智利化工礦業 (SQM) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the first quarter, 2005 SQM Earnings Conference Call. My name is Enrique and I'll be your coordinator for today.

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 conference. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes.

Now I'd like to turn this presentation over to your host for today's call, Mr. Patricio Vargas, Head of Investment Relations. Please proceed, sir.

Thank you Enrique. Good morning everyone and welcome to SQM's first quarter, 2005 Earnings Conference Call. For your information, this conference call will be recorded and is being with the slides.

You may follow the on-line presentation we will review this morning, by accessing the webcast at our website, www.sqm.com.

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 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 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. I want to briefly go over the most important aspects that have defined this first quarter, and what I believe are the most important challenges we face at SQM.

Let's go to slide number 2. In this slide we can see the evolution of the Net Income in the last 3 years, as well as the first quarter of 2 of the years, 2004 and 2005.

I think you will agree with me, that after the significant increase we had in 2004, we have started 2005 on the right, right direction, with a year-over-year increase in Net Income of 77%.

I will go over the main reason for this in the next slides, but I would like to point out here that we must still be cautious, as we face many challenges ahead. You will also remember that the first quarter, 2004, had the lowest earning in the year 2004, even though it was better than first quarter of 2003.

If we move to the slide number 3, we can see the evolution of our annual and quarterly revenues. Again, after the last positive years, 33% increase in revenues, for the first quarter 2005, is more the result of higher volumes, and significant price recoveries, throughout all of our business lines.

And I would like to stress the word, recovery, as we believe prices are regaining part of the value they lost in the first years of the [indiscernible].

Moving ahead, we should continue to increase volume, although to a lower extent compared to the first quarter. And we have finished our capacity expansion and we should see some additional recovery in the prices of our main business.

On the next slide, number 4, we can see the EBITDA evolution, defined as Operating Income plus depreciation. You can see that we are generating strong Cash Flow, which is the logical outcome of high prices. Higher volumes, new products and the effort made by SQM to contain the pressures on cost.

Year-over-year our first quarter EBITDA grew up by approximately 38%. It is this growing cash generation that would allow us to finance most of the CapEx program for the next few years, maintaining our financial indicator at healthy levels.

Moving to slide number 5. I would like to review the most important aspect, and explain the 59% increase in Operating Income for the first quarter 2005.

First, the Specialty Plant Nutrient is enjoying an increasing demand. It has helped to recover prices between 15 to 20% in most of our products.

In addition to the increased demand, a change in the product mix, the constrained supply condition and a better worldwide pricing condition for all production related to Specialty Plant Nutrient, has also benefit this business line.

Regarding Iodine, the higher revenues achieved reflect both the increase in volume as well as the recovery of prices. Demand continued to increase. Was mainly driven by the x-ray contrast media, biocide and other products.

Anticipated in the past conference call, the LCD Polarizing application, a slowly but better surely taking a more active in the demand for Iodine. Prices recovered by approximately 20%.

Regarding Lithium, revenues increased by more than 50%, also due to the higher volumes and price recovery. But again, we have to note it that the first quarter of 2004 was lower than last year's quarterly average.

Lithium hydroxide kept growing at the good profit for the world economic growth, possibly impact the use of lubricating greases.

Finally, going to slide number 6. I would like to end this presentation by pointing out that we have challenges in the road ahead.

The high energy cost, and the appreciation of the Chilean peso that are apparently conditions, that we are going to have to learn to live with. And the fact that we are operating our facility at almost 100% of our capacity make it really complex to keep costs down.

Nonetheless we have now tremendous potential and resources, capabilities and human capital to find way of effectively dealing with this challenge. The road will not be easy but I believe we will not let you down, and will deliver again in 2005. Thank you.

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

Thank you sir. [OPERATOR INSTRUCTIONS]. Your first question comes from Francisco Errandonea from Santander.

Yes. Hi. Good morning and congratulations on result. 2 questions.

The first 1, I would like to know if there is any specific region in the world driving the demand for potassium nitrate fertilizer?

And the second 1 is relating with the lithium business. After the year 2004 and 2005, in the local presentation you did, you were expecting an increase in the demand of lithium between 6 and 7,000 ton per year, with the demand of battery growing more than 25%?

Batteries. All this talk of lithium in batteries products change your view on demand for lithium?

Okay. It's not a region. It's specifically this month. I think here and there that are pulling demand growing in the range of 5% to 6%, and has been doing that in the last 17 years that we have been in this business. There is not any specific market that is by itself explaining this growth in demand. There are several countries and markets that are providing for us this number.

Related to the lithium, we still continue demand within the range of 6% to 7% and that means 5,000 to 6,000 metric tons per year. Demand is still our best estimate for the year, and how they have been going on up to date.

Looking forward, 2006, along with the -- do you think the lithium demand to continue 2006 in the 6% to 7% range?

We think that it should be in that range.

Thank you.

We would be surprised if it isn't in that range.

Thank you very much.

Your next question comes [indiscernible] for UMB.

Good morning gentlemen. I have a question about the note at the bottom of the release yesterday. On April 25 Potash requested eliminating Series A and B and their privileges.

I'm wondering if you could provide more detail about that? And also tell me if there is a document available to go into great depth on that? Thank you.

The only thing -- This is a matter of our shareholders. They are in the Bylaws, and the Corporate owners' framework, that explain the characteristic of the shares, what they are entitled to go through, and what to do.

So, clearly all shareholders should know exactly what the meaning of the Bylaws that we have, and the changes. What mean the changes of 1 of the main shareholders is asking for off SQM.

I can't -- I really can't say more than that. And I think the Bylaws of the company explain by itself. And the summary that we made of the governmental, governors' framework of the company also that I followed that very clear.

Let me add, that the Corporate Governance framework of SQM is available at the SQM web page, www.sqm.com.

Thank you.

Your next question comes from the line of Cesar Perez-Nova from Celfin Capital.

Yes. Good morning, gentlemen. Stepping back into Lithium, you mentioned in yesterday's press release that consumers somewhat would start with lithium iodine batteries, and that that could affect overall 2005 consumption. My question is how much exposure you have to that specific business, in relation to your overall lithium revenues, and if that could expect, or could exert, any price pressure, as a result?

We have to think that in the approximately 30,000 metric tonnes, of total demand of lithium last year, about 90,000 tonnes were related to that.

So if batteries doesn't grow at the 20% we're expecting, we'll still take 1,000 metric tonne out of the 6,000 metric tonne that we're expecting in the total demand growth.

So at the most the impact in the total demand will be the 1,000 metric tonne out of 70,000. So, it's not a big, big issue. And maybe it could mean that we're somewhat less, in the range of 500 maximum 1,000 metric tonnes.

And clearly we are the 40% of the world market. So, we should be back in that range in our participation.

Right, and is there any price impact for this year?

Excuse me?

Will there be any price impact? I'm sorry.

The prices are going -- as I said in the report they are recovering. You have to remember that in 1997 when we entered into this market, prices were in the range of 3,000 per hundred, $4,000 per metric tonne.

Now prices are getting to a range of $3,000, and we don't see any impact in this continuous trend of recovery related to just 1,000 metric ton, at the most, that the market today is not demanding.

Okay, gentlemen. Thank you.

Your next question comes from Cristian Ramirez from Larrain Vial.

Good morning gentlemen, and once again congratulations on your results.

My question is related to costs, and I see that you have kept tight control over costs, despite the increase in volume sales.

But the question goes, what are the challenges that you foresee on the cost side, for 2005 and on, regarding the increase in energy costs, the increase in transportation costs, the high diesel price and in oil? That's it.

Okay, we -- we are well aware. We have connected gas contract. And up to now we have not really been suffering. Just about 8% of our consumption.

Our best information we have, that apart from this year, we will not face any long – any further constraint. But that's -- But no body can be absolutely 100% sure. But that is the best information that we have at this stage.

Just to give you an answer. If tomorrow, we had fuel gas and burning gas diesel, it will mean for us in the range of over $20m more expenditure, with the barrel prices maybe 25 to 30.

Due to that factor, we have announced last year, and we are now -- we announced also when we made the conference call for the 2004 year that we are making an investment to change. And instead of burning diesel, to burn [banco see]. It's a heavy oil, much more pure, less pure, much more inexpensive than diesel.

The first operation that will be able to burn fuel [banco see], instead of diesel, will be at the end of May. So, about 45% of the operation we have, they will be in condition, to not to burn diesel, okay. We don't have gas. But burn [banco see], that is about 2.5%, 2 point times to 2.5 times more expensive than gas, but not 4 to 5 times more expensive than diesel.

So we are providing our, let's say, insurance, with a cheaper fuel from now from the end of May onwards.

In any case, up to now, we are about 8 to 9% constrain, and it's not further than there. And the information that we have informal that that is probably the best scenario. But -- and I repeat again, no body can assure. But since May, the end of May onwards, we will be in condition to have that situation, in terms of providing ourselves a low cost of energy, related to diesel. That will be the worst situation.

We expect that a year from now, we will, by doing our new investment, we will be in condition to have nearly 100% of the total operation being able to burn [banco see], instead of diesel. So, that is, the situation will be also in time to come from now.

Regarding diesel, clearly it will be more expensive. And we have estimated according to current prices of diesel, that we have higher cost in the range of $6m to $8m more for the year. It would be in that range. We already have taken into account that possibility. That's a high possibility.

In terms of other areas, we have a long-term contract for electricity. We are still paying exactly what the contract says, even though we have a, we have an arbitration, where the contract, the company that provide us with energy is asking for another value. We think that that should not. It should prevail, the terms of the contract. But that is something that the, our arbitrator will decide.

What the company have said, publicly, that the, for the mining industry, they are looking forward to increase. And this arbitration or contract, whatever, in the range of 10% to 15%. That has been announced in the newspaper.

If that go through, and the arbitrator found them unreasonable, that could mean for us in the range of $2m more.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Ben Laidler from UBS.

Hi. Thanks. Ben. Good morning everyone. Just a quick question on potential mining royalties.

Before you've talked about a potential impact of a mining royalty of between $3m to $5m a year.

I just wanted to check that you were still thinking about an impact, potential impact, in that sort of area, with the changes that have been to the Bill, that's now unapproved, but it's sitting in Congress?

Ben, Ricardo Ramos speaking. As you know Ben it's still a draft of the new law, and we don't have a new estimate.

I think we keep our old estimate in order that we think it's going to be something between $3m to $6m. We don't know. But, but anyway will depend on the end of the final law. It's too early to say the final, final impact.

Of course, we're going to pay some royalties regarding our operating profits, according the draft. But operating, operating income related to our network resources. No operating income related to our derivative products or high value products or our distribution Chile, and so on and so on.

And this is -- It's not that it's not simple to calculate the number. But at the end it'd be better to wait until we have the final draft from the Government.

Okay. Great. Thank you.

[OPERATOR INSTRUCTIONS]. Sir at this time there are no additional questions.

Okay Enrique. That'll be it then. Thank you all very much for joining us today, and we hope to have you with us in the next conference call. Good-bye everyone.

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