Livent Corporation

Good afternoon and welcome to the second quarter 2020 Earnings Release Conference for Livent Corporation. Phone lines will be placed on listen-only mode throughout the conference. After the speaker's presentation, there will be a question and answer period. I will now turn the conference over to Mr. Daniel Rosen, Investor Relations and Strategy for Livent Corporation. Mr. Rosen, you may begin.

Thank you, Mariamma. Good evening, everyone, and welcome to LiveIn's second quarter 2020 earnings call. Joining me today are Paul Graves, President and Chief Executive Officer, and Gilberto Antoniazzi, Chief Financial Officer. The slide presentation that accompanies our results, along with our earnings release, can be found in the investor relations section of our website. The prepared remarks from today's discussion will be made available after the call. Following our prepared remarks, Paul and Gilberto will be available to address your questions. We would ask that any questions be limited to 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. I'd like to take a brief moment first just to commend the entire Livent organization globally. Our employees have quickly adapted to the new work environment brought about by COVID-19, and we're taking precautions to provide a safe working environment for all of them. We'll begin today by providing some insights into the current state of the lithium market, as well as Livent's second quarter performance. We'll discuss how, despite some of these near-term challenges, the long-term outlook for electric vehicle demand growth remains exceptionally strong. Also, how recent major changes to the supply outlook, driven by both COVID-19 and lower recent lithium prices, is creating a rapidly approaching structural supply deficit. And most importantly, we'll discuss what Libent is doing to ensure we're in the best position possible to take advantage of future improvements in lithium market conditions. As expected, the lithium market was very weak in the second quarter due to the impact of COVID-19 and the significant disruption this has created for global supply chains generally and for the auto industry especially. Demand was impacted as China only slowly resumed its recovery and many OEM plants in Europe and the U.S. were shut down for much of the quarter. And despite production largely resuming by the end of June, the ramp-up was gradual as consumer demand remained weak and broader uncertainty pervaded the market. This uncertainty continues today, and we can see that the end consumer on average has not yet returned to spending at pre-COVID levels, and this is inevitably impacting the electric vehicle supply chain. Understandably, some lithium customers have been reluctant to take their lithium volume commitments any sooner than necessary. as they instead focus on managing working capital until they gain greater visibility into their own customer demand plans. In fact, certain customers that have historically discussed order patterns in excess of a year out are now only able to communicate their needs several weeks forward. We've also seen much lower non-contracted lithium purchase activity, reflecting a broader slowdown in other industrial markets, creating unreliable market price indicators and and adding additional challenges to the broader lithium inventory situation. Despite this, we remain encouraged by electric vehicles setting all-time high penetration rates, most notably in Europe. While this is off lower total auto sales here today, it is still a testament to the growing trend towards vehicle electrification over the coming years. We entered this year in a state of oversupply, albeit with a wide range of quality capabilities on the supply side. This was fed by continued high inventory levels of spodumene concentrate, much of which was shipped in prior quarters into China to be processed into lithium chemicals. The near-term slowdown in demand driven by the coronavirus has slowed the rate at which our industry is working through this excess material. In this environment, we've not seen any fundamental change to lithium pricing in our target markets, although some smaller reported transactions in China have been testing the marginal cash cost of even the lowest cost producers. We believe this reflects an increasingly desperate cash position for local converters in this market, who are now running at operating rates that are not sustainable. With spodumene inventory already on the ground in China, they have an incentive to sell, to reduce their working capital and create cash flow, but this cannot continue indefinitely. For spodumene, with pricing now being reported below $400 per tonne, a large portion of the spodumene cost curve is no longer profitable. In fact, we believe that only one producer today is capable of selling spodumene at these prices while covering cash costs and providing a return on existing invested capital. And even there, it is unclear whether these prices support any kind of expansion investment. Some producers have resorted to drawing down stockpiled ore and implementing other temporary measures to lower operating costs as much as possible. Similar to the non-integrated lithium converters of this spodumene feedstock, there is an incentive to continue covering cash costs in the hopes of remaining in operation until the market improves. We have finally started to see declines of spodumene imports into China, and we expect this trend to continue. For brine-based production, which tends to be lower cost for carbonate, Many companies in Chile and Argentina have been able to resume production with a reduced workforce and amended operating procedures following COVID-related shutdowns. Still, the approvals required to resume any ongoing expansion work are complex, and we believe that pretty much all expansion projects in the region are, practically speaking, on hold right now. While the ultimate impact of these delays remains to be seen, it will no doubt add to a challenged supply picture for our industry in the coming years. LIVEN'S PERFORMANCE FOR THE QUARTER WAS NEGATIVELY IMPACTED BY THE DISRUPTION CAUSED BY COVID-19, AS SHOWN ON SLIDE 4. FOR THE SECOND QUARTER OF 2020, WE REPORTED REVENUE OF $65 MILLION, ADJUSTED EBITDA OF $6 MILLION, AND WERE BREAKEVEN ON AN ADJUSTED EARNINGS PER SHARE. THE DECLINE IN REVENUE WAS DRIVEN BY LOWER VOLUMES SOLD ACROSS ALL PRODUCTS, BUT MOST NOTABLY IN LITHIUM HYDROXIDE. While energy storage applications were most impacted in the quarter, many of our other industrial end markets also faced pressure to varying degrees. Some customers continued to defer purchases as they worked to limit their own inventory buildup in an extremely uncertain environment. Realized pricing was also down slightly on a sequential basis for both lithium hydroxide and high purity metal, reflecting both customer mix and some lower prices. Average margins were negatively impacted by lower realized pricing and by sales of lithium hydroxide previously produced using higher-cost third-party lithium carbonate. We carried forward roughly 4,000 tons of hydroxide into 2020, much of it produced from third-party carbonate, in order to meet higher volumes projected by our customers in Q4 of last year. While we expected the majority of this inventory to be sold in the first half of 2020... Customer delays will result in some of this product being sold and impacting margins into the second half. During this period of weaker lithium demand and limited near-term visibility, Livent has been focused on a few key areas as shown on slide five. First, Livent has been committed to ensuring its manufacturing sites continue to operate safely and with minimal disruption. Due to our close work with local and national authorities since the onset of the virus, our production facilities all currently remain operational. This is particularly important in Argentina, where we worked closely with the government to develop and administer a safe and practical set of protocols to resume local operations after only two weeks of downtime. As a result, we currently expect full-year carbonate and chloride production levels out of Argentina to be broadly similar to 2019. This has also been a critical time to be as close to our customers as possible to best understand their demand needs. Many of our customers continue to meet their volume commitments, although the timing has been delayed in certain cases. And while these customers continue to indicate that they will honor their full year commitments in 2020, Achieving this will require a meaningful increase in volumes delivered to them in the second half of this year. With what we see in the market today, these volumes would have to be delivered mainly in the fourth quarter. Given the timing of the return to pre-COVID levels of activity remains very difficult to predict, we remain measured in our projections of a more fundamental recovery. We have continued to progress conversations with multiple potential new customers and and have started the process of getting qualified with many of them. These conversations are with automotive OEMs as well as battery and cathode producers, and we hope to be able to share more details as we move through 2020. What we can say today is that with respect to battery technology decisions, many of which must be finalized in the coming quarters ahead of planned EV model launches, the focus remains on various forms of high nickel cathode, all of which require lithium hydroxide. Carbonate-based batteries have and will continue to have an important place in parts of the market, especially for lower cost and shorter range passenger vehicles, as well as for commercial vehicles. And these will remain very large markets in total volume terms. But for the performance specifications required for the premier EV models being sold into Western markets, high nickel cathode production will be needed. As a leading lithium producer over many decades, Our long experience of producing high-performance lithium hydroxide and our differentiated route to expansion is increasingly valued as companies look to increase their understanding of the lithium supply chain and set out their own long-term sourcing strategies. We will often be asked to provide insight on different methods of lithium production, cathode performance, and supply chain footprints, including helping them to understand the sustainability factors relevant to the production of lithium chemicals. This wide range of ongoing dialogue within the lithium supply chain today, both immediate and long-term in nature, provides a unique challenge for our business. On one hand, we're managing our supply chain through unprecedented times to deliver qualified hydroxide with varying and increasingly stringent physical and chemical specifications on a less and less predictable schedule. While on the other hand, we're being asked by OEMs to increase capacity to meet their demands over the next five plus years, to localize this capacity closer to their end markets, and increasingly to diversify away from solely China-based production. We continue to work with these OEMs to help them understand what their role may need to be to ensure that a future shortage of lithium chemicals does not become an issue for their own growth plans. but it is increasingly clear that the current lithium industry pricing environment, the significant capital needs relative to available capital, and the way lithium supply chains have developed so far will not be sufficient for what the automotive industry as a whole will need if its plans for EVs are to be realized. I will now turn the call over to Gilberto to provide a financial update.