Livent Corporation

Good afternoon and welcome to the second quarter 2021 Earnings Release Conference Call for Liven Corporation. Phone lines will be placed on the 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 Wilson in Best Relations and Strategy for Liven Corporation. Mr. Wilson, you may begin.

Thank you, Chino. Good evening, everyone, and welcome to LiveIn's second 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. 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 risks 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 Industrial Relations website. And with that, I'll turn the call over to Paul.

Thank you, Dan. Good evening, everyone. It's been a productive and exciting few months, and we have a number of important topics to discuss with you today. We reported strong second quarter results supported by improving customer demand and strengthening overall market conditions. And our ability to take advantage of this improving environment has enabled Liven to increase its 2021 four-year guidance, which we'll go into in more detail shortly. During the second quarter, Liban successfully completed its equity issuance, raising growth proceeds of $262 million. The transaction was met with strong demand from both new and existing investors, and the capital will be deployed primarily towards our lithium capacity expansions. As a reminder, Liban has already resumed its capacity expansion projects in the United States and Argentina earlier this year. by the execution of a number of long-term supply agreements and improving market outlook and continued local support. Also during the quarter, Liban released its 2020 Sustainability Report. It details our meaningful ESG progress in the last year. It highlights our new sustainability goals, and it reaffirms our commitment to environmental protection, social responsibility, and transparency. Before I provide further commentary on the state of our industry, as well as some livened specific updates, I'll turn the call over to Jim Gilbetto to walk us through livened financial performance.

Thanks, Paul, and good evening, everyone. I'll begin with our second quarter results on slide four. We reported revenue of $102 million. adjusted EBITDA of $16 million, and adjusted earnings of 4 cents per diluted share. Revenue increased 11% sequentially and 57% year-over-year, with higher volumes driven by increased customer demand across most of our products, particularly hydroxide. We also saw higher sequential pricing across large parts of our business, although we expect greater pricing momentum in the second half of the year and into 2022. Adjusted EBITDA was 44% and 150% higher than prior quarter and year, respectively. This improved profitability was supported by higher sequential pricing and an improved product mix, but was somewhat offset by higher costs. we're seeing higher costs from certain raw materials, including solvents, in our butyl lithium business, and from markedly higher shipping and logistic costs, largely due to COVID-19-related disruption. As you will see on slide five, Liven is increasing its full-year 2021 guidance as the company's financial performance continues to strengthen. Guidance for revenue is now projected to be in the range of $370 to $390 million, up from $335 to $365 million. Adjusted EBITDA is expected to be $55 to $70 million, higher than the prior range of $40 to $60 million. Our new revenue and adjusted EBITDA estimates represent 32% and 180% growth at the midpoint, respectively, versus last year's results. The expected improvement in our 2020 results will largely be driven by pricing, which we now anticipate being slightly up on average across a broad portfolio of lithium products. This improvement comes despite some limit to upside for Livent this year. This is a result of our available volumes being largely committed on our annual contracts that were negotiated in 2020 and won't be set until the new calendar year. We do expect to continue to see realized price improvement in the second half of 2021 on a subset of our customer contracts, They are subject to monthly or quarterly price renegotiation or have a lag from market link pricing adjustments. In addition to the higher energy storage demand supporting this positive outlook, we have seen notable improvement in some non-energy storage markets, many of which were significantly impacted by COVID-19 related operational and market challenges. The key variable as to where in the guidance range we fall is the potential for shipping delays caused by extremely challenging global supply chain conditions. The combination of COVID-19 related shutdowns followed by a rapid pickup in demand and continued strict regional protocols has added increasing complexity, risk, and costs to supply logistics. Based upon what we've seen today, there is a risk that some sales may be delayed by a few weeks due to logistic issues. And even where we are able to deliver on time, we might be forced to incur higher shipping costs to achieve this. It's worth acknowledging that while we're seeing favorable market conditions support higher lithium pricing, current average prices realized still remain well below historical highs. and have not reached reinvestment cost levels for higher-cost producers. We expect the positive momentum to continue and for Liven to see further benefit from this as we finalize more contracts with customers for 2022 and beyond. Nearly all of our anticipated volumes to be sold in 2022 will be at fixed prices that will be set in 2021. with the remainder being more closely tied to the market pricing. To conclude, LIVEN's 2021 guidance for total capital spending is unchanged at $125 million as our capacity expansion projects continue to progress. We have spent $34 million through the first half of the year and expect this to accelerate with additional work over the next two quarters. I will now turn the call back to Paul.

Thank you, Roberto. Moving on to slide six and some commentary on current market conditions. The strong pickup and lifting demand that we saw at the very end of last year has accelerated to the first half of this year and shows no sign of slowing down. The largest driver of this higher demand has been higher electric vehicle sales, one of the highest growing end markets for our industry. June EV sales in China were roughly 240,000 vehicles up 18% month over month and bringing first half total sales to 1.1 million. The China Association of Automobile Manufacturers has already raised its forecast for full-year new energy vehicle sales by 33% from its initial projection just at the beginning of this year. In Europe, second quarter growth in the top five regional markets increased 240% year over year. And June registration rates in the UK and France reached comparable levels to December 2020, when there was a strong year-end push from OEMs to reach CO2 compliance levels. Now seen forecasts for 2021 global electric vehicle sales to exceed 6 million vehicles. This would be nearly double 2020 EV sales, 3.2 million, and triple the EV sales of 2.1 million we saw in 2018, the year that Leiden went public. The strong demand for electric vehicles has impacted the entire supply chain, resulting in meaningful growth in demand for batteries, cathode, and battery materials. The impact of this growth on lithium and other battery materials has no doubt been magnified by the fact that it comes immediately after a time when COVID-19-related uncertainty brought many purchases to delay orders and worked through existing inventories as needed. Today, the supply chain for lithium materials, whether phlogamine, carbonate, or hydroxide, have limited usable access inventory, and this is even more pronounced in applications with the most stringent product quality standards. The increase in lithium demand has been seen in both hydroxide and carbonate. While much of the commentary today has been on carbonate, given some of the positive data points seen in the first half of this year, hydroxide demand has been particularly strong in recent months. This is a result of increasing high nickel capital production in China, as well as Korea and Japan, as a number of new EV models come to market. Lithium pricing has continued to increase, supported by this market backdrop. Following the price increases first seen in carbonate in China, we've seen upward price sentiment in hydroxide and sodium in prices, as well as international prices outside of China. Hydroxide prices once again established a premium over carbonate during the most recent quarter, and we're now seeing some spot spodumene concentrate transactions at over $1,000 per ton. This has nearly tripled the historical lows that were previously seen, and meaningfully ahead of disclosed contracted spodumene prices. The clear disconnect we're seeing between recent spot spodumene transactions and contracted price levels is telling of a few important trends. First, it indicates that any excess spodumene inventory has likely already been worked through. And given a large portion of this feedstock material goes to the production of lithium hydroxide by converters in China, this will continue to challenge hydroxide supply and keep up the pressure on pricing. Second, the volatility in spodumene prices continues to shed light on the differences between the non-integrated converter model in China and the fully integrated lithium chemical producer. The challenges in securing material and the lack of predictability around costs make it very difficult to rely on this part of the market. Automotive OEMs or battery customers looking for security of supply or predictability of price will increasingly have to look towards integrated suppliers as a core part of their volume needs. Separately, there continues to be a lot of strain on global supply chains, including APMs. largely driven by the destruction and remaining restrictions and protocols as a result of the pandemic. The difficulty in securing product containers and transportation, either by boat or truck, makes it challenging to accelerate any customer demand. The timing uncertainty and the additional costs in managing this complex environment are expected to remain, as highlighted by recent announcements from leading auto OEMs around semiconductor shortages, for example. In the face of these near-term challenges and long-term trends, we continue to believe that Liven remains well-positioned as a leading supplier of choice. As a fully integrated lithium producer, from resource to final lithium chemical production, we have more cost predictability and security to apply to commit to and deliver on long-term supply agreements with greater price stability and visibility. We expect positive lithium market dynamics to continue through 2022. There continue to be announcements from both OEMs and governments that add confidence for the longer-term demand growth trajectory. This accelerating demand will continue to increase the pressure on meaningful battery quality supply growth. In the last few weeks alone, we've seen EV day events from multiple leading auto OEMs outlining their plans for increasingly large investments into the electrification of their fleets and firmer or closer targets for ending the sale of legacy ICE vehicles. In a transformational announcement, the European Union proposed the Fit for 55 package, which would require emissions from new vehicles to drop 55% by 2030 and 100% by 2035 off of a 2021 baseline. Said differently, new vehicles sold after 2035 would need to be exclusively zero emission or non-ICE. According to Bloomberg New Energy Finance, this means at least 60% of new vehicle sales would have to be battery electric in Europe in 2030, compared to their expectations for 14% in 2021. In the U.S., the push for electrification continues to gain traction as $15 billion of spend will be allocated towards e-transportation as part of the most recent bipartisan infrastructure plan. And just today, we saw the U.S. administration releasing new targets for electric vehicles to comprise half of all new vehicle sales in 2030. This announcement makes standing alongside leading US auto OEMs adding further seriousness and support to their own commitments. More than just incentivizing the shift to electric vehicles, governments around the world are getting serious about pushing the transition to cleaner forms of power generation with a renewed focus on climate change. Combined with a lot of demands from global consumers, lithium will undoubtedly play a key role in broader energy storage solutions of the future. In response to higher lithium prices and increasing confidence in the long-term demand picture, there has been a supply-side response from lithium producers. This has been in the form of raising capital or announcing capacity expansions or greenfield project developments. However, these projects are unlikely to do much to alleviate the short and medium-term challenges to provide sufficient material, and in particular, the most needed material that is battery qualified. Even under optimal timelines, they will take several years to bring online and ultimately ramp up and begin the length of qualification processes. Bear in mind that major extraction projects are not typically designed for speed, and stages of permitting are meant to ensure key deliverables can be met responsibly. Many of these expansions are needed and will have to be successful in order to keep up with compounding lithium demand growth. With that said, greenfield lithium development, particularly those with unproven resources or using novel technologies, are bound to face timing delays and additional capital requirements, pushing out the cost curve and the necessary returns on investment. Additionally, the demands being placed on lithium producers to deliver battery-qualified material are not becoming any easier. This will only lengthen the learning curve for producing multiple different specifications of material consistently at scale and will continue to put incumbent producers such as Liban at an advantage. Many purchases of battery materials in the EV supply chain today are cut to this realization, with some faster than others. There is an increased sense of focus and urgency in conversations with both existing and potential customers, many of whom are now looking to secure meaningly larger and longer data volumes than what they anticipated just six months ago. We expect this to translate into some exciting new partnership opportunities for Livent over the next few quarters, and it reiterates why it is so important for us to continue to focus on expanding our low-cost, sustainable global production properties. I want to conclude by providing a few business updates more specific to Libent. First, to resume our capacity expansion work earlier this year, we have remobilized our projects in both Argentina and the U.S., and we continue to track toward our previously disclosed target dates. The funds raised from Libent's equity issuance in June will provide a significant portion of the funding required for our expansion plans, along with improving cash flow generation and access to our existing credit facilities, we believe we have sufficient funding in place for these projects. And with this step up behind us, we can further focus our efforts on executing and delivering on these projects. As we remind, a livened 5,000 metric ton hydroxide addition in Bessemer City and phase one 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 crude phase II carbonate expansion in Argentina for an additional 10,000 metric tons is expected to be in production by the end of 2023. We have all of the necessary permitting granted to us by the local and federal governments and expect the ramp-up period to runway capacity on each of these units to be short, given our plans to dedicate the new hydroxide plant to no more than one or two contracted customers. You should expect 2023 to reflect a large portion of the new capacity from Phase 1 in Argentina and Betama City, and 2024 to include the additional Phase 2 capacity for Argentina. NAMASCA continues to make meaningful progress in its optimization study this year. You may have seen from the recent NAMASCA press release that a new site has been secured at the Industrial Park on Port of Beconcourt in Quebec, Canada, for the construction of a downstream chemical conversion facility. Additionally, NAMASCA has made the decision to produce battery-grade lithium hydroxide and will be well-positioned to serve the growing markets in North America and Europe. We expect NAMASCA to conclude its optimization efforts by the end of 2021. Lyman continues to believe we have an attractive investment in NAMASCA as the last cost-competitive, fully integrated lithium chemical asset powered by renewable hydrogen energy. Finally, Lyman released its 2020 sustainability report in June. The report detailed our sustainability goals, which were partly announced earlier this year, and are highlighted by our commitment to carbon neutrality by 2040, a path to 100% renewable energy use and an ongoing focus on sustainable water use. These goals reflect the highest priorities of Lydon's customers, communities, investors, employees, and other stakeholders, and our team is acutely focused on mobilizing our resources as needed to execute on them. The report also highlights the meaningful progress we've made on a number of wide-ranging ESG efforts, despite the difficulties presented by the global pandemic. Key metrics in the report were reviewed and assured by a leading third-party ERM certification and verification services, and the content satisfies more of the requirements of the leading disclosure frameworks, which we will continue to build upon. Our ongoing efforts 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.

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

All right. If you would like to ask a question at this time, please press star, then the number one on your telephone keypad. Please limit yourself to one question and one follow-up question. If you have additional questions, you can jump back in the queue. To resolve your question, press the pound key. We'll pause for a moment to compile the Q&A roster. First question comes from the line of Bob Kurt from Goldman Sachs. The line is now open.

Hi, this is Emily on for Bob. I was wondering if you guys could describe the bridge to get from prior guidance to current guidance, and then maybe give us an idea of how much of that is driven by higher pricing versus other moving parts. Thank you.

Sure. Roberto, would you like to answer that one?

Yes. So we're increasing the midpoint of our guidance by approximately $30 million. um i would say that 80 of that is pricing driven and about 20 of that is volume driven and and as you fall down to to evita we in addition to the price improvement that we're seeing throughout this year you know we're facing some some increased costs particularly related to logistics as we mentioned disruptions of supply chain has been immense so far this year And in order to mitigate any issues and be able to deliver to customers on time, we have to be making some earlier and higher purchases of third-party lithium products. And finally, we'll be seeing also some higher raw material costs, particularly solvents in the lithium business. As a result of that, our midpoint guidance for EBITDA is increasing by about $13 million.

Great. Thank you.

Next question comes from the line of Joel Jackson from BMO Capital Markets. Your line is now open.

Hi. I actually want to follow up on that exact same question. So your incremental guidance is coming at 40% margins. That $30 million of additional sales is coming at a 40% margin. Your prior guidance company-wide was about 14% margins. You talk about this being 80% incremental from price. Can you maybe give a little more color? Are those all hydroxide sales? Are these all using your own carbonate or third-party carbonate? Any more color to talk about why the incremental sales are extremely higher margins?

I think the key takeaway in this, Joel, is clearly that we're primarily a hydroxide producer, so most of the additional sales are in hydroxide. But pricing is really across the board. We're seeing pricing across the board. Incremental volume, to the extent that we have incremental volume, is largely within hydroxide. But as I said, the incremental cost, including increased use of third-party carbonate, and one of the challenges we have with the supply chains as they are, is we will have to carry more inventory to make sure, because we cannot rely upon supply chains being as reliable as they have been in the past. And so that means that we have to hold more of our lithium carbonate, for example, at Bessemer City. It means that we'll use probably slightly more third-party carbonate in our China operations. And, of course, as Gilberto touched upon, we see logistics costs. We've seen solvent costs. We're seeing, you know, a bunch of costs, broadly speaking, climbing across the business as well, which does offset, you know, the otherwise pricing given gain and why you don't get so much profit dropped into the bottom line. As you point out, it is a much higher margin than our previous guidance on the incremental sales, but it is not as high as it could have been because of those incremental costs, which impact the entire business, not just the incremental sales.

If these business – thank you for that, Paul. If these business conditions continued into 2022 based on different things you talked about, holding floor inventory, similar third-party carbonate, volatile inflation, but seeing stronger prices. If these same business conditions continue to 2022, would your margins expand in 2022 about 16% or would they contract?

The biggest driver of that in 2022 is going to be price. So if the existing market conditions continue, and by that I mean supply chain challenges, increased costs, our volume frankly doesn't change, which is not market change, but our capabilities, and what we know about pricing we've already agreed for next year, as well as what we expect to be contracting for next year's prices later this year, then yes, our margin will absolutely expand. It's a little bit too early to say how much it will expand, but it will certainly expand next year.

Thank you. Next question comes from the line of Creon Price from Raymond James. Your line is now open.

Hi. Thank you for taking my question. So I guess the first one, just wanted to check on the vaccination status of your workforce in Argentina and to see if you've had any COVID-related issues from the Delta variant. I know in the past there were some kind of targeted outbreaks in certain areas.

Sure. Good question. So, you know, our protocols for moving people in and out of the Salah down there are incredibly strict. We put people in hotels now for five days before quarantine, before they go. We test them before they go into quarantine in hotels and we test them as they come out. And then we test them again when they get on the mountain. We test them halfway through their 14 or 21 day shifts and we test them again before they come back down again. So there's a lot of testing going on. And so to the extent that we've picked up on, we've had any COVID cases, we generally pick them up before they get to the salar. We don't have a huge, we've not had a large amount of COVID issues down there in terms of individuals being infected amongst our workforce. The vaccination rate for our employees up there today, we believe it's not entirely clear because as you know, every country has different rules about what people have to disclose, but it's about 60% of our workforce today is either partially or fully vaccinated. And timing quickly, there's certainly more vaccines available down there in Salta and Catamarca available to our employees.

Got it. Got it. Good to hear. And then for my follow-up, just off the comments you made around the higher shipping and logistics costs, I wanted to see if I guess if you had any visibility on when those might dissipate or when they might peak, just your outlook there.

Yeah, we talk about that a lot. I think the short answer is we have no idea. If you had asked me six months ago, What would have happened, when we were running into extra costs and logistic challenges back then, we would have said probably in six months the challenges we're facing will probably have abated a little. And they started to, but really the last month or so, it's just been really ratcheting back up. And it's hard sometimes to... understand what's driving them. We've had ships canceled where we've had ships just not turn up to port, particularly in China, with some fire in China, with some crackdowns they've had on storage of goods in China. You take an aerial satellite picture of the port of Shanghai right now, it is nothing like historical levels in terms of the number of ships just around waiting. And as a result of that, we've seen almost across the board not just costs go up. We talk about 5x or even more sometimes for costs of transportation. But in some cases, there's just not an available period. There's no amount of cost that will get you the trucks or get you the ships. And so it's not entirely clear to us what's driving it. And a lot of our industry struggles to look at the root cause and figure out what it is. And therefore, it's hard to figure out what's going to change it as well.

Got it. Understood. Thank you very much.

Next question comes from the line of Chris Cash from Loop Capital Markets. The line is now open.

Yeah, hi. Good evening. I appreciate the color and perspective. I just wanted to call attention to a couple trends that have emerged, and here you're thinking with respect to these trends. One is pretty obvious, another one less obvious. So one is just the increased relevance of carbonate longer-term feeding into LFP applications. And I'm just curious if that trend is influencing your thinking with respect to your intentions to your manufacturing footprint and commitment to being a preeminent supplier of hydroxide vis-a-vis carbonate. And then the other one less obvious is that there's evidence of some cathode folks that are looking to maybe do some of that conversion in-house because they don't feel like there's just a reliable enough base of suppliers of those battery-grade hydroxides. So are you seeing that at all, and is that influencing the strategic thinking of your investments?

Yeah, look, there's two clearly important factors that we look at very carefully. I think the first time I would say is that the use of LFP in more vehicles and natural gas and more carbon, it makes absolutely, frankly, no difference to, Our philosophy or strategy, our philosophy has always been that we would like to have more company exposure. It's not necessarily LFP exposure we're looking for. Company is a broader market. It's a more diverse market. And I do agree with much of what some commentators are saying at the moment, which is and will remain the single largest form of lithium being used in the industry broadly and probably in energy storage. I think it's far more suited for stationary storage applications. It's far more suited for many automotive, particularly lower-cost, low-performance automotive applications. It continues to be used in most mobile-derived battery technologies. But to market, we want to be an LFPH piece of that, frankly, at the moment. And while it's clearly a big surprise to some people today and driving some of those short-term spikes, probably in carbonate pricing in China, it's not fundamental change in what our view of the attractiveness of the carbonate market is or will be in the future. So it's really just part of what we'd already set our strategy around, which is to take at least a meaningful position, and I say meaningful in terms of it can supply enough carbonate to a customer to be meaningful to them. I'm not trying to be the world's biggest carbonate producer or seller for sure. And I think, so I say it's not EIP, it's a more broad carbonate market that I think is going to continue to be really, really very attractive in the long run. I'm sorry, Chris, remind me of your second question.

Any evidence that you've seen of cathode producers wanting to do their conversion in half the hydroxide?

Yeah, I've seen a little bit of evidence. I wouldn't say it's widespread. Here's the challenge. I think if you're going to make the cathode pass, then you probably need to be... a full-scale battery producer. So that keeps you to a relatively small number of companies that are doing that. And what we've also seen, generally speaking, is just because you're making batteries doesn't make you a cathode expert. And so some of those cathode producers are making cathodes in-house. That's a struggle sometimes. to actually meet the quality that they need for their own batteries, never mind for third parties. I think the idea that people will start to make hydroxide in-house had a moment. Maybe in the last six months people have talked about it. There's been a few well-known announcements about that and then a few what looked like well-known pullbacks from that position. The challenge is always the same, right, which is if you're going to make the hydroxide yourself, then you need a feedstock. You need a carbonate or you need spodumene concentrate depending on which way you're going to go. And it's not entirely clear if there's anybody out there that has solved that problem of having to back-integrate all the way into the base resource. We continue to see very few consumers of lithium chemicals expressing appetite to be in mining or lithium extraction or, frankly, Argentina or Chile, where we are. So I'm not convinced that the idea that people will bring either semi-hydroxide production or even carbonate production in-house will be a particularly broad idea.

a widely held strategy that's felt in our industry got it and my follow-up paul is um and this is longer term in nature granted but there's a lot of enthusiasm and focus on the emergence of solid state battery technology and this is an area where you've you know been i think i'm publicly skeptical about the timeline of adoption of solid state but i'm just wondering based on um your engagement with um commercial downstream customers if you Are seeing any more reasons to be optimistic on the transition ultimately to solid state and the benefits that come with that? Thanks.

Yeah, no, I don't see any change in it, frankly, in terms of acceleration of those timelines to a pure solid state that everybody talks about. I think people will start to realize a little bit like the transition from low nickel to high nickel wasn't a static change, but it's a gradation of increase in nickel use and a chemical point at which the switchover made you use hydroxide. So it's a lot of activity in that gray area where you could carry carbonate or hydroxide. I see the same happening with solid-state. Solid-state, clearly everybody focuses on the safety benefits and on the solid element of the battery. But I think the first phase is going to be increased pre-lithiation of the anode, increased use of metal in the anode to increase energy density. So I do believe, and I have seen more conversations about ways pre-lithiate anodes which is a step, if you will, on that evolutionary path to a solid state. I do expect lithium metal requirements to climb, and I do expect there to be more battery technologies that are using lithium metal as a primary input into their anodes, but that's a long way from pure solid state, and so I don't see solid state batteries really hitting any kind of commercial scale this decade.

Appreciate it. Thanks.

Next question comes from the line of Kevin McCarthy from Vertical Research. Your line is now open.

Good evening, Paul. I'm interested to hear your thoughts about pricing philosophy. Obviously, we've seen strong momentum over the last nine months. And so if we think about 2022, how are you thinking about balancing surety of price and visibility on the one hand versus you know, leverage to what could be a tighter market and upside pricing opportunity. On the other hand, maybe you could talk through, you know, strategy in terms of the contracts you have in place and more importantly, the negotiations to come.

Sure. I think it's important to sort of step back and take a look at what our portfolio looks like today and what it will look like in the future. And first and foremost, I think we believe that the right path for us to go down is private departments that are willing to effectively guarantee economics for us. largely fixed cost structure. And so it's important to have more clarity, we believe, on price and just chasing the highest possible spot. Hydroxide price is not the right strategy for us. So we will continue to pursue arrangements with customers that give that certainty, that tends to lead towards fixed pricing over multiple years. And we believe that today's a good environment to be having those conversations. It's balanced. It's a balanced environment between the economics for the automotive producer and the economics for ourselves. Looking forward, I think there'll be a couple of things to bear in mind. One, we're doubling our capacity over the next few years, and so there will be more conversations to have with customers, and I suspect we'll be striking more contracts in a year at some time in a different price environment, probably a higher price environment than we've been in for the last six months or maybe even will be for the next six. I think in terms of... Second opportunity to take advantage of a sustained increase in prices. I think carbonate is more likely to remain a shorter-term contracting market than the hydroxide market because the qualification requirements are different, and therefore it's easier to switch. And so I think people will take more of a market-based approach in carbonate, and we will have more carbonate. And so I think there will be more volatility in our business, but it's probably 2024 before we're in that place of selling a meaningful amount of lithium carbonate. I'd also say, by the way, I think there's more and more automotive companies that are looking at their own products, their own processes, their own economics. It was easy in the last year or two as they first started to look at lithium and say, why do I contract long-term? It's a lot more difficult today to sit there and say, I'm going to just take market pricing. I don't think any automotive companies love what they've seen with regard to public prices. You cannot debate whether they are accurate and realize prices because they're largely not. They do impact sentiment and they impact attitude and We've certainly seen some customers have suppliers renege on them, walk away from them, renegotiate prices on them. And so I think they'll all start to look a little bit different about what their portfolio of suppliers will look like. And I suspect they will also take a similar approach, which is varying percentages, but they will have a fixed price part of their supply chain. And they will take some market exposure with some more variable price contracts in place as well.

Very helpful. And then the second question I wanted to ask you about butyl lithium. Sounds like increased costs for solvents are becoming more onerous there. And so my question would be, you know, is there an opportunity to extract, you know, incremental pricing in butyl lithium to recover or over-recover the solvent cost pressure? And if not, you know, is there an opportunity to reallocate mix away from butyl to other lithium derivatives?

Yeah, you know, good question. You know, the truth is this is not an industry to us. It's not a new situation to find ourselves in with lithium. moving solvent prices up or down. And generally speaking, we get founders off on a lag. Just as when solvent prices come down again, we'll have to pass those savings on with a lag. And so, yeah, we would expect that those solvent prices in the end will be passed on to most of our customers. Some of our customers actually pay for the solvent anyway, so it doesn't impact us directly, but others don't. And so there will be definitely opportunities to do that. Diverting it to other products is possible, but the reality is it's There's not a huge amount of LCEs going into the butylene business, and it's chloride-based, not carbonate-based for us. For some others who make metal for butylene, they start with carbonate, but we don't. We go directly from chloride. So it's not actually an easy diversion of LCEs to either carbonate or hydroxide. So I don't really expect that to happen so much in the short term. Okay.

Thank you, Paul. Next question comes from the line of Steve Byrne from Bank of America. Your line is now open.

Yes, thank you. I was hoping you would share with us, Paul, the portion of your volumes in the third and fourth quarters that you know right now what the price will be. Gilberto talked about a variety of these contracting mechanisms and But from where you stand right now, do you have a pretty good view of where pricing will be for your third quarter volumes and most of it in the fourth? The reason I ask is that, you know, for your guide that you have put up there, is there a portion of that volume that you really haven't priced yet and therefore there's some upside in that number? And then the other reason being the sequential increase you saw in price from the first and the second quarter here. Is that a sequential gain that you think you might be able to continue into third and fourth quarters?

Yeah, there's a lot in there. And the short answer to your question is yes, we have very good visibility on pricing in third and fourth quarter right now. As Gilberto pointed out, one of the bigger challenges, frankly, is the timing in which we'll realize that pricing because making sure we can get it to the customers is not that easy. And so we're seeing longer and extended and slower supply chains. And so there's certainly an aspect of I see the pricing, I know what the customer will pay, but I have to get the material to get that pricing done. And so the risk is really around timing on third and fourth quarter. In my view, it's not on... the pricing environment embedded into our guidance at that point in time. And in terms of the first couple of quarters, there's a lot of mixed issues going on as well. We were fulfilling some first and second quarter business that was really last year's pricing, and a lot rolled off and did roll off as we went through. We were able to change mix of customers and the products into a place that helped with our average realized pricing. But I certainly expect the benefit on average realized pricing in hydroxide and in carbonate that we saw in the first part of the year to probably accelerate in the second half of the year. As we said at the beginning of the year, it's really the back half of the year where those opportunities mostly reside. And we may even see some of the other products that we have get some price impact in the back end of the year as well.

And then just maybe an extension of this into 2022, is there any potential for a meaningful increase in volumes in any way until Bessemer City expansion comes on? And any comment on how much visibility you have on pricing for 2022 now?

Yeah, we certainly don't have a lot of ability to increase volumes, given where we are. Everybody knows what our installed capacity is of hydroxide and of carbonate, and they're not really meaningfully going to change. And even though we are confident in our ability to quickly qualify for the best in the city plant, it's unlikely to be moving a lot of volume in 2022. So I don't see a huge amount of volume unfortunately for us. If we do, by the way, they'll probably because we delay some 2021 sales. not intentionally, but because of the supply chain and they'll get pushed into next year. So it may look like there's higher volume, but our fundamental capacity doesn't really increase until the start of 2023 when Argentina phase one comes online. And look, in terms of pricing for next year, I think we feel pretty confident that our average realized price for 2022 is going to be higher than it was in 2021. And, you know, if you recall, we started 2021 saying that our average realized pricing was going to be flat to slightly down. compared to the prior year, and it's coming in slightly up now, a little bit higher than it was in terms of what we think our average will be across the portfolio. That's just the nature of when we agree prices, and so we'll end this year with a very good, very clear view as to what our pricing environment is going to look like for 2022, and every indication is that it's going to be meaningfully higher than it was this year.

Thank you. Next question comes from the line of David Dekelbaum from Cohen and Company. Your line is now open.

Good afternoon or good evening, everyone. Thanks for taking my questions tonight. Good evening. Just curious, as you think about some of the expansion that's going on right now at Solar Omboree, There's been a lot of talk in the market about some advancements in DLE technologies. 11 was one of the earliest known to use DLE. As you think about ramping volumes, are you looking into any advancements on the technology side or any new applications for DLE that might be able to accelerate some of that production timeline? Or are there any initiatives with either partnerships or internally to improve upon what's already there.

I don't know why it's become such a buzzword. I guess a couple of people have been running around on specific projects talking about, you know, very, very fast DLE, you know, immediate, if you will, extraction. And by the way, we've been able to do this for years and years and years. It's not a new technology, but a new concept. The issue has always been that the yield from the very rapid DLEs just doesn't justify, you know, your yields are so low that you don't really justify the investments in advance, which is why you typically ended up with a DLE process like ours in Argentina, which is a bit of a hybrid where we do concentrate the brine very quickly, really, in hours to a usable level, but a small amount of time in a pond. massively increases the concentration through evaporation, allowing us to enter in our carbonate plants off a higher concentration of chloride than we would if we didn't have the ponds. The challenge as we go forward has been people clearly want to get away from pond structures and all the water evaporation that comes from that. So most of our technology investment down there in Argentina is actually all about reducing water usage, and we have some pretty interesting projects underway today that could, by the look of things, massively reduce the pond footprint that we have, may even eliminate the pond footprint for future expansions, and may even justify it into what we have today. But that's really, it's not going to take our costs down. Your costs won't really change, and it won't necessarily improve our yields. It's really about improving the sustainability footprint down there, which is really important. I think DLE in other locations, you have to understand there are many, many different ways of doing it, and they don't all work everywhere. Most of them will only work in specific situations. So lining up your DLE technology with the resource that you have is really the critical point. You can have a solvent-based DLE technology, very rapid. It's truly never going to be given an environmental purpose down there in South America. You can have, it may work in petrobrines, for example. You can have other DLE structures that are very good in high concentration, low impurity blinds, but don't work with specific impurities. So it's not an easy question or answer to say, is DLE going to make a huge difference? I think it will unlock some resources. And I think with a higher price environment today than maybe the last time people looked at this, and maybe the last time people looked at it, they were competing with SQM's $5 carbonate back in the start of the 2000s. The economics behind DLE are probably more favorable than necessarily technology changes in DLE. But we certainly, we continue to look at our knowledge in that process will help us develop other grind-based resources. And that's a constant focus of ours. And obviously, to the extent that we do make any progress, you'll be the first to know.

I appreciate that. And it's a great response, Paul. I guess it speeds into maybe a second follow-up. You mentioned the MASCA and the prepared remarks and reaching some decision points towards the end of the year. I guess, should we expect to see Libent looking into any other upstream resources in terms of expansion beyond the MASCA, beyond Hard Rock, maybe into other brines? Or would we expect to see just more expansions on the conversion side before?

I think yes, for sure. So we absolutely expect and intend to diversify our resource base. And while NMASC is obviously an important start for us, and we're pleased and proud to be an investor in that project today, and obviously a technology and operating partner in that project, it's still not enough. We need more resources. And so yes, we continue to look at additional opportunities for us to bring what we would describe as our unique capabilities to certain assets and resources that fit those capabilities. We are not the correct owner for many lithium assets for multiple reasons, whether it's the fact that they're particularly challenging mining products or because of the geography that they're in. But there are many others that we believe are natural investor, operator, or maybe even owner of them. So we will continue to look at that. And I do hope in the coming years, yes, we find additional resources to take control of.

I appreciate the time, everyone. Thank you. Thank you.

Next question comes from the line of Lucas Spice from B Reilly Securities. Your line is now open. Yes, good evening, everyone.

Thanks for taking my question. Paul, I'd like to go back to some of the earlier questions in regards to close sergeants. I appreciated all your comments there and And I wanted to take a step back, higher level question. If you look at margins in the second quarter, about 20% gross margins, what do you think they should go to, these gross margins, for a business that's growing quickly, you know, where there's a lot of demand growth in the years to come? We would really appreciate your comment. Thank you.

Yeah, you know, it's a difficult question to answer, because in the end, what you've really got to take a look at, what you're really asking is what price you're going to go to, and will some of the higher costs we're seeing today be permanent, or will it be regressed back to a more of a historic norm? I mean, if you go back to 2018, as I'm sure you know, we made about $180 million of revenue on something approaching, you know, high $400 to $500 million of revenue. So we've demonstrated margins in that kind of range in the past. I think as we get bigger and we have more volume, there are certain costs that don't grow with volume, corporate costs, head office costs, a whole bunch of different costs. But equally, as we continue to increase our quality of our product and as our customers demand that, we also get some cost headwinds too. There's no doubt there's meaningful benefits. opportunity for our margins to expand, but it's largely going to be driven by what your assumption of pricing is as to what gets you there.

That's helpful. Thank you, Paul. And a related question on ROA, and I will get kind of a turn from this. In the second quarter, there seems a pretty obvious disconnect between that and the recurrence needed to incentivize the capacity that the world is clearly asking for. So how do you expect those two realities to converge? Thank you very much for your perspective.

I think the solution to all things and the question that everybody asks and the challenge that everybody faces is pricing. When you take a look at resources and you try and get an appropriate return on investment, which is what we're all looking for, there's a lot of variables in there. Not everybody shares the same view. You know how long the life of the resource is. What is the political risk in the country? What is the capital risk when you start the program? We've seen many projects. increase their capital cost from start to finish and so on and so forth. I think the bridge to this remains, in my view, more visibility and stability, particularly on the pricing environment. I do think the business model of our industry has to evolve as well. I think, you know, I thought for a while that what we actually have is a transitional industry model now with a lot of non-integrated converters in China and a lot of you know, non-chemical assets based in Australia, i.e. mining assets. And I think what we're seeing is a recognition amongst most people that if you don't have upstream or downstream, as you described, if you don't have a resource, you've got to get one. And we see a lot of Chinese converters taking that path and a lot of others realizing that if you're only a miner, you can't stay there. You need a department downstream or you need to invest in conversion capacity yourself. The reason I think that's important is because I think that is the primary step that helps bring more stability and predictability to pricing because now you do have control of the entire cost structure and you can sit down with customers and have a proper conversation with transparency about what returns you need. It's harder to do that when one of your variables is spluttering concentrate that can go from $350 to $1,200 in the space of four months, five months, you know, so. I think integration of supply is inevitable and a necessary precondition for appropriate returns on investments.

That is very helpful. Really appreciate it and best of luck.

Next question comes from the line of Alex from KeyBank. Your line is now open.

Thank you, and good evening, everyone. Paul, it sounds like there was meaningful progress at Namaska. So based on what you've learned so far, are you inclined to stay at the 25% or increase your share in the project in the future?

Yeah, you know, Namaska, as I'm sure you know, it runs as an independent entity. We don't run it. We're not making the decisions. We're obviously party to them. We certainly think that the project is what we thought it was. We've known, as we know, since about 2000, early teens, we've been looking at talking to previous owners, et cetera. And I think what we've seen is really solid progress of that management team in understanding the market, understanding the challenges in building an integrated supply chain. There's a huge amount of support from the Quebec government on that one. That's what helped Namaste get this new location, which is a far more appropriate place to build. And I think all along, I think it really reinforces why we wanted to invest in Namaskar. And we are providing technical help and another help to women in making those decisions. Clearly, in the long run, Leiden's position in the market is not to be an investor in other people's living projects. So you should assume that at some point in the future, we would hope to increase our involvement in and ownership of that Namaskar resource. But it's been... barely a year, really, less than a year since we made the investment. And there's still a lot of work to be done to verify that it is, in fact, what we think it is.

And so we're in the rush at the moment. If I can just quickly follow up on that, maybe just a softer question on the same. Are you more positive about this project, having learned new things over the last few months, or about the same place, or more negative on it, if you could directionally indicate?

We were, as I'm sure you may have known, highly cynical about the previous NAMASCA-based project. So we think the resource is a very good, solid resource. It's a good concentration. It's a good size. It's in a difficult-to-mind location, and it brings its own challenges. We are more positive on the new location, for sure. And I think the idea that this is making lithium hydroxide makes sense. But it, again, is not without challenges. So it's an investment, it's a resource, it's a project that we remain absolutely positive about. It certainly has a place in the lithium supply chain in the future. There's absolutely no doubt in my mind about that.

Thank you.

There are no further questions at this time. I will now turn the call over back to Mr. Rosen for closing remarks.

Thanks. That's all the time 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.

This includes the live incorporation second quarter 2021 earnings release conference call. Thank you.