Livent Corporation
Q4 2020 Earnings Call Transcript

Published: 18 Feb 2021

[Operator:]

Good evening, and welcome to the Fourth Quarter 2020 Earnings Release Conference Call for Livent Corporation. I will now turn the conference over to Mr. Daniel Rosen, Investor Relations and Strategy for Livent Corporation. Mr. Rosen, you may begin.

[Daniel Rosen:]

Thank you, Rob. Good evening, everyone, and welcome to Livent’s fourth quarter 2020 earnings call. Joining me today are Paul Graves, President and Chief Executive Officer; and Gilberto Antoniazzi, Chief Financial Officer. The slides presentation that accompanies our results, along with our earnings release, can be found in the Investor Relations section of our website. The prepared remarks from today’s discussion will be made available after the call. Following our prepared remarks, Paul and Gilberto will be available to address your questions. We will be happy to address any additional questions after the call.

[Paul Graves:]

Thank you, Dan. Good evening, everyone. Before I begin, it’s been a year now since we first started having to adapt our operations and practices as a result of COVID-19. And there’s no doubt it’s had a major impact on Livent and its employees at many levels. So once again, I would like to take a moment to thank all of our employees globally for the way they’ve adapted their routines and practices both personally and professionally. To ensure that we keep operating safely in this environment and can continue to meet our customer’s needs. These challenges are not easy and we truly appreciate your commitment and efforts. We have a number of important topics to discuss today, including what we saw in our fourth quarter relative to the rest of 2020 and what it might mean for 2021, the recent positive signs seen in the lithium market and how we expect them to evolve, our outlook for 2021 both Livent specifically and for the industry as a whole, and a discussion of how we see 2022 and beyond unfolding. But first, I’d like to highlight the announcement we made today regarding our supply agreement with BMW Group. This is a multi-year agreement under which Livent will deliver both lithium hydroxide and lithium carbonate for use in the batteries that will power BMW’s electric vehicle fleet. Livent has already begun delivering material for qualification and commercial volumes will commence in 2022. Multi-year multiproduct agreements with premier OEM, such as the BMW Group have a core part of Livent business model. We believe that it will reflect Livent’s position as a global leader in the lithium industry with a differentiated product offering, the proven track record and a unique sustainability profile. We also believe that the operational flexibility that allows Livent to deliver multiple lithium products from and to various geographic locations is an important focus for our global customers, as they look to build more resiliency into their supply chains in an increasingly complex world.

[Gilberto Antoniazzi:]

Thank you, Paul, and good evening, everyone. On Slide 5, we discuss Livent’s Q4 financial results and our sequential improvements. In the fourth quarter of 2020, we reported revenue of $82 million, adjusted EBITDA of $6 million, and $0.02 adjusted loss per diluted share. Revenue increased 13% sequentially, driven by higher volume sold and better average realized pricing. As previously discussed, we expect that volumes to be higher in the fourth quarter across our lithium products, due to older customer order push-outs driven by COVID-19 related to disruption and uncertainty. Profitability has improved from the prior quarter, due to higher prices and lower costs from reduced third-party carbonate usage. Although this was partially offset by a nearly $3 million impact from the pause of lithium hydroxide production at our Bessemer City facility in North Carolina for two months. The upper grades that we undertook to meet increasingly tighter specification requirements from our customers were implemented successfully and we are currently back up and running at pre-upgraded volumes. For the full year 2020, we reported revenue of $288 million, adjusted EBITDA of $22 million and $0.05 adjusted loss per diluted share. The year-over-year declines were due to a combination of lower volumes, lower average pricing and higher costs resulted from third-party carbonate usage, lower volumes produced and increases spending in order to implement the necessary COVID-19 safety protocols at all of our operating sites. Our total lithium hydroxide sales volumes were lowering 2020 by roughly 2000 metric tons and we sold limited carbonate volumes. We also carried 4,000 tons of hydroxide inventory, largely produced from third-party source carbonate into 2020 to meet higher expected customer demand. While much of this higher cost material has now been worked through, we are carrying a slightly higher amount of inventory between hydroxide and carbonate into 2021, largely due to COVID-19 related demand disruption. Average pricing on a LCE basis across the portfolio was down mid teens percent in 2020 year-over-year. This was in line with our initial expectations heading into the year, despite lithium market price, largely being lower than expected and is a reflection of Livent’s typical contracting terms, which set the prices on an annual basis. We ended the year with $114 million in total capital spending, $22 million of those for general maintenance and we’d expect the spending to remain at lower levels moving forward. The remaining $92 million going towards growth investments. It was primarily related to our expansion in Argentina and Bessemer City prior to the decision in March to suspend construction work.

[Paul Graves:]

Thank you, Gilberto. Before discussing market conditions in further detail, I want to expand on some of Gilberto’s comments with respect to the impact of prices on our 2021 outlook. As many of you know, Livent seeks to contract as much of its volumes as possible on an annual basis. This is critical as it allows us to manage our production and supply chains more efficiently and helps us to justify the cost and complexity of qualification processes. In addition, we have historically looked to contract with annual fixed pricing and not have large parts of our contracted volumes exposed to intra-year price movements, based on indices or core play or even monthly renegotiations.

[Daniel Rosen:]

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

[Operator:]

Thank you. And your first question comes from the line of Chris Kapsch from Loop Capital Markets. Your line is open.

[Chris Kapsch:]

Yes. Good afternoon. Just had follow-up question on the discussion around the BMW contract and against the context of your comments about pricing that aren't really sufficient to support reinvestments. So I'm wondering if that providing too much detail, does the pricing in that contract, would that be sufficient to – for reinvest in economics, I'm asking because you said multi-year – it's a multi-year agreements. So I'm wondering if you have, if that agreement portends supplying out of an expanded resource or out of your existing resource. And I have one follow-up.

[Paul Graves:]

Yes, sure. Because you can imagine that I'm probably not going to answer that question. Let me try and do the best that I can, which will essentially tell you. Look, this is part of a longer-term partnership that we're constructing with BMW. There's -- we think it's really important that we set the framework for what a supply chain and a supply relationship actually looks like. And there's a sustainability piece to that. There's a flexibility piece to that. There's frankly, diversification piece to that as well. And so it's more -- this contract has a lot of -- in my view, a lot of very progressive aspects to it that we think are really important to where the industry needs to go in the future, both in terms of our side and from the OEM side. When it comes to reinvestment, I think you really -- it all boils down in the end to some of the prices that we believe will be available in the future across our entire portfolio. It isn't that every single contract needs to have a specific price hurdle before we can enter into it. But across our entire portfolio, we need to have enough visibility into the price levels to justify putting that capital to work.

[Chris Kapsch:]

Okay. Let me – and the follow-up, would be you've mentioned that you're supplying both carbonate and hydroxide and that you're in the process of qualifying some products to that. I think it implies that this is carbonated from – you're not using third-party carbonate, but product from your asset in Argentina. There's been like a narrative from some that suggests western OEs prefer their hydroxide from hard rock assets. In this case clearly, since it's implied that they're sourcing from a brine asset, that's not the case. And so I'm just wondering, how much of – how important was sustainability and then sorts of knowing that they'd be sourcing effectively from a brine asset. How did that play into the conversation and in this ultimate agreement that with Ford? Thanks.

[Paul Graves:]

I think it's fair to say it was a critical part of the conversations. But it's never an easy conversation to answer because I think there remains a degree of confusion. And you've seen some public statements from some European OEMs that the -- frankly, while maybe a lot misguided in various places about the difference between spodumene and brine-based resources. It's probably fair to say that if your primary concern is carbon content, then you tend to prefer brine-based lithium. And then your attention turns to water usage and local community issues. And when you do that, then it becomes a technology conversation. And there are, of course, different technologies being used in different brine resources. And I think you've heard us say in the past that we think we walk a pretty balanced line in terms of being sort of on a positive end, but not the best of carbon content, and on the positive end, and probably amongst the best in terms of water usage. And so it really sort of frames, I think, the complexity of that conversation that says, you can never have everything. And if you really do care about carbon content, you really are forced to take a long hard luck at brine resources, and you really need to start thinking very, very carefully about an integrated producer who can actually make commitment all the way, if you are going to go to hard work, all the way back to the mine. It's not really credible if you're putting sustainability in those factors at the forefront to just pick a non-integrated converter, it's just a bit for them to be able to qualify the production processes with you.

[Chris Kapsch:]

Paul, is it right to conclude that this contract skews more heavily towards hydroxide vis-a-vis carbonate? Or can you share any detail there? Thank you.

[Paul Graves:]

Yes. It does. It skews towards hydro. It's really based upon hydroxide, but with that flexibility and optionality to take carbonate. I think we're all realistic that the technology roadmap is fluid. I think we all know the trend is towards hydroxide. But predicting it on a one or two-year basis, it's just as difficult as some of the car companies as it is for us. And so putting that flexibility in, I think, was really attractive to them. And frankly, to us, of course, because we do produce both, right? We don't have to make a decision as what to produce. We always start with the carbonate. So we are structurally capable of offering that flexibility.

[Operator:]

Your next question comes from the line of Bob Koort from Goldman Sachs. Your line is open.

[Bob Koort:]

Thanks very much. I think Gilberto had some comments about some challenges in resuming the construction efforts in Argentina or some things that may get in the way of that. I'm curious, the market now has something like a – is better than 50 times EBITDA valuation on your equity, and we've seen, any of your competitors raise funds, is that an avenue to jumpstart the – and resume the expansion program if you considered that, should we look for that in the coming days?

[Paul Graves:]

First of all, Bob, I hope you've got some power down there. Not using all your cell phone battery on as I hope. But look, the expansion in Argentina, we started and there's never been a capital availability question in the first instance. It's really about the complexities of operating in Argentina today. And there's no doubt those complexities are real, but not insurmountable. You can assume that we are talking quite extensively to the local authorities about what it would mean for us to restart. What we would be looking for from them. And equally, by the way, what they are looking for from us with regard to a safe restart of expansion in a COVID world. So look, I think we're taking a long hard look at it. It has to progress at its own pace. Argentina has its own challenges and issues. They have their own objectives. I think the dialogue that we have, by the way, down there is probably the best that we've ever had, certainly, the best that we've had in the six to seven years that I've been involved in this business. So at the moment, I feel that we will soon have an answer as to what a restart looks like and what the timing of it will look like. Clearly, at that point, we will then have to answer some other questions with regard to financing, funding, et cetera. But that's more of a long-term question than an immediate one.

[Bob Koort:]

Got you. And then, I mean, it sounds like maybe a little opening that it's not an all hydroxide future in light of your comments around the BMW purchase. Is it possible you might go deeper into carbonate? Or is there something about low nickel chemistries that has changed your opinion? Or how can we interpret the notion that as a broader portfolio?

[Paul Graves:]

Yes. I've been pushing for awhile. I mean, as long as I can remember to say, I would love to have more balance between carbonate and hydroxide. I continue to believe that carbonate not only is not going away, but will continue to grow. I continue to believe that we have an advantage positioning from a cost perspective, even though the technology advantage and the process capability advantage we have in hydroxide is maybe not as pronounced in carbonate. It's just good business for us to diversify into more carbonate. And we really have not had enough to be relevant and incredible. We would like to have more balanced between carbonate and hydroxide, but we are – first and foremost, going to be a hydroxide producer. And so I think, yes – and this is not driven by view on technologies. Like I think if you took a view out a few years and you look at carbonate demand today, the week that the least aggressive forecast that I've seen have cut demand for carbonate claiming by about 2 to 2.5 times between now and 2025. In absolute terms, more than hydroxide will grow over that same period of time, even though the percentages are higher for hydroxide. And so I think having some exposure to that kind of diversification is something that I think would just be good business for us, to be honest, Bob.

[Bob Koort:]

Perfect. Thanks.

[Operator:]

Your next question comes from the line of Chris Parkinson from Credit Suisse. Your line is open.

[Chris Parkinson:]

Great. Thanks, guys. Paul, I'm trying to make sure I answer this in a way you can hopefully answer. Just outside of pricing, can you hit on a few of the other factors that may have changed in the recent weeks or months that didn't enable the supply agreement? I mean, presumably you've been in talks for a while, and then if you could kind of extend that commentary to what gaps elsewhere still need to bridged with other OEM, given their ongoing initiatives that you haven't really locked in yet. So just any additional framework on how we should be thinking about these going forward from what – to the extent, which you can share. Thank you.

[Paul Graves:]

Yes. Sure, Chris. I think you need to talk to your colleagues in the auto analyst side of the shop, because this really is down to how much -- how quickly an OEM themselves can get confidence around their own EV platforms. I think we've certainly seen in Europe, the action of the regulator has now forced more European OEMs to start to act and start to take action. And that involves making a decision on back the technology, at least for this generation of launches. It also forces them to think hard about who they're going to source their batteries from. And I know that's got a little bit more complicated for some companies in the last few weeks, and it's forcing them to think a little bit more about what that supply chain looks like and where they're going to go in that supply chain. And then of course, look even further down and say, well, what differentiates may EV versus somebody else's if it's not a powertrain anymore. And so questions like sustainability and environmental friendly, selling points start to come to the forefront. Until the OEMs actually start to get confidence about what their position is, what stance they're taking and how they're going to define their EV platforms. It's pretty difficult for them to then start to go back down the supply chain and put the supply agreements in place. I think it's also difficult for them because this intermediate step of battery production I still incredibly fluid. It's incredibly fluid. And I don't just mean the battery producers. I mean the cathode production, if you want to produce cathodes, if you want to buy batteries, the cathodes today are all largely being produced in China, right? And so if you're trying to diversify away from that, you start to scratch your head and say, how do I localize cathode production? And that's not really happening that quickly either. So there's a bunch of big pieces that need to be put into place. I think the more forward-thinking companies are therefore saying, like, I need to start developing the relationships, not just with lithium, but maybe with nickel and other producers today and put in place agreements that are fluid and flexible enough that this is somebody I can partner with over the next three or four or five years while this starts to evolve. And that's not frankly, a typical way an automotive OEM has operated, right? We know how they're typically operated as they drive maximum profitability out of their operations. So many of them just have to make some meaningful cultural changes, I think, before they can make those decisions.

[Chris Parkinson:]

I'd say being 100% in certain regions is a pretty aggressive target, but so we'll see how they bridge that. The other question, I had is just kind of going back to the expansion on Bob's question. Just one of the, let's say, near to intermediate-term pieces of the thesis I just been what's everybody seeing on the ground in China in terms of stockpiles, it definitely appears that the situation is, digging in the ease, if not improve materially. Can you just hit on, how that situation as it kind of started off in 2020 is impacting your current contract discussions? And then just what needs to happen for you to fully detach from China spot prices on a go-forward basis? Thank you.

[Paul Graves:]

Yes. Look, I don't -- China spot prices have always been an interesting. Interesting beach in our industry, because I think we had one of our competitors say earlier today that they don't sell really anything to speak of at China's spot prices. And we certainly don't participate in the China spot market. Just the nature of our product portfolio doesn't lend itself to that being mainly hydroxide and mainly qualified material, not just technical grade. And so I think what China spot does is create an unfortunate conversation with some customers about what their price expectations are. And there's always some people out there who are willing to take a risk on qualified material. There's some people are always wanting to take a risk on reprocessing material and that the willingness to do that grows when you see an oversupply into a market like we saw in China. So it makes contract negotiations more difficult. I mean, they say timing is everything. Most of our contracts with customers for 2021 and the pricing in them was put in place largely in sort of September, October window, maybe November window of last year. And it was just two or three months to soon relative to what was happening out there. And so I think the disconnect on China spot prices, I think will only happen when the market just matures, matures, matures, when more people are engaged in the market, when more ultimate consumers, the automotive companies become active purchases of lithium, or at least become actively engaged with the challenges of securing lithium, their battery suppliers are willing to use. Once they get to that point, I think they will understand the complexity and that maybe just having a price that is hard to verify that is probably not directly comparable in terms of product quality terms, et cetera, appear in China is not really the right basis for a conversation. And I think that would become especially acute when the inevitable price spike does come. When people look around and say, I really don't want to expose myself for something that can go down as low as $7 and up as high as $27. I think that's a pretty scary place, given the margins in the EV industries for many of these car companies to put the place themselves.

[Chris Parkinson:]

It's very helpful color. Thank you as always.

[Operator:]

Your next question comes from the line of aligner Pavel Molchanov from Raymond James. Your line is open.

[Pavel Molchanov:]

Thanks for taking the question. First kind of conceptually, you said, you're still contemplating whether to resume capacity expansion. What are the specific variable factors that you're tracking in making that decision on the timetable?

[Paul Graves:]

Yes, I would probably change the wording there. We’re not still debating whether to restart. It’s a question of when we restart and how we restart. And frankly, what we would restart. As I’m sure, we have a program in Argentina to expand capacity by 40,000 tons and to do that in probably four phases, four steps. There’s really nothing to stop us doing that more quickly, doing it in two steps, certainly we would do it in a single step, but doing it in two steps, that does bring some other challenges and to take on that commitment would require some strong commitments back from us, particularly from the province of capital market, where we operate as well as from the federal government. We’re not looking frankly for much other than certainty and a path to making sure that we get this done on time and on budget. And you can imagine those conversations are pretty well advanced. I think the second thing, we touched upon it earlier is, it’s going to be a function of where we choose to make long-term commitments to customers and what we choose to do. Because the sooner that people start to step up and are willing to make the commitments to us, it’s not just about price, it’s about a true commitment. A true certainty that what we have is a multi-year agreement and that of course will be a big factor in how quickly we restart those expansions. It will also frankly, shape how much downstream capacity would take on. If more and more customers like the idea of flexible supply agreements, where they switch between carbonate and hydroxide, we may not add as much downstream hydroxide capacity. We otherwise would have planned, but that will largely become more clear based upon conversations with our customers.

[Pavel Molchanov:]

That’s helpful. You mentioned that Europe is now at the forefront of light duty electrification. You have a plant in England, and I’m curious, does that – what role does that facility play in battery grade hydroxide? And if it doesn’t, is there a logic for perhaps, converting it or kind of repurposing it for the European battery market?

[Paul Graves:]

Yes. So a couple of points there. That is a butyllithium plant, it’s a small footprint, we don’t do any lithium hydroxide there today. And we certainly don’t have the spatial, the capacity of that location to put a lithium hydroxide facility there. So we wouldn’t use an existing facility in Europe. I think maybe people heard me in the past talk about, I do believe, Europe will be an important market in the future. But for that to happen, it comes a little bit back to some of the comments I made earlier, which is even if people are assembling batteries in Europe, Europe is the largest market, the lithium goes into the cathode materials and all of that has been processed outside of Europe. So until there are meaningful cathode plants being built in Europe, and there are a couple being talked about, but until those times go in, there’s no way to sell the lithium to in Europe. And so even if you make it there, you’re just exporting it out at that point in time. So it’s a big chicken and egg. We are fortunate that we can build quickly and if somebody wanted to have a lithium hydroxide plant put in place, we co-locate very well. We use common infrastructure, we do not produce waste really at all in our lithium hydroxide process unlike a spodumene based process. And so it’s actually a pretty attractive option for many people to talk to them about locating hydroxide plants. I think Europe is still a little bit of way off of actually developing its battery industry and the supply chain for the battery industry though to the point that those trends of decisions are likely, certainly not in 2021, I don’t expect.

[Pavel Molchanov:]

All right. Good point. Thanks very much.

[Operator:]

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

[Joel Jackson:]

Good afternoon, Paul. A couple of questions, I’ll do one by one. Going back to the BMW deal, BMW is a much better deal for you in this case. I was going to say, can you maybe talk about who those tons would have gone to? So, you would have sold these tons to a customer. You were talking to an OEM, to a cathode maker, like just like a battery maker, a cathode maker. Can you just give me a sense – give us a sense of, how you’re shifting your portfolio here and who you’re selling to now versus you were selling before, if that makes any sense?

[Paul Graves:]

Yes. look, it’s hard to specifically answer that, because I don’t know where it would’ve gone. The industry’s evolving and you’ve heard me talk about this. I think first and foremost, the historical sale of lithium materials directly to capital producers is not quite the same today, as it was a year or two ago. I think while we do still sell to them and they ask, I’d like to purchases for most OEM, Western OEM platforms, the cathode producer is no longer in charge of that buying decision. They are by the way for many non-OEM applications. And so I wouldn’t say that the customer base is not important and not going to be important. It is and it will be. I think the battery producer themselves have tried to insert themselves into that space with mixed success and not entirely always consistently. And so if I was to really predict, I would expect in the future, most of our volumes will go to a OEM contract or to directly to the cathode producers for non-OEM applications. And I would probably guess, and I’m only guessing now that the amount of sold under contract held with the battery producers themselves, maybe won’t be as great as we might have thought a year or two ago.

[Joel Jackson:]

That’s helpful. If we can look into 2022 a little bit, just on just general volume, how would you see having more volume in 2022 right now, hydroxide carbonate just give maybe or a magnitude of what we could see there?

[Paul Graves:]

For the market or for ourselves?

[Joel Jackson:]

Sorry, for Livent, yes.

[Paul Graves:]

Again, it’s a hard one to answer. I mean, our challenge remains that the demand is there for hydroxide and don’t have the carbonate to feed it. And so the couple of things that I would look to, I think first and foremost, it will depend on how quickly and how confident am I that I can bring on board the Argentina production. I think as we’ve said in the past, we’re willing to be short carbonate for a period of time, but we know that our own carbonate is coming. And so it may be that we do add hydroxide capacity for 2022 in order to be able to meet customer demand at that point in time. And if we do make that decision, we have no choice then but to add the carbonate capacity. It may though, that we just do this through Nemaska. You are pretty familiar with them. And that’s an asset that as we work through what the right decision is for Nemaska that could certainly be both carbonate and hydroxide produced there depending on the decisions we make. So it’s a little bit hard for me today to tell you exactly where it will be. I would just say, if you give me another quarter or two, I suspect I’ll be able to give you a bit more visibility as to what 2022 volumes look like for us.

[Joel Jackson:]

How much lead time would you need to get more hydroxide volume for

[Paul Graves:]

We – Gilberto mentioned earlier, some of that capital spending that we stopped with a year ago now was on a new hydroxide line for Bessemer City. So much of the spending on the capital has actually been done. And without massively over simplifying as my team love it, when I do this, we kind of have all the steel, we have all the plant, it’s all ready to be installed. It just needs to be installed. So we could actually get an hydroxide plant in Bessemer City today, at least up and running pretty quickly if we felt that we needed to.

[Joel Jackson:]

Perfect. Thanks.

[Operator:]

Your next question comes from the line of P.J. Juvekar from Citigroup. Your line is open.

[P.J. Juvekar:]

Paul, I need a little clarification. When you say any of the contracts, does that mean that they start all on January 1 or do you have some contracts rolling through the year? And if that’s the case, then the contract expiring second half, could you see better pricing there?

[Gilberto Antoniazzi:]

Most contracts are annual, P.J., vast majority of them. So we do have some – by the way that do expire off annual, but they tend not to be in the hydroxide market, they tend to be in the butyllithium, sometimes in the grease Africa industrial applications, but very few of them in volume. What we actually have is contracts, again, when we negotiate the contract, there’s two pieces to a contract that we care about how much and what price. We always try and fix the how much piece. First and foremost, because that’s what our production times for the following year can then be put in place. And it’s much more efficient to have an annual volume commitment from your customers that you can then plan around. Historically, both we and our customers wanted to know the price. And so you’ve tended to put them all down at the beginning of the year. What has evolved over the last couple of years has been an attempt led by customers to follow indices, to a sense of saying, I’m happy for my price to change as long as it follows market prices. There’s no clarity though, amongst these customers about which indices they like. They don’t really want to follow China at all. So China prices are almost always completely excluded from a venture – from an index that they look to. They also get a little bit nervous about moving the price every month. And so they like to have a smoothing effect in that. So they have a light on it, for example. And that’s why we talked about in the second half of the year, the contracts we have with customers that look to some form of market price, whatever it may be and they’re all different is likely anything that happens in January, doesn’t actually hit pricing until July, which is why we talk more of a second half of the year opportunities. Now we do have some volumes where we’ve agreed with the customer. Look, we’ll just sit down every month, see what the prevailing prices. And we’ll negotiate a price at that point in time. We have historically not done that much, unlike some of our competitors. But we do have some of those contracts in place for this year as well.

[P.J. Juvekar:]

Great, great. Thank you for that color. And then can you talk about Argentina FX? Peso has been volatile. How do you plan to handle that volatility? And in the future, how do you plan to take cash out of Argentina? Thank you.

[Gilberto Antoniazzi:]

So the second question is the easiest, which is, we probably won’t be taking cash out of Argentina in my lifetime. We’re putting cash into Argentina, right, when you think about the expansion. So no cash is getting trapped in Argentina anytime soon, because there’s plenty of local investment that needs to be done to bring capacity online. So I’m not too concerned about that piece. The FX piece is just less and less relevant in our business, more and more of our business is conducted in the U.S. dollars. We – it will be local salaries. So we do adjust local salaries on local inflation basis. And so our cost benefit or hit is always when inflation and currency depreciation are not in line with each other salary inflation, particularly. What we try to do is keep them as close as possible. And so we try to – we do work with our employees down there to treat them clearly fairly and make sure their standards of living to maintain. But also not just look at local inflation, but also tie in as much as we can a currency piece to it. It’s never perfect. And there are times only benefit and times when we don’t. But as I said, the bulk of our costs down there, whether there’s energy costs or other input costs are not peso denominated anymore.

[P.J. Juvekar:]

Thank you.

[Operator:]

Your next question comes from the line of Mike Harrison from Seaport Global Securities. Your line is open.

[Mike Harrison:]

Hi, good evening. Just a couple of questions on the guidance. Can you maybe walk through some of the key variables that could drive you toward the high end or the low end of EBITDA? Is it all pricing or are there are some other components? And maybe talk about like the cadence of earnings best to assume that most of your earnings are going to be weighted towards the second half this year.

[Gilberto Antoniazzi:]

So I’m sure you conspicuously noted that we’re not giving quarterly guidance. And so I’m not going to try and do that. I don’t know that it’s all back half of the year, but I can answer you that, upsides and downsides are pretty much price driven. We know what our cost structure looks like. We know what volumes we have. Now clearly, if we had a massive reversal in the market and the demand wasn’t there – like what happened in 2020, the volume may not be as high. I think that’s always possible, but in 2021, not very likely. It really comes down to A, what happens to price. And also, just as importantly, where does it happen to price? As I mentioned about the contracts that we have, if there’s a price change that is not reflected in the indices, that in some cases we’re pricing up, then we won’t get any benefit. Equally if those indices move more than what we see in other places will get more benefit. But you should assume that the variability in 2021 is massively dependent on what our average realized price turns out to be.

[Mike Harrison:]

All right. And then, I wanted to ask about your comment on increasing quality and qualification requirements. How do you think your capabilities stack up against competitors there? And would you say that there is a growing number of suppliers out there that can meet more stringent requirements? Or are the requirements getting more stringent more quickly than the capabilities?

[Gilberto Antoniazzi:]

Yes. I would today say that there are three companies in the lithium industry globally that I have confidence can produce lithium hydroxide, that kind of specifications. I think there are maybe two or three more that get close and essentially will require that material to maybe treat a little differently, or maybe they work in certain applications, but not all. Those numbers haven’t changed. They haven’t changed in two or three years. In fact, I might even argue this, probably the three that I said might have been four or five at one point. The specifications have tightened enormously. They just haven’t. And it’s a really interesting process because all it does is limit the number of people that can actually supply into certain applications. And it makes it harder for customers to switch. It also, frankly, in some cases can cause challenges about where you source your lithium from, because some of the impurities are specific to a particular brine-based resource or a particular spodumene resource that means, it’s just not cost effective for you to meet a spec. If they’re picking on a particular impurity, that’s specifically a resource, so it’s all just making the landscape more difficult, frankly, for the battery producer. Now, will this continue? I don’t know. We actually have many conversations with our customers that say, look, if you are willing to relax the spec, it allows me to produce a high volume because essentially meeting the spec slowed my production rates down. And we can have a conversation then about prices, et cetera, but they’re just so nervous about product quality. They have so many challenges producing these next-generation batteries. But they are absolutely appropriately focused on every piece of the supply chain. And they’re reducing their tolerance for variability and for impurities. Again, I think frankly, from my perspective, it’s a trend that we’ve been talking about for several years and I think it’s another reason that it supports and gives sort of an incumbency advantages to those of us that can actually demonstrate not only that we can do it, but we can do it from multiple locations and multiple plants.

[Mike Harrison:]

All right. Thanks very much.

[Operator:]

We have now reached the allotted time for questions. I will now turn the call over to Daniel Rosen for brief closing remarks.

[Daniel Rosen:]

Thank you. That is all the time we have for the call today. So we will be available following the call to address any additional questions you may have. Thanks, everyone and have a good evening.

[Operator:]

This concludes the Livent Corporation fourth quarter 2020 earnings release conference call. Thank you.