Livent Corporation

Good day and welcome to the first quarter 2020 earnings release conference call for the Liveint Corporation. Phone lines will be placed on a listen-only mode throughout the conference. After the speaker's presentation, there will be a question and answer period. I will now turn your conference over to Mr. Daniel Rosen, Manager, Investor Relations for Liveint Corporation. Mr. Rosen, you may begin.

Thank you, Tina. Good evening, everyone, and welcome to Liveint's first quarter 2020 earnings call. Joining me today are Paul Graves, President and Chief Executive Officer, and Gilberto Antoniazzi, Chief Financial Officer. The slide presentation that accompanies our results, along with our earnings release, can be found in the investor relations section of our website. The prepared remarks from today's discussion will be made available after the call. Following our prepared remarks, Paul and Gilberto will be available to address your questions. We would ask that any questions be limited to two per caller. we would be happy to address any additional questions after the call. Before we begin, let me remind you that today's discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including but not limited to those factors identified in our release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today's information. Actual results may vary based upon these risks and uncertainties. Today's discussion will include references to various non-GAAP financial metrics, definitions of these terms, as well as a reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided on our investor relations website. And with that, I'll turn the call over to Paul.

Thank you, Dan, and good evening, everyone. There are a few key topics we want to address today, all of which will be discussed in the context of the novel coronavirus pandemic and its current and potential future impact on Livent. Before doing so, I would like to give a special thanks to all of our Livent employees around the world. Their hard work and resilience have allowed us to maintain a safe and healthy working environment while continuing to operate and serve our customers. We have asked a lot of them and truly appreciate their focus and commitment during these challenging times for us all. To begin, we're pleased to state that all of our production facilities around the world are fully operational. Apart from a two-week stoppage in Argentina due to a mandatory national quarantine and an extended lunar year break in China at the beginning of the COVID-19 outbreak, all of our sites have continued to operate, albeit with additional health and safety protocols. Our ability to operate through the pandemic has been a testament to the strong and dedicated teams we have in place around the world. Second, as the coronavirus began to spread outside of China, it became clear to us that the potential impact on our business, as well as the broader market, would require us to take a more disciplined approach to cash flow management and liquidity. In March, we made the decision to suspend all capital expansion work globally. This action allows us to cut our forecasted capital spending in 2020 by half to approximately $115 million. While we remain fully committed to our long-term capacity expansion plans, temporarily suspending all capital projects was the prudent decision to take in the current environment. We worked closely with our relationship lenders to amend our credit facility and increase our maximum allowed net leverage to six times EBITDA through 2020 versus three and a half times previously. We believe this amendment to our revolver will provide ample liquidity through the challenging near-term environment. Gilberto will provide more details in his comments. And third, we will share our latest views on the lithium market, specifically what the coronavirus pandemic has done so far, what we expect the impact to be in 2020, and potential longer-term implications. Starting on slide three of our prepared slides, given Liban's presence in China and Asia more broadly, we've been addressing the coronavirus outbreak since early February when we formed a regional pandemic response team and implemented various actions to keep our employees safe. By taking decisive early steps and diligently monitoring the situation, we were able to safely resume operations in China following the extended Lunar New Year holiday. This early start also meant we could react quickly and confidently at our sites outside of China once it became clear that we needed to do so. We maintain the same safety protocols today and have been able to run without any major issues in China since then. Even during the period when there were significant logistical challenges in moving people and products across provincial borders in China, we were able to leverage our global supply chain to minimize disruption in delivering products to customers. Informed by our experience in Asia, Libent was able to quickly form a global pandemic response team in early March when the worldwide spread and severity of the virus became clear. Since then, we continue to prioritize the safety and well-being of our employees, customers, and communities around the world. We also took actions to safely keep all of our manufacturing sites running. Many of the lithium products we make are essential, not only in energy storage, but in critical applications that the world needs now more than ever, from pharmaceutical ingredients and industrial disinfectants to components used in vital medical equipment. To ensure that we could continue operations without compromising on health and safety, We worked closely with local and national authorities and our employees to develop and institute strict procedures on a site-by-site basis. These include visitor and medical screenings, essential person designations, split shifts, and social distancing measures. Our collaboration with the provincial and federal officials in Argentina during the mandatory countrywide quarantine reflects Liven's level of preparedness and commitment to responsible operations. We work closely with the Argentine government to develop and administer a safe and practical set of protocols to resume local operations after only two weeks of downtime. Since then, we've been operating at the Salar and our processing facilities without incident. We've also used this pandemic as an opportunity to further engage with and support our local communities. from donating personal protective equipment in the UK to providing support for medical personnel and ambulance services and essential air transportation in Argentina, we are grateful to be in a position to help those in our communities. Now onto the current impact of COVID-19 on the lithium industry. I will attempt not to speculate too much, but will instead focus on what we are actually seeing today. First, there is reduced visibility in our ability to forecast near-term lithium demand. And by this, I mean the remainder of 2020. A large part of this can be attributed to the broad disruption to the auto market and the implications of prolonged OEM plan shutdowns. World passenger vehicle sales declined by 24% in the first quarter. And while electric vehicle penetration rates have been notably higher, total volumes were negatively impacted. The timing, duration, and overall impact of the coronavirus has also varied greatly by region. For example, in the final week of April, Chinese retail auto sales improved to roughly flat year over year after being down as much as 40% earlier in March. Further, China's new energy vehicle sales surged just over 300% month over month to 53,000 units in March, despite being down roughly 55% year to date versus last year. Meanwhile, many OEM plants in Europe and the US remain shut down due to government restrictions, with the second quarter expected to be the most impacted. Just as important, the average consumer is clearly not spending at anything like pre-COVID levels, and this is especially true for larger items such as autos. It is difficult to predict how quickly consumer spending will rebound. or when manufacturing and supply chains will return to prior levels of activity. While we remain in close contact with customers regarding volume needs for the remainder of this year, it is still unclear whether some demand will be recovered in the second half of 2020 or pushed out further. This is amplified in an environment where there is understandably more focus on managing working capital than building inventory at our customers. Delays in restarting manufacturing plants may result in upcoming electric vehicle launches being delayed by several months. However, from a fundamental standpoint, we have not seen any evidence of OEMs pulling back from their electrification objectives or substantially altering their lineup of EVs for launch. In fact, we've seen certain OEMs use this as an opportunity to engage more directly on key aspects of their electric vehicle supply chain. from taking a greater interest in the location of sourcing and manufacturing sites to setting more stringent standards for quality and sustainability. With a heightened focus on managing capital and R&D spend, we are seeing OEM development efforts go towards platforms that will be attractive and sustainable over a long period of time. Put another way, we see OEMs allocating their own scarce resources towards future EV platforms rather than historical ICE technologies or projects with uncertain commercial models such as autonomous driving. Moving to the lithium market, we entered this year in a general state of oversupply, albeit with a wide range of quality capabilities on the supply side. The near-term slowdown in demand, driven by the coronavirus, put additional downward pressure on pricing. This was particularly evident in shorter-term, uncontracted markets such as China, which was fed by a continued oversupply of spodumene concentrate, especially that shipped in prior quarters which has been sitting in China waiting to be processed. There was also little urgency from customers to take their share of annual volume commitments in the first quarter or enter into new agreements given the broader market uncertainty. We expect this dynamic to continue through the middle of this year as customers resume production and work to assess the impact on their own near to medium-term end market demand. Last quarter, we discussed industry-wide postponed or canceled lithium capacity expansion projects, as well as announced output reductions as a result of weaker pricing. This trend continues with sustained lithium pricing pressure and near-term demand weakness due to the coronavirus. Production declines to date have still been relatively modest, reflecting the incentive for many higher-cost producers to continue covering their cash costs in the hopes of remaining in operation until the market improves. However, we believe this is not feasible over an extended period, and we expect to see further reductions in production in the coming months. Additionally, there have been challenges for lithium products already in development, with coronavirus-related supply chain and government restrictions further delaying the time expected to bring them into production. More importantly, though, the growing number of canceled or postponed expansion projects will have broader implications for the industry as we move beyond 2020. These announcements have come from all geography and resource types, as well as new and established industry players. In aggregate, we have seen over 400,000 tons worth of expansion delays or cancellations in both lithium carbonate and hydroxide over the last few quarters. Current lithium prices have severely challenged any reasonable investment return hurdles, and several notable distressed lithium assets have illustrated the limited to non-existing financing options in today's market. While near-term lithium demand forecasts have significantly widened due to the current uncertainty in the market, positioning from governments and global OEMs continues to support demand levels in 2022 and beyond, that have not materially changed from prior expectations. So as demand picks up, as the global business environment normalizes and electric vehicle production accelerates, we believe there will be a much more rapid tightening of the supply-demand balance than we would have predicted just a few months ago. I will now turn the call over to Gilberto.