Albemarle Corp

NYSE:ALB

Earnings Call Analysis

Quarterly Performance Overview

In the third quarter of 2024, Albemarle Corporation experienced a significant downturn, with net sales dropping to $1.4 billion from $2.3 billion year-over-year, a decline of 41%. This sharp decrease primarily resulted from lower lithium prices. The company recorded a substantial loss of $1.1 billion, translating to a diluted loss per share of $9.45, while adjusted diluted loss per share was reported at $1.55. This downturn was exacerbated by an $861 million pretax charge related to capital project asset write-offs at Kemerton, demonstrating the impact of market fluctuations and cost management struggles.

Operational Adjustments and Cost Management Initiatives

Despite the difficult environment, Albemarle is adapting its operational model to navigate these challenges. The company is targeting $300 million to $400 million in cost and productivity improvements by streamlining its workforce and optimizing manufacturing costs. As part of these adjustments, Albemarle plans to reduce its global workforce by 6% to 7%, which amounts to nearly 1,000 roles in total. Additionally, the company is decreasing capital expenditures for 2025 by $800 million or approximately 50%. These initiatives are expected to enhance financial flexibility and operational efficiency, critical for sustaining competitiveness in the evolving market.

Future Outlook and Guidance

Looking ahead, Albemarle has maintained its full-year outlook for 2024, despite the headwinds from weaker lithium pricing. The company forecasts corporate net sales to be near the lower end of the $12 to $15 per kilogram price range due to price pressures in the second half of the year. However, adjusted EBITDA is expected to fall in the middle of this range, benefiting from effective cost-cutting measures. Moreover, Albemarle's energy storage segment anticipates over 20% growth in volume year-over-year, driven by ongoing demand, particularly in China.

Balance Sheet and Liquidity Status

As of the end of the third quarter, Albemarle reported available liquidity of $3.4 billion, which includes $1.7 billion in cash and cash equivalents. The firm's net debt to adjusted EBITDA stood at 3.5x, significantly below the covenant limits, allowing for greater financial maneuverability. Effective cash management and reduced operational costs have further bolstered this position, ensuring that the company can maintain its financial health amid current market challenges.

Market Dynamics and Long-term Growth Potential

On the market front, Albemarle anticipates continued demand growth in lithium, driven by increased electric vehicle registrations and grid storage applications. The company expects lithium demand to surge significantly, with anticipated expansions in both U.S. and Chinese markets. Concurrently, supply-side challenges persist as a substantial portion of the resource cost curve operates at a loss, theoretically tightening the market for viable producers like Albemarle. These factors position the company advantageously for future growth while navigating the current pricing pressures.

Earnings Call Transcript 2024-Q3

[Operator]

Hello, and welcome to the Albemarle Corporation's Q3 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded today.

I will now turn the call over to Meredith Bandy, Vice President of Investor Relations and Sustainability.

[Meredith Bandy, executive]

Thank you, and welcome, everyone, to Albemarle's Third Quarter 2024 Earnings Conference Call. Our earnings were released after the market yesterday, and you'll find the press release and earnings presentation posted to our website under the Investors section at albemarle.com.

Joining me on the call today are Kent Masters, Chief Executive Officer; and Neal Sheorey, Chief Financial Officer; Netha Johnson, Chief Operations Officer; and Eric Norris, Chief Commercial Officer, are also available for Q&A.

As a reminder, some of the statements made during this call, including our outlook, guidance, expected company performance and strategic initiatives may constitute forward-looking statements. Please note the cautionary language about forward-looking statements contained in our press release and earnings presentation, which also applies to this call. Please also note that some of our comments today refer to non-GAAP financial measures. Reconciliations can be found in our earnings materials.

And now I'll turn the call over to Kent.

[Jerry Masters, executive]

Thank you, Meredith. During the third quarter, Albemarle continued to demonstrate solid operational execution, delivering volumetric growth in energy storage and specialties, year-over-year EBITDA growth in specialties and Kitchen, strong operating cash conversion of over 100% and leverage metrics well below our covenant limits. We also continued to progress our cost improvement plans, further ramp our new facilities and deliver higher volumes.

As a result, we are maintaining our full year 2024 corporate outlook considerations. In a few moments, Neal will give more detail on our third quarter performance, key results and actions we are taking to preserve our financial flexibility.

My focus today will be on addressing the outcomes that we are now driving as a result of the comprehensive cost and operating structure review we progressed over the past few months. In conjunction with this review, we are implementing a new operating structure, transitioning to a fully integrated functional model designed to deliver significant cost savings and maintain long-term competitiveness.

We are targeting $300 million to $400 million of further cost and productivity improvements by eliminating redundancies, reducing management layers and optimizing manufacturing cost. These savings are due in part to the difficult but necessary decision to reduce our global workforce by an additional 6% to 7%. In total, we have eliminated nearly 1,000 roles, including all the actions announced this year. We also are now driving a year-over-year reduction in our full year 2025 capital expenditures by at least $800 million or about 50%.

And with a disciplined focus on critical health, safety, environmental and site maintenance and a phased approach to maintaining our world-class resource base. We are confident these actions are the right steps to adapt to market conditions while serving our customers and pursuing long-term value creation. I will have more to say about our cost-out and productivity plans later on the call.

I'll now hand it over to Neal to discuss our financial results during the quarter.

[Neal Sheorey, executive]

Thanks, Kent, and good morning, everyone. Beginning on Slide 5, I will summarize our third quarter performance. We recorded net sales of $1.4 billion compared to $2.3 billion in the prior year quarter, a decline of 41% driven principally by lower pricing, particularly for lithium.

During the quarter, we recorded a loss attributable to Albemarle of $1.1 billion and a diluted loss per share of $9.45. Adjusted diluted loss per share was $1.55. Our GAAP results included a pretax charge of $861 million related to capital project asset write-offs at Kemerton 3 and putting Kemerton 2 into care and maintenance, of which about 10% is cash outflow in the second half of the year. This charge was below our initial estimate that we provided on the last earnings call of $900 million to $1.1 billion.

Turning to Slide 6. Our third quarter adjusted EBITDA of $211 million was lower than the prior year period, also primarily due to lower lithium pricing. This was partially offset by lower cost of goods sold primarily related to reduced spodumene pricing. Other positives include higher volumes in energy storage related to delivery of our growth projects and in specialties related to stronger end market demand.

Our cost and efficiency initiatives also provided productivity benefits, which more than offset inflation. Looking at adjusted EBITDA by operating segment, we saw improved year-over-year profitability in specialties due to productivity improvements and better end market demand. Ketjen EBITDA also improved year-over-year as we continue to execute our turnaround plan during the quarter.

Moving to Slide 7. As Kent mentioned, we are maintaining our full year 2024 outlook considerations, thanks to the execution of our cost and productivity improvements, continued strong volume growth, including higher sales volumes at our Talison JV and and contract performance in energy storage. As a reminder, these scenarios are based on historically observed lithium market pricing and represent a blend of relevant market prices including both China and ex-China pricing for lithium carbonate and lithium hydroxide.

Turning to Slide 8 for additional commentary on outlook. We expect corporate full year 2024 net sales to be near the lower end of the $12 to $15 per kilogram scenario, primarily due to weaker second half pricing for lithium, offset by contract performance. Full year 2024 adjusted EBITDA is expected to be in the middle of that same scenario range, thanks to successful cost-cutting and productivity improvements.

In energy storage, we now expect full year volume growth to be more than 20% year-over-year as we have continued to benefit from solid demand, particularly in China and ongoing ramps of our new facilities. Fourth quarter volumes are expected to be down sequentially, primarily due to timing of spodumene sales volumes, reduced tolling and planned outages.

Margins are expected to be slightly higher sequentially as the benefit of lower-priced spodumene and cost of goods sold offsets the impact of unabsorbed fixed costs as our new plants continue to ramp. At both specialties and Ketjen, we continue to expect modest sequential improvements in the fourth quarter, thanks to better end market conditions and productivity benefits. Please refer to our appendix slides in the deck for additional modeling considerations across the enterprise.

Moving to our balance sheet and liquidity metrics on Slide 9. We ended the third quarter with available liquidity of $3.4 billion, including $1.7 billion of cash and cash equivalents and the full $1.5 billion available under our revolver. The actions we have taken to improve our cost structure and enhance operational efficiency have also provided enhanced financial flexibility. Thanks to our successful actions to reduce costs and optimize cash flow. We ended Q3 with net debt to adjusted EBITDA of 3.5x or 2 turns below the covenant limit in the quarter. To navigate market conditions, we took proactive measures in the quarter around our covenant waiver.

The outcome of our action is shown on Slide 10. In October, we proactively extended our covenant waiver through the third quarter of 2026 and reshaped it to ensure we have the financial flexibility needed as we execute our new operating structure and cost reduction actions.

Moving forward, our goal remains to stay well within these limits through solid financial and operational execution as we have shown throughout 2024.

Slide 11 highlights our execution focus, which is demonstrated by the continued improvement in our operating cash flow as a result of operational discipline and cash management actions. Our operating cash flow conversion, defined as operating cash flow as a percent of adjusted EBITDA was greater than 100% in the third quarter, primarily due to timing and management of working capital. We continue to expect full year operating cash conversion to be approximately 50%. And at the higher end of our historical range and above our expectations at the beginning of the year. This is driven by increased Talison dividends with higher sales volumes at Greenbushes, and working capital improvements, including a significant focus on inventory and cash management across our operations.

This means that we expect fourth quarter cash conversion to be lower than recent quarters due in part to cash outflows associated with the workforce reductions we announced today as well as the timing of JV dividends. As a reminder, we account for our 49% interest in the Talison JV via the equity method. Therefore, the impact to cash flows is in dividends received. As we have said before, we expect dividends to be lower than normal this year and into 2025 as Talison completes the CGP 3 capital project at the Greenbushes mine.

I'm pleased to see that our efforts to improve operating cash flow conversion are yielding results. We will continue driving toward free cash flow breakeven through our ongoing ramp of new capacity, inventory management, bidding events, cost out and productivity measures and other cash conversion improvements.

Turning to Slide 12. I will provide a few comments on current lithium market conditions, which have shown some positive signs. On the supply side, there have been several announced upstream and downstream curtailments, nonintegrated hard rock conversion is unprofitable, and larger integrated producers are under pressure. We estimate that at least 25% of the global resource cost curve is unprofitable or operating at a loss.

On the demand side, grid storage demand continues to surprise to the upside, up 36% year-to-date led by installations in the U.S. and China. Global electric vehicle registrations are up 23% year-to-date, led by China, and demand growth in the United States is also up double digits.

Slide 13 breaks down global EV demand growth by region. China represents 60% of the overall EV market with continued strong year-to-date demand growth of more than 30%, in line to slightly ahead of initial expectations. In terms of demand mix, we have seen stronger growth in plug-in hybrid sales in China as current subsidies are more balanced between battery EVs and plug-in hybrids. Chinese plug-in hybrids include range-extended vehicles with battery sizes somewhere between traditional battery EVs and plug-in hybrids.

Meanwhile, the softest demand region globally is Europe, where EV sales growth is down slightly year-to-date due to reduced subsidies and weaker economic conditions. Potential price cuts and the drive towards EU emission targets represent rebound opportunities in 2025.

North American sales are up 13% year-to-date, far stronger than suggested by recent headlines. U.S. EV sales trends have strengthened in the back half of the year, benefiting from increased model availability and affordability.

Looking further out on Slide 14. Longer term, we continue to expect lithium demand growth to expand by 2.5x from 2024 to 2030. The global energy transition remains well underway, supported by consumer preferences government policies and technological advancements. From an affordability perspective, the global EV supply chain is on track to achieve the critical $100 per kilowatt hour tipping point, where EVs are at purchase price parity with ICE vehicles. The Chinese industry has likely surpassed that target with the rest of the world not far behind. Overall, these trends continue to reinforce our belief in the long-term growth potential of the industry.

With that, I'll now hand it back to Kent.

[Jerry Masters, executive]

Thanks, Neal. Turning to Slide 15. I will cover the significant yet necessary actions we are taking to rebaseline our cost structure. While allowing us to maintain our leadership position and preserve future growth.

Let me start with our new operating structure on Slide 16. Over the past several months, we have evaluated multiple organizational models, balancing cost with an agile go-to-market approach. Following this review, we announced a new operating structure, transitioning to a fully integrated functional model to deliver significant cost savings and maintain our long-term competitiveness.

This slide shows our leadership team with several title and role changes to reflect our new structure. From a financial reporting perspective, we will continue to report across our 3 segments of energy storage, specialties and [ Ketjen ]. Our fully integrated organizational structure is designed to flex with the complexities of our markets and to strengthen our core capabilities in a cost-effective way to maintain our leadership position.

Turning to Slide 17. It's important to put our latest actions in context of the series of self-help steps we have been progressing for several months as we navigate the current business environment. Albemarle continues to act urgently across 4 key areas: optimizing our conversion network, improving cost and efficiency, reducing capital expenditures and enhancing financial flexibility. Our actions are broad-based and designed to maintain our long-term competitive advantage in light of market conditions. And given the dynamic environment we continue to face, we are always adding to our list of potential actions so that we are ready to pivot as necessary. I'm confident in the team's ability to deliver these improvements based on our performance to date.

We highlight that on Slide 18. Here is a summary of our progress on the cost savings and cost flow initiatives -- cash flow initiatives introduced in January and July of this year as well as the additional actions we're announcing today. All these programs are in execution and the January and July actions are on track or ahead of plan, demonstrating our sharp focus on operational efficiency and proven ability to execute. Regarding the $300 million to $400 million of cost improvements we announced today, we expect to achieve a 40% to 50% run rate by the end of this year.

Additionally, we plan to reduce our 2025 CapEx to between $800 million and $900 million, down about 50% versus 2024. How we got to these cost-out and CapEx targets was through rigorous analytics that involved a combination of robust peer benchmarking and bottoms-up project planning to estimate target savings.

Over the quarter, we analyzed spend across 3 categories: nonmanufacturing costs, specifically SG&A and R&D, manufacturing costs and capital expenditures. Our levers to deliver the nonmanufacturing and manufacturing cost and productivity savings are detailed on Slide 19.

Our total cost-out opportunity of $300 million to $400 million includes approximately $150 million in manufacturing opportunity split between cost reductions like energy and maintenance efficiencies and increased volume through plant rents, yield improvements and other areas. The $150 million to $250 million of nonmanufacturing cost improvement follows a robust benchmarking review with the assistance of a third-party consultant. We evaluated and analyzed our nonmanufacturing cost structure against like-sized peers in lithium and other related industries like specialty chemicals and mining. The biggest driver of these nonmanufacturing savings is to change to our operating structure. The integrated model we made effective November 1 allows us to consolidate activities and reduce duplicative work, optimizing management layers and increasing efficiency.

Other key drivers include shifting more activities to established hubs and low-cost jurisdiction and leveraging technology to reduce manual work. We will continue to internally track our actions and progress through an established program management office, which will be laser-focused on these initiatives and leveraging our ability to execute.

Slide 20 breaks down the third leg of our work, which is the reduction of our 2025 capital expenditures by more than $800 million versus 2024. Overall, we are targeting sustaining CapEx of 4% to 6% of net sales, in line with historical performance and specialty chemical averages. Though we have pulled down our spending, we will continue to invest in critical help, safety, environmental and site maintenance projects. Through our disciplined capital allocation, we will maintain our industry-leading resource base in a phased manner. Additional growth capital will be limited to primarily high-return brownfield expansions and productivity improvements.

Moving to Slide 21. The actions we are taking are designed to maintain Albemarle's significant competitive advantages and position us for long-term value creation, which is encapsulated by our strategic framework shown on Slide 23. Our strategy is unchanged, but as always, we will adjust our execution to pivot and pace with the dynamic markets we serve.

Our strategic framework continues to guide how we operate Albemarle as we lead the world in transforming central resources into critical ingredients. The resources we provide play a critical role in areas with a compelling long-term growth profile and we have competitive strengths that will allow us to navigate the environment, highlighted in more detail on Slide 23. First, our world-class resources are arguably the best in the industry with large scale, high grade and, therefore, low-cost assets.

In energy storage, we have access to some of the highest grade resources in both Hard Rock in Australia and Brian in Chile. Similarly, in specialties, we are the only producer with access to both Tier 1 bromine resources globally in Jordan and the United States. Second, our leading process chemistry know-how is key to achieving further productivity and cost improvements, safely and sustainably. At both the Salar and Magnolia, we have evaluated a wide range of direct lithium extraction options and our piloting solutions.

Third, we have a pipeline of high-impact innovative solutions in both bromine and lithium. Our research, testing and piloting facilities in North Carolina, Louisiana and Germany allow us to participate in differentiated high-margin segments and support our customer-specific requirements.

Fourth, Albemarle's leading industry position as a partner of choice is demonstrated through our partnerships with iconic pioneering companies. Both our businesses have high Net Promoter Scores with significantly positive gaps relative to competitors. Reflecting long-standing successful relationships with major customers. And we are increasingly recognized for the good work we do and the good that our work is doing. For example, we were recently named as one of the world's best companies by time, demonstrating our commitment to creating a more resilient world and advancing the sustainability objectives of our customers.

In summary, on Slide 24, Albemarle delivered another solid performance in the third quarter, including higher volumes in energy storage and specialties and year-over-year improvements in adjusted EBITDA for specialties and Ketjen. We've maintained our full year 2024 outlook considerations, thanks in part to enterprise-wide cost improvements, strong energy storage project ramps and contract performance. We are focused on taking broad-based proactive steps to control what we can control and ensure we are competitive across the cycle.

Albemarle remains a global leader with a world-class portfolio and vertical integration strength. I am confident we are taking the right actions to maintain our competitive position and to capitalize on the incredible long-term opportunity in our markets. I look forward to seeing some of you face-to-face at upcoming events listed here on Slide 25.

And with that, I'd like to turn the call back over to the operator to begin the Q&A portion.

[Operator]

[Operator Instructions] Our first question is from Aleksey Yefremov from KeyBanc.

[Aleksey Yefremov, analyst]

Was lower fixed cost next year and some volume growth. Can you keep your EBITDA at least flat if prices don't change? Or do you expect an increase or decline?

[Jerry Masters, executive]

So -- okay. So that's a '25 question as we go into it. So just to be clear, we're not going to give an outlook for '25 on this, but we can give you some kind of puts and takes off of '24. Neal, do you want to take that?

[Neal Sheorey, executive]

Yes, sure. Aleksey, so yes, just -- we're obviously working through our 2025 outlook right now. So it's a little premature for us to talk about that. We'll talk about that on the next earnings call. But just to give you a couple of puts and takes here. So obviously, where pricing is today, that's something that you can observe. And relative to the lower end of our guidance range today, we're probably 20% to 25% market pricing is below the average that we have achieved in 2024. And so you can kind of build that if you assume today's prices kind of roll into next year, that gives you a thought of what to build in for -- in terms of a headwind for pricing.

I'd also point you to remember that in Q2, we had a bump up in our equity earnings from the Talison JV because we had an unusually high offtake by our partner at the JV. And so we had about $100 million uplift in the second quarter. And I don't expect that to repeat in 2025 as well.

Now on the opposite side of that is, as you mentioned, our fixed cost, you should expect our fixed costs are going to come down. We've had the actions that we've announced today, the $300 million to $400 million of cost and productivity actions. We expect at the end of this year that we'll be at that 40% to 50% run rate. So that is savings that you can start to build into 2025. And of course, we'll continue to build on those savings as we go through the year. And then, of course, we're also still ramping our plants, especially in the lithium business. And so you should expect that our fixed assets are going to continue to ramp as we go through 2025. So just a few puts and takes to think about things as you go through 2025.

[Aleksey Yefremov, analyst]

And then to follow up on the last point, you cut your CapEx for '25. How is it affecting your volumes next year and if you can provide any comments about volume growth next year in lithium?

[Jerry Masters, executive]

Yes. I don't -- I mean, the CapEx cuts we're doing now will impact volume. Our forecast for volume for next year. Those -- that's further out and then us getting just tighter on our CapEx program. So we're still -- we look at -- I think we've previously talked about 20% growth through '27. Some of the CapEx cuts we've done and taking some volume out, that's probably 15% CAGR through '27. So it's a little -- but it's longer term. It's not so much in '25.

[Neal Sheorey, executive]

Yes. And Aleksey, maybe just to pile on to that, the growth that I'm talking about for 2025 is obviously driven by assets that are already built and continuing to ramp.

So like the Salar yield improvement project, Meishan in China, Kemerton in Australia. So those are things that have been ramping in 2024, and we'll continue to ramp in '25.

[Operator]

Our next question is from John Roberts with Mizuho.

[John Ezekiel Roberts, analyst]

On Slide 8, in that fourth quarter improved margin guidance for energy storage. What are you assuming for Talison equity income in the fourth quarter? And what's the Talison CapEx for 2024 and 2025.

[Neal Sheorey, executive]

Yes. So John, this is Neal again. So when you think about equity income for next quarter, I think your assumption should be, I mean, basically spot pricing has been pretty flattish if you look at third quarter into fourth quarter. So I think you should think about something kind of similar to what we've experienced in the third quarter, all things being equal. And then I think the second part of your question, can you repeat that again?

[John Ezekiel Roberts, analyst]

Budget for 2025 yet? And what do you think their 2024 CapEx comes in at.

[Neal Sheorey, executive]

Yes. So it is definitely premature for me to talk about the CapEx budget for 2025. For sure, there is capital that the JV continues to need to spend with regards to the CGP 3 asset. That's an asset that will continue to be built. It will be finished up in 2025, and we expect it to be actually starting up as we get towards the end of 2025. But John, we're literally working through the Talison budget with the JV and with the partners right now.

So it's a little premature for me to speak to that. We should have more to say on the next earnings call.

[John Ezekiel Roberts, analyst]

And what did you have to agree to or pay in order to get the revised financial covenants.

[Neal Sheorey, executive]

Yes. John, I won't give you the exact number, but it was a very small amount. You should think about it being far less than $1 million.

[Operator]

Our next question is from David Deckelbaum with Cowen.

[David Deckelbaum, analyst]

I was curious if you've received some questions on the impact of the CapEx cuts on your long-term growth profile. The reduction of that $800 million, $900 million, as you go through this strategic review, is that where we should think of approximately maintenance capital? Or as we get into '26 and beyond, could we see numbers quite a bit below those levels?

[Jerry Masters, executive]

Yes. So we're -- look, we're getting -- we're tightening down on maintenance capital, and we're targeting a range of 4% to 6% of revenue at a normalized level. So you'll see us a little bit above that this year because we think pricing is below a normalized level. So we're a little above that, but we're also working to tighten that up. And then you see growth capital in there for high-return projects, productivity type projects, brownfield type expansions, which are high return and quick paybacks.

So that's kind of how what we've got built into that $800 million, $900 million, and we'll continue to work on that. It depends on the opportunities that we have, but we'll continue to focus. But we're from a maintenance capital standpoint, we're trying to be in that range of 4% to 6% on a normalized basis, and we're a little ahead of that for this year.

Or for next year. Sorry.

[David Deckelbaum, analyst]

And then just continuing with just the theme of cash preservation. What's the outlook for the next several quarters in terms of cash conversion? Obviously, this quarter, there was some working capital management that really helped that conversion and helps kind of fortify the balance sheet. So I'm curious how you think about the next several quarters ahead of us here.

[Jerry Masters, executive]

Yes. So Neal can give us some specifics on that. But we're very focused on it. Some of our key metrics around that is cash conversion. So cash flow, everything around that, but a key management metric that we're focused on is cash conversion. You saw a big number this quarter. We obviously -- we can't repeat that. So it will come off that. We're above historic levels that where we've operated historically, but we're focused on driving that conversion number up.

Neal, do you want to make any specific comment?

[Neal Sheorey, executive]

Yes. Just to add to that, Kent. So absolutely, I'll double down on what Kent said that we obviously have a very strong focus internally on cash generation, cash conversion and driving to that free cash flow breakeven point in the future. And we're continuing every quarter to work on this. Several things that we've got in flight is obviously working capital management is very much front and center. We have the cost and productivity that we are already doing. But obviously, today, we've announced even more that we're doing. And so we continue to drive on that. The other piece that will be very important for our overall cash flow generation is how we think about the dividends coming off of the Talison joint venture.

One of the reasons that we mentioned in the deck that our cash conversion is going to be lower in the fourth quarter, is that at the moment, we see those dividends from the Talison joint venture in the fourth quarter coming down. Right now, our assumption is they'll be zero. But obviously, as we get into 2025 and as we work through things with the JV, it will be very important as we think through the dividends of that JV can throw back to the partners.

[Operator]

Our next question is from Ben Isaacson with Scotia Capital.

[Unknown Analyst]

This is [indiscernible] on for Ben. So my question for you is that -- so you've discussed your leverage covenants providing a substantial buffer. We thought kind of 2x spread in Q3. Is there any color that you can provide on the shape of those limits as they evolve through 2026. Moving specifically at Q2 and Q3 '25 where that lever the covenant limit rises to kind of 5.75x. So any color there?

[Jerry Masters, executive]

Yes, [indiscernible]. So essentially, the shaping of that covenant waiver sort of follows -- recall that our covenant waiver is calculated on a trailing 12-month EBITDA. And so you can imagine that we've kind of shaped this based on how we look backwards at the the shape of the EBITDA that we've generated so far in 2024 as well.

So that's really how we've thought through how the trailing 12 months might look like as we go forward and then shape the covenant waiver accordingly.

[Operator]

Our next question is from Steve Byrne with Bank of America.

[Rock Hoffman Blasko, analyst]

Rob Hoffman on for Steve Byrne. In 3Q, realized pricing energy storage has seemingly come in at a lower premium relative to the lithium apartment market prices. versus prior quarters. Was there any meaningful shift in the percent of contract pricing with 1 quarter lag and pricing for? And what percent of the Q3 contractors figure has pricing for us.

[Jerry Masters, executive]

Yes. So I don't -- there's really no change in the contracts that rolled off during the quarter. So that's I'm not sure -- so that view is a little different than the way that I think about it. But the contracts really they haven't changed. So it's the mix of where those customers are and where that volume gets taken is how your average price moves. And we're -- I don't think we're going to say anything more than we have said before about the contracts and the floors that we have. So we've got contract volume on about 2/3 of it and some have floors and ceilings and others don't. But we're not going to -- but it hasn't changed.

[Eric Norris, executive]

I could just add -- this is Eric, that during the quarter, we did see our highest volumes that we'll see of any quarter to date and will be higher than the fourth quarter as well. A lot of that was due to the timing of spot sales and spodumene sales, which would bias the mix in a quarter and has. So I mean I think you're noting something that is on target, that there's a mix effect there. That's not a reflection of contract that would wash out on a full year basis and be consistent with our guidance.

[Rock Hoffman Blasko, analyst]

Makes sense. And just as a follow-up, given lower pricing being sustained, might you consider cutting operating rates to tighten the market rather than the forementioned guided 15% near-term CAGR growth in volume?

[Jerry Masters, executive]

Yes, Philip, we look at everything. It's probably -- it's less a little bit about tightening the market but where it makes sense for us to -- what our customer demand is, what we see volumes growing to and the mix about where we produce most cost effectively. So -- but we look at -- we're looking at everything, including operating rates at plants, but it's really more about the mix of our customers, the demand growth than it is about thinking about tightening the market.

[Operator]

Our next question is from Vincent Andrews with Morgan Stanley.

[Vincent Andrews, analyst]

Neal, could I ask you on the $300 million to $400 million in a 40% to 50% run rate by the end of this year. What then gives you such a wide range for -- I guess, you're going to call off by the end of next year, but what would make it $300 million and what would make it $400 million?

[Neal Sheorey, executive]

I think that's -- I mean, it's just -- it's a range that we're giving and some of the things that we're working through around that. So it's not all completely detailed out. So and there's a dynamic around that as we go. Some of it is around overhead, some of it's around operating cost productivity improvements and things that we're doing at plant. So there's a range to give us a little bit of breathing room because we're -- the lower end would be fairly conservative and the upper end would be a bit of a stretch. I don't think it's any more sophisticated than that.

[Vincent Andrews, analyst]

Fair enough. And if kent if could ask you, as we look ahead, we're obviously at the bottom of the cycle, let's assume the cycle turns, we assume prices go back and make up a number, $25,000 a ton when you clean up your balance sheet issues. What is Albemarle's strategy and lithium going to be? Is it just going to be a reversion to what you were doing for the last down cycle where you want to get back into conversion and you want to go out and buy resources or you going to do something different? Or are there things you're not going to do? How are you? And how is the Board thinking about sort of where the company wants to be strategically going forward?

[Jerry Masters, executive]

Yes. So we've said and actually said in our prepared remarks that our strategy has not changed, but the way we're executing against it has. So if -- and when we'll react to the market. So prices come back -- to be honest, I think we're going to be a little conservative to make sure that they are going to stay there before we shift our plans around that. So we'll be -- we want to make sure if they move up that they're going to stay up and we're just not in another cycle and I think right now, we're focused on making sure that we put the cost structure in place to compete through the bottom of the cycle, and we'll be able to -- we're trying to create the flexibility to pivot up if the market returns, but we're going to be a little conservative to make sure it really changed and we're just not in a cycle.

[Operator]

Our next question is with Kevin McCarthy from Vertical Research Partners.

[Matthew Hettwer, analyst]

This is Matt Hettwer on for Kevin McCarthy. During your cost structure review, what new processes did you learn from benchmarking lithium peers? And how do you plan to implement those at Albemarle? On Slide 19, it looks like there's a gap between the current nonmanufacturing costs at Albemarle and that of your median peer group. What did you identify as a source of that difference?

[Jerry Masters, executive]

So on the benchmarking, I'll take that. Sorry, we got a phone going off in the room. So -- on the benchmark, I'm not sure we learn any new processes from benchmarking our peers, but it's more about the cost of overhead where people were operating and not -- it's less about lithium peers and it was just about broad corporate cost structure, with people that have a footprint that looks a bit like ours, very global with heavy manufacturing, those type pieces. I'm not sure we picked up any big process changes that we learned from our lithium peers. I think it's just more about the aspiration we took from a cost savings standpoint based on what we saw other corporates doing.

[Neal Sheorey, executive]

And maybe -- this is Neal. Just to add to a couple of things. Look, as an organization standpoint, we were obviously positioned for for growth historically. And now in this new environment, we're moving to more of a cost-focused organization. Time and again, that model that works is the functional model that we announced. And so I think 1 of the key things that we saw is that there are ways to achieve what you need to from a strict functional model standpoint.

So that's 1 of the key things as we functionalize the company, there are naturally going to be cost and simplification opportunities. And then the other thing I'll point out too is that we have to up and running and very well running back offices. And those are areas that we can use much more efficiently, especially in a functionalized model as well.

So those are just a couple of examples. You see them on slide, I think it's 19 as well. But those are really some of the core areas where we are finding cost out opportunities.

[Matthew Hettwer, analyst]

And then could you comment on some of the recent supply curtailments that you've seen? Has there been any significant downward movement in lepidolite supply out of China or Africa and given that you estimate 25% of the supply curve to be unprofitable, why do you think it's taken so long to see a significant downward momentum in supply?

[Eric Norris, executive]

Yes. This is Eric. So speaking on lepidolite, it was announced during the quarter, and we've since been able to get corroboration although it isn't always clear in China, but the lepidolite -- one of the largest lepidolite suppliers had gone down into care and maintenance, taking some capacity offline. But there's still lepidolite in the market. Obviously, that's all in China. We've also seen continued growth in supply coming -- that's replacing that, serving the growing China market coming out of Africa. Where we've seen a lot of the shutdowns have been in some of the -- or modulations in some cases, has been out of the Western Australia sites and some delays on some of the Brian projects that were more either greenfield or significant brownfield expansions have been pushed out. We can get in more detail, but that's a quick summary. As to why more has not come out, it is a little puzzling. It is a fragmented market. It is a market with significant Chinese presence today. And it's -- it's a market where you have a lot of young companies whose sole reason for existing is to raise a lithium project. They may have cash on their balance sheets. And as long as they can continue to operate, they will do so, they don't have an alternative.

So I think it's the maturity maybe when we're putting out this market is such that it's going to take a little longer, and that is reflected in our lower for longer view on pricing potentially, which is driving our need to be competitive across -- through the cycle and all these actions that we have talked about taking today.

[Operator]

Our next question is from Joel Jackson from BMO Capital Markets.

[Joel Jackson, analyst]

Just following up on that for my first question. Don't you think that more supply needs to come out of the market, like real supply, not some projects for years now, but real spodumene, real hard rock, real brine out of the market now to get prices going? Or what do you think needs to happen to get prices to recover? Because it seems like it can't just be demand. It's got to be supply at this point. Would you agree?

[Jerry Masters, executive]

Well, I think it's both, right? So we do think more supply needs to come out. And as these prices persist, it will come out. It's a matter of how long it takes. And then -- and demand is still pretty strong, right? It's over it's been picked up a little bit by some of the fixed storage volumes in the last few quarters. A little stronger than we had anticipated, but it is both. It's both demand and supply. And we do -- we need more supply to come out, and we expect it to at prices at these levels.

[Joel Jackson, analyst]

There have been a lot of stories in the media in the last few months about Albemarle maybe looking at some asset sales, whether it be your stake in Greenbushes or Talison, which I think you refuted publicly or had a retraction in the media got a retraction made from that report in the media, but also maybe speculation you'd be considering selling your stake in [indiscernible]. Could you just generally talk about if you're looking at any asset sales?

[Jerry Masters, executive]

But we're always looking at from a portfolio perspective. So Ketjen is an example of that. And we've talked about that and said that's a noncore asset that we look to sell. But Greenbushes, I mean we are not -- when we're -- we wouldn't speculate on rumors around that, but -- but we did clarify Greenbushes, not something that we're thinking about selling.

[Operator]

Our next question is from Michael Sison from Wells Fargo.

[Unknown Analyst]

This is Abdul on for Mike. Just wanted to ask about the status of Kings Mountain, if there's any update in terms of costs or plans or anything like that?

[Jerry Masters, executive]

So Kings Mountain is a project we continue to push and invest in. So we're going through the permitting process. And that process is on track, there's a number of permits that are necessary for that, and it's a pretty long time frame to secure all of those. But I would say we continue to pursue that from a permitting standpoint. And that process is at this point, it's on track.

[Operator]

Our next question is from Christopher Parkinson with Wolf Research.

[Unknown Analyst]

This is Harris venue. -- for my first one, it would be helpful to hear some of your thoughts on the implications from the election, how you're thinking about tariffs and EV subsidies and maybe how you're adopting the strategy for that kind of environment.

[Jerry Masters, executive]

Yes. So it is -- well, it's a little early to talk about what a Trump administration may do. We know what they've talked about. We'll have to see what they do. But this -- the energy transition is kind of a global phenomenon that is happening. It's really driven first by China, Europe, probably the second largest market in that and in North America. And I don't want to speculate on what Trump administration might do. We'll have to wait and see. I will say that we've worked across the aisle in -- around the U.S. And we have contacts there. We know what they had talked about, but I think we just have to wait and see what they do, and then we will adjust to that.

But it is a global market, and this energy transition is happening and we're pretty well positioned around the globe to take advantage of that. We were -- our strategy had been to pivot to the west. We've kind of backed off that given that prices have been so low and economics are building that supply chain now in the West, we still hope to do that, but we have to wait and see what a Trump administration wants to do.

[Unknown Analyst]

Got it. That's helpful. And then for my second one, in Slide 17, you mentioned potential upside actions, accelerating productivity and reducing capital intensity even more. I guess maybe could you provide a little more detail as to what's on the table right now? Anything you can share as to what that might entail?

[Jerry Masters, executive]

So look, I think we're working through this, and we -- as we said before, we've given a range because -- and we're being pretty aggressive around that, and it covers everything from overhead to R&D, part of that and our manufacturing base. So there's some opportunities to take cost out of there. So I don't know that we want to speculate on those. We need to do the work and then we'll come back to it. I think first you'll see, hopefully, we'll be narrowing the range to the upside as we go through and execute against this. And then if we have anything new to report, we'll do that in time. But I'm not -- I don't want to get out in front of that.

[Operator]

Our next question is from Joshua Spector with UBS.

[Christopher Perrella, analyst]

It's Chris Perrella on for Josh. I wanted to follow up on the contract outlook for lithium next year. I know it's 2/3 under contract for this year. What are your expectations for the mix in 2025? And then I had a follow-up on use of cash in the fourth quarter.

[Jerry Masters, executive]

So I guess, as we go through this, so as the -- we're not -- our mix won't change materially other than the fact that a lot of the growth will come on at spot volumes. And it may be under a contract, but it would be probably not with the same level of floors that we have in our current contracts. So the growth kind of creates additional mix, if you will, so it's not really a change in those contracts -- the existing contracts per se, but that new ones, either that come on or the volume that we sell is on a spot basis, it's more reflective of the spot market.

[Christopher Perrella, analyst]

And then I guess for Neal, the use of cash in the fourth quarter from an operational standpoint is quite large. Could you just bucket or size out expand upon what the cash outflow or the use of cash is going to be from an operational standpoint in the fourth quarter?

[Neal Sheorey, executive]

Yes. Let me maybe give you a couple of things to think about. So first of all, in the fourth quarter, as I mentioned on a previous Q&A, we're right now not expecting a dividend from the Talison JV. If you go back and look at what we did in the third quarter or what we got in the third quarter, you'd probably find that, that dividend was in the, let's call it, $70 million to $80 million kind of range in the third quarter. And so that's that's 1 piece that we won't -- we're not expecting on in the fourth quarter. The other piece is, as we mentioned in the prepared remarks, 1 of the reasons that we -- there are 2 things behind our working capital performance in the third quarter.

The first, we said was working capital management, which very much happened. We reduced our inventories in the quarter, and we're still focused on driving those to an efficient point by the end of the year. But we also talked about timing of working capital. And what that was specifically is we had some items in A-Pay that moved from the third quarter into the fourth quarter.

So we'll eventually have to obviously make those payments. And I won't give you the exact number here, but you can imagine that, that's going to be in the tens of millions of dollars. As we finish up those payments. And then the last 1 is the payments related to the cost reduction actions that we announced today. If you go and look in our queue, I don't know if you've had time to look at that, but we breadbox that and it's kind of in that $40 million to $50 million kind of cash outflow range as well. So that maybe gives you a few key buckets to think about from an operating cash flow perspective.

[Operator]

Our next question is Patrick Cunningham from Citi.

[Unknown Analyst]

This is Eric Zhang on for Patrick. On the 2025 CapEx guide, can you walk us through the actions you guys have taken to bring down CapEx and what is contemplated and are there any assets under consideration that could potentially go into care and maintenance.

[Jerry Masters, executive]

So okay, let me do the capital first. So -- and then you can help me on this a little bit. But we've looked across the organization, and we've taken out there some growth projects that we have taken out of capital. We've tightened others up -- and from a maintenance capital standpoint, we've gotten tighter on that, a little more rigorous. And as we said before, what we've kept in, we've got maintenance capital, what we think is a minimum that we need -- and again, we're targeting that 4% to 6% of revenue for -- in the range for maintenance capital, and we're a little ahead of that for '25 because we just -- that's on a normalized revenue basis. And we think we're below a normalized level given lithium prices. And we've got projects around either a pretty short payback investment projects, whether they're for cost improvement or additional product that would be high-return, short payback type projects, we're still doing those. And the larger growth projects, which is why were we pulled back on our growth forecast out into the future because we're not doing some of those bigger projects that we had planned.

And then the second part of the question, I'm sorry?

[Unknown Analyst]

On the question -- so we.

[Jerry Masters, executive]

Yes. So we've done -- yes, I got it. Sorry. So we've done the train 2 at Kemerton in care and maintenance. And depending on where prices go, we will look at other assets, both from a resource and conversion standpoint across the portfolio. It's something that we are -- that we will look at. We've not made decisions around that. And some of those are acquire like JV decisions as well.

So Wodgina is 1 where we're deciding about the number of trains that we operate at Wodgina, but it's something we have to agree with our joint venture partner.

[Operator]

Thank you. That's all the time we have for questions. I will now pass it back to Kent Masters for closing remarks.

[Jerry Masters, executive]

Okay. Thank you, Jimmy. Albemarle continues to deliver solid operational results due to our execution across the company. With proactive steps underway to reduce cost and drive performance, we are well positioned to take advantage of the long-term growth opportunities across our end markets. Thank you for joining us today, and please stay safe.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.