智利化工礦業 (SQM) 2004 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth quarter, 2004 SQM earnings conference call. My name is Alicia and I will be your operator. At this time all participants are in a listen only mode, and we will be facilitating a question and answer session towards the end of the call. [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 begin sir.

Thank you Alicia. Good morning everyone and welcome to SQM’s fourth quarter, 2004 earnings conference call. For your information, this conference call will be recorded and is being with the slides.

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, and Ricardo Ramos, Chief Financial Officer.

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 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 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.

Good morning everyone. I would like to thank you all for taking the time of being here this morning. Today I will briefly review our Company’s evolution in the past 5 years, what were the most important aspects that influenced the outcome of 2004, and what we expect for 2005 onwards.

Let’s go to slide number 2. In this slide you can see the evolution of our net income for the past 5 years, which clearly shows the improvement we have achieved in these years. Overall net income compound annual growth rate has been 29%.

As we have stated here before, this improvement up to 2003 was the result of the very hard work and discipline or everyone here at SQM. We were able to overcome the strong competition, and declining pricing scenario, for our Specialty Plant Nutrition and Iodine divisions.

2004 was a reward to our efforts. We kept the same cost and efficient discipline that is now deeply rooted in SQM’s way of doing business, and received the full benefit of the stronger pricing conditions. During 2004 we also sold our stake in Empresas Melon, showing that we are committed with our strategy of focusing in our 3 main businesses.

Next page, and slide number 3. You can see the same 5 years’ evolution for our other revenues. Again the strength is unmistakable. We have increased revenues with the years 2000 through 2003 mainly driven by increasing volumes and new products. The last part of 2003, and in through the year 2004, were benefited by the improved market condition across our main business lines.

The commercial agreement have helped us achieve higher volumes on new products and at the same time reduce our distribution costs. As we mentioned in our earning release, we expect the positive market trends will continue during 2005.

In the next slide, we can see the evolution in our EBITDA defined as the operating income plus depreciation [has experienced]. Higher prices, higher volumes and new products, and our commitment with the keeping low costs has paid off, and should continue very strong in the years to come. This strong cash generation will allow us to practically finance most of the capital program for the next 3 years.

Moving to slide number 5, let me summarize the most important aspect that explains the 42% increase in operating income for the year 2004. First, Specialty Plant Nutrition has continued to benefit from an ever-increasing demand. But this year we have accumulated 7% average growth for the past 5 years. Within this increased demand, we pivoted higher margin markets, especially North America, Europe, as well as Latin America. By doing this we reduced some sales to China. This change in market, and different product mix, and the constrained supply condition, were the drivers that possibly influenced price, which increased on average by 10 to 15%. Due to this business line -- due to this, this business line grew by 18% year-over-year.

Regarding Iodine, 31% higher revenues achieved reflect both the increase in volumes, as well as the strong recover of price. Demand continued to increase, closer to 6% this year, mainly driven by the extra [conscious media], [bioside], electronics and pharmaceutical industries.

Particularly interesting has been the development of the LCD screen application, which during 2004 doubled its Iodine consumption. But I will not just dwell on them], as it only accounts for 3% of the Iodine demand. This should increase in the following years. This healthy demand and current supply condition has been pressing price, which we expect will continue the next year.

Regarding Lithium, revenues increased by approximately 26%, also due to the higher volumes and better pricing conditions. The higher volumes respond mainly to our consolidation in the Lithium Iodine battery market, in which SQM has done important efforts, to achieve the high chemical requirements demanded by battery customers. Achievements to this market doubled this year become the most important application, with 20%.

Finally, slide number 6. I will like to point out what I expect for the future. We expect that the market trends observed so far will remain in the next year, possibly influencing volumes and prices. Our 3 business lines will enjoy increasing demand, and given that supply will continue constrained, the prices should keep moving up.

We will continue with our announced CapEx program as scheduled, increasing Nitrates and Iodine capacity by 30%. All of this will be financed mainly with internally generated cash flows, and some new financial debt, but keeping our net debt, divided by the EBITDA ratio close to 1.

We will also face some challenges, such as the high energy costs. But as I told you before, we are committed to with different cost reduction initiatives, and we are pursuing very hard to prove our production deals. Because of all of the above, we believe that SQM should deliver better results in 2005 than in 2004. Thank you.

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

[OPERATOR INSTRUCTIONS]. The first question is from Francisco Errandonea with Santander Investments. Please go ahead.

Yes, good morning. Congratulations on the results. And I have 2 questions. The first 1 I would like to know a little more detail on the financing side of the CapEx plan. Specifically, I would like to know how much of the recently signed $100m loan you are expecting to use in this CapEx plan?

And the second question is related with Lithium capacity, or new Lithium related products?

Francisco, Ricardo Ramos speaking. About the cash flow in order to finance our CapEx program for the 3 years, it needs the $400m CapEx. You should consider that internally generated cash flow means the net income plus the depreciation, plus other charges that are not cash flow in our net income. We think that we can generate in the next 3 years, something close to $600m, probably better than $600m. It means an average of $200m per year.

Don’t forget that we have depreciation in excess of $70m. Probably will be close to $80m in the near future, and the projections of the net income, we do have projections of the net income close as close to the $100m. That’s why it is reasonable to expect an internally generated cash flow at an average of $200m per year, $600m in 3 years. The CapEx is close to $400m as we previously informed, and probably we will increase our working capital no more than $40m.

If you consider dividends, dividends could be something between $150m to $200m during the period. At the end, it is reasonable to expect that the total net financial debt will have a slight increase in the period, and the net financial debt will be lower than $200m at the end of 2007. It means that most of the CapEx program will be financed through our own internally generated cash flow.

About the $100m debt that we just closed a couple of weeks ago. The main use of this debt is to pre-finance our maturity of the $200m at September 2006.

Related to the Lithium, we are consolidating our volumes of production in the rate of 28,000 to 30,000 metric tonnes, and basically this year we are putting in operation our plant of lithium hydroxide in the second semester, and we think that it’s going on stream quite well.

Thank you very much.

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

Hi, good morning. 2 quick questions if I may. Could you just give a little bit more detail on the demand you are seeing from China. You give some color in the press release, especially you are underweight there on the plant nutrient side. Just whether you expect that to continue? And if you could just give a bit of color on the demand you are seeing on the Iodine Lithium side from China, and what that would represent of your sales at the moment?

And the second question would just be on the logistics side. What sort of pricing pressure you expect to see going forward, given rising logistics costs?

Related to China, as you say there in terms of, as we already had said, that may have been strong worldwide. So even though there is demand in China, we have sold less last year because we found better markets have better margins, considering that the freight costs to China has gone up very high. So even though prices in China could be [suitable] [indiscernible] the return that we have on those sales, they were not as good as our markets.

We think that in China demand exists, but also around the world. So we see in that sense of our selling China will be more or less in the same range this year compared to last year, because we have better alternatives in terms of our return.

In terms of the demand in Iodine and Lithium, they are very very strong. In Iodine there basically lose very little to none. So there the demand in the last 5 years has increased from 800 metric tonnes, to almost 2,000 metric tonnes. So they have been increasing about 10%, more than 10% the demand in Iodine.

Anyhow, we have to consider that the world market in that is over 23,000. So still China being important, is not that significant, in terms of the growth of Iodine worldwide. And as we explained before, the driven force behind -- the most important driven force behind the demand of Iodine has been the x-ray conscious media. That has been growing faster than 8% per year in the last years.

In terms of the Lithium, you have also been very important, China, but they produce in China. So some of our demand has been able to be satisfied by their own production, and some by external. And even though they have been increasing their internal production, they have been also buying more from abroad, and also because of us -- and also to us.

And they are incrementing their capacity of production batteries to compete with the Japanese and Korea. And we have to consider that this sector of the industry has increased last year more than 40% of growth. How much will be in batteries this year, we don’t know. But clearly part of it will continue to be big, and the Chinese role in the batteries industry will increase more significantly.

Just on the freight costs, what you expect--

Okay, we have -- in terms of logistics, we have almost fixed our logistics in terms of methods throughout the world, and we think that it is going to be slightly more expensive than last year. Clearly what could be in terms of energy, and that is not only in logistics, but in general you know, where we use diesel, we influence logistics and the cost of our operation because they are always much more expensive this year than last year.

And I think that is the highest challenge we have in the Company. That also goes to the logistics in terms of the using of trucks, whatever, around the world. And in terms of pesos, there we don’t see a big big change compared to last year.

Great, thank you very much.

The next question is from Cristian Ramirez with Larrain Vail. Please go ahead.

Hello everyone, and congratulations on your results. I’ve got 2 questions. The first 1 goes into a little bit more detail with regards to the energy costs, and what you are foreseeing for the future and for the next year, with regards to the [gas charge] [credited] from Argentina.

And the second 1 deals with price. Up to where can you expect to see prices going up before you can see any reactivation of projects from your competitors, or maybe any subsidy products coming in because the price is so high that any product can be feasible? So those are the 2 questions.

Related to the energy costs, we have assumed this year in the range for different processes – electricity and oil and gas – in the range of $7m. And we believe it will be higher than that because the oil, the barrel is in the range of 54, and we were expecting it to be in the range of 50, 48, something like that. In the range of [25m]. So there we are having a higher cost than we expect.

Related to gas, we don’t have, up to now, a big problem. Last year we did have, a month, a big [indiscernible], about 40% [indiscernible], and that cost us $1m, extra cost, because we paid for that, we have to burn diesel. We have already in those $7m, as I told you before, what we consider the effect of gas for the year. What will happen next year is difficult to say, but what we are as a Company.

The alternative fuel that we are using today instead of gas, when we don’t have gas, is diesel, and this is much more expensive. But from May onwards we will have about 45%, instead of having diesel, we will be able to burn [bakersee], it’s a more heavy oil, less purified, that costs about 2 times the – instead of 4 to 5 for the diesel, it costs about 2 times more than the gas.

And from March onwards next year, we should be in the range nearly 100% being a condition to burn fuel [or bakersee], instead of diesel, in case that we don’t have gas. So the worst scenario from March onwards, if prices continue at this level, $43, $44 per barrel, and the relation that that could have with [bakersee], that we can have an extra expenditure if it’s 100% proved the gas from 2006 onwards, will be in the range of $8m to $9m more per year, if we put ourselves in that worst scenario.

Okay.

It could something in between of them we don’t know, but the worst scenario from 2006 onwards, is with zero gas, that would mean $8m, $9m more. In terms of pricing, really we don’t have extraordinary prices. As we say, we are recovering prices. Still in Iodine we have not reached what prices have been in the 90s and in the 80s. Just to mention, ‘81 the price of oil was $14.5. If you look in real terms, prices should have been today in $26, $27 per kilogram in real terms. In ‘89, it was $20, so the same.

In ‘97, it was $20. We are still in nominal terms today far from that. We are in the range of $17, $17.5 per kilogram. So we don’t have the extraordinary prices. We are still, I think, in the line of recovering prices more than increasing prices to extraordinary levels. And demand is very strong, and the chances of the newcomers in Chile, also they are more limited to what they were in the ‘90s.

That they were the ones that imbalanced the terms of supply and demand during that period of time. So they can continue to grow, but not as they did in the ‘90s on 1 hand. And clearly demand is much more stronger of Iodine than what were in the demand -- in the growth of demand during the ‘90s. So my personal belief that here there has been a structural change, and we are yet far from even to get to the point of recovery, not even increasing really prices at the next level.

In the case of the Nitrate, it’s about the same. There is a big raw materials behind the production of calcium nitrate, and clearly we are not fixing the price in the market that is potassium chlorine. And potassium chlorine has increased prices last year in the range of $40 to $50 per metric tonnes. And because of that reason, even we produce ourselves, but we don’t shift ourselves, in terms of subsidizing the production of potassium nitrate. Potassium nitrate has an extra cost of $40, $50 per metric tonne in that production, because of the situation in the market of potassium chlorine.

Of course we have the benefit on the new price of potassium chlorine because we produce potassium chlorine, and we put in the cost of potassium nitrate the new cost of potassium chlorine, but the market is richer. So if you look the pricing of potassium nitrate as it was before, considering that potassium chlorine was much more cheaper, we are far from reach yet the prices that we enjoyed at the beginning of 2000 or 1999. So we don’t have an extraordinary price.

Even though there is other considerations. 1 that they have been closing plants during this period of time. Kemeira had closed their plant in Finland. There was about 50,000, 70,000 metric tonnes from August onwards. And also in 2001, 2002, [Haifa] Chemical, that they have an operation in the United States, also closed an operation of 90,000 metric tonnes. And the newcomers in Chile also had been not that successful. So considering the fact that potassium chlorine is more expensive, and the growth of supply also has not been as it should have been, or not as we thought it should have been, we are still far from reaching extraordinary prices.

And the same happened with Lithium. In 1997 SQM stopped production and prices then in the market were $3,500 per metric tonne. And when we entered into the market, prices collapsed to $1,500, when they were in the range of $2,500. So we are far from reaching where the Lithium prices were in 1997. And demand also that used to be in the range of 2 to 3% in Lithium, last year was more than 10%, and this year it is also going to be much -- will be also very high – 6, 7 8% at least. So there is also structural change in terms of demand. But also in a certain way it goes to the supply and demand capability, and clearly there we have not reached, and we are far from reaching the prices historically that were in 1997 and 1996.

Okay thank you.

The next question is from Cesar Perez-Nova with Celfin Capital. Please go ahead.

Good morning gentlemen and congratulations for your outstanding results. My question is in relation to the Lithium Carbonate division. I understand that you are operating close to nominal capacity. My question is in regard if you are contemplating further upgrades of your Salar de Atacama plant, and how much allocation, if you would, are you expecting to allocate on any potential upgrade? Hello.

Hello Cesar, Ricardo Ramos speaking here.

Hi Ricardo.

Yes. As you know we are working, of course, the increasing demand of lithium carbonate in the last 3 years. The demand has been greater than we expected. And we are working very hard now in order to increase our capacity to produce lithium carbonate again. As you know, we increased our capacity close to the 30,000 metric tonnes. We have this new capacity in the 30,000 now, and we are working now very hard in order to reach again new increase.

I don’t have a final number about the new capacity. It will probably be close to the 40,000 – between 35,000 to 40,000 metric tonnes. We are working in the basic engineering now, and we expect to have, during the next 3 or 4 months, the total investment required in order to go to the 40,000 or 35,000, and the timeframe in order to reach this production capacity.

But anyway, keep in mind that we have inventories. We have enough products and production capacity today to allocate our products to the market. That’s why we don’t expect to have any problems to supply lithium carbonate in the near future.

Alright gentlemen, thank you.

[OPERATOR INSTRUCTIONS]. We have a follow up question from Cesar Perez-Nova. Please go ahead.

Yes gentlemen. Just if you could provide a brief outlook for what is maritime costs? I assume that on average costs have been weighting around 6 to 7% for certain shipping rates. I don’t know if you have any expectations, either this could go up or down throughout the 2005.

For shipments Cesar?

Shipping.

Shipping. As I said before, we will have slightly more costs. We have already made a contract for the full year, in terms of shipments. So there is not going to be a significant change compared to last year.

Right. And just some clarification. You are -- the bulk of the product that is being put out of Chile, that goes to Tocopilla right?

Yes.

Thank you.

The bulk of product to Tocopilla, and the containers to go to [Patache].

Okay. And I assume those shipping contracts are long term right? They are carried on a spot basis.

Some of them are long term until next year, and some are contracts that we have already made for the year. So what we have already done for the year, next year we have not those next year. But what we have done for this year is almost closed.

Alright. Okay, thank you.

We have no additional questions in the queue at this time.

Okay Alicia. Well, thank you all very much for joining us today, and we hope to have you with us in the next conference call. Goodbye everyone.

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