智利化工礦業 (SQM) 2004 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2004 SQM conference call. My name is Alicia and I will be your Operator. [Operator instructions]. I would now like to introduce your host for today's call, Mr. Patricio Vargas, Head of Investor Relations. Mr. Vargas, you may proceed sir.

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

Joining me this morning our speakers are Patricio 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 growth, together with other statements that are not historical facts are forward-looking statements as that can be 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 filing made with the Securities and Exchange Commission and forward-looking statements should be considered in light of those factors.

I will now give leave with Patricio Solminihac.

Good afternoon everybody. If you go to slide number 2 you can see the evolution our earnings have had in the last 3 years. We reported yesterday net earnings for the first half of 2004 in the amount of 29.9m, which is 30.8% higher than the $22.8m of the first half 2003.

The better results are consistent with the trend of the last 3 years in which higher prices and the stronger volumes during this year have helped us consolidate the cost production effort carried out in the past 3 years.

Moving on to slide number 3. The main drivers for the 30.8% increase in the first half of 2004 net income are first in specialty fertilizers we have had higher sales of potassium nitrate to North America Europe. Plus we had higher sales of sodium potassium nitrate to Latin American markets, mainly in Brazil.

The higher sales volumes were partially offset by lower sales to China due to the high freight cost mainly in the first quarter. Consistent with the strong demand, prices have shown a steady recovery during the first half of 2004.

Regarding iodine, the higher revenue achieved reflects both the increasing volume, and with that, the recovery of prices. General demand growth is keeping the rate of 5% being the most important segment the x-ray contrast media, biocides and pharmaceutical industries.

Supported by this demand increase and continuing with the trend observed during the last year, iodine price has continued with its recovery.

As for lithium, revenue increased by approximately 20% also due to the high volumes and a slightly better price condition. The higher volume was from mainly through our consolidation in the battery grade lithium market in which SQM has made an important effort to achieve the high technical requirements demanded by the battery customers.

Due to the increased demand we have also been able to demand slightly higher prices during this period.

On the downside, as already mentioned, we experienced higher freight costs mainly during the first quarter of this year and lately we have been affected by the energy high cost. In addition to this, year-over-year we have experienced a negative effect of the less favorable exchange rate conditions in Chile.

On slide number 4, looking at what's to come, we are positive about the market conditions faced by our main markets.

First, in the specialty fertilizers, the drivers that supported the increasing potassium nitrate demand continue to be strong and reinforce our view that the positive trend observed during the first half will continue during the second half of this year. The increasing demand is pulling the price up from the customer side. From the supply side, prices are being pushed up due to the higher production costs. Potassium chloride price continues to increase. In this sense, we have a significant advantage compared to our competitors and we produce our own potassium chloride.

Regarding iodine, volume should be higher than those of the second half of 2003 again driven both by x-ray contrast media demand. The growing demand and the fact that more capacity is closing the gap with the total demand, we believe prices will continue with the recovery trend observed so far.

As for lithium, our strong position in the battery market grade should be an important contributor to the full year sales volume. We expect therefore higher volumes for the second half of 2004 compared to the second half of 2003. And additionally, a slight increase in market price.

Finally, I would like to go over the most important topic related to the sale of our equity stake in Melon. If you go to slide number 5 you will see that we sold all of our equity participation yesterday. A stake that amounted to 14.05% of the largest Chilean cement company Empresas Melon. The total proceeds are approximately $69m. After tax, profit should be approximately $5.6m and they will be accounted for during the third quarter of 2004.

Finally, as we have stated in the past, this transaction is consistent with SQM's strategy to focus and extend our position as the worldwide leader in the specialty fertilizer, iodine and lithium businesses.

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

[Operator instructions]. The first question is from Cesar Perez-Novoa with Celfin Capital. Please go ahead.

Good morning gentlemen and congratulations for your second quarter earnings. My question is in relation to your industrial chemical business. Pretty much your revenue growth was by improved pricing rather than volume growth. Should we expect further volume erosion in the second half of 2004, or should this change?

Also gentlemen, if you could provide a second half outlook for your fertilizer sales taking in consideration last week's USDA report which pretty much mentioned inventory accumulation for corn wheat and soybean in the North American market? Thank you.

Okay, thank you Cesar. Regarding your first question industrial chemical. This is, as you know, the product made in the industrial nitrates, a complement of our specialty fertilizer products. This market has not been growing as the overall market and we see the second half we will continue more or less in the same volumes. We don't see lowering the volume. But we don't see that we will be higher volumes in this market - production of nitrate industrial grade as well as sodium nitrate industrial grade.

Regarding the sodium sulfate which is within our industrial chemical, sodium sulfate we have been introducing less quantity in order to produce more nitrate. So because of the supply situation we are sending less sodium sulfate.

Regarding boric acid, which is a by-product of our potassium sulfate production, we are sending everything that we produce.

Going now to your second question which is regarding the specialty fertilizer sales during the second half, we see first half to remember that our specialty fertilizers really are related to high value crops. They are not related to the commodity crops, or crops like corn and grain. So we see very strong situation for the second half in the market as we go into the second half. We don't see an effect of what you were referring. So we are confident of our projection in prices as well as in volumes for the second half.

Right. If I may, I was actually -- maybe I formulated wrong the question. But if I could know further on the pricing policy for the second half. I understand that commodity fertilizers may come down and that may imply also a drop for other prices, or for the products that SQM sells. Am I correct in that sense?

We are not planning to -- we don't see an effect on our pricing strategy. We see that the price could continue to strengthen slightly given that we have already increased the prices. The supply and demand situation is tight and all the effort that we have done in the past regarding developing new markets is paying off. And also, as you know, what happened in the consolidation on the supply side.

Sure. Thank you gentlemen.

The next question is from Ben Laidler with UBS. Please go ahead sir.

Hi. Good afternoon everyone. Two quick questions if I may. Could you just detail the CapEx timetable over the next couple of years in line with your announcement a couple of months ago of the new investments you'd be making, the sort of 3 year CapEx plan by year?

I guess the second question would be just use of proceeds from the Melon sale. If you could just give a bit of detail there?

Okay. Thank you Ben. Regarding the first question, as we announced in June, at the end of June, our CapEx program for the next years goes to $350m. This is 2004, 2005 and 2006. Now the total -- also remember that of this $350m there is $145m that goes to the special plant increased capacity in our nitrate and iodine production in Nueva Victoria. We already described the main projects that are within this program.

Regarding the immediate, or total investment plan, for 2004 we are expecting that total CapEx will be approximately $125m. That includes the $35m that we have to pay before the end of the year to PCS for the acquisition of PCS Yumbes. That is the answer I think to the first question.

Regarding to your second question, the use of proceeds of the Melon sale, in the first sense that will be for paying prepaid debt and of course, after that, we will use it for our CapEx program that we already discussed.

Okay. Sorry, if I could just follow up to be clear. So we will be looking about $145m CapEx for 2005, for next year?

Hello. As I say, it is $350m for the 3 years. $325m for this year and for 2005 will be in the range of $120m more or less.

Great. Thank you very much.

Okay.

[Operator instructions]. The next question is from Cesar Perez-Novoa. Please go ahead.

Gentlemen, if you could please provide further outlook for iodine output and the upgrade at Nueva Victoria. Also if we can get more insight into metho iodide?

Okay starting with the second question. Metho iodide, methyl iodide I think you are referring to which is the product that we actually produce for some application in our SG&A group was originally a good replacement for methyl bromide in the US. What happened in this case is the phase out of methyl bromide had to be postponed in the first place. In the second place the total cost of methyl iodide as a replacement of methyl bromide is only for some applications because of cost. We continue to believe that when the approval of the FDA are, this would be an important consumption, or additional consumption of iodine. But the approval is not ready not. They are working on it and also will mean of course toward some of the crops that use methyl bromide and not all the crops.

Regarding the question of Nueva Victoria we are in the process of increasing the capacity in Nueva Victoria. We are now getting all the permits and we expect that we will be ready with the expansion, with the first stage expansion in Nueva Victoria, middle of next year.

Right gentlemen, thank you.

The next question is from Ben Laidler with UBS. Please go ahead.

Hi. Sorry, if I can just follow up again. Would you just be able to give a sort of overview of your China exposure both direct, indirect and what you're seeing at the moment? I mean guess specifically the pricing impact that China seems to be having on the iodine market and the volume impact you're seeing on the industrial nitrate side.

If I understand correctly Ben, you're referring to the exposure that we have in China and the different parts?

That's right yes.

Okay well as we explained before, during the first half we did not want to sell into China some of our fertilizer products because of the trade costs and we prefer to direct those sales mainly to the US and Europe. So from a weakness point of view, we have continued to see the strong demand. We are increasing the price not only because of the increase in the pricing there, but also because of the increase in the freight. We expect to deliver some product during the second half. So we don't see there, we see more opportunity than exposure from a weakness point of view.

Regarding the iodine, iodine consumption, like many other products in China, has been increasing. We have increased our sales also in iodine in China. But they are not also as an important percentage of our total sales.

Lithium is really increasing in the most important way, mainly because of the battery new production of lithium batteries based in China. We also feel very strongly that that will continue and we are not seeing any signaling of weakness in those 3 products.

Just a follow up. I mean how important would you define China as to overall pricing in the iodine market to the overall market pricing?

If you look at the total demand of iodine in the world, which is in the range of 23,000 tons, China will represent let's say 1.5,000. So we don't see that, as I said before, that even though it is growing, is as important yet to have any influence on the pricing.

That's great. Thank you.

[Operator instructions]. It appears we have no more questions at this time sir.

Okay. Thank you Alicia. Well thank you very much for joining us today and we hope to have you with us on the conference call. Goodbye everyone.

Ladies and gentlemen, this concludes your conference call. You may now disconnect. Good day.