ALBEMARLE CORP (ALB) FY 2022 MD&A

Overview

We are a leading global developer, manufacturer and marketer of highly-engineered specialty chemicals that are designed to meet our customers’ needs across a diverse range of end markets. Our corporate purpose is making the world safe and sustainable by powering the potential of people. The end markets we serve include energy storage, petroleum refining, consumer electronics, construction, automotive, lubricants, pharmaceuticals and crop protection. We believe that our commercial and geographic diversity, technical expertise, access to high-quality resources, innovative capability, flexible, low-cost global manufacturing base, experienced management team and strategic focus on our core base technologies will enable us to maintain leading positions in those areas of the specialty chemicals industry in which we operate.

Secular trends favorably impacting demand within the end markets that we serve combined with our diverse product portfolio, broad geographic presence and customer-focused solutions will continue to be key drivers of our future earnings growth. We continue to build upon our existing green solutions portfolio and our ongoing mission to provide innovative, yet commercially viable, clean energy products and services to the marketplace to contribute to our sustainable revenue. For example, our Lithium business contributes to the growth of clean miles driven with electric vehicles and more efficient use of renewable energy through grid storage; Bromine enables the prevention of fires starting in electronic equipment, greater fuel efficiency from rubber tires and the reduction of emissions from coal fired power plants; and the Catalysts business creates efficiency of natural resources through more usable products from a single barrel of oil, enables safer, greener production of alkylates used to produce more environmentally-friendly fuels, and reduced emissions through cleaner transportation fuels. We believe our disciplined cost reduction efforts and ongoing productivity improvements, among other factors, position us well to take advantage of strengthening economic conditions as they occur, while softening the negative impact of the current challenging global economic environment.

2022 Highlights

•In the first quarter of 2022, we increased our quarterly dividend for the 29th consecutive year, to $0.395 per share.

•In January 2022, we signed a joint development agreement with 6K to explore the use of 6K’s patented UniMelt® advanced, sustainable materials production platform to develop novel lithium battery materials through potentially disruptive manufacturing processes.

•In February 2022, we announced that we signed a non-binding letter agreement with our MARBL joint venture partner, MRL, to explore a potential expansion of the MARBL joint venture, in an effort to expand lithium conversion capacity with increased optionality and reduced risk.

•In May 2022, we issued $1.7 billion of senior notes pursuant to an underwritten public offering. The proceeds from this issuance were used to redeem the 4.15% Senior Notes due in 2024 (the “2024 Notes”), repay the balance of commercial paper outstanding and for general corporate purposes.

•Production of spodumene concentrate from the first and second trains at the Wodgina mine managed by our 60%-owned MARBL joint venture was achieved in May and July of this year, respectively.

•We announced plans to build integrated lithium operations in the United States, including the Kings Mountain, North Carolina spodumene mine and a lithium conversion plant in the Southeast.

•We announced the conclusion of our strategic review of the Catalysts business. As a result of the review, we chose to retain the business under a separate, wholly-owned subsidiary of Albemarle that has been renamed Ketjen in 2023. This structure is intended to allow the Catalysts business to respond to unique customer needs and global market dynamics more effectively while also achieving its growth ambitions.

•We announced the realignment of our Lithium and Bromine global business units into a new corporate structure designed to better meet customer needs and foster talent required to deliver in a competitive global environment. The realignment was effective January 1, 2023, and resulted in the following three reportable segments: (1) Energy Storage; (2) Specialties; and (3) Ketjen (Catalysts).

•In October 2022, we announced that we have been awarded a nearly $150 million grant from the U.S. Department of Energy to expand domestic manufacturing of batteries for EVs and the electric grid and for materials and components

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currently imported from other countries. The grant funding is intended to support a portion of the anticipated cost to construct a new, commercial-scale U.S.-based lithium concentrator facility at our Kings Mountain, North Carolina, location.

•In October 2022, we completed the acquisition of all of the outstanding equity of Qinzhou, for approximately $200 million in cash. Qinzhou's operations include a recently constructed lithium processing plant strategically positioned near the Port of Qinzhou in Guangxi, which began commercial production in the first half of 2022. The plant has designed annual conversion capacity of up to 25,000 metric tonnes of LCE and is capable of producing battery-grade lithium carbonate and lithium hydroxide.

•In December 2022, we unveiled a groundbreaking product, MercLok™, which captures mercury from soil and mining waste, helping to remove this harmful element from the food chain.

•In December 2022, we announced the acquisition of a location in Charlotte, North Carolina, where we intend to invest at least $180 million to establish the Albemarle Technology Park, a world-class facility designed for novel materials research, advanced process development, and acceleration of next-generation lithium products to market. We anticipate that innovations from the new site will enhance lithium recovery, improve production methods, and introduce new forms of lithium to enable breakthrough levels of battery performance. In addition, we anticipate the creation of at least 200 jobs at the site.

•We achieved net income of $2.7 billion during 2022 compared to $123.7 million for 2021. The increase in 2022 net income was primarily driven by increased lithium prices reflecting tight market conditions and greater volumes sold under index-referenced and variable-based contracts.

•Cash flows from operations in 2022 were $1.9 billion compared to $344.3 million in 2021.

Outlook

The current global business environment presents a diverse set of opportunities and challenges in the markets we serve. In particular, the market for lithium battery and energy storage, particularly for electric vehicles (“EVs”), remains strong, providing the opportunity to continue to develop high quality and innovative products while managing the high cost of expanding capacity. The other markets we serve continue to present various opportunities for value and growth as we have positioned ourselves to manage the impact on our business of changing global conditions, such as slow and uneven global growth, currency exchange volatility, crude oil price fluctuation, a dynamic pricing environment, an ever-changing landscape in electronics, the continuous need for cutting edge catalysts and technology by our refinery customers and increasingly stringent environmental standards. Amidst these dynamics, we believe our business fundamentals are sound and that we are strategically well-positioned as we remain focused on increasing sales volumes, optimizing and improving the value of our portfolio primarily through pricing and product development, managing costs and delivering value to our customers and shareholders. We believe that our businesses remain well-positioned to capitalize on new business opportunities and long-term trends driving growth within our end markets and to respond quickly to changes in economic conditions in these markets.

Beginning in the first quarter of 2023, the chief operating decision maker began evaluating performance, forecasting and making resource allocation decisions based on our previously announced realignment of the Lithium and Bromine global business units. The new corporate structure was designed to better meet customer needs and foster talent required to deliver in a competitive global environment. The realignment resulted in the following three reportable segments: (1) Energy Storage; (2) Specialties; and (3) Ketjen (Catalysts). The below segment outlook is presented in the new segment structure based on how the chief operating decision maker started reviewing the business starting in 2023.

Energy Storage: We expect Energy Storage results to increase year-over-year in 2023, mainly due to increased pricing as well as higher sales volume. The increased market pricing reflects tight market conditions, primarily in battery- and tech-grade carbonate and hydroxide, as well as renegotiations of certain of our long-term agreements. Since the beginning of 2022 market indices have increased 70% to 200%. Some of our renegotiated contracts include higher prices on existing long-term agreements that are more reflective of current market conditions. In other cases, we have moved from previous fixed-price, long-term agreements towards index-referenced and variable-priced contracts. As a result, our Energy Storage business is more aligned with changes in market and index pricing than it has been in the past. While we expect these prices to remain strong throughout the year, a material decline in these market prices would have a negative impact on our outlook. The increased sales volume is primarily expected from new capacity coming on line from La Negra, Chile, Kemerton, Western Australia, and the recently completed acquisition of Qinzhou, which includes a lithium hydroxide conversion plant designed to produce up to 25,000 metric tons of LCE per year. While we ramp up our new capacity, we will continue to utilize tolling arrangements to meet growing customer demand. EV sales are expected to continue to increase over the prior year as the lithium battery market remains strong.

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We announced agreements for a strategic investment in China with plans to build a battery grade lithium conversion plant in Meishan initially targeting 50,000 metric tons of LCE per year. Construction of the Meishan facility is currently underway and is expected to be complete by the end of 2024. In addition, production of spodumene concentrate from the first and second trains at the Wodgina mine managed by our 60%-owned MARBL joint venture was achieved in May and July of this year, respectively. In February 2022, we announced that we signed a non-binding letter agreement with our MARBL joint venture partner, MRL, to explore a potential expansion of the MARBL joint venture, in an effort to expand lithium conversion capacity with increased optionality and reduced risk.

On a longer-term basis, we believe that demand for lithium will continue to grow as new lithium applications advance and the use of plug-in hybrid electric vehicles and full battery electric vehicles increases. This demand for lithium is supported by a favorable backdrop of steadily declining lithium-ion battery costs, increasing battery performance, continuing significant investments in the battery and EV supply chain by cathode and battery producers and automotive OEMs and favorable global public policy toward e-mobility/renewable energy usage. Our outlook is also bolstered by long-term supply agreements with key strategic customers, reflecting our standing as a preferred global lithium partner, highlighted by our scale, access to geographically diverse, low-cost resources and long-term track record of reliability of supply and operating execution.

Specialties: We expect both net sales and profitability to increase in 2023 due to strength in demand across our product portfolio that benefits from diverse end markets. One anticipated contributor to growth is the December 2022 launch of MercLok, a groundbreaking new bromine-based product that sequesters elemental and ionic mercury in the environment. Volumes are expected to increase compared to 2022 due to the continued successful execution of growth projects, assuming continued availability of raw materials like chlorine. In addition, Specialties’ ongoing cost savings initiatives and higher pricing are expected to offset higher freight and raw material costs such as lithium chloride.

On a longer-term basis, we continue to believe that improving global standards of living, widespread digitization, increasing demand for data management capacity and the potential for increasingly stringent fire safety regulations in developing markets are likely to drive continued demand for fire safety products. We are focused on profitably growing our globally competitive bromine and derivatives production network to serve all major bromine consuming products and markets. The combination of our solid, long-term business fundamentals, strong cost position, product innovations and effective management of raw material costs should enable us to manage our business through end-market challenges and to capitalize on opportunities that are expected with favorable market trends in select end markets.

Ketjen (Catalysts): Total Ketjen results in 2023 are expected to increase year-over-year despite inflationary pressures in freight and input costs, including the volatility of natural gas pricing in Europe related to the war in Ukraine. These higher costs are expected to be offset by higher pricing in refining markets. Volume is expected to grow across each of the Ketjen businesses. The fluidized catalytic cracking (“FCC”) market has recovered from the COVID-19 pandemic as a result of increased travel and depletion of global gasoline inventories. Hydroprocessing catalysts (“HPC”) demand tends to be lumpier than FCC demand, but is expected to see a prolonged recovery due to refineries pushing out turnarounds. In addition, the Ketjen business is seeking contingent business interruption insurance settlements for lost income from 2019 to 2022 due to multiple incidents with one of its customers. If we prevail with these claims, we could receive these settlements in multiple distributions in 2023, totaling up to an additional $47 million. Our decision to retain this business as a separate, wholly-owned subsidiary is intended to better meet customer needs and foster talent required to deliver in a competitive global environment.

On a longer-term basis, we believe increased global demand for transportation fuels, new refinery start-ups and ongoing adoption of cleaner fuels will be the primary drivers of growth in our Ketjen business. We believe delivering superior end-use performance continues to be the most effective way to create sustainable value in the refinery catalysts industry. We also believe our technologies continue to provide significant performance and financial benefits to refiners challenged to meet tighter regulations around the world, including those managing new contaminants present in North America tight oil, and those in the Middle East and Asia seeking to use heavier feedstock while pushing for higher propylene yields. Longer-term, we believe that the global crude supply will get heavier and more sour, a trend that bodes well for our catalysts portfolio. With superior technology and production capacities, and expected growth in end market demand, we believe that Ketjen remains well-positioned for the future. In performance catalyst solutions (“PCS”), we expect growth on a longer-term basis in our organometallics business due to growing global demand for plastics driven by rising standards of living and infrastructure spending.

Corporate: We continue to focus on cash generation, working capital management and process efficiencies. We expect our global effective tax rate will vary based on the locales in which income is actually earned and remains subject to potential volatility from changing legislation in the United States, such as the Inflation Reduction Act and the CHIPS and Science Act of 2022, and other tax jurisdictions.

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Actuarial gains and losses related to our defined benefit pension and OPEB plan obligations are reflected in Corporate as a component of non-operating pension and OPEB plan costs under mark-to-market accounting. Results for the year ended December 31, 2022 include an actuarial gain of $37.0 million ($26.5 million after income taxes), as compared to a loss of $56.9 million ($43.6 million after income taxes) for the year ended December 31, 2021.

We remain committed to evaluating the merits of any opportunities that may arise for acquisitions or other business development activities that will complement our business footprint. Additional information regarding our products, markets and financial performance is provided at our website, www.albemarle.com. Our website is not a part of this document nor is it incorporated herein by reference.

Results of Operations

The following data and discussion provides an analysis of certain significant factors affecting our results of operations during the periods included in the accompanying consolidated statements of income.

Discussion of our results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020 can be found in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021.

Comparison of 2022 to 2021

Selected Financial Data

Net Sales

Gross Profit

Selling, General and Administrative (“SG&A”) Expenses

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Research and Development Expenses

Loss (Gain) on Sale of Business/Interest in Properties, Net

Interest and Financing Expenses

Other Income (Expenses), Net

[table omitted - see filing]