Q4 2019 Earnings Call
Good morning, and welcome to me fourth quarter and full year 2019 earnings release conference call for the Libin Corporation phone lines will be placed on listen only mode. Throughout the conference. After the speakers presentation. There will be a question and answers period I will now turn the conference over to Mr., Daniel Roving manager Investor.
Relations for the Wiband Corporation Mr. Wilson, you may begin.
Thank you Kelsey good evening, everyone and welcome to Elevens fourth quarter 2019 earnings call.
Joining me today, or Paul grades, President and Chief Executive Officer, and Roberto and Tony Ozzie Chief Financial Officer.
Slide presentation that accompanies our results along with our earnings release, which includes our 2020 outlook 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, Poland, Roberto will be available to address your questions.
We would ask any questions be limited to two per caller.
We would be happy to address any additional questions after the call.
Before we begin let me remind you that today's discussion will include forward looking statements that are subject to various risks and uncertainties concerning specific factors, including but not limited to those factors identified in our release and in our filings with the Securities and Exchange Commission.
Information presented represents our best judgment based on today's information.
Actual results May vary based upon these risks and uncertainties.
Today's discussion will focus on adjusted earnings for all income statement EPS references.
Reconciliations of these terms as well as other non-GAAP financial turns to which we may refer during today's conference call are provided on our website.
With that I'll turn the call over to Paul.
Thank you Dan and good evening, everyone I'm starting on slide three there were few keep topics that will address today as part of our earnings release first liven has provided its financial guidance for the full year ahead.
Well go into further detailed on this guidance today, but as we announced in early January we are expecting profitability in 2020 to be lower year over year, its highest sold volumes more than offset by lower average realized pricing.
Hi, a consumption of third party lithium carbonate.
Well guiding a wider range than usual due in part to the inherent uncertainty in the first half of the year.
Arising from the potential impact to the Corona Vivus.
In this context liven reaffirms its probably a guidance for 2020 volume growth in total LC eat and expects to sell roughly 30% higher topel LC Eads <unk> 2019.
Again, reflecting the uncertainty in haven't on the demand side in the first half of this year, we're highlighting that we may shift more volume towards lithium carbonate sales, depending on how underwear demand days and when opportunities arise.
We'll continue to provide significant volumes to key strategic customers as they increase they use of hydroxide based catheter chemistries in energy storage applications.
And finally, we will provide an update on livens expansion programs.
The drivers behind the decision to slow down the execution of these projects.
On slide four I want to spend some time discussing whether lithium market stands today.
Its implications for 2020.
2021.
Let me begin by characterizing what we saw in 2019.
Clearly there was a slowdown in electric vehicle demand growth in 2019, largely driven by a change in Chinese subsidies.
Even then lithium demand continued to grow at a healthy rate with lithium demand increasing by about 15% year on year to exceed 300000, they'll see towns.
Specifically for hydroxide, we estimate demand grew to just under 100000 product tons from approximately 65000 tons in 2018.
Playing over 35% year on year growth.
If you strip out the base demand from industrial applications, which did not meaningfully change demand for lithium hydroxide <unk> energy storage applications likely grew by about 75% for the.
Despite this increase in demand the short term on Noncurrent contracted lithium market experienced a good decline in pricing over the course of 2019, a significant new supply came on line.
This new supply was largely due to increasing output of spodumene from Australia.
Combined with an increase in Chinese conversion capacity.
A meaningful portion of the China conversion capacity was non integrated meaning the spodumene produces with separate from the converters to produce the final lithium products.
It is this non integrated supply chain, which was largely responsible for the excess supply, resulting an elevated spodumene inventory levels lower operating rates and therefore increased pricing pressure from converters.
It is this part of the supply chain and lithium hydroxide and Carbonite. The represents the marginal cost producer for the industry today, given the inherent inefficiencies in this model.
It is increasingly clear that todays short term pricing levels not sustainable for the lithium industry.
Especially given the need to invest in growing future output to meet growing demand.
Recent announcements across the industry underscore just how challenging it is to justify investment in most projects at current prices.
Not surprisingly, we have seen a number of development projects, where traditional financing sources have been essentially nonexistent.
This difficulty extends to better capitalized lithium produces a new entrants bluebonnets pullbacks or delays in their own expansion plans in light of revised anticipated returns.
From these producers alone and the last few months roughly 300000, the L.C.E. tons of volume I've been taken out of planned supply additions in the next few years.
Beyond expansion delays and cancellations, we've reached a point where prices have also impacted existing operations.
Hi, a cost producers of disclose the struggle to cover operating costs at today's prices.
Some companies <unk>, even have a relatively low cost position struggling to achieve profitability.
And we've seen hardware producers concluding that it makes little sense to continue to deplete finite life resources, a prices that are barely above cash operating costs and significantly could tailing concentrate production as a result.
In light of all of this it's come as no surprise that life and it's slowing down its own capacity expansion.
We expect that the market will begin to see the impact of these production an expansion cuts, particularly as we head into the latter part of 2020 and early 2021.
And the near term however that remains an oversupply primarily due to elevated spodumene inventory levels. There will need to be worked through that's total demand continues to grow.
We therefore, we remain cautious in indicating when we expect to see an inflection in the market.
And have not included any recovery in pricing for the year from today's levels and out 2020 guidance.
Today, we also facing the uncertainty created by the Corona Vivus I'm, particularly the impact it may have on our end markets and.
And the immediate term, we we stopped at all of our operations in China. After the lunar new year and have had no operating issues at the plans themselves.
However, the logistics and transportation issues associated with moving products across provincial borders has created some disruption.
Both in terms of getting raw materials throughout plans and shipping product to customers in China and the other Asian countries.
The lots of challenges today is understanding what the impact of these restrictions will be on a customers and competitors.
It is clear that they will be some headwinds in the first half of this year.
As a result of the epidemic and we are watching closely to understand how much of this will be recovered once China resumed normal operations.
Consequently, we cannot yet predict with any reasonable certainty what the impact on our business will be for Twentytwenty.
And we have therefore attempted to reflect this uncertainty in wide guidance ranges compared to prior years.
I'll now hand over to feel better to review fourth quarter financial results on the 2020 outlook before I would tend to give more color on the status about current expansion programs.
Thank you Paul and good evening everyone.
Turning now to slide five and our financial results to close 2019.
Okay.
The fourth quarter of 2019 reported revenue of $78 million adjusted EBITDA of 60 million and adjusted earnings per share a five cents.
First of all regional guidance provided November performance was impacted primarily by about 800 fewer problems stones, hopefully come hydroxide sold than anticipated.
Largely due to what are the words elite into 2020 by customers.
Sequentially average realized prices remained relatively flat for hydroxide compare to Q3.
Oh pricing for carbonates continued to decline.
For full year 2019 revenue was $380 million adjusted EBITDA was 100 million an adjusted earnings per share was 42 cents.
The year over year revenue decline was driven by lower volumes and lower pricing.
Higher hydroxide sales volumes were offset by a decline in carbonic volume so we.
We also saw a decline in average realized price.
Oh hydroxide and carbonate.
We should carbonic prices falling by roughly 20 percentage points more hydroxide.
Average pricing for future lithium hi, Peter metals were higher on a constant currency basis.
[noise], specifically on the cost side, the largest contributors to low year over year profitability.
At the higher cost of purchased third party carbonate.
One time air freight expenses and be viewed t. incurred on exports from China.
As you recall, we began 2019 with limited inventory.
And I've normal rain event in Argentina, the first quarter of last year cost disruptions in our supply chain.
That resulted in life and incurring additional costs equally air freighting certain material.
Additionally, the roughly 1000 tons of loss carbonate production Argentina.
Meant that we had to source additional third party carbonate above our initial plan to feed hydroxide customer meetings.
We ultimately purchased about 6000 tons of third party carbonate in 2019.
And used roughly 2000 tons hydroxide sales.
The remainder we'd be using 220 20 to meet hydroxide customer commitments.
And lastly, while the V.T. read on Chinese exports was reducing 2018 weaker higher costs total dollar basis due to higher sold volumes.
Randy out 2000, I see results foreign exchange was a headwind for the year on the topline primarily from the RMB and the euro.
Although there was more than offset by cost benefit from devaluation you'd be argentinean peso.
Turning now to slide six [noise].
And our full year guidance for 2020.
We expect revenue to be in the range of $375 million to $425 million just above.
2018 results at midpoint.
This is primarily driven by higher volumes be offset by lower pricey.
Average price on a LC bases across the portfolio, though down by meats.
2020, adjusted EBITDA and adjusted earnings per share are projected to be in Iran. Dropped 60 to 85 million and 18 to 31 cents per diluted share respectively.
On slide seven we provide further detail livens expected sales volume growth 2020.
Well not L.C. basis, we plan to sell up to 28500 tons of lead to 2020.
Implying a roughly 30% increase from 2019 sales volumes at the midpoint of our guidance range.
There are two points I'd like to call your attention too.
First you see that we are showing projecting beecham hydroxide and carbonate sales volumes as one line item and as total Lcs.
Why we previously stated anything should you sell less than a thousand tons of carbon 80 2020.
Paul mentioned earlier, we once you sure we maintain enough flexibility in our plans to sell higher volumes truly make sense to do so.
The sales will not be at the expense of any eyedrops like customer commitments.
And we would not expect carbon he sees to exceed more than a few thousand tons.
Second.
We have now.
Provided projected sales volumes for elsie's related to our older product lines, maybe namely due to we feel quite to the metal and other specialty compounds.
These products are all derived from beecham chloride as a feedstock and we expect sales volumes for these compounds to remain relatively flat year over year.
On slide eight we provide additional detail on key drivers or projected adjusted EBITDA performance, He 2020 versus the prior year.
First we expect to grow to elsie's, so by roughly 30% versus 29 T. sales volumes.
The sales volumes, which are higher than our annual production capacity are achievable given the decision to carry forward or roughly 4000 product lines of hydroxide inventory.
Did you meet customer commitments.
To reduce hydroxide sales volumes, we will need to use up to 7000 tons of third party Beecham carbonates.
Represents an increase of 5000 tons compare to 2019 usage.
This incremental use of third party carbonate its cost to our operations, we compare to rely on our old low cost carbonate produced out of Argentina.
Additionally, we expect average realized pricing for leaching hydroxide in 2020 to be low to mid teens percent lower than the average realized price for 2019.
We also expect carbon pricing to be down again year over year.
With respect to Butyllithium.
We expect both volumes and pricing to be relatively flat compared to last year and finally, we are anticipating some additional costs from inflation on some of our key raw material inputs as well a slight FX headwind.
I want to conclude.
On slide nine by commenting on cash flow as we always give you an update on our cap to supply any plans for 2020 before pull addresses this in more detail.
For the full year 2019.
Well I haven't generated adjusted cash from operations of $90 million.
Hi, with our expectations.
We deployed $189 million in capital spending for the year and why we spend the accelerated in the fourth quarter as expected. The total spend was below our guidance of $210 million to $240 million.
We ended 2019 with debt net of cash or $438 million.
For captain.
Well kept expenditures, we are projecting tourist spending for 2022 being the range of 202 $230 million.
This number is inclusive of growth capital predominately in Argentina, as well as Mena spending across the business.
As a reminder, capacity expansion will lead us to cap doing Argentina is front loaded in both 12, 2019, and 2020 as we'd be though infrastructure that will drive us through future expansion phases.
With that I will turn the call back to Paul.
[music].
Thank you so bad so as we mentioned Enlivens January announcement, we are revisiting what the most appropriate execution strategy is.
For a near term expansion plans.
Start by being clear I'm expansions themselves on the strategy that underpins them have not changed we remain committed to expanding our low cost company operations in Argentina and.
And to growing out capabilities in hydroxide to support our customers growth plans.
It is the pace of execution of the expansions the we have adjusting.
As part of the revised plan liven will be slowing down its phase one carbonate expansion in Argentina, primarily to preserve a financial flexibility in these market conditions.
As we outlined on slide 10, we have continued to hit a key expansion milestones.
We have completed construction camps, a fully underway in key infrastructure build out and I've had a number of carbonate module derived in Argentina from the fabrication yards in China.
We have elected to delay the installation of the first carbonate modules until after the Argentine winter, which will push the startup of these units into mid 2021.
Since our current 5000 ton hydroxide expansion was lined up to process the additional carbonate from Argentina.
Also shifting the timeframe.
Hydroxide expansion completion to align with this.
We do not expect this revised timeline to impact our ability to meet the needs of customers. Many of whom see 2021 is the first year that they will look to increase that purchases from livant, where they larger ramp up coming in subsequent years.
In this fluid and rapidly shifting environment. We know it is critically important to stay flexible enough capital planning and we will remain agile and adopted plans based on market dynamics and customer commitments.
I'd like to finish on slide 11 by sharing some key developments to keep in mind today and as we look ahead.
First relative to even just a few years ago, it's increasingly clear, but the shifts to ease is gaining traction.
Even if the ability to predict the pace in the very near term remains difficult.
This is a pound and all of the announced partnerships between Oems and battery producers as well as the substantial capital being committed and deployed across the supply chain.
It's even more visible and the number of new E V models Neiman production on the growing number of electric vehicles on the road.
Global Oems are also much more active engaging further down the supply chain, that's part of that electrification strategies.
There have been some challenges as the supply chain struggles to keep up with the ambitious electrification plans set by these Oems.
The challenges to Oems meeting them announced sales targets appear to be driven more from the supply side than the demand side.
For example, there have been several existing examples of Oems, specifically referencing a lack of sufficient battery supply from top tier suppliers as a reason for change in forecasted sales.
It's also worth noting that that continued to be positive demand signals coming from both China and Europe largely viewed as the key growth regions for electric vehicles over the next few years.
China began this year by issuing a strong statement to the market that it will not be making any significant cuts to its E.V. subsidy policy in 2020.
Despite the image of a potential midyear phase out.
This is just one example, and a growing list of actions from China to reiterate its commitment to paying a leading role in the global push towards electrification.
While China will continue to be the largest market for electric vehicles, 2000, and twentys widely viewed as a year when Europe will begin to close that gap as Oems need to sell more electric vehicles to avoid the financial penalties or reputationally risk from not being compliant would see each cotwo emission levels.
Why is still very early on in the yeah. Some of the initial data coming out of Europe is positive.
Despite the overall ultra maki being down in Western Europe in January year over year.
Electric vehicles continue to gain momentum.
Good penetration levels, reaching all time highs in some countries.
Longer term there has been additional support with the European commissions pledge of 3.2 billion euros towards battery technology development unlocking an additional 5 billion euros and expect to private investment and additional announcements of planned European battery plans and cathode material production.
[noise] localization of supply chains is a growing topic and there was an increasing realization that for lithium, particularly this cannot happen with Kevin concentration of the Australia, China supply access.
Has also been a greater focus on the overall sustainability profile of the he be supply chain.
Given that the transition to electric vehicles is rooted in green environmentally conscious goals and E.S.G. principles more broadly. This is an area that will only continue to grow and importance over time.
Today topics, such as water usage carbon footprint on local community impact all being examined by Oems and especially consumers when they consider the realities of electric vehicle production [noise].
We're proud of Livens ongoing efforts to be a responsible sustainable producer, including the what we're doing to partner closely with the communities, where we operate around the world, especially in Argentina.
We've spent the last year was a standalone public company, focusing our efforts on tailoring and strengthening our sustainability program for the future.
We intend to provide a number of updates on this front as we move through 2020, and we will continue to work closely with customers local communities is another key stakeholders.
In closing despite the recent challenges experienced by the lithium industry as a whole we are excited about the opportunities ahead.
The low cost and sustainable nature about Brian based operations, a partnerships with leading battery produces an automotive Oems have continued investment in developing next generation engineered lithium products and our reputation for reliability safety and quality that is second to none on all key differentiators.
The position Ivan for future success.
I'll now turn the call back to them for questions.
Thank you Paul Kelcy you may now begin the Q in a session.
If you 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 if you have additional questions you may jump back into queue to withdraw your questions press the pound <unk> well pause for just a moment so compiled acuity roster.
And your first question comes from the line of Bob Court with Goldman Sachs.
Good morning. This is Don Campbell on for Bob I quit for questions here on carbon it sounds like you're delaying or installation a that carbon at module I'm curious kind of what the rationale as they're considering I'm kinda net short position on carbon it.
And that would be cotton that cost Favre and then I guess the second question on carbon that I guess he mentioned that.
Could shift more volumes to lithium carbonate sales fell in response to kind of recent chatter we've heard on the use of outlet Pete cathodes in China.
So let me, let me tackle those questions and that OTA. So the rational only by simply is.
We want to make sure that we protect our financial flexibility, we I think we've been pretty clear.
In the past that we see reaching leverage points of about four times debt to EBITDA was being something we're comfortable reaching for periods of time, but we don't feel comfortable going north of that and we made the decision. The frankly, it makes more sense to slow down and to pace out the execution.
You know to maintain that financial flexibility on the balance sheet.
It's it's an interesting tradeoffs with company pricing, whether it is today frankly, the cost of buying carbonite relative to the build is not as punitive as perhaps it will be in the future and so what we really doing is delaying by six months the ability to take those to take those costs down now I will say while its.
Well its wasn't the basis for the decision.
I think one way or the other we'd like you would have had to delay expansion as well we have certainly I'm gonna have some issues getting out of module covenant modules out of China, given the Corona Vivus, it's certainly slowed down the fabrication there and I think because we've spoken about in the past we run quickly into and out in time winter weather.
It is not particularly easy to do these installations or the 14000 feet above sea level in the middle of winter and so it was never our expectation that we would be doing construction in the winter and so we've delayed it on that basis.
In terms of the ship the company, but frankly the conversation on Carbonite is always driven by our customers. It's it's not that we sit devon trying to be more strategic about it we certainly have customers.
Asking if we can supply them lithium carbonate instead of lithium hydroxide certainly in the short term many about customers make multiple types of cat those on that we'll have a need for both.
Many of them themselves out just responding to signals that they receive from that customers. It feels to us that Oh, we certainly won't be selling generally.
The probability to bring flexibility and switch between hydroxide I'm carbonite at really very little cost is something that our customers appreciate and in this environment, where there's still a lot of fluidity. If you will about about the technology developments and the pace at which they develop.
The value our ability to do that and reaching that was on that basis. I certainly don't expect carbonate to suddenly be a massive peaking volumes for us, but I can't imagine that will be a few thousand tons higher this year than than we originally thought we would be.
That's helpful and I guess, a clarification question on on Capex and despite the production production plans I'm an expansion plans it looks like Capex growth and 2020 relative to 2019, what's driving that yep.
Yep, frankly is where we are in the projects. So we will have the first phase of the lithium hydroxide construction will be completed so the modules will be completed we just want installed the mumbled delay that till next year and in Argentina look it's a complex project in Argentina, and if we're going to hit. These these deadlines we continue to.
I have to finish and complete some key aspects of the infrastructure rollout and once we start to these with something not going to slow them down. Some of it is just simply rollover to lay up costs from 2019 running into 2020. It was always expected regardless. The 2020 would have been the peak capital spending year for this project.
Got it thank you.
And your next question comes from the line of Christopher Parkinson with Credit Suisse.
Thank you.
She spent a lot of time on the supply side justifiably, So and you hit on this a little but can you further comment on your demand outlook in 20 to 22 in the development, specifically specifically you've heard.
From your supply chain as it pertains to the adoption of NMC in the end CA technologies. Just is there anything new on that front or is it kind of the status quo, which you've already given.
No look in terms of absolute levels of demand I think I think the demand for lithium on an L.C. basis continues to climb in that mid to high teen percentage rate year over year, that's what certainly what we see happening in 2020, and we certainly see continuing to see a faster growth rate in lithium hydroxide, which reflects that shift too.
To the high a nickel applications I I think we have frankly, a lot more high nickel applications out there today than people realize I think this this focus on NMC eight Romano and see a.
Some of this some of this challenges in and getting eight one want it into commercial applications. I was confused people in traveled the fact that really we're making a lot of NMC materials today that are north of 65% nickel and that's the tipping point into lithium hydroxide you. So while it may not be 811, or we may not be a broader adoption of NCR.
Hey, it's certainly the case the cathode materials today I'll rapidly shifting over to hydroxide really hasn't changed.
Got it.
<unk> I understand to delay in your origin tiny carbonate expansion or at least the pace of construction and to maintain your financial flexibility. The how should investors take the announcement in the context of your intermediate to long term margin outlook is good we understand there's a natural benefits, reducing third party supply once you're up and running but how should we assessed to kind of the intermediate to long term margin framework just.
Any color you could possibly give on that would be appreciated. Thank you.
Yeah, I'll deal with the cost side of it which I think what your what you're pointing to because clearly yes, I says a completed the conversation, but it doesn't really change in it and frankly all it does is it means that we're going to be short carbonate for six months. That's the only real change instead of going online at the end to 2020 with the first phase of the expansion it'll be it'll be middle of 2021.
The second phase will follow right behind that we structured this so that there was significant infrastructure carryover benefits into the second phase and so we do not expect to go back into a short carbonite position once that first phase is up and running so the cost basis in Argentina.
You know obviously, allowing for some of the short term movements, we can get an inflation and currency depreciation really hasn't changed its cost structure remains really where it has been for several years and again, we don't expect that to change either.
Thank you.
Your next question comes from the line, it's Chris catch what the loop capital.
Yeah.
Yeah. Good afternoon question about pricing in 2020 is there any way you can you characterize your outlook for pricing based on what is sort of locked in for the full year versus what could you know drift one way or another the reason I'm asking him speak and trying to reconcile the yeah the down.
I'm going to revision your and your guidance versus what you said earlier this year, primarily on the base the pricing person juxtaposed against what a lot of my checks are saying is granted I understand where oversupply, great now, but <unk> in hydroxide there.
We more evidence of of a tightening hydroxide market.
Example, I know its unique circumstances, <unk> again thing, but they introduce it 10% price increase earlier last week, there, but it given the shift in demand favoring hydroxide, but just alluded to tightening hydroxide, because there's not a departure hydroxide mm mm.
Sorry, the channel inventories or is the notion that hydroxide pricing could be improving are very good 2020. So that's what I'm asking rents or is are you locked in on the pricing that you just sort of outlook or you're just conveyed or third the possibility that you can kind of from a more favorable hydroxide price.
Right.
Sure Hi, Chris Thanks for that you kind of really come to the hub one of the key challenges that we've had this year in terms of some of the decisions. We've had to make clearly there's a trade off we may do we do.
Do we sit here and leave more pricing open on the expectation that will be a recovery and pricing from here, but it's hard to predict when or or do we look at all in and so we sort of tied to balance that we do have a bunch contracts that rolled over anyway, and so the those prices didn't change and haven't changed from 2019 to 2020, we have other customers where.
We elected to fix the pricing, even though it's lower year over year.
Just the nature of those customers, we chose to do that our guidance as I said does not assume an increase in pricing in the second half of the year I see the same external announcements that you've seen from people like Nanfang, we've seen some commentary about challenges, bringing hydroxide material.
Plants online successfully in so yes, you can certainly see data points that suggest the tightening is going to happen.
It's really difficult today, Chris to answer the question as to whether it's changing because frankly, it's not a normal market when as we look up the impact of the the disruption that's in China that that doesn't just impact China that im impacts throughout the supply chain and even if it doesn't directly impact our supply chain for example, lithium all the batteries themselves out.
Cathode materials is certainly the case that it's more difficult to build vehicles today. So even if you have enough material for the batteries batteries that you may not have enough other parts of the other components. So it's frank and very difficult to pass through all the noise.
And to work out whether you are in fact seeing signals or whether you are in fact, just seen noise at the moment.
Okay, and just as a follow up and maybe it's just way too early to to see how this may.
Effect sort of I guess supply chain thinking of major always but given the kroner virus and how disruptive it's been in sourcing from.
Supply chains that rely on China, and given that the vast majority of conversion of hydroxide happens and trying to say notwithstanding I guess youre convergent in North Carolina, and maybe a little bit of than some others.
Do you have any thoughts on as a this industry evolves in matures that would would that put you in.
A better competitive positioning or worse credit position do you have any sense that conversations with downstream customers are going evolved to a point, where they they want to rely less on you know conversion that takes place in China any feel for how that may play out over time. Thanks.
But I think that was there has been for a while it is too soon to know what the Kona Vivus world will be a direct factor driving this but there's been a concern for a while amongst many end users Oems, particularly about the concentration of conversion capacity in China, and specifically around the desire to localize supply chains. This political.
Russia to do that as environmental pressure to do that but I think what is changing and has changed in recent months from my perspective at least is that the Oems announced on spend a lot more time really truly understanding how and where lithium is produced.
And they are certainly starting to understand that it isn't like any of the material that they've ever had to deal with its not like pgms. It behaves differently and has produced on a different based system things like nickel and cobalt copper aluminum et cetera.
And so they started to scratch their head and say have you localize the supply chain. When it appears that most of the raw material is being mined in Australia and shipped a 6% concentration levels because that is extremely difficult to localize when they asked that question. They then tend to us and say you have a different model come and explain it to US is this more able to below.
Closed and to your point to you in into the U.S. So the answer is yes, we do have a lot more conversations around it I would not for one moment suggest the we are at the point, where people are making actual decisions on that basis, but they are certainly starting to ask the questions and depending on who it is express.
Preferences for what they want nest future supply chain to look like.
And your next question comes from the line of Kevin Mccarthy.
Research.
Good evening question on your sales guidance, which at the mid point seems to imply growth of 3% in 2020 trying to reconcile that level of sales growth with the 30% volume that you indicate on slide seven.
And price erosion in the low to mid teens.
Can you help me reconcile that.
Yeah sure like that I think it's probably fair to say the we are being very cautious on pricing and on mix you'd notice that we also shifted a hydroxide carbonite assumption and to the as well so we have a price.
Decline for sure and hydroxide, absolutely a price decline continued and carbonate.
We've also have price declines in set another I was particularly ones that are largely referenced to carbonite as a feedstock like some of the metals based businesses that we have where with carbonite pricing declining it becomes more of an incentive to convert that into chloride and create metal based products. So we also have some quite significant price declines in San.
In other areas as well, we I think it's probably fair to say that did not that revenue guidance as I said, we were being maybe a little overly cautious in some people's minds, but but there is as I said no assumption whatsoever of any price changes away from where the market is today and that's what's.
Driving much of this.
Okay, and so as a follow up Paul it isn't the case that the total company average price erosion could be greater than the mid teens or is it the case rather that.
Well you could sell 30% higher volume what is embedded is it something less than that.
So I think the little bit of both right. There's certainly a potential that it goes from mid teens to high teens I don't see going much further than that just because of the mix of how much pricing has already.
Committed an agreed across that contracts frankly, it's more likely that we sell less volumes and I think when you look at the volume range that we have out there.
Some of the volumes that we have in Oh, no not particularly profitable business to be perfectly honest, it's it's profitable, but not hugely profitable and and we're not going to place that with customers for no reason, it's gonna be placed with the most important customers and and want to make more sense. If the market doesn't involve that way if we do get an impact in China and it doesn't.
Cover in the second half the a will frankly, just pull those volumes from the market, we want to sell them for the sake of it. So you should assume that there's a a degree of flexibility a wide a degree of flexibility and not volume estimates and then do is maybe in price.
Okay understood. That's helpful and if I may I had a second question for she'll burrito.
What is the amount of working capital source or usage, that's embedded in your cash flow from operations guidance range for 2020.
[laughter].
So we we expect this is regarding midpoint generate about $85 million of cash.
With the midpoint of Capex of 250.
So if anything comes off of or working cap to match, where we build up a lot of inventory beginning of the year.
Kevin and for this port thousand metric tons that we measure over the call as we draw and his inventory that is going to accelerate or cash generation as well so thats why.
That's why our or.
Our outlook for cash he is actually higher than our EBITDA guidance.
Okay. So you plan to liberate some cash then from trade work yeah.
Okay very good things, just where there will be without really Q4.
Thanks again.
Okay.
And your next question comes from the line of TJ <unk> City.
Yeah. Good afternoon, Hey, Paul you know you mentioned that they desire to become less reliant on China for for the supply chain.
And how do you see that supply chain developing in Europe, and the U.S. seems to be lagging behind but the industry doing anything to lobby the golar rent in the U.S.
The issue in the U.S. frankly is you don't really move the inputs like lithium locally until you've really got the cathode material production locally in and it's like a cathode materials and chemical infrastructure in the U.S. that really is lagging more than anything else and your best less the case, the certainly more people out of them in the awesome.
Pretty important cathode material Cadiz based in Europe, and committed to Europe, and there's also most state support or you support yep for that for that localization <unk> for multiple reasons, you know I don't know, how it's going to evolve if I'm perfectly honest I don't know what appetite markets have top lodge spodumene mining operations, we know there are spot.
I mean resources in the U.S. on in parts of Europe, it's not entirely clear the there's an appetite for that mining to actually take plot place when you get into the local communities.
I also think there's an acknowledgment on a recognition and you have a penny way that this will result in higher costs, we see that isn't the way that the baby energy intensive cathode material could use isn't yet all paying extra to get window, so level or the renewable energy sources.
Custom mall I don't know that that will be as acceptable in other parts of the world either so the dynamics as to how it localized is I think is is starting to be understood more clearly by many of these interested parties is not very simple. So there's not a simple solution to it I mean, clearly one ways you take lithium carbonate could.
Used in South America, and convert that locally and yet which is as you know what we do.
But not everybody views that as a as a good long term solution.
Okay.
And then coming back to life and you mentioned that you know your Capex in 2020 still around that 230 million dollar Mark what's the cadence beyond that particularly in 2021, and then based on your outlook today and look here can you find all that capex through your internal cash.
I'll, let you bet to touch on I'm 2020 want the short answer is yes, right I mean, it's always the <unk> in terms of funding of our own internal cash.
It's not it's not clearly ideal that we don't have the cash flow generation today that we had a couple of years ago, but we do have the ability to just frankly, just slowed down that expansion will it get done as quickly no. It certainly well I'll be honest with you my take on this is very straightforward I hit the market. It speaking customers are saying hey.
We'll take that risk will take the risk that they will be a delay to new capacity coming online, we'll take advantage of oversupply today to drive prices down and we recognize that that's quite likely to create a spike in prices in the future.
The decision the market is making we're listening to the market was slowing down we'll add capacity at a slower pace will add it frankly as quick as we can without taking undue financial risk.
The PJ.
Regarding the Capex for 2021 as you said as you ask so we expect to be ramping up normally finishing and 21.
And do you want expansion of the phase one expansion, Argentina, but also due to the B C.
And we'll continue to have the 30 about $30 million all combined 2021, 2020, and what we look out it something the magnitude between having a 75 $200 million.
Okay, great. Thank you.
<unk>.
Your next question comes from the line of Steve Byrne with Bank of America.
Good evening.
These 7000 tons of carbonate that you're purchasing from third parties and converting into hydroxide do you need to do this to me volume commitments or or to absorb fixed costs of your conversion capacity in China or or this is this profitable for you.
Good question, let me just quickly we won't purchase 7000 tons of of lithium carbonate. This year some of that within the company is actually embedded in the inventory that we brought forward from 2019 into 2020 put the P.L. impact is 7000 tons or so of lithium carbonate I'm certainly not doing it too.
To to run the plans Flatout, China plans don't have any fixed costs because of the way we operate them. They have a higher variable operating feed or we can turn them on we can turn them off without any meaningful cost a tall and we've always been very clear if it doesn't make sense to run them and we can't sell the product comfortably we will just turn them off we'll just something but would that small lines that.
5000 timelines three of them and if we have to 10, one along those lines off will slow down some of the lines will do so we certainly don't have a cost burden from doing that but it's about a question that we we certainly today. This is profitable business. We we don't need to buy for example battery grade carbonate to convert into hydroxide, we can use multiple.
Great. So we have a lot of purchasing flexibility as to what we can use in those units and that gives us a cost saving.
Our plans all very efficient, especially the ones in China, So even with no fixed cost to allocate the variable costs that we incur is competitive and competitive with what we do in the U.S.
And so today, even even China pricing today, we can still undue still make money on that particular business. It is not great business compared to what we want it to be in what the rest about businesses and we certainly will only do it if it makes sense for long term benefits right customers, we will not be trying to you know self small amounts.
Two non important nonstrategic customers on that basis.
And Paul you've got a long history, there of improving the selective absorption of the brine.
Solutions zone in Argentina, and continually improving that in reducing the amount of evaporation ponds do you see the potential for that technology to get to the point, where you could eliminate the evaporation ponds.
Yeah. So very good question I technical team would love to eliminate the the evaporation ponds to shut in so that is yes, we absolutely. We do have a plan to retire have evaporation ponds, we will keep the smaller ones I'm sure. You know we have two types of evaporation ponds with a large pre evaporation ponds similar to what you see in Chile, and then we have much much.
Mall, a fraction of the size basically finishing ponds that the brine stays in for about a month or so after its come out of the selective absorption process, we will absolutely as part of the expansion eliminate those evaporation pre evaporation ponds for two reasons one of them as the.
Evacuation you know a lot of water leaves the environment, we know waters, a scared some valuable resources, where we buy we produced lithium not so much as it is in Chile patch, but still critically important and it's important to us first to reduce that now water loss and eliminating the pre evaporation ponds does that the second there is plenty expensive to maintain we had.
Lot of salt buildup in the bottom of these ponds and so every few years you have to.
Drain them and and and one way and other would move that salty. Both have that itself is expensive, but also creates another waste product, which is the the sodium magnesium chloride the builds up in the bottom of the palm. So for long answer to say, yes, we absolutely will expect that within the next couple of years, we will be retiring those pre evaporation ponds.
Thank you.
And your next question comes from Mike Harrison with Seaport Global.
Hi, good afternoon.
Apologize if I missed this but can you comment at all on the expected cadence earnings in 2020, obviously, we're coming off for Q4 that was 16 million in EBITDA and at the low end your 60 million EBITDA guidance 65.
Implies something like 15 million a quarter or for 2020, so any any thoughts on how that progresses over the course.
Yeah look I don't think main response is gonna be if you'd surprise to anybody clearly the first part of the year is gonna be more challenged given the disruption that we've seen in China and given how much of my business and how much about customers and how much about product ultimately finds its way someway another through China. So we certainly expect in the first half to be weaker than the SEC.
In tough it is I don't have the confidence yet from the date to that I've seen to know how long that lasts how deep it is oh, even whether in fact, we will get everything that we lose in the first hop back in the second half the questions around all of those but what I can say reasonably confident he is the certainly compete.
I had to the second half the first half is gonna be softer.
[noise] [noise], alright, and in terms of the the customer delays that you saw during Q4.
Can you give a little bit of color on what will add your customers to delay and I guess help us understand.
What's in your contracts.
That may be gives them flexibility around when they take deliveries I guess I would've assumed that those volumes are committed.
Maybe they would have to take so.
Look it's a it's a it's a complex question on the demand side number of customers as we mentioned before this is a fluid market. We've had they themselves have their own customers changing demand changing orders changing structures and.
So there's no single reason behind some of these delays other than perhaps this.
<unk> flux that we have in the supply chain today with maybe a higher degree of uncertainty over who is making want how much they're making our contracts you know we haven't various types of contracts with customers multiple ones we.
Do not think kids in anybody's interest to force product time to customers that frankly don't need it lithium hydroxide, especially does not have as long as shelf life is lithium carbonate. It is not in our view a healthy relationship with a customer to force them to take material that they don't need at that point in time, we have tended to find.
Overtime, and we still see this holding up today that went on a on a life of contract basis, our customers live up to the commitments. They take the volumes that they commit to take from us sometimes they take it more quickly than they thinking that's an upside to as in the short time short term and then other times they have delays and and that's it.
I'm sorry, two as in the short term, but we certainly don't have not had yet at least any major customers not living up to that volume commitments.
Thanks very much.
And your last question comes from the line of Joel Jackson with BMO capital markets.
Hi, Good evening I wanted to follow up on some of the cap. The Capex an expansion question. So beyond the first phase of carbonate hydroxide over the next phase Department.
And I talked expansion here.
What would be the cadence you think of adding the next round of expansion.
How would your capital budget kind of.
Phase out here or fees down or trajectory.
20 to 20 to 24 I'd, maybe add on your next leg of capacity.
Yeah, and even Joe its we had seen good evening by the way on an earnings call I have to say how.
So so.
First phase two of Argentina, clearly, we will continue to go ahead with the expansion was designed to essentially break into two groups phases. One two and then phases, three and four and phases, one and to really do go hand in hand, and so once phase one is completed even before it was completed we'll start to turn our attention to phase two hence the.
No we will slow down in capital spending likely to come and 2021.
On the hydroxide side, we do not expect to add any more units in hydroxide or something and I have enough visibility today. It anything other than maybe a unit in China I can we see an opportunity to add another small unit in China, but as you know that's a relatively low capital outlay for us. It's just a very different way that we do it not in China compared to in the U.S.
[noise] beyond 2021 look I think we're not went up and make any decisions yet at the moment. The only commitments, we've made or what I just described herein and on that basis, we'll see a significant ramp down in capital spend if that's a would ramp down in capital spending in Twentytwenty to I think we reserve the right that if market conditions change.
If customers make appropriate commitments then there's a likelihood that we will move into more phases either of hydroxide, all lithium carbonate, but we're certainly not making that commitment today.
If I interpret that right now 95000 time I just trying to carbonate 5000 ton addition, hydroxide. That's not books I will finish you may add a little bit more jockeyed in China or somewhere but have not yet nothing from the plan right now.
And another nine enough thousand tons of of lithium carbonate the phase two in Argentina.
We've done we did not unhappy took a yes or compared to today, we will have more than doubled the carbonite right went up about 10000 tons more hydroxide and so the first year you might get down if you don't do anything other than that.
First year, you might get down to like a true maintenance capital costs might be 23, what you would that be.
Yeah, probably second half of 22 will be not pay so on a full year basis 23 correct.
Okay and if my other question Wise have you do you have a view on the.
The new Argentine expert.
World. He are used to me that get to regulate into law full time.
You must be referring to one that the previous president has issue. That's here we see a finished.
Yeah. So that has this year to gross too. So we haven't heard anything different from what was said before so we are your your dollar against short term <unk>.
Yes.
Thank you very much.
And that is all the time that we have for today. This concludes Suleiman Corporation fourth quarter and full year 2019, earning release conference call. Thank you.
[noise].