital that we're going to invest.

So it's all a part of the capital plan to grow our overall market and meet that customer demand..

Thanks. I appreciate the color..

Thank you. We have another question for you. This one's from Jim Sheehan at SunTrust. Please go ahead. You're live in the call..

Good morning.

You mentioned for uses of cash a possible share buyback, so just wondering if you could discuss maybe what your intentions are for reducing the share count in 2017 and any cadence of any share buyback activity?.

Sure.

Scott?.

Yeah. Thanks, Jim. Right now, in our guidance, we've assumed a $250 million share buyback. And depending on what the stock price would be on that, obviously that would drive the share count. But in our guidance, we've assumed that we have a 2 million share reduction in our average shares in that EPS guidance.

So you'll see an announcement here shortly, in the next day or so, around that share buyback, as we've done in the past, but we'll be using accelerated share repurchase in order to do that and should be completed by the end of the second quarter or so..

Great. And in Refining Solutions, you mentioned some headwinds in raw material costs.

Could you give some more color on what exactly you're experiencing there and how long you expect that headwind to persist?.

Yeah. I'm going to ask Silvio Ghyoot to take that question..

Thank you. Well, in general we're coming out of period where we have maybe had favorable tailwinds with the raw materials. So utilities, some of the basic raw materials, seem to be trending up these days, and obviously that makes a small difference so far versus last year.

Also there have been some action by the Chinese authorities to get somewhat better organized with the output of the rivers (48:02) out of China, so that may cause an additional headwind. These are the major ones I was referring to..

Thank you..

Thank you. We have another question for you. Apologies again for pronunciation. This one's from Dmitry Silversteyn from Longbow Research. Please go ahead. You're live on the call..

Good morning, guys. Thanks for taking the call. I'll make this really quick. A couple of things. First of all, on the strength in bromine in the fourth quarter, you talked about sort of a little bit flattish expectations for 2017, but obviously 2016 was a better year than perhaps we could have expected.

Was the fourth quarter strong performance, was that just driven by the electronic markets, or was it better drilling fluids, perhaps not going down as much? Can you talk a little bit about the bromine market in the fourth quarter and also your kind of outlook for 2017?.

Sure, Dmitry. This is Raphael. So in the fourth quarter the strength that we saw relative to what we had guided to for the fourth quarter was really driven by, as you had mentioned, some strength in the electronics market as it relates to flame retardants.

I think what we've seen over the last year is really the diversification of the end of markets for flame retardant is now providing some stability to a market that was once more volatile because of the rise and fall of TVs and laptops.

And now with more flame retardant usage in automotive and servers, we're starting to see a regain of strength within flame retardants, which give us confidence that we'll have a market that is flat to growing slightly going forward, and we saw some of that resurgence of strength within flame retardants in the fourth quarter.

Also in the fourth quarter, we had additional sales of hydrogen bromide and some of our amines into China. So that was some additional strength versus what we had expected. And overall been working very hard over the past year, as we always have, in bromine on cost management. So that's really what contributed to the beat in the fourth quarter.

Going forward, I think we continue that outlook on stable to slightly growing flame retardant market. We think that the completion fluids market – that's the drilling end market – that flattened – that sort of bottomed out. We should see stability generally flat in 2017.

And overall we'll continue to work on our cost-out and efficiency programs within bromine, which leads us to believe that will continue to be a good cash generator year over year for the company..

Got it. Thank you for that level of detail. And then as a follow-up, when you look at your input costs, the one metal that seems to have gone up about 25% here in the first quarter year over year is molybdenum.

Is that a concern for you yet, or you'll be able to get those pricing through very quickly, or is it just sort of a normal volatility in the metals that you kind of got to ignore until it gets out of hand?.

Well, the moly price has been locked in. You may remember this; last year we had a floor of moly, $10 throughout the industry. But what we do see is that the moly price is ramping up gradually as we go forward and it starts to meet (51:53) that level of $10 per pound..

So I think, at the end of the day, we'll see an increase in moly, not all of which will be passed through in 2017. And that is included within the estimates that we provided, Dmitry..

Okay, okay.

So you're expecting a little bit of a headwind, but that's part of your guidance and hopefully it'll get the price momentum going for you guys?.

That's exactly right. Now, if it goes higher than what's in our forecast, we're going to have to adjust and deal with that, but the way you described it is accurate..

Okay. Thanks a lot. That's all I have..

Thanks, man..

Thank you. We have another question. And this one's from Mike Sison, KeyBanc. Please go ahead. You're live in the call..

Hey, guys. Nice end to the year there. Hey, when you think about the 160,000 metric tons of LCE capacity by 2020, in total, how much is it going to cost you to get there? And I guess the returns would be pretty impressive.

Can you share any thoughts there?.

I mean, what we've said is it's going to be around $1 billion for us to spend between now and 2021, that kind of range, to get to that LCE, both with respect to the conversion assets, as well as what we have to do in the Salar. And as we've always stated, we look to get 2x our cost of capital, and this will be significantly higher.

So these will be great return projects – if the demand holds, and we have no reason to believe that that demand is not going to hold..

Great. And then just a quick follow-up. Clearly, when you think about the end market exposure by 2021, if you do the math, it looks like you'll be, whatever, 80%, 90% battery grade.

What's the EV penetration that you think needs to occur to sort of support the demand out that far?.

This is John. So, in order to be able to support the 160,000 metric tons of supply that we're bringing on by 2020-2021 timeframe, we only have modeled 2% penetration of battery electric vehicles and plug-in hybrids..

Great. Thank you..

Thanks..

Thank you. We have another question. Again, apologies for pronunciation. Arun Viswanathan from RBC Capital Markets. Please go ahead. You're live in the call..

Hi. This is Dan DiCicco on for Arun. Thank you for taking my question.

Just looking beyond 2017, if we see that 20,000 metric tons of annual demand growth in lithium continue to play out, is that 10% to 15% pricing growth number you guys mentioned for 2017 a reasonable assumption going forward, or would we need to see accelerated demand growth to sustain those increases?.

Yeah. I think it's too early for us to talk about what price is going to be in 2018. We focused on 2017 today. What I will say is if you look, as we fill up these assets, our per-unit cost will continue to drive down, drive to a lower per-unit cost.

And as a result, we're very confident, based on the price and our cost improvement, that we'll be able to maintain those kind of 40%-plus margins for the foreseeable future in Lithium..

Great, thanks. And then just for a follow-up, you mentioned underlying volume growth in the PCS business for 2017.

Just what's driving that?.

Polyethylene and polypropylene demand..

Is that the new capacity coming on? Or is that just -.

Yes..

– demand in general?.

Okay. Great, thank you..

Yeah, if you look at the demand coming on around the U.S. Gulf Coast or these ethylene crackers they're bringing on and what's happening in Asia and other areas of the world, the Middle East, we expect that you're going to see that type of demand growth, and that's really from third parties that are estimating that growth.

And we see it consistent when we talk to our customers..

Great. Thank you..

Thank you. We have another question and this one's from Mike Harrison at Seaport Global Securities. Please go ahead. You're live in the call..

Hi. Good morning..

Hey..

Luke, I was hoping you could give maybe a post-mortem on the new lithium agreement in Chile. Obviously, the overarching goal down there was to extend and expand your extraction rights there, which you were successful on.

But can you talk about how that royalty structure and maybe some other components of the deal played out relative to your expectations?.

Yeah. I mean, we had a long discussion and an approval process that we had to go through, and the thing I'd say is that none of the material terms changed from January, February of 2016 till December of 2016, when it was just finally signed. So we had a long runway to get over the finish line. But the material terms were always consistent.

They never changed. Dollars may have moved around a little bit, but the total dollars stayed the same in the commitment. So, look, it took a while to go through that process.

We were the first ones to go through it, but couldn't be happier with the deal that we got down there, and the ability to ensure the long-term sustainability of the greatest lithium resource in the world for Albemarle..

And then just looking over at the Catalyst business, you noted the mix improvement that happened in the fourth quarter.

Can you talk a little bit about what you're seeing there and also comment on what you're seeing in terms of the pricing environment on the FCC side of the business?.

Yeah. I'll turn that over to Silvio..

Thank you. First question, the mix improvement is always hard to predict at the end, so which changes will occur in a specific quarter.

So there is no structural or no seasonal trends in there, so it's just a fact that some orders may have larger volumes, less profitable products, and another quarter may have much smaller volumes and more profitable products.

And the fourth quarter has been one where we have a reasonable size of hydrotreating business, though less favorable than we have had in other quarters, combined with still a strong HOU or FCC business, which gives that resultant average margin over the four quarters. With regards to the pricing on the FCC, you know this is an overhaul design.

It will take a while before we get this fully implemented. 2017 will be a year where we will be – keep on working on the implementation of this price increase.

However, we think that we will see some of the trial effects through our pricing that ultimately the 2017 pricing will show more the effect of the blending of businesses rather than the effect of the pure price increase..

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day..