Q2 2023 Livent Corporation Earnings Call
Good afternoon, and welcome to the second quarter 2023 earnings release Conference call for <unk> Corporation.
Lives will be placed on listen only mode throughout the conference.
After the speaker's presentation, there will be a question and answer period.
I will now turn the conference over to Mr. Daniel Rosen Investor Relations and strategy for <unk> Corporation. Mr. Rosen you may begin.
Great. Thank you Josh good evening, everyone and welcome to <unk> second quarter 2023 earnings call. Joining me today are Paul Graves, President and Chief Executive Officer, Andrew Burrito, and Tony <unk>, Chief Financial Officer a.
A 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 <unk>, who will be available to address your questions. Given the number of participants on the call today, we request a limit of one question and one follow up per caller.
We will 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 a reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP are provided on our Investor Relations website.
With that I'll turn the call over to Paul.
Thank you Dan.
Good evening everyone.
As always we have a number of important topics to cover with you today.
<unk> 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 and $600 million.
Progress at Nebraska, lithium and integrated 34000 metric ton lithium hydroxide project in which live and is a 50% shareholder and operating partner continues to advance.
After completing a detailed engineering phase earlier, this year and receiving no mask a board approval. The company is pushing forward with construction and plans for first sales in 2025 in the form of spodumene concentrate.
We've provided cost estimates for development of the integrated project as we will discuss.
The mascot 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 of both companies <unk> and share our commitment to the development of a sustainable and socially responsible north American battery supply chain.
During the second quarter alive, and <unk> announced a proposal to combine in a merger of equals 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 on the key milestones to expect as we approach targeted at transaction close by around the end of calendar year 2023.
Finally, <unk> recently published its annual sustainability report for 2022, we.
We will touch on key accomplishment for the company.
Well as our unwavering belief that lithium will continue to play a critical role in supporting our low carbon future.
Yeah.
Before going into more detail on the <unk> business updates I will turn the call over to digital better to discuss our second quarter performance as well as our reiterated full year 2023 financial guidance.
Thanks, Paul and good evening everyone.
Turning to slide four.
<unk> reported second quarter revenue of $236 million.
Adjusted EBITDA of $135 million and adjusted earnings of 51.
Per diluted share.
These results were all up considerably versus the second quarter of 2022.
We're lower.
And then a record a record setting first quarter 2023 results.
Volumes sold were roughly flat versus the first quarter as well.
While average realized prices were slightly lower.
And overall costs were higher.
All of which was largely in line with our own expectations and already reflected in our 2023 for the year financial guidance.
Lower realized price in the second quarter was seen across most of our retail products.
However.
Ladies and gentlemen, this is the operator, we are currently experiencing technical difficulties. Please remain on the line. Thank you.
Please wait the conference will begin shortly.
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Thanks, Paul So we start again, thanks, Paul and good evening everyone.
Turning to slide four lateral reported second quarter revenue of $236 million.
Adjusted EBITDA of $135 million.
And adjusted earnings of 61 cents per diluted share.
This results were all up considerably versus the second quarter of 2022.
Where were lower.
The record setting first quarter of 'twenty three results.
Volumes sold were roughly flat versus the first quarter.
While average realized prices were slightly lower in overall costs were higher.
All of which was largely in line with our own expectations and our regular reflected in our 2023 full year financial guidance.
Lower realized pricing in the second quarter was seen across most of all the two products. However, the BEC was more limited by the fact that we sell very lead to.
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.
And the natural lag or for few months typically seen and 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 where royalty payments as a result of higher reference price on which royalties are calculated.
And higher input cost per production, most notably energy raw materials, such as soda ash and labor.
License 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 ongoing expansions.
As a reminder, license 2023 capital expenditures anticipated to be 325 to.
Q3 hundred $75 million slightly higher than 2022.
And are supported by adjusted cash flow from operations projected to be in the range of 362 $440 million.
Our balance sheet and overall liquidity remained very strong.
We ended the quarter with $160 million in cash.
And no draw on our $500 million revolving credit facility.
The combination of our current cash position.
Our ability to draw on the credit facility and a stronger outlook for cash generation give us continued confidence in our ability to internally firm our capacity expansions.
Okay.
On slide five we reaffirmed <unk> 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 1.0 25 billion to 1.1 dollars 25 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 volumes sold and higher average realized pricing across all of the two products, partially offset by higher <unk> 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 light in the past the cadence of our earnings can be very different.
<unk> given you.
Different product and customer mix from one quarter to the next.
When evaluating what could potentially affect full year results.
Be towards the high or low ends of our guidance ranges.
When it 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 ligand.
Given by our initial phases of expansion coming alive.
This includes our first 10000 metric ton, especially regional company in Argentina.
Which is largely complete and equaled the commissioning phase and we will see a new 5000 metric ton lithium hydroxide line in Bessemer City, North Carolina that was.
Was completed the end of last year.
Due to the nature of a ramp up in Argentina.
Most of these incremental sales volume will be weighted towards the fourth quarter.
Many any delays could result in a partial production increases rolling through 2024.
Equally we had always expected market prices to decline through 2023.
Actually 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 continue to expect that ligand will see meaningful average realized price improvements and the full year 2023 compared to 2022.
Ultimately the magnitude of this improvement will be determined by how that will lead to market evolves over the remainder of this year and particularly the fourth quarter, given our volume cadence.
Why.
We achieved higher retail prices the first half of the year versus initial expectations and the market continues to feel healthy our guidance does not assume any notable improvement in lithium prices from current levels.
As a reminder, roughly 70% of our 2023 volumes prices there are fixed for 2023.
In terms that were set prior to our 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 liter market price.
The 730 volume of location between firm fixed price commitments and market price exposed opportunities.
Allows us to strike a balance of locking in higher prices for 2023.
While we retain the flexibility to elect which product line to focus on carbonate or hydroxide.
And even chloride or metal versus butyl lithium.
It also allows us to retain potential additional upside as we move into 2024.
Finally, while we expect higher costs in 2023, TCP meaningful margin improvement versus 2022, largely due to pricing.
Were more than offset these higher costs.
Back to the second quarter. In addition to higher projected royalty payment is 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.
Thank you Alberto.
While not as extensive as that typical remarks, I do want to make a few comments on current lithium market dynamics.
We've seen that historically high lithium prices at the end of Q4 of last year fall to what we believe a more sustainable levels in the last two quarters.
Floor on pricing, which is likely set by high cost producers in China.
<unk> 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 there are likely to be price spikes above this level into the foreseeable future drill.
Driven by inevitable demand movements and supply interruptions, both of which can be driven by multiple ought to predict factors.
Underlying fundamentals ignoring these short term movements remain the same which is an overall market that is at best tight.
When looking at the highest performance qualified material market such as battery qualified hydroxide quite likely short term sufficient supply for several years to come.
Given these market characteristics, we have remained consistent and 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 six on a few operational updates for ligand.
As you may have heard during the quarter and the early morning of Monday June 26th a fire broke out license 800 acre manufacturing facility investment <unk> North Carolina.
The fire was largely contained to a warehouse that was used primarily to primarily to install lithium metal and is located away from most of our operating facilities at the site.
Most importantly, there were no injuries to live in personnel emergency responders are members of the surrounding community.
<unk> carries adequate insurance for this type of event and is working with its providers to assess the damage and applicable coverage that is expected to be minimal impact on financial results from the incident.
Company was able to resume operations at Bessemer City within just two days of the fire.
In lithium hydroxide, butyl lithium 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 from shared infrastructure and that has high purity lithium metal. However, this product is very small from an earnings contribution standpoint.
Turning now to license ongoing expansion efforts toward meaningful volume growth for the company over the next few years.
Beginning with hydroxide towards the end of 2022, we completed a 5000 metric ton expansion invest in a city, bringing total capacity at the site to 15000 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 15000 metric ton lithium hydroxide facility at a new location in the province.
<unk> 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 out total global lithium hydroxide capacity to 45000 metric tons.
In Argentina work continues to progress on our two equal 10000 metric tons phases of lithium carbonate expansion.
Having recently completed our first phase we are now in the commissioning stage are bringing online. This first 10000 metric tons of production.
We expect first product to be generated in the third quarter with the ramp up to commercial quantities of carbonate in the fourth quarter.
We expect to complete our second 10000 metric ton phase in Argentina before the end of 2023. This will result in a nameplate lithium carbonate capacity being double that of 2022 approaching 40000 metric tons. It will also have is largely balanced between lithium hydroxide capacity in it.
Carbonate production capabilities to feed it.
I'd like to spend a little bit of time talking about Nebraska lithium on slide seven.
As a reminder, the masco lithium is an integrated.
<unk> 4000 metric tons lithium hydroxide project located in Quebec, Canada, and with live it is a 50% shareholder.
Earlier this year after completing the detailed engineering phase and receiving approval from the <unk> Board.
<unk> entered its current construction phase, which includes the acceleration of mining operations that will be achieved.
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 these expense expected in 2026.
Total capital requirements for project development are estimated to be approximately $1 6 billion in U S dollars, but the upstream where buchi development, comprising roughly $400 million of that total amount.
Anticipate the majority of this capital to be spent in 2024 and 2025.
Projects operating costs on a fully integrated basis are expected to be very competitive with other compatible lithium production assets.
The domestic lithium project continues to be highly attractive due to its relative cost position strategic location in North America.
First mover advantage for hydroxide in the region.
Favorable sustainability profile with access to low carbon hydro electric 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 Nebraska lithium to current shareholders live on <unk> and invest them in Quebec.
At this time <unk> 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 upfront.
This level of funding is consistent with our press release made by IQ last months, where they highlighted a commitment of 250 million Canadian dollars in capital to help fund the project, which will also be contributed over time as needed.
After <unk> was appointed to engage in the sales and marketing efforts on its behalf no masker lithium announced its first customer agreement with Ford in May the agreement calls for the delivery of up to 13000 metric tons of lithium hydroxide per year of.
11 year period with the sale of spodumene concentrate from the mill Gucci mine to Ford until lithium hydroxide production is ready and Beckman Paul.
Both companies and life and are committed to supporting the development and growth of the North American battery supply chain and we are appreciative of <unk> strong commitment to the project.
We've also mentioned in the past that there is additional land available at them at the cycling back in court 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 feedstock material to feed the additional units on an integrated basis.
Okay.
Now I'd like to spend some time highlighting license pending merger of equals with old camp that will create one of the leading global lithium chemical companies.
So I'm much more in depth review of the proposed transaction I encourage you all to review the transcript from our prior call on May 10th announcement date.
As well as the material is available on the <unk> Investor Relations all of the major web site.
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.
Great increases our scale with an expanded geographic footprint and our combined lithium deposit base that ranks amongst the largest in the world.
It immediately enhances our vertical integration, bringing together, our complementary businesses and areas of expertise that can deliver meaningful operating synergies and capital savings, while both accelerating and Derisking our development plans.
And finally, both companies contribute highly attractive growth profiles in similar geographies that are truly unparalleled when combined we expect the merger will enable us to unlock significant value creation for shareholders pilot enhancing our position within the lithium value chain and increasing our relevance to our global.
Customer base.
As Youll see on slide nine both companies have been working diligently since the announcements to be in a position to close the transaction as quickly as feasible.
Newco can begin to deliver the various benefits.
Key milestones have continued to progress.
All pre closing regulatory notifications and applications.
Filings as applicable have been filed and required jurisdictions by license and oil chem, including both antitrust and foreign direct investment. Additionally.
Additionally, our preliminary registration statement was filed with the SEC on July 20th.
<unk> provides important information about license and the promote proposed combination.
The new co board nominees will also announced earlier this week.
The Newco board will be comprised of six nominees from the current live and board, including myself and six nominees from the old <unk> Board, including Pizza Coleman, who will serve as chairman of the newco.
As far as key next steps are concerned all chem investors are waiting a scheme for the proposed transaction, which is the Australian equivalent to the S. Four in simple terms.
This scheme Butler, which will include the independent expert report is expected to be finalized and sent to investors early in the fourth quarter.
Once all relevant documentation is distributed and approved by the applicable regulators each of ligand and all Campbell's seek approval from their respective shareholders. A special meeting is expected to take place within a day of each other in the fourth quarter.
Subject to 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 to date 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.
More information to share on various fronts related to the merger.
I want to conclude on slide 10 by providing some commentary around items latest ESG efforts.
<unk> recently published its 2022.
Our sustainability report with a team of re imagining possibilities. It reflects the company's commitment to responsible production and expansion to an ongoing focus on environmental stewardship, social social responsibility and transparency.
Among the highlights of the report our initial global scope III screening of license greenhouse gas emissions first disclosures on global Air pollutants and a summary of recent water biodiversity studies that were conducted at the Salon, Colombia, and Argentina, alongside some of our key customers.
We will report followed leading disclosure framework 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 support of low carbon future, while minimizing environmental impacts.
I will now turn the call back to Dan for questions.
Thank you Paul Josh you May now begin the Q&A session.
At this time, if you would like to ask a question. 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 can jump back in the queue.
So withdraw your question again press Star one thank you.
First question comes from the line of David <unk> with TD Cowen Your line is open.
Thanks, Paul <unk> and team I appreciate the time this afternoon.
Best of luck with the closing and the outcome deal.
I did want to just check in on solar Hombre and see if.
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 4000 tons contributed this year.
Commercial sales in the fourth quarter should we still should we be shading down towards three that's that's sort of implied in your guidance with some wiggle room there around.
Some upside on timing and should we still think about the same timeline for the phase II process commissioning.
Yes, good question David.
It's probably closer to three than four given where we are at the moment in terms of ability to drive commercial sales.
So you can appreciate.
Wrapping up these operations as is a complicated process.
While I'm pretty happy with the progress that we've made so far is pretty difficult to predict within a couple of months as to exactly when you iron out all the kinks in the startup. So it's around 3000 tons is about the right number for the rest of this year the second phase.
I would really help the whole point of doing two phases that we learn as we go and so there is no doubt that we will be we already recognize how to accelerate the startup for the next phase we will be putting those plans in place. So I certainly expect that we will be bringing in the second phase on some mechanical completion to commercial production quicker than we.
Will the first phase.
Thanks, Paul.
My second is just I wanted to just clarify the comments you made where you it sounds like you anticipate.
<unk> net share of build out that what buchi and second core 100, and the <unk> to be roughly $160 million to $240 million.
It sounds like the other financing might reimburse you for costs over time.
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.
Yes look if you think about the financing, let me I'm going to break it into four.
Four buckets right.
Number one is customers contributing cash advances.
Okay, and then on Damascus commitment to them that commitment back as to help with the financing to be perfectly honest. So thats something we certainly expect to be a part of the funding for <unk> as we go forward.
The second is what im loosely clinical government money and I think it's a relatively new.
In our industry there is money available in various forms in various jurisdictions to help accelerate these investments we create other jobs create lot of revenue.
Having a an integrated battery industry is pretty important in many areas, including in Quebec, Canada broadly. So we certainly expect there to be some capex from government capital than the good old fashioned latitude as third party debt financed.
Built on the fact that if we could you seen spot concentrate in 2025, we will be cash flow pump revenue positive guidance basket can impact too.
Its own third party financing.
And the gaps will be filled by investors contributing new equity, which is split equally between ourselves and IQ <unk>.
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 will disclose them without adding as we go.
Thanks for the color Paul Good luck with everything.
Thanks.
Your next question comes from the line of Matthew Deyoe with Bank of America. Your line is open.
Okay.
Good afternoon, everyone.
If I look at.
Well, Hey can I ask you this but if I look at like the S. Four and some of the disclosures around the agreement with all Cam and the path laid out and we get a lot of questions around some of the projections that were put out there.
Forecast for $1 billion of EBITDA in 2024 based on $25000 or $235000, a ton lithium hydroxide et cetera.
So well ahead of the consensus and perhaps some of the numbers that people, where we're playing around with so is it looks like from an opex perspective or <unk>.
From a.
Contracting adjustment perspective is there anything there or is that just the difference.
Assumptions.
Yes.
It is important to understand exactly what that is right.
When we're looking at mergers of equals one of the first conversations we have to have is putting essentially both our business and <unk> business onto a similar sucked into a comparable analysis and so the starting point was to agree a price deck.
And that prostate doesn't necessarily has to be the prediction of alignment of the prediction of all MN show you can imagine we are probably slightly different views in slightly different areas.
Im.
It just needs to be a reasonable one based on market conditions at the time based upon a range of forecast by independent forecast is doesn't completely crazy.
5000 tons today soon it doesn't let completely crazy that the average price by the way that prices for third party contracted volumes right. It doesn't include anything that we already have.
Contracted or committed.
Yes, maybe a little bit ahead of where consensus is but it was designed to be a reasonable approximation of where we called the market would likely be in 2024 doesn't seem a long way out.
Mathematically to get lighter to $1 billion of EBITDA is not that complicated when you do the volume increase that we just talked about.
You see a step up in our average realized prices, which by the way in 2023 will not reach 75000.
Dollars per ton hydroxide.
So it is not a particularly heroic stretch to see $1 billion of EBITDA next year, that's not a forecast the S. Four document doesn't represent alive and forecast.
<unk> forecast.
But certainly I think those assumptions in that today at least still look pretty reasonable to me.
Understood.
I was a little late joining the call. So maybe maybe I missed this a little bit but the conversion facility.
Obviously these numbers are perhaps.
A bit more normal these days as it relates to capex intensity on what we're looking at dealing with the west, but if you were to kind of highlight some of the big buckets for inflation between I think what was originally maybe 700 million for further downstream and now its 1.2.
Where are you kind of ran into pockets of higher spending.
And where do I okay.
Good luck.
Quite frankly is.
I'll make this comment.
<unk> won best it certainly applies to a degree to Nebraska, as well which is.
I think with the level loading and the engineering of these projects and there are a lot of people are overly simplifying the engineering and coming out with forecast before that engineering has been really fully vetted and tested and we've seen some of the challenges.
Not fully engineering these projects rushing to get them built more quickly.
Just don't work because they were not engineered a new account retrofit them. So you have to get it right I.
I think some of the forecast that were out there and I would throw the Nebraska forecast into this bucket will probably premature I think the industry has a tendency to apply standard factors as to where we are in the engineering and what typically the eventual cost would be plus or minus 50% minus 20%. They don't seem to apply that well to lithium projects and pod.
That is this learning curve on the engineering part of it has been some pretty significant increase in the cost of things like materials, particularly commodities have moved around steel and other commodities.
Certainly been an increase in the cost of certain key we call them long lead items, but some of the engineered items that our country and so much demand.
The producers of those can barely keep up and as you can imagine in that scenario the cost of them goes up and then the final point is.
Is that the cost of construction and it's largely a function of time I think what you see very quickly on these projects is.
Love to take you to build them.
Very quickly the cost estimates go up on it's a not insignificant factor as the projects that people might say take two years to build if it takes four years to build instead of to your costs are really going to escalate quickly. So there's some of that work as well and these are not all specific comments on Nebraska. These are broad comments I think if you look around our industry the factors.
They have really driven the increased capital intensity I don't see them coming down anytime soon I don't see a learning curve benefit anytime soon our reduction in some of these factors.
We're now starting to do a better job of understanding and therefore describe what the real capital intensity of an integrated lithium project is.
Your next question comes from the line of Christopher Parkinson with Mizuho Securities. Your line is open.
Great. Thank you Paul I was just hoping you could give us a little bit more color on slide 70 kind of had this that's helpful outlay of both the spodumene.
Aspects of <unk> as well as the hydroxide plant.
Whats your degree of confidence in terms of the commercial production dates.
In terms of.
Your own history in the industry it kind of gives you.
The confidence to put those out there and how we should be thinking about them and what progress the investments you've made should be monitoring over the next year or two to further underscore there is in our models. Thank you.
Thanks, Chris.
Confidence.
The competency is highest and then bulk concentrate.
Much higher than it is and the timing on lithium hydroxide part of that is just simply a simpler simple process.
More advanced and also obviously more confident on our 2025 date in 2026 day I think one of the key the key variables really to watch out for EMEA at least will be.
And we've got to get we've got to get the mine up and running them that I think that'll be pretty easy to monitor and on the lithium hydroxide plant is actually getting it built and getting the commissioning start just.
Hardrock lithium hydroxide plants don't stop overnight the commissioning process on that panel will be slower than it would be.
Certainly on the <unk>.
Carbonate to hydroxide plant, which is relatively quick.
For us the least slow and it will be on a.
Brine based carbonate plant given the process that we use and the brine based company. So my biggest uncertainty frankly on the lithium hydroxide plant is the pace at which we can startup and it isn't just let me take me nine months or 12 months. It will also be how much can I produce given that start to process and what quantity of those so I think 2026 into.
2027 is the key window, when you need to be watching out for that.
The success or otherwise of that project on the hydroxide side.
Understood understood very quick follow up just coming back to the S. Four registration for all Ken just when we're taking a step back and just look at the initial synergies in the kind of the integration process and the first one or two years I'm sure you've done a lot of work on this since the deal was initially announced a few months ago can you just kind of give us a quick update on your personal thought process.
What needs to be done to what can be done and how quickly can be done as well as areas of potential upside just in the more you have been able to dive into the numbers. Thank you.
Yeah look I think I think it was two steps I think the first and most important focus is what many of you will recognize that sort of a day one readiness program, we need to sort of hit the ground. The date closers and be able to operate two businesses as they currently are.
As part of that process have a plan in place to tackle the cost savings the more basic if you will cost savings cost synergies that we presented in.
That work is advancing and I'm very confident given the expense of both the <unk> management team given that previous merger and our management team, which while a separation is not exactly the same as many of the same processes that will tackle that pretty well I think the second thing is to sort of take a long hard look at the business and make sure that we develop and operating <unk>.
Most of the business that does not look like a hybrid it has to be one that reflects the asset base in the.
Operational capabilities of the two organizations it takes a little bit more time, but it's probably the biggest upside to running the business.
Truly as a collection of integrated assets carries the most upside and Thats the area of my own personal focus in the period post closing is how quickly do we move to.
A business that doesn't look like live in and it doesn't look like all Kevin doesn't or like some kind of hybrid mix of the two it looks like a truly new company and is being run.
The most efficient way relative to the asset base and the operating model.
Thank you.
Your next question comes from the line of Chris Capps with loop capital markets. Your line is open.
Yes. Good afternoon. So I wanted to ask a question following up on Paul on your commentary about when.
Youre characterizing the market talking about the structural tightness and there is an inference there that.
<unk> great.
Chemicals are tighter the importance being maybe that skewed more towards hydroxide versus carbonate, especially when you hear the discussion about the challenges associated with now with ramping.
Hydroxide conversion just sounded like you are talking about in the context of Nebraska.
But then separately you talked about how as you ramp your Argentine capacity that your intent right now is to kind of keep it balanced between converting downstream into hydroxide and having that carbonate sort of optionality. So I'm. Just wondering if you could sort of reconcile that if the market is.
More tight and your customers are asking for more battery grade hydroxide maybe.
Then when <unk> went that inform your sort of your roadmap in terms of capital allocation.
You ramp your capacity.
Thanks for taking the question.
Yes.
Well <unk>.
<unk> Standalone Mylan has always been as you know focused on the hydroxide market is where we think we have the biggest competitive advantage the most capability to add value and it fits our business model of building close customer relationships.
Our historical approach to producing lithium hydroxide, though interestingly does have this capability to to a degree.
Swing between carbonate and hydroxide, if the market demands.
She will be even more the case, if we have 30000 tons of capacity in China, which is incredibly low capital and low operating cost and frankly, it doesn't have to be run all the time and if there's opportunities in carbonate in the future will certainly be able to take advantage of them.
You're somewhat tempered in your ability to do that because to produce real high quality lithium hydroxide that the customer is willing to commit to.
They want a commitment from you that youre, not just going to be speculatively, moving in and out of the hydroxide market. So we do see the hydroxide market is bringing more price stability, we do see the hydroxide market. We've seen that certainly this year at offering a meaningful premium over covenant most of the time. It doesn't mean, the carbonate market is not quite capable of becoming incredibly tight and having some <unk>.
Price spikes that blow past hydroxide at times, absolutely will happen just don't see it as a long run sustainable position to be I. Also think there are opportunities I think we can learn from people like <unk>.
Our focus more on producing volume in these markets than necessarily worrying too much about it I'll be battery grade because there isn't always a massive price difference in carbonate between battery grade non battery grade should be clearly in hydroxide that isn't really a market for non battery grade hydroxide really none of any scale.
It's got to be a batch of greater nothing but.
These are all the factors that we continue to think about.
Including by the way through the metals changes as I'm sure you know by starting with <unk>. We have that other branch, we can head down and produce chloride based chemicals, as well metals and others and.
And so I think it's just going to be coming in the future with an increasingly complex operating model.
And I think it's which is a good thing because I think it really reflects the fact that theres opportunities for us to be constantly optimizing our profitability per LTE, while at the same time, having a differentiated footprint in what we think will be the highest value market, which is lithium hydroxide.
Alright, that's all.
For color I appreciate it and then just a follow up on that though.
The engagement with your customers.
Just curious if it feels like that the demand for <unk> in Asia skewed towards carpet.
In North America like for example, the.
Our engagement with forward Skus hydroxide or is that an over simplification do you think they'll be a buyer.
Vacations in that direction or.
Not necessarily thank you.
I assume in your engagement with the major Oems is very much hydroxide, driven because I think they see that as the area that requires the most involvement by them to make sure that they have reliable secure supply of change I think they have a little bit more confidence that covenant will be available for that carbonate based batteries to be clear all of them have both high and low nickel battery.
<unk>.
Models out there, but running I think in terms of by region and it's a little bit more complicated because I think a lot of the really high nickel high quality cathode plant, so in Korea, or Japan, but there's still a lot in China to I think a lot of the carbonate baseload nickel I mean, its OLED, China frankly, so you sort of have this weird dynamic that if.
If you're taking carbonate into a battery chain is almost certainly going into China was hydroxide does actually have more places that it can be processed into into the heightened <unk> applications.
Thank you.
Your next question comes from the line of Kevin Mccarthy with vertical Research partners. Your line is open.
Thank you and good evening would you provide an update as to the percentage of your lithium hydroxide business.
That you've.
Entered fixed.
<unk> contracts for 2023, and also 2024, if you would.
Yeah. So.
As we've disclosed about 70% of our lithium hydroxide. This year is contracted and the price has been fixed for 2023.
2020 full pricing the majority of that is still largely up for discussion with those customers.
It almost certainly will be fixed for next year, but it will not be fixed at 2023 prices.
Okay. Thank you for that.
To be clear Kevin.
It's almost certainly going to be higher.
In 2024, and then in 2023.
Very good.
Then I wanted to ask about your capital expenditure plans for the profile beyond this year.
Consumable you have some spend rolling off in Argentina, and you've quantified.
Some of the cash that you expect to expend for in the mask.
If you kind of net all that out do you think your 24 budget would be likely to trend flat up or down versus this year's range.
So the first thing I would say is I feel like spending never trends up in Argentina. Just gets replaced by another SaaS spending we have at least two or three more phases to build in Argentina. So yes, as one phase and then another one.
And while the next phases tend to be more capital efficient because they take advantage of the infrastructure, they're going to be bigger. So the capital need is still not massively diminished excluding <unk>, we expect capital requirements and next year to be sort of largely flat with this year and probably the same going into 2025 as well and then there'll be no massive spending on top of that so I think in aggregate, we will see that.
Capital spend across both Argentina and.
No mask it together, probably slightly higher than we saw in 2022 and 2023 now that could change if we add more lithium hydroxide plants, which is entirely possible.
Okay I appreciate the color thanks, Paul.
Your next question comes from the line of Alexia <unk> with Keybanc capital markets. Your line is open.
Thanks.
Everyone. Paul you made a comment that there is probably more rationale behind there.
All current deal now over the last shame on us.
Elaborate.
Comments.
Yeah look I, just think I think the needs for us to be large incredible with customers has definitely been reaffirmed by our conversations with customers and how they are looking for more reliable supply and supportive of anything.
Anything that helps them have more choices more options and more material available to them to support their business models and I think we can also start to see as we start to dig in a little more closely.
Opportunities across our asset base to integrate them more closely not just the capital, but also integrate the operations and the commercial strategy across a wider more dispersed.
Set of products that we can produce an office so.
It's like anything you sort of see the logic you do your arms, let's dance once you can actually start to do a lot more detailed planning.
It start to play out and show us that there's really quite a lot of that to be to be sharp fall in to benefit from as we as we put these two companies together.
Okay makes sense. Thank you and then on your first 10 kiloton expansion in Argentina.
Sam it's running close to full rates next year or there is a longer.
No. It's a reasonably quick ramp statistically route in the summertime down that so you should assume that that's running at full rates next year.
Got it thanks a lot.
Your next question comes from the line of Joel Jackson with BMO capital markets. Your line is open.
Good afternoon.
Paul a couple of questions just following up on.
The S. Four question in kind of the projections that you put into that and I understand the presentations for certain purposes. I just wanted to ask about the 2024 projection for live in it but I think it's about $1 billion EBITDA.
Can you just tell me is the rationale there to show like the best case scenario you gave the pricing deck. So we know what that is I think it was 25 hydroxide in 'twenty two carbon if I recall.
Is that when you assume.
All your capacity is running full out including your current hydroxide expansion in your carbonate expansion in Argentina, everything ramps up day, one boom, 100% day, one is it like the most idealized.
Production scenario could you just give us some sense of what that 1 billion means.
No look it's not it's not an idealized anything I haven't given the rest of it designed to be a representative model not a forecast, but a representative model them to be.
That it has to a realistic estimate.
Estimates of when production would come online what kind of volume it would be what form it would be in hydroxide or carbonate.
Just as much as it needs to be at least a reasonable.
Justifiable and defensible.
<unk> forecast so it's certainly not what I would call a overly simplistic desktop model that you just supply Matt. So it actually does reflect when the model was produced what our best estimates would be of the production profile of live in 2024.
Okay. Thank you for that so my next question is.
So it's interesting you know youre able to hold your full year guidance range exactly the same.
Last few months, you've seen obviously quite volatile pricing, maybe seen carbonate and hydroxide prices move up a fair bit from April to June and then start to ROE lower.
And.
I know you've got a lot of fixed set pricing this year.
The majority of your volume, but it's interesting that you didn't have to change. Your your range at all can you just talk about that despite all the volatility and price you weren't you didn't have your range is exactly the same.
Okay.
So look.
I'd like to think that we're not completely blind to what might happen in the market and while no one can.
Predictive perfectly.
Directly we are not too bad at predicting what we think is going to happen in the market. If you if you're actually follow what the neurological flow band.
What we've assumed in that and you look at what our EBITDA for the first half of the year and then what the assumption might be for the second half of the year, given we have an expectation of more volumes come on in Q4, you can see that.
We factored in what we think the pricing environment is in fact going to look like it's not we've never claimed.
We don't take the Q4.
Price stick it in our model for the following four quarters and use that as a guidance didn't take a Q1 price deck and so on and so forth. We do look for we look at our customer mix, our customer mix as we you know by quarter can vary meaningfully.
A lot of predictability because of where we know pricing is in those of hydroxide contracts and in <unk> and <unk> and other specialties customer base. So we can probably more than most today at least debate whether this survives many more years, but today at least we can have a reasonable degree of confidence as to what.
What the sort of base profitability of that business is likely to be now Youll also recognized so we didn't change our guidance, but we didn't change the range right and so we recognized with half the year left the range is still as wide as it was before and that is designed to at least captured some concept that there will be some variability in pricing, which while we're not linearly.
Related to it will of course impact as if prices are significantly higher than that out of assumption or significantly lower the price. The guidance range is designed to help us capture that.
Thank you.
Last question comes from the line of <unk> <unk> with Deutsche Bank. Your line is open.
Hey, good afternoon, thanks for taking the time and the question.
Could you just help me and maybe the cost profile into <unk> in four Q. I believe you had mentioned is based on a gross margin of 52 or 53% for the year. So just trying to understand why the cost increase.
Sorry, Q4, Q Avon is the floor.
While the annual thank you.
Hi, Corinne geographically here so the cost increases that we're anticipating for the second half again as we are navigating through the year and we are using more and more of new raw materials, we have seen a lot of price increases.
Yeah.
Key raw materials rose like soda ash, and they're materializing more and more so for example, raw material excellent ash is going to be back to equally Q3 and Q4.
Energy in Argentina, some labor costs in Argentina, as well when you think about ramp up in costs as we're commissioning of the plants.
He might be more in Q3.
And actually in Q4, as we as again as we ramp up the production, particularly in MDA in Argentina, where you're going to have a little more costs.
I will tell you that I think Q3, when we have a little bit more cost impact compared to Q4, but we're going to be certainly higher than we had in the first half of the year.
Okay, that's helpful and.
Just keeping up with numbers, but.
Significant adjustments right I think 19 million also related to that as well thanks Sharon.
How do we think about it for Switzerland culture wasn't just like a onetime alcohol would you ask Jeremy to comment as well.
Actually can you repeat the question I'm not sure I understood the question.
Yes.
18, eight transaction a gentleman that your guidance for the EBITDA calculation is it just a onetime off <unk> or should we expect more coming with <unk>.
There'll be more cost per transaction come in Q3 and Q4.
Sure, but those are those are excluded from our adjusted EBITDA as you probably know.
But there'll be more cost relief transaction for sure, particularly as we initially started our integration effort with okay.
Okay. Thank you.
There are no further questions I'll turn the call over to Daniel Rosen for closing remarks.
Great. Thanks, Josh that's all the time, we after the call today, but we will be available following to address any additional questions you may have.
Everyone have a good evening.
This concludes the <unk> Corporation second quarter 2020 earnings release conference call. Thank you.
Please wait the conference will begin shortly.
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