Livent Corp (LTHM) 2020 Q2 法說會逐字稿

Good afternoon, and welcome to the Second Quarter 2020 Earnings Release Conference for Livent Corporation. (Operator Instructions)

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

Thank you, Mariama. Good evening, everyone, and welcome to Livent's Second Quarter 2020 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. We would ask that any questions be limited to 2 per caller. We will be happy to address any additional questions after the call.

Before we begin, let me remind you that today's discussions 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 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. I'd like to take a brief moment first just to commend the entire Livent organization globally. Our employees have quickly adapted to the new work environment brought about by COVID-19. And we're taking precautions to provide a safe working environment for all of them.

We'll begin today by providing some insights into the current state of the lithium market as well as Livent's second quarter performance. We'll discuss, how despite some of these near-term challenges, the long-term outlook for electric vehicle demand growth remains exceptionally strong. Also how recent major changes to the supply outlook, driven by both COVID-19 and lower recent lithium prices, is creating a rapidly approaching structural supply deficit. And most importantly, we'll discuss what Livent is doing to ensure we are in the best position possible to take advantage of future improvements in lithium market conditions.

As expected, the lithium market was very weak in the second quarter due to the impact of COVID-19 and the significant disruption this has created for global supply chains generally and for the auto industry, especially.

Demand was impacted as China only slowly resumed its recovery and many OEM plants in Europe and the U.S. were shut down for much of the quarter. And despite production largely resuming by the end of June, the ramp-up was gradual as consumer demand remained weak and broader uncertainty pervaded the market. This uncertainty continues today, and we can see that the end consumer, on average, has not yet returned to spending at pre-COVID levels, and this is inevitably impacting the electric vehicle supply chain.

Understandably, some lithium customers have been reluctant to take their lithium volume commitments any sooner than necessary, as they instead focus on managing working capital until they gain greater visibility into their own customer demand plans. In fact, certain customers that have historically discussed order patterns in excess of a year out are now only able to communicate their needs several weeks forward.

We've also seen much lower non-contracted lithium purchase activity, reflecting a broader slowdown in other industrial markets, creating unreliable market price indicators and adding additional challenges to the broader lithium inventory situation.

Despite this, we remain encouraged by electric vehicles setting all-time high penetration rates, most notably in Europe. While this is off lower total auto sales year-to-date, it is still a testament to the growing trend towards vehicle electrification over the coming years.

We entered this year in a state of oversupply, albeit with a wide range of quality capabilities on the supply side. This was fed by continued high inventory levels of spodumene concentrate, much of which was shipped in prior quarters into China to be processed into lithium chemicals. The near-term slowdown in demand, driven by the coronavirus, has slowed the rate at which our industry is working through this excess material.

In this environment, we've not seen any fundamental change to lithium pricing in our target markets. Although some smaller reported transactions in China have been testing the marginal cash cost of even the lowest cost producers. We believe this reflects an increasingly desperate cash position for local converters in this market who are now running at operating rates that are not sustainable. With spodumene inventory already on the ground in China, they have an incentive to sell to reduce their working capital and create cash flow, but this cannot continue indefinitely.

For spodumene, with pricing now being reported below $400 per ton, a large portion of the spodumene cost curve is no longer profitable. In fact, we believe that only 1 producer today is capable of selling spodumene at these prices, while covering cash costs and providing a return on existing invested capital. And even there, it is unclear whether these prices support any kind of expansion investment.

Some producers have resorted to drawing down stockpiled ore and implementing other temporary measures to lower operating costs as much as possible. Similar to the nonintegrated lithium converters of this spodumene feedstock, there was an incentive to continue covering cash costs in the hopes of remaining in operation until the market improves. We have finally started to see declines of spodumene imports into China, and we expect this trend to continue.

For brine-based production, which tends to be lower cost for carbonate, many companies in Chile and Argentina have been able to resume production with a reduced workforce and amended operating procedures following COVID-related shutdowns. Still, the approvals required to resume any ongoing expansion work are complex, and we believe that pretty much all expansion projects in the region are practically speaking on hold right now. While the ultimate impact of these delays remains to be seen, it will no doubt add to a challenged supply picture for our industry in the coming years.

Livent's performance for the quarter was negatively impacted by the disruption caused by COVID-19, as shown on Slide 4. For the second quarter of 2020, we reported revenue of $65 million, adjusted EBITDA of $6 million and were breakeven on an adjusted earnings per share. The decline in revenue was driven by lower volumes sold across all products, but most notably in lithium hydroxide.

While energy storage applications were most impacted in the quarter, many of our other industrial end markets also faced pressure to varying degrees. Some customers continue to defer purchases as they work to limit their own inventory buildup in an extremely uncertain environment.

Realized pricing was also down slightly on a sequential basis for both lithium hydroxide and high-purity metal, reflecting both customer mix and some lower prices. Average margins were negatively impacted by lower realized pricing and by sales of lithium hydroxide previously produced using higher cost third-party lithium carbonate. We carry forward roughly 4,000 tons of hydroxide into 2020, much of it produced from third-party carbonate in order to meet higher volumes projected by our customers in Q4 of last year. While we expected the majority of this inventory to be sold in the first half of 2020, customer delays will result in some of this product being sold and impacting margins into the second half.

During this period of weaker lithium demand and limited near-term visibility, Livent has been focused on a few key areas, as shown on Slide 5. First, Livent has been committed to ensuring its manufacturing sites continue to operate safely and with minimal disruption. Due to our close work with local and national authorities since the onset of the virus, our production facilities all currently remain operational. This is particularly important in Argentina, where we worked closely with the government to develop and administer a safe and practical set of protocols to resume local operations after only 2 weeks of downtime. As a result, we currently expect full year carbonate and chloride production levels out of Argentina to be broadly similar to 2019.

This has also been a critical time to be as close to our customers as possible to best understand their demand needs. Many of our customers continue to meet their volume commitments, although the timing has been delayed in certain cases. And while these customers continue to indicate that they will honor their full year commitments in 2020, achieving this will require a meaningful increase in volumes delivered to them in the second half of this year. With what we see in the market today, these volumes would have to be delivered mainly in the fourth quarter. Given the timing of the return to pre-COVID levels of activity remains very difficult to predict, we remain measured in our projections of a more fundamental recovery.

We have continued to progress conversations with multiple potential new customers and have started the process of getting qualified with many of them. These conversations are with automotive OEMs as well as battery and cathode producers, and we hope to be able to share more details as we move through 2020. What we can say today is that with respect to battery technology decisions, many of which must be finalized in the coming quarters ahead of planned EV model launches, the focus remains on various forms of high nickel cathode, all of which require lithium hydroxide.

Carbonate-based batteries have and will continue to have an important place in parts of the market, especially for lower cost and shorter range passenger vehicles as well as for commercial vehicles, and these will remain very large markets in total volume terms. But for the performance specifications required for the premier EV models being sold into western markets, high nickel cathode production will be needed.

As a leading lithium producer over many decades, our long experience of producing high-performance lithium hydroxide and our differentiated routes to expansion is increasingly valued as companies look to increase their understanding of the lithium supply chain and set out their own long-term sourcing strategies. We will often be asked to provide insight on different methods of lithium production, cathode performance and supply chain footprints, including helping them to understand the sustainability factors relevant to the production of lithium chemicals.

This wide range of ongoing dialogue within the lithium supply chain today, both immediate and long-term in nature, provides a unique challenge for our business. On one hand, we're managing our supply chain through unprecedented times to deliver qualified hydroxide with varying and increasingly stringent physical and chemical specifications on a less and less predictable schedule. While on the other hand, we're being asked by OEMs to increase capacity to meet their demands over the next 5-plus years to localize this capacity closer to their end markets and increasingly to diversify away from solely China-based production. We continue to work with these OEMs to help them understand what their role may need to be to ensure that a future shortage of lithium chemicals does not become an issue for their own growth plans. But it is increasingly clear that the current lithium industry pricing environment, the significant capital needs relative to available capital and the way lithium supply chains have developed so far will not be sufficient for what the automotive industry as a whole will need if it's plans for EVs are to be realized.

I will now turn the call over to Gilberto to provide a financial update.

Thank you, Paul, and good evening, everyone. I'd like to start by providing further detail on Livent's recent financing and its greatly improved liquidity position. As a reminder, earlier this year, we worked closely with our relationship lenders to increase the total net leverage covenant limit on our revolver facility, allowing for up to 6x EBITDA through 2020 versus 3.5x previously. This higher leverage limit provided additional flexibility as we evaluated alternate debt structures beyond our revolver.

Given the active and attractive capital markets in the second quarter, Livent decided to enter the market. And on June 23, Livent announced the successful pricing of its $225 million green convertible notes, which are due in 2025.

Livent was one of the first U.S. companies to tap into this green financing option and it provided a number of key benefits for us. First, it allow us to execute our transaction quickly during a time of heightened economic uncertainty. As we look at the remainder of the year, with the potential for resurgence in coronavirus and a looming U.S. election, we felt it was prudent to take advantage of this attractive window. Second, it allows us to put a longer-term tranche of unsecured capital in place. This was a leverage-neutral transaction for Livent with proceeds being used to pay down our secured revolver. Livent still maintains additional liquidity under the revolver. However, the total net leverage covenants have now been replaced with a 3.5x net leverage limit, but on the secured debt only.

And lastly, our ability to issue and qualify this convertible as a green bond under the provisions of the International Capital Market Association was a strong and important message to send to both our customers and our investors. As part of this process, we established a green bond framework, which we intend to build upon moving forward. I encourage everyone to refer to our Investor Relations website for further information on the issuance, our framework and the second-party opinion that was provided in support of it.

On Slide 6, we have provided a pro forma net debt table to account for the partial exercise of the over-allotment option offered to our banks as part of the financing. This greenshoe option was exercised after the end of second quarter, resulting in a total raise of $246 million to Livent.

I would also like to make a few comments regarding our capital plans. The majority of our projected capital spending for 2020 was completed in the first half of this year, with $90 million of a projected $115 million being spent already. This is a result of Livent making the decision in March to suspend all capital expansion work globally.

While we remain fully committed to our long-term capacity expansion plans, we cannot currently provide a specific date for when we intend to resume. The restart of our capital projects, however, will be driven by the absence of COVID-19-related imposed restrictions, coupled with improved pricing dynamics or firm long-term commitments from customers. Additional expansion must be supported by a sufficient return on invested capital, and pricing at base levels certainly challenges this belief.

Disruption to our industry and the typical consumer caused by COVID-19 makes it difficult for us to reinstate formal guidance at this time. The uncertainty with respect to the second half of 2020 is primarily related to volumes versus pricing. And while we continue to expect Livent's lithium carbonate production in Argentina to be flat in 2020 year-over-year, our hydroxide production will be driven to meet customer demand, while minimizing additional third-party carbonate purchases and inventory build. And limiting hydroxide production levels will likely result in a slightly higher unit cost versus prior year. We intend to provide an updated financial outlook at a later date once we have greater visibility.

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

Thanks, Gilberto. While it can be difficult to focus on the longer-term outlook for lithium when the near-term is so challenging, there continued to be various data points to support why conviction for the future of electric vehicles is as strong as ever.

During this pandemic, governments around the world have once again demonstrated their commitment to supporting the transition to electric vehicles. Given the path of the coronavirus, China was one of the first countries to act in this respect, by extending its NEV subsidy program by 2 years through 2022 and exempting new energy vehicles bought in this time from federal purchase taxes. It has also maintained its ambitious new energy vehicle penetration target of 25% by 2025. However, Europe has made the most headlines in recent months, with a number of new subsidies and initiatives put in place.

A proposed new green deal from the European Commission would see EUR 20 billion spent over 2 years to support electric vehicle sales, along with the building of 1 million charging points. This is on top of incentives and tax benefits being offered by most EU members, with both Germany and France recently implementing strong support for the purchase of new EVs. On a combined level, for Germany, France, the U.K., Spain and Italy, momentum accelerated in June with BEV sales up by 120%.

For leading OEMs, we continue to receive greater detail on EV models launching as early as 2021. And while the U.S. may be behind China and Europe with respect to EV adoption today, the number of electric SUV and pickup truck models being announced shows the growing focus on this important market. But more than just communicating attractive features to eager consumers, OEMs are being forced to make decisions on partnerships and on the form of the supply chain that will meet their rapid growth plans.

With respect to sourcing, the questions go beyond whether there will actually be enough qualified material available, which itself is by no means certain, but also whether these volumes can be procured in a sustainable manner. Regardless, these important decisions around lithium need to be made now for vehicles that will be coming off production lines, starting in some cases in as little as a year's time.

Another reason for the heightened attention of late around electric vehicles has been the impressive run-up in stock price for certain existing EV producers as well as the strong fundraising and public market debuts for several new EV entrants. Clearly, there are a number of factors at play here, but these valuations are only possible because the market believes that the electrification of vehicles is happening, that it can be done profitably and that there is a tremendous growth opportunity for those that succeed. Capital markets are voting with their wallets as to who they think the winners will be in the move to electrification.

With carbon-conscious principles strongly behind the transition to electric vehicles, the industry is poised to further benefit from recent announcements from leading companies around the world that are doubling down on commitments to reduce their own carbon footprint. And one of the primary areas to evaluate, at least as a starting point, is a company's product delivery network. Examples of this include Amazon's purchase of 100,000 electric delivery vehicles, which they expect to be on the road by 2021, and Lyft's goal of a 100% EV network of drivers by 2030. This corporate push is being driven by demands from both consumers and investors and should only continue to grow.

As lithium demand picks up when the global business environment normalizes and electric vehicle production accelerates, there will need to be a corresponding increase in lithium supply well beyond existing capacity. Further, the majority of this new material will need to be suitable for qualified battery applications. And with the current lower lithium pricing environment, the number of postponed or canceled expansion plans have only increased. Lithium projects, and particularly greenfield assets in more remote locations, take many years to bring online. However, unlike for the new EV companies I just mentioned, the financing to support growth in lithium supply is virtually nonexistent from today's capital markets.

According to S&P Global Market Intelligence, in the first 5 months of 2020, financing for junior and intermediate lithium companies was only 5% of the amount raised in the same period in 2019. This dynamic has also caused one of the industry's leading consultants, Benchmark Minerals, to bring forward its projection for lithium industry structural supply deficit, beginning as early as 2022 in certain parts of the market.

The importance of sustainability in the lithium industry in electric vehicle supply chain will only continue to grow over time. I want to finish by outlining some key initiatives Livent has taken to strengthen its own commitments in this area. And we believe our sustainability credentials are a key differentiator and competitive advantage for Livent.

It's important to recognize that despite being a relatively new public company, Livent has a much longer history of prioritizing and delivering on its sustainability commitments. As a business segment of FMC Corporation, we previously initiated 20% reduction targets by 2025 in key areas such as energy consumption, greenhouse gas emissions, waste generation and water usage.

As part of our first sustainability report as a stand-alone company published in May, we were pleased to announce that we exceeded or nearly achieved all of these goals are for 5 years ahead of schedule, as you can see on Slide 8.

Over the last year, we've engaged a leading sustainability advisory firm to assist us in generating a detailed materiality assessment, incorporating input from key stakeholders. This analysis includes a comprehensive review of our strategy and performance in key ESG focus areas. We're excited to share some of the key findings from this work later this year as we implement future goals to build upon.

Shortly after releasing the sustainability report, we announced our green bond financing, which was accompanied by a Livent-specific green bond framework and an audited second-party opinion. This was an important milestone for the company for a few reasons. It allowed us to share our compelling story with a new and wider base of interested investors. It also sent a strong message to customers about our focus and dedication in this area. And we've already received positive feedback in this regard. However, more importantly, sustainability is central to Livent's mission and all of our investment decisions, and this was a key step in aligning those principles.

As the scope of our conversations with customers has continued to expand, transparency regarding our operations has been extremely beneficial. And our unique proprietary brine-based extraction process has significant sustainability advantages versus other forms of lithium production.

We are the only producer that uses a form of direct lithium extraction process at a commercial scale, and we have been doing so for multiple decades. Our ability to directly target the lithium in our brine has multiple benefits versus more traditional brine-based production. Livent's process is not reliant on large pre-concentration ponds, which significantly lowers our land footprint and also means we do not add to the natural rate of water loss from evaporation by exposing underground brine to the elements over a roughly 2-year period.

Livent is able to return almost all of the brine and water it draws back to the Salar without introducing any solvents or hazardous chemicals. Livent has carefully tracked the impact of its operations in the Salar over many years, developing detailed models alongside a leading geology firm and with support from the local Catamarcan government. Based on these models, in our over 20 years of operation in the Salar, there has been no visible decrease in brine or water levels. Our detailed monitoring of the Salar over this time frame has allowed us to build a rich database of information that we have been able to leverage to effectively communicate with all of our important stakeholders and drive real improvements in our operations.

It's important to understand that we do not view this monitoring as just a regulatory requirement or as a costly unwelcome obligation. Given the importance of brine and water in our operations and our remote location, sustainable use is essential for the future viability of our business. That is why we introduced reuse and recycle technologies to help achieve our 20% water intensity reduction goal 5 years early, and we will continue to find ways to innovate in our production processes.

And while our lithium extraction method does require higher energy use than relying solely on natural evaporation, it still has a materially lower carbon footprint than producing lithium chemicals from current conventional hard rock mining processes and supply chains. While we have seen reports suggesting that lithium hydroxide is produced in China from imported spodumene has a similar carbon footprint to our own carbonate-based process, unlike our own data, these reports fail to take into account the carbon footprint of the spodumene itself and therefore, need to be treated accordingly.

We fully acknowledge that in order for lithium supply to continue to keep pace with demand over the long term, both brine and hard rock resource production and expansion will be required. And by doing our part to disclose the footprint of our global operations, we hope to further educate on why lithium is the key material required to support a low-carbon energy transition to electric vehicles and other energy storage applications.

In closing, as Livent looks beyond current market conditions, we remain excited about the future opportunities for our business and the markets in which we operate. We believe that our core advantages, the low-cost and sustainable nature of our operations, our partnerships with leading battery producers and automotive OEMs and our continued investment in developing next-generation engineered lithium products position us to be a prime beneficiary of future improvements in lithium market conditions.

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

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

(Operator Instructions) Your first question comes from Chris Kapsch with Loop Capital Markets.

Yes. So Paul, it's an interesting juxtaposition that you described, I think, most observing the space are keenly aware, just the continued pricing pressures, acute demand weakness, lack of visibility, the marginal producers struggling to cover costs. But then this potential for a structural supply deficit rapidly approaching. So my question is with this backdrop, I'm curious about your conversations with customers in the supply chain, particularly as you're still engaged with them on qualifying your products for newer future platforms. As they look at their supply chains and their future needs, is there any acknowledgment about this scenario of a structural deficit? Have these conversations, are they translating into commercial relationships where they acknowledge that suppliers need to realize better pricing to make better returns and sufficient returns to support reinvestment?

Chris, thanks for your question. It's a really -- the first thing I would say is there isn't one single conversation. I mean, we have -- I think it's fair to say, a wide range of knowledge and capabilities in that conversation. There are a couple of guys out there who've been really deep in the lithium industry as big users, particularly lithium hydroxide for a while, who are years ahead of their competitors when it comes to an understanding of all battery materials, not just lithium, but also in their understanding of what the implications are if we don't get this right. And so conversations with those customers is far more constructive and thoughtful than it is maybe with some others who just look at data that is published on various priced websites and say, that's the price I want. We have -- I think it's fair to say as well, a different conversation with somebody who has a historical legacy of building vehicles and wants to approach building an electric vehicle in exactly the same way because they tend to have their set way of doing things, which are either not necessarily applicable to our industry are so slow moving.

It's almost hard to know whether it's really a conversation or not. And so I would describe it as a very -- frankly, quite a frustrating set of conversations at time. I mean we do spend a huge amount of time with the ultimate consumers of this product, whether that's a battery guy or an automotive OEM. And while some of them do understand it, I think you can also appreciate that many of them have their own short-term earnings cash flow and other targets and objectives that consume them. And I think it's probably fair to say that they're still being educated on what they need to do, whether that's around putting capital to work, making commitments or even just thinking about what the right reinvestment pricing environment needs to look like to actually make decisions. And COVID hasn't helped, right? I mean, ultimately, we've seen with the COVID-19 shutdowns and with some of the changes, a lot of people who've been leaving these conversations that our customers have been pulled over into other areas, whether it's the cost going programs or other places that they themselves are tackling it for their own future survival as well.

Okay. So Paul, my follow-up would be one of your big competitors has -- their commercial strategy has resulted in a lot of long-term supply agreements. And the way they characterize those evolving discussions or relationships of sort of concessions that may or may not be short-term in nature. I'm just wondering if you could comment on -- is there any way you can characterize your existing agreements that you've had in place? And any dynamics around how the resetting of pricing may have played out or may play out during this period?

Yes. Look, I think we're all different. And we all have very different profiles and different products. And we tend to be very concentrated in lithium hydroxide in certain areas and certain applications. And I think it's probably fair to say that we certainly have not seen a big resetting of our longer-term contracts. However, we've also probably had more contracts that have been more market referencing than some others. Not always, but we've had that the classics sit down and renegotiate each year, which is always has a market reference to it. While there's no single data point, clearly, that's a competitive process. And we're also increasingly seeing customers looking towards some kind of index measure. These are admittedly imperfect indices. And generally, they're references rather than mathematical calculations. And so what we've tended to see in our business is well, like I say, we certainly haven't had to give concessions to customers around historical price agreements, but we have moved with many of those customers to a more market-based structure. And frankly, it's been in our interest to do that because we think looking forward, the pricing as to where we are today is not going to be where it's going to be forever. And when it climbs again, I think we -- the last thing we really wanted to be doing was to be putting in fixed price agreements.

Now the final point I'll make is while you look towards one of our competitors, they sort of have a -- I think I know who you're referring to, but they're back integrated. They're fully integrated. They have a fixed cost structure in the way that we do, too, but also competing with a lot of companies that do not have a fixed price structure and do not want fixed pricing out there in the market, and therefore, we'll compete with us by reference to, for example, spodumene input prices. And so what we're finding is different customers prefer different things when it comes to those conversations.

Our next question comes from Chris Parkinson from Crédit Suisse.

Great. Hopefully, everybody is doing well. So we've all seen the spike up in Euro EV sales, in part, obviously, driven by several countries efforts to support the industry. And in turn it appears the OEM and battery manufacturers are obviously now focusing on shoring up supply chains, there's been a lot of rhetoric out there. So just how should we think about this in terms of battery-grade hydroxide demand, especially if it's going to take time for you and the other 1 to 2 layers, the key hydroxide producers to re-ramp expansions to meet this demand that you already were alluding to that, which by all accounts you're not really incentivized to do so quite yet. Just what are the key thoughts on that?

Chris. Look, it's -- no, I talked about this sort of 2 opposing forces, almost a unique situation that we find ourselves in where the demands on us and the requirement service and the needs for us to continue to invest in existing operations to meet increasingly tight specifications is no joke. And it's not easy for anybody to do. And it takes a lot of time and -- and I think it's largely facilitated by the fact that the move to actually using large volumes of lithium hydroxide is not quite here yet. And so we have this -- I don't want to call it a dance if that's the right description, but it's certainly a process where we have to change some of our processes. Customers themselves have to understand what the outlook possibly is with regard to lithium hydroxide production, and they themselves are trying to modify their own processes to, as you would expect, uses wider range of lithium hydroxide as possible. But we are tending to see in that process, the battery engineers rather than the procurement organizations are winning. And what that means is that demands just keep going up and up and up. And we have more and more of our customers sending those new demands and asking for visits and so on.

Meanwhile, of course, that's the battery guys. The OEMs are obviously looking forward at their own profitability and saying that we want to get involved in the supply chain and maybe it's not for the next 1 or 2 years. But once we get beyond that, we expect to be the ones sourcing the lithium and that's a different conversation. Because they'll fill numbers at you that are 1 single customer wants 3x our total installed capacity today within 3 years just for North America. And so you look at some of those numbers floating around you, you wonder how that's going to happen without some more rapid decision-making engagement and partnering going on then. And I think, therefore, our big challenge is picking who we want to partner with, picking who, in fact, we think, are the ones that actually understand that this business the best and are most capable of making the decisions and helping us work through our investment challenges in a way that supports us and that could be multiple different things. But we find ourselves in a -- it's just a very bizarre market right now that COVID has really magnified where there's a huge amount of future demand. There's a huge amount of expectation of higher level quality. There's a realization that the high-quality lithium hydroxide is key. And yes, very few people are able to pull the trigger and put in place the longer-term secure supply chains that they all recognize that they're going to need.

Got it. That's very helpful color. And just sticking within, I guess, the back half of 2020 and into '21. Just given your assessment of global inventories, just near- to intermediate-term demand understanding that's a difficult question right now. And then re-ramps of supply. Just what are the 2 to 3 things you'd like to see to get market prices back up to a reasonable level? And what price point do you believe needs to be achieved to incentivize expansion restarts in order to potentially avoid that supply void?

Yes. I'm going to answer the second question first and as careful a way as they can so that my lawyer doesn't shout at me. Look, I think the first thing I would way -- I think the first thing I would say is that there has been an inappropriate focus by most observers on the cash marginal costs at the mine gate of production. And people seem to see that as the point from which we should be calculating profitability. But of course, if you look around our industry and with the exception of 1, maybe 2 -- yes, maybe certainly 1 today, there's only one lithium company in the world today that's operating more than 1 resource, right? And so we are all essentially a single mine resource with an entire corporate structure on top of us, right? And so when you can look at the performance of our business today, I mean, we're averaging the lithium hydroxide put price north of $11-change per kilo, we're breakeven on EBITDA basis. And some of that's volume-driven, but the industry does not have the cost structure that people think it has.

Once you start to factor in the basics of corporate infrastructure as well and particularly as public companies needing to survive as public companies, you just can't start with the mine day production cash marginal cost because nobody will be able to -- will be able to fight the insolvency with negative EBITDA on that basis. And so I think what you've got to do is now take a look around and say, well, what is the real capital cost? And you cannot just look at a Chinese convertor. Because the Chinese convertor, it's all very well just starting there, but there's a capital required for spodumene that comes before that of a carbonate if they're going to be converting carbonate into hydroxide. And you need to put -- not just a Chinese converter return on capital, but in Australian or Canadian spodumene miner return on capital in there as well. And again, you guys can all go, I'm sure, speak to your colleagues in those parts of the world, you're going to see anywhere between $2 and $5 a kilo of just return on capital needed to incentivize you to invest. Because if you don't -- you just don't invest, you just can't. And so I think that conversation is a hard one for many of our customers to really get their head around.

And frankly, they don't always believe the numbers when you show it to them. But one advantage we have as a relatively transparent public company is we can point them to our K and our Q, and we can walk them through the numbers. And we can demonstrate that we are a Q1 producer, a cost curve producer of lithium carbonate and a Q1, Q2 cost curve producer lithium hydroxide and demonstrate that at these prices, we can't invest. And so I would say that the reinvestment and the expansionary needs, the conversation with customers has got to be different to how it's been so far. They have to accept either that there's a price they have to pay to allow that expansion to occur or they're going to have to think about putting capital direct somewhere into the supply chain. I think that given all the rest of their capital needs, whether it's in autonomous driving on legacy business with OEMs or whether it's around the giga factories the battery guys need to build, I'm not entirely sure they're putting capital in what many of those first choice.

And I apologize, I missed -- I forgot what the first part of your question was, but maybe I answered it in there?

It was just what were the 2 to 3 things you would like to see to make you feel further confident in that pricing recovery?

Yes. Look, I think the first thing was I could see some of these supply chains in place. We have some very well publicized, very public battery electrification plans of automotive OEMs, where those guys are out and telling everybody what their electrification is going to be, and they haven't even a picked a battery technology yet. Never mind the cathode supplier with whom we need to go and get qualified with. So I'd actually like to see actions backing up the words is my own personal preference. And I say that largely with traditional OEMs. I think the new entrants, they don't have that problem. They know exactly what they're doing and where they're going and what they need and what they intend to do. But the larger OEMs that we look towards are not making the decisions, in my view, that they need to at this point.

Our next question comes from Bob Koort from Goldman Sachs.

Paul, you paint what could be a pretty alarming outcome down the road here or maybe your customers are trying to -- the industry customers are taking advantage of the weak dynamics, but it's going to lead to a pretty ugly day of reckoning. So I guess my question is, how do you ensure that you get the full symmetry of this pricing curve? I know on the way up, you talked about having pricing bands that would limit price movements every year. And clearly, you weren't selling at some spot market, but how do you ensure you get your fair payback down the line given the compromised environment today? How do you adjust those pricing bands? How do you adjust your contract scheduling? How do you ensure that you get a fair return for the sort of misery that's out there at the moment?

It's maybe the single biggest question we wrestle with every day. And I maybe answer it as follows. I think you get this through a portfolio approach. I think anybody who thinks that we're going to sit there and have a signal pricing mechanism in our industry is not spending enough time with the electrification supply chain and understanding the challenges and tensions, et cetera, what goes on there. And there are multiple different forces of work in there. And what that means is that there will quite likely be large chunks of business to be had, where you can sit down and give a transparent model to your customers and say, look, this is what is going to cost me to make the product, this is the capital that I will need, and this is the risk around that capital. And here's a return that my investor is going to demand on me for putting that capital to work, which leads to price X, if you are willing to give me a take-or-pay contract over an appropriate time frame at that price, let's get on with this and let's get it done. And I think that will be a core part, bringing stability and visibility and transparency to lithium pricing for those customers that are willing to sit down and actually have a proper engagement with you and not just think that the more they buy, the cheaper the product gets, which is a very common mindset out there in the automotive industry.

I think the second piece of what you will do is you will continue -- I think we will all continue to leave ourselves a little naked, if you will, on pricing, allowing ourselves to take advantage of opportunities as and when they come. You've seen in the past that when things get tight, you don't want to be fully sold out. And so trying to figure out how you walk that line and what your capacity looks like and what your expansions look like is the second thing that I think we all be trying to do in order to make sure that we don't get left behind with regard to -- with regard to the run-up when it comes. What we're not going to try and do, though, is become suddenly a predictor of future pricing. In the end, we tend to look at our own assets, our own costs, the return that we believe that we need for the risk that we take. And that's what we're trying to price this at. And we're certainly not trying to sit there and what I'll call super normal returns relative to the risks that we take. That's absolutely not our intent or our objective.

Got you. That's helpful. And maybe for Gilberto. You guys showed the sequential revenue breakout was fairly flat in price and volume. Can you help us with the $50 million or so year-over-year revenue decline, how much was price and volume of that change?

Bob, so in terms of the revenue, I would say that 2/3 of that is volume and about 1/3 is pricing on a year-over-year basis.

Your next question comes from Kevin McCarthy with vertical Research Partners.

Paul, would you comment on how your sales trended on a monthly basis from April through July and into August to the extent you're able to comment on your order books?

Sure. I'll do what I can there. Look, I think the first thing that I would say is that it depends on the product, right? And so what we've tended to see is in our lithium -- I don't know most people focus on the hydroxide business, the lithium hydroxide business clearly had a slowdown in April, May, June. I mean, and frankly, haven't returned in any meaningful way to where we thought it would be as of July, and August is always a funky month for everybody. And so there's certainly been a slowdown there and that's largely been -- it's always difficult to find out is this COVID related? What is it? And I think lastly, it's ultimately lack of visibility all the way through the chain. And it's very difficult for people to start placing orders if you don't know whether the consumer is going to be buying the cars and whether they -- which models they're going to buy. And so it worked it's all its way back actually pretty quickly. When we found Tesla being shut down for a, when was it, almost a month, you can imagine it's impossible to think that won't have some knock-on effect back to the supply chain, and it clearly has had not just with Tesla, but with others as well. I think if you look at our other industrials businesses, I think the slowdown there was pretty dramatic relative to the normal stability in those businesses. We expect lumpiness. We expect a degree of unpredictability in something like lithium hydroxide, given the market is selling into an immaturity, but some very mature markets, which -- when you look at it, you realize what the role of the automotive industry has, also found them sort of slowing down, some of them because their plants were closed because they were seeing lower demand as well. And while it's not as dramatic, I think it's a pretty important indicator of what global industrial activity has actually happened so far. And I don't see it recovering yet. Again, August is not the best time to be looking for those signs. But I don't really see the signs of those more general industrial activity levels have started to recover globally.

Okay. And then one of your industry peers referenced elevated inventory in the channel -- battery channel for electric vehicles that is, do you see that from your perspective as well? And if so, what are your thoughts with regard to how long it might take to work off the excess?

I think -- okay. I think one of the more puzzling facts in our industry over the last -- which has become more transparent in the last week or so has been a view of very, very soft demand from most people supply in the battery industry, allied with a couple of big battery producers talking incredibly bullishly about what Q3 is going to look like for them. And the only way we can really square that circle is to think that there's probably more inventory throughout the channel. And I'm talking batteries, I'm talking cathode materials as well our lithium material. And it's the only way that you can really square that circle, assuming both of the statements are, in fact, true and reflect the realities that each of us see. There's certainly been an increase in lithium chemicals building up in the chain. I mean we've seen this all year. We saw this starting in January, February when COVID start to hit China. And we've been already pulling back on our own production levels to manage that. We produce with some and now running flat out in China by any stretch of the imagination. We're not running at capacity because the demand isn't there. And part of the reason the demand isn't there is because there is a degree of lithium material, some of it's in spodumene form, and that continues to be converted into carbonate and hydroxide in China. And some of it is mainly in carbonate form, less so in hydroxide, given the nature of hydroxide, but it's out there. It's certainly at the limits of where you really want it to be given the demand environment.

Your next question comes from Mike Harrison from Seaport Global Securities.

I was wondering, Paul, if you can talk a little bit about the situation kind of on the ground in Argentina? It sounds like maybe cases are worsening a little bit, but do you feel confident that you're going to continue to be operating your facilities and not see further disruption? Or is it still a little bit uncertain how things are going to play out?

Argentina has been a really interesting lesson for us all. But the first thing I would say is perhaps the part of our workforce and our organization that's borne the biggest brunt of COVID-19 has been our workforce down there in Argentina at the Salar. I mean some of these individuals have really gone the extra mile our employees. They've -- we normally have people up on the Salar for 14 days on, 14 days off. But because the government put restrictions of movement of people, some of them have been up there for well over a month. This is pretty unpleasant frankly to be. It's tough on not being there for a day or 2, but to be there for over 28 days, I mean, it really kind of showed what our employees were willing to do. I think we've now moved with the support of the local authorities into quite a good cadence of how we work with back to more normal rotations, but it has a huge amount of -- and requires a huge amount of logistical work. Certain vehicles normally allowed to go in certain places. We have employees all essentially self-quarantined between shifts so that they can make sure that they remain COVID free. We've certainly seen COVID cases, rather, we have not seen any yet at our facility thankfully. And I put that down to both good luck and the processes that we put in place to prevent that. But we've certainly seen -- and we'll always have that risk that some spike could create some kind of issue down there. But we do have the full support of the unions, the full support of the local government. We do have the process and protocols in place. And so far, we continue to operate really at normal operating levels down there. So I certainly don't see anything on the horizon other than an unexpected event that would trip us up in that regard.

All right. And then you mentioned the customers that are seeing they're going to honor their volume commitments for 2020 and that those volumes would mostly have to come in Q4. So I mean, understanding that you're not providing guidance, but is the way to think about the business that Q3 probably looks similar to what you did in the first half and then the fourth quarter is potentially when we see some improvement? Or is it just too early to tell?

I would not make any predictions, frankly, right now, but my comment was designed to be exactly as you described it. Look, we talked about customers. And we have volume agreements with them on a calendar year basis. And they're not taking the volume at that rate right now. But across the board, they will say, look -- but we intend to take our volumes. Absolutely, our intent is to take the volumes. The challenge that they have is they're still waiting for their customers to confirm demand, confirm orders, confirm their needs. And the cynic in me says, look, I know you want to, I know you intend to. But given where we are right now, you're going to need it all. It's going to have to all come to you in Q4. I think that decision as to whether they come and talk to us and say, look, maybe we need some relief and defer some of that volume into next year will largely be, I suspect, a decision that they make when they themselves have a better view about what the first part of 2021 looks like from that perspective. I think if they see a recovery in that window, I don't think they will decline the volumes at all. In fact, I think they'll be quite keen to take the volumes. But the big uncertainty we have is that you don't have to be particularly creative to come up with scenarios that say, look, that may not happen. And so as you say, we're not giving guidance, but there's no obvious sign of a return to fundamental demand patterns right now, but that could change very, very quickly.

Our next question comes from P.J. Juvekar from Citi.

This is Kendall Marthaler on for P.J. So just going back to the supply deficit comments. I know you mentioned benchmark is kind of predicting maybe 2022 as the year when that actually occurs. Would you agree with that? And does that require any more, I guess, capital -- or capacity rationalization or delays from here? And then just kind of relatedly, would you then go back to considering for your Argentina carbon expansion to maybe do 2 separate phases in each one 9,000 to 10,000 tons instead of kind of what you talked about last quarter doing one 20,000 ton phase?

Yes. Look, I think there's an engineering and an efficiency question around the engineering to your second part. I mean, I think it, of course, will be driven by market needs. But look, I have no doubt we need that extra 20,000 tons or more over time. I mean, there's not even a debate in my mind, we're not big enough at 18,000 tons of carbonate or 17,000, 18,000, 19,000 tons of carbonate. I mean, just -- you just -- we just cannot stay at that size and expect to be a relevant player in this market with the growth that's ahead of us. And so we absolutely will look at all aspects of it. But frankly, I think if you really look forward in the expectation that we recommence in Argentina is, first and foremost, driven by COVID-19, but actually it's more importantly driven by affordability. It's not cheap to expand in brine-based operations. And one of the reasons you end up with such a low operating cost is the counter to that is you ended with a higher capital cost. And so we need to see frankly a pricing environment that we can believe in and trust in whether that's backed by specific customer contracts or something else that gives us the confidence that we actually have the funding in place to do that because we're going to have to do this all ourselves. There's no magic bullet for the capital that's needed to do this.

Now in terms of benchmarks, yes, look, I think it's a demand-driven question. There's no doubt there's not enough supply. Installed capacity, you talk out to 2025 and maybe it's 800,000, maybe it's 1.2 million tons of lithium needed, there's not enough to even the low end of its forecast by 2025. You don't need more rationalization to see that. And I think when you start to look at qualified capabilities, it's an even more complicated conversation. I think then if you're going to start counting the lithium content in spodumene and in other areas, you can convince yourself there's enough LCEs. But when you sit down with major automotive OEMs, look at their very specific needs and the grades that they need and where they need it delivered and what their sustainability demands are of us, there's nowhere near enough today. It's not about rationalization of supply. Even if all the projects come online with a deferred 1 or 2-year delay as a result of COVID-19, there still won't be enough supply coming online. So the real question is not really a supply question even though we phrase it that way, the real question is, what is the demand going to be and when.

Okay. And then just as a follow-up to that. So you talked about in your prepared comments maybe some OEMs, talking about diversifying like lithium production or supply away from China. Has that kind of been a recent phenomenon heightened by the pandemic? And what is your response to the OEMs when they kind of bring that up in conversations?

I think there's 2 or 3 reasons for it. I think one of them is just a general recognition. And I think the most famous person in the electric vehicle industry has made the comment, it's crazy the way we move battery materials around the world. I mean, today, they're moving cobalt, nickel, lithium from remote parts of South America or Africa through Asia, all the way back to the U.S. to put in a vehicle to sell that vehicle in Norway. I mean there's just a crazy supply chain that has been the focus for quite a long time. And so I think there's a general recognition that from a business perspective, from an environmental perspective and increasingly, from a political perspective, we can't have an industry that does that. I think the new piece to it, frankly -- and I think COVID-19 has sharpened this rather than created this though is now we're taking a risk having everything go through 1 country. And that's what happens in hydroxide today. Just bear that in mind when you go look at the installed capacity of hydroxide, it is all in China. While we have 10,000 tons outside China and there's some Russian converters and there's a little bit, I think, down in Chile and then another smaller amount in U.S., it's kind of irrelevant relative to these huge plants that are being built in China. And I think that is starting to cause a little bit of heartburn for some people, as they think about these increasingly large global supply chains.

That is all the time we have for questions. I will now turn the call back over to Daniel Rosen for closing remarks.

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

This concludes the Livent Corporation Second Quarter 2020 Earnings Release Conference Call. Thank you for joining. You may now disconnect.