智利化工礦業 (SQM) 2004 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2004 SQM earnings 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. Please go ahead sir.

Thank you Alicia. Good morning everyone and welcome to SQM's third quarter earnings conference call. For your information, this conference call will 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 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 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 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 now leave you with Patricio Contesse.

I would like if we move to slide number 2. Good morning everyone and thank you for being here this morning. I would like to start by sharing with you what I believe are the most important measures for SQM. In the slide we are commenting, you can see the quarterly evolution of our net income for the past 3 years. In this chart you can clearly appreciate the upward trend that we have achieved in this year, maintaining the trend of improving our results every quarter in relation with the same quarter of the previous year.

I would like to remind you that it was not until to the end of 2003 that prices for our nitrate and iodine business reversed the negative trend of the previous 3 years, and that we were able to achieve improving results in spite of that fact. And now we're getting the benefit of the hard work carried out by the Company.

The year 2004 is becoming a milestone that will encourage us in the next years to keep doing what we know best, and to make the most out of the improving market conditions. It is also worth noting that during the third quarter of this year we sold our stake in Empresas Melon. This transaction proves that we are ever more committed with our strategy of focusing on our 3 main businesses of the Company.

If you go to slide number 3 you can observe the same 3 years evolution for our quarterly revenues. If we adjust for the seasonality related to the fertilizer industry, you can appreciate the consistent upward trend experienced in revenues. For the years 2002 and 2003 the main driver was increasing volume, in the sense the commercial agreements we made helped us achieve the higher volumes.

During the year 2004, in addition to the better price environment for our 3 main business lines, we have been able to increase the sales volumes for our value-added products, such as specialty blend, as well as for iodine and lithium. As we mentioned in our earnings release, the fact that there has been pushing up prices worldwide is a healthy demand growth observed for all of our products. Coupled with the somewhat tight supply in some of our markets, we expect this scenario to continue during 2005.

Finally, going to the slide number 4, let me summarize the most important aspects that explained the 39% increase in operating income for the first 9 months of 2004.

First, in the specialty fertilizers, we have been able to confirm the strong demand in all of our markets. There we have produced ourselves to shine, to stimulate higher margin markets. The increase we had in North America, Europe as well as in Latin America, more than compensated our net revenues, resulting in an increase of approximately 21%.

Potassium Sulfate has also improved as the Company has increased its production and worldwide potassium demand has increased. Therefore, consistent with the strong demand observed, prices have shown a steady recovery during the first 9 months of 2004.

Regarding iodine, the 25% higher revenues achieved reflect both the increase in volume as well as the recovery of prices. As I mentioned in the past conference call, demand continued to increase in the range of 5%, mainly driven by the x-ray contrast media, biocides, electronics and pharmaceutical industry.

This healthy demand has been pressing on prices, which have increased in average during the first 9 months of this year by approximately 12%.

Regarding lithium, revenues increased by approximately 21 -- 22%, also due to the higher volumes and better pricing conditions. The higher volume was formed mainly to our consolidation in the battery grade lithium market, which it's clear has done important efforts to achieve the high technical requirement demanded by battery customers.

Prices have also increased in the range of 5% during the first 9 months. As we have mentioned during this year, we have experienced higher freight costs and higher energy costs. In addition to this, year-over-year, we have experienced a negative impact of the less favorable exchange rate conditions in Chile. This negative effect, however, has not been able to affect the positive market conditions, which we expect will continue during 2004. Thank you very much.

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

[OPERATOR INSTRUCTIONS]. The first question is from Ben Laidler with UBS. Please go ahead sir.

Good morning and congratulations on a great quarter. I just really had 1 question. You're beginning to see price increases come through. You mentioned the supply's pretty tight in some of your businesses. Could you just talk a little bit about your sense of what the competition are doing? Any capacity increases that they're looking to put through that you know of? And just generally whether you think the supply tightness will continue?

I will talk about the 3 main products we have. 1 related to the specialty plant nutrient, that is based on potassium nitrate. What happened is that Camelia(ph) has closed their plant in Denmark, and that's about 60,000, 70,000 metric ton of the market that from July it's not on the market. To our best knowledge our products have not been able to achieve more than 50,000, 60,000 metric tons of capacity of 450 because of a problem in the process, and we have not been able to resolve in the last 3 years.

Thirdly, we think that Hifa(ph) have the bottleneck several parts of their plants. So they have increased production, vis-à-vis in the range of 40,000 metric tons of potassium nitrate. As you are aware of, that about 3 years from now Hifa Chemical close their plant in the US from 90,000 metric tons. In Chile, you know we are selling what [PCS Umbus] has been producing. It has been more or less in the comparative(ph) of 150,000, 160,000 metric tons.

So there we don't have any different news of what we thought a year ago in our budget. We -- At the end of the year, our agreement we should be taken over this operation, so that is going on stream at this stage. Regarding [indiscernible], also we have a strong capacity of 150,000 metric tons but they have not been able to achieve more than 40,000, 50,000 metric tons per year.

So due this consideration, and the growth of demand of 5% to 6%, that means 60,000, 70,000 metric tons more per year. Clearly there's a shortage in terms of supply and demand. And on the other hand, the [indiscernible] itself is a micro-element, it's a nutrient. It's a growth demand in worldwide, and also it's important for the manner of our potassium nitrate and potassium sulfate itself.

So we think, in terms of supply and demand today, very tight. And that situation I think next year also it's going to be in the same condition, that would permit us for the potassium itself. And for the quite tight situation supply and demand to have a good environment to reach some volumes and prices for next year too.

In terms of the iodine, iodine I think has been a structural change. And that Aquilla(ph), I think, basically is the place where iodine can be produced. During the 1990s and the beginning of the 2000 it became several newcomers into the production, that if you add all of them they produce almost the same as SQM are today. We think that our best knowledge of -- for the reserve they have, they cannot do this again in the next future. They can increase some but not to 7,000 metric tons again.

In newcomers in Chile or current producer, we think that they can increase gradually in the next 5, 6 years in the range 500 metric tons average per year. We don't see that they can do more than that. So, if in this -- if in many other place of the world iodine can be produced at these level of prices, or even higher, at a certain stage, we think SQM should be able to capture most of the growth.

And here also there's a structural change in the sense of growth in the market. In the 1990s the growth was in the range of 3%, now the growth is in the range of 5% to 6% per year. So at least we should be able to see a growth in demand in terms of 1,000 metric tons per year. So today the situation is tight. Prices have been recovering, $2 higher than last year.

We see also an environment for next year that we be able to increase prices. We cannot assure exactly how much but also at these increased bottleneck 1,000 metric tons, that at least demand should grow. So also we see a better environment for iodine next year in terms of supply and demand, and furthermore the capabilities of our competitors to do.

In the case of lithium, demand has been growing at the stage also 6%, 7% per year, that means about 4,000 to 5,000 metric tons of lithium per year. We think we can capture there in the range of 35% to 40% of that growth. The other growth should be able to be captured by some production in Argentina and in China.

Today, the supply demand is also tight, that's why price has been increased. Our demand has, our volume has increased. We think that next year also, we are forecasting a scenario of increasing some part our volumes, and pricing too. So in the same main core business because market situation and because our competitors are able to achieve, we see that 2005 good environment for these 3 main businesses.

Great. Thank you very much.

The next question is from Gavin Templeton with IN Trust. Please go ahead.

Good afternoon gentlemen and congratulations on an excellent third quarter. I have a couple of questions. I would like to see if you could shed some color on what is going on in the nitrate market. You did mention in the press release, that you are shipping volumes from China into higher margin markets, in Latin American and in Europe.

However, I would like to know if there is a -- also a change in the mix of products, which is also positively impacting prices? Or is it just that demand is strong enough to maybe -- for you guys to allow you to allocate production where there is a better price?

Also I have a question with -- in the other income line. I don't know if there was a reclassification during third quarter. Just wanted to know that maybe, it seems that during third quarter the other revenue line came in a little bit low. I don't know if you reclassified some of that production into the nitrates line?

And also I don't know if you can mention what spot prices you are looking for iodine right now? I understand you did mention that you had $2 more in price with regards to last year, which gives me round about $15. I don't know if you're looking at that level or maybe something a little bit higher? And if you could give us maybe your outlook on what do you think prices are going to do during 2005.

And also in the lithium market, it's -- I would like to know -- I don't know I had flat volumes projected for this quarter. And if I work under that assumption and I look at your revenues, basically what the conclusion? But I'm getting at is that there has been a very important increase in the price of lithium.

I don't know if I'm correct or -- I don't know, my estimates are that you guys would be producing around 27,000 tons this year. And I would also like to know if you have any increases in the future for lithium? Thank you.

Some of the question -- Patricio Contesse speaking - some of the question I will deliver to Ricardo Ramos. I will start with the nitrate market because you make 4 question. About the nitrate market, potassium nitrate by itself is growing at the rate of 65,000, 70,000 metric tons per year. And because some production went off the market, and some of those products didn't come into the market as we were expecting for the new development, there was a shortage of supply.

According to this new demand that permit us to deliver products to other market that would have had higher margins than in China, and in China we faced 2 problems. I think one big problem that the freight cost to China become very expensive, and we didn't have for that market as we do have for other markets, long-term contracts. And there also traditionally, historically at least, we were having the lowest margins.

So, to accomplish to the new situation, an increase in prices in China were significantly. So that's why, at the end of the day, we end up selling less but we were able - because of the other situation - much more in the other market. You have to consider also that the potassium chlorine worldwide, that is our main raw material to produce potassium nitrate, that we produce by ourself. Anyhow has increased their pricing this year in the range of $30-40 per metric ton.

And because there is an imbalance of uses of production in the world. So there we continued to grow, and there we'll have an impact also on the value of our own potassium chloride. Because using as a raw material, potassium chloride to produce potassium nitrate, we don't make subsidy. We put the value of the real potassium chloride independently on the cost we have.

So that situation of pricing and market and freight cost, that balance and the growth of demand, have permitted us to selling our service, where we have higher margins, and not in China because there we were having less margins. I think China is -- will continue demand more potassium nitrate but for us, for that purpose, they will have to accept a new reality in price, and due to the conditions that I will think.

But if China comes again aggressive into the market, then the shortage we're thinking - this very tight situation, this supply and demand for potassium nitrate - here is going to be tight, much more tight than it is already.

According to pricing of iodine, today the average price of this is $2. In the last quarter we have $1 over the average of this year. So already we put that dollar as an average of the last quarter. For next year we already -- we have there $1 more. How much we will increase, we don't know exactly but it will probably be in the range of $0.50 to $1 more per kilogram. So we could have $1.50 to $2 more per kilogram next year. We will see that throughout the year on demand and various factors that could be affected.

A definite thing in the price of the last quarter will mean a dollar more as an average for next year. In terms of the lithium market, I will ask Patricio de Solminihac to make comments on it, and then I will ask for classification of other revenues to Ricardo Ramos to make the comments.

This is Patricio de Solminihac. Regarding the lithium volume - lithium volumes in 2004, we expect that will be more or less 15% more than last year. And one of the main factors on the volume increase, is our consolidation in the lithium hydroxide market. Which have been continue to consolidate to be ready for a -- when our plant for lithium hydroxide will be producing middle of next year.

That means that, of course, we have been having because of the recent - as Patricio Contesse explained before - a good, a very tight in the range of 5% to 10% more but increasing the total revenue is more affected by this increase in volumes.

Okay, about other income, that is for the others. It's mainly, note it to remember, it's mainly trading activity of commodity fertilizer in Chile and Mexico. If you consider up to September, the first 9 months, total revenues in others, this trading activity's quite similar. During third quarter it's lower than last -- than third quarter last year, but if you consider full 9 months it's quite similar.

It is important to consider what is called the fertilizer season. Last year we increase our sales during first -- during last year during the first 9 months, especially third quarter. This year was mainly due in the first 6 months. Additionally you will have to consider that from time to time we reduce some sales that are low margin activities, low margin trading activities in, mainly in Mexico. But at the end, if you consider the full-year projections, we expect to have similar sales as compared to last year.

Thank you very much gentlemen.

The next question is from [Francis Corelandon] with Santander. Please go ahead.

Hello, yes. I would like to know if you can quantify the size of the increase in cost of price in the cost side. And are you expecting a fuller decrease in sales to China on the back of this issue?

Can you repeat about China, I didn't got the point there.

Okay. Are you expecting any further decrease in sales to China, on the back of the increase in freight costs?

For next year?

Yes.

Okay. The net effect of freight costs is depreciation(ph) in the value of $4m to $5m, and we think that for next year, more or less will be in the same range again, according to the best information we have at this moment.

In terms of China, we think we have reached the bottom because this year was the worse situation to -- for us to be selling in China. So I think that we will have a better opportunity next year in China. Also in [indiscernible] I think that we are just selling 35,000 metric tons. In China last year we sold approximately 90,000 metric tons, and I think 35,000 is the bottom.

So probably next year where we will see numbers higher than that but with higher margins. Because we -- being so tight to the market we are not aiming to serve to any market on low margins, as we did historically in the past.

[OPERATOR INSTRUCTIONS]. Mr. Laidler you may proceed.

Hi, just a small follow-up question. With the sell of Melon, I'm getting there's very little in the way of non-core assets left. The only one I can think of might be the copper deposit and Aquoria(ph). Would you just be able to give us - a, am I right there? Is that the only real asset left? And, b, would you just be able to give us some color as to what was going on there? What's the state of that asset, especially with copper prices up at these levels?

Well, you are aware we sold Melon in $96m, and I think that was by far the largest asset in the non-core business we did have. $69, $69m, yes. And related to copper is -- the policy in SQM has been in the last years that we don't think that it is exploration(ph). We have more than $2m(ph) [indiscernible].

When we opened this for exploration, clearly the price of copper were very low, so we're not much [in for us] Probably at these new prices of copper and structural change in the amount produced, and we have seen preliminary talking with some third parties, that could get -- they could start again making some exploration. But at what standard would they be successful or not, we don't know.

We hope they are and we were doing some [indiscernible] in that could be a good copper mine. But really our policy there is to not make -- to don't make the risk of exploration, the investment, is to just have some value needs and some royalty afterwards if they are successful. That's the policy that up to now we have defined on the copper business.

Right. Thank you.

[OPERATOR INSTRUCTIONS]. It appears we have no more questions at this time sir.

Okay Alicia. Thank you very much. That's it for today. Thank you all for joining us today and we hope to have you with us in the next conference call. Goodbye everyone.

Ladies and gentlemen, thank you for joining today's conference. This concludes your presentation. You may now disconnect. Good day.