智利化工礦業 (SQM) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SQM third quarter 2003 earnings conference call. My name is Alicia, and I will be your operator. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero and an operator will assist you. As a reminder, this conference is being recorded.

I would now like to introduce your host for today's call Mr. Patricio Vargas, Head of Investor Relations. Please go ahead, sir.

Thank you, Alicia. Good morning everyone, and welcome to SQM's third quarter earnings and outlook conference call. For your information, this conference call will be recorded and Web cast live. You may access the Web cast for replay at our Web site www.sqm.com approximately half an hour after this conference call is our.

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 performance and anticipated profitability, revenues, expenses or other financial items anticipated cost synergies and product or service line growth, together with other statements that are not historical facts are forward-looking statements as that term is defined under federal securities laws.

Any forward-looking statements are estimates reflecting the best judgement of SQM based on currently available information that 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 effect the accuracy of such forward-looking statements are identified in the public filing made with the Securities and Exchange Commission. And forward-looking statements should be considered in light of those factors.

I will now leave you with Patricio Contesse.

As you can see in slide number two, continuing with the previous positive trends first quarter 2003 net income was higher than third quarter last year. It is the 10th consecutive quarter where net income has been higher than the respective quarter of the previous year. Net income during third quarter was 13.3 million, 60 cents per AVR which is 14.5 percent higher than the 11.6 million or the four cents per AVR of the same period of previous year.

Moving to slide number three certain revenues for the first nine months of the year were 27.6 percent higher than the same period of 2002 with a 24.3 percent increase in the specialty fertilizer sales, 8.1 percent increase in industrial chemicals. Five point four increase in the iodine and iodine derivative sales. Forty one point three increase in lithium carbonate and lithium derivatives. And 73.6 percent increase in other sales, mainly trading of commodity fertilizers in Chile and Mexico.

As is stated in the slide number four, the main reason for the 114 million increase in revenues are the following. An increase of 42 million in trading of commodity fertilizers in Chile and Mexico, mainly due to the acquisition of Nos Iro (ph), Chile and Fertilizante Formica (ph) in Mexico. Approximately 25 million of addition potassium nitrate sale due to the distribution agreement with PCS Jumbus (ph). SQM will get the full margin of the sales after the acquisition of PCS Jumbus expected at the end of 2004.

Seven million of lithium hydroxide SQM bought at the end last year, in the venture of lithium hydroxide in the U.S. in order to enter in to this market. SQM expects to start selling lithium hydroxide produced from SQM from 2006 onward getting the full margin of these sales.

Inclusive of sales of potassium nitrite and sodium potassium nitrite mainly in Latin America and Europe due to the positive effect of the distribution agreement with Nosquiel (ph).

Finally, I continue with a positive market trend and increase of sale of lithium carbonate and iodine and iodine derivatives.

Thank you. Operator, we may now go to the Q&A session.

Ladies and gentlemen, if you would like to ask a question, please key star followed by one on your touch-tone telephone. If your question has been answered, or you wish to withdraw your question, please key star by followed two. One moment while we prepared for the first question.

And the question comes from Manuel Salazar with Santender. Please go ahead, sir.

Yes, good morning, gentlemen. I actually have three questions. The first one has to do with the appreciation of the Chilean peso. And if you can give us an indication of how much this impacts your cost of goods sold. The second one has to do with your other revenues. You have a very large increase there from quarter-to-quarter and from year-to-year. I assume that has to do with Almeca and Nos Iro, Chile. But I want to know if that's sustainable in the long term.

And then finally, the third quarter would have to you plan to go it o the lithium hydroxide business, operating on your own by 2006. I would like to get an indication of what are we looking at in terms of margins for lithium hydroxide when compared with lithium carbonate.

Well with respect to the Chilean peso, clearly we have significant issues that we are dealing with and we have already started in the fourth quarter. Even so saying that we expect that we are going to be able next year to deliver better net income and operating income next year even though that situation.

Regarding all of the revenues in terms of the Almeca and Nos Iro you're right. We make this a one type business that says we're not going to buy another make or similarity. So the same happened in Chile. So we think that this increase in basically commodity trading, fertilizer that we do in Chile and Mexico they're going to be more or less the same level next year.

In terms of the lithium hydroxide we are developing a plan for lithium hydroxide in Chile that should be operating on the end of 2005 to be on the market by 2006 earlier. And the margins there to be obtained are similar to what you obtain in the lithium carbonate in the future. So clearly, there we're going to put margins because today basically in the lithium oxide (ph) we're selling - we bought it at relatively high prices, so there we make a normal trading margins.

Now just follow up on that lithium hydroxide question. Will you be able to produce the same amount of lithium carbonate? And on top of that produce lithium hydroxide? Or are you going to have to decide for one or the other?

We have to increase the capacity of lithium carbonate to supply that plan.

OK. So this will not eat up in to the lithium carbonate production?

No. Because today beside the lithium carbonate we produce we are selling that inventory that we bought in the U.S. last year.

OK. Perfect. Thank you.

Again, ladies and gentlemen, if you would like to ask a question, please press star followed by one. And the next question is from Craig Shaw (ph) with HMM. Please go ahead, sir.

Good morning. Reading through the press release, there was a comment, right at the end indicating that fourth quarter net profits should be similar to those from last year. And in that case, that would imply a fairly steep fall off in net profits quarter on quarter, relative to the quarter just ended. What - could you clarify that a bit further, please?

Yes, we - to see the net income of SQM normally first and third quarter have been better than second and fourth quarter. That has been the story more or less from the last two or three years. Besides that, clearly in last quarter, we are having an impact on the value of the peso and also on the freight. So those effects are effecting us and pulling that - even though that situation we expect slightly better or equivalent net income on the fourth quarter than the quarter last year.

Looking ...

There are basically two effects, one that normally the fourth quarter has been net income lower than the third quarter. And besides, we are already absorbing a big impact on the Chilean peso and the freight cost.

Right. Understand. And just looking at your margins, like for example, your EBITDA margins this year compared to last year. I know you've been doing a lot more trading this year, and that's a lower margin business. But just eye balling it here, it looks like EBITDA margins are down, you know, four to 700 basis points. Do you have a feel for how much of that decline is due to say freight rates?

No. During the first nine months, freight has not been an element.

OK.

Or slightly higher than last year, but not (inaudible). Clearly freight costs have been pushing us (inaudible) with more significance.

OK.

I just say that we have some of the increases we have the one in market that we have less return, like for example, China. So we have increased our volume of potassium nitrite in China significantly. And but there the margins are smaller than the average.

OK. Thank you.

And excuse me, we also have increase on sales in lithium in there. And there also (inaudible) have been which will improve their future, but there we also have smaller margins that we usually have as an average.

OK. Thanks.

And excuse me, hello.

Sorry. I placed his line back in to the call.

Yes.

We have the next question ...

No. I would like to also we have another reason that we have about 25 million sales of PCS Jumbus. In the commercial agreement we have that we reach one company or the other at the end of 90 - 2000. And those 25 million is also in terms of revenue are reported, but in margins also are a trading activity. So that's another reason why. But in the future, once we buy the assets - the PCS Jumbus operation and we settle that volume in our own operation, we will obtain enormous margins for those potassium nitrite. That should be 2005 onwards.

Are you ready to take the next question sir?

Yes, we are.

That's Cesar Perez-Novoa with Celfin. Please go ahead, sir.

Yes, good morning, gentlemen. The cost of goods sold jumped 39 percent in the quarter. I understand that part of the effect is due to in part due to a two month balancing period at your potassium sulfate plant. My question is how large was this impact? And is this going to be reflected in the fourth quarter?

No. The impact basically of the potassium sulfate has all reflected in the third quarter. And it's - now we're not yet where we should be there, but the main impact of the potassium sulfate has not been already recognized.

Alright, thank you.

And we have no more questions sir. I'm sorry, actually we have a question from Craig Shaw. Please go ahead.

Thanks again for your answers before. Since there are no other questions, I thought I might just ask a couple more if you don't mind.

This year we've seen very high natural gas prices here in the States which have had an effect on commodity type fertilizers here. Has that helped your sales process this year? Your sales prices have done quite well this year, and stayed pretty firm. Has this had a positive impact for you? Or is it just has not amounted to anything?

Well I should say that being in the specialty fertilizer our linkage with the commodity fertilizer is not absolutely, but we cannot say it's none on the other hand.

And in the - we have been already improving slightly our prices. And from now clearly we will see that next year, slight increases, that is permitting because of this bit of atmosphere for the pricing on the nitrogen worldwide. In a certain way, it's related with the gas situation in the U.S. as you are telling. But basically, they manage stronger in world. But our linkage to the situation of synthetic nitrogen, clearly is not that much. We have been, periods of time when prices go very down. We more or less maintain our prices. And then they go up, clearly we don't move in the same trend.

OK. Great. Thank you.

And we have another question from Cesar Perez-Novoa with Celfin. Please go ahead.

Third quarter revenues for your iodine and derivative unit was flat in third quarter after growing six percent over the nine month period. And the same happened to industrial chemical sales which actually dropped five percent. Does this respond to inventory replenishment on behalf of the consumer as an effect related to prices? Or is this a slow down in demand?

No. I think it's matter of just delivery of products in terms of the iodine. We're expecting to sell more volume of iodine's this year. We think the total revenues of iodine will be higher than last year, even though that the average price of iodine will be lower. Even though now that we see in the fourth quarter price recovery, but the average of the iodine pricing in the year will be smaller.

And the reason why we are obtaining more revenues in the iodine and better margin are because two reason. One we have reduced our cost in the iodine. And the volume have increased. In the case of the industrial chemicals, basically the explanation that we are producing less sodium sulfate.

OK. Alright, thank you gentlemen.

We have no more questions, sir.

OK. Well thank you very much for participating in this conference call. We hope to have you with us in the next one. Good bye everyone.

Ladies and gentlemen, thank you for joining the call. This concludes the program. You may now disconnect. Good day.