LTHM - Livent Corporation - Earnings Call Transcript Q3 2021

Operator: Good afternoon, and welcome to the Third Quarter 2021 Earnings Release Conference Call for Livent Corporation. Phone lines will be placed on listen-only mode throughout the conference. After the speakers’ presentation, there will be a question-and-answer period. I would now like to turn the conference over to Mr. Daniel Rosen, Investor Relations and Strategy for Livent Corporation. Mr. Rosen, you may begin.

Daniel Rosen: Great. Thank you, Celine. Good evening, everyone, and welcome to Livent’s third quarter 2021 earnings call. Joining me today are Paul Graves, President and Chief Executive Officer; and Gilberto Antoniazzi, Chief Financial Officer. The slide presentation that accompanies our results, along with our earnings release, can be found in the Investor Relations section of our website. Prepared remarks from today’s discussion will be made available after the call. Following our prepared remarks, Paul and Gilberto will be available to address your questions. Given the number of participants on the call today, we would request to limit a one question and one follow-up per caller. We would then be happy to address any additional questions after the call. Before we begin, let me remind you that today’s discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including, but not limited to, those factors identified in our release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today’s information. Actual results may vary based upon these risks and uncertainties. Today’s discussion will include references to various non-GAAP financial metrics. Definitions of these terms as well as a reconciliation to the most directly comparable financial measure, calculated and presented in accordance with GAAP, are provided on our Investor Relations website. And with that, I’ll turn the call over to Paul.

Paul Graves: Thank you, Dan, and good evening, everyone. We have a number of important topics to discuss today. We reported our third quarter results with both revenue and adjusted EBITDA in line with the second quarter. Although, the underlying business conditions were much stronger in Q3 compared to Q2. Live and achieved higher realized pricing, but this was offset by lower delivered volumes and higher costs, both of which were a direct result of various supply chain disruptions and operating interruptions in the quarter. Neither of these issues reduced our total LCEs available for customers. And we expect to recover the revenue lost due to lower delivered volumes in the upcoming quarters. We will also go into the operational decisions live and made in the third quarter. So we’ll provide the company with more opportunities to take advantage of current higher pricing conditions in the fourth quarter and into 2022. Given how we are entering the final quarter, we are further increasing our revenue and adjusted EBITDA guidance for the full year 2021. This is driven by a combination of higher anticipated realized pricing as well as a different customer and product mix. Lastly, we continue to progress on our carbonate and hydroxide capacity expansion activities, and remain well on track with all of our previously disclosed target dates. Before I provide further market commentary, as well as some Livent specific updates, I will turn the call over to Gilberto to walk us through Livent’s financial performance.

Gilberto Antoniazzi: Thanks, Paul, and good evening, everyone. I will begin with our third quarter results on Slide 4. We reported revenue of $104 million. Adjusted EBITDA of $15 million and adjusted earnings of $0.03 per diluted share. Revenue was up 43% compared to the same quarter in 2020, driven by higher volumes, as well as increased realized pricing across almost all region products versus prior quarter revenue was flat with higher realized pricing across all products offset by a slightly lower total of LCE soared. Third quarter adjusted EBITDA was meaningfully higher than the prior year. And it’s lightly down versus the second quarter. Much of the improvement in realized prices compared to the second quarter was offset by higher costs and impact of supply chain issues. Some of the higher costs relate to energy and raw material inflation in our business, including solvents and lithium metal feedstock for butyllithium business. We also incur higher operating costs due to lower and less predictable production in China. As we were impacted by unscheduled power cuts imposed by government authorities on industrial park we operate. These government imposed shutdowns have impacted many different provinces and industries beyond just battery materials. A second technical factor that impact our results or the decision to prioritize higher lithium chloride production in Argentina in the quarter as we accelerated the fulfillment of some legacy supply contracts. This added operational costs that typically would be – would have been spread more evenly throughout the year. Finally like almost everyone who moves product around the globe, we experience higher shipping and logistic costs and some delivery disruptions. The issues we face include the difficulty in securing available product containers and transportation either by boat or truck. This meant we either did not deliver the product in the quarter as expected, or we had to secure higher costs to air freight material to some key customers. Taken together, a large portion of this higher cost should be considered more temporary nature. Although, how long the cost will persist is difficult to predict. During the quarter, Livent prioritized fulfilling a large portion of its remain 2021 full year volume commitments to customers. This commitments reflected a lower price environment than today’s market as they were made prior to 2021. In our market was consistently high rising prices and strong demand, many customers were eager to take product earlier than originally planned. And Livent therefore choose to prioritize these customers in the quarter. This means that when we enter the fourth quarter, the far more available volume to sell in the current price environment and we had in the first three quarters. As we recall from our previous earnings call, you were always expecting to benefit more from higher pricing conditions in the later part of the year. Due to the cadence of customer agreements and the index price lag in some of our contracts. However, the company now has greater flexibility to take advantage of today’s significantly higher price environment in the fourth quarter, as well as in the year ahead. We will also benefit from greater weighting of sales toward lithium carbonate in the upcoming quarter. As Paul mentioned earlier, we expect our lithium hydroxide production to be lower than planned due to four shutdowns of our China plants in the third and fourth quarter. But since our conversion plants are fed by our lithium carbonate, we are able to pivot fairly easily to sell in this carbonate in place of the hydroxide. This provides us with great operational flexibility and single location spodumene converters in China. And it’s something that we believe is unique to Livent. And since many of our customers use both hydroxide and carbonate, it enhances our ability to continue to support our customer base in times like today, when all suppliers of Livent are experiencing some type of disruption. Looking forward, Livent has the option to hold inventory, to support future hydroxide production and help smooth out supply chain challenges or to sell carbonate volumes more opportunistically. Given the current pricing for carbonate in China, carbonate sales in the fourth quarter will get higher margins than our contracted hydroxide sales. We expect this volume – we expect this will continue to be an area of incremental opportunity for Livent in the future. Especially as we bring our first expansion online in just over a year from now. For these reasons, if you see on Slide 5, the Livent is increasing its full year 2021 guidance for both revenue and adjusted EBITDA as market conditions and the company’s financial performance continue to strengthen. Guidance for revenue is now projected to be in the range of $390 million to $410 million, up $20 million at midpoints. Adjusted EBITDA is expected to be $62 million to $72 million, which is 34% higher at the midpoint than our regional guidance at the start of the year. At midpoints, the new revenue guidance implies nearly 40% year-over-year growth. If adjusted EBITDA roughly 3 times higher than last years’ results. In addition to a further improve outlook for 2021, as Paul discussed, we expect Livent to see even greater benefit as we finalize our latest customer commitments for 2022 and beyond. This is due to the large portion of our volumes that are available to make new or expanded commitments in 2022. With a 100% of our volume commitments being made based on the price environment we’re seeing in 2021. Finally, Livent’s 2021 guidance for total CapEx spend remains unchanged at $125 million, as our capacity expansion projects continue to progress. While we have only spent $55 million through the three quarters of the year, we expect this to increase in the fourth quarter and is simply due to the timing of cash flows. I will now turn the call back to Paul.

Paul Graves: Thank you, Gilberto. Moving now to Slide 6 and some commentary on current market conditions. The strong lithium demand that we saw in the first half of this year continued in the third quarter and showed no signs of slowing down. Behind this growing demand is higher electric vehicle sales and of particular importance record battery installations for EVs. It is battery installations rather than EV sales that drives battery material demand in the short-term, and which helps to provide greater insight into the evolution of battery size, electro technology and specific battery material demand. In September, EV sales in China reached another high with penetration rates approaching 20% levels. Total retail sales of new energy vehicles in China through September year-to-date of 1.8 million vehicles are over 200% higher versus the same period last year. New energy vehicle battery installations in China sets a record in the month of September with 15.6 gigawatt-hours of installed capacity. This is nearly twice the monthly average seen through August year-to-date, and is roughly three times the monthly averages seen in both 2019 and 2020. In key markets in Europe, year-over-year sales growth was over 50% in September with penetration rates reaching new highs. And in the U.S., we’ve seen a number of new EV targets announced from leading OEMs, along with new battery partnerships and large capital commitments for localized production. The positive trends behind demand for lithium-ion batteries do not end with electric vehicles. We continue to see increased demand expectations for other areas of energy storage, including light commercial vehicles, e-bikes, stationary storage and mobile devices. This energy storage demand growth has pulled through meaningful demand growth in batteries, cathode materials and battery materials. The increase in lithium demand has been seen in both lithium hydroxide and lithium carbonate with low usable inventory available in the market, whether that is finished lithium chemicals or spodumene based feedstock. We’ve seen sharp lithium price increases across all products in the growing Chinese non-contracted market. Published lithium prices, both inside and outside of China continue to move higher and we’ve seen some of this improvement reflected in the latest contracted prices as well. The entire lithium market is tight today and the strengthening demand picture combined with the non-linear nature of capacity additions will likely result in further periods of tightness in the future. However, on the hydroxide side, the market tightness appears more amplified today due to reliance on the spodumene conversion rate. The well publicized high auction prices for uncontracted spodumene feedstock, the stated price expectations for future contracted pricing from spodumene producers and the reduced shipments of spodumene concentrate from Australia into China, which actually decline in Q3 compared to Q2, all impact hydroxide production, more keenly than carbonate. For users of hydroxide, the challenge in obtaining supply is being compounded by the demonstrated struggles of many producers to get qualified in battery grade applications. In fact, the qualification standards are actually becoming tighter with most battery makers, paying even more attention to the quality and consistency of their hydroxide supplies. We are watching carefully to see how lithium producers respond to these challenges, since in a period of high carbonate prices, complex manufacturing and qualification standards for hydroxide compared to carbonate and the risks associated with not being able to sell low grade hydroxide due to a lack of customers willing to use it, some converters may choose to switch to carbonate production. As I’ve noted before, once a converter makes this switch and therefore withdraws from the hydroxide market, it is going to be more difficult for them to reenter in the future. Pressure remains on all global supply chains, including lithium. There have also been a number of issues specific to China, which remains a critical region for battery materials and broader EV production. These include seasonal production slowdowns, the lack of locally sourced lithium feedstocks, whether brine or hard rock based creating a reliance on imported lithium feedstocks that are not growing at the same rate as conversion capacity. And energy consumption restrictions that have resulted in periodic production shutdowns and higher operating costs. While it is hard to determine how long some of these operating and logistical pressures will remain, higher cost of lithium production are likely to remain for most in our industry, particularly for those producers that are not fully integrated back into a cost competitive resource. More fundamentally though, we’re seeing the challenges of operating production assets in China today. Although, Livent has been impacted in this regard, like many of its peers, we are uniquely positioned with our operational flexibility of producing different lithium products and having an operational footprint both inside and outside of China. We also benefit from a more predictable cost structure, given our fully integrated operations. Automotive OEMs and battery producers want greater security of supply and the input cost predictability that comes from not relying on volatile spot market prices. In order to do this, they’re realizing the need for fully integrated suppliers with a global footprint, to be a core part of their volume needs. And they’re seeing firsthand the challenges of relying on new entrants or unproven greenfield development projects. It will be impossible to exclude China from battery supply chains, given how much battery cathode and lithium conversion capacities located there. But over time, we expect more complete battery infrastructure to develop in other parts of the world, in part, as a result of the disruptions we have seen today. Additionally, there’s a greater understanding that the low market prices seen over the last few years are insufficient to incentivize reliable long-term lithium capacity growth. And the firm multi-year commitments, which provide guaranteed minimum financial returns are required, at least for a part of the OEM procurement portfolio. Livent is one of the few lithium producers with these global integrated multi-product capabilities and the ability to offer and deliver multi-year fixed price supply arrangements. I want to conclude by providing a few specific business updates for Livent on Slide 7. Although, we are not yet providing 2022 financial guidance, there are a few key points we can provide about the upcoming year. We expect average realized prices to be notably higher year-over-year and we have already agreed to new or expanded lithium hydroxide commitments with several leading OEMs and battery producers. That prices that are more reflective of current market conditions. Livent’s expected future hydroxide revenues will likely be derived from two separate approaches to the market. First, Livent plans to maintain a large portion of volumes under multiyear fixed price take or pay commitments with a small number of customers. These should provide a base of stability and predictability around returns on its capital investments. Second, Livent plans to make firm annual volume only commitments on the remaining smaller portion of its hydroxide volumes with periodic pricing reviews that allow for exposure to directional movement in market prices. We expect most of our hydroxide customers to transact with us on this basis. With respect to lithium carbonate, we have not made any meaningful volume or pricing commitments and do not expect to do so for 2022. But we will continue to be opportunistic with regard to our participation in the lithium carbonate market. This includes cell and lithium carbonate to a small number of existing hydroxide customers as we have done in the past. For our remaining key lithium products, including butyllithium, we plan to continue committing volumes to our existing base of customers, but we’ll likely see more entry year price discussions taking place than we have seen historically. As we continue to sign more longer data contracts with strategic customers, it reiterates why it is so important for us to continue to focus on expanding our low cost sustainable global production footprint. Livent continues to progress on its near term capacity expansions, tracking to the previously stated schedule. As a reminder, Livent’s 5,000 metric ton hydroxide addition in Bessemer City and its initial lithium carbonate expansion of 10,000 metric tons in Argentina are expected to reach commercial production by the third quarter of 2022 and the first quarter of 2023 respectively. Additionally, our Phase 2 carbonate expansion for an additional 10,000 metric tons is expected to be in production by the end of 2023. We expect the ramp up period to run rate capacity on each of these units to be short and you should expect 2023 volumes to reflect a large portion of the new carbonate and hydroxide capacity and 2024 volumes to also include the second additional carbonate phase. We believe the funds raised from Livent’s equity issuance in June, along with improving cash flow generation and access to our existing credit facilities will provide sufficient funding for these projects. And while we are not providing further capital guidance at this time, you should expect 2022 capital spending to be higher than 2021. And understand that we will look to accelerate the timing of our expansions wherever we can. As announced in a separate press release earlier this week, Livent announced the live experiment for its proprietary lithium metal product. Livent is a unique printable formulation of lithium metal and other specialty materials that improves the performance of lithium-ion batteries, reduces manufacturing costs enables the next generation of battery technology, all while enhancing safety and sustainability. Our valued long-term customers continue to look to us to create sustainable solutions that improve battery performance, safety and manufacturing efficiency. Initial auto and battery producer interest in this innovative product has been promising. And we look forward to sharing further details in our progress in the coming quarters. Finally, Livent continues to make progress on important sustainability initiatives that will help us to achieve a 2030, and 2040 sustainability goals. This includes work on process efficiency and renewable energy projects, further analysis of the company’s climate change risks and opportunities in alignment with the widely recognized TCFD framework, preparing for third-party auditing against the standards of IRMA, The Initiative for Responsible Mining Assurance and ongoing collaboration in studies on lithium brine and freshwater aquifers in South America, working closely with our supply partner BMW Group and their co-sponsors. In addition, prior the United Nations Conference on Climate Change, which began this week in Glasgow, we committed to the UN’s Race to Zero initiative and the business ambition for a 1.5 degree Celsius campaign, both of which require external science based validation of net zero carbon reduction targets, as well as the plans to achieve them. We plan to provide further details on the pathway to achieving our long-term sustainability targets over the coming quarters, which will likely include some innovative process changes as well as capital investment. Our ongoing efforts in this regard are underpinned by the belief that the responsibility to operate in a safe, ethical, socially conscious and sustainable manner is a fundamental obligation of our right to operate and essential for the viability of our business. I will now turn the call back to Dan for questions.

Daniel Rosen: Thank you, Paul. Celine, you may now begin the Q&A session.

Operator: Thank you. We have our first question coming from the line of Chris Kapsch with Loop Capital Markets. Your line is open.

Chris Kapsch: Yes, good afternoon. So I’m interested in getting a little bit more color around your comments about what sounds like structurally tighter aspects of the hydroxide portion of the market. Juxtapose, you gets your at least near term pivot to supply more carbonate. So I guess, we could conclude then the lean towards greater carbonate volumes is temporary. Can you just comment on how long you see that tactical shift?

Paul Graves: Yeah. The carbonate shift was in the fourth quarter is really been imposed on us by the fact that we – were forced to reduce production of lithium hydroxide from that carbonate in China. And so we frankly have extra carbonate and I think conversations with customers has always been quite fluid and that they know that we do have carbonate sometimes. And so many customers have asked us, well, if you can’t supply me with the hydroxide, which I understand, if you plant shut down, can you supply me with carbonate? So that’s what we will be doing. It is truly opportunistic. I mean, we just – we are not yet long carbonate. We still need all the carbonate for commitments that we’ve made in hydroxide. That doesn’t mean we don’t have sometimes the ability to move some – take advantage of some carbonate situations. And we will do that. But I certainly don’t expect in 2022 that we will suddenly become a large lithium carbonate seller. I think when Argentina Phase 1 comes online, so really in 2023, I think we’ll have more opportunity to do that. But even now, in the context of the size of the global lithium carbonate market, we will always be a small player in lithium carbonate.

Chris Kapsch: Okay. The follow-up would be that based on what you described. It sounds like with a structurally tighter hydroxide market, you’d expect maybe a premium for hydroxide pricing. That’s not reflected in spot prices, but understand the contract market and spot market are different. So – but just wondering that if there is this structural shift on the ability of converters to access spodumene to supply hydroxide such that they would exit the hydroxide market, I would think customers would be aware of that. And that would be reflected in the conversations around long-term security supply in your contract. Is that what’s happening? Would you – would one expect that there would be a more pronounced premium for hydroxide vis-à-vis carbonate and long-term supply agreement? Thank you.

Paul Graves: It’s really interesting question to think about, because you can go in lots of different directions. But the one thing that I’ve always said is there’s not really any fundamental reason why hydroxide or carbonate should have necessarily a premium or a discount over the other. What we tended to find though over time is much more stability in hydroxide pricing, because of these commitment. So people use a lot of lithium hydroxide, historically, recognized that there is not the same diversity of supply. And therefore, achieving security of supply is pretty important. I don’t think that’s really changed. I don’t think that there was going to be anywhere near the breadth of qualified hydroxide producers out there. That’s the heat that you will see in lithium carbonate, lithium carbonate is frankly just much easier to produce and it’s much easier to produce at a battery grade. And you do get moments like today, where carbonate pricing, which is much more volatile. Does that perform lithium hydroxide production for periods of time? And there’s no reason why that couldn’t continue for awhile, especially as you know, many OEMs are shifting over to carbonate based practice for at least part of that fleet. The LFP has been talked about a lot, but again, it’s an interesting dilemma for anybody, which is how far do you go? And one technology over another, one interesting feature of everybody suddenly decided that LFP as an important part of that portfolio was this time to see that the actual total cost of an LFP battery now is approaching a high nickel NCM battery. So while people ran away from nickel and the high cost of nickel in NCM batteries, they’ve not been hit by the big price increase in carbonates at that scene. And it’s all China carbonate pricing, right, all the LFP is made by Chinese factory makers. So it’s not an easy question to answer, because I think in the long run, there will be fewer lithium hydroxide producers. I think they will be slightly more concentrated in their customer relationships. And I think overall the economics will be more favorable than carbonate because of price predictability over time.

Operator: Thank you. We have our next question coming from the line of Stephen Richardson with Evercore ISI. Your line open.

Stephen Richardson: Thank you. Paul, I really appreciate some of the color around 2022 you provided. So we could go back on a pretty basic question about the underlying earnings power cash flow generation potential of Livent. If we know – if we just take 2018 as a baseline and we know what you all generated back then close to $200 million of EBITDA. And we know that the market today and I don’t think you’re saying that you think the market’s going to give back on pricing and you’re telling us that you’re going to have more – less exposed to contract and more spot. Can you just help us bridge, like, what is the cost structure and the product mix and how it’s changed at Livent relative to just four years ago. And why maybe that baseline is not the right starting point as we think about 2022.

Paul Graves: Look, it’s an interesting reference point, I’d say, more than a baseline. And the reason I’d say that is the business has changed, right. Costs are certainly higher – certainly a direct cost to carbonate and hydroxide production really hasn’t changed much, but lots of the other customers around the business, customer in a public company at higher cost of shipping and logistics, a higher – energy and other related costs metals businesses are now higher today. And probably remain higher for awhile. I think the other difference back to 2018 was mix. We have less hydroxide or more carbonate and if you’d go back and look at that point in time, carbonate pricing was much higher than hydroxide at that point in time. So we have the ability to sell more carbonate at that higher price. And I’m probably the single biggest difference between 2022 and 2018 will be the fact, we don’t have that much carbonate. Then when you looked at 2023 though, and add an extra 10,000 LCEs that we will have and we belong carbonate. And the business mix look like a larger version of 2018. And so I put all those pieces together and say, I think to achieve 2018 financial performance with the current top trade is by no means on achievable. I think where the pricing is going today and what the pricing looks like for next year suggests that that’s eminently achievable. I think it will really boil down to is where does the price actually go to in 2022? And how much of that given the way we’re structuring our business around more frequent pricing conversations with customers. How much we can capture during the year.

Stephen Richardson: Appreciate that. Maybe as a quick follow-up, I mean, you did mention in terms of CapEx and the expectation that 2022 CapEx will be a little bit higher acknowledging that you’re progressing in the expansion Argentina. As you mentioned, opportunities to accelerate, I think was the word that you used. Would could those look like on the margin, in terms of what are the opportunities to kind of accelerate a little bit? Is it a Bessemer, it in Argentina, is it both, maybe you could just help us size out a little bit?

Paul Graves: Yes, I think the opportunity to accelerate. It’s small. I mean, it’s weeks, maybe a month or two quick if we to the projects and all of them in theory could come in a little bit quicker. But it’s not going to make a massive difference in 2022, to be honest, I’d be really surprised if we meaningfully moved our total LCEs by accelerating any of the projects right now.

Operator: Thank you. We have our next question coming from the line of P.J. Juvekar with Citi. Your line is open.

P.J. Juvekar: Hey, Paul, good afternoon.

Paul Graves: Hey, P.J.

P.J. Juvekar: Are the battery companies or more importantly, the auto companies, are they willing to pay more for lithium as you know, prices spike or the chip shortages for auto companies and lower profitability as a result making any of these conversations difficult?

Paul Graves: It’s an interesting analysis. I mean, because if you stand back and look at the earnings performance of the battery companies, the vast majority of them are doing unbelievably well and not going down. And then perhaps the biggest reason for that structurally they pass the cost of raw materials on. So they’re taking advantage of the scaling of their operations, getting scale benefits to drive higher profitability. So all the battery material costs are going on to the OEMs. The OEMs though are probably have the most pricing power, they’ve had phases. I’m sure you’ve seen many of them increasing that their margin forecast for their businesses, because one advantage of shortness of vehicles is that you have more pricing power. You don’t have to have as many discounts. And so it’s not easy for me to sit here and say, wow, there’s a massive profitability hit to the sort of global automotive or battery industries as a result of higher battery material prices that they always want lower prices, of course, it’s in their DNA. But actually I think the conversations today are much more about securing supply. They have, I think, really now started to shift, I know you probably heard me say this most quarters that they need to – and they’re not doing it well. I think they’re starting to now, then now starting to look at security of supply. And I do believe a number of them have been educated if you will about the challenges of securing supply. They’ve had contracts broken by some suppliers. They’ve had some suppliers remove price commitments that they’ve made and they’ve had some supplies fail to get qualified by the OEM in the end doesn’t control the qualification, the battery companies typically do. And so you can’t just impose lithium carbonate or hydroxide onto a battery producer, no matter how you try. And so I think what they’re doing is they’re stepping back now and saying, okay, I get it. I need to find the most reliable suppliers and I need to give them the incentive to supply me and to grow the production and such a way that they can grow that supply to me in the future. That requires, as I mentioned, multi-year contracts, it requires takeoff pay commitments and it requires economics that are sufficient to both incentivize and support expansions.

P.J. Juvekar: That makes sense. Thank you. And then I know, Paul, you have aspirations of having some production out of Argentina, outside of Argentina with an upcycle ahead of us in lithium, that seems like the case. And many junior companies still out there. If you worry at all banker at, is this the right time to make a move to acquire any of the junior companies.

Paul Graves: And burn that banker at 10 years ago, P.J. I learned – it’s an interesting question. Because one of the famous, I guess, putting my banker at back on, again, one of the famous stories around most mining companies, particularly as they only go buying things when no expensive, when the price of them goes up outcomes to the M&A activity. And for the mining industry as a whole, that that lousy has never ended well. Having said that, I do think there are certainly opportunities, where clearly as a junior developer, your confidence in delivering a project. It’s probably not as great as mine is, when we line up what a risk adjusted view of some of these resources is, the risk to me might seem a little lower than it does to an inexperienced mining team. You only have to look around the world and see how many of these – how many chemical conversion plants are struggling to get up and running either because they can’t get them built or they build them and they don’t operate properly. So I think it will create opportunities for those of us that actually have confidence in our ability to complete and bring into operation lithium projects.

Operator: Thank you. We have our next question coming from the line of Bob Koort with Goldman Sachs. Your line is open.

Emily Kech: Hi, this is Emily Kech on for Bob. So my first question, as you guys are completing the 2022 contracting process, are most of the contracts going to start close to the beginning of the calendar year? Or do you think there’ll be a delay in seeing some of the higher pricing?

Paul Graves: Not at the last far, January 1, most of that we do have some of the spin to of the Chinese New Year and a couple of very small ones that went on a little bit, start a little bit later than that, but the bulk of it is as a calendar year basis.

Emily Kech: Okay. Thank you. And as a follow-up, do you guys have any more details around the projects you’re working on in South America around responsible lithium extraction?

Paul Graves: We will. Maybe a couple of months too soon in that, but we’ve certainly got a lot going on in terms of how we can ensure that everything we do down that is done responsibly and is in line with our sustainability target. So I’ll ask for a bit of patience from you on that one. I’m going to give you more details in the coming quarters.

Operator: Thank you. We have our next question coming from the line of Joel Jackson with BMO Capital Markets. Your line is open.

Joel Jackson: Hi, good morning everyone. Oh, sorry. Sorry. It’s a long day. I want to talk a little bit about the last three quarters, so – and any of your guide for the fourth quarter. So Q2, Q3 and Q4, interesting, because you’re recently guiding at the midpoint. So just over $100 million of revenue every quarter, Q2, Q3, and Q4, but you’re guiding to extremely higher EBITDA in the fourth quarter versus Q2 and Q3. I think you talked about some higher costs around lithium chloride in the third quarter, but at least if ignore that you’re pointing to a much higher level of burning in the fourth quarter on the same revenue level as the second quarter. And so can you explain a bit about what’s going on in the fourth question, they have a lot lower costs, which is Q2 and Q3 and helped me figure that out.

Paul Graves: Yes, but I think some of it, we mentioned higher cost in Q3 that we don’t expect to repeat in Q4. I think we’ve also mentioned the shift towards carbonate, which is just frankly, much higher margin. Every dollar of revenue generates a lot more profitability than what we saw earlier in the year. Early in the year, the vast majority has been satisfying contracts that were commitments made typically in late 2020, and so they were priced in late 2020. And if you go back and look, the way pricing was in October, November, December, last year, just a different price environment. And most of those contracts, not all of them, but most of them didn’t have annual ability to check back in and revisit those prices. And in Q3, we recognized we needed to have the ability if we were going to really show what we can do to take advantage of the current market conditions. And so in the first part of the year, we have been satisfying a bunch of customers given what was going on. Our contract with price was much lower than they could get it out there in the market. So they wanted to take more volume from us, but it means that in the fourth quarter, we just have more volume available to sell under – not under those commitments. So there’s a bunch of factors at work, I think the two biggest though, are the mix change – product mix change to a higher margin product and the cost that we don’t expect to repeat in Q4, so in Q3.

Joel Jackson: So just a follow-up on that, does that mean that you’re selling some carbonate that you had built up inventory earlier in the year. You’re not upgrading to hydroxide. So it just looks, it’s really good margin the fourth quarter. And then also – I also want to ask, you talk about lithium pricing is expected to be higher in 2022 versus 2021 as you get into discussions with customers. Look, how your contacts will work out. Do you think you’re more likely to have single digit or double digit average price increases in 2022?

Paul Graves: Okay. So to your first piece, fundamentally, if you think about it, if we will running our business, we move in carbonate and it’s sitting in China, not a lot of it, but waiting to be processed into lithium hydroxide. And if the government comes and shuts down the industrial park and we’re not running the plant, that carbonate has just out there. So in the right place, it’s already incurred the shipping transportation cost. It’s pretty straightforward to see why that would be given what you’ve seen pricing out there, quite a high margin opportunity for us to sell that company. Doesn’t have to be a lot. Clearly, the revenue in total is as you quite rightly point out pretty consistent, but we don’t have to sell as much culminate in this situation as we would have had to sell hydroxide to generate some amount of revenue or profitability. In terms of looking into 2022 for pricing, I mean, again, it’s a wide, wide range of expectations. I think, as I mentioned, most of the transacting that we do, which is not most of our volume, we will not set prices before the year starts. We will much more market price in much of that volume, where we do set prices and where we have set prices, it will certainly be double-digit price increases. I mean, just at a very high level. I think the lowest price increase that we’ve agreed to so far is over 20%. And I think there will be a bunch that have much, much higher than that.

Operator: Thank you. We have our next question coming from the line of Greg Tuttle with Piper Sandler. Your line is open.

Greg Tuttle: Hey, Paul, Gilberto. Good afternoon. And thanks for taking the questions. So first question on the hydroxide plant in China, do you think that’s running at maybe, I don’t know, three days a week or for just a few hours a day. Or I’m just trying to understand, like, the utilization going on there. And then on top of that, have you had any conversations with the government on when those power issues or electricity issues could get alleviated to continue operating the plant higher utilization rates?

Paul Graves: Yeah. The second one is a hard one, because nobody really knows. In many cases, that driven by factors that aren’t easy to predict. And while over the policy remains in place, I think is likely that there will be disruptions. It’s just hard to know how long and where and whether you’ll be susceptible to them. In terms of – it’s impacted us in a couple of different ways, I’m just bearing in mind the way we operate, we have three lines. And in some cases, the whole park has been shut down. So all three lines have been down. In other cases, they’ve asked us to take a line or two down and only run one line to save energy. And so it’s a little bit of a mix of different situations sometimes where the line down for two days and then it’s allowed to come back up again. We don’t know until it happens exactly what’s going to happen, how it’s going to work. So it’s hard to generalize or plan for or predict

Greg Tuttle: That’s super helpful. Thank you. And I guess, from a big picture perspective, with this LIOVIX lithium metal announcement the other day, and I appreciate you giving some commentary this afternoon. I’m curious, I just think about the chloride facility in Argentina, that typically runs at approximately 50% to 60% utilization. Can we think maybe mid decade that becomes a larger part of the business or any commentary that you could give there would be super helpful?

Paul Graves: Yes. Look, I think it will become a larger part of the business. And interestingly, we – as I’m sure you know the reason the plant down there in Argentina runs at that rate is because we tip it to people that chloride or have often have that internal use, and they only need so much. A second reason, frankly is that we are typically having to choose because we’re constrained on brine capability between making carbonate or making chloride. And so we have the ability to ramp up that plant to much higher levels of chloride production without any more capital investment. It just means that we’ll be taken away from carbonate at that point in time. And so having said that, I do expect that a printable lithium is going to grow really, really quickly. It’s a small product today and is likely to be small for the next few years. But I certainly think it’s going to become whether it’s our technology or somebody else’s technology increasingly common to pre-lithiate. And when you do pre-lithiate, you do need a safe process that you can plug and play directly into what you’re doing today. And that’s what we have, we create today a way of pre-lithiating that generally speaking from most battery producers is actually quite easy for them to do. So I do have pretty high hopes for that product.

Operator: Thank you. We have a next question coming from the line of Christopher Parkinson with Mizuho. Your line is open.

Harris Fein: Hi, this is Harris Fein on for Chris. Thanks for taking my question. You mentioned this a bit in your prepared remarks. Even though lithium prices are high right now, you’re also seeing input costs inflation. You’re seeing high spodumene costs will controls in China logistics. I’m curious whether or not you are seeing any potential for non-integrated producers in China to potentially exit the market or for capacity to come out of the market over maybe a longer period of time.

Paul Graves: I don’t know. Here’s what I see though. I did most of these and I – and generally speaking, a large international company with Chinese operations is going to be in a different place than a small single location producer who has only one relatively small conversion plant. I think it will be a function of – essentially, your ability to source spodumene concentrate in the future. Because if you look away, obviously this all coming from Australia today. And while there may be some getting shipped in from a few other places like Brazil in the future, it’s not really enough to feed all of the conversion plants there. And I think while you have a shift of Australian spodumene miners wanting to be integrated themselves, wanting to build hydroxide plants either in Australia or in Korea, or in other places, it’s just going to reduce the ability to dive a merchant spodumene concentrate into China. I think it’s going to naturally derate that non-integrated conversion complex in China. Will they exit? That’s a hard one to answer. I don’t know. I don’t know the answer to that. Will they find other sources as spodumene concentrate? Possibly. But it’s certainly an interesting challenge for them.

Harris Fein: And in the past, we’ve talked about how the supply chain was taking for granted the idea that enough lithium will be out there for them to execute on their goals. Just anecdotally, are you sensing that there’s a better appreciation for the need for security of supply and any – without naming any customers, but any conversations you’ve had where you’ve met resistance in the past that now you’re seeing better reception to potentially longer-term contracts with built-in price protection on your end?

Paul Graves: Yes. I would say anecdotally, I can confirm, we see that. I would say that contractually, I can confirm that we’ve benefited from that. And I would say that with regard to future business and conversations that we’re having, absolutely the conversation is a more constructive one now about what it means to commit to each other when it comes to supply of particularly lithium hydroxide. I actually am not convinced that lithium carbonate will be quite so easy for people to perform that view on just a bigger, deeper market, but in lithium hydroxide, given the challenges of qualification that we’ve seen out there, I think we absolutely will see that happen.

Operator: Thank you. We have our next question coming from the line of Kevin McCarthy with Vertical Research. Your line is open.

Kevin McCarthy: Good evening. Paul, in your prepared remarks, you talked about two different contract paradigms. And I guess my question would be what percentage of your production for 2022 would you intend to sell into the multi-year fixed price contract category? It sounded like that would be a majority, but can you provide a little bit more color as to what that split might be?

Paul Graves: Yes. In hydroxide, it’s going to be way not the 50%, the less than 80% is going to be in that kind of range for hydroxide. I think though as I said, if you add it in a total LCE basis, it’s probably between 50% and 60% or so, because when you factor in carbonate, when you factor in butyllithium and other molecules that we sell it’s in that kind of range for that hydroxide business. It’s a meaningful proportion about business that will be sold that way.

Kevin McCarthy: Okay. That’s very helpful. And then secondly is there any update on your investment in Nemaska as I recall, they were working towards an optimization study that was expected I guess around now or by yearend 2021. Any incremental thoughts on the path forward there?

Paul Graves: Yes. I think as we mentioned before, you’re correct. We have some important final decisions and reports coming our way in the next few weeks, which certainly expect by the next time we sit down on an earnings call with you guys. I hope we can talk a little bit more about what it is, but it is so far so good. We were happy with what we see at the – it has challenges, developing any resource in a new part of the world in a different physical time at them where people typically mind spodumene. It’s not to be sniffed that. And I think thinking about the infrastructure issues that people start to realize that building some of these chemical plants and also creates some interesting issues, but they’re all surmountable that none of them are challenges that can be overcome. And so we feel pretty good about what track is on.

Operator: Thank you. We have our next question coming from the line of Mike Harrison with Seaport. Your line is open.

Mike Harrison: Hi, good evening. Was wondering if you could talk a little bit more detail about these changes in customer mix? It sounds like you have some legacy contracts that you were trying to get out of the way during the first part of this year. So that you have better exposure to higher prices late in the year. My question is, do we still have some overhang from these legacy contracts as we get into 2022, 2023 and beyond, or are a lot of them rolling off at this point?

Paul Graves: Yes, 100% of our 2022 volumes regardless of product will be the price. And we’ll be set either now in this market or next year in terms of what the market is. We have no legacy carrying forward into the future at all.

Mike Harrison: All right. And then a question for Gilberto, I’m curious, when do you stop capitalizing the interest that’s coming off these bonds right now? And what does the interest expense look like once you have to start accounting for that in the P&L?

Gilberto Antoniazzi: Well, the capitalized interest is really associated with our capital spending. And as long as we’re going to continue to invest in the expansions, we will continue to capitalize those interests, because they’re essentially supporting the cutbacks that we’re doing.

Operator: Thank you. We have our next question coming from the line of Aleksey Yefremov with KeyBanc. Your line is open.

Aleksey Yefremov: Thank you. Good evening, everyone. Paul, you mentioned challenges that new entrance are seeing and getting their hydroxide specifications. Could you elaborate on that and maybe tell us how competitive landscape and this higher end hydroxide market where you play? Has that changed at all? Do you see new entrants that were successful?

Paul Graves: I think the new entrants that have been successful a lovely existingly – existing successful producers who have more capacity. I mean that generally has been successful. I think but that is it. I don’t think that’s been a true new entrance get into the hydroxide market in any kind of scale who’s been able to get qualified that I’m aware of. I don’t have perfect visibility in that, but there’s some hydroxide floating around that is lowest standards required for it in certain markets, but that’s not where we typically played. And it’s not typically a growth market in the same way. The challenges that they’ve had really come from one of two areas. The first challenge they’ve had is maybe they have legacy plants with pack to make hydroxide, but they weren’t built to make battery-grade. So they can’t actually structurally and physically cannot do it. So they’re waiting to bring new capacity on in order to the – to produce today is quality of hydroxide. And to be clear, the quality of hydroxide required today is on a different level than it was even a year ago, maybe would call about this time last year, we took some downtime in North America to have to upgrade our facility there to build, to meet current levels of specifications. And even that, when we talked to many of our customers today, likely will requires more than that small capital for us to continue to improve our product. And we think we make the best hydroxide in the business. I certainly have not found anybody we haven’t been able to get qualified with, but it’s more and more difficult to do so. The second issue that you run into has been frankly, not being able to build a new plant in a timely way or in a successful way. There’s a couple of very well known examples of that in our industry that I won’t quote right now, but these are meaningful – meaningfully sized plants, but just on April to actually produce battery-grade lithium hydroxide.

Aleksey Yefremov: Thank you, Paul.

Operator: Thank you. We have our next question coming from the line of David Deckelbaum with Cowen. Your line is open.

David Deckelbaum: Good evening, Paul, and everyone. Thanks for taking my questions tonight.

Paul Graves: Pleasure.

David Deckelbaum: I’m curious just to follow-up a bit on LIOVIX and the printed lithium metal, you talked about obviously the opportunity for carbon and hydroxide and contracts this year. Are you receiving contracts already specifically for LIOVIX? Or are you going to be withholding some of your own upstream supply in order to sort of create this market and lead some of your customers?

Paul Graves: So let’s just step back a little and maybe help you think about that in the context of what pre-lithiation actually generally is. Pre-lithiation does not use a huge amount of lithium, actually relatively very small amounts of lithium. And all it’s designed really to do is to make more of the lithium ions that are in the battery available after that first charge, because you don’t lose those – the lithium ions the first time the battery is charged. And so it actually makes a huge difference to available lithium in the battery without actually adding a lot. The value in it is less about the amount of lithium the dosing, but actually the delivery method. I think you probably see many, many years now, people trying to solve the lithium foil challenge, which is how to make lithium foil small enough. Then I had to make it stable enough and then had to actually integrate into manufacturing process. Nobody’s cracked that code, and frankly, we never believe anybody ever would. And so ours is a process and a system that allows you to get lithium metal directly into the anode. It means that we don’t just charge for the lithium being – having the lithium available is important. And it’s interesting we do get some customers asking us for quotes on lithium metal out in the future. They clearly have plans to pre-lithiate themselves, but it’s likely that our product the economic argument behind it is less about the lithium content and more about the performance benefits it brings and the ease of implementation into existing battery processes.

David Deckelbaum: I appreciate that color, Paul. It’s very helpful. Now just the last one for me, certainly you’ve talked about the past, the importance of scale, Nemaska obviously represents some resource upside. There’s resource upside at as well. As you think about the rest of the market, we’ve seen a number of non-producing projects, particularly in Argentina. Some other brine projects in South America being acquired for all equity. Is that something that we should expect that you’re actively involved in canvassing? Is there an impetus to especially just given your vertical an integration to try to go out there and find some more perhaps advanced development resource that’s out there right now?

Paul Graves: It’s a – it’s very high on our objectives is, how do we grow more quickly? How do we get bigger? What is the best way to do that? Which one creates the most value for our shareholders? Which creates the most value for our customers? I think the one thing we do know is that sitting still is not an option, sitting still and just being the size we are, it doesn’t – that doesn’t work. So we certainly have to solve that problem for sure.

Operator: Thank you. We have our next question coming from the line of Matthew DeYoe with Bank of America. Your line is open.

Matthew DeYoe: Thanks. Paul, I was wondering if you could talk a little bit more about the battery storage capacity phenomenon that you touched on the call a little bit. I know you gave some nice stats around that. But how does that change the arc of lithium demand and buying patterns. I guess think about it in a normalize world where you have a demand function on a vehicle level, but obviously that might be different when a battery plant starts up and when that does, is this large? Yeah, I guess we’ll start there. And I guess isn’t on the back end, is there a cool off period here, or do we just see more battery plants coming? We’re just not going to catch up from there I guess.

Paul Graves: The way the data factors have been built, there’s clearly an expectation that there’s going to be exponential growth clearly continuing and required back is, whether it’s for EVs or whatever it’s for. I mean and in fact, I think if you look at some of the consultants out there, they produce some interesting, but ultimately theoretical exercise, if all of these battery plants today were up and running at a 100% capacity, how much battery materials would they demand? And we know what that building, and when they out five years, how much would they demand? And in every case, it’s 2 to 3 times what actual demand is today, and that sort of reflects this startup arc. What you tend to find is a couple of things during the stock. Yes, they run up lower capacity. They are typically still proving themselves. They typically have a very high wastage. So they use more lithium in each battery than they will do when they’re up and running and running stable. So you have this kind of odd arc where they start to use more lithium up first. And then slowly but surely become more efficient until they get to closer to sort of the theoretical lithium consumption per gigawatt hour. So pretty building battery capabilities is one thing, but in the end, you’ve got to run them and you’ve got to find so much for the batteries when they build, otherwise that will stop. And that’s why we talk about battery installations being so important. Having the battery made is one thing, but having it then put into use is what really creates the demand for the next battery to be built the next Gigafactory to be built and therefore starts to pull all the battery materials too.

Matthew DeYoe: Okay. And then if we think about just the cost inflation year-over-year, it’s obvious, I would assume some of the reagents stuff like that are moving up. But what do we think on a percent inflation for 2022? And then kind of longer-term, I guess my general assumptions for inflation are low-single digits, but clearly the demand pull on some of these products is growing just as fast, or perhaps maybe it’s growing just as fast as the lithium demand itself. And so should we think about cost inflation as a higher number than that? Just given everything that’s going on.

Paul Graves: I think for us, it’s a little difficult to answer that because if you think about what are really true direct costs are, it’s energy costs. It is – in some cases, it’s solvent and reagents, but in many cases, we pass those costs on and some we don’t. So we certainly carry some of that cost in our organization. Shipping and logistics costs. And it’s hard to know how long these costs remain elevated. I mean clearly we can manage that by simply taking longer to deliver product or carrying more inventory so that we don’t have to air freight material that we are fine with longer supply chains, because of the way we built the business, but that will have a capital cost clearly if we carry more inventory. It’s hard for me to answer that question for else, because everybody else has a different cost structure. So as an industry, there’s no doubt that if you bind spodumene concentrate, the cost of production is about 5 times what it was. Cost is spodumene concentrate and we may be as much as 5 times what it was a year ago. Again, I’m not close enough to that market to know whether that’s where it’s going to stay forever.

Operator: Thank you. There are no further questions at this time. I will now turn the call back over to Daniel Rosen for any closing remarks.

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

Operator: This concludes the Livent Corporation third quarter 2021 earnings release conference call. Thank you.