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Good morning, and welcome to the Fourth Quarter 2018 Earnings Release Conference Call for the 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 will now turn the conference over to Mr. Rasmus Gerdeman, Chief Strategy and Investor Relations Officer for the Livent Corporation. Mr. Gerdeman, you may begin.
Thank you, Sharon. Good morning, everyone, and welcome to Livent Corporation’s fourth quarter earnings call. Joining me today are Paul Graves, President and Chief Executive Officer; Gilberto Antoniazzi, Chief Financial Officer. Paul will review our fourth quarter performance and provide the outlook for the full-year and the first quarter of 2019. Gilberto will then provide an overview of select financial results.
The slide presentation that accompanies our results, along with our earnings release, which includes our 2019 outlook are available on our website, and the prepared remarks from today’s discussion will be made available after the call. Tom Schneberger, Chief Operating Officer, will then join Paul and Gilberto to address your questions.
Please note that we intend to complete today’s call in 45 minutes to allow FMC’s fourth quarter earnings call to begin promptly at 9:00 AM Eastern Standard Time. Additionally, we would ask that any questions following our prepared remarks be limited to one per caller. We would be happy to address any additional questions directly after the call.
Before we begin, let me remind you that today’s discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including, but not limited to those factors identified in our release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today’s information. Actual results may vary based upon these risks and uncertainties.
Today’s discussion will focus on adjusted earnings for all income statement and EPS references. A reconciliation and definition of these terms as well as other non-GAAP financial terms to which we may refer during today’s conference call are provided on our website.
With that, I will turn the call over to Paul. Paul?
Thank you, Rasmus, and good morning, everyone.
Today, I will review Livent’s fourth quarter and full-year 2018 financial results and walk you through our guidance for the first quarter and full-year 2019 in detail. I will also review current market conditions and summarize the outcome of our 2019 contract negotiations. We’ve heard from investors about the opacity of our industry, and I hope that what we share today will provide a better understanding of both Livent and of our industry.
2018 was an important year for Livent and we finished the year well. As set out on Slide 3, revenue in the fourth quarter was 6% higher than the same period last year, largely due to higher volumes. With no additional capacity added in the quarter, the higher volumes came from increased operating rates at both our China and U.S. lithium hydroxide units.
On a like-for-like basis, our pricing was up in the quarter, as it was all year, but a negative customer mix offset the benefit of higher prices. In particular, we increased the relative proportion of sales to cathode material producers in Asia outside of China, where we are seeing the strongest growth in demand today. This was in line with our expectations, as shown by the fact that our full-year revenue and adjusted EBITDA were both within the guidance we had been providing all year.
For the full-year, we saw a 27% increase in revenue, with higher volume and higher pricing both contributing positively, offset by a slightly negative customer mix and a small FX headwind.
Turning to Slide 4. Our adjusted EBITDA in the quarter was 5% higher than last year on a comparable basis. Volume again was the main factor, with favorable FX being offset by higher costs. The fourth quarter EBITDA margin of 38% was lower than the full-year rate of 41%, as the customer mix at the end of the year was not as favorable as what we had experienced during the first-half of the year.
For the full-year, adjusted EBITDA was 45% higher on a comparable basis, as shown on Slide 5. Volume was the largest factor, as we benefitted from a full-year of lithium hydroxide production in China, as well as higher output in Argentina as our debottlenecking investments drove higher production rates.
Pricing was higher than 2017, while customer mix was slightly negative. Costs were almost $17 million higher than the prior year, driven by two main factors. First, inflationary pressures in Argentina were not offset by currency adjustments until late in the year, creating a cost headwind until the devaluation took place. In aggregate, FX movements were a net positive on the cost side and a net negative on the revenue side, essentially cancelling each other out.
Second, raw material costs were higher in our butyllithium and high purity lithium metal businesses as we saw increased lithium metal costs. Ultimately, the most important driver of our business, and indeed our industry, is the growth in the sales of electric vehicles. It is this trend that will define Livent’s growth in the next decade and beyond.
During 2018, a total of 2 million electric vehicles were sold globally, and sales forecasts were exceeded across all regions. Even as internal combustion engine vehicle sales slowed during 2018, electric vehicles maintained a growth rate of over 60%. There were over 60 new electric vehicle model launches in 2018 and there are more than 90 new electric vehicle model launches planned for 2019 as major automakers continue to increase the pace of investment to provide electric vehicle offerings.
Finally, the trend towards pure electric vehicles and larger batteries with higher energy density was clearly demonstrated during 2018 and we expect it to continue. Our ability to support customers’ innovation and production of higher energy density batteries is at the core of our strategic approach to this market.
These underlying trends of increased electric vehicle penetration and larger more energy dense batteries give us confidence in our strategy to invest and continue to expand our business.
Before I turn to our 2019 guidance, I want to discuss how the year-end process for contract negotiations for 2019 played out. We saw price and volume increases in both our butyllithium and high-performance lithium metal product lines, reflecting Livent’s strong position in these markets.
Contracting for lithium hydroxide began in late 2018 and early verbal indications from customers suggested increases to volumes and stable to slightly higher prices across all regions. In particular, we saw significant increase in demand from customers in South Korea and Japan, reflecting the continued migration towards lithium hydroxide based cathode technologies in these countries.
In China, however, it became apparent as we moved through December and into January that our existing customers were not willing to enter into annual or longer contractual commitments for lithium hydroxide at volumes or prices that they had verbally indicated to us just a few weeks earlier.
In a number of cases, these customers abruptly halted their conversations with us unless we were willing to commit to prices that were lower than prices we were achieving elsewhere in the world. We believe that this recent shift was caused by two factors.
First, uncertainty created by potential changes to the China electric vehicle incentive regime leading to uncertainty as to what form of cathode materials will be needed in 2019. And second, customers in China have relayed to us their view that lower spodumene prices observed in late 2018 should feed through to lower lithium compound prices in the year.
We believe that the price at which lithium hydroxide will ultimately be supplied in China will be in line with our prior expectations, given what we see in terms of demand compared to available qualified supply. As of this time, however, it appears that customers in China have elected to delay their purchasing decisions until they have greater clarity on market conditions.
Faced with these dynamics, we made the decision that we would contract a greater proportion of our volumes to customers in Japan and Korea than we had previously planned. A positive outcome from this is that we have now broadened our exposure to producers of high nickel content cathode materials, as well as diversified our geographical footprint.
Consequently, we expect our volumes sold to Chinese customers will not increase in 2019 compared to 2018. It also became clear that a number of our lithium carbonate customers were keen for us to continue to supply them with our Argentina produced carbonate as we went through the year-end contracting process. Many of these customers are using this carbonate in specific applications where our product is already qualified and they were reluctant to qualify new suppliers.
As a result, Livent may earn a premium price on the volumes supplied to these customers when compared to the prevailing market price. In addition, certain customers also buy a broad range of lithium products from Livent. Our initial plan to not supply them with carbonate was expected to be a temporary one, as we await the additional volumes expected to come out of Argentina in the middle 2020.
However, given these developments, we made the decision to continue to supply carbonate volumes in line with 2018 levels. As a result, we have entered into several contracts with lithium carbonate producers to supply carbonate to us in 2019 as feedstock. More specifically, our plan is for all of this material to be used in the production of our lithium hydroxide in China.
Our production experience allows us to purchase a reasonably wide range of lithium carbonate and manage our hydroxide operations to produce final product that meets required customer specifications. I will give more details on the pricing outcomes, our expected production and sales volumes and the financial impact of our contracting strategy in a moment.
First, let me turn to our guidance for 2019 set out on Slide 6. We expect revenue to increase to the $495 million to $525 million range, an increase of 15% at the midpoint, with 90% to 95% of this revenue coming from performance lithium compounds. We expect adjusted EBITDA to increase to $190 million to $200 million, an increase of 7% at the midpoint on a comparable basis.
These midpoints represent an adjusted EBITDA margin of 38%, in line with Q4, but lower than full-year 2018 by approximately 3 percentage points. This decline is driven by the lower effective margin on lithium carbonate, as both lower realized prices and higher costs arising from the purchase of third-party material depress our overall adjusted EBITDA margin.
We saw the opposite effect in lithium hydroxide, where around 80% of our volumes will be sold at the same or higher prices compared to 2018, and in butyllithium and high purity metals, where average contracted prices were 3% and 9% higher, respectively.
Offsetting these price and volume increases is a negative impact from customer mix in our hydroxide business, as our commitment of much larger volumes to a smaller number of customers is lowering our average realized price by around $0.50 per kilo compared to 2018, despite the fact that year-over-year prices are higher for most customers.
Finally, higher costs from raw materials and VAT incurred due to higher exports out of China act as a further headwind to 2019 adjusted EBITDA. For the first quarter, we expect revenue of $95 million to $105 million, roughly flat with last year, and adjusted EBITDA in the $26 million to $30 million range. This lower adjusted EBITDA is driven entirely by timing factors. We will touch upon this further shortly.
Let me start with further detail on 2019 full-year guidance, starting with volumes as set out on Slide 7. You can see that we expect to sell around 6,000 tons more of lithium hydroxide in 2019 compared to 2018. In effect, we have taken all of our lithium carbonate sales from 2018 and converted them into additional lithium hydroxide sales. It is this action, consistent with our strategy, that has allowed us to maintain our average price achieved per LCE at approximately $21 per kilogram.
Our 2018 carbonate production was a little lower than we had projected. This was largely due to unplanned repairs we needed to perform, which lost us almost a week of production. Our 2019 lithium carbonate production is expected to be in the 17,500 to 18,500 tons range, 2% to 7% higher than in 2018.
However, this production will not be evenly weighted through 2019 for two key reasons. First, the second phase debottleneck work will not take place until mid-2019; and second, we will see reduced volumes in Q1 as a result of significant weather issues we saw in the last week of January.
We had over 80 millimeters of rainfall inside just a couple of days, along with damaging hail, and the rain has continued for almost 10 days. While we had some damage to equipment which we quickly repaired, we have seen significant dilution to the concentration ponds.
We expect to restart lithium carbonate production in the next day or two as concentration levels return to usable levels. In total, this event caused the loss of approximately two weeks of production during a period that is traditionally our highest yielding time of year, reflecting possibly as much as 750 tons of carbonate production lost.
All of this means that we will need to augment our internal production with approximately 1,000 to 1,500 tons of third-party carbonate for use in our hydroxide units. This use of third-party carbonate is likely to be greatest in the first-half of the year, for the reasons set out above.
With lithium chloride production largely flat, Livent will have approximately 6% to 10% higher total volumes on an LCE basis. To be clear, this analysis excludes the revenue impact of any additional purchased lithium carbonate feedstock, arising from our decision to sell our own lithium carbonate to certain key customers.
Moving now to Slide 8. In total, we expect to generate revenue of between $495 million to $525 million in 2019, an increase of 15% at the midpoint. We anticipate revenue from performance compounds to be in the range of $460 million to $485 million. This represents an increase of around 23% at the midpoint of our guidance range, with hydroxide alone climbing by over 30%.
Butyllithium revenues are expected to climb approximately 9%, driven by higher prices and higher volumes. High purity lithium metal is also expected to increase high single digits percent, with both price and volume contributing, and we expect to sell between 3,000 and 4,000 tons of lithium carbonate.
Now on Slide 9, let me explain the main factors influencing our 2019 adjusted EBITDA compared to 2018. The largest factor driving our increased performance is higher volumes. Hydroxide volumes are roughly 6,000 tons higher than 2018. Increased volumes in butyllithium and high purity lithium metal is also expected to add to adjusted EBITDA.
Lithium carbonate volumes are expected to be flat to down compared to 2018, and our margins on the sale of lithium carbonate will be lower due to the higher costs of third-party purchases. Taken together, these factors represent the majority of the favorable volume impact on our adjusted EBITDA, adding approximately $24 million to $30 million to 2019 adjusted EBITDA.
We expect to see higher prices in all product areas except lithium carbonate. However, we have a significant headwind impacting us throughout the year due to a changing customer mix. Put simply, a larger proportion of our lithium hydroxide volume will go to long-term, well-established and rapidly growing customers.
This, combined with some negative FX impact, has the effect of lowering the average realized hydroxide price by roughly $0.50 per kilo, even while 80% of our customers have committed to a price that is equal to or higher than the price they paid in 2018. The negative shift in mix will more than offset higher prices and is expected to reduce our full-year adjusted EBITDA by $5 million to $8 million. We also see rising costs for raw materials, particularly solvents, metals and energy.
As mentioned earlier, we will also have a temporary cost headwind from VAT incurred in China that we can no longer reclaim due to our decision to export lithium hydroxide to customers outside China. Offsetting this, as the year progresses, we expect to see a cost benefit arising from a favorable Argentine peso exchange rate. Combined, we expect these cost factors to reduce 2019 adjusted EBITDA by $8 million to $9 million.
On Slide 10, we have set out a few more data points that help explain the fundamentals we see in our business in 2019. We will continue to shift towards a heavier weighting of performance lithium compounds, on a revenue basis, as our hydroxide business continues to grow far quicker than any other business.
Our sales contract structure has not materially changed, with about 70% of total 2019 volumes sold under contracts that have a duration of two years or more, and roughly 80% of 2019 volumes contracted at prices that will not change during the year. Within our hydroxide business, the high-growth and strategic customer base is now at around 80% of our total volumes, up from 2018.
And finally, roughly 80% of the customers we sold to in 2018 contracted for volumes in 2019 at prices that were the same or higher than the price they paid in 2018. This last data point gives us confidence that the market for lithium hydroxide remains a strong one for us, in contrast to what we see in the lithium carbonate market. Finally, as mentioned earlier, our butyllithium and high purity lithium metal businesses saw price increases in the mid to high single-digit percents.
Turning now to Slide 11, and an overview of our Q1 guidance. As we have repeatedly said in the past, it can be misleading to look at our business on a quarterly basis. Seasonal variations in production and different year-over-year purchasing patterns experienced from our fastest-growing customers can significantly skew any single quarter.
In 2018, customer mix impacted our quarterly performance, with Q1 2018 adjusted EBITDA margin 7 points higher than in 2018 Q4, with no meaningful change in underlying prices or costs in our operations between those two periods. The impact from customer mix effect in Q1 2019 is particularly pronounced and is exacerbated by the timing in which we will incur certain costs.
First, our Q1 revenue is flat with last year. While customer mix is a headwind to revenue, it is partially offset by higher volumes and slightly higher prices. However, our adjusted EBITDA is significantly impacted by the customer mix. This is predominantly due to one large lithium hydroxide contract that has been in place for several years and therefore has a much lower price than any of our other contracts, including other contracts with this same customer.
Given our commitment to support this customers’ growth, we agreed to ship more than a quarter of their annual 2019 volume in Q1 to support their immediate needs. Obviously, this effect will reverse as the year progresses and this customer represents a smaller proportion of our volume in later quarters. There are cost impacts associated with this decision too, since we will ship a significant proportion of these volumes out of our China facility, meaning we will incur costs of VAT.
Last year, we exported very little volume out of China in Q1, whereas this year we have committed almost all of our China production for the quarter to customers outside the country. We also expect to have lower carbonate production in the first quarter, as I mentioned earlier, meaning that we will be using more of the purchased carbonate in both Q1 and Q2, ahead of higher Argentina operating rates in the second-half of the year, following additional debottlenecks.
Finally, we have costs associated with our butyllithium and high purity lithium metal businesses that we will incur throughout the year. I want to reiterate that the lower projected Q1 adjusted EBITDA compared to our full-year run rate is purely a result of timing that we believe will reverse as the year unfolds.
I will now turn the call over to Gilberto to discuss the financial results in more detail.
Thank you Paul. Moving now to Slide 12 and onto cash flow, balance sheet and capital spending. Reflecting certain separation-related adjustments, Livent generated adjusted cash from operations of $99 million in 2018.
Looking ahead to 2019, we are expecting $105 million to $135 million in adjusted cash from operations, representing an increase of approximately 21% at midpoint of our projection.
With respect to our balance sheet, we ended the year with $28 million in cash and $34 million drawn under our $400 million revolving credit facility. Livent’s full-year capital spending totaled $78 million, which was at the lower end of our forecast, driven largely by timing of certain payments.
With our lithium carbonate capacity expansion project in Argentina on track, coupled with a slight acceleration for expanding hydroxide capacity outside of China, we now forecast capital spending in 2019 to be in the range of $235 million to $265 million. As communicated earlier, the majority of our capital spending in 2019 will be directed towards our carbonate expansion in Argentina, with spending projected at $175 million.
As we advance our expansion in Argentina, we are increasing infrastructure investments in 2019, which will enable us to accelerate the commissioning of later phases. The remaining $75 million dollars will go towards additional lithium hydroxide expansion as we accelerate the buildup of capacity outside of China, as well as towards general maintenance and improvements to production safety, capacity and costs.
We continue to expect that Livent will fund all of it’s announced capacity expansions via free cash flow generation over the announced expansion period, while maintaining ample liquidity. On taxes, at the end of 2018, Livent’s tax rate of 19.6% was very much in line with earlier expectations.
Looking into 2019, we estimate a net tax rate in the range of 17% to 21%. With our underwriters having exercised their greenshoe option to purchase an additional 3 million shares from our IPO, we closed the year with 146 million of common shares outstanding.
Lastly, as per FMC press release issued yesterday, FMC Corporation, with the approval of its Board of Directors, has officially announced the distribution of it’s remaining interest in Livent to FMC shareholders. The spin will occur on March 1, 2019, and will complete the full separation process. Please refer to the press release, available on fmc.com, for additional details.
With that, I will turn the call back over to Paul.
Thank you Gilberto. Before we turn to your questions, I want to quickly review Livent’s strategic priorities that we previously shared with you during our roadshow process and share a few of the key metrics we track to assess the health of the industry and our customers.
What you see on Slide 13 is what governs our strategy and how we prioritize decisions over the intermediate to longer term. While we have expanded our lithium hydroxide production by 13,000 tons since the start of 2017, we recognize that we need to continue to expand our production at the same rate our most important customers are growing.
We expect to give final approval for an expansion of our Bessemer City hydroxide operations in the next few weeks, which will result in an additional 6,000 tons of hydroxide capacity coming online in the second-half of 2020.
To do this, we are accelerating our expansion in Argentina, to ensure we have sufficient lithium carbonate to meet both our hydroxide needs and our customer needs. The first phase of expansion remains on track for a mid-2020 start up, and we expect to give more details on this in the coming quarters.
As Gilberto just mentioned, we are accelerating infrastructure investment, so that we can bring later phases online more quickly, and will give an update on the timing of those expansions in future quarters also. Additionally, we will look to diversify and increase our sources of lithium carbonate supply.
Livent constantly monitors and evaluates a range of strategic opportunities, both internal and external, to improve its supply base. We remain focused on exploring alternative extraction technologies and additional resources to expand our production over and above the planned expansion in Argentina. We continue to find that our customers prefer to contract with proven producers who can supply qualified product to them, reliably and cost effectively, to locations around the world.
Finally, you have previously heard us point to a long legacy and success in developing new and novel technologies in lithium chemistries. Livent has made significant progress in recent months with its printable lithium technology that will enable lithium to be printed directly onto substrates that form the anode of the battery. This exciting new technology will begin trials with a few key customers during the early part of 2019 and you should expect to hear more about this from us during the year.
I will now turn the call back to Rasmus for questions.
Thank you, Paul. Operator, you can now begin the Q&A period.
[Operator Instructions] And your first question comes from the line of Kevin McCarthy with Vertical Research.
Good morning. Thank you. Paul, can you comment on what changed in China as the fourth quarter progressed? And what portion of that change you would attribute to industry-specific considerations around lithium versus general macro uncertainty? And what are you assuming in your guidance for China specifically as the year progresses?
Sure. Clearly, and I think you saw commentary from many many places about a real change in sentiment in China that happened late in the year. It’s frankly, Kevin, difficult to separate how much of it is driven by broader macro concerns. How much of it is driven by specific, what I loosely call, EV uncertainty in the country and how much is driven by lithium specific factors. I think, frankly, they have all contributed to it.
What we do know and I think what we’ve seen and this is corroborated by independent commentary we’ve seen by some of the consultants that cover our industry that there has been very little activity in lithium products, whether that’s carbonate or hydroxide in China in the first – early back-end of December to January and even into early February now, as we get through the Chinese New Year.
As I say, it’s really hard to separate, which is which. We did not, by the way, see those same trends at all in butyllithium or in lithium metal, which does tend me to – lead to think that this is perhaps more related to the EV side than anything else. But frankly, we are keen to see what happens post Chinese New Year ourselves.
Okay.
Actually, a question of our context for the rest of the year, we mentioned that our volumes into China are broadly flat. The majority of that volume remains under contract and with prices that were put in place previously and remain in force. There is some of that volume that is still open to quarterly conversations with those customers, but it’s a relatively small proportion of the volume.
Just as a clarification, Paul, with regard to price for the minority of your portfolio that – that’s not fixed, what are you assuming in that regard?
We’re assuming that the prices are roughly in line with what our average price is. One of the challenges we have, I think, we’ve shared this with you before. The average realized price is math. It’s a total revenue divided by the number of kilos of hydroxide that we sell.
We have only one contract, where pricing is at or below that price. Every other kilo that we have out there is at a price north of our average realized price. So it’s a very distorted effect you get by looking at our average realized price. And so looking into the rest of the year, I think, we’ve been pretty clear of what we think an equilibrium price for lithium hydroxide is and that’s where we think this business will trade during the year.
Okay. Thank you very much.
Your next question comes from Christopher Parkinson with Credit Suisse.
Great. Thank you. Can you just comment – it’s kind of corollary to Kevin’s question. As you comment on the – how the Chinese negotiation is and how the evolution of that is occurring in the context of the current local dynamic. Is this in anyway affects your long-term thinking regarding local hydroxide expansions, given the VAT, or should we consider that unchanged?
We should certainly consider it unchanged, because it’s a difficult one. We have to remind people that there was essentially no lithium hydroxide sold in China for battery purposes until 2017. This is a new market that’s evolving very quickly. We’re seeing the Chinese customers themselves have to sort through who is getting their product qualified in the battery and vehicle supply chain. And so there’s by almost definition, there’s a degree of unpredictability and uncertainty to the quarterly or even – maybe longer than that period of activity.
However, it – the move to high nickel content cathodes, the move towards the use of lithium hydroxide, the change of battery technology is clear, it’s extremely clear. It’s very difficult to predict on a quarterly basis. I think, some of our customers, for sure, are going through a few teething pains as to exactly the product that they’re producing and getting their own products qualified.
And so I think what we’re seeing is what you would expect to be a normal degree of volatility and uncertainty as new technologies are being adopted in that country. It still remains a largely lithium carbonate market, let’s not lose sight of that.
Thank you. And just as a quick follow-up on that front. There’s obviously been a lot of noise in the Chinese market. In terms of just the evolution of the demand dynamics, your nickel-based cathodes, your discussion unless – obviously have a cathode maker or the battery manufacturer or the ROM. Has there been any change whatsoever in terms of your longer-term demand outlook, or the deep in firms over the last six months? How should we be thinking about that?
I think, the most telling data point that we picked up this year was really quite a significant shift increase in demand for lithium hydroxide by non-Chinese producers who are very credible and well-established, but historically have been almost – using almost entirely lithium carbonate in their production processes. And we’ve seen a meaningful shift in that dialogue with those customers who are now looking to increase demand, looking hydroxide that they purchase.
I’d also point to when you look at the new facilities that are being built in China today, whether by Chinese or non-Chinese companies, they’re almost all looking at next-generation lithium-ion batteries. And that again, reinforces our view that the growth in lithium hydroxide and we’ve, I think, been pretty clear 2021, 2022, 2023, all the years where we really see the inflection point in demand for lithium hydroxide. I’d say, we’re more confident on that today than we were six months ago.
A couple. Thank you.
Your next question comes from Stephen Byrne with Bank of America.
Yes. thank you. Do you produce different grades and different purities of lithium hydroxide depending on the customer and each sold at different price points?
So the short answer to that is, every customer has very specific requirements for performance for the lithium hydroxide that we sell to them. It doesn’t mean though that we cannot meet all those requirements with, what I loosely call, one grade. Now we do produce different grades. We do produce different types of lithium hydroxide.
What we tend to see though is that, there’s a constant tightening of the requirements from those customers. And our job frankly, is to produce to get a grade of lithium hydroxide that meets the requirements of the most demanding customer, and that’s what we continue to strive to do.
Pricing is a more complex conversation. As I’m sure, you can imagine, there’s more to it than just simply specification and grading volumes. And so that’s – I wouldn’t want to give you a misleading answer about different prices and grades between those.
Thank you.
Next question comes from Bob Court with Goldman Sachs.
Good morning. This is Don Campbell on for Bob. Thanks for the interesting color on the China market. I guess, could we dive a little bit deeper in terms of customer preferences and the difference between kind of the China customers versus your Japanese or Korean customers in terms of that qualification and specification, and whether this seemingly bifurcating market can be sustainable?
Sure. I think the bifurcation in the market, there’s a couple of factors at work. Just bear in mind that we have slightly different nickel rich cathode chemistry is being produced in different parts of the world. And that can certainly be a factor in people’s experience and preferences for use of lithium hydroxide.
I think, one thing we’ve seen throughout the year in China and outside China is a constant tightening of specification requirements on lithium hydroxide, that really hasn’t changed. We are not always entirely privy to the manufacturing process of every single customer. You can understand, it’s quite a commercially sensitive question for them.
We do believe that they do all use their lithium hydroxide in slightly different ways and that may account for some of the different requests that they make for from us. We certainly see a Chinese consumer of lithium hydroxide. Today has been more willing to blend lithium hydroxide or to use different versions.
We’ve also seen frankly, less success in commercialization of the resulting cathode materials from those producers. And I think what you’re seeing there is a constant learning process and a constant evolution of how they use lithium hydroxide and what the key specifications that matter most to them.
Got it. Thank you.
Next question comes from Joel Jackson with BMO Capital Markets.
Hi, good morning, everyone. Could you give a little more color on what type of margin contribution the third-party carbonate resells would be? And is this available to you, because you should have some healthy materials owing to you from Alaska [ph] under a variety of schemes, I suppose it might buy also you in the year, can you describe that dynamically?
Sure. I think, it’s important – let me just reiterate that practically speaking, we will not be reselling any third-party lithium carbonate. We only sell our own produced lithium carbonate. It will come out of Argentina and we will ship directly to customers. So customers that purchase lithium carbonate will see no change from us in terms of what products they get, where they get it from all the grade or the quality of that product.
What we have spent a lot of time working on is making sure that we can use multiple grades and multiple specifications from multiple suppliers of lithium carbonate and our lithium hydroxide facilities. As you can imagine, we are world’s lowest-cost producer of lithium carbonate.
So when we purchase lithium carbonate, it does have a negative impact on our overall margin, because we’re able to purchase from multiple sources in quite large volumes, because we have quite wide tolerances as to what kind of material that we can actually use.
We do believe that we are able to source lithium carbonate at a price that is a meaningful discount to the market price. We do have firm contracts in place for 2019 with multiple suppliers of lithium carbonate, and we’re not going to get into disclose of exactly who they are, what the terms are. We’re not reliant on any one supplier to meet our lithium carbonate requirements for the year.
Thank you.
Next question comes from with P.J. Juvekar with Citi.
Yes. Hi, good morning.
Good morning, P.J.
What are your views on the NAV subsidy cut for 2019 by China? And how are your customers anticipating it or just in for that? Do this year rush to buy any reads ahead of that subsidy cut, and then a potential slowdown? Can you just comment on that?
Sure. I think you have to step back a little bit China, because it keeps evolving quickly. There’s a couple of things going on. There’s no doubt that Chinese policy towards EV’s has not changed. The Chinese policy towards encouraging a rapid adoption of EV and frankly to be the world’s leader in EV adoption has not changed.
I think, there has been a general sense that the shift over towards higher density batteries and longer range vehicles is not really firmly kind of taking off and therefore, requires less direct subsidy by the Chinese authorities. I think what we are seeing is a shift of subsidies, maybe away from the producers, away from even the consumers and more towards infrastructure. We’ve certainly seen redirection of subsidies towards charging infrastructure in the country, all designed to make sure that this continued penetration and growth in EV sales continues.
So I think it’s fair to say, though, as you go through all of that, there’s no doubt that some of them are challenged EV manufacturers and some of the capital manufacturers are looking at this and trying to work out what it means for their own economics. And I think that’s been a reasonably big factor and what caused the pause in purchasing activity in China in late December to January.
I think, we now see that the Chinese government has essentially not moved the subsidies in a meaningful amount. They’ve not improved them. They’ve put a few more regional subsidies in place, and it will unfold, in my view, over the next two to three months how the Chinese producer reacts to that.
And just quickly there was an M&A transaction announced by one of your competitors in fourth quarter. I was wondering if you take a – took a look at that. And is that type of a diversification step that we can expect from Livent? Thank you.
Look, I – I’m assuming that I know which transaction you’re talking about. But okay, I think sourcing a diverse supply of raw materials is a really key question for all of us. We wonder no illusions that being a single source, single point of supply business and the larger automotive sector isn’t necessarily a recipe for success based on historical patterns.
And so we look at every possible transaction, every possible structure of partnership, supply arrangement to provide both the amount of material that we need to grow with our customers, while also reducing our reliance on any single source. That doesn’t mean, we won’t grow Argentina as quickly as possible. We will, there were all limits, there were infrastructure limits to what we can do in Argentina. Therefore, we absolutely will have to look at and be creative, I believe as to how we get a long-term reliable source of lithium carbonate in the future.
Thank you.
Next question comes from Aleksey Yefremov with Nomura Instinet. Your line is open.
Yes. Good morning. Thank you. Paul, the reversal of adverse customer mix, can you tell us any details about the timing of when it happens? Do you have visibility if that starts early in the second quarter or sometime in the second-half? And also do you have good visibility into demand from other richer mix customers? Is this somewhat speculative that they will buy more or you really have the orders?
No, it’s not speculative at all. It’s all contracted commitments that we have in place. I would expect that the mix reversal is going to be more pronounced in the second-half of the year than it will be in Q2 just based on what we know with regard to two factors.
One, the pace at which other customers start to take up their commitments with us; and secondly, the fact that our third line bring on more volume making us able to serve those customers comes online probably commercially effectively in the middle of Q2 as well. So we just have more hydroxide volume in the second-half of the year to meet some of those customer’s needs. But yes, we will expect this to even out little in Q2 and start to reverse in Q3 and Q4.
Thank you. And then in China, if demand from those customers or other customers that you walked away from – if demand comes back at some point in 2019, would that be upside to your guidance? You still have some on spec volume, it seems like this year?
Yes. We’ve been pretty deliberate as to how much, what I loosely call, quarter-to-quarter pricing risk we’re willing to take. I think, given where we were at the end of this year, we’ve taken a little more of that this year than we have done historically, partly driven by the timing of the – of bidding on the new line. We do have a little more upside to pricing if, in fact, China does increase during the year.
Look, frankly, if it doesn’t, we’ve been turning customers away out of sight China unfortunately. We remain in a position where we have more demand than we have available supply. And so what I wouldn’t want to overstate this, there’s certainly a degree of upside from higher pricing if, in fact, China does – China pricing does rebound.
Thank you.
And operator, that is the last question. So that’s all the time we have for the call today. I’ll be available following the call to address any additional questions you may have. Thank you, and have a great day.
That’s all the time we have for today. This concludes the Livent Corporation fourth quarter 2018 earnings release conference call. Thank you.