Livent Corporation (LTHM) CEO Paul Graves on Q1 2019 Results - Earnings Call Transcript

About: Livent Corporation (LTHM)
by: SA Transcripts
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Earning Call Audio

Livent Corporation (NYSE:LTHM) Q1 2019 Earnings Conference Call May 8, 2019 8:00 AM ET

Company Participants

Rasmus Gerdeman - Chief Strategy and Investor Relations Officer

Paul Graves - President and Chief Executive Officer

Gilberto Antoniazzi - Chief Financial Officer

Thomas Schneberger - Chief Growth Officer

Conference Call Participants

Christopher Kapsch - Loop Capital Markets LLC

Kevin McCarthy - Vertical Research Partners

P.J. Juvekar - Citigroup Global Markets, Inc.

Stephen Byrne - Bank of America Merrill Lynch

Christopher Parkinson - Credit Suisse

Aleksey Yefremov - Nomura Instinet

Alexandre Falcao - HSBC

Joel Jackson - BMO Capital Markets


Good morning, and welcome to the First Quarter 2019 Earnings Release Conference Call for the Livent Corporation. Phone lines have been placed on 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, Carol. Good morning, everyone, and welcome to Livent Corporation’s first quarter earnings call. Joining me today are Paul Graves, President and Chief Executive Officer; Gilberto Antoniazzi, Chief Financial Officer. Paul will review our first quarter performance and discuss our second quarter and full-year outlook for 2019. Gilberto will then provide an overview of select financial results.

The slide presentation that accompanies our results, along with our earnings release, which includes our 2019 outlook are available on our website, and the prepared remarks from today’s discussion will be made available after the call. Tom Schneberger, our Chief Growth Officer, will then join Paul and Gilberto to address your questions.

Additionally, we would ask that any questions following our prepared remarks would be limited to two per caller. We would be happy to address any additional questions directly after the call.

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

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

With that, I’ll turn it over to Paul.

Paul Graves

Thank you, Rasmus, and good morning, everyone. Today, I will review Livent’s 2019 first quarter results followed by second quarter and full-year guidance. I will also review our perspective on current market conditions and how certain factors specific to our business have impacted our revised views on 2019 performance. After Gilberto review his select financial data, I will conclude by providing an update on our ongoing capacity expansion of lithium carbonate in Argentina and lithium hydroxide in Bessemer City.

Let me start with Q1 performance starting on Slide 3. Our business performed largely as expected during the first quarter with revenue, adjusted EBITDA and adjusted EPS in line with our guidance range. Operationally, in Argentina following heavy rains in late January, we ended up with approximately 1,000 tons of lost lithium carbonate production in the quarter.

This was higher than we had previously expected as a sustained period of unfavorable weather and that it took longer than we'd hoped for pond concentration levels to return to usable levels. However, once they did, we were immediately back to full operating rates and we continue to achieve daily production rates of carbonate that are at the top end of our historical range.

This lost production had an impact on costs in the quarter as we have to use more purchased carbonate to produce lithium hydroxide than originally planned. It will have a larger effect on Q2 costs, which I'll discuss shortly. We brought a third hydroxide line in China into production during the quarter, taking our total annual capacity in China to around 15,000 tons.

We are already producing hydroxide from this line that is consistent with that produced in other lines. It is disability to produce consistent product across multiple lines and locations that is helping us bring greater flexibility to our supply chains and enabling us to reliably supply customers across multiple regions.

Turning to Slide 4. Our adjusted EBITDA for the quarter was $27.6 million in line with our guidance. Unfavorable customer mix in lithium hydroxide, lower year-over-year carbonate sales due to lower production volumes in Argentina, and higher year-over-year costs are the drivers of the reduction in adjusted EBITDA compared to Q1 2018.

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

Of the large global auto OEMs continue to commit capital to and provide further detail on the next-generation electric vehicles. The need for batteries with higher nickel chemistries is becoming increasingly clear. This intern is placing the challenge of meeting the higher performance and safety requirements onto the battery chain and especially under the cathode material producers.

In recent conversations with a few of our large established cathode and battery customers, it is becoming increasingly clear that the current facilities being used to manufacture high-nickel cathodes will require additional investment in their processes to meet OEM demands. The result of making these investments is a delay in large scale production of high-nickel chemistries across several of our customers.

To offset the lower volumes of high-nickel cathodes and to improve short-term profitability during this transition, many of these established cathode manufacturers are increasing their production of older catalog chemistries. This has been further reinforced by the changes to incentive structures in China, which has created a window in 2019, but producers of these existing chemistries to delay the introduction of next-generation cathode materials.

However, many of these older chemistries can't use either lithium carbonate or lithium hydroxide. As a result of the lower performance requirements in these applications, high performance lithium hydroxide such as that sold by Livent does not generate the same price premium as in high-nickel applications. And today it's priced relative to the lithium carbonate equivalent. This is consistent with pricing patterns we've seen in these applications historically.

[Indiscernible] spodumene mine startups in Australia. It is now clear that spodumene concentrate is in an oversupplied position over the near-term. This situation is particularly impactful in China, where the majority of the spodumene conversion facilities as well as many of the consumers have lower grade lithium carbonate are located.

As bias lithium carbonates see these lowest spodumene prices, they are delaying purchases and therefore pushing the price of carbonate down. Today, published reports indicate lithium carbonate prices in China are to marginal cost of production for a non-integrated converter in China. Reports of recent stable condition of carbonate pricing in China support this view. These factors are resulting in weaker market conditions today.

Let me now share with you the longer-term supply and demand indicators across our industry. The most important driver for the future demand of lithium hydroxide continues to be the broad adoption of electric vehicles.

During the first quarter, two of the key indicators of EV adoption that we track continued to be positive. Global set; passenger electric vehicles increased 58% as compared to the first quarter of 2018 for a total of 500,000 vehicles sold during the quarter.

In China, sales of electric vehicles more than doubled versus Q1 2018 to 274,000 vehicles. We also track new model launches as a leading indicator of future demand. Today we see a path towards a significantly higher level of new model launches with an increase in launches now slated from late 2020 onwards. The majority of these newer electric vehicles will use larger batteries, typically 60 kilowatts or higher and with stated ranges that confirm the need for higher energy density batteries.

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

These captures aren't expected to become the backbone of the next-generation of electric vehicles, also supporting the Livent’s long-term view and strategy of the increasing technical and quality requirements by cathode manufacturers from the lithium hydroxide suppliers for these high-nickel chemistries.

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

Finally, let me share what we are seeing in terms of production across the industry as well as new supply additions. If we stuck with the producers currently in operation, we estimate based on public announcements there more than 15,000 tons of lithium carbonate production has been removed from estimates of South American brine-based production in 2019. This underscores that the lowest cost producers today have limited ability to rapidly increase volumes in the short-term. This means that any short-term increase in supply must come from higher cost hard rock sources.

With respect to the development of new resources, we have seen a number of projects announcing significant delays to their development timelines with technical challenges, cost overruns and lack of available financing as the primary causes. Many of these new projects need a long run lithium carbonate price above today's levels to be economically viable. Once financing costs and reinvestment economics are taken into account, we would expect while our current market conditions persist, these types of delays will become increasingly common.

With this as background, let me discuss our second quarter outlook on Slide 6. For the second quarter, we expect revenue of $105 million to $115 million, roughly flat at the midpoint compared with last year. Adjusted EBITDA is expected to be in the $26 million to $30 million range. At a high level, we expect our second quarter financial performance to be broadly similar to the first quarter.

Let me walk you through the details on our adjusted EBITDA guidance as set out on Slide 7. We will have higher lithium hydroxide volumes available from the third line in China. However, the benefits of this relative to the same period a year-ago will be offset by lower carbonate sales, negative customer mix and higher operating costs.

Regarding customer mix adjusted in the first quarter, one large lithium hydroxide contract that has been in place for several years and as a much lower price than any of our other contracts is driving this mix effect during the quarter. This customer continues to seek the delivery of more of its committed volumes from Livent in the first half of the year.

We now estimate that this customer will oversee roughly two-thirds of its 2019 contracted volumes by the end of the second quarter. This pattern of delivering more volumes in the first half of the year is differs to what we have seen historically from this customer.

I think earlier to some of our contracted lithium hydroxide customers are delaying net purchases of hydroxide from us as they suspend production of their high-nickel cathode materials while they make additional investments in their existing processes. This delay means that we will have excess hydroxide volumes available in the quarter that will not be sold under existing contracts and will instead likely be sold on the shorter term arrangement primarily in China.

Unlike the rest of the world, the China market remains largely a short-term market for such lithium products with prices set monthly or quarterly basis. Furthermore, much of the demand for hydroxide in China today is driven by lower performance cathodes especially LFP. Consequently, we expect that these sales into China in the quarter will be at prices that are lower than those achieved in the rest of the world today.

With regard to operating costs, we will have certain non-recurring costs, which are due to the impact of the rain in Argentina. One of the consequences of this lost production is the disruption to our supply chain. We do not having excess lithium carbonate inventories at our hydroxide facilities, meaning that we risk having insufficient carbonate to meet our production needs.

In China, this means we will incur additional costs from procuring third-party material to feed the new hydroxide line. In the U.S., we will incur costs to every carbonate from Argentina to Bessemer City. The final cost related to the lost production or the manufacturing variances that arise from not operating for three weeks. The fixed costs evaporating in Argentina were not producing or carried forward and hit the income statement a few months later.

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

Now let me address our updates and outlook for the full-year 2019 on Slide 8. We now expect full-year revenue of $435 million to $475 million essentially flat with 2018. Adjusted EBITDA will be between $125 million and $145 million reflecting lower average realized prices for lithium hydroxide and lithium carbonate as well as higher operating costs. Adjusted EPS is now expected to be in the range of $0.56 to $0.66.

To help explain our revised guidance let me first provide more detail on our expected 2019 production plan sets out on Slide 9. Based on reduced demand for high performance lithium compounds from a number of our larger customers, we have reduced our forecast portfolio production and sales of lithium hydroxide by roughly 2000 tons.

Livent’s 2019 internal carbonate production is expected to be in a range of 17,000 to 18,000 tons, slightly less than we expected three months ago due to the previously mentioned January rain event. We remain committed to sell up to 3000 tons of carbonate to existing customers, which means we expect to purchase up to 3000 tons of carbonate from third parties in order to meet our sales commitments. As a reminder, the lithium chloride on this chart, it's sold in the form of either butyllithium or high purity lithium metal.

Now on Slide 10. Let me explain in more detail. The main factors driving the reduction to 2019 adjusted EBITDA as compared to 2018. As I just set out we expect that overall volumes for the year to be slightly higher than last year. This will be senior higher hydroxide and butyllithium sales offset by lower lithium carbonate sales.

Higher average price realizations in butyllithium on high purity metal we'll be more than offset by lower averaged realized prices above lithium carbonate and lithium hydroxide. We expect our average realized price for carbonate to be around $4 per kilo lower in 2019 compared to 2018 and for hydroxide closer to $2 per kilo lower.

The largest drivers of the hydroxide average price reduction. Our customer mix and lower sales prices on hydroxide sold them the short-term arrangements in China. Foreign exchange will be a headwind for 2019 of the RMB and the Euro impact is at the revenue level and Sterling and Argentine Peso hit our costs. The largest contributors to our higher cost though are the impact of the rain in Argentina, which all hits us in the first half of the year. The VAT incurred on exports from China and the higher cost of purchase carbonate compared to internal production.

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

Gilberto Antoniazzi

Thank you, Paul, and good morning, everyone. Let me start today by first highlighting the completion of license spin-off process. On March 1, FMC Corporation distributed the remaining 85% interest it how the Livent via the spin or 423 million shares to FMC shareholders. This last step completed live and separation from FMC resulting in Livent’s full independence as a public traded company.

Before turning to Slide 11, a few comments on selected items of the income statement, specifically on faxes and interest expense. On Texas driven by our revised forecast and it's impact or the mix of earnings across various geographies. We have amended our guidance on adjusted tax rate for the full-year to 18% to 22% an increase of 100 basis points at the midpoint.

On interest expense despite Livent’s strong cash flow generation, we will continue to draw on our revolver that facility throughout the year. This borrowing is driven entirely by spending on our capacity expansions. Therefore, we are capitalizing the majority of the approximately $6 million of cash interest we will incur this year consistent with normal accounting practices. Our guidance for interest expense and income statement for the full-year reflects these accounting treatment.

Moving now to the balance sheet, cash flow and capital spending. Respect to our balance sheet we ended the quarter with $80 million in cash and $50 million drawn and there are $400 million five year revolving credit facility.

The $60 million increase in drawing versus the end of last quarter is largely due to capital spending, but also reflect the timing of certain reimbursement payments we made to FMC during the first quarter.

Livent generated adjusted cash from operations of $22 million during the first quarter of 2019, which was in line with expectations. Look into the full-year we're now projecting $75 million to $105 million in adjusted cash from operations.

On capital deployment, Livent remains committed to the four phases of lead to carbonate expansions in Argentina and to the first phase of lethal hydroxide expansion in Bessemer City, North Carolina. In the first quarter, we made progress towards meeting key milestones in the expansions, resulting cash outlays of $25 million.

In Argentina, our lithium carbonate expansion project continues to advance with roughly $20 million of cash spent through the end of March. Early into the second quarter, we are already beginning to see the expected acceleration of capital spent as we continue to meet our project milestones.

Our forecasts for capital spending in 2019 remains in a range of $235 million to $265 million. I’d like to provide further commentary on the economics of Livent’s capital investment, particularly related to our carbonate expansion in Argentina.

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

As I stated previously Livent commenced a substantial capital deployment project in Argentina during 2018 to increase lithium carbonate production by 40,000 metric tons, going from today's roughly 80,000 tons to almost 60,000 tons by 2025.

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

The total cost of the four phases of expansion is estimated at $600 million. We're approximately $15,000 per metric ton of lithium carbonate. We expect that each phase, we'll have a cash operating cost in the range of $4 per kilo of lithium carbonate produced. Make it amongst the lowest costs sources of carbonate for this foreseeable future.

From a technology risk standpoint, our carbonate expansion project will not evolve any new extraction or processing technologies, the same process that we run today. The technical risk is therefore low, maybe as focused on the project execution risks, which Paul will discuss in more detail shortly.

Do help explain why we consider this such an attractive investment. Let me highlight what we expect from this expression in terms of financial returns. At lithium carbonate prices in the high single or low double-digit range, which is at the low-end or what we're seeing in the market today, each 10,000 ton phase of our expansion would add $60 million to $70 million of EBITDA, starting to any in 2021.

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

We look at the range of independent estimates for future prices. This would suggest the risk to this EBITDA estimate is skewed to the outside. To further reinforce why we believe this is an attractive investment, upon completion of the 40,000 ton carbonate expansion, we would expect free cash flow conversion of this EBITDA of 70% to 75% after all taxes and all maintenance capital spending.

And unlike hard-rock projects is economics are not impacted by mine life concerns, do not require changes to the operating costs over the life of mine as new errors are exploited and do not have end of mine site remediation costs to consider. You can therefore understand Livent expect to see a very attractive return on our $600 million investment in our expansion in Argentina.

Additionally, it's important to develop EVs is done in a way that is sustainable. Right now the largest contributor to the carbon cost of EVs is the battery materials. And we already see the sustainability becoming an increasingly important factor in sourcing decision across all battery metals. Advantages of our brine-based source of lithium carbonate is that we have a smaller carbon footprint compared to many current approach to produce in lithium.

Much of the energy we use is truly renewable. We use solar and wind-based evaporation in the production for our lithium carbonate. And while our resource is removed from end users with [indiscernible] or brine across long distances. In light of all of the above, we remain committed to complete our announced expansions in Argentina.

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

Paul Graves

Thank you, Gilberto. So before we turn to your questions, I want to provide an update on the status of these expansions in the province of Catamarca in Argentina and Bessemer City in the U.S. Livent’s position in the lithium industry is built upon two key factors.

First, our position as the lowest cost producer globally of lithium carbonate, and second, our leadership in the production of high performance lithium hydroxide that is qualified for using the most demanding performance applications. Second quarter our future that we are able to grow our supplier both carbonate and hydroxide at the same rate as our customers demand growth.

On Slide 12, we've set out the major work streams related to our first phase carbonate capacity expansion in Argentina and the additional lithium hydroxide unit in Bessemer City. The first thing you can see is that we remain on track and expect to bring both units online in the second half of 2020 with the carbonate expansion expected to be operating shortly ahead of the hydroxide unit.

There were two main components of the Argentina expansion. The first is the infrastructure which includes a new 31 kilometer water pipeline, roads, work at camps, various utilities, warehouses and buildings as well as additional ponds. This phase includes most of the infrastructure needed for the subsequent lithium carbonate expansion phases.

The second component is the lithium carbonate units. These will be constructed in modular form in China and shipped to Argentina once complete. These units are based on the same design as the carbonate production units we are using today helping to simplify and derisk the overall project.

For the hydroxide expansion, we are also constructing modular production units in China. These will use the same design and engineering that we used to successfully install three hydroxide lines in China over the past few years. We remain confident in our progress as all projects continue according to our plan. We have critical oversight of three key areas of execution risk to ensure the projects are completed in a timely manner.

The first is the water pipeline which has been constructed over challenging terrain and is required to operate the new carbonate units. The second is the shipping of the modules from China and particularly the process and timing of getting the units into Argentina and then up to the [indiscernible]. And finally the customer qualification period that follows commissioning for both carbonate and hydroxide.

Our customers are increasingly tightening their requirements. There's less visibility today as to how long this process might take 18 months from now. However, we are designing into our construction the equipment that will be needed to provide materials that meet the requirements of the most demanding applications.

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

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

Rasmus Gerdeman

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

Question-and-Answer Session


Thank you. [Operator Instructions] Your first question comes from the line of Chris Kapsch from Loop Capital Markets. Please go ahead.

Christopher Kapsch

Yes. Good morning. My question is focused on, Paul what you described as a transition period for the cathode manufacturers and their delay in transitioning to high-nickel metal chemistries. But I guess the question is this, are you referring exclusively to 811?

My follow-up really kind of depends on the answer to that because my sense is that the delay and adoption of 811 is – it could be a multiple year sort of delay in terms of the introduction of those chemistries into EV platform. So – but the context, what you describe may it sound like this transition is something that will be over and done within 2019. If you could just elaborate on that dynamic that'd be helpful.

Paul Graves

Sure. Happy too. Let me just step back a little. Your question is a good one, but it necessarily simplifies the situation I understand. I think the definition of high-nickel has tended to be described as NCA or 811 and that tends to be the simplification.

But the reality is that today there are a number of technologies out there that are what I loosely call borderline high-nickel, they are some form of 622, but in a form that requires hydroxide for example. We have some that are – and everyone use different terms, instead of 60% nickel, 70% nickel, somewhere between 622 and 811. We certainly see an increased focus on NCA in Korea and China and not just in Japan today, which is obviously high-nickel chemistry as well.

So we're also seeing blends, and so I think it's fair to say that the initial introduction of the highest performing cathode materials are not going to be used on their own for first implementation. We'd like it to see 811 blended, for example, with 622 or even 532.

So I think it's a complicated transition that is more than just a step change from 532 get 622 and go straight to 811. It's also not entirely sure whether it will all be NCM based. We have NCA and also some alternative versions of NCA being developed by various producers. It is without a doubt a complex environment.

What we do know though is that – and this has really been rapidly accelerated in the last few months. The OEMs themselves as they've started to become clearer about their vehicle launches are being much clearer now into the supply chain as to what performance characteristics they expect both energy density and safety performance.

And so we have seen frankly a little bit of a scrambling on some customers who thought that the delay would have been longer and have been taking their time to move over to high-nickel. We've seen others as we just mentioned, who have been making high-nickel, but realize what they're making today will not meet those tightened performance requirements of the OEMs. And we're seeing a real – I've heard people call it an arms race for battery materials.

There's a bit of an arms race now as to who can bring high-nickel – performing high-nickel content cathode materials into the chain the quickest. There is certainly likely to be a first mover advantage in that process.

I think 811 itself, pure 811, we shared the broad view and have for a while that is likely to be 2021 or maybe even 2022 before we see wide scale adoption of pure 811 in the OEM chain. But we do expect to see some hybrids maybe some single crystal 622 or [7-1.5], whatever it's called by its producer to sort of fill the gap between now and then.

Christopher Kapsch

Okay. That's helpful. The performance has been – the performances that you've described with your high-quality hydroxide is that exclusively an advantage when deployed in 811 chemistries or do you feel like you have that advantage when deployed in some of these hybrids, whether it's 622 or another variant that you alluded to? Thank you.

Paul Graves

The two sources of our advantage, just want to make sure that I explained them both clearly. We certainly can demonstrate an advantage in the results of producing high-nickel content cathode materials without hydroxide compared to many of our competitors. That's certainly most proven in an NCA technology. We can demonstrate that in an 811 technology too, and to a lesser extent, but still there in 622 technologies as well.

I would just bare in mind that the second advantage that we have, which is a different one and it's certainly one that allows us in the short-term to have an advantage in our conversations with customers is our ability to actually meet the production specifications and technical requirements of the customers. They have two different things, two different sources of advantage if you will that we sell to customers.

Now, I will be frank with everybody, not every customer has yet necessarily, what I'll loosely call built into some of those arguments. They continue to test different hydroxide materials. They continue to blend different hydroxide materials. They continue to make changes to the physical properties before they use it in their processes.

They're all searching for performance of the hydroxide materials in that own processes that actually work. We continued to work our way through that, look and we continue to do our own testing, provide data and support the arguments to these customers as they transition.


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

Kevin McCarthy

Good morning. Paul is your view of global electric vehicle demand in 2019 changed at all and if so how? Maybe you can talk through the change in subsidy regime and what you anticipate downstream in China and elsewhere?

Paul Graves

Sure. Look I don't think our view has changed much at all. I mean, historically over the last few years what we've seen is that we've tended to underestimate the adoption rates around the world. There is no doubt that there is a bit of a step back and a pause looking at what will frankly the China market be in 2019 and into 2020 because most of these launches of the next-generation high performance vehicles they don't come until the end of 2020.

So people quite rightly and understandably are looking at the subsidy regime in China. And I think it's fair to say that we perhaps will continue to see an extended period of use of older cathode chemistries in smaller shorter range vehicles that are suitable, lousy for the China market in 2019 and maybe part of 2020. That doesn't mean there won't be major launches of vehicles using high-nickel chemistries and using next-generation batteries, but we don't expect them to be the bulk of the volume in 2019 and 2020.

Much of the shift that we saw frankly in the demand for lithium hydroxide in China and this comment about a shift back to LFP, which is certainly seems to be taking on an extended life is linked to China subsidies, but it's actually more of an e-Buses and commercial applications than it is necessarily around passenger vehicles. And I think frankly one aspect of the China subsidies when they came in, while they will – largely what we expected. One area that we did fail to spot was the incentive we gave at the regional level to continue to incentivize e-Bus adoption.

And what that would do to provide incentives for cathode material producers to reinvest and continue to invest in LFP and lowers grade NCM. That was [indiscernible] a little bit and I think that the resurgence of LFP, it looks like it's here for a few years to come really driven by commercial and e-Buses rather than passenger vehicles.

Kevin McCarthy

Okay. That's helpful. And then as a second question, I was wondering if you could help me reconcile your assertion that the need for high-nickel cathodes is increasingly clear with the short-term dynamic whereby your customers are deferring launches and you're experiencing diminish demand for high-grade hydroxide into high-nickel cathodes. Maybe you can provide an example or two on how your conversations with customers have evolved and what do you think is driving this decision? I think you mentioned additional investment is required. So maybe if you can provide some color around that concept if you would.

Paul Graves

Sure. Look, I'm happy too. There was a big shift in China particularly, and mainly in China of companies, building capabilities to make high-nickel content cathode materials. And we've been through the plants, we've seen in the factors, we've seen that they can make it. But what they've seen and what they've increasingly realized, and actually been specifically told us they've attempted to get that cathode materials qualified is that they don't actually perform at a level that's acceptable.

And so the first thing that we see is – the bad news is these guys on that saying, look, I don't need to make any more of these cathode materials because I need to change my production processes, and I need to do that in a way that I can actually reliably make cathode materials that perform in higher quantities with a greater degree of reliabilities to the performance catalyst, variability in the performance characteristics.

So the bad news is, that it slowed down and as they make those changes to the processes. The good news is it is now clear what they're shooting for. And I think it's fair to say in the past, they were not that clear as to what they're shooting for.

We've had a couple of customers who only four or five months ago where we're setting up pretty clear demand patterns for us as to what their expected delivers of hydroxide would be this year. Turning round and saying, we've got to back away because we've just found out we have to make these changes and we expect to be up and running late 2019, but as of today, we will likely not need as much lithium hydroxide in 2019.

So I do understand it's a bit of a complex statement, right? We're saying good news, more high-nickel lithium, high-nickel cathode being produced, being demanded, should I say. Bad news is nobody's making them. And that is a temporary transitional process. It’s likely to run us through 2019 and into 2020. But it again, I think it bodes well for the longer-term, but we got to get there first.

Kevin McCarthy

Thanks so much.


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

P.J. Juvekar

Yes. Good morning, Paul.

Paul Graves

Good morning, P.J.

P.J. Juvekar

How much of this weakness is related to the subsidy cuts particularly? The reason I'm asking is we're trying to figure out what is structural and what is temporary. I mean is a switch to LFP at temporary thing before that we catch up with high-nickel batteries here. What structure and what sort of the near-term?

Paul Graves

I think there were multiple changes going on here that are impacting us. I think the shift to LFP is not so much a shift. It's sort of an extended life of LFP that we’re seeing. Clearly LFP has been around a while and it's well proven, and in particularly in e-Buses, which have public of them, nobody wants a bus bursting into flames for example, with 40 or 50 passengers on it.

I think the sort of the safety requirements as well as the lower performance requirements of those batteries means that we do expect that LFP is here for quite a long time, and some other similar chemistries are likely to be here for awhile where we've even seen people talk about, EV grade LCO technologies, which historically has largely been in just in your cell phones.

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

We've generally guide it out to about 20, 25 where something approaching about 30% to 40% of volume will behind nickel, but the rest of the vehicle batteries well be at that point in time, still older chemistries.

So I don't think that's a fundamental structural change. I think what we've have is, uncertainty and timing of delivery of product, uncertainty of timing of qualification of product and perhaps most challenging, frankly as a whole is uncertainty as to who will get that first and who will get that actual.

We've spoken before about there's a large number of companies around the world attempting to solve this problem. What we've seen for sure, and one thing you can read to what's happening in the incentive policy in China is a desire to have consolidation, to have the weaker players fall and have a winners in that process and that's creating a lot of disturbance in the market in the short-term P.J.

P.J. Juvekar

Okay. Thank you for that. And secondly, you mentioned some Chinese customers going through shorter-term contracts. Are these smaller customers got a supplying to like second tier and third tier automakers or is it big customers?

Paul Graves

I think the market in China has generally tended to prefer market-based pricing. However, we define that quarterly, short-term, monthly, it just kind of varies by product. I think we've seen them experiment in the last couple of years particularly because of lithium hydroxide that that they could use was in such short supply experiment with locking up contracts.

Some take-or-pays, which they are – we have take-or-pays with Chinese customers that they are taking and they are paying with no changes to prices of volumes. But I think that the market itself has tended to be, and I think you've heard me say before, I do expect the China market supply demand dynamics to be different to the rest of the world. They prefer shorter-term purchasing.

They have a regime in China. The disincentivize as a way of exporting product back out of the country because of inability to reclaim VAT, et cetera. We do see different dynamics, more short-term nature, more transactional relationships in China. It isn't just with the smaller second and third tier guys. It's with the bigger guys too.

P.J. Juvekar

Okay. Thank you. Very helpful. Thanks.


Your next question comes from Robert Koort from Goldman Sachs. Please go ahead.

Unidentified Analyst

Good morning. This is [indiscernible] on for Bob. If I heard you correctly, you noted a $2,000 per ton drop in lithium hydroxide prices. I think last quarter you noted 80% of volume was under contract with a firm price in 2019. So does that imply a much more severe price impact for a small portion of your volumes? Or did you actually have to take down some of your contract prices?

Paul Graves

Yes, we did not take down contract prices. It’s an important point to make. What we've not done is seeing customers taking same volumes, but prices that are below what they've committed to in the past. What essentially is happening in the math around, this is pretty straightforward.

First of all, we lose a couple of thousand tons of lithium hydroxide, which was at meaningfully higher prices than our average realized price. If you recall, we talked before about our average realized price for 2019 being approaching $1 or just less than a $1 lower in 2019 than in 2018 all driven by customer mix.

What we have now is as we take 2,000 tons of higher priced product that we expected to sell go away because the customers have given us indications they are unlikely to need it. We also have that 20% of uncontracted volume at pretty low prices. You see prices float in China and some of the independent market research documents. They pretty much reflect what we see in the market too. And so it's an averaging effect across this lost volume, which was at a higher price plus the uncontracted business, which will be sold in lower price market in China.

Unidentified Analyst

Got it. That's helpful. And then I think you guys talked about $4 per kilo carbonate all in costs. What is the cost structure for hydroxide and I guess compared to spodumene or hard rock and spodumene going cheaper, where is the comparison of your all in costs to hydroxide compared to non-integrated hard rock producer to lithium hydroxide?

Paul Graves

If you just take pure cash costs from the work we've done and we don't have complete transparency clearly over every single unit, size, scale of unit, quality of the spodumene feedstock, consistency of the feedstock, really all feed into the economics of a converter. But we would expect that there are a number of spodumene and carbonate converters that are capable generally of making either hydroxide or carbonate at roughly the same price.

We've tended to see that somewhere in the $9 to $10 per kilo on a cash basis that that again ignores any margin for the converter or any reinvestment economics. And that assumes spodumene at about $600 a ton. So there's a wide range around that and there will be wide ranges even for individual units as they produce from different feedstocks.

For the carbonate side, I think it's been pretty clear. We make carbonate at $4 or less per kilogram. We do have a cost to convert that into hydroxide that you should imagine that we certainly don't view ourselves as cost uncompetitive in the production of hydroxide.

Unidentified Analyst

Great. Thank you.


Your next question comes from Steve Byrne from Bank of America. Please go ahead.

Stephen Byrne

Yes, thank you. I recall a quarter ago when you were getting pushback from some Chinese customers on price, you shifted more volume to Korea and Japan, just wanted an update on those customers? Are they also taking less volume of hydroxide and/or are they also pushing back on price?

Paul Graves

So the customers that we talked about who are indicating that they will need less volume are not all in China. A couple that are outside China too. So this broad shift, this board technology challenge and the attempt to solve the specification challenges set by the OEMs is not unique to China by any stretch of the imagination. So what we're seeing outside China though is push back on volumes. It is not push back on price so much. And frankly it's a bit of a argument because many of them are saying, I just don't need the amount of volumes that I thought I would need in 2019. I'm going to need it in 2020. So the conversation frankly never really gets to price with them in that case.

Stephen Byrne

Okay. And can you comment on your outlook for some homegrown capacity in China for its own conversion capacity or lithium resources within the country, either as brine or spodumene? Does that affect your decision making on where you would build your next carbonate hydroxide conversion capacity?

Paul Graves

I think there are – it may not be quite the Holy Grail, but it's not far off is can anybody actually use the lithium resources that are actually in China. The hardware resources tend to be remote and poor quality and the brine is extremely difficult if not impossible to process into battery grade materials simply because of the nature and the level of impurities in those brines.

And we as an industry and certainly we alive and specifically it's been a lot of time and efforts in if we can find a solution to that with particular with brine and I've been unable to do so. So we don't see production from China based resources being a particular factor in the development of industry in the foreseeable future, you can take those next three, four, five years, whatever it may be.

For us I think the question that we will be asking with regard to our own capabilities is how regionalized will the market for lithium become. Do we need to make sure that we have capabilities to produce lithium hydroxide close to the customers? We mentioned earlier this concept of sustainability.

It's a really important question for the EV value chain, which is how do we make sure that we are not essentially gaining on the fossil fuels that the cost consume but losing it on the construction of the vehicles themselves. And one of the challenges and industry, my view that we have today as currently constructed, the industry tends to ship a lot of waste product around the world.

And that's as creating a pretty significant footprint – carbon footprint throughout for lithium as a whole. We believe that the ability to locate conversion units of carbonate conversion units that is not spodumene conversion units close to your customers actually brings a lot of advantages not just sustainability but also flexibility, et cetera. And we certainly will take a long and are taking a long hard luck in the long one about where exactly do we locate our carbonate or hydroxide conversion capabilities.

Stephen Byrne

Thank you.


Your next question comes from Christopher Parkinson from Credit Suisse. Please go ahead.

Christopher Parkinson

Great. Thank you. You mentioned some less favorable or short-term pricing dynamics in China. But can you just compare this to what you're still hearing or you're on a go forward basis from customers in Japan and South Korea. Just ultimately, how do you believe this evolves over the intermediate to long-term and do you believe any eventual consolidation of the supply chain? We'll change this. Thank you.

Paul Graves

I think some of the dynamics that we've talked about, Chris, with regard to the supply chain really have not changed. In fact, I might argue that what you've actually seen is that is that a couple of different factors at work. I think one of them is an increasing realization that there were many individual products sorry resources that people are attempting to develop on their own using traditional financing methods of frankly just not going to get done.

When you look at that, the better quality resources you would think are likely to be picked up by larger entities in the lithium industry whether that's just lithium players on new entrants is hard to say. We've seen obviously new entrants start the head up in the last few days in our industry. It's hard for me to imagine that that trend is isolated to just a couple of companies.

Whether though that will change the board of the supply dynamics over the long-term is a lot more difficult for me to say. Today Japan, China, Korea, the U.S, and the Europe they all have very specific characteristics that make them different enough that they're not all driven by the same forces and processes. I think over time they were all obviously migrating to who can actually capture the value in the battery chain through technology and through put up kind of the best quality and highest performing batteries.

Once we go down that path and we see the rate of EV reduction that we've talked about in the past. This demand curve, this demand acceleration isn't going to slow down. And I think the bigger factor that's going to drive behavior in the market is frankly, whether the supply can keep up in the long run.

We've certainly see it demonstrate in a soft year, like 2019 for demand. But the supply is there. But it's a different question when we see demand going up to 600,000 million, 2 million tons over the coming decade. I don't know whether in fact consolidation is going to be needed to actually provide the capital to actually create the amount of lithium for the market.

Christopher Parkinson

That's probably good leeway to the second one. Can you also just update us on your willingness to do even longer-term contracts, similar to some of your peers? You've alluded to some reluctance to do this, go that far into the future, but just – can you give us an update on your thought process and hit on what you're hearing from your customers and just paralleled that with what we've seen from the OEM's? Thank you.

Paul Graves

Yes. You go to the crux of one of the challenges of our industry that Chris, how will the supply chain involved and who will contract for product and who will be saying that the pricing, et cetera. I think it's fair to say that we continue to see a huge advantage for the technology leaders to secure reliable supply of lithium hydroxide.

That made – they're going to have to answer that question for themselves as to how they do that. Clearly, one part of that solution we would hope would be longer-term contracts take-or-pay up fixed prices. They may layer their supply chains, they may have multiple sources. I doubt it will end up as a single model.

I think when you have a fully integrated play. We have an incentive clearly to secure both volumes and price. If you're non-integrated and you're exposed to spodumene prices, if you can for example, index your purchase of spodumene to an index of lithium prices, you have less of an incentive to fix the price. So I think the dynamics of the supply side at in form factor as indeed are the preferences of the bias when it comes to long-term contracts.

Christopher Parkinson

Great. Thank you.


Our next question comes from Aleksey Yefremov from Instinet. Please go ahead.

Aleksey Yefremov

Thank you. Good morning, everyone. Paul, I just wanted to confirm that I heard you correctly, so about 80% of your hydroxide businesses still under the same price in the same contracts as at the beginning of the year. And if that is correct, how do you assess them maybe risks and opportunities for volume and price, for that bucket of that's under contract for the remainder of the year?

Paul Graves

Yes. You did hear that, correct. It's 80% on the contract. It’s obviously 80% now of a smaller number. We did lose some of that volume that wasn't the contract. That ratio is roughly the same still.

I think it's fair to say that we see for the rest of the year under existing contracts, we see minimal if any price risk, small price risk, but there's always a little bit not meaningful, but we see obviously volume risk. I mean we don't know yet whether our customers themselves frankly fully understand what they need for the rest of the year yet. And some of them continue to work through their own plans.

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

I think generally speaking for the piece that's uncontracted, there is clearly still price risk out there in the market. I think you may have noticed that full-year guide is not only, a touch lower than it was before. It's also wider. The range is wider intentionally.

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

We have seen short-term markets in China go up and down very quickly and it's not easy to predict. We've done our best to capture all of that in the guidance range, but I think it would be somewhat inconsistent of me to say that all of a sudden now we are perfect predictability on what pricing is going to do through the rest of the year.

Aleksey Yefremov

Understood. Thank you, Paul. And given some uncertainty was hydroxide demand. I mean you have several hydroxide expansion projects, right? Is there maybe an opportunity to reassess the timelines for those either Bessemer City that may be more underway already, but subsequent expansions as well? Do you have that ability to delay those expressions if you can't sign the contracts as you like?

Paul Graves

Yes. It’s a good question. And an important one I think if you read between the lines of what we said in that script, we only talked about one expansion in hydroxide. Right now we have only one expansion in hydroxide underway at Bessemer City.

It's an important one because it brings a lot more flexibility to our cost structure. It removes a lot of the requirement that we have today to export out of China and incur that VAT cost et cetera. It's also a lot of cost production actually than in China. Once we were running at BC, the unit cost is lower than in China. Even though the capital cost is meaningfully higher.

We do not today have any plans, specific plans for a fourth line or more in China, nor for a third line in Bessemer City. We will revisit those and only when we have sufficient visibility as to what the demand for our specific offering is.

Aleksey Yefremov

Thank you.


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

Alexandre Falcao

Thank you. Good morning. I have two questions. One regarding your strategy on, selling you aren't uncontracted volumes in China? Is that something that you it had no choice but selling and it's a buyer's market and it is what it is and second is, given that you estimate that you're going to sell more there, why the, the increase in the VAT taxes, they're just one's to reconcile those? Thank you.

Paul Graves

Yes. Let's add that to the two different masters about we're taking down production of lithium hydroxide that will largely be in our China units. The strategy I'll put quotes around strategy of selling in China. It is frankly not something when we get to this position that we have a lot of choice over. Most of our customers outside China prefer to buy under contracts that they've put in place at the start of the year.

And so the industry as a whole largely for our product, at least I don't speak for every lithium product is largely contracted for volumes for most of the rest of the year. So placing product into other places requires a change to the positive in the expectations of customers outside China if we're going to do that, and that's not what we're seeing at the moment.

So we really don't have a lot of choice. The market for short-term placement of product is the China market. We will obviously keep exploring other areas that offer a better return for us. The increase in VAT is frankly commitments that we've already made outside China to supply lithium hydroxide that requires us to export. We're not exporting more volumes than we expected at the beginning of the year. Our export volumes of roughly the same, maybe a touch lower not much. So the VAT impact is really reflecting the full year plan, not just a shift in production that we're talking about today.

Alexandre Falcao

Perfect. Thank you.


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

Joel Jackson

Hi, good morning, Paul. A couple of questions. So it's been answered and it's a bit of an open ended question, but what's transpired the last few quarters, I mean there's you do speak about a shift and a delay in what you think will happen, but does this events, the last few quarters really lead you to reconsider all of your underlying assumptions as you plan out your strategy around product mix, customer mix and your expansion plans?

I mean, there's a lot of question is being raised here about the commoditization of hydroxide. The commoditization of your own hydroxide, the trajectory that you've spoken a lot about above more nickel rich capital customers, excuse me, cathode chemistries, rebound in LSP and even just how secure your contract terms and customers are. So I'm basically asking you, do you really need to reassess how you view the world, what you're planning to do, what's your plan to invest in and the timing of it all?

Paul Graves

Thanks Joel. Well, it's such a broad question. I'm glad we kept the line open for a few extra minutes for you Joel? Like I think the short answer is yes. I mean, let me just step back a little. I think it's clear to us and we have customers today who are taking advantage of this lower price and are clearly not trying to help the lithium industry any more than they have to.

They have their own costs to think about who are explicitly saying this is going to rebound on us. This is going to course problems because it's clear that with prices, where they are today and with buying plans as they are today, a lot of people are going to think long and hard about their investment plans and this is going to come and catch it in a couple of years. Because today is when the investments are needed to meet the supply that we know we're going to need in a few years' time.

So I think project creates a challenging strategic question, which is what is the right place to be in 2021, 2022, 2023 and beyond. But how do we get that given current market conditions and conditions that we expect to last certainly through 2019 and as I sit here today, probably to the start of 2020 as a minimum.

So when you put all those together, we have to reassess where are we? What are we? I think it is fair to say that when you stand back and look at live and strengths, one of them is what I would loosely call an ever present if the lowest cost producer of lithium carbonate.

A second one is maybe a little more difficult to rely upon at all the time. And that's the customer preference for our product over others, our specialization if you will. We think both of those are both real and sustainable, but they carry different value at different points in time.

We have to stand back and look at what are we live and we're going to do with that capital, with our contracting decisions, with our production decisions over the next two years.

Joel Jackson

Thank you for that. And my last question would be, I pretty sure about a month or two ago when you were in Switzerland, I think it was Switzerland, you were commented as talking about maybe looking at getting in towards investing in some spodumenes, hard-rock assets, maybe some brine asset, but hard-rock assets now to [indiscernible] came out today and really touted the benefits of brine over spodumene. Can you reconcile those buckets of commentary please?

Paul Graves

Sure. I'm not sure whether you heard me, or whether you would just saw the reporting of my comments. My comments in Switzerland where frankly saying we vastly prefer brine. Most of our approaches today involve brine based resources and brine based technologies.

We do spend perhaps as much time and effort on brine based extraction technologies that would allow us to either extract more lithium from existing resources or tap into resources that today on economical because of the technology challenges.

Our first choice by a mile remains brine. It's what we know, is what we do. We use the lowest cost production source typically and it does carry these environmental and sustainable advantage has done right.

What I did say at the conference though was the reality is in the near-term, we don't have a lot of visibility over a game changing expansion of that capability based on brine. We just don't. Argentina can only go so far, tapping into another resource near as in Argentina runs into the same issues with this infrastructure issues that stopped has not resource issues.

And so when you do that you'll have no choice. If you believe it's important to grow, if you believe it's important to expand that pays at least in line with the industry, at least in line with what your customers’ demand of you. You have no choice, but to look at hard-rock. You have no choice.

And so that was really that that the heart of my comments and I don't think it's inconsistent with what we just described. I think what you're better was really trying to describe is why despite the market conditions we see today and while we recognize a number of people are asking the question, does it still make sense to invest in Argentina in these conditions, in this environment? We were trying to set out all the reasons why emphatically yes. It absolutely makes sense to continue to invest in Argentina.

Joel Jackson

Thanks, Paul.

Paul Graves

Thank you. 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.


That is all the time that we have today. This concludes the Livent Corporation first quarter 2019 earnings release conference call. Thank you for attending.