Livent Corp (LTHM) 2021 Q2 法說會逐字稿

Good afternoon, and welcome to the Second Quarter 2021 Earnings Release Conference Call for Livent Corporation. (Operator Instructions)

I will now turn the conference over to Mr. Daniel Rosen, Investor Relations and Strategy for Livent Corporation. Mr. Daniel Rosen, you may begin.

Thank you, Gino. Good evening, everyone, and welcome to Livent's Second Quarter 2021 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, 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. (Operator Instructions) We would be happy to address any additional questions 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 risks may vary based upon these risks and uncertainties.

Today's discussion will include references to various non-GAAP financial metrics. Definitions of these terms as well as a reconciliation to the most directly comparable financial measure, calculated and presented in accordance with GAAP, are provided on our Investor Relations website.

And with that, I'll turn the call over to Paul.

Thank you, Dan, and good evening, everyone. It's been a productive and exciting few months, and we have a number of important topics to discuss with you today. We reported strong second quarter results, supported by improving customer demand and strengthening overall market conditions. Our ability to take advantage of this improving environment has enabled Livent to increase its 2021 full year guidance, which we'll go into in more detail shortly.

During the second quarter, Livent successfully completed its equity issuance, raising growth proceeds of $262 million. The transaction was met with strong demand from both new and existing investors, and the capital will be deployed primarily towards our lithium capacity expansions. As a reminder, Livent has already resumed its capacity expansion projects in the United States and Argentina earlier this year, backed by the execution of a number of long-term supply agreements, an improving market outlook and continued local support. Also during the quarter, Livent released its 2020 Sustainability Report. It details our meaningful ESG progress in the last year. It highlights our new sustainability goals, and it reaffirms our commitment to environmental protection, social responsibility and transparency.

Before I provide further comment on the scale of our industry as well as some Livent-specific updates, I'll turn the call over to Gilberto to walk us through Livent's financial performance.

Thanks, Paul, and good evening, everyone. I'll begin with our second quarter results on Slide 4. We reported revenue of $102 million, adjusted EBITDA of $16 million and adjusted earnings of $0.04 per diluted share. Revenue increased 11% sequentially and 57% year-over-year, with higher volumes driven by increased customer demand across most of our products, particularly hydroxide. We also saw higher sequential pricing across large parts of our business, although we expect greater pricing momentum in the second half of the year and into 2022.

Adjusted EBITDA was 44% and 150% higher than prior quarter and year, respectively. This improved profitability was supported by higher sequential pricing and an improved product mix but was somewhat offset by higher costs. We're seeing higher costs from certain raw materials, including solvents in our butyllithium business, and from markedly higher shipping and logistic costs, largely due to COVID-19-related disruptions.

As you will see on Slide 5, Livent is increasing its full year 2021 guidance as the company's financial performance continues to strengthen. Guidance for revenue is now projected to be in the range of $370 million to $390 million, up from $335 million to $365 million. Adjusted EBITDA is expected to be $55 million to $70 million, higher than the prior range of $40 million to $60 million. Our new revenue and adjusted EBITDA estimates represent 32% and 180% growth at the midpoint, respectively, versus last year's results.

The expected improvement in our 2020 results will largely be driven by pricing, which we now anticipate being slightly up on average across our broad portfolio of lithium products. This improvement comes despite some limit to upside for Livent this year. This is a result of our available volumes being largely committed on our annual contracts that were negotiated in 2020 and won't be set until the new calendar year. We do expect to continue to see realized price improvement in the second half of 2021 on a subset of our customer contracts that are subject to monthly or quarterly price renegotiation or have a lag from market-linked pricing adjustments.

In addition to the higher energy storage demand supporting this positive outlook, we have seen notable improvement in some nonenergy storage markets, many of which were significantly impacted by COVID-19-related operational and end market challenges. The key variable as to where in the guidance range we fall is the potential for shipping delays caused by extremely challenging global supply chain conditions. The combination of COVID-19-related shutdowns followed by a rapid pickup in demand and continued strict regional protocols has added increasing complexity, risk and cost to supply logistics. Based upon what we've seen today, there is a risk that some sales may be delayed by a few weeks due to logistic issues. And even where we are able to deliver on time, we might be forced to incur higher shipping costs to achieve this.

It's worth acknowledging that while we're seeing favorable market conditions support higher lithium pricing, current average prices realized still remain well below historical highs and have not reached reinvestment cost levels for higher-cost producers. We expect the positive momentum to continue and for Livent to see further benefit from this as we finalize more contracts with customers for 2022 and beyond. Nearly all of our anticipated volumes to be sold in 2022 will be at fixed prices that will be set in 2021 with the remainder of being more closely tied to the market pricing.

To conclude, Livent's 2021 guidance for total capital spending is unchanged at $125 million as our capacity expansion projects continue to progress. We have spent $34 million through the first half of the year and expect this to accelerate with additional work over the next 2 quarters.

I will now turn the call back to Paul.

Thank you, Gilberto. Moving on to Slide 6 and some commentary on current market conditions. The strong pickup in lithium demand that we saw at the very end of last year has accelerated through the first half of this year and shows no sign of slowing down. The largest driver of this higher demand has been higher electric vehicle sales, one of the highest growing end markets for our industry. June EV sales in China were roughly 240,000 vehicles, up 18% month-over-month and bringing first half total sales to 1.1 million. The China Association of Automobile Manufacturers has already raised its forecast for full year new electric vehicle sales by 33% from its initial projection just at the beginning of this year.

In Europe, second quarter growth in the top 5 regional markets increased 240% year-over-year. And June registration rates in the U.K., Italy and France reached comparable levels to December 2020, when there was a strong year-end push from OEMs to reach CO2 compliance levels. We're now seeing forecasts for 2021 global electric vehicle sales to exceed 6 million vehicles. This will be nearly double 2020 EV sales of 3.2 million and triple the EV sales of 2.1 million we saw in 2018, the year that Livent went public.

This strong demand for electric vehicles has impacted the entire supply chain, resulting in meaningful growth in demand for batteries, cathode and battery materials. The impact of this growth on lithium and other battery materials has no doubt been magnified by the fact that it comes immediately after a time when COVID-19-related uncertainty drove many purchasers to delay orders and work through existing inventories as needed. Today, the supply chain for lithium materials like spodumene, carbonate or hydroxide has limited usable excess inventory, and this is even more pronounced in applications with the most stringent product quality standards.

The increase in lithium demand has been seen in both hydroxide and carbonate. Though much of the commentary today has been on carbonate, given some of the positive data points seen the first half of this year, hydroxide demand has been particularly strong in recent months. This is a result of increasing high-nickel cathode production in China as well as Korea and Japan as a number of new EV models come to market. Lithium pricing has continued to increase, supported by this market backdrop. Following the price increases first seen in carbonate in China, we've seen an upward price momentum in hydroxide and spodumene prices as well as international prices outside of China. Hydroxide prices once again established a premium over carbonate during the most recent quarter, and we're now seeing some spot spodumene concentrate transactions at over $1,000 per ton. This is nearly triple the historical lows that were previously seen and meaningfully ahead of the disclosed contracted spodumene prices.

The clear disconnect we've seen between recent spot spodumene transactions and contracted price levels is telling of a few important trends. First, it indicates that any excess spodumene inventory has likely already been worked to. And given a large portion of this feedstock material goes to the production of lithium hydroxide by converters in China, this will continue to challenge hydroxide supply and keep upward pressure on pricing.

Second, the volatility in spodumene prices continues to shed light on the differences between the nonintegrated converter model in China and the fully integrated lithium chemical producer. The challenges in securing material and the lack of predictability around costs make it very difficult to rely on this part of the market. Automotive OEMs or battery customers looking for security of supply or predictability of price will increasingly have to look towards integrated suppliers as a core part of their volume needs.

Separately, there continues to be a lot of strain on global supply chains, including lithium, largely driven by the disruption and remaining restrictions in protocols as a result of the pandemic. The difficulty in securing product containers and transportation, either by boat or truck, makes it challenging to accelerate any customer demand. The timing uncertainty and the additional costs in managing this complex environment are expected to remain, as highlighted by recent announcements from leading auto OEMs around semiconductor shortages, for example.

In the face of these near-term challenges and long-term trends, we continue to believe that Livent remains well positioned as a leading supplier of choice. As a fully integrated lithium producer from resource to final lithium chemical production, we have more cost predictability and security of supply to commit to and deliver on long-term supply agreements with greater price stability and visibility.

We expect positive lithium market dynamics to continue through 2022. There continue to be announcements from both OEMs and governments that add confidence for the longer-term demand growth trajectory. This accelerating demand will continue to increase the pressure on meaningful battery quality supply growth.

In the last few weeks alone, we've seen EV day events from multiple leading auto OEMs outlining their plans for increasingly large investments into the electrification of their fleets and firmer or closer targets like ending the sale of legacy ICE vehicles. In a transformational announcement, the European Union proposed a Fit for 55 package, which would require emissions from new vehicles to drop 55% by 2030 and 100% by 2035 off of a 2021 baseline. Said differently, new vehicles sold up to 2035 would need to be exclusively 0 emission or non-ICE. According to Bloomberg New Energy Finance, this means at least 60% of new vehicle sales will have to be battery electric in Europe in 2030 compared to their expectations for 14% in 2021.

In the U.S., the push for electrification continues to gain traction as $15 billion of spend will be allocated towards e-transportation as part of the most recent bipartisan infrastructure plan. And just today, we saw the U.S. administration releasing a new target for electric vehicles to comprise half of all new vehicle sales in 2030. This announcement was made standing alongside leading U.S. auto OEMs, adding further seriousness and support for their own commitments.

More than just incentivizing the shift to electric vehicles, governments around the world are getting serious about pushing the transition to cleaner forms of power generation with a renewed focus on climate change. Combined with louder demands from global consumers, lithium will undoubtedly play a key role in the broader energy storage solutions of the future.

In response to higher lithium prices and increasing confidence in the long-term demand picture, there has been a supply-side response from lithium producers. This has been in the form of raising capital or announcing capacity expansions or greenfield project development. However, these projects are unlikely to do much to alleviate the short- and medium-term challenges to provide sufficient material, and in particular, the most needed material that is battery qualified. Even under optimal time lines, they will take several years to bring online and ultimately ramp up and begin the lengthy qualification processes. Bear in mind that major extraction projects are not typically designed for speed, and stages of permitting are meant to ensure key deliverables can be met responsibly. Many of these expansions are needed and will have to be successful in order to keep up with compounding lithium demand growth.

With that said, greenfield lithium developments, particularly those with unproven resources or using novel technologies, are bound to face timing delays and additional capital requirements, pushing out the cost curve and the necessary returns on investment. Additionally, the demands being placed on lithium producers to deliver battery qualified material are not becoming any easier. This will only lengthen the learning curve for producing multiple different specifications of material consistently at scale and will continue to put incumbent producers such as Livent at an advantage.

Many purchasers of battery materials in the EV supply chain today have come to this realization, with some faster than others. There is an increased sense of focus and urgency in conversations with both existing and potential customers, many of whom are now looking to secure meaningly larger and longer-dated volumes from what they anticipated just 6 months ago. We expect this to translate into some exciting new partnership opportunities for Livent over the next few quarters, and it reiterates why it is so important for us to continue to focus on expanding our low-cost, sustainable, global production footprint.

I want to conclude by providing a few business updates more specific to Livent. First, through resuming our capacity expansion work earlier this year, we have remobilized our projects in both Argentina and the U.S., and we continue to track towards our previously disclosed target dates. The funds raised from Livent's equity issuance in June will provide a significant portion of the funding required for our expansion plans. Along with improving cash flow generation and access to our existing credit facilities, we believe we have sufficient funding in place for these projects. And with this step now behind us, we can further focus our efforts on executing and delivering on these projects.

As a reminder, Livent's 5,000 metric ton hydroxide addition in Bessemer City and its Phase 1 lithium carbonate expansion of 10,000 metric tons in Argentina are expected to reach commercial production by the third quarter of 2022 and the first quarter of 2023, respectively. In addition, our crude Phase 2 carbonate expansion in Argentina for an additional 10,000 metric tons is expected to be in production by the end of 2023. We have all of the necessary permitting granted to us by the local and federal governments and expect the ramp-up period to run rate capacity on each of these units to be short, given our plans to dedicate the new hydroxide plants to no more than 1 or 2 contracted customers. You should expect 2023 to reflect the large portion of the new capacity from Phase 1 in Argentina and Bessemer City and 2024 to include the additional Phase 2 capacity for Argentina.

Nemaska continued to make meaningful progress in its optimization study this year. You may have seen from the recent Nemaska press release that a new site has been secured at the industrial park and port of Bécancour in Quebec, Canada for the construction of a downstream chemical conversion facility. Additionally, Nemaska has made the decision to produce battery-grade lithium hydroxide and will be well positioned to serve the growing markets in North America and Europe. We expect Nemaska to conclude its optimization efforts by the end of 2021. Livent continues to believe we have an attractive investment in Nemaska as a large cost-competitive, fully integrated lithium chemical asset powered by renewable hydrogen energy.

Finally, Livent released its 2020 Sustainability Report in June. The report detailed our new sustainability goals, which were previously announced earlier this year and are highlighted by our commitment to carbon neutrality by 2040, our path to 100% renewable energy use and an ongoing focus on sustainable water use. These goals reflect the highest priorities of Livent's customers, communities, investors, employees and other stakeholders. And our team is acutely focused on mobilizing our resources as needed to execute on them.

The report also highlights the meaningful progress we've made on a number of wide-ranging ESG efforts despite the difficulties presented by the global pandemic. Key metrics in the report were reviewed and assured by a leading third party, ERM Certification and Verification Services. And the content satisfies more of the requirements of the leading disclosure frameworks, which we will continue to build upon. Our ongoing efforts are underpinned by the belief that the responsibility to operate in a safe, ethical, socially conscious and sustainable manner is a fundamental obligation of our right to operate and essential for the viability of our business.

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

Thank you, Paul. Gino, you may now begin the Q&A session.

(Operator Instructions) First question comes from the line of Bob Koort from Goldman Sachs.

This is [Emily] on for Bob. I was wondering if you guys could describe the bridge to get from prior guidance to current guidance? And then maybe give us an idea of how much of that is driven by higher pricing versus other moving parts.

Sure. Gilberto, would you like to answer that one?

Yes. So we increased the midpoint of our guidance by approximately $13 million. I would say that 80% of that is pricing-driven, and about 20% of that is volume-driven. And as you fall down to EBITDA, we -- in addition to the price improvement that we're seeing throughout this year, we're facing some increased costs, particularly related to logistics. As we mentioned, disruptions of supply chain has been immense so far this year. And in order to mitigate any issues and be able to deliver to customers on time, we have to be making some earlier and higher purchases of third-party lithium products. And finally, we'll be seeing also some higher raw material costs, particularly solvents in the butyllithium business. As a result of that, our midpoint of guidance for EBITDA is increasing by about $13 million.

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

I actually want to follow up on that exact same question. So your incremental guidance is coming at 40% margins. So that $30 million of additional sales is coming at 40% margin. Your prior guidance company-wide was about 14% margins. You talk about this being 80% incremental from price. Can you maybe give a little more color? Are those all hydroxide sales? Are these all using your own carbonate or third-party carbonate? Like any more color to talk about why the incremental sales are all -- incremental sales are extremely higher margin?

I'll let Gilberto get you some specifics on that one. I think the key takeaway on this, Joel, is clearly that we are primarily a hydroxide producer. So much of the additional sales are in hydroxide. But pricing is really across the board, we're seeing pricing across the board. Incremental volume, to the extent that we have incremental volume, is largely lithium hydroxide. But the -- as I said, the incremental costs, including increased use of third-party carbonate -- and one of the challenges we have with the supply chains as they are is we will carry -- have to carry more inventory to make sure because we cannot rely upon supply chain being as reliable as they have been in the past.

And so that means that we have to hold more of our lithium carbonate, for example, at Bessemer City. It means that we'll use probably slightly more third-party carbonate in our China operations. And of course, as Gilberto touched upon, we see logistics costs, we're seeing solvent costs, we're seeing a bunch of costs, broadly speaking, climb across the business as well, which does offset the otherwise pricing-driven gain and why you don't get so much of it dropped into the bottom line. As you point out, it is much higher margin than our previous guidance on the incremental sales. But it is not as high as it could have been because of those incremental costs, which impact the entire business, not just the incremental sales.

Yes. If these business -- thank you for that, Paul. If these business conditions continued into 2022 based on different things you talked about, holding more inventory, some more third-party carbonates, raw material inflation by seeing stronger pricing, if these same business conditions continue to 2022, would your margins expand in 2022 above 16%? Or would they contract?

The biggest driver of that in 2022 is going to be pricing. So if the existing market conditions continue, and by that, I mean, supply chain challenges, increased costs, our volume, frankly, doesn't change, which is not a market [condition], but our capability is, and what we know about pricing we've already agreed for next year as well as what we expect to be contracting for next year's prices later this year, then yes, our margin will absolutely expand. It's a little bit too early to say how much it will expand, but it will certainly expand next year.

Next question comes from the line of Graham Price from Raymond James.

So I guess the first one, just wanted to check on the vaccination status of your workforce in Argentina and to see if you've had any COVID-related issues from the Delta variant. I know in the past, there were some kind of targeted outbreaks in certain areas.

Sure. Good question. So our protocols for moving people in and out of the Salar down there are incredibly strict. We put people in hotels now for 5 days for quarantine. Before they go, we test them before they go into quarantine in hotels, and we test them as they come out. And then we test them again when we get them to the mountain. We test them halfway through their 14- or 21-day shifts, and we test them again before they come back down again. So there's a lot of testing going on. And so to the extent that we pick up on -- if we had any COVID cases, we test them, we pick them up before they get to the Salar. We don't have a huge -- we've not had a large amount of COVID issues down there in terms of individuals being impacted amongst our workforce.

The vaccination rate for our employees up there to date, we believe, it's not entirely clear because, as you know, every country has different rules about what people have to disclose, but it's about 60% of our workforce today is either partially or fully vaccinated. And finally, quickly, there's certainly more vaccines available down there in Salta and Catamarca available to our employees.

Got it. Got it. Good to hear. And then for my follow-up, just kind of off the comments you made around the higher shipping and logistics costs, I wanted to see if -- I guess, if you had any visibility on when those might dissipate or when they might peak, just your outlook there.

Yes. We talk about that a lot, and I think the short answer there is we have no idea. If you'd have asked me 6 months ago, what would have happened when we were running into extra costs and logistic challenges back then, we would have said probably in 6 months, the challenges that we're facing will probably have abated a little. And they started to. But really the last month or so, it's just been really ratcheting back up. And it's hard sometimes to understand what's driving them. We've had ships canceled where we've had ships just knocked down at the ports, particularly in China, with some fires in China, with some crackdowns they've had on storage of guns in China. You take an aerial satellite picture of the port in Shanghai right now. It is nothing like historical levels in terms of the number of ships just going around waiting.

And as a result of that, we've seen almost across the board not just costs go up, and we've talked about 5x or even more sometimes for costs of transportation, but in some cases, there's just nothing available, period. There's no amount of cost that will get you the trucks or get you the ships. And so it's not entirely clear to us what's driving it. And a lot of our industry struggles to look at the root cause and figure out what it is. And therefore, it's hard to figure out what's going to change it as well.

Next question comes from the line of Chris Kapsch from Loop Capital Markets.

I just wanted to call attention to a couple of trends that have emerged. And here, you're thinking with respect to these trends. One is pretty obvious, another one less obvious. So one is just the increased relevance of carbonate longer-term feeding into LFP applications. And just curious if that trend is influencing your thinking with respect to your intentions to your manufacturing footprint and commitment to being a preeminent supplier of hydroxide vis-à-vis carbonate.

And then the other one less obvious is there's evidence of some cathode folks that are looking to maybe do some of that conversion in-house because they don't feel like there's just a reliable enough base of suppliers of those battery-grade hydroxides. So are you seeing that at all? And is that influencing the strategic thinking of your investments?

Yes. Look, 2 fairly important factors that we look at very carefully. I think the first starting point I would say is that the use of LFP in more vehicles and (inaudible) more carbonate make absolutely, frankly, no difference to our philosophy or strategy. Our philosophy has always been that we would like to have more carbonate exposure. That -- it's not necessarily LFP exposure we're looking for. Carbonate is a broader market. It's a more diverse market.

And I do agree with much of what some commentators are saying at the moment, which is carbonate is and will remain the single largest form of lithium being used in the industry broadly and probably in energy storage. I think it's far more suited for stationary storage applications. It's far more suited for many automotive, particularly lower-cost, lower-performance automotive applications. It continues to be in most mobile device battery technologies. It's a market we want to be in, and LFP is just piece of that, frankly. And while it's clearly a bit of a surprise to some people today and in driving some of those short-term spikes probably in carbonate pricing in China, it's not a fundamental change in what our view of the attractiveness of the carbonate market is or will be in the future.

So it's really just part of what we already set our strategy around, which is to take at least a meaningful position, and I say meaningful in terms of we can supply enough carbonate to a customer to be meaningful to them. I'm not trying to be the world's biggest carbonate producer or seller, for sure. And I think -- so I'd say it's not only LFP. It's a more broad carbonate market, and I think it's going to continue to be really, really, very attractive in the long run.

I'm sorry, Chris, remind me of your second question.

Any evidence that you've seen of cathode producers wanting to do their conversion in-house to hydroxide?

Yes. I've seen a little bit of evidence. I don't -- I wouldn't say it's widespread. Here's the challenge. I think if you're going to make the cathode pass, then you probably need to be a full-scale battery producer. So that keeps you to a relatively small number of companies that are doing that. And what we've also seen, generally speaking, is just because you are making batteries doesn't make you a cathode expert. And so some of those cathode producers who are making cathodes in-house have struggled sometimes just to actually meet the quality that they need for their own batteries, never mind for third parties.

I think the idea that people will start to make hydroxide in-house had a moment. Maybe in the last 6 months, people have talked about it. There's been a few well-known announcements about that and then a few what looks like well-known pullbacks from that position. The challenge has always been the same, right, which is if you're going to make that hydroxide yourself, then you need the feedstock. You need either the carbonate or you need spodumene concentrate, depending which on way you're going to go. And it's not entirely clear that there's anybody out there that has solved that problem of how to back integrate all the way into the base resource. We continue to see very few consumers of lithium chemicals expressing appetite to be in mining or lithium extraction or, frankly, in Argentina or Chile, where we are.

So I'm not convinced that the idea that people will bring either certainly hydroxide production or even carbonate production in-house will be a particularly broad or widely held strategy that's developed within our industry.

Got it. And my follow-up, Paul, is -- and this is longer term in nature, granted, but there's a lot of enthusiasm and focus on the emergence of solid-state battery technology. And this is an area where you've been, I think, publicly skeptical about the time line of adoption of solid-state. But I'm just wondering based on your engagement with commercial downstream customers, if you are seeing any more reasons to be optimistic on the transition ultimately to solid-state and the benefits that come with that?

Yes. No, I don't see any change in it and, frankly, in terms of acceleration of those time lines to a pure solid-state that everybody talks about. I think people will start to realize a little bit like the transition from low nickel to high nickel wasn't a step change. But it's a gradation of increasing nickel use. And the chemical point at which the switchover made you use hydroxide, there was a lot of activity in that gray area where you could (inaudible) carbonate or hydroxide.

I see the same happening with solid-state. Solid-state, clearly, everybody focuses on the safety benefits and of the solid -- on the battery. But I think the first phase is going to be increased pre-lithiation of the anode or increased use of metal in the anode to increase energy density. And so I do believe I have seen more conversations about ways to pre-lithiate anodes, which is a step, if you will, on that evolutionary path to a (inaudible). But I do expect lithium metal requirements to climb. And I do expect there to be more battery technologies that are using lithium metal as a primary input into their anodes. But that's a long way from pure solid-state. And so I don't see solid-state batteries really hitting any kind of commercial scale this decade.

Next question comes from the line of Kevin McCarthy from Vertical Research.

Paul, I'm interested to hear your thoughts about pricing philosophy. Obviously, we've seen strong momentum over the last 9 months. And so if we think about 2022, how are you thinking about balancing surety of price and visibility on the one hand versus leverage to what could be a tighter market and upside pricing opportunity on the other hand? Maybe you could talk through strategy in terms of the contracts you have in place and more importantly, the negotiations to come.

Sure. Look, I think it's important to sort of step back and take a look at what our portfolio looks like today and what it will look like in the future. And first and foremost, I think we believe that the right path for us to go down is to find partners that are willing to effectively guarantee economics for us. We have a largely fixed cost structure. And so it's important to us to have more clarity, we believe, on price and just chasing the highest possible spot. Hydroxide price is not the right strategy for us. So we will continue to pursue arrangements with customers that give that certainty that tends to lead towards fixed pricing over multiple years. And we believe that today is a good environment to be having those conversations. It's balanced. It's balanced environment between the economics for the automotive producer and the economics for ourselves.

Looking forward, I think there'll be a couple of things to bear in mind. One, we're doubling our capacity over the next few years. And so there will be more conversations to have with customers. And I suspect we'll be striking more contracts in a year or 2's time in a different price environment, probably a higher price environment than we've been in for the last 6 months or maybe even will be for the next 6.

And I think in terms of second opportunity to take advantage of the sustained increase in prices, I think carbonate is more likely to remain a shorter-term contracting market than the hydroxide market because the qualification requirements are different. And therefore, it's easier to switch. And so I think people will take more of a market-based approach in carbonate. And we will have more carbonate. And so I think there will be more volatility in that piece of our business, but it's probably 2024 before we're in that place of selling a meaningful amount of lithium carbonate.

I'd also say, by the way, I think there's more and more automotive companies are looking at their own products, their own processes, their own economics. It was easy in the last year or 2 as they first got [a couple] of lithium and say, "Why did I contract long term?" It's a lot more difficult today to sit down and say, "I'm going to just take market pricing." I don't think any automotive companies love with what they've seen with regard to public prices. We cannot debate whether they are accurate around unrealized prices because they're largely not. They do impact sentiment, and they impact attitude. And we've certainly seen some customers have suppliers remain on them, walk away from them, renegotiate prices on them. And so I think they'll also have a little bit of [difference] of what their portfolio of suppliers will look like. And I suspect they will also take a similar approach, which is varying percentages, but they would have a fixed price part of their supply chain. And they will take some market exposure with some more variable-priced contracts in place as well.

Very helpful. And then as a second question, I wanted to ask you about butyllithium. It sounds like increased costs for solvents are becoming more onerous there. And so my question would be, is there an opportunity to extract incremental pricing in butyllithium to recover, overrecover the solvent cost pressure? And if not, is there an opportunity to reallocate mix away from butyl to other lithium derivatives?

Yes. Good question. The truth is this is not [new] to us. It's not a new situation to find ourselves in with the moving solvent prices up or down. And generally speaking, as we get (inaudible) off and the like, just as when solvent prices come down again, we'll have to pass those savings under the line. So yes, we would expect that those solvent prices in the end will be passed on to most of our customers. And some of our customers actually pay for the solvent anyway. So it doesn't impact us directly, but others don't. And so there will be definitely opportunities to do that.

But diverting it to other products is possible. But the reality is, there's not a huge amount LCEs going into the butyllithium business. I mean, it's chloride-based, not carbonate-based for us. And with some others that make metal for butyl, they start with carbonate. But we don't. We go directly from chloride. So it's not actually -- it's not an easy diversion of LCEs to either carbonate or hydroxide. So I don't really expect that to happen so much in the short term.

Next question comes from the line of Steve Byrne from Bank of America.

I was hoping you would share with us, Paul, your -- the portion of your volumes in the third and fourth quarters that you know right now what the price will be. You -- Gilberto talked about a variety of these contracting mechanisms. And -- but from where you stand right now, do you have a pretty good view of where pricing will be for your third quarter volumes and most of it in the fourth?

The reason I ask is that full year guide that you have put out there, is there a portion of that volume that you really haven't priced yet and, therefore, there's some upside in that number? And then the other reason being the sequential increase you saw in price from the first and the second quarter here, is that a sequential gain that you think you might be able to continue into the third and fourth quarters?

Yes. There's a lot in there. And the short answer to your questions, yes, we have very little visibility on pricing in the third and fourth quarter right now. As Gilberto pointed out, one of our bigger challenges, frankly, is the timing in which we'll realize that pricing because making sure we can get it to the customers is not that easy. And so we've seen longer and extended and slower supply chains. And so there's certainly an aspect of, I see the pricing, I know what the customer will pay, but I have to get the materials in place to get that pricing down. And so the risk is really around timing on the third and fourth quarter, in my view. It's not the pricing environment embedded into our -- that guidance at that point in time.

And in terms of the first couple of quarters, there's a lot of mix issues goes on as well. We were fulfilling some first and second quarter business that was really last year's pricing, and a lot of it rolled off and did roll off as we went through. We were able to change mix of customers and of products into a place that helped with our average realized pricing. But I certainly expect the benefit on average realized pricing in hydroxide and in carbonate that we saw in the first part of the year to probably accelerate in the second half of the year. As we said at the beginning of the year, it's really the back half of the year where those opportunities mostly reside. And we may even see some -- in some of the other products that we have here some pricing traction at the back end of the year as well.

And then just maybe an extension of this into 2022. Is there any potential for a meaningful increase in volumes in any way until Bessemer City expansion comes on? And any comment on how much visibility you have on pricing for 2022 now?

Yes. We certainly don't have a lot of ability to increase volumes given where we are, and everybody knows what our installed capacity is of hydroxide and of carbonate. And they're not really meaningfully unchanged. And even though we are confident in our ability to quickly qualify the new Bessemer City plant, it's unlikely to be moving a lot of volume in 2022. So I don't see a huge amount of volume out of the site, unfortunately, for us. If we do, by the way, it'll probably be because we delayed some '21 sales, not intentionally, but because of the supply chain, and they'll get pushed into next year. So it may look like there's higher volume, but our fundamental capacity doesn't really increase until the start of 2023 when Argentina Phase 1 comes online.

And look, in terms of pricing for next year, I think we feel pretty confident that our average realized price for 2022 is going to be higher than it was in 2021. And if you recall, we started 2021 saying that our average realized pricing was going to be flat to slightly down compared to the prior year. And it's coming in flat to slightly up now, a little bit higher than it was in terms of what we think our average will be across the portfolio. That's just the nature of when we have reprices. And so we'll end this year with a very good, very clear view as to what our pricing environment is going to look like for 2022. And every indication is that it's going to be meaningfully higher than it was this year.

Next question comes from the line of David Deckelbaum from Cowen and Company.

Just curious, as you think about some of the expansion that's going on right now at Salar Hombre, there's been a lot of talk in the market about some advancements in DLE technologies. Livent was one of the earliest known to use DLE. As you think about ramping volumes, are you looking into any advancements on the technology side or any new applications for DLE that might be able to accelerate some of that production time line? Or are there any initiatives with either partnerships or internally to improve upon what's already there?

DLE is a -- I don't know why it's become such a buzzword. There's a couple of people who have been running around on specific projects talking about very, very fast DLE, immediate, if you will, extraction of lithium. And by the way, we've been able to do this for years and years and years. It's not a new technology or a new concept. The issue has always been that the yield from the very rapid DLEs just doesn't justify -- the yields are so low, they don't really justify the investments in advance, which is why you typically ended up with a DLE process like ours in Argentina which is a bit of a hybrid, where we do concentrate the brine very quickly, really in hours, to a usable level. But a small amount of time in a pond massively increases the concentration through evaporation, allowing us then to [have a] carbonate price [that plans] to offer higher concentration of chloride than we would if we didn't have the ponds.

The challenge as we go forward has been people clearly want to get away from pond structures and all the water evaporation that comes from that. So most of our technology investment down there in Argentina is actually all about reducing water usage. And we have some pretty interesting projects underway today that could, by the look of things, massively reduce the pond footprint that we have, may even eliminate the pond footprint for future expansions and may even justify able to go a bit into what we have today. But that's really -- it's not going to take our costs down. The cost won't really change, and it won't necessarily improve our yields. It's really about improving the sustainability footprint down there, which is really important.

I think DLE in other locations, you just have to understand, there are many, many different ways of doing it. And they don't all work everywhere. Most of them will only work in specific situations. So lining up your DLE technology with the resource that you have is really the critical point. You can have a solvent-based DLE technology, very rapid, but it's clearly never going to be given an environmental permit down there in South America. You can have -- it may work in Africa, for example. You can have other DLE structures that are very good in high-concentration, low-impurity brines but don't work with specific impurities.

So it's not an easy question or answer to say, is DLE going to make a huge difference? I think it will unlock some resources. And I think with the higher price environment today than maybe the last time people looked at this, and maybe last time people looked at it, they were competing with SQM's $5 carbonate back in the start of the 2000s, the economics behind DLE are probably more favorable than necessarily the technology changes in DLE. But we certainly -- we continue to look at how our knowledge in that process will help us develop other brine-based resources, and that's a constant focus of ours. And obviously, to the extent that we do make any progress, you'll be the first to know.

I appreciate that. And it's a great response, Paul. I guess to squeeze into maybe a second follow-up, just you mentioned Nemaska in the prepared remarks and reaching some decision points towards the end of the year. I guess, should we expect to see Livent looking into any other upstream resources in terms of expansion beyond Nemaska, beyond hard rock, maybe into other brines? Or would we expect to see just more expansions on the conversion [aside the 4]?

Yes. I think yes is the short answer. We absolutely expect and intend to diversify our resource base. And while Nemaska is obviously an important stock for us, and we're pleased and proud to be an investor in that project today and obviously a technology and operating partner in that project, it's still not enough. We need to -- we need more resources. And so yes, we continue to look at additional opportunities for us to bring what we would describe as our unique capabilities to certain assets and resources that fit those capabilities. We are not the correct owner for many lithium assets for multiple reasons, whether it's the fact that they're particularly big challenging mining -- byproduct or the geography that they're in, but there are many others that we are, we believe, a natural investor/operator and maybe even an owner of them. So we will continue to look at that. And I do hope in the coming years, yes, we find additional resources to take control of.

Next question comes from the line of Lucas Pipes from B. Riley Securities.

Paul, I'd like to go back to some of the earlier questions in regards to gross margins, appreciated all your comments there. And I wanted to maybe take a step back, high-level question. So if you look at margins in the second quarter, about 20% gross margins, what do you think they should go to, these gross margins, for a business that's growing quickly, where there's a lot of demand growth in the years to come? Would really appreciate your [take] on that.

Yes. It's a difficult question to answer it because in the end, what you're really going to take a look at -- what you're really asking is where the price is going to go to? And will some of the higher costs we're seeing today be permanent or will there be -- regress back to more of a historical norm? I mean, if you go back to 2018, as I'm sure you know, we made about $180 million of revenue on something approaching high $400 million to $500 million of revenue. So we've demonstrated margins in that kind of range in the past.

I think as we get bigger and we have more volume, there are certain costs that don't grow with volume, corporate costs, head office costs, a whole bunch of different costs. But equally, as we continue to increase our quality of our product and as our customers demand that, we also get some cost headwinds, too. There's no doubt there's meaningful opportunity for our margins to expand, but it's largely going to be driven by what your assumption of pricing is as to what gets you there.

That's helpful. And a related question but on ROA. When I look at kind of the returns in the second quarter, there seems to be a pretty obvious disconnect between that and the returns from you to incentivize the capacity that the world is clearly asking for. So how do you expect that -- those 2 realities to converge?

Look, I think the solution to all things and the question that everybody asks and the talent that everybody faces is price. I think when you take a look at resources and you're trying to get an appropriate return on investment, which is what we're all working for, there's a lot variables and I know not everybody shares the same view, how long the life of the resource is? What is the political risk in the country? What is the capital risk when you start the program? We've seen many projects increase their capital cost from start to finish and so on and so forth.

I think the bridge to this remains, in my view, more visibility and stability, particularly on the pricing environment. I do think the business model of our industry has to evolve as well. I think that -- I've thought for a while that what we actually have is a transitional industry model now with a lot of nonintegrated converters in China and a lot of nonchemical assets based in Australia, i.e., mining assets. And I think what we're seeing is a recognition amongst most people that if you don't have upstream or downstream, however you describe it, if you don't have a resource, you've got to get one. And we see a couple of larger Chinese converters taking that path and a lot of others realizing that if you're only a miner, you can't say there. You either get a partner in downstream or you need to invest in conversion capacity itself.

The reason I think that's important is because I think that is the primary step that helps bring more stability and predictability to pricing because now, you do have control of the entire cost structure. And you can sit down with customers and have a proper conversation with transparency about what returns you need. Harder to do that when one of your variables is spodumene concentrate that can go from $350 to $1,200 in 4 months, 5 months. So I think integration of supply is inevitable and a necessary precondition for appropriate returns on investments.

Next question comes from the line of Aleksey Yefremov from KeyBanc.

Paul, it sounds like there was meaningful progress at Nemaska. So based off what you've learned so far, are you inclined to stay at the 25% or increase your share in the project in the future?

Yes. Nemaska, as I'm sure you know, is run as a independent entity. We don't run it. We're not making the decisions. We're obviously party to them, given our economic rights. And we certainly think that the project is what we thought it was. We've known, as you know, since about 2000 -- early teens, we've been looking at, talking to previous owners, et cetera. And I think what we've seen is really solid progress of that management team and understanding the market, understanding the challenges in building an integrated supply chain. There's a huge amount of support from the Quebec government on that one, and that's what helped Nemaska get this new location, which is a far more appropriate place to build. And I think all along, I think it really reinforces why we wanted to invest into Nemaska. And we are providing help, technical help and other help to them in making those decisions.

Clearly, in the long run, Livent's position in the market is not to be an investor in other people's lithium projects. So you should assume that at some point in the future, we would hope to increase our involvement and in ownership of that Nemaska resource. But it's been barely a year really since -- less than a year since we made the investment, and there's still a lot of work to be done there to verify that it is, in fact, what we think it is. And so we're in no rush at the moment.

If I can just quickly follow up on that, maybe just a softer question on the same. Are you sort of more positive about this project, having learned new things over the last few months or about the same place or more negative on it? If you could directionally indicate.

We were, as I'm sure you may have known, highly cynical about the previous Nemaska-based project. So we think the resource is a very good, solid resource, right? It's a good concentration. It's a good size. It's in a difficult-to-mine location, and it brings its own challenges. We are more positive on the new location, for sure. And I think the idea that this is making lithium hydroxide makes sense because again, it is not without challenges.

So it's an investment. It's a resource. It's a project that we remain absolutely positive about. It certainly has a place in the lithium supply chain in the future. There's absolutely no doubt in my mind about that.

There are no further questions at this time. I will now turn the call over back to Mr. Rosen for closing remarks.

Thanks. That's all the time we have for the call today, but we will be available following the call to address any additional questions you may have. Thanks, everyone, and have a good evening.

This includes the Livent Corporation's Second Quarter 2021 Earnings Release Conference Call. Thank you.