Livent Corp (LTHM) 2019 Q1 法說會逐字稿

Good morning, and welcome to the First Quarter 2019 Earnings Release Conference Call for the Livent Corporation.

(Operator Instructions)

I will now turn the conference over to Mr. Rasmus Gerdeman, Chief Strategy and Investor Relations Officer for the Livent Corporation.

Mr. Gerdeman, you may begin.

Thank you, Carol.

Good morning, everyone, and welcome to Livent Corporation's First Quarter Earnings Call.

Joining me today are Paul Graves, President and Chief Executive Officer; Gilberto Antoniazzi, Chief Financial Officer.

Paul will review our first quarter performance and discuss our second quarter and full year outlook for 2019.

Gilberto will then provide an overview of select financial results.

The slide presentation that accompanies our results along with our earnings release, which includes our 2019 outlook, are available on our website, and the prepared remarks from today's discussion will be made available after the call.

Tom Schneberger, our Chief Growth Officer, will then join Paul and Gilberto to address your questions.

(Operator Instructions)

Before we begin, let me remind you that today's discussion will include forward-looking statements that are subject to various risks and uncertainties, specific factors including, but not limited to, those factors identified in our release and in our filings with the Securities and Exchange Commission.

Information presented represents our best judgment based on today's information.

Actual results may vary based upon these risks and uncertainties.

Today's discussion will focus on adjusted earnings for all income statement and EPS references.

A reconciliation of these terms, as well as other non-GAAP financial terms to which we may refer during today's conference call, are provided on our website.

With that, I'll turn it over to Paul.

Thank you, Rasmus, and good morning, everyone.

Today, I will review Livent's 2019 first quarter results, followed by second quarter and full year guidance.

I will also review our perspective on current market conditions and how certain factors specific to our business have impacted our revised views on 2019 performance.

After Gilberto reviews select financial data, I will conclude by providing an update on our ongoing capacity expansions of lithium carbonate in Argentina and lithium hydroxide in Bessemer City.

Let me start with Q1 performance, starting on Slide 3. Our business performed largely as expected during the first quarter with revenue, adjusted EBITDA and adjusted EPS in line with our guidance range.

Operationally, in Argentina, following heavy rains in late January, we ended up with approximately 1,000 tons of lost lithium carbonate production in the quarter.

This was higher than we had previously expected as the sustained period of unfavorable weather meant that it took longer than we had hoped for pond concentration levels to return to usable levels.

However, once they did, we were immediately back to full operating rates and we continue to achieve daily production rates of carbonate that are at the top end of our historical range.

This lost production had an impact on cost in the quarter as we had to use more purchased carbonate to produce lithium hydroxide than originally planned.

It will have a larger effect on Q2 costs, which I'll discuss shortly.

We brought a third hydroxide line in China into production during the quarter, taking our total annual capacity in China to around 15,000 tons.

We are already producing hydroxide from this line that is consistent with that produced in other lines.

It is this ability to produce consistent product across multiple lines and locations that is helping us bring greater flexibility to our supply chains and enabling us to reliably supply customers across multiple regions.

Turning to Slide 4. Our adjusted EBITDA for the quarter was $27.6 million, in line with our guidance.

Unfavorable customer mix in lithium hydroxide, lower year-over-year carbonate sales due to lower production volumes in Argentina and higher year-over-year costs were the drivers of the reduction in adjusted EBITDA compared to Q1 2018.

Before turning to Q2 and the 2019 outlook for Livent, Slide 5 provides an overview of the lithium market conditions that are most relevant to Livent, which will help frame both our Q2 and full year guidance.

As the large global auto OEMs continue to commit capital to and provide further detail on their next-generation electric vehicles, the need for batteries with higher nickel chemistries is becoming increasingly clear.

This, in turn, is placing the challenge of meeting the higher performance and safety requirements onto the battery chain and especially onto the cathode materials producers.

In recent conversations with a few of our large established cathode and battery customers, it is becoming increasingly clear that the current facilities being used to manufacture high-nickel cathodes will require additional investment in their processes to meet OEM demands.

The result of making these investments is a delay in large-scale production of high-nickel chemistries across several of our customers.

To offset the lower volumes of high-nickel cathodes and to improve short-term profitability during this transition, many of these established cathode manufacturers are increasing their production of older cathode chemistries.

This has been further reinforced by the changes to incentive structures in China, which has created a window in 2019 for producers of these existing chemistries to delay the introduction of next-generation cathode materials.

However, many of these older chemistries can use either lithium carbonate or lithium hydroxide.

As a result of the lower performance requirements in these applications, higher performance lithium hydroxide, such as that sold by Livent, does not generate the same price premium as in high-nickel applications and today is priced relative to the lithium carbonate equivalent.

This is consistent with pricing patterns we've seen in these applications historically.

Following several spodumene mine start-ups in Australia, it is now clear that spodumene concentrate is in an oversupplied position over the near term.

This situation is particularly impactful in China, where the majority of the spodumene conversion facilities as well as many of the consumers of lower-grade lithium carbonate are located.

As buyers of lithium carbonate see these lower spodumene prices, they are delaying purchases and therefore, pushing the price of carbonate down.

Today, published reports indicate that lithium carbonate prices in China are at marginal cost of production for a nonintegrated converter in China.

Reports of recent stabilization of carbonate pricing in China support this view.

These factors are resulting in weaker market conditions today.

Let me now shift to review the longer-term supply and demand indicators across our industry.

The most important driver for the future demand of lithium hydroxide continues to be the broad adoption of electric vehicles.

During the first quarter, 2 of the key indicators of EV adoption that we track continue to be positive.

Global sales of passenger electric vehicles increased 58% as compared to the first quarter of 2018 for a total of 500,000 vehicles sold during the quarter.

In China, sales of electric vehicles more than doubled versus Q1 2018 to 274,000 vehicles.

We also track new model launches as a leading indicator of future demand.

Today, we see a path towards a significantly higher level of new model launches with an increase in launches now slated from late 2020 onwards.

The majority of these newer electric vehicles will use larger batteries, typically 60 kilowatts or higher, and with stated ranges that confirm the need for higher energy density batteries.

During the past few quarters, based on discussions with research facilities, battery manufacturers and auto OEMs, it has become increasingly clear to us that the solutions capable of delivering these higher energy density batteries will involve higher nickel chemistries, whether that is NCA or NCM-based.

These chemistries are expected to become the backbone of the next generation of electric vehicles.

Also supporting Livent's long-term view and strategy are the increasing technical and quality requirements by cathode manufacturers from their lithium hydroxide suppliers for these high-nickel chemistries.

The specific requirements for high-performance lithium hydroxide are already tightening significantly, and we are seeing longer and more challenging qualification processes from customers.

Finally, let me share what we're seeing in terms of production across the industry as well as new supply additions.

If we start with the producers currently in operation, we estimate, based on public announcements, that more than 15,000 tons of lithium carbonate production has been removed from estimates of South American brine-based production in 2019.

This underscores that the lowest-cost producers today have limited ability to rapidly increase volumes in the short term.

This means that any short-term increase in supply must come from higher-cost hard rock sources.

With respect to the development of new resources, we have seen a number of projects announcing significant delays to their development time lines with technical challenges, cost overruns and a lack of available financing as the primary causes.

Many of these new projects need a long-run lithium carbonate price above today's levels to be economically viable once financing costs and reinvestment economics are taken into account.

We would expect that while current market conditions persist, these types of delays will become increasingly common.

With this as background, let me discuss our second quarter outlook on Slide 6. For the second quarter, we expect revenue of $105 million to $115 million, roughly flat at the midpoint compared with last year.

Adjusted EBITDA is expected to be in the $26 million to $30 million range.

At a high level, we expect our second quarter financial performance to be broadly similar to the first quarter.

Let me walk you through the details on our adjusted EBITDA guidance as set out on Slide 7. We will have higher lithium hydroxide volumes available from the third line in China.

However, the benefits of this relative to the same period a year ago will be offset by lower carbonate sales, negative customer mix and higher operating costs.

Regarding customer mix just as in the first quarter, one large lithium hydroxide contract that has been in place for several years and has a much lower price than any of our other contracts is driving this mix effect during the quarter.

This customer continues to seek the delivery of more of its committed volumes from Livent in the first half of the year.

We now estimate that this customer will have received roughly 2/3 of its 2019 contracted volumes by the end of the second quarter.

This pattern of delivering more volumes in the first half of the year is different to what we have seen historically from this customer.

I stated earlier that some of our contracted lithium hydroxide customers are delaying their purchases of hydroxide from us as they suspend production of their high-nickel cathode materials while they make additional investments in their existing processes.

This delay means that we will have excess hydroxide volumes available in the quarter that will not be sold under existing contracts and will instead likely be sold in the shorter-term arrangements, primarily in China.

Unlike the rest of the world, the China market remains largely a short-term market for such lithium products with prices set on a monthly or quarterly basis.

Furthermore, much of the demand for hydroxide in China today is driven by lower-performance cathodes, especially LFP.

Consequently, we expect that these sales into China in the quarter will be at prices that are lower than those achieved in the rest of the world today.

With regards to operating costs, we will have certain nonrecurring costs, which are due to the impact of the rain in Argentina.

One of the consequences of this lost production is the disruption to our supply chain.

We do not carry excess lithium carbonate inventories at our hydroxide facilities, meaning that we risk having insufficient carbonate to meet our production needs.

In China, this means we will incur additional costs from procuring third-party material to feed the new hydroxide line.

In the U.S., we will incur costs to airfreight carbonate from Argentina to Bessemer City.

The final cost related to the lost production are the manufacturing variances that arise from not operating for 3 weeks.

The fixed costs of operating in Argentina, while not producing, are carried forward and hit the income statement a few months later.

In aggregate, the costs in the quarter related to this lost production will be approximately $6 million, with higher VAT and raw material costs making up the remainder of the increasing costs compared to last year.

Now let me address our updated outlook for the full year 2019 on Slide 8. We now expect full year revenue of $435 million to $475 million, essentially flat with 2018.

Adjusted EBITDA will be between $125 million and $145 million, reflecting lower average realized prices for lithium hydroxide and lithium carbonate as well as higher operating costs.

Adjusted EPS is now expected to be in the range of $0.56 to $0.66.

To help explain our revised guidance, let me first provide more detail on our expected 2019 production plan as set out on Slide 9. Based on reduced demand for our high-performance lithium compounds from a number of our larger customers, we have reduced our forecast for full year production and sales of lithium hydroxide by roughly 2,000 tons.

Livent's 2019 internal carbonate production is expected to be in a range of 17,000 to 18,000 tons, slightly less than we expected 3 months ago due to the previously mentioned January rain event.

We remain committed to sell up to 3,000 tons of carbonate to existing customers, which means we expect to purchase up to 3,000 tons of carbonate from third parties in order to meet our sales commitments.

As a reminder, the lithium chloride on this chart is sold in the form of either butyllithium or high-purity lithium metal.

Now on Slide 10, let me explain in more detail the main factors driving the reduction to 2019 adjusted EBITDA as compared to 2018.

As I just set out, we expect our overall volumes for the year to be slightly higher than last year.

This will be seen in higher hydroxide and butyllithium sales offset by lower lithium carbonate sales.

Higher average price realizations in butyllithium and high-purity metal will be more than offset by lower average realized prices of both lithium carbonate and lithium hydroxide.

We expect our average realized price for carbonate to be around $4 per kilo lower in 2019 compared to 2018.

And for hydroxide, closer to $2 per kilo lower.

The largest drivers of the hydroxide average price reduction are customer mix and lower sales prices on hydroxide sold in the short-term arrangements in China.

Foreign exchange will be a headwind for 2019 as the RMB and the euro impact us at the revenue level and sterling and Argentine peso hit our costs.

The largest contributors to our higher cost, though, are the impact of the rain in Argentina, which all hit us in the first half of the year; the VAT incurred on exports from China; and the higher cost of purchased carbonate compared to internal production.

I will now turn the call over to Gilberto to discuss our financial results in more detail as well as to give an update on the financial implications of our current capacity expansions.

Thank you, Paul, and good morning, everyone.

Let me start today by first highlighting the completion of Livent's spinoff process.

On March 1, FMC Corporation distributed the remaining 85% interest it held in Livent via the spin of 123 million shares to FMC shareholders.

This last step completed Livent's separation from FMC, resulting in Livent's full independence as a public traded company.

Before turning to Slide 11, a few comments on selected items of the income statement, specifically on taxes and interest expense.

On taxes, driven by our revised forecast and its impact on the mix of earnings across various geographies, we have amended our guidance on adjusted tax rate for the full year to 18% to 22%, an increase of 100 basis points at the midpoint.

On interest expense, despite Livent's strong cash flow generation, we will continue to draw on our revolver debt facility throughout the year.

This borrowing is driven entirely by spending on our capacity expansions.

Therefore, we are capitalizing the majority of the approximately $6 million of cash interest we will incur this year, consistent with normal accounting practices.

Our guidance for interest expense in the income statement for the full year reflect this accounting treatment.

Moving now to the balance sheet, cash flow and capital spending.

With respect to our balance sheet, we ended the quarter with $18 million in cash and $50 million drawn under our $400 million 5-year revolving credit facility.

The $16 million increase in drawing versus the end of last quarter is largely due to capital spending but also reflects the timing of certain reimbursement payments we made to FMC during the first quarter.

Livent generated adjusted cash from operations of $22 million during the first quarter of 2019, which was in line with expectations.

Looking to the full year, we're now projecting $75 million to $105 million in adjusted cash from operations.

On capital deployment, Livent remains committed to the 4 phases of lithium carbonate expansions in Argentina and to the first phase of lithium hydroxide expansion in Bessemer City, North Carolina.

In the first quarter, we made progress towards meeting key milestones in the expansions, resulting in cash outlays of $25 million.

In Argentina, our lithium carbonate expansion project continues to advance with roughly $20 million of cash spent through the end of March.

Early into the second quarter, we're already beginning to see the expected acceleration of capital spend as we continue to meet our project milestones.

Our forecast for capital spending in 2019 remains in a range of $235 million to $265 million.

I'd like to provide further commentary on the economics of Livent's capital investment, particularly related to our carbonate expansion in Argentina.

Unlike other projects which we have seen run into financing, technical or investment return hurdles, our expansion remains a highly attractive investment that compares extremely favorably with every other lithium project globally.

As I stated previously, Livent commenced a substantial capital deployment project in Argentina during 2018 to increase lithium carbonate production by 40,000 metric tons going from today's roughly 18,000 tons to almost 60,000 tons by 2025.

Livent's capacity expansion project will be executed in 4 separate phases, each adding almost 10,000 tons, with the first phase reaching mechanical completion in the second half of next year.

The total cost of the 4 phases of expansion is estimated at $600 million or approximately $15,000 per metric ton of lithium carbonate.

We expect that each phase will have a cash operating cost in the range of $4 per kilo of lithium carbonate produced, making it amongst the lowest-cost sources of carbonate for the foreseeable future.

From a technology risk standpoint, our carbonate expansion project will not involve any new extraction or processing technologies using the same process that we run today.

The technical risk is therefore low, leaving us focused on the project execution risks, which Paul will discuss in more detail shortly.

To help explain why we consider this such an attractive investment, let me highlight why -- what we expect from this expansion in terms of financial returns.

At lithium carbonate prices in the high single or low double-digit range, which is at the low end of what we are seeing in the market today, each 10,000 ton phase of our expansion would add $60 million to $70 million of EBITDA starting in 2021.

Therefore, even under our modeling assumption of carbonate prices remaining at levels similar to where they are today, the project as a whole will generate incremental EBITDA of $240 million or more per year.

We look at the range of independent estimates for future prices, this would suggest the risk to this EBITDA estimate is skewed to the upside.

To further reinforce why we believe this is an attractive investment, upon completion of the 40,000 ton carbonate expansion, we would expect free cash flow conversion of this EBITDA of 70% to 75% after all taxes and all maintenance capital spend.

And unlike hard rock projects, these economics are not impacted by mine life insurance, do not require changes to the operating costs over the life of mine as new areas are exploited and do not have end-of-mine site remediation costs to consider.

You can therefore understand why we would expect to see a very attractive return on our $600 million investment in our expansion in Argentina.

Additionally, it's important that the development of EVs is done in a way that is sustainable.

Right now, the largest contributor to the carbon cost of EVs is the battery materials.

And we already see that sustainability becoming an increasingly important factor in sourcing decision across all battery metals.

And the advantage of our brine-based source of lithium carbonate is that we have a smaller carbon footprint compared to many current approaches to producing lithium.

Much of the energy we use is truly renewable.

We use solar and wind based evaporation in the production of our lithium carbonate.

And while our resource is remote from end users, we do not ship unprocessed rock or brine across long distances.

In light of all of the above, we remain committed to completing our announced expansion in Argentina.

With that, I will turn the call back over to Paul.

Thank you, Gilberto.

So before we turn to your questions, I want to provide an update on the status of these expansions in the province of Catamarca in Argentina and in Bessemer City in the U.S.

Livent's position in the lithium industry is built upon 2 key factors: First, our position as the lowest-cost producer globally of lithium carbonate; and second, a leadership in the production of high-performance lithium hydroxide that is qualified for use in the most demanding performance applications.

It's therefore core to our future that we are able to grow our supply of both carbonate and hydroxide at the same rate as our customers' demand grows.

On Slide 12, we've set out the major work streams related to our first phase carbonate capacity expansion in Argentina and the additional lithium hydroxide unit in Bessemer City.

The first thing you can see is that we remain on track and expect to bring both units online in the second half of 2020, with the carbonate expansion expected to be operating shortly ahead of the hydroxide unit.

There are 2 main components of the Argentina expansion.

The first is the infrastructure, which includes a new 31-kilometer water pipeline, roads, worker camps, various utilities, warehouses and buildings as well as additional ponds.

This phase includes most of the infrastructure needed for the subsequent lithium carbonate expansion phases.

The second component is the lithium carbonate units.

These will be constructed in modular form in China and shipped to Argentina once complete.

These units are based on the same design as the carbonate production units we are using today, helping to simplify and derisk the overall project.

For the hydroxide expansion, we are also constructing modular production units in China.

These will use the same design and engineering that we used to successfully install 3 hydroxide lines in China over the past few years.

We remain confident in our progress as all projects continue according to our plan.

We have critical oversight of 3 key areas of execution risk to ensure that projects are completed in a timely manner.

The first is the water pipeline, which is being constructed over challenging terrain and is required to operate the new carbonate units.

The second is the shipping of the modules from China and particularly, the process and timing of getting the units into Argentina and then up to the Salar.

And finally, the customer qualification period that follows commissioning for both carbonate and hydroxide.

Our customers are increasingly tightening their requirements.

There's less visibility today as to how long this process might take 18 months from now.

However, we are designing into our construction the equipment that will be needed to provide materials that meet the requirements of the most demanding applications.

We will continue to update you on our progress, but I would like to reiterate that today, we remain on track for these time lines and are confident in our ability to deliver these projects on time and on budget.

I will now turn the call back to Rasmus for questions.

Thank you, Paul.

Carol, you can now begin the Q&A session.

(Operator Instructions) Your first question comes from the line of Chris Kapsch from Loop Capital Markets.

My question is focused on, Paul, what you described as a transition period for the cathode manufacturers and their delay in transitioning to high-nickel metal chemistries.

But I guess the question is, are you referring exclusively to 811?

My follow-up really kind of depends on the answer to that because my sense is that the delay in adoption of 811 is -- it could be a multiple year sort of delay in terms of the introduction of those chemistries into EV platforms.

So -- but the context which you described made it sound like this transition is something that will be over and done with in '19.

So if you could just elaborate on that dynamic, that will be helpful.

Sure.

Happy to.

Let me just step back a little.

Your question is a good one, but it necessarily simplifies the situation, I understand.

I think the definition of high nickel has tended to be described as NCA or 811.

That tends to be the simplification.

But the reality is that today, there are a number of technologies out there that are, what I'll loosely call, borderline high nickel.

They are some form of 622, but in a form that requires hydroxide, for example.

We have some that are -- and everyone use different terms.

Instead of 60% nickel, 70% nickel, somewhere between 622 and 811.

We certainly see an increased focus on NCA in Korea and China not just in Japan today, which is, obviously, a high-nickel chemistry as well.

So we're also seeing blends.

And so I think it's fair to say that the initial introduction of the highest-performing cathode materials are not going to be used on their own for first implementation.

We're likely to see 811 blended, for example, with 622 or even 532.

So I think it's a complicated transition that is more than just a step change from 532, get to 622 and go straight to 811.

It's also not entirely sure whether it will all be NCM-based.

We have NCA and also some alternative versions of NCA being developed by various producers.

It is without a doubt a complex environment.

What we do know, though, is that -- and this has really been rapidly accelerated in the last few months.

The OEMs themselves, as they started to become clearer about their vehicle launches, are being much clearer now into the supply chain as to what performance characteristics they expect, both energy density and safety performance.

And so we have seen, frankly, a little bit of a scrambling on some customers who thought the delay would've been longer and have been taking their time to move over to high-nickel.

We've seen others, as we just mentioned, who have been making high-nickel but realized what they're making today will not meet those tightened performance requirements of the OEMs.

And we're seeing a real -- I've heard people call it an arms race for battery materials.

There's a bit of an arms race now as to who can bring high-nickel -- performing high-nickel content cathode materials into the chain.

The quickest there is certainly likely to be a first mover advantage in that process.

I think 811 itself, pure 811, we shared a broad view, and have for a while, that it's likely to be 2021 or maybe even 2022 before we see wide-scale adoption of pure 811 in the OEM chain.

But we do expect to see some hybrids, maybe some single-crystal 622 or 7 1.5 1.5 whatever it's called by its producer, to sort of fill the gap between now and then.

Okay.

That's helpful.

The performance advantage that you've describe with your high-quality hydroxide, is that exclusively an advantage when imparted -- when deployed in 811 chemistries?

Or do you feel like you have that advantage when deployed in some of these hybrids, whether it's 622 or another variant that you alluded to?

There's 2 sources of our advantage.

I just want to make sure that I explain them both clearly.

We certainly can demonstrate an advantage in the results of producing high-nickel content cathode materials with our hydroxide compared to many of our competitors.

That's certainly most proven in an NCA technology.

We can demonstrate that in an 811 technology, too.

And to a lesser extent, but still there, in 622 technologies as well.

But I would just bear in mind that the second advantage that we have, which is a different one, and it's certainly one that allows us in the short term to have an advantage in our conversations with customers, is our ability to actually meet the production specifications and technical requirements of the customers.

And they are 2 different things, 2 different sources of advantage, if you will, that we sell to customers.

Now I will be frank with everybody.

Not every customer has yet necessarily, what I'll loosely call, bought into some of those arguments.

They continue to test different hydroxide materials.

They continue to blend different hydroxide materials.

They continue to make changes to the physical properties before they use it in their processes.

They're all searching for performance of their hydroxide materials in their own processes that actually work.

We continue to work our way through that.

Look -- and we continue to do our own testing, provide data and support the arguments to these customers as they transition.

Our next question comes from the line of Kevin McCarthy from Vertical Research Partners.

Paul, has your view of global electric vehicle demand in 2019 changed at all?

And if so, how?

Maybe you can talk through the change in subsidy regime and what you anticipate downstream in China and elsewhere.

Sure.

Look, I don't think our view has changed much at all.

I mean historically, over the last few years, what we've seen is that we've tended to underestimate the adoption rates around the world.

There is no doubt that there's a bit of a step back and a pause looking at what will, frankly, the China market be in 2019 and into 2020 because most of these launches of the next-generation high-performing vehicles really don't come until the end of 2020.

So people quite rightly and understandably are looking at the subsidy regime in China.

And I think it's fair to say that we perhaps will continue to see an extended period of use of older cathode chemistries in smaller, shorter range vehicles that are suitable largely for the China market in 2019 or maybe part of 2020.

That doesn't mean there won't be major launches of vehicles using higher-nickel chemistries and using next-generation batteries, but we don't expect them to be the bulk of the volume in '19 and '20.

Much of the shift that we saw, frankly, in the demand for lithium hydroxide in China, and this comment about a shift back to LFP, which is -- certainly seems to be taking on an extended life, is linked to China subsidies, but it's actually more on ebuses and commercial applications than it is necessarily around passenger vehicles.

And I think, frankly, one aspect of the China subsidies when they came in, while they were largely what we expected, one area that we did fail to spot was the incentive it gave at the regional level to continue to incentivize ebus adoption and what that would do to provide incentives for cathode material producers to reinvest and continue to invest in LFP and lower-grade NCM.

That one, I will admit, caught us out a little bit, and I think that the resurgence of LFP looks like it's here for a few years to come, really driven by commercial and ebuses rather than passenger vehicles.

Okay.

That's helpful.

And then as a second question, I was wondering if you could help me reconcile your assertion that the need for high-nickel cathodes is increasingly clear with the short-term dynamic, whereby your customers are deferring launches and you're experiencing diminished demand for high-grade hydroxide into high-nickel cathodes.

Maybe you can provide an example or 2 on how your conversations with customers have evolved and what do you think is driving this decision.

I think you mentioned additional investment is required.

So maybe provide some color around that concept, if you would.

Sure.

Look, I'm happy to.

Look, there was a big shift in China particularly, mainly in China, of companies building capabilities to make high-nickel content cathode materials.

And we've been through the plants.

We've seen the factories.

We've seen that they can make it.

But what they've seen and what they've increasingly realized and actually been specifically told as they've attempted to get their cathode materials qualified is that they don't actually perform at a level that's acceptable.

And so the first thing that we see is -- the bad news is these guys are now saying, look, I don't need to make any more of these cathode materials because I need to change my production processes.

And I need to do that in a way that I can actually reliably make perform -- cathode materials that perform in higher quantities with a greater degree of reliability as to the performance -- less variability in the performance characteristics.

So the bad news is that it slowed down as they make those changes to the processes.

The good news is it is now clear what they're shooting for, and I think it's fair to say, in the past, they were not that clear as to what they're shooting for.

We've had a couple of customers who only 4, 5 months ago were setting up pretty clear demand patterns for us as to what the expected deliveries of hydroxide would be this year; turning around and saying, we got to back away because we've just found out we have to make these changes, and we expect to be up and running late 2019.

But as of today, we will likely not need as much lithium hydroxide in '19.

So I do understand it's a bit of a complex statement, right?

We're saying good news, more high-nickel lithium -- high-nickel cathodes being produced -- being demanded, should I say.

Bad news is nobody is making them.

And that is a temporary transitional process.

It's likely to run us through 19 and into '20.

But it again -- I think it bodes well for the longer term, but we got to get there first.

Your next question comes from the line of P.J. Juvekar from Citi.

How much of this weakness is related to the subsidy cars particularly?

The reason I'm asking is we're trying to figure out what is structural and what is temporary.

I mean, is the switch to LFP a temporary thing before we catch up with high-nickel batteries here?

So what's structural, what's sort of near term?

I think there are multiple changes going on here that are impacting us.

I think the shift to LFP is not so much a shift, it's sort of an extended life of LFP that we're seeing.

Clearly, LFP has been around a while and is well proven.

And particularly, in ebuses, which have public -- nobody wants a bus bursting into flames, for example, with 40 or 50 passengers on it.

I think that sort of the safety requirements as well as the lower performance requirements of those batteries means that we do expect that LFP is here for quite a long time and some other similar chemistries are likely to be here for a while.

We're even seeing people talk about EV-grade LCO technologies, which historically has largely been in just in your cellphones.

And so I think people are looking to which part of the market in the long run will actually need these more expensive, higher-nickel cathode materials and which actually can survive and will survive on the older chemistries.

We've generally guided out to about 2025 where something approaching about 30% to 40% of volume will be high nickel, but the rest of the vehicle batteries will be, at that point in time, still older chemistries.

So I don't think that's sort of a fundamental structural change.

I think what we have is uncertainty in timing of delivery of product, uncertainty of timing of qualification of product and perhaps most challenging, frankly, as a whole is uncertainty as to who will get there first and who will get there at all.

We've spoken before about there's a large number of companies around the world attempting to solve this problem.

And what we've seen for sure and one thing you can read to what's happening in the incentive policy in China is the desire to have consolidation, to have the weaker players fall and have winners in that process.

And that's creating a lot of disturbance in the market in the short term, P.J.

Okay.

And secondly, you mentioned some Chinese customers going through shorter-term contracts.

Are these smaller customers that are supplying to like second tier and third tier automakers?

Or is it big customers?

I think the market in China has generally tended to prefer market-based pricing, however you define that, quarterly, short term, monthly.

It kind of varies by product.

I think we've seen them experiment in the last couple of years, particularly because lithium hydroxide that they could use was in such short supply, experiment with locking up contracts, some take-or-pays which they are -- we have take-or-pays with Chinese customers that they are taking and they are paying with no changes to prices or volumes.

But I think the market itself has tended to be -- and I think you've heard me say before, I do expect the China market supply-demand dynamics to be different to the rest of the world.

They prefer shorter-term purchasing.

They have a regime in China that disincentivizes the way of exporting product back out of the country because of inability to reclaim VAT, et cetera.

We do see different dynamics more short term nature, more transactional relationships.

In China, it isn't just with the smaller second and third tier guys.

It's with the bigger guys, too.

Your next question comes from Robert Koort from Goldman Sachs.

This is Dylan Campbell on for Bob.

If I heard you correctly, you noted a $2,000 per ton drop in lithium hydroxide prices.

I think last quarter, you noted 80% of volume was under contract of a firm price in 2019.

Does that imply a much more severe price impact for a small portion of your volumes?

Or did you actually have been forced to take down some of your contract prices?

Yes.

We did not take down contract prices.

That's an important point to make.

What we have not done is seen customers taking the same volumes but at prices that are below what they've committed to in the past.

What essentially is happening, and the math around this is pretty straightforward, first of all, we lose a couple thousand tons of lithium hydroxide, which was at meaningfully higher prices than our average realized price.

If you recall, we talked before about our average realized price from '19 being approaching $1 or less than $1 lower in '19 than in '18, all driven by customer mix.

What we have now is as we take 2,000 tons of higher-priced product that we expected to go away because the customers have given us an indication they're unlikely to need it.

We also have that 20% of uncontracted volume at pretty low prices.

You see prices remaining in China, in some of the independent market resource -- research documents, they pretty much reflect what we see in the market, too.

And so it's an averaging effect across this lost volume, which was at a higher price, plus the uncontracted business, which will be sold in lower-priced market in China.

Got it.

That's helpful.

And then I think you guys talked about $4 per kilo carbonate all-in cost.

What about -- what was the cost structure for hydroxide?

And I guess compared to spodumene or hard rock, is spodumene going cheaper?

What is the comparison of your own cost to hydroxide compared to a nonintegrated hard rock producer to lithium hydroxide?

If you just take pure cash costs, from the work we've done -- and we don't have complete transparency clearly over every single unit.

Size, scale of unit, quality of the spodumene, feedstock, consistency of the feedstock really all feed into the economics of a converter.

But we would expect that a -- there are a number of spodumene and carbonate converters that are capable generally of making either hydroxide or carbonate at roughly the same price.

We tended to see that somewhere in the $9 to $10 per kilo on a cash basis.

That again ignores any margin for the converter or any reinvestment economics, and that assumes spodumene at about $600 a ton.

So there's a wide range around that, and there will be wide ranges even for individual units as they produce from different feedstocks.

And for the carbonate side, I think it's been pretty clear.

We make carbonate at $4 or less per kilogram.

We do have a cost to convert that into hydroxide, but you should imagine that we certainly don't view ourselves as cost-uncompetitive in the production of hydroxide.

Your next question comes from Steve Byrne from Bank of America.

I recall a quarter ago when you were getting pushed back from some Chinese customers on price, you shifted more volume to Korea and Japan.

Just wanted an update on those customers.

Are they also taking less volume of hydroxide and/or are they also pushing back on price?

So the customers that we talked about who are indicating that they will need less volume are not all in China.

There are a couple that are outside China, too.

So this broad shift, this broad technology challenge and the attempt to solve the specification challenges set by the OEMs is not unique to China by any stretch of the imagination.

But -- so what we're seeing outside China, though, is pushback on volumes.

It is not pushback on price so much.

And frankly, it's a bit of a moot argument because many of them are saying, I just don't need the amount or volumes that I thought I would need in 2019.

I'm going to need it in 2020.

So the conversation, frankly, never really gets to price with them in that case.

Okay.

And can you comment on your outlook for some homegrown capacity in China to -- for its own conversion capacity or lithium resources within the country either as brine or spodumene?

Does that affect your decision-making on where you would build your next carbonate to hydroxide conversion capacity?

I think there are -- it may not be quite the holy grail, but it's not far off as can anybody actually use the lithium resources that are actually in China.

The hard rock resources tend to be remote and poor quality, and the brine is extremely difficult, if not impossible, to process into battery-grade materials simply because of the nature and the level of impurities in those brines.

And we, as an industry, and certainly we at Livent specifically have spent a lot of time and effort seeing if we can find a solution to that with -- particularly with brine and have been unable to do so.

So we don't see production from China-based resources being a particular factor in the development of industry in the foreseeable future.

You can say in the next, 3, 4, 5 years, whatever it may be.

For us, I think the question that we will be asking with regard to our own capabilities is, how regionalized will the market for lithium become?

Do we need to make sure that we have capabilities to produce lithium hydroxide close to the customers?

We mentioned earlier this concept of sustainability.

It's a really important question for the EV value chain, which is how do we make sure that we are not essentially gaining on the fossil fuels that the cars consume but losing it on the construction of the vehicles themselves.

And one of the challenges in the industry, my view that we have today, is as currently constructed, the industry tends to ship a lot of waste product around the world, and that's creating a pretty significant footprint -- carbon footprint for lithium as a whole.

We believe that the ability to locate conversion units, of carbonate conversion units that is, not spodumene conversion units, close to your customers actually brings a lot of advantages, not just sustainability but also flexibility, et cetera.

And we certainly will take a long and are taking a long, hard look in the long run about where exactly do we locate our carbonate to hydroxide conversion capabilities.

Your next question comes from Christopher Parkinson from Crédit Suisse.

You mentioned some less favorable or short-term pricing dynamics in China.

But can you just compare this to what you're still hearing -- or hearing in a go-forward basis from your customers in Japan and South Korea?

Just ultimately, how do you believe this evolves in the intermediate to long term?

And do you believe any eventual consolidation of the supply chain will change this?

I think some of the dynamics that we've talked about, Chris, with regard to the supply chain, really have not changed.

In fact, I might argue that what you've actually seen is a couple of different factors at work.

I think one of them is an increasing realization that there are many individual products -- I'm sorry, resources that people are attempting to develop on their own using traditional financing methods that, frankly, are just not going to get done.

And when you look at that, the better quality resources you would think are likely to be picked up by larger entities in the lithium industry.

Whether that's just lithium players or new entrants, it's hard to say.

We've seen, obviously, new entrants start to pop their head up in the last few days in our industry.

It's hard for me to imagine that, that trend is isolated to just a couple of companies.

Whether, though, that will change the broader supply dynamics over the long term, it's a lot more difficult for me to say.

Today, Japan, China, Korea, the U.S., Europe, they all have very specific characteristics that make them different enough that they're not all driven by the same forces and processes.

I think over time, they're all obviously migrating to who can actually capture the value in the battery chain through technology and to production of the best quality and highest-performing batteries.

Once we go down that path and we see the rate of EV adoption that we've talked about in the past, this demand curve, this demand acceleration isn't going to slow down.

And think the biggest factor that's going to drive behavior in the market is, frankly, whether the supply can keep up in the long run.

We've certainly see it demonstrate in a soft year like 2019 for demand that the supply is there.

But it's a different question when we see demand going up to 600,000, 1 million, 2 million tons over the coming decade.

I don't know whether, in fact, consolidation is going to be needed to actually provide the capital to actually create that amount of lithium for the market.

Got it.

It's probably a good leeway to the second one.

Can you also just update us on your willingness to do even longer-term contracts similar to some of your peers?

You've alluded to some reluctance to do this, go that far into the future.

But just can you give us an update on your thought process and hit on what you're hearing from your customers and just parallel that with what we've seen from the OEMs?

Yes.

You go to the crux of one of the challenges of our industry there, Chris: how will the supply chain evolve and who will contract for product and who will be setting the pricing, et cetera.

I think it's fair to say that we continue to see a huge advantage for the technology leaders to secure reliable supply of lithium hydroxide.

That means that they're going to have to answer that question for themselves as to how they do that.

Clearly, one part of that solution we would hope would be longer-term contracts, take-or-pay at fixed prices.

They may layer their supply chains.

They may have multiple sources.

I doubt it will end up as a single model.

I think when you have a fully integrated player, we have an incentive, clearly, to secure both volumes and price.

If you're nonintegrated and you're exposed to spodumene prices, if you can, for example, index your purchase of spodumene to an index of lithium prices, you have less of an incentive to fix the price.

So I think the dynamics of the supply side are an important factor as indeed are the preferences of the buyers when it comes to long-term contracts.

Our next question comes from Aleksey Yefremov from Instinet.

Paul, just wanted to confirm that I heard it correctly.

So about 80% of your hydroxide business is still under the same price and the same contracts as of the beginning of the year.

And if that is correct, how would you assess maybe risks and opportunities for volume and price for that bucket of -- that's under contract for the remainder of the year?

Yes.

You did hear that correct.

It's 80% still under contract.

It's obviously 80% now of a smaller number, and we did lose some of that volume that was in the contract.

But that ratio is roughly the same still.

I think it's fair to say that we see for the rest of the year, under existing contracts, we see minimal, if any, price risk -- small price risk, but there's always a little, but not meaningful.

But we see, obviously, volume risk.

I mean we don't know yet whether our customers themselves, frankly, fully understand what they need for the rest of the year yet and some of them continue to work through their own plans.

I think a more rapid resolution of manufacturing -- or a slower resolution of manufacturing issues at our customers will have an impact more on volume than it will on price for us.

I think, generally speaking, for the piece that's uncontracted, there is clearly still price risk out there in the market.

I think you may have noticed our full year guide is not only a touch lower than it was before, it's also wider.

The range is wider intentionally.

We do see today, at least, that we are looking at a range of performance for this year and not a midpoint that we would typically look to, and that really reflects the fact that it is still an uncertain market.

We have seen short-term markets in China go up and down very quickly, and it's not easy to predict.

We've done our best to capture all of that in the guidance range, but I think it would be somewhat inconsistent of me to say that all of a sudden now, we have perfect predictability on what pricing is going to do through the rest of the year.

Understood.

And given some uncertainty with hydroxide demand, I mean, you have several hydroxide expansion projects, right?

Is there maybe an opportunity to reassess the time lines for those?

Either Bessemer City that may be more underway already, but subsequent expansions as well?

Do you have that ability to delay those expansions if you can't sign the contracts as you like?

Yes.

That's a question and an important one.

I think if you read between the lines of what we said in that script, we only talked about one expansion in hydroxide right now.

We have only one expansion in hydroxide underway, Bessemer City.

It's an important one because it brings a lot more flexibility to our cost structure.

It removes a lot of the requirement that we have today to export out of China and incur that VAT cost, et cetera.

It's also a lower-cost production actually than in China.

Once we're running up B.C., the unit cost is lower than in China even though the capital cost is meaningfully higher.

We do not today have any plans -- specific plans for a fourth line or more in China nor for a third line in Bessemer City.

We will revisit those only when we have sufficient visibility as to what the demand for our specific offering is.

Your next question comes from the line of Alex Falcao from HSBC.

I have 2 questions.

One, regarding your strategy on selling your uncontracted volumes in China.

Is that something that you had no choice but selling and it's a buyer's market and it is what it is?

And second is given that you estimate that you're going to sell more there, why did the increase in the VAT exist there?

I just wanted to reconcile those.

Yes.

They're 2 different matters, right?

We're taking down production of lithium hydroxide.

That will largely be in our China units.

The strategy -- and I'll put quotes on that, "strategy" of selling in China, it is frankly not something when we get to this position that we have a lot of choice over, where most of our customers outside China prefer to buy under contracts that they put in place at the start of the year.

And so the industry as a whole, largely for our product, at least, I don't speak for every lithium product, is largely contracted for volumes for most of the rest of the year.

So placing product into other places requires a change to the positive in the expectations of customers outside China if we're going to do that, and that's not what we're seeing at the moment.

So we really don't have a lot of choice.

The market for short-term placement of product is the China market.

We will obviously keep exploring other areas that offer a better return for us.

The increase in VAT is, frankly, commitments that we've already made outside China to supply lithium hydroxide that requires us to export.

We're not exporting more volumes than we're expected at the beginning of the year.

Our export volumes are roughly the same, maybe a touch lower, not much.

So the VAT impact is really reflecting the full year plan, not just a shift in production that we're talking about today.

Your last question comes from the line of Joel Jackson from BMO Capital Markets.

A couple questions.

So it's not much of answer.

It's sort of an open-ended question, but what's transpired the last few quarters?

I mean there's -- you do speak about a shift and a delay and what you think will happen.

But does this event in the last few quarters really leads you to reconsider all of your underlying assumptions as you plan out your strategy around product mix, customer mix and your expansion plans?

I mean there's a lot of questions being raised here about the commoditization of hydroxide, the commoditization of your own hydroxide, the trajectory that you've spoken a lot about, about more nickel-rich cathode customers -- excuse me, chemistries, rebound in LFP and even just how secure your contract terms and customers are.

So I'm basically asking you, do you really need to reassess how you view the world, what you're planning to do, what you're planning to invest and then the timing of it all?

Thanks, Joel.

With such a broad question, I'm glad we kept the line open for few extra minutes for you, Joel.

Look, I think the short answer is yes.

I mean let me just step back a little.

I think it's clear to us, and we have customers today who are taking advantage of this lower price and are clearly not trying to help the lithium industry any more than they have to, they have their own cost to think about, who are explicitly saying this is going to rebound on us.

This is going to cause problems because it's clear that with prices where they are today and with buying patterns as they are today, a lot of people are going to think long and hard about their investment plans.

And this is going to come and catch us in a couple years because today is when the investments are needed to meet the supply that we know we're going to need in a few years' time.

So I think, first, it creates a challenging strategic question, which is what is the right place to be in '21, '22, '23 and beyond, but how do we get there given current market conditions and conditions that we expect to last certainly through '19?

And as I sit here today, probably through the start of 2020 as a minimum.

So when you put all those together, we have to reassess where are we, what are we.

I think it is fair to say that when you stand back and look at Livent's strengths, one of them is what I would loosely call an ever present.

It's the lowest-cost producer of lithium carbonate.

Second one is maybe a little more difficult to rely upon all the time, and that's the customer preference for our product over others, our specialization, if you will.

We think both of those are both real and sustainable, but they carry different value at different points in time.

And we have to stand back and look at what are we, Livent, going to do with our capital, with our contracting decisions, with our production decisions over the next 2 years.

And my last question would be, [At a trade show] about a month or 2 ago when you were in Switzerland.

I think it was Switzerland.

You commented or talking about maybe looking at getting into or investing in some spodumene, some hard rock assets, maybe some brine assets, but hard rock assets now.

Gilberto came out today and really touted the benefits of brine over spodumene.

Can you reconcile those buckets of commentary, please?

Sure.

I would -- I'm not sure whether you heard me or whether you just saw the reporting of my comments.

My comments in Switzerland were, frankly saying, we vastly prefer brine.

Most of our purchase today involved brine-based resources and brine-based technologies.

We do spend perhaps as much time and effort on brine-based extraction technologies that would allow us to either extract more lithium from existing resources or tap into resources that today aren't economical because of technology challenges.

Our first choice by a mile remains brine.

It's what we know, it's what we do with the lowest-cost production source typically.

And it's -- and it does carry these environmental and sustainable advantages done right.

What I did say at the conference, though, was the reality is in the near term, we don't have a lot of visibility over a game-changing expansion in that capability based on brine.

We just don't.

Argentina can only go so far.

Tapping into another resource near us in Argentina, it runs into the same issues with -- infrastructure issues that stop us, not resource issues.

And so when you do that, you have no choice if you believe it's important to grow.

If you believe it's important to expand at a pace at least in line with the industry, at least in line with what your customers demand of you, you have no choice but to look at hard rock.

You have no choice.

And so that was really the heart of my comments, and I don't think it's inconsistent with what we just described.

I think what Gilberto was really trying to describe is why, despite the market conditions we see today and while we recognize a number of people are asking the question, does it still make sense to invest in Argentina in these conditions, in this environment.

We were trying to set out all the reasons why emphatically, yes, it absolutely makes sense to continue to invest in Argentina.

Thank you.

That's all the time we have for the call today.

I'll be available following the call to address any additional questions you may have.

Thank you, and have a good day.

That is all the time that we have today.

This concludes the Livent Corporation First Quarter 2019 Earnings Release Conference Call.

Thank you for attending.