Livent Corporation (NYSE:LTHM) Q2 2023 Earnings Call Transcript

Livent Corporation (NYSE:LTHM) Q2 2023 Earnings Call Transcript August 3, 2023

Livent Corporation beats earnings expectations. Reported EPS is $0.51, expectations were $0.46.

Operator: Good afternoon, and welcome to the Second Quarter 2023 Earnings Release Conference Call for Livent Corporation. Phone lines will be placed on listen-only mode throughout the conference. After the speakers’ presentation, there will be a question-and-answer period. I will now turn the conference over to Mr. Daniel Rosen, investor relations and strategy for Livent Corporation. Mr. Rosen, you may begin.

Daniel Rosen: Great. Thank you, Josh. Good evening, everyone, and welcome to Livent’s second quarter 2023 earnings call. Joining me today are Paul Graves, President and Chief Executive Officer; and Gilberto Antoniazzi, Chief Financial Officer. The slide presentation that accompanies our results, along with our earnings release, can be found in the Investor Relations section of our website. Prepared remarks from today’s discussion will be made available after the call. Following our prepared remarks, Paul and Gilberto will be available to address your questions. Given the number of participants on the call today, we would request a limit of one question and one follow-up per caller. We’d 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 Form 10-K and other filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today’s information. Actual results may vary based upon these risks and uncertainties. Today’s discussion will include references to various non-GAAP financial metrics. Definitions of these terms, as well as reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP, are provided on our Investor Relations website. And with that, I’ll turn the call over to Paul.

Paul Graves: Thank you Dan and good evening everyone. As always we have a number of important topics to cover with you today. Livent reported another strong financial performance in the second quarter, and we continue to see very healthy demand from our customers amid a fairly resilient broader lithium market environment. The company is also reiterating its full year 2023 financial guidance after previously raising projections with our first quarter results. This year’s anticipated record performance is highlighted by adjusted EBITDA projected between $530 million and $600 million. Progress at Nemaska Lithium, an integrated 34,000 metric ton lithium hydroxide projects in which Livent is a 50% shareholder and operating partner continues to advance.

After completing its detailed engineering phase earlier this year and receiving Nemaska board approval, the company is pushing forward with construction and plans for first sales in 2025 in the form of spodumene concentrate. We have provided cost estimates for development of the integrated project as we will discuss. Nemaska Lithium also signed its first customer agreement, which was announced with Ford Motor Company in the second quarter. Ford will be an important and strategic partner as both companies and Livent share a commitment to the development of a sustainable and socially responsible North American battery supply chain. During the second quarter, a Livent and Allkem announced a proposal to combine in a merger of equal’s transaction to create a leading global lithium chemicals producer.

In addition to reiterating the highly compelling logic for the transaction, we will highlight the progress made since signing and the key milestones to expect as we approach targeted transaction clothes by around the end of calendar year 2023. Finally, Livent recently published its annual Sustainability Report for 2022. We will touch on key accomplishments for the company as well as our unwavering belief that lithium will continue to play a critical role in supporting a low carbon future. Before going into more detail on Livent business updates, I will turn the call over to Gilberto to discuss our second quarter performance as well as our reiterated full year 2023 financial guidance.

Gilberto Antoniazzi: Thanks, Paul and good evening everyone. Turning to slide 4, Livent reported second quarter revenue of $236 million. Adjusted EBITDA of $135 million and adjusted earnings of $0.51 per diluted share. These results were all up considerably versus the second quarter of 2022, but were lower than the record set in the first quarter of 2023 results. Volumes sold were roughly flat versus the first quarter, but average realized prices were slightly lower and overall costs were higher, all of which was largely aligned with our own expectations and already reflected in our 2023 full-year financial guidance. Lower realized price in the second quarter was seen across most of our lithium products. However, the impact was more limited by the fact that we sell very lithium carbonate today, which is where we saw the weakest relative prices.

Given the negative trend we saw in lithium market prices in the first quarter of this year, and the natural lag of a few months typically seen in achieved contract prices, we had decent visibility into this move lower. We previously discussed the cost-related benefits we saw in the first quarter as being mostly timing-related. As expected, we saw the impact of higher costs on our second quarter results, and we’ll continue to do so for the remainder of 2023. The biggest drivers behind this increase were royalty payments, as a result of higher reference price on which royalties are calculated, and higher input costs for production, most notably energy, raw materials such as soda ash, and labor. Livent’s total capital spend year-to-date was $156 million.

We expect this level to increase in the second half of the year as we further progress multiple on-going expansions. As a reminder, Livent’s 2023 capital expenditures are anticipated to be $325 to $375 million, slightly higher than 2022, and are supported by adjusted cash flow from operations projected to be in the range of $360 million to $440 million. Our balance sheet and overall liquidity remain very strong. We ended the quarter with $160 million in cash, and no draw under our $500 million revolving credit facility. The combination of our current cash position, our ability to draw on the credit facility, and a strong outlook for cash generation, give us continued confidence in our ability to internally fund our capacity expansions. On slide 5, we reaffirmed Livent’s full year 2023 guidance range after increasing projections with our first quarter results.

We continue to expect a substantial improvement in financial performance compared to 2022, leading to another year of record results. For the full year, we project revenue to be in the range of $1.025 billion to $1.125 billion, and adjusted EBITDA to be in the range of $530 million to $600 million. This implies revenue growth of 32% and adjusted EBITDA growth of 54% at midpoint versus 2022. Our guidance continues to be based on higher volume sold and higher average realized pricing across all lithium products, partially offset by higher anticipated costs. We expect second half of 2023 financial performance to be broadly similar to the first half of the year. But as you have seen with Livent in the past, the cadence of our earnings can be very different, especially given different product and customer mixes from one quarter to the next.

When evaluating what could potentially affect full year results, be it towards the high or low ends of our guidance ranges, it largely comes down to volume and pricing. Total volumes in the second half of 2023 were always expected to be higher than the first half for Livent, driven by our initial phases of expansion coming online. This includes our first 10,000 metric ton expansion of lithium carbonate in Argentina, which is largely complete and in the commissioning phase, and we’ll see a new 5,000 metric ton lithium hydroxide line in Bessemer City, North Carolina, that was completed at the end of last year. Due to the nature of our ramp up in Argentina, most of this incremental sales volume will be weighted towards the fourth quarter, meaning any delays could result in a portion of production increases early to 2024.

Equally, we had all these expected market prices to decline to 2023, especially compared to the fourth quarter of last year resulting in slightly lower realized prices in the second half compared to the first half of 2023. Despite this, we continued to expect the Livent we see meaningful average realized price improvements in the full year 2023 compared to 2022. Ultimately, the magnitude of this improvement will be determined by how the retail market evolves over the remainder of this year, and particularly in the fourth quarter, given our volume cadence. While we achieve higher lithium prices in the first half of the year versus initial expectations and the market continues to feel healthy, our guidance does not assume any notable near improvement in lithium prices from current levels.

As a reminder, roughly 70% of our 2023 volumes have prices that are fixed for 2023 on terms that were set prior to a fourth quarter, earnings release. And many of these are under firm take or pay commitments. As a result, we have a high degree of confidence around a 40% average expected price increase across these volumes. The remaining 30% of volumes have varying levels of exposure to the lithium market price. The 730 volume allocation between firm fixed price commitments and market price exposure opportunities allows us to strike a balance of walking in higher prices for 2023, while retaining flexibility to elect which product line to focus on carbonate or hydroxide, and even chloride or metal versus due to lithium. It also allows us to retain potential addition upside as we move into 2024.

Finally, while we expect higher costs in 2023, we anticipate meaningful margin improvement versus 2022 largely due to pricing, which will more than offset this higher costs. Compared to the second quarter, in addition to a higher projected royalty payments in Argentina, we expect to temporarily face higher costs on the commissioning and ramp up of our new production units in the second half of the year. I will now turn the call back to Paul.

Paul Graves: Thanks Gilberto. Now while not as extensive as our typical remarks. I do want to make a few comments on current lithium-market dynamics. We’ve seen the historic day high lithium prices at the end of Q4 of last year fall to what we believe are more sustainable levels in the last two quarters. The floor on pricing, which is likely set by high cost producers in China, seems to be settling at above $30 per kilo in China based on public data points, and we expect this to be the case through the rest of this year and into 2024. However, we also can see that they are likely to be price spikes above this level into the foreseeable future, driven by inevitable demand movements and supply interactions, both of which can be driven by multiple hard to predict factors.

Underlying fundamentals, ignoring these short-term movements remain the same, which is an overall market that is at best tight. And when looking at the higher performance, qualified material markets such as battery qualified hydroxide, quite likely short of sufficient supply for several years to come. Given these market characteristics, we have remained consistent in our realized price forecast for the year, with average prices in the second half of 2023, lower than what we saw at the end of Q4 last year and into Q1, but still significantly higher than what we have ever seen historically. Turning now to slide 6 and a few operational updates for Livent. As you may have heard during the quarter, in the early morning of Monday, June 26th, a fire broke out at Livent’s 800-acre manufacturing facility in Bessemer City, North Carolina.

The fire was largely contained to a warehouse that was used to primarily to store lithium metal and is located away from most of our operating facilities at the site. Most importantly, there were no injuries to Livent personnel and emergency responders or members of the surrounding community. Livent carries adequate insurance for this type of event and is working with its providers to assess the damage and applicable coverage. There is expected to be minimal impact on financial results from the incident. The company was able to resume operations at Bessemer City within just two days of the fire and lithium hydroxide, butyllithium, and catalyst-grade lithium metal production lines were quickly back to normal operating levels. There is one business we have periodically discussed that may take a few additional months to bring production back online due to impacts on shared infrastructure, and that is high purity lithium metal.

However, this product is very small from an earnings contribution standpoint. Turning now to Livent’s on-going expansion efforts that will have meaningful volume growth for the company over the next few years. Beginning with hydroxide, towards the end of 2022, we completed a 5,000 metric ton expansion in Bessemer City, bringing total capacity at the site to 15,000 metric tons of hydroxide. The new unit has been producing initial material while getting qualified with relevant customers, although we do not expect meaningful volumes until our first carbonate expansion phase in Argentina ramps up in the next few months, as this will be used as feedstock for the unit. Construction also continues to progress well on a 15,000 metric ton lithium hydroxide facility at a new location in the province of Zhejiang in China, and is on track for completion by year-end.

First commercial volumes from this unit are expected in 2024, and it will double our capacity in the country while taking our total global lithium hydroxide capacity to 45,000 metric tons. In Argentina, work continues to progress on our two equal 10,000 metric ton phases of lithium carbonate expansion. Having recently completed our first phase, we are now in the commissioning stage of bringing online this first 10,000 metric tons of production. We expect first product to be generated in the third quarter, with a ramp-up to commercial quantities of carbonate in the fourth quarter. We expect to complete our second 10,000 metric ton phase in Argentina before the end of 2023. This will result in our nameplate lithium carbonate capacity being doubled out of 2022, approaching 40,000 metric tons.

It will also have us largely balanced between lithium hydroxide capacity and our carbonate production capabilities to feed it. I’d like to spend a little bit of time talking about Advancements in Nemaska Lithium on slide 7. As a reminder, Nemaska Lithium is an integrated 34,000 metric ton lithium hydroxide project located in Quebec, Canada, in which Livent is a 50% shareholder. Earlier this year, after completing the detailed engineering phase and receiving approval from the Nemaska board, the project entered its current construction phase, which includes the acceleration of mining operations at Whabouchi. Commercial production and sales of spodumene concentrate are expected to begin in 2025 and will continue until the hydroxide facility comes into full production.

Initial production of lithium hydroxide is expected in 2026. Total capital requirements for project development are estimated to be approximately $1.6 billion with the upstream Whabouchi development comprising roughly $400 million of that total amount. We anticipate the majority of this capital to be spent in 2024 and 2025. Project operating costs on a fully integrated basis are expected to be very competitive with other comparable lithium production assets. The Nemaska Lithium project continues to be highly attractive due to its relative cost position, strategic location in North America, and first-mover advantage for hydroxide in the region, and its favorable sustainability profile with access to low-carbon hydroelectric energy. Sources of funding for project development are expected to include a combination of prepayments from customers, various sources of government funding, third-party debt financing, and contributions from Nemaska Lithium’s two current shareholders, Livent and Investissement Québec.

At this time, Livent does not expect its own funding contributions for the project development to exceed 10% to 15% of total needs, and these capital contributions will not all be delivered up front. This level of funding is consistent with a press release made by IQ last month where they highlighted a commitment of C$250 million in capital to help fund the project, which will also be contributed over time as needed. After Livent was appointed to engage in the sales and marketing efforts on its behalf, Nemaska Lithium announced its first customer agreement with Ford in Maine. The agreement calls for the delivery of up to 13,000 metric tons of lithium hydroxide per year, over 11 year period, with the sale of spodumene concentrate from the Whabouchi mine to Ford until lithium hydroxide production is ready in back and forth.

Both companies and Livent are committed to supporting the development and growth of the North American battery supply chain, and we are appreciative of Ford’s strong commitment to the project. We’ve also mentioned in the past that there is additional land available at the site in Bécancour to add future lithium chemical production. With additional line expansions also likely to be quicker and more capital efficient, one of the main considerations to do this would be the ability to secure enough lithium feed stock material to feed the additional units on an integrated basis. I’d now like to spend some time highlighting Livent’s pending merger vehicle with Allkem that will create one of the leading global lithium chemical companies. For a much more in-depth review of the proposed transaction, I encourage you all to review the transcript from our prior call on the May 10th announcement date, as well as the materials available on the Livent investor relations or the merger website.

However, I would like to reiterate the extremely compelling strategic rationale for the transaction, which has only grown in the last few months. The transaction delivers a step change in all of our critical objectives, and the merits can be most easily summarized in the following three points. It greatly increases our scale with an expanded geographic footprint and a combined lithium deposit base that ranks amongst the largest in the world. It immediately enhances our vertical integration, bringing together complementary businesses and areas of expertise that can deliver meaningful operating synergies and capital savings while both accelerating and the risking our development plan. And finally, both companies contribute highly attracting growth profiles in similar geographies that are truly unpowered when combined.

We expect the merger will enable us to unlock significant value creation for shareholders while enhancing our position within the lithium value chain and increasing our relevance to a global customer base. As you will see on slide 9, both companies have been working diligently since the announcement to be in a position to close the transaction as quickly as feasible so that the NewCo can begin to deliver the various benefits? Key milestones have continued to progress. All pre-closing regulatory notifications and applications, or draft filings as applicable, have been filed in required jurisdiction by Livent and Allkem, including both Antitrust and Foreign direct investment. Additionally, a preliminary S-4 registration statement was filed with the SEC on July 20th, which provides important information about Livent and the proposed combination.

The NewCo Board nominees were also announced earlier this week. The NewCo Board will be comprised of six nominees from the current Livent board, including myself and six nominees from the Allkem board, including Peter Coleman, who will serve as chairman of the NewCo. As far as key next steps are concerned, Allkem investors are awaiting a scheme booklet for the proposed transaction, which is the Australian equivalent to the S-4 in simple terms. This scheme booklet, which will include the independent expert report, is expected to be finalised and sent to investors early in the fourth quarter. Once all relevant documentation is distributed and approved by the applicable regulators, each of Livent and Allkem will seek approval from their respective shareholders, a special meeting is expected to take place within a day of each other in the fourth quarter.

Some sector-positive votes, as well as all other required approvals and closing conditions, which both parties believe can be achieved by the end of calendar year 2023, the transaction will move to closing. We’re encouraged by all of the progress made today, by the positive feedback we’ve received from shareholders, customers, and other stakeholders so far, and we look forward to keeping you updated as we reach critical milestones and have more information to share on various fronts related to the merger. I want to conclude on slide 10 by providing some commentary on Livent’s latest ESG efforts. Livent recently published its 2022 sustainability report with a theme of reimagining possibilities. It reflects the company’s commitment to a responsible production and expansion to an on-going focus on environmental stewardship, social responsibility, and transparency.

Among the highlights of the report are an initial Global Scope 3 screening of Livent’s Greenhouse gas emissions, first disclosures on global air pollutants, and a summary of recent water and biodiversity studies that were conducted at the Salar del Hombre Muerto in Argentina alongside some of our key customers. Our report follows leading disclosure frameworks with key ESG metrics reviewed and assured by a third party. We will continue to prioritize corporate social responsibility within our operations, supply chain, workforce, and communities, and do our part with customers and partners to support a low carbon future while minimizing environmental impacts. I will now turn the call back to Dan for questions.

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

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of David Deckelbaum with TD Cowen. Your line is open.

David Deckelbaum: Thanks Paul, Gilberto, and team. I appreciate the time this afternoon and best of luck with the closing in the Allkem deal. I did want to just check in on Salar del Hombre and see if I missed this, if you could just be explicit about how many volumes you’re including in your updated guidance. I think previously the thought was that you’d see 4,000 tons contributed this year. With commercial sales in the fourth quarter, should we be shading down towards three? That’s sort of implied in your guidance with some wiggle room there around, I guess, some upside on timing. And should we still think about the same timeline for the phase two process commissioning?

Paul Graves: Yes, good question, David. You’re right. It’s probably closer to three than four given where we are at the moment in terms of ability to drive commercial sales. I’m sure you can appreciate starting up these operations is a complicated process. And while I’m pretty happy with the progress that we’ve made so far, it’s pretty difficult to predict within a couple of months as to exactly when you iron out all the kinks in the start-up. So it’s around 3,000 tons is about the right number for the rest of this year. The second phase I would really hope the whole point of doing two phases is that we learn as we go. And so there’s no doubt that we already recognize how to accelerate the start-up for the next phase and we’ll be putting those plans in place. So I certainly expect that we will be bringing the second phase on from mechanical completion to commercial production quicker than we will the first phase.

David Deckelbaum: Thanks, Paul. My second is just, I wanted to just clarify the comments you made where it sounds like you anticipate Livent’s net share of build out at Whabouchi and Bécancour under Nemaska to be roughly $160 million to $240 million. Sounds like the other financing might reimburse you for costs over time. I just wanted to clarify that and then maybe get a sense of what we should anticipate in terms of timing when you think these solutions might be more publicly apparent.

Paul Graves: Yes, if you think about the financing, I’m going to break it into four buckets, right? Bucket number one is customers contributing cash advances as part of Nemaska’s commitment to them. Their commitment back is to help with the financing, to be perfectly honest. So that’s something we certainly expect to be a part of the funding for Nemaska as we go forward. The second is what I’m loosely going to call government money and I think it’s a relatively new phenomenon in our industry that there is money available in various forms in various jurisdictions to help accelerate these investments. We create a lot of jobs create a lot of revenue and having an integrated battery industry is pretty important in many areas, including in Québec, Canada broadly.

So we certainly expect there to be some government capital. Then the good old-fashioned last two is third-party debt finance, built on the fact that if we’re producing spod concentrate in 2025, we’ll be cash flow positive, revenue positive by then. Nemaska can in fact start to its own third-party financing and the gaps will be filled by investors contributing new equity, which is split equally between ourselves and IQ. You should expect as we go through the rest of this year and into next year, as we get more certainty on each of those pieces, we’ll disclose them with our earnings as we go.