智利化工礦業 (SQM) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the SQM conference call. At this time, all participants are in listen-only mode. My name is Christine, and I will be your coordinator today. (CALLER INSTRUCTIONS) I would now like to turn the program over to your host for today's call, Mr. Patricio Vargas, head of Investor Relations. Please proceed.

Thank you, Christine. Good morning, everyone, and welcome to SQM's second-quarter earnings and outlook conference call. As usual, this conference call will be recorded and webcast live. You may access the webcast for reply at our website, www.SQM.com, approximately half an hour after this conference call is over.

Joining me this morning as speakers are Patricio Contesse, Chief Executive Officer; Patricio De Solminihac, Executive Vice President and Chief Operating Officer; and Ricardo Ramos, Chief Financial Officer and Business Development Senior Vice President.

Before we begin let me remind you that statements in this conference concerning the company's business outlook, future economic performances, anticipated profitability, revenues, expenses, or other financial items, anticipated cost synergies and product or service line (inaudible), together with other statements that are not historical fact, are forward-looking statements as that term is defined under Federal Securities laws. Any forward-looking statements are estimates reflecting the best judgment of SQM, based on currently available information and involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those stated in such statements. Risks, uncertainties and factors that could affect the accuracy of such forward-looking statements are identified in the public filings made with the SEC; and forward-looking statements should be considered in light of those factors. I will now leave you with Ricardo Ramos. Okay? I'm sorry, it's going to be Patricio Contesse.

As you can see in the first slide, we have stated net income in the second-quarter for $12 million. That amount of net income means that we have been 30 percent higher than what it was in the second quarter last year. Also as you say, that during the last two years net income in every quarter has been higher than what it was the previous year.

If you go back to the second slide, you can see that in the last six semesters we have been able to increase gradually our net income every six months compared to the other ones. That is demonstrating the improvements in terms of operation, costs, and also in terms of the market increasing basically in volumes. But admitting us to being able to have this trend.

If we go now to the (inaudible), the other slide, I would like just to make a brief comment of what was announced yesterday, related to the option of purchasing the Yumbes PCS operation in Chile. As you can see there, that we have this option; it has been (inaudible) in line in the rate to have it at $1.57 million. The purchase price, if we exercise the options, it is going to be $35 million; whereas we can deduct the $1.7 million that is the options.

I should like just to go through very briefly what we see the main benefits related to this operation for us SQM. I would say first that the main benefit we see to this operation, that it would permit us to increase our participation in the market, in about 20 percent of where we are today; that it was in the range of 38. So after this operation is concrete, (inaudible) SQM would have about 58 percent of the world market potassium nitrate. We think that by doing so, looking forward what they have in terms of industrial installations, plus our own resources of natural resources, we can have big synergies in terms of producing that 20 percent of the market, with great benefit in terms of our own costs, plus the current prices of potassium nitrate in the market.

What we are looking forward to buy, at the end, from this company is the shares of this company with all the assets without any liability or passives (ph). We think that by having this higher volume of participation in the market, it will give us synergies also in terms of the logistics, in terms of the costs on administration, in terms of per metric ton of product. Because this should not mean basically or very much an increase in terms of people being able to sell this new capacity.

So basically those are the main benefits that we see. With this operation, now is going to a procedure of independent evaluator, according to the Chilean law. Once that is done, it should come to the members of the Board. If that evaluation is positive, the Board should probably approve and then go through a deliberation. There's a transition period of time, that you end up more than after the 31st of December next year, when then SQM should take full administration of these assets.

Finally in slide number 4, about the outlook of the company, I would like to say that special fertilizers has continued to grow in terms of volumes and demand during this year. That is permitting us to increase the volumes compared to last year. During the second half of 2002, we think they were higher than what they were in the first half of 2003, even though the pricing was slightly higher. We are expecting half of the year that the volumes, and therefore sales, will be slightly more than last year; and prices stable to slightly higher.

In terms of potassium sulfate, we expect the first half 2003 -- that was similar to last year; but we expect during the second semester they will be lower than what they were 2002.

In terms of the iodine, we see similar sales volume during the year; some recovery in prices. And clearly we have been able to achieve significant cost reduction compared to what they were last year. So iodine in terms of margins or benefits to the company during this year has been significantly better than what they were last year.

In terms of lithium also, demand has been slightly higher than what we were expecting; and because of that we were having in terms of lithium higher volumes. Pricing has increased somewhat, in the range to 5, 6 percent compared to last year. And the outlook for this product in terms of demand has been very good.

Coming back to iodine, we expect during the second half of this year volumes relatively similar to what they were the second half of last year. But the prices should be slightly better, compared to the significantly low cost. That's why at the end iodine for this year, as I told already, are having a good improvement in terms of margins for the company.

As a summary, we expect during the second half of this year that would be slightly better than what we have been already having for the first semester. So in terms of the year, we see better than last year; having a better first semester; and a slightly better perspective (ph) for the second half of this year than what it was the first half of this year.

Okay, thank you. Christine, we may now go to the Q&A session.

(CALLER INSTRUCTIONS) Our first question comes from Manuel Salazar of Santander.

Good morning, gentlemen. Just trying to get a little more color on the purchase of Yumbes. If I understand correctly, this would be finalized in January of next year. I am just trying to assess what this is going to mean in terms of volumes and margins. I remember, or I seem to recall, that you have a contract with them for 96,000 tonnes of potassium nitrate. It this all they produce? Or do they produce more? That would be my first question.

The second question would be, they also produce iodine. Can you give us an idea of what the volumes are there? And the third question on Yumbes would be, you were probably getting a fee for those 96,000 tonnes of potassium nitrate. Now they're going to be part of your own sales. Can you give us some color on what the improvement in margins could be there?

I would say that out of the approximately 100,000 metric tons, Yumbes is in the range of production of 150, 160,000 metric tons of potassium nitrate. So by this, say, purchasing it, we come up to that, at the end, it will mean that what we are acquiring in terms of market share is about 60,000 metric tons. If we would have been able to assure that 100,000 metric tons for the next year or future, that clearly was not in the contract.

So we are assuring by this operation the full 160,000 metric tons that they already have today. Because I was not able to have it by sure (ph) that I was going to have the 100,000 metric tons 2003 to 2004 onwards. So even now, compared to this year, you are going to be in the range of 60,000 metric tons more. But compared to what could have been nothing in the future is 160,000 metric tons.

We think, and we don't want go strictly on margins, but (indiscernible) synergies in terms of operation in the future, with the industrial establishment plus our own resources that we have in SQM, that we can have lower cost at what we were buying already for the 100,000 metric tons. Plus all the benefit (ph) of the new tonnages, compared to what it is this year that they were producing. So there we have and we see higher margins in the half, compared to the situation today that permit us to pay what we had agreed.

Also I should say that handling more tonnage for SQM, it is basically the same salesforces. Meaning by each tonnage that we are selling, we are having a lower cost initiative. And also I should say that the industrial capacity of the plant itself, not I mean by our factory, but the plant itself at Yumbes is capable to produce in the range between, nominally, about 300,000 (technical difficulty) tons. So we meet our estimate with that asset, in the future, to continue to increase production if the market (inaudible) this respect.

Yes. And the iodine volume for Yumbes is how much?

Is in the range of 200, 250 metric tons per year. That they will also -- that is stopped (ph) for action and we will be able to (inaudible) by ourselves in other areas much more cheaply.

Okay, thank you.

We are also (indiscernible) we are tapping, even though a not so significant, but 150 (inaudible) something.

Our next question comes from Ben Lader of UBS.

A couple of questions, just on Yumbes. Previously you have been fairly negative on this project, especially when it was starting up, in terms of the costs likely to be achieved there. Can you talk me through what has changed in your thinking? Has the project, have the costs in reality been lower than your initial expectations? Or does the purchase price, the low purchase price make up for the higher costs? If you can just talk me through what has changed with your thinking there.

My second question is just in your potassium nitrate sales to China. What sort of visibility you have there for the second half of the year? And if you can give us some sort of range of your expectations for volume sales for the second half?

First of all, what we have said about Yumbes has not changed at all. You will see exactly what we are buying is the assets, without any other (inaudible) pricing of the company. We think by using their industrial plant -- that we have never said they are bad. What we always questioned was the natural resources related to Yumbes. Using that capacity, industrial capacity, plus our own reserves, SQM's reserves, plus the source of nitrogen that we use now plays in; we see benefits in terms of being able to have a quite effective and quite competitive operation. And that is part of the synergies we see, doing that way besides the market share we are buying.

In terms of China, it is a market that has been growing every year. And we are expecting for the second half to sell about 60,000 metric tons more of potassium nitrate. Plus last year they were in the range only of 50,000 metric tons. We sold in the range of about 8 to 10,000 metric tons more during the second half compared to last year.

Great. Thank you very much.

(CALLER INSTRUCTIONS) There are no more questions in the queue. Our next question comes from Ben Lader.

Sorry, gentlemen, if I could just follow up. The La Corona (ph) iodine project you purchased back in the June, could just talk me through the rationale for that? What the intended use of it is, going forward? And if you can just confirm the $13 million purchase price; and whether that included all assumed debt, contingencies, etc.?

We paid for only there the mine. It did cost $13 million. We bought that basically because it's a good mine, a very good mine, with high yield of iodine. And clearly we see it in some near future being part of our operation in production volume (ph) considering that it was a good mine.

And can you be any more specific on the timing? I mean, where was that project in terms of exploration, developments?

In terms of exploration, we know it quite well. Because when we bought that, clearly they give us all the information, geological, and we were able to confirm by due diligence that geological information, making grails (ph). So we have quite well knowledge about the mine, inquired (ph) well into that and paid for that. And exactly we cannot say when it will come into operation, but clearly it is today one of the mines in place in the valuation, compared to other ones, to be in the next two or three years maybe, or not, in operation for us here.

Thank you very much.

There are no more questions in the queue.

Okay, Christine. That'll be it. I want to thank everyone for participating in this conference call, and we hope to have you all with us in the next one. Goodbye, everyone.

Thank you for your participation in today's conference. This concludes your program. You may now disconnect. Good day.