Livent (LTHM) CEO Paul Graves on Q3 2018 Results - Earnings Call Transcript

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About: Livent (LTHM)
by: SA Transcripts

Livent (NYSE:LTHM) Q3 2018 Earnings Conference Call November 6, 2018 8:00 AM ET

Executives

Rasmus Gerdeman - Chief Strategy and IR Officer

Paul Graves - President and CEO

Gilberto Antoniazzi - CFO

Tom Schneberger - COO

Analysts

Aleksey Yefremov - Nomura Securities

Chris Kapsch - Loop Capital Markets

Christopher Parkinson - Credit Suisse

P.J. Juvekar - Citi

Robert Court - Goldman Sachs

Kevin McCarthy - Vertical Research

Operator

Good morning, and welcome to the Third Quarter 2018 Earnings Release Conference Call for the Livent Corporation. Phone lines will be placed on a listen-only mode throughout the conference. After the speakers' presentation, there will be a question-and-answer period.

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

Rasmus Gerdeman

Thank you, Greg. Good morning everyone, and welcome to Livent Corporation's third quarter earnings call. Joining me today are Paul Graves and President and Chief Executive Officer; Gilberto Antoniazzi, Chief Financial Officer. Paul will review our third quarter performance, and provides the outlook for 2018 and the fourth quarter. Gilberto will then provide an overview of select financial results.

The slide presentation that accompanies our results, along with our earnings release, which includes our 2018 outlook are available on our Web site, and the prepared remarks from today's discussion will be made available after the call. Tom Schneberger, Chief Operating Officer, will then join Paul and Gilberto to address your questions.

Please note that we intend to complete today's call in about 45 minutes, to allow FMC's third quarter earnings call to begin promptly at 9:00 am.

Before we begin, let me remind you that today's discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including, but not limited to those factors identified in our release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today's information. Actual results may vary based upon these risks and uncertainties.

Today's discussion will focus on adjusted earnings for all income statement and EPS references. A reconciliation and definition of these terms as well as other non-GAAP financial terms to which we may refer during today's conference call are provided on our Web site.

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

Paul Graves

Thank you, Rasmus, and good morning everyone. I'm pleased to welcome you to Livent's first earnings call as a standalone public company. FMC completed the IPO of Livent, which began trading under the ticker LTHM on October 11. We've recognized that overall market conditions have been volatile since that day, and we appreciate the show of support for our business from those of you who are now owners of Livent.

Before I discuss Livent's business performance during the third quarter, I would like to revisit the fact that we believe make Livent so compelling as an investment. Livent is one of the world's leading producers of high-performance lithium-based products, and has significant know-how and experience obtained by developing and producing lithium products over six decades. We are one of only a few fully integrated performance lithium compound manufacturers.

We operate a global manufacturing network, and we have a complete offering of lithium hydroxide, butyllithium, and high purity lithium metal products which we sell in all regions of the world. We are well positioned to grow with our customers who rely on our lithium expertise as much as our global network of installed assets. We are one of the lowest-cost producers of lithium carbonate and lithium chloride in the world due to our world-class brine resource in Argentina. We have operated this asset for over 20 years, and we've started the process of tripling our lithium carbonate production capacity in multiple phases by the end of 2025, with the first major volume expansion coming online in 2020.

We intend to consume the majority of this lithium carbonate in the production of lithium hydroxide, and therefore intend to expand our lithium hydroxide production capabilities at broadly the same rate to serve the growing needs of our global customer base. While we currently have lithium hydroxide capacity in the United States and China, we intend to grow our footprint as lithium-ion battery production expands to other geographies. Our proven ability to install lithium hydroxide capacity quickly and reliably means we are able to match our customers' expected demand patterns as new electric vehicle models come to market. And finally, working with several customers, we are beginning to test new lithium products that can complement our existing product offering to further improve lithium-ion battery performance.

You can understand why we believe our company is well positioned to be a leader in the performance lithium compounds market, with a once-in-a-generation demand shift for our products driven by a multi-decade transformation of the auto industry towards electric vehicles; we see significant demand growth ahead of us. Livent continues to forecast total demand for lithium compounds on an LCE basis of around one million tons by 2025. This includes over 400,000 tons of lithium hydroxide demand by 2025 as EV batteries increasingly migrate towards higher nickel content cathode technologies.

So before I discuss our financial results on slide four, let me turn to slide three and explain exactly what the basis of our earnings numbers are. We are in an unusual situation, during Q3 Livent was 100% owned by FMC, and today remains approximately 85% owned by FMC. As a result, we will remain a reporting segment of FMC in the fourth quarter of this year, but we'll be reported as discontinued operations when FMC reports first quarter results next year.

Pro forma EBITDA referenced in today's materials is the same basis that FMC used in its August 1, 2018 guidance. It excludes any costs associated with Livent operating as a standalone company.

Livent did in fact incur standalone costs during Q3, and of course we will incur standalone costs during Q4. FMC Segment EBITDA, as we reference on slide three, includes the actual standalone cost we incurred. This is the segment EBITDA reported by FMC in its results last night. Livent standalone adjusted EBITDA is calculated using carve out accounting methodology for the nine months ended September 30. For full-year 2018, our guidance includes the standalone costs incurred in the third quarter, and that we expect to incur in the fourth quarter. Since Livent standalone adjusted EBITDA essentially double-counts the actual standalone costs in Q3, we believe it understates what our EBITDA would have been had we been independent for the full-year 2018 by two to three million dollars.

So now turning to slide four, in the third quarter of 2018 the business performed ahead of prior guidance, driven largely by the timing of sales to certain customers. Livent reported third quarter revenue of $112 million, which was 19% higher than the same period last year. 17% of the revenue increase was driven by volume from our previously completed lithium hydroxide expansion in China, and to a smaller degree, by expanding butyllithium sales. Improved price mix contributed a 2% year-on-year increase in revenue. Net income for the third quarter was $30 million.

Moving now to slide five, third quarter pro forma EBITDA of $50.3 million was 25% higher than the same period last year. [Technical difficulty] this measure of EBITDA is on the same basis as both last year and prior guidance. $1 million of the improvement came from price mix, $9 million came from higher volumes. Foreign exchange contributed $1 million of further benefit and higher costs reduced results by $1 million. A further $2 million of standalone costs incurred in the quarter brings us to the $48.6 million of FMC segment EBITDA as reported by FMC last night, and carve out accounting adjustments of $6 million complete the bridge to Livent standalone adjusted EBITDA of $42.8 million.

Turning to our guidance for the fourth quarter and full-year 2018, on slide six, we have tightened our full-year revenue guidance to $440 million to $450 million. All revenue guidance is $117 million to $127 million. Full-year FMC segment EBITDA guidance of $193 million to $197 million, including full-year estimated standalone costs of approximately $5 million is equivalent to FMC's prior segment EBITDA guidance of $200 million at the midpoint. Fourth quarter 2018 FMC segment EBITDA and Livent's standalone adjusted EBITDA are both in a range of $43 million to $47 million, and are inclusive of all expected Livent standalone costs.

Fourth quarter adjusted earnings per share is expected in the range of $0.21 to $0.23 per share. Full-year Livent standalone adjusted EBITDA guidance is $180 million to $184 million, and full-year adjusted earnings per share is expected in the range of $0.89 to $0.91 per share.

Let me turn to slide seven, and I want to spend some time providing an update on some of the key factors that are driving our industry today, and how Livent is performing against this backdrop. At the start of 2018, FMC forecasted total lithium demand of a million metric tons by 2025, this bottoms-up forecast reflects our view as to the pace of electric vehicle adoption, and assume that in 2018 1.6 million EVs will be sold globally. As of the end of September, total EV sales for the year reached approximately 1.3 million. Given we have historically seen higher EV sales in the last quarter, it is likely that actual that 2018 electric vehicle sales will exceed our forecast, as well as the forecast of most industry experts.

It is also important to note, that while there has been negative data and on broader auto sales in China, EV sales continue to be strong, with China EV sales up 82% year-to-date over the same period in 2017. We have begun to see the impact of a shift in Chinese incentives promoting EVs with longer driving ranges. This has resulted in average battery pack sizes starting to increase. We also believe that the regulatory changes in Europe will continue to accelerate the adoption of EVs in that market. The China market experienced a slowdown in lithium carbonate demand during the summer months as customers consumed inventory and shifted their production towards higher performance cathode technologies. This shift was driven by the revised subsidy program in China which reduces subsidies available for EVs with smaller ranges and increases subsidies available for larger and higher performance batteries.

We are now seeing signs that demand is once again rising for both lithium carbonate and lithium hydroxide of sufficient quality for battery production. Annual and multiyear contract prices have been relatively unchanged during the year, and we expect average contract prices to be modestly higher on a constant currency basis as we head into 2019. As expected, lithium supply increased from South America and Australia during 2018. However, once again, we've seen both new entrants and existing producers announcing delayed or reduced volume of product they're able to bring to the market. When we go back and look at the capacity that was announced to come online in 2018, this is what has actually been produced on an LCE basis. We see that less than half of announced capacity increases have actually been achieved.

Regarding Livent, we are pleased with recent developments throughout our product portfolio. We expect to proceed over 16,000 tons of lithium hydroxide in 2018. Our lithium hydroxide network is now operated at an annualized rate of approximately 20,000 metric tons per year, slightly ahead of our expectations. The newly-installed offices have not only operated reliably but are producing at rates that are higher than the original nameplate design. The third production line in China is on track to begin commercial sale at the start of second quarter next year, adding another 5000 tons of nameplate capacity. In Argentina, we expect to produce around 21,000 tons on a LCE basis this year. Of which, nearly 18,000 tons is lithium carbonate and the remainder is lithium chloride. The majority of this production will be consumed internally.

In early 2019, we anticipate our de-bottlenecking projects in Argentina will be completed resulting in total operating capacity of 22,000 LCEs including 19,000 tons of carbonate production capacity leaving us imbalanced between carbonate and hydroxide for the year. In butyllithium, we continue to see strong demand in polymer applications. And we continue to add capacity incrementally to meet this increased demand. In summary, we see a favorable overall contract structure that protect against significant price volatility. And we expect to see stable to increasing prices in local currency terms although some of these pricing gains will be offset by recent unfavorable currency movements in the RMB.

Finally, let me give a little more detail on our previously announced capacity expansions. The most significant investments commenced in 2018 as we executed the de-bottlenecking projects in Argentina, during 2019, we expect roughly $55 million of our total capital spend to be associated with the expansion and de-bottlenecking projects in Argentina. We also began projects to add the first 950,000 tons of lithium carbonate expansion capacity.

We expect total project spending for this first stage of expansion to be in the $260 million to $300 million range. This expansion includes infrastructure required to support future expansion phases such as roads, employee camps, water pipelines and utilities. All required government approvals have been secured to begin construction in early 2019. During the first-half of 2019, we also plan to begin constructions to accommodate processing facilities.

The prefabricated modules will be shipped from China to Argentina beginning late 2019 and are expected to be installed in the first-half of 2020. This expansion phase is expected to be mechanically complete by mid-2020 and producing carbonate in the second-half of 2020. In lithium hydroxide, we expect line four in China to be completed by the end of 2019, bringing our nameplate capacity in China to around 20,000 tons and our global nameplate capacity to 30,000 tons.

In addition, we plan to commence construction of a second line of facility in North Carolina next year, and anticipate this will be operational in the second-half of 2020. Overall, we expect total spending on these two additional lithium hydroxide units to be just over $50,000 million. We have walked through our expansion plans over the next two years in detail. But on slide eight, you'll find a summary overview of our anticipated capacity and production volumes for both lithium carbonate and lithium hydroxide in 2018 and 2019.

I'll now turn the call over to Gilberto to discuss the financial results in more detail.

Gilberto Antoniazzi

Thanks, Paul. Before turning to slide nine, let me start by providing an update on the impact of standalone on Livent as an independent company. In Livent, all your communications particularly during a recent road show, we still anticipate full-year standalone costs in 2019 of approximately $15 million, which again primarily consists of publicly-traded company-related costs such as C-suite, Board of Directors, external audit fees, and SEC reporting requirements.

Moving now to slide nine, and on the cash flow and balance sheet, reflecting certain [technical difficulty] related adjustments, Livent generated adjusted cash from operations of $67 million through year-to-date. Looking to full-year 2018, we are expecting a $100 to $100 million in adjusted cash from operations as a standalone company. With respect to our balance sheet, we completed the IPO with net cash and a $400 million revolving credit facility in place. When we meaningfully draw on this facility, we will keep you updated around our projected interest expense. Touching briefly on taxes, we expect a net tax rate for this year in the range of 19% to 22%.

Moving over to capital spending, Livent anticipates a range of $80 million to $90 million for the full-year 2018, with around half of that being spent in Q4. As Paul mentioned earlier, nearly two-thirds of this year's spending will be directed towards Argentina, where we have commenced spending on our plans to triple carbonate capacity to 60,000 metric tons by 2025. In 2019, we expect capital spending of approximately $230 million related to our expansions in Argentina, our new lithium hydroxide capacity in China [indiscernible], as well as the funding of a research and development facility in Singapore.

We continue to expect that Livent will fund all of its announced capacity expansions via free cash flow generation over the announced expansion period. Lastly, we expect to exit 2018 with approximately 143 million to 146 million total shares outstanding, mainly depending on whether our underwriters exercises their option to purchase an additional three million share on the over-allotment option or green shoe [ph] from our IPO.

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

Paul Graves

Thank you, Gilberto. Given the importance of the upcoming quarter in finalizing our 2019 volumes and pricing, we expect to provide detailed guidance for 2019 in our earnings call, in early February. We continue to see industry conditions today as favorable, with significantly increasing demand for lithium hydroxide in particular. We remain of the view that new supply additions will result in a market that is, at best, balanced, and mostly likely somewhat tight throughout 2019. We remain focused on our longer-term objective of supporting and growing with our customer base, and we will add capacity specifically focused on the objective of maintaining and building relationships with the most important customers in our marketplace.

In summary, we believe the lithium industry is poised for significant demand growth, and that we're well placed to take advantage of that growth given our legacy, our relationships, our technology base, and our production capabilities. While the IPO was a key first step in separating into a standalone publicly-traded company, it only marks the beginning of our ambitions for the business.

I will now turn the call back to Rasmus so we can begin answering your questions.

Rasmus Gerdeman

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Aleksey Yefremov from Nomura. Please go ahead.

Aleksey Yefremov

Good morning. Thank you, and congratulations on completing the spinoff. Pricing in the third quarter was up 2% price and mix, and was up 22% year-over-year in the second quarter. What causes deceleration? Is this purely base effect or was there any sequential decline in price and mix?

Paul Graves

Thanks, Aleksey. Just to be clear, we haven't quite finished the spinoff yet, but the IPO is done. But we take your point. Now, the pricing is -- we've made a point I think, in the past, as a segment of FMC, that you really have to look at our business on an annual basis. We will get movements quarter-to-quarter that reflect both product and customer mix, timing of shipments. And I think we've told at some length in the past about the fact that we do have, based on largely historical reasons, contracts that are different prices in there. And so we also, I think, talked earlier this year about the first-half of the year being a particularly rich mix on a customer basis. And we always said it would even out as the year expanded.

So that's really all you're seeing. It's not an underlying pricing -- reflection of pricing. It's largely driven by customer mix relative to earlier quarters. I think we've sort of stated in the past that, on average, we expect the 2018 average pricing to be 10% or more higher than 2017 on a full-year basis, and that remains where we see 2018 coming out on a full-year basis.

Aleksey Yefremov

Understood, thank you. And then you made a comment, Paul, on pricing being modestly higher as you enter 2019. Is this reflective of just the point in time early in the year or are you talking about the full-year of 2019 pricing?

Paul Graves

Yes, as we go into '19, well north of 90% of our revenue, the pricing will be set in Q4 contracts. And so it will be set for the full-year. We don't readjust those prices during the year, nor do we, as you can see, have a lot of spare lithium carbonate that we expect to be selling into the market on an opportunistic basis, especially compared to history, we will have even less to sell in '19. So you can really look at 2019 pricing for us and any comment we make about pricing reflecting the full-year for 2019.

Aleksey Yefremov

Understood. Thank you.

Operator

Your next question comes from the line of Chris Kapsch from Loop Capital Markets. Please go ahead.

Chris Kapsch

Yes, good morning, and congrats on the IPO. So, my question focuses around your comments about your commitment to customers that you had characterized I guess as the most important in the marketplace. I'm just curious how you decide that. And then given that the market opportunity and the growth for hydroxide is expected to, obviously, exceed the overall industry growth, exceed carbonate growth, but also exceed your capacity growth. I'm just wondering how you're thinking about in terms of allocating that capacity, and how is that sort of translating into these contract negotiations as we look at '19 and beyond?

Paul Graves

Thanks, Chris. There's a lot in that question, so let me try and touch on it. I think the first key point clearly is, as we've talked about a lot, our focus amongst the customers is those customers that either historically we've had a long and deep relationship with. We have some very important customers, that are not EV related, that remain critically important to us whether they're grease customers, or butyllithium customers, or in the metal space. In the EV space, clearly we're watching how to world evolves in the high nickel content cathode space, and so -- for then NCA and NCA 811 [ph] and even 622, is all clearly going to be driving the lithium hydroxide market.

Within that space we've recognized we nor does anybody, frankly, have the capacity to serve the entire market. We do have, as you know, some pretty deep, long-lasting, and close relationships with customers in the high nickel content space. They will continue to be a focus of ours. We also want to make sure that when we think about how this industry develops over time, and I frankly believe that there will be a China industry and an ex China industry, there will be a Japan, a Korea, and a European center of production. We're looking around those geographic regions, we're looking at those customers that actually have capability and have made a commitment to high nickel content cathodes. And we're looking to both establish and build relationships in all those different areas.

It is absolutely true that our biggest constraint and 2019 really points to that is, how quickly can we add capacity to meet those customers' needs. Frankly, much of what we're focused on is how we add capacity in the 2021, '22 period and beyond because that's when the real increase in demand comes. But we're thinking about 2019 very much in that context when we think about contracts.

Chris Kapsch

Okay. And then if I could just follow-up. I appreciate your comments on the trends in China and the retooling having taken place, and some evidence that demand is resuming there. Is that narrative consistent with what you've seen in your order patterns for demand for your hydroxide products?

Paul Graves

Yes, it is. There's no doubt that carbonate was impacted way more than any other product in this de-stocking period. We frankly had -- in our order book and with our customers did not see any particular meaningful shifts in demand in 2018. We certainly saw some data that others have provided and heard anecdotal evidence. But we certainly didn't see with our customers any meaningful shift in demand for lithium hydroxide products in 2019.

Chris Kapsch

Okay.

Rasmus Gerdeman

Okay. Operator, before the next question, can we just we poll for additional question?

Operator

[Operator Instructions] Next, we'll go to the line of Christopher Parkinson from Credit Suisse. Please go ahead.

Christopher Parkinson

Great, thanks. Paul, you hit on this a little bit. While investors continue to focus on everything from Chinese carbonate price volatility to host of other factors regarding some of the startups you already mentioned, can you just give us just a little broad insight on the actual variables that are arising in your contract negotiations? As I said, you hit on this a little bit. But if you can just dive a little bit further? I mean just what are the factors in terms of the modest considerations? Is it solely around battery grade hydroxide production new specs for the current year, outer years? Just what's the best way to think about this over the next year or two? Thank you.

Paul Graves

Thanks, Chris. Look, this -- some of this is actually obviously pretty basic. What we have is a bunch of customers that themselves are busy getting their own product qualified for their own customers. Their customers continue to look to get their products qualified for their customers largely the OEMs -- the auto OEMs. So what we have is a chain that is slowly evolving and maturing such that we have relatively rapid evolution of various technologies. And that's creating a degree of fluidity between different technologies as we move forward. And so, our customers are looking to balance their procurement options in such a way that make sure that they do not end up short of lithium hydroxide. It's really I am not going to say as simple as that, but it does boil down to that. They want certainty of supply. They need to make sure that the -- in the right place, in the right part of the world, frankly.

Then also as they move to these high nickel content applications tightening up quite meaningfully the product specification and quality requirements of all producers. And so, we see more and more focus on those of us that have proven that we can actually produce this product, and increasingly those of that are willing to make additional investments to improve the quality of our product yet further. And that's a really factor going on in the market I think today is this sorting through of who is actually going to be there in '19 and '20 and who can work these customers to produce product in the right form and in the right specification that they need. Perhaps another challenge for our customers as they speak to us is there is a significant ramp up in volume requirements as you head further out.

So as you get to the back half of '19 and the first half of '20 and the second half of '20, their own demand pattern show a significant acceleration of requirements for lithium hydroxide. So once again, that conversations while they look at 2019, remain focused on the years '21 and '22 when they see the real challenge in meeting supply. So, it's a pretty multivariable conversation we are having with them.

Christopher Parkinson

Got it. And just again from a much higher level, just you have obviously been in this business for some time, but during the IPO process, what were the larger surprises regarding just investor interactions and how do you respond to broader concerns? I mean essentially what do you believe over the next about a year or so that your team needs to do to drive investors to view Livent in the exactly the same positive light as your team does? Thank you.

Paul Graves

I think there will always be a bit of a tug of war in the industry of lithium about what do we sell. And I have differentiate, I have specialties and all that multiple grades? Or will it all ultimately homogenized/commoditized over time? I think what I would you say is that generally speaking on the IPO Road Show what we saw is the demand side of the equation was frankly barely challenged if at all. And that maybe concerns me a little because I think it is important that we continue to cast a critical eye over the demand side, not just the actual LCE base level of demand but also what form is needed and where in the world is that demand going to be. The really important nuisance is that I think people need to start thinking about in our industry a little bit more.

I think on the flip of that, on the supply side, I think we need to continue to our push to encourage investors to look at this business product by product rather than attempting to take it down to a single common denominator that LCEs or whatever it may be. They are not only meaningful differences between hydroxide and carbonate, and frankly BuLi, metals, chloride, but there is also meaningful differences even within the carbonate and hydroxide markets and if investors don't spend more time and frankly we as an industry don't spend more time helping investors understand that, I think well, continue to have this tug of war of supply and demand that overly simplifies the conversation and frankly has typically in my view lead to if not false at least inaccurate conclusions by many investors.

Christopher Parkinson

Got it, thank you.

Operator

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

P.J. Juvekar

Good morning.

Paul Graves

Good morning, P.J.

P.J. Juvekar

Paul, lithium hydroxide today is at a significant premium to carbonate, I think it's several thousand dollars. Do you see carbonate and hydroxide [indiscernible] or would they converse in the future in your view?

Paul Graves

So like it's a really important question, I understand when you're trying to sit that and model the two products. Let me try and maybe step back a little and give you a bit of perspective. I think it's fair to say that we at Livent and previously at FMC -- and this may surprise a lot of people, but frankly typically received a premium for carbonate than we have over hydroxide and the reason for that is there isn't just one carbonate market and there isn't just one carbonate customer and so what we've seen historically is even within lithium carbonate there are wide range of prices depending on specification. I think what you are typically seeing when you see lithium carbonate prices out there are shorter term non-battery grade trades largely in small markets. And so the first point I would make is that I am not entirely convinced that any of the data that you see out there is really truly representative of what the actual prices are.

The second point I would make is that the dynamic between carbonate and hydroxide that people draw two important parallels, one of them is that there are connections between carbonate and hydroxide for those of us that convert carbonate to hydroxide, and so I do understand why people would assume that as an input the two prices would be connected. That will be increasingly less the case as you move to more hydroxide being produced directly from spodumene and then the second thing that you will start to see increasingly is that historically you could substitute carbonate and hydroxide in many EV applications. It was simply a cost conversation especially in the LFP technologies. That will not be the case once we go high nickel content, it will have to be hydroxide, and so this option to shift into carbonate is just no longer there.

So you're going to have a disconnect. Perhaps the final comment I will make - and maybe I'll make two more. The next comment I'll make is I think China is a different market to the rest of the world too. I think that the way that China is structurally capturing lithium inside the market whether that's through import or export restrictions or VAT rebate policies that they have or other incentives inside China, I think you have a different market inside and outside China for both hydroxide and carbonate in the future.

And then the final point is I think most of us certainly -- I'll speak for Livent, our view is we don't really want to be at volatile in lithium hydroxide pricing and so we will prefer contract structures that bring price stability over multiple years. So you may find that gap between a market carbonate price expands and contracts quarter-to-quarter, year-to-year, largely driven by the fact that most hydroxide volume will be getting sold into relatively fixed price multi-year contracts relative to carbonate. So I do think you will find that trend, that pattern harder to form a pure connection. I think the correlation will diminish over time.

P.J. Juvekar

Okay. Thank you for the detailed answer. And then recently China announced new subsidy rules for NAVs in 2019 have you as Livent seen any rush orders in 4Q ahead of that, what are you hearing in China about any NAVs in 2019?

Paul Graves

I'm going to pass that over to Tom, and let Tom speak to that question.

Tom Schneberger

Hi, P.J. yes, this is Tom, I guess, there's a couple of dynamics that we see there is the requirement for 10% of all vehicles manufactured in 2019 to be NAVs. That, I think, is causing folks to ramp for 2019, but there's also an expectation and it seems to be increasingly the expectation that some additional subsidies will go away before 2019. So we are looking very recently at the potential for some rush on LFP technology specifically or some of the lower nickel technologies before the end of 2018, that's yet to be seen.

P.J. Juvekar

Thank you.

Operator

Your next question comes from the line of Robert Court from Goldman Sachs. Please go ahead.

Robert Court

Thanks, good morning, guys. Paul, I wanted to ask you about approach and strategy on your contracting with your hydroxide customers.

I know that when your competitors recently had two or three sort of marquee customer deals, they announced, and I think they talked about market pricing, and you guys have maybe taken a different approach without necessarily identifying those customers in having longer-term pricing, can you tell us maybe how you see the market evolving, do you think that's going to continue to be sort of a dichotomy of approaches, or do you think maybe well-harmonized towards a more standard approach in the hydroxide markets?

Paul Graves

Good morning, Bob. Yes, thanks. I think there is no doubt, and you kind of touched on underlying your question is, this is a relatively new market. The dynamics of the supply chain continue to evolve from a relatively immature stage. I think there are multiple models when you look through the entire supply chain from OEM to mine, as to who will play where and how they will play. Our view though, and this is really been reflected in most of our conversations today is that there will be a preference for longer-term contracts with certainty of volume, and certainty of pricing. Now whether that certainty of volume as an increase in volume or flat volume with multiple layered contracts or single contracts that really wrap in an escalation, I think when you think about what is needed to bring on more capacity, what is needed to make those commitments, both upstream and by this Hombre Muerto [ph] brine or downstream in hydroxide processing.

And when you think about the objectives of our customers, which is to frankly have good quality product available to meet this incredibly high rate of growth of demand and wouldn't underestimate the challenges that puts on a supply chain when you have EV growth so rapid in a short period of time. Reliability of supply, certainty of supply, trust between supplier and customers is going to increasingly be the factors that drive those conversations. I believe there will continue to be consumers of lithium hydroxide that would prefer to go year-to-year. I think though probably the slight majority or maybe a bit more than the slight majority, are likely to look for a higher degree of certainty of supply and price that implies. So, some form of multi-year contracts and relatively tight if not fixed pricing bands to me actually what become more common in the hydroxide space.

Robert Court

Thanks for that. You also, you highlighted the fact that -- and there is going to be some pretty explosive growth in the superiority of supplies are important, it seems the biggest challenge confronting you is getting these capacity expansions done on time, and the industry is notorious for having troubles there even amongst incumbent producers and your neighbors down on South America. So, can you give us some sense of how you get comfort that you'll be able to execute on the carbonate expansions in particular, obviously your hydroxide ones have gone well, but how about on the brine expansions, what gives you the confidence?

Paul Graves

Sure. So I'm going to -- let me say, first of all, there is nothing with a bigger focus in Livent than our expansions today. 2019, as you see is very much a transitional year for us and probably likely for the industry over to the hydroxide demand, and making sure that we get all of our engineering and expansions done on time for 2020 ramp up in volumes, nothing is more important to us. I'm going to pass it over to Tom, who I speak to every single day about exactly -- let him give you some color as to why he is confident.

Tom Schneberger

Yes. Hi, Bob. So first of all, I think that you've been following us for a while, you've seen that for a couple of years now we've been working on this expansion project. I think you've also seen us get out of ahead with the government and started talking with them very early, so that we could identify and eliminate surprises that way. And then finally the thing that I would say in terms of pure execution, especially as we keep ramping up the team and look to the multiple phases, we are already working on Phase 2 by the way, is that breaking this into phases makes it more manageable for us. So we are very process-oriented, Paul is in my office everyday, and we've got our eyes on fact that we need to deliver.

Robert Court

Got it, thanks very much.

Rasmus Gerdeman

Operator, I think we have time for one more question.

Operator

Okay. Your final question today comes from the line of Kevin McCarthy from Vertical Research. Please go ahead.

Kevin McCarthy

Good morning. Just to follow-up on the expansion projects, can you speak to how you interact with contractors, how much of the cost resident in your budget tend to be fixed versus variable, just trying to get a sense of what the confidence intervals are around the future spend, does that flows through your financials over the next couple of years? And also, how the answer might vary by region, U.S., Argentina, and China?

Tom Schneberger

Yes. Thank you. So there is a lot in there, and actually just to add one more thing in terms of the confidence, we are expanding exactly the same technology we run. So, whether it's equipment manufacturers or looking to operational readiness, we know exactly what we are installing.

In terms of contracting, there you know, it's a little bit more complex than the typical project. We are up at 14,000 feet, and you know, that in fact Paul had mentioned in the script that we're building modularly in China and moving it to Argentina. So, there are number of different contracts, both in the construction of the modules themselves and then on the size. And we use a mix of different contracting approaches. So it's not a 100% fixed or 100% T&E, but a combination of the two. And I think that we have taken the right level of risk here because even if you go 100% fixed in a project like this, there is clearly a potential for change orders and overrun on that as well. So we're taking an educated approach in managing the risk.

Paul Graves

Let me just reiterate what Tom said. It's really important to understand this point, we are just replicating what we do today; we have no design risk, we have no technology risk, we have a proven process whether that's carbonate or hydroxide, proven processes that we will replicate. That makes a huge difference to your degree of confidence with regard to ability to deliver these projects.

Kevin McCarthy

That's helpful, thank you. And then a second one if I may, would you comment on the mix of sales in the third quarter, and how that might have shaken out in terms of performance versus base lithium or put differently in your price mix contribution of positive 2%, perhaps you could speak to the underlying price versus the mix embedded in that number.

Paul Graves

So it's a complex question to answer in less than two minutes and without data and frankly without comprising, what I would term commercially sensitive. We did continue to migrate to more and more mix towards hydroxide in the quarter, and we certainly had a customer concentration mix that was less rich as I said, frankly I think without getting into details which most of you can probably guess, anyway we do have different customers, and it was always scheduled that one of our customers is a very large one, but has a relatively longstanding contract that reflects more historical prices than current prices, took more volumes in Q3, and so that was really the biggest driver of -- and will be the biggest driver of the difference between H2 and H1.

Kevin McCarthy

Thank you very much.

Paul Graves

Thank you.

Rasmus Gerdeman

Thanks, Kevin. That's all the time we have for the call today. I'm available following the call to address any additional questions you may have. Thank you, and have a good day.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.