Livent Corp (LTHM) 2019 Q3 法說會逐字稿

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

(Operator Instructions) I will now turn the conference over to Mr. Daniel Rosen, Manager, Investor Relations for the Livent Corporation.

Mr. Rosen, you may begin.

Thank you, Suzanne.

Good morning everyone and welcome to Livent's Third Quarter 2019 Earnings Call.

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

The slide presentation that accompanies our results, along with our earnings release, which includes our 2019 outlook can be found in the Investor Relations section of our website.

The prepared remarks from today's discussion will be made available after the call.

Following our prepared remarks, Paul and Gilberto will be available to address your questions.

We would ask that any questions be limited to 2 per caller.

We'd be happy to address any additional questions directly after the call.

Before we begin, let me remind you that today's discussion will include forward-looking statements that are subject to various risks and uncertainties concerning 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.

Reconciliations 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 the call over to Paul.

Thank you, Dan, and good morning everyone.

Turning to Slide 3. There's a few key points that I would like to highlight.

We met our third quarter adjusted EBITDA and adjusted EPS guidance on lower than projected revenues.

We announced a memorandum of understanding with LG for a multiyear supply agreement for lithium hydroxide and we're able to provide a first look at our expected production and sales volumes for 2020.

The commitments we're currently making for 2020 customer deliveries form the basis for our decision to build hydroxide inventory in the fourth quarter of 2019, allowing us to ensure we have sufficient products in 2020 -- a year in which we will effectively have no additional production capacity compared to 2019.

A consequence of this fourth quarter inventory build, is that we have lowered our expected revenues, adjusted EBITDA and adjusted EPS in the fourth quarter by an amount corresponding to the inventory build.

And are therefore also lowering our full year guidance for 2019.

We remain committed to our previously announced capacity expansion initiatives and we'll provide an update on the progress of our current expansion programs later in this call.

Turning now to Slide 4, on Livent's perspective on where the market for lithium carbonate and hydroxide stands today.

Clearly, it's a very challenging time for the industry.

All lithium producers have been impacted in this declining price environment with the extent of the impact largely dependent on factors such as product mix, product quality, cost structure, customer relationships, and the extent of exposure to short-term pricing in China, whether that is for carbonate, hydroxide or spodumene.

The pricing environment did not improve in the third quarter, and it does not appear to be improving in the fourth quarter.

However, near term prices do not tell a complete story about the current conditions in the lithium industry and especially the lithium hydroxide market.

Let me start with lithium carbonate, which is the largest lithium product by volume, given its broad use in less demanding battery applications such as mobile devices, e-buses and stationary storage as well as in a broad range of industrial applications.

While still growing at a mid-teens annual rate, demand growth from these applications appears to be slowing relative to the 20% plus growth rates seen in recent years.

And it's certainly not growing as fast as demand for hydroxide.

Lithium hydroxide has seen its growth rate increase from the low-teens to well north of 20% or even 30% per year.

The pricing environment for carbonate has also been affected by oversupply.

The additional supply isn't just because of the high volume of spodumene being shipped to converters in China from Australia, although this is the single biggest factor.

We've also seen brine-based producers look to reestablish themselves in markets that they've been absent from in recent years, especially China.

This confluence of additional supply and weaker than expected short-term demand has created significant downward pressure on carbonate prices in China, especially over the last few months.

And as the China market price for carbonate has fallen, we've seen price pressure in other markets, too, notably in Japan and Korea, as high cost of China producers seek to place their product in the rest of the world.

Hydroxide pricing in China has also declined in 2019, driven by material from new plants coming online and the same oversupply of spodumene, leading to lower costs for China-based nonintegrated converters.

However, the pricing impact has been more muted for hydroxide, relative to carbonate.

There are several reasons for this.

First, demand growth for hydroxide is more robust worldwide, which we estimate to be around 100,000 metric product tons for 2019, a more than 50% year-over-year increase.

Geographically in 2019, we saw China as relatively less important as a buyer of hydroxide than it is of carbonate, with Japanese and Korean battery makers, Western cathode material producers and the European OEMs playing a greater role in the sourcing decisions.

This greater diversification in the type of purchaser is a notable difference between the hydroxide and carbonate markets in the battery segment.

Second, applications for hydroxide continue to have stricter qualification requirements than their carbonate counterparts.

And there remain relatively few lithium producers today that are able to consistently achieve both the quality and volumes demanded across multiple hydroxide specifications.

As a result, hydroxide prices outside of China have remained relatively stable throughout the year, albeit lower than in recent years.

In fact, while Livent's lithium carbonate realized price has declined dramatically since the first quarter of 2019, Livent's average realized price for lithium hydroxide has been very stable over the year, varying by less than $0.10 per kilo in any quarter.

We believe the current hydroxide pricing environment in China is simply not sustainable in the face of rapidly rising demand from high nickel battery applications.

Future hydroxide expansions have been delayed or canceled, existing and planned spodumene operations are being curtailed or idled, financing structures are collapsing and smaller nonintegrated converters are likely operating at cash losses, even with spodumene prices approaching $500 a ton.

Underpinning our longer-term confidence is the development of the global EV market.

While some of the current EV data coming out of China suggests a slowdown in sales, we do not believe this reflects a new normal, but is merely a pause related to policy shifts ahead of the next stage of growth in EV sales.

This is not just Livent's view, but is shared by a number of independent consultants, lithium experts and Wall Street analysts.

We continue to see that the leading OEMs in battery and cathode makers are positioning themselves for a significant number of new EV model launches, beginning in 2020 and accelerating in 2021 and beyond.

The development paths for these models are now reaching into the battery market and indeed into the lithium market.

These development paths rely heavily on increased usage of lithium hydroxide.

Government policies in China and Europe are the major force driving demand for EVs today, with China mandating OEMs to sell ever-increasing volumes of EVs and aggressive CO2 reduction mandates in Europe creating the same effect.

We see more and more European OEMs announcing all-in on EV strategies.

Just as important, we're seeing an acceleration in the shift to high nickel battery chemistries.

Cathode sales data within China supports this trend.

For instance, we've seen sales of NMC 811 in China more than double in Q3 compared to Q1 of 2019.

And for the first time, we've seen 811 sales volumes start to approach NMC 622 volumes.

While the data we can see only captures one part of the overall market, the trend is clearly there.

We also see broader adoption of NCA chemistries, as recent announcements have supported.

As we get closer to launch of the new EV models coming to market, the supply chain for EVs is slowly becoming clearer.

There is more visibility into who is supplying who, as evidenced by the increased partnership announcements we've all seen.

Battery producers are making commitments to Western OEMs with regard to performance, volumes and safety that are pushing them to take a more active role in key aspects of the battery supply chain.

It helps explain why some battery makers are looking to bring more cathode material capacity in-house, and why they're also looking to take a leading role in sourcing critical battery materials such as lithium hydroxide.

The interplay up and down the supply chain is still not fully transparent or uniform, but it's certainly better than it was at the start of the year, and we expect that it will only continue to improve.

The evolution of the supply chain is leading to increased adoption of longer-term supply agreements with well-known, high-quality lithium producers that can provide a reliable supply of hydroxide to exact specifications, and who can grow with the EV battery market.

Livent has always recognized the critical role the battery producers and OEMs will play in the future lithium procurement decisions, and we have a long history of partnering directly with them.

This is why we're pleased to have signed a memorandum of understanding for a multiyear supply agreement with LG.

For the first time, starting in 2020, we expect a significant majority of Livent's lithium hydroxide will be supplied under multiyear arrangements with either battery producers, or auto OEMs.

I'll now hand over to Gilberto to review third quarter financial results and the fourth quarter outlook, including more details on the impact of our decision to build hydroxide inventory in the fourth quarter to meet our customer commitments in 2020.

Thank you, Paul, and good morning, everyone.

Turning now to Slide 5. While third quarter revenue came in below expectations, both adjusted EBITDA and adjusted EPS were in line with our guidance and consistent on a sequential basis with the first 2 quarters of this year.

This combination has resulted in adjusted EBITDA margin of 29%, representing an improvement of over 400 basis points quarter-over-quarter.

Revenue for the third quarter was $19 million.

The year-over-year decline was primarily due to a combination of lower volumes and a decline in the average realized price for both lithium carbonate and hydroxide.

Pricing for butyllithium and high purity metals continue to be higher on average on a constant current basis, and foreign exchange added a headwind of 1%, primarily from the RMB and the euro.

Third quarter adjusted EBITDA of $28 million was consistent with first and second quarter results in 2019.

The corresponding margin improvement this quarter versus second quarter was driven by improved customer and product mix as well as lower costs.

We provided lower volumes to one large hydroxide customer under contract that has been in place for several years and has a lower price than any of our other contracts.

Additionally, we realized lower costs from using less third-party carbonate.

On Slide 6, we have shown bridges for adjusted EBITDA on a year-over-year and on a quarter-over-quarter basis.

While we have historically discussed both performance and outlook on a year-over-year basis, in today's fast shifting market environment, we believe a sequential quarterly comparison adds additional insights.

We are 3 quarters of the way through 2019, and you will see that our results over the course of this year have been very consistent, with adjusted EBITDA of $28 million in each quarter.

This is despite the broader volatility and downward trend that has characterized the lithium industry this year.

Driving our consistent performance are 2 factors.

First, while the third hydroxide line we brought online in China in the first quarter enabled production of higher total volumes in 2019, these volume gains have largely been offset by the need to source third-party carbonate to produce them -- this work inversely in the most recent quarter, where sales volumes decreased and we realized a sequential cost tailwind.

We will continue to require third-party carbonate in 2020 until Phase 1 of our Argentina expansion comes online.

And the recent price declines in carbonate, will provide an opportunity to accelerate certain carbonate purchases.

Second, other than what we have seen in lithium carbonate, the average price of Livent's product portfolio has remained flat throughout the year.

And given our reduced sales volumes of carbonate, we have had a smaller impact from the significant price pressure seen in that market.

To reiterate, we sell relatively little hydroxide in short-term China markets.

And additionally, we have a significant business in butyllithium and other specialty areas with long-standing customers where our products is largely specified into their own production process.

These businesses tend to operate with greater stability and are impacted by different market conditions.

Turning now to the fourth quarter and full-year outlook on Slide 7. Livent has revised its fourth quarter and full-year 2019 guidance, reflecting the decision to carry up to 4,000 metric ton product of hydroxide inventory into 2020 in order to meet higher customer commitments.

I will give further details on our overall anticipated customer commitments for 2020 shortly.

Livent now expects fourth quarter 2019 revenue to be in the range of $90 million to $100 million.

Fourth quarter 2019 adjusted EBITDA and adjusted earnings per share are projected to be in the range of $21 million to $26 million, and $0.08 to $0.11 per diluted share, respectively.

For full-year 2019, Livent expects revenue to be in the range of $400 million to $410 million, adjusted EBITDA to be in the range of $105 million to $110 million, and adjusted earnings per share to be in the range of $0.44 to $0.47 per diluted share.

For further perspective on this later guidance, on Slide 8 we want to provide additional color on the anticipated changes for adjusted EBITDA between third and fourth quarter of 2019.

Historically, the last quarter of the year has been highest volume for Livent, and we had expected this pattern to repeat in our original guidance.

We have certainly seen the historical pattern of higher production volumes in the second half repeat this year, with over 3,000 tons of additional material available in the second half versus first.

However, given the continued growth of demand for hydroxide from our customers in 2020, we are prioritizing the buildup of inventory in the fourth quarter to meet those needs.

Rounding out our sequential comparisons are a few factors that combine to essentially offset each other.

We expect modestly favorable price mix in the fourth quarter, offset by lower carbonate pricing and a small sequential increase in costs.

Finally on Slide 9, I want to conclude by providing a few comments on select items in the income statement as well as give an update on our capital spending plans.

Livent generated adjusted cash from operations of $93 million through the third quarter of 2019.

We spent $125 million on capital spending in the same period and ended the quarter with debt net of cash of $67 million.

In conjunction with our adjusted EBITDA guidance revision for the fourth quarter, we are updating our adjusted cash from operations for the full year to a range of $80 million to $90 million.

Our full year guidance for capital spending remains in the range of $210 million to $240 million.

We expect capital spending to accelerate in the fourth quarter of this year, reflecting cash outlays on a number of important items on our expansion plans as certain construction milestones are met in both Argentina and Bessemer City.

Paul will update you on the progress we made in this regard in his closing remarks.

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

Thank you, Gilberto.

Although we will not be providing full guidance for 2020 until February of next year, we do want to provide a first look at our expected 2020 production and sales volumes for both lithium hydroxide and lithium carbonate.

I will just focus on hydroxide and carbonate today and not the approximately 4,000 LCEs of lithium chloride, which supports our businesses in butyllithium, high purity metal and specialty organics.

As you can see on Slide 10, all of the lithium carbonate we will produce next year in Argentina will be converted to hydroxide, and even then, this won't be enough to meet our customer demand in 2020.

As a result, we will continue buying third-party carbonate in 2020.

Given what we see for carbonate pricing in the fourth quarter and into the first part of 2020, we expect to be able to purchase carbonate on terms that are better than those we achieved year-to-date in 2019.

We expect to sell very small amounts of carbonate in 2020, mainly certain specialty grades and a small amount under existing longstanding commercial relationships.

Our goal for 2020 is to increase lithium hydroxide volumes to meet our customer commitments.

With existing customers increasing their volumes, and new customers looking for Livent to supply a significant portion of their 2020 needs, even at peak production levels, we will fall short of our committed 2020 sales volumes for hydroxide if we do not start to build inventory in the fourth quarter of 2019.

To help you better understand these commitments, I'll break down our 2020 hydroxide customer commitments a little more.

Historically, a combination of cathode producers and industrial consumers have made up the majority of our sales.

But as I mentioned earlier, 2020 will be the first year that the majority of our LCEs are committed to either automotive OEMs or battery producers.

We would expect that our hydroxide volumes delivered to these 2 classes of customer will exceed our entire 2019 hydroxide sales volume.

The remainder of our volumes are composed primarily of long-standing customers of lithium hydroxide across multiple applications and geographies as well as some carbonate commitments to long-standing customers.

We will have greater clarity on these volumes once we've concluded end of year negotiations.

We therefore project up to 26,000 metric product tons of lithium hydroxide sales in 2020, higher than our annual production capacity by up to 4,000 tons.

It is this shortfall that drove the decision to build inventory to carry into 2020.

We are making commitments to customers today that support our expansions in both Argentina and the United States, meaning that as we increase our available capacity at the end of 2020, we will have the customer commitments in place for that higher volume.

I'd like to wrap up by giving an update on progress towards our key priorities for 2020.

First, as Gilberto mentioned, we remain committed to delivering on our announced expansion plans in Argentina.

And we remain on track to meet our key milestones for delivering the first 9,500 metric ton capacity increase for carbonate by the end of 2020.

Recent milestones we have met include completing construction and support infrastructure, awarding contracts for earthworks and civil engineering, finalizing union contracts for construction workers in the region and commencing construction of the water infrastructure.

Importantly, we have started the process of shipping modules, parts and equipment for the expansion after the fabrication sites in China and we expect these first shipments to start arriving in Argentina later this year ready for deployment at the Salar in the first quarter of 2020.

We continue to fulfill our commitments to undertake all of our activities responsibly with full transparency and engagement with local communities.

We see our operations in Catamarca as a partnership between Livent and the local communities and we will continue to operate this way.

Our second priority is further improving the capabilities of our global hydroxide network.

Our existing lithium hydroxide network is already running at record levels of production out of both China and the U.S. By the end of 2020, we expect to produce an additional 5,000 metric tons of lithium hydroxide per year out of Bessemer City, bringing total capacity in the U.S. to roughly 14,000 metric product tons of lithium hydroxide per year, about the same capacity as we currently have in China.

All of the material we produce in the U.S. will serve customers outside China.

In addition, we continue to add processing capabilities to our existing hydroxide lines, increasing our operational flexibility to better meet the demands of our customers.

In 2020, we will also assess hydroxide production investments in other locations around the world.

We intend to keep expanding our global hydroxide network to align with our commitments to customers, especially as their specification and geographic needs continue to evolve.

Lastly, Livent continued to direct its innovation efforts towards next-generation lithium applications, particularly in the area of lithium metals, and production technology is focused on additional brine resources.

We are advancing next-generation lithium-metal applications in partnership with many of the battery producers that are increasingly becoming our customers for lithium hydroxide.

Our work to develop printable lithium-metal, allowing cost-effective prelithiation at commercial scale and offering the potential to print lithium-metal foils directly into anodes, also at commercial scale, is an example of the technology developments we are investing in.

While the direct impact on Livent's results will not be significant for the next few years, we are seeing that our knowledge of how to use lithium in advanced battery applications at commercial scale is a significant differentiator in our discussions with OEMs and battery producers.

We're also investing in and exploring next generation lithium extraction technologies.

Our investment in E3 Metals is an example of this.

We believe that even incremental improvements in processing efficiencies will help support long-term growth, sustainability, and most importantly, our ability to better serve customers.

This is our approach to everything we do and every decision we make -- to constantly look forward to what the market will need and what our customers will value.

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

Thank you, Paul.

Suzanne, you may now begin the Q&A session.

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

So you've characterized your hydroxide pricing as generally stable during the course of 2019 despite the spot market sort of volatility.

And part of this is just not selling much hydroxide into the China market.

Is there any way you could characterize the anticipated dynamic on hydroxide pricing into 2020?

Would stable -- fairly stable be a good characterization given that you have some visibility based on these contractual commitments?

It's a difficult one.

I think it's important that we don't try and make predictions for next year before we actually have the data available to do it.

I think as you know, the end of the year is clearly a time when we all sit down and discuss with our customers what next year's environment looks like and on what terms we are going to transact with each other.

I think for Livent, specifically, we do have a degree of stability because of the support we get from existing long-term contracts that are in place.

We -- the philosophy of not selling into China spot markets is one that we've always tried to adhere to.

I think in 2019, it was a relatively small proportion of our sales, but frankly still more than we're comfortable with.

And our objective is to remove all exposure to China short-term contracting decisions.

And that doesn't mean clearly that we won't be a meaningful presence in China.

But as I mentioned before, I think the contracting party and the buying decisions in hydroxide aren't necessarily today residing with that marginal Chinese buyer of material.

They're largely sitting with counterparties that are -- have a maybe a different perspective.

We will certainly give more guidance on what we think pricing will be once we get through the end of the year.

But at the moment, it's a little premature to be giving that information out.

Okay.

Fair enough.

But my follow-up is, and I guess reference to Slide 10 on your volume outlook which sort of implies -- and again, I guess it doesn't capture all of your product lines but the most important ones -- the notion that you can do 50% higher volumes next year.

If you have fewer low priced carbonate sales, if you're able to source some -- to the extent you outsource some carbon for conversion to hydroxide some lower-cost there, maybe diminish that penalty from exporting hydroxide converted and China, it seems like if there is stable pricing, you could have improved margins and with that volume growth, it seems like indirectly an endorsement with where street expectations are on the EBITDA line for 2020.

Any comment on that observation?

Every point you made is relevant and clearly our objective is to bring as much stability into next year as possible.

It is too early for me to tell you whether in fact some of those tailwinds, if you will, to our EBITDA will in fact play out for next year.

I'm going to ask for patience from you as we go through our year-end process.

Clearly, if we had that degree of visibility and the only thing outstanding was 1 or 2 small amounts of small customers with regards to price, we may be in a different place today, but you're just going to have to take my word that we still have to conclude conversations with many customers before it's possible.

And including by the way, where product are shipped to, what grades or specific grades of products they are asking for.

These all carry important implications on our actual EBITDA for the year and they can move the EBITDA in ways that are meaningful enough that certainly, Wall Street cares about.

So I'm going to be as firm as I can on this one and say you're just going to have to be patient with us for the first look at next year.

And our next question comes the line of Bob Koort of Goldman Sachs.

Paul, it seems like you characterize maybe a market of established hydroxide producers in the Western markets and then maybe a different market within China.

Can you talk maybe about what that premium is and how long you expect it to sustain your ability to produce on-spec to have availability in a surety of supplies as we conceptualize the advantage that you provide there and how long you might be able to retain that advantage?

I think one of the characteristics that we're trying to get across to people in hydroxide is that the buying decision rests today or is increasingly moving to a buyer of hydroxide who has frankly made some pretty significant commitments to their customers as to the performance of the battery when it's done; and so they are paying extremely close attention to the performance of the materials that are going into the battery.

There is also I think it's fair to say a bit of a shift in the business model that's developing between inside and outside China supply chains for batteries, where I think there's an attempt in the battery industry to own more control over the purchasing decision of raw materials, rather than just treat it as a direct pass-through.

What that means is as they head down that path, the last thing they really are looking for is highly volatile pricing.

Now they don't want to be at a cost disadvantage to people with a different strategy.

And their time frame for this is a multiyear time frame.

And so we have to make sure the pricing remains competitive regardless.

But the dynamic is very much more to bring more stability and predictability over multiyear periods to the input costs for the battery.

Just not that anybody is giving money away, lithium remains a relatively small input cost into the battery.

Lithium hydroxide and the performance of it remains an extremely critical part of the performance of the battery, particularly with regard to safety.

And again every single battery producer is following a proprietary process of manufacturing their materials, cathode materials, batteries, et cetera, which they frankly don't share broadly.

All of this is creating a very different dynamic for a Japanese or Korean or even European-focused supply chain than what we see in China.

I wouldn't necessarily describe it as a premium or a discount.

I personally imagine a scenario in the next couple of years where the China price goes through one of its gyrations upwards through the roof and it may be that we are selling at a discount to that short-term price.

I just think it will be a different pricing model and it will offer greater stability as time unfolds.

And if I could follow up on your contract approach to those cathode producers or through the auto companies.

I think in the past you guys have talked about resetting price annually subject to some collars.

It appears, maybe some of your South American brine peers have used different approaches, either spot markets or more of a fixed price.

How do you see your approach to contracting changing in the market?

And then also how do you make sure that your brine expansions come through?

It seems like the industry has had challenges in terms of expansions of brine assets.

Good way to sneak 2 questions together, Bob.

Look, I think in terms of the contracting strategy, our strategy this year, I mean it historically has been -- we made -- maybe overstate who controls that contracting strategy.

Look in the end, it's the customers that have their own views, as to how they want to run their businesses.

And they are trying to line up supply arrangements, including contracting and pricing strategies that align with that.

Our job frankly is to find those customers that are willing to contract on a basis that is attractive to us and recognize and values what we do.

So that means that we actually try to be somewhat agnostic as to whether they're fixed-price contracts, floating price contracts, caps and collars, annual renegotiations.

We do our best not to move into anything that requires frequent renegotiation.

It just isn't healthy for us, for our relationship or for anything.

While at the same time we want to make sure that our customers feel like they actually have an open line to us that if market -- and vice versa by the way, those market prices and their prices get consistently and long-term out of line we actually have a conversation that we can have with them.

The basis for that, frankly Bob, is getting in with the customers early, making sure that our product is qualified, making sure that our product is being used in their processes and that they are happy with our delivery schedules, the quality of what we produce and everything else.

On the back of that, you can start to have a proper customer relationship rather than just a pricing negotiation, and that really is the philosophy.

And I would just point to the fact, as I said, the hydroxide market is evolving differently than how the carbonate market behaves today.

Whether they evolve over time to the same place is hard for me to predict, but it certainly feels to me that we're in a different place today with regard to the contract, and the negotiation and the customer relationship process.

As for Argentina and our brine expansions, we remain on track.

We tried to be clear on this; I'm just going to say it again.

Our estimates have not moved by a single day as to when we will bring production in Argentina.

Since we started the project, we've always said, mechanical completion in the back half of 2020 so that we have a volume available in 2021.

That remains the track that we're on and the path that we're on.

The same is true for our hydroxide expansion in North Carolina.

It is absolutely on track still.

And our next question comes the line of Christopher Parkinson of Credit Suisse.

It seems as though it's mostly a timing issue, but given the lower op cash guide, can you just update us on the current funding capacity for the expansion?

And then also you hit on this a little at the end, but can you offer some additional detail on the construction progress you've made during the quarter, and probably more importantly, highlight any remaining large benchmarks or hurdles that you must execute on the prior to the initial commissioning?

It's Gilberto here.

So on the capital funding for expansion, again, we have reaffirmed our intention to invest between $210 million to $240 million this year.

Again in Q4, we have a lot of activity taking place as Paul described, a lot of the module shipments, a lot of the real start up the constructions in the Salar.

So we expect a lot of expanding this year.

In terms of financial capability, nothing has changed.

We still have our revolver for $100 million with everything is in place for us to fund with no problems our expansion.

Yes, in terms of the Argentina expansion, it really has 2 -- I'll loosely describe it as 3 groups.

We have the broad infrastructure we need to put in place to actually complete the expansion.

That's largely complete.

The team listening on the phone I'm sure will be wincing that we're saying it's largely complete, but camp infrastructure, et cetera is all well underway.

The second is the key aspect of any brine-based operation, which is access to a sustainable supply of water.

That requires us to build essentially a water pipeline or aqueduct.

Construction on that has commenced and we've deployed contract.

It's well underway.

This is a key construction season for us, it's summer down there, and so we need to make as much progress as we can on that before the cold weather sets back in again next March, April time.

And the third piece is that the completion, the fabrication of the carbonate and other related modules in China, and then the physical relocation to the Salar, which as you know, is pretty remote.

That process has started.

The first modules are underway.

Almost 100 modules have either left or are about to leave China.

They'll all arrive in Argentina at the end of the year, and we'll start the process of deploying them up to the Salar as the year goes on.

All of those remain extremely complex processes.

And while there is no single factor that we see that could trip us up or delay us, it -- you never quite know what you're going to find at various points in time.

And so I feel very good about where we are.

I think we have the right team, we have the right processes, we have extremely constructive relationship with the local communities and local authorities that's helping us when we do run into some logistical issues.

So never say never, but it feels to me that we are progressing as well as we could have hoped.

Got it.

And just a quick follow-up: how do you characterize the broader diversification opportunities you currently see in the market?

Are you still looking for partnership opportunities in light of some of the uncertainty in Argentina?

Or are you still just simply focused on executing Catamarca and Bessemer City for the time being?

I think we've found ourselves in places in the past where with hindsight, we maybe should have been more forward looking.

And we've delayed decisions, we've been too heavily influenced by short-term market conditions and find ourselves several years later wishing we'd had a better crystal ball.

I think we look forward and say to remain relevant in this market, we have to keep exploring ways in which we can expand our capacity.

I mean we can take it from an LCE basis, and that makes us look around a little more.

And we do look at partnership opportunities for expansion projects where we think we bring something more than just capital, where we think we bring real expertise, and we'll continue to look for those partnership opportunities to give us cost-effective and capital effective access to more LCEs.

We'll continue to expand in hydroxide.

Our business model is a little different than everybody else.

We don't intend to build a business model that locates every ton of conversion capacity in the same geographic region and leaves us exposed to a single specific market.

We have diversification today with China and the U.S., and there's no doubt that there'll be more and more increasing amount of demand for lithium hydroxide in other geographies, including Europe.

And we'll continue to look forward about what we need to do as the market evolves with our asset footprint.

And our next question comes from line of Kevin McCarthy of Vertical Research.

Paul, I think you indicated you've got a significant majority of your hydroxide volume in 2020 to be supplied under multiyear arrangements with either battery producers or auto OEMs.

My question is: for those contracts that you already have in place, to what extent do you have visibility or confidence as to what the price is going to be?

In other words, to what extent is your contract price fixed or variable, or perhaps there are examples of each?

How would you characterize that?

Yes, I think there's examples of each.

I think what we're trying to do, and we've talked about this in the past, is our customers with long-term contracts aren't static in their demand requirements.

And as they've come back to us as their demands have required and have looked for additional volume, we've been able to effectively layer in additional commitments, maybe in slightly different terms, different prices, different structures.

So in aggregate, it brings a lot of predictability to the supply arrangement, while at the same time giving both of us the opportunity to revisit and check where we are relative to market pricing on a 1- or 2-year basis, which is what we found happened.

We're continuing down that path.

We're trying to build something that allows both ourselves and our customers, without it being a constant negotiation, to actually turn around and have frequent conversations to say, hey does the price really reflect what both of us is trying to achieve?

Are we giving you a price that makes sure that you as a customer do not feel cost-disadvantaged?

While at the same time, are we getting the economics that we need to continue to invest alongside you?

And the contracts in their entirety are designed to be structured that way.

I think as we go into 2020, I feel very good that we have exactly that kind of contract structure in place.

It will evolve though again in 2020 and in 2021 as demands change, as our capacity increases and our customers ask for more product.

That's helpful.

And then if I may, coming back to Slide 10 and the hydroxide sales volume range of 25 to 26 kilotons that you referenced, if a year from now, it turns out that the sales are different from that level, what would be the most likely reason for that circumstance?

Maybe you can just talk about your level of confidence.

You spoke a bit about the contracts, but what are the other key risks around that level of sales growth next year?

It's a difficult one to answer today, Kevin, because clearly it's our best estimate.

And I could be a little bit glib and say well customers take more or less or we produce more or less.

The reality is that what we see is an acceleration each quarter in requirements, requests, demand for product from us.

And so you shouldn't for example assume that that 26,000 tons is going to be evenly spread in every single month.

It's not that difficult when you're shipping a couple of thousand tons or more per month.

In some cases, a customer taking 500 to 1,000 tons in a month, that if their demand patterns change a little and they ask to delay some or accelerate some, which we've had happen in the past, they could make a difference, especially when you're fully sold out.

Clearly, we can find both cataclysmic issues that a customer completely walks away from a contract, or the opposite that a customer suddenly appears with a massive new basis of demand.

I don't really expect either of those two to happen next year.

And our next question comes from the line of P.J. Juvekar of Citibank.

The lithium supply chain is really long.

You go from carbonate to hydroxide in China to cathodes, batteries and OEMs.

When you look at your market intelligence, what do you think that inventory is being held at?

Is it held at more at the OEM level or battery level?

Where is inventory getting backed up today?

I'm not convinced that our crystal ball is any better than anybody else's.

I only know what we do see, and I can see that there isn't a lot of lithium hydroxide inventory out there in the channel.

And why would there be?

This is a product with a potentially reasonably short life, depending on how it's processed and what grade it is as well as a market where most of the short-term buyers are looking at it saying prices going down, why would I buy more?

We do certainly hear and see and feel a lot of spodumene inventory out there, and we certainly see a lot of carbonate inventory at customers.

I mean one of the interesting developments for us this year has been some of the battery producers or the battery chain where they've been relatively living caught out a little by how quickly they themselves are shifting over to hydroxide, and they've therefore maybe overcommitted in some places to carbonate purchases, and we've seen examples of people taking that carbonate and trying to find ways to toll process it into hydroxide as a need to use it up.

So I do think there's some carbonate inventory sitting out there at the sort of the cathode level or at the battery level.

I don't frankly have a lot of visibility beyond that, unfortunately.

Okay.

And then your choice of expansion in Bessemer City, I would assume that most of that product will be sold in the Western hemisphere.

How is the lithium supply chain developing outside of China, particularly in the U.S. and Europe?

U.S. remains unfortunately a relatively small demand center for lithium hydroxide, and until we see a significant shift in battery supply chain, cathode material manufacture particularly, I don't really see that changing anytime soon.

We do see that changing in Europe.

We see customers building cathode capabilities and battery capabilities in Europe, and I think the policy decisions that we're seeing over there, whether it's starting with charging infrastructure or subsidies to consumers for EVs or CO2 mandates, are somewhat aligned with a desire in Europe to actually have a domestic battery production supply chain, all the way through cathode materials.

I personally am skeptical that they'll be particularly happy about spodumene mining or even spodumene processing [in the era] but time will tell.

But I do think we will expect to see a demand center growing -- we already see a demand for product that is not sourced entirely through China.

I think that is a well-recognized pinch point by OEMs that as we look forward with almost all the expansion looking like it's going in China for conversion capability, it's reasonably difficult for many OEMs to look at that and say, is that really a sustainable supply chain that I'm willing to rely upon?

And our next question comes from the line of Mike Harrison of Seaport Global Securities.

Paul, I was wondering if you can talk a little bit about the political situation in Argentina and whether that might have an effect on your operations or your expansion plans there?

Any concerns about changes in capital control regime or export taxes or anything like that?

I think history has shown us that when we have a highly interventionist federal government in Argentina, the impact tends to be on those areas that you just described, FX capital controls.

Just bear in mind that we are a net import to a product into Argentina for the foreseeable future.

Capital controls are typically -- not always but typically structured to prevent you taking dollars out of the country.

We're putting dollars into the country and will be for the next 4, 5 years or even more.

And so in the short term, it really does not make a big direct difference.

Now clearly when we end up with inflation, up at 40%, 50% plus on a currency that is artificially held down to not depreciate at the same rate, we will get some cost headwinds coming from that.

We've seen that in the past and if it continues, we will see it again in the future.

So certainly the federal administration change is something we're keeping an eye on, as to what their policies will be in that regard.

All the notes have been positive so far.

Very supportive of extractive industries, very supportive of developing stronger exports, which of course all of our product is exported.

Very supportive of giving more authority and more power to the governors in the regions and that's really perhaps that maybe the main takeaway.

For us is that what really matters to us is our relationship with the local administration in Catamarca.

We spend a lot of time working with them and partnering with them.

We haven't always been perfect in the past, but I think we've put ourselves now in a place where we have a very good understanding with the administration.

While the Governor did not stand for re-election, her successor is somebody we know very well and remains extremely committed and supportive to what we're trying to do down there.

So it really does not change our expansion plans in Argentina at all.

And then the other question I had is on your purchases of third-party carbonate.

You had some disruptions in Argentina early in 2019.

And I'm just trying to get a sense of, do you expect that your third-party carbon purchases to be higher in 2020 or lower relative to 2019?

Look, I think you can see the math that we have set out in the slide that shows the gap between how much hydroxide we're producing and how much carbonate we're producing isn't really that different year-over-year.

It's maybe a little bit higher.

So in terms of the amount of carbonate that we will have -- third-party carbonate that we will have to use in 2020 to support our sales, it will be higher.

On top of that, I think we've certainly learned our lesson with regard to supply chain management and making sure that we do not allow a disruption in Argentina -- unforeseen disruption for weather, etcetera, to have such a disruptive effect on us.

We're certainly revisiting the timing and the patterns of buying of carbonate to provide ourselves some protection again.

And our next question comes from the line of Steve Byrne of Bank of America.

This is Matt on for Steve.

So just given the shift in volumes to 2020, is it safe to say volumetrically things will be fairly flat between 2020 and 2021?

And kind of on the back of that given the LG comments or contract or comments about being forward-thinking, when do you see bringing forward the next line of hydroxide and would that have to happen coincidentally with an expansion in Argentina?

No, we would expect to see volumes a little higher in 2021 versus 2020.

I'm impressed with the long-term nature that we're already talking about 2021 volumes.

The reality is, I have about 18,000 tons of [sold] carbonate capacity and I'm adding 9,500 tonnes to it.

So I clearly will have more LTE's in 2021.

And then by adding the 5,000-ton unit invest in Bessemer city, you can see by looking at the slide we put out, I should in theory be able to produce about 27,000 tons of lithium hydroxide compared to sales of 26,000 tons that we're talking about.

So I would expect some increase.

Now, just bear in mind, we're trying to be very responsive to customers.

If we see demand in 2021 for lithium hydroxide being higher than the 27,000 tons that we can produce for us -- demand for us, we do have the capacity and a relatively short time frame to add additional lines in China.

We've done that in the past.

We've added 4,000, 5,000 tons at a time.

It takes us somewhere between 6 and 12 months depending on a few factors.

So it may be and I'm certainly not putting this out there in your models yet -- it may be that we choose sometime in 2020 to commence a fourth line in China if the customer demand is there.

Okay.

And maybe a little bit of a technical question.

But can you just, you mentioned it briefly but hydroxide has the moisture scavenging nature of it, I guess.

But how does that impact the costs to store 4,000 metric tons in the next year and how should we think about the implications on the cadence and volumes as that product kind of rolls to market?

Should it be front-end loaded or can you level that out through the year?

It's a little more complex than just simply that.

The reality is that the single biggest factor that tends to drive short shelf life on lithium hydroxide is its tenancy to clump, its tenancy to compact.

Maybe the single biggest factor of that is actually the size of the particles, whether you have larger crystal sized particles or smaller ones.

Clearly large crystals, they tend to be harder to make consistently and they tend to have better storage capabilities but customers don't like them, and so they tend to want to have them either ground into smaller particles or to produce a smaller crystal to start with.

All of those factors impact how long you can store the product for.

We do always have the capability to essentially skip the last step of processing until just before shipping to customer so we end up with an almost complete product, which gives us a little bit more shelf life in that regard.

But generally speaking, we expect the product as we make it will not have a shelf life issue with regard to our customers.

And our next question comes from Dmitry Silversteyn of Buckingham Research.

Just wanted to quickly follow up on the third quarter more so than looking out to 2020 just to understand what's going on in the market.

So you had much lower carbonate sales in the quarter, which caused you to take -- to miss in terms of revenue and guide down and all that stuff.

So I understand that.

What I'm trying to understand is, as you were sort of scrambling to make up the shortfall from the issues of producing in Argentina in the first half of the year, how do I reconcile that ramp up that we were looking for in the second half of the year with the result that you actually put up in the third quarter and the decision of not selling hydroxide in the fourth quarter to the level that you originally planned on?

In other words, I guess what I'm asking is what changed in the market in terms of your expectations of being able to catch up with the volume by the end of the year?

So let me just differentiate a couple of comments.

The production volumes that we have in the second half of the year, we've really been bang in line with what we said at the Q2 results and continue to be.

We produced almost 20%, I think, more carbonate in the second half of the year than we did in the first half of the year, but just remember where it is.

It's on top of a mountain in Argentina and much of that product then has to find its way into either the U.S. or China to then be subsequently processed into lithium hydroxide.

It doesn't move into the market instantaneously.

I think the same is true of hydroxide units.

Because we didn't bring our third line in China on until the end of the first quarter, we also have meaningfully higher hydroxide outputs about I think mid-teens higher in the second half than the first half as well.

So our actual production volumes are exactly as we just described and that entire process is all part of the buildup of inventory that we're talking about going into 2020 in the hydroxide that we're carrying forward.

Okay.

I guess I'll follow up offline.

The second thing -- the follow-up question was on the memorandum of understanding with LG.

Is there any dimensions that you can provide of how impactful this is for you, the length of the contract, any minimum commitments, other than the fact that it's going to be a contracted business?

Is there anything else you can tell us about this new relationship with LG?

Sure.

It's multiyear, as we said.

I'm going to be more vague than you would probably prefer but this is a commercially sensitive agreement.

We are sensitive to commitments we've made to LG with regard to nondisclosure.

So you're going to have to bear with me on that.

It is multiyear, it is for lithium hydroxide.

It is for multiple grades of lithium hydroxide.

It is going into multiple applications; they're all energy storage applications.

They are predominantly EV applications.

We will be delivering both in China and outside China and to multiple processes of that material.

Some of that material will be delivered to LG itself, some others will be delivered into their supply chain.

So it does bring -- it brings both greater certainty than we had and also importantly greater diversification as well for our products.

So it's a pretty important contract to us.

The relationship with LG is a very important relationship to us.

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

You talked about having to make sure you meet your customer commitments in 2020.

Can you talk about how much of the 25,500 tons, maybe talk about how much of that is locked in by customers?

How much are minimums?

How much are on take-or-pays?

Is any kind of color you can give on how much is locked in versus could be maybe not taken?

I think 2019 and maybe even 2018 should have told everybody that locked in doesn't necessarily mean locked in.

I think the key to us is to build relationship with customers where we both understand what commitments we're making and we both live up to them.

I think we sit there with some very important, very credible, very long-standing customers as well as some very important new customers.

I have a high degree of confidence that no matter how the market unfolds, we will be having a degree of predictability in 2020 that I think we have felt was somewhat lacking from us in 2019.

I think I would mislead either yourself or myself if I attempted to put a percentage today on how much of that I think you guys can take to the bank in your models.

I would suggest that we have -- we would not be putting that volume out there unless we had a high degree of confidence in our ability to deliver that volume.

And I personally believe that where we sit today in the business is a far stronger position than where we came into 2019 with regard to customer relationships, customer conversations, with regards to the nature of our commitments and the commitments that have been made to us by customers.

Thank you for that.

And finally, on your hydroxide made from third-party carbonate, what's the margin profile looking like right now for those sales?

Well, first of all, the customer doesn't see a difference, right?

I mean while some of them will separately qualify now we use a different carbonate, in the end it's the same hydroxide at the end of it.

So we don't charge a different price.

The only difference in the margin profile is the cost of the third party carbonate relative to what we produce in-house and no surprise it's much more expensive to buy carbonate for us than it is for us to make it.

Are you making money on those third-party -- on those hydroxide produced from third-party carbonate right now?

I would hope we haven't reached the point where we are a charitable organization and actually losing money on every kilo that we sell.

So yes, we are making money on it.

I'll now turn the call back to Mr. Daniel Rosen for his closing remarks.

Thank you.

That is all the time we have for the call today.

We will be available following the call to address any additional questions you may have.

Thanks and have a good day.

And that is all the time we have for today.

This concludes the Livent Corporation's Third Quarter 2019 Earnings Release Conference Call.

Thank you and you may now disconnect.