智利化工礦業 (SQM) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the second quarter, 2005 Sociedad Quimica y Minera de Chile SA 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. we will be conducting a question-and-answer session towards the end of the conference. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn this presentation over to your host for today's call, Ms. Carlina Perez, Director of Investment Relations. Please proceed, ma’am.

Good morning everyone and welcome to SQM's second quarter, 2005 Earnings Conference Call. For your information, this conference call will be recorded and is being broadcast live. 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 as 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 the 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 with you Mr. 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 the second quarter, and I want to review the fundamentals behind the outlook for second half 2005.

Let’s go to slide number 2. In this slide we can see the evolution of net income quarterly and half year for the years 2004 and 2005. We reported on Tuesday, August 9 net earnings for the second quarter of 2005 in the amount of $39.7 million which is 87% higher than the second quarter 2004. We increased our net income from first half of 2004 to first half of 2005 approximately 82%. Indeed, the results have improved; the second quarter 2005 reflects a positive tendency which we have already seen in first quarter of this year. Strong net income percent, an important challenge to us in order to continue with the positive tendency of the second half of 2005 and projecting into 2006.

Moving to slide number 3, you can see the evolution for our quarterly and half-year revenue, showing a 12% increase in revenues for the second quarter 2005 and a growth of 17% for the first half of 2005. In the specialty plant nutrition business, the revenues during second quarter 2005 are mainly due to the recovery in price partially offset by slightly lower sales volumes. It is important to say that SQM is producing as its fullest capacity, and we are working strongly in increasing the production capacity to start off second half 2005. The increase in revenues in recorded in the iodine business line is explained by higher sales, volume and prices as compared with the second quarter of 2004.

Finally, regarding lithium, as it was expected higher revenues are [indiscernible] by recovery of prices, partially offset by lower sales volume.

On the next slide, number 4 we can see the operating income evolution for quarterly and half-year 2004 compared with the year 2005. Year-over-year second quarter operating income grew to approximately $51 million which is 71% higher than the second quarter 2004. We increased our operating income from first half 2004 to first half 2005 by approximately 66%. As you can see, SQM [indiscernible] operating income, which is the outcome of higher prices, new products, and the efforts made by SQM to contain the pressure on costs.

Second quarter operating income increase basically for us by better prices in our 3 core businesses; specialty plant nutrition, iodine and lithium, and slight increase in iodine sales volume. All the above was partially offset by a slight increase in sales volume in specialty plant nutrition, in lithium products, and an increase in costs particularly of energy, raw materials, and the less favorable exchange rate scenario.

Moving to slide number 5, I would like to review the second half 2005 operating income outlook. Even though the less favorable exchange rate scenario, the increasing energy and raw material costs posed new challenges for the Company, SQM expects second half operating income should be higher than second half 2004 and slightly higher than first half 2005. The main drivers are first in specialty plant nutrition we expect sales volume slightly higher than second half 2004 and prices between 10% to 15% higher year-over-year.

Regarding iodine, we expect sales volume between 5% to 10% higher than the second half 2004, a price increase of between $3 to $5 per kilogram higher than second half 2004. Regarding lithium, we expect sales volume should be lower than second half 2004 and higher price. Finally, and as I explained to you before we expect production cost will be affected by less favorable exchange rate scenario, higher cost of energy and raw materials. This negative effect would be partially offset by the different cost-reduction initiatives implemented by the Company.

Okay, thank you Mr. Contesse. Operator we may now go to the q-and-a session.

Thank you ma’am. [OPERATOR INSTRUCTIONS]. Christopher Ramirez, Larrain Vial. Mr. Ramirez, you may proceed.

Hello everyone, and congratulations on your results. I’ve got a couple of questions, and the first one is related to the estimated threats that you foresee, not only during the second half of 2005 but on the following years; threats coming from [indiscernible] products, from new entrants, [indiscernible], things like that. That’s the first one.

I’d like to say the threats are, one of them that we are already suffering is the exchange rate. We are affected strongly by the revaluation of the Chilean peso and the forecast for the future, clearly we don’t know. But we have been impacted already significantly during the year in the last 2 years.

Also we are heavily impacted by energy. We have a lot of contracts related to the oil prices, operation related to the oil consumption, and clearly these new prices and scenario of energy is a threat and what the prices will be in the future, who can tell? And that is also a significant challenge.

Thirdly, as we said before, we are 100% capacity production, so whatever could happen it’s going to affect us on a negative trend, not on a positive trend; there is a possibility in terms that we are not able to produce more and whatever operation problems to produce and that is missing opportunity for selling and marketing our products.

As you all know that we are in the very important correction for the near future that [indiscernible] action as we have already said will come probably at the end of 2007 or before that. And the main problem will be slightly somewhat more in iodine but not in lithium and not in the nitrates or in the specialty plant nutrients.

In terms of competition, we at this stage we feel comfortable the way the specialty plant nutrients, we don’t see significant changes in terms of supply. In terms of the lithium somewhat increased in China [ph] but also that could not affect the value between supply and demand. And in iodine too, the increase in production evolves in Chile also. We don’t see that a change in the equation between the supply and demand.

In terms of pricing, in general we have a positive feeling about the second half and next year in terms of the 3 parts we are handling, specialty plant nutrition, iodine, and lithium.

And then the second question is related to you new, as far as I know, production and sales strategy because of your 100% capacity utilization, I know that you are not planning to increase your volumes because you cannot, and all the increases that you are planning to have in the near future you are planning also to augment your [indiscernible] capacity in order to be able to respond better and faster to increases in demand. Is that right, or I don’t know, is that your new sales strategy for the future, trying to make new entrant with a higher cost base into the market so that you can assure a better market for all your main 3 product lines?

I’m not sure that I got you straightforward your question, but I will try to answer about strategy and increasing our capacity. We think we should probably in the range of say 85% capacity being used to go ahead with our production to get to 100%. So we are increasing our iodine and lithium and the specialty plant nutrients 30% in the next 2-1/2 years. Then [indiscernible] are going to have to be in that range.

As you say that because of that we will be able to increase not only our, to be not in the position 100% but to be in the 80% to 85% but also that will permit us to increase our volume sales, we don’t see that increment will boost prices down because demand is still strong. And also we don’t see a strong new capacity being [bid by third parties too]; somewhat yes but not significantly. So that incremental I think would permit us a better service in terms of supply, but not creating an invalue to supply and demand that could favor a decrease in pricing, a scenario that we don’t see in the near future.

So strategy is to supply a reliable market; I think it’s important in terms of the long-term business. And if the demands continue to be strong we will have to go through again a new development for new capacity in 2008/2009.

But coming from your capacity increase by 2007, you are not expecting that you will be in those years at a capacity realization of 80% to 85%, that prices should go down because there will be more capacity worldwide. Yes, prices will go up; I mean it will be more profitable for not only you but for the rest of the producers worldwide to increase capacity. Are you not foreseeing any decrease in prices from 2008 on?

For 2008 on is a very long time. But we -- what would happen I think more than on the supply side, an effect will be economics worldwide. We don’t see at this stage that this new price scenario will create by itself a situation to have less price. So our view is that it’s touch and go [indiscernible] will be more related to the world economics than from the supply of companies.

Okay, thank you very much.

Cesar Perez-Nova, Celfin Capital.

Good morning gentlemen, and congratulations for the second quarter earnings. My question is in relation to vessel bottlenecks in the quarter, which shifted your sodium potassium nitrate exports into the second half of the year. What volume size are we talking about? Also you mentioned in the press release that these volumes, excluding the shipping effect, would be stronger. If you could provide guidance on your growth that we may expect, I would appreciate that.

This is Ricardo Ramos speaking. As was stated in the press release, of course we expect that some sales of sodium potassium nitrate will be moved from first half to second half, and we do expect that total volume sales of the specialty plant nutrients, I’m thinking about the nitrates, potassium nitrates or sodium potassium nitrate maybe, during the second half we think will be between 5% to 6% higher than volume sales second half last year mainly due to the fact that some of the sales to Latin America for sodium potassium nitrate were moved from first half to second half. And as was stated in the press release, we expect that total year sales, volume sales of specialty plant nutrients, and I’m thinking about nitrate, potassium nitrate and sodium potassium nitrate will be similar to last year or slightly lower.

All right then, thank you.

Ben Laidler, UBS.

Hi good morning; 2 quick question if I might. Could you just talk a little bit about what sort of demand elasticity you’re seeing to the rising price environment? If you could just maybe do that quickly across your 3 main businesses. And then the second question would just be, the pressure on the cost side, which of these costs is particularly surprising you? Which is most off versus what you’re running with internally in your budget?

Okay, in terms of specialty plant nutrients, I think that there are 2 driving forces; one is that demand is strong so we are allocating in present markets our limit production. So that is creating on one hand a better return on our products because we are relating towards better markets.

Second fact of that is the pricing scenario in a positive way is what’s going on with MOP [ph] or KCL [ph]. I think those 2 factors, they will be there, they will be remaining I think from this year to next year. So we have recently looked in a positive at the trend towards price.

In terms of the iodine demand is strong as it has been the last 2 or 3 years so we have been slightly increasing [indiscernible] too. But still this [indiscernible] between supply and demand, and if demand continues to be so, we still further improvement in pricing for the iodine.

In the case of lithium, it’s about the same as [indiscernible] products; also demand is strong. There is limited availability of new capacity today in the world. So we see that prices continue to recover from what they were in ’97. Remember that when we entered the market, prices collapsed from 3,500 to 1,500; we’re still far from that number and we are getting the right climate to get to that pricing in the near future.

So I see that the same reasons that have been in the market for let’s say the last 24 months have been for us in the scenario for getting prices and the [inaudible] pricing scenarios, they are still in place in the next 12 to 18 months I think at least.

Related to costs, clearly I am surprised about the costs. I guess in a very short period of time, 2 main factors have been that we are waiting for our Company while the exchange rate of the Chilean peso, we had to recall just about 2 months ago it was 580 pesos or 590 pesos and today we are not rated 540 pesos. Clearly it is a big change to us. And also the same with the energy. We were seeing prices around $50 per barrel; today we are in $63 or $64 in just a few weeks, 2 months. So those are big, big impacts that we are having now on our costs.

Thank you; if I could just quickly go back to the price and demand that you see, you’re really not seeing any reaction from your customers to the rising price environment at the moment.

I should say no Ben because on one hand when we go to specialty plant nutrients, I mentioned the 2 factors why prices are being, are again going up, I don’t see those values being changed in the near future, in the next let’s say 12 or 18 months. [Indiscernible] the capacity, the [indiscernible] is very limited because the [indiscernible] placed; they have not really also, no one today but just [inaudible] are incrementing their capacity. For the near future production [indiscernible]; but they are doing what has been done; [indiscernible]

In terms of the iodine, there are some increases in costs but the volumes are increasing is still in the range of getting good supply and demand. And no one else is increasing their capacity, but that’s also [indiscernible] SQM. And no one else is doing it.

In the case of lithium, we have heard some new production is coming from China, but not in a significant way that could change the scenario of pricing that we are now foreseeing.

Ben this is Patricio de Solminihac. Just to complement the comments of Patricio first on the cost supply, as far as we see these [inaudible] now as Patricio described, they are fully in operation for the second half. That’s why we expect that the second half of 2005 the operating income should be higher than the second half of 2004, and also slightly higher than the first half of 2005. So in this projection, these costs surprises are fully considered.

And a second comment regarding your first question on price elasticity, or demand elasticity on the new price from the 3 businesses, as Patricio said in specialty plant nutrients, we don’t see anything different in change in demand because of the new prices because of the cost of [inaudible]. In the case of iodine, there are some indications that maybe they’re not growing at the rate that they used to grow. But the main application being x-ray [indiscernible] is not affected because of the inference of the cost [indiscernible] are in their final throes, so they continue to grow and I think to grow very high.

And regarding lithium the same thing from [inaudible] and there are other applications of aluminum or others that we are seeing a small effect and less growth. But so far there is not such an effect that we see right now.

That’s great, that’s very helpful. Thank you.

Dan Maclowski [ph], Schroeder’s.

Good morning; a couple of questions. In terms of your cost of goods sold, could you give us a rough breakdown of the various constituencies in terms of sort of percentage-wise, what’s synergy, what’s raw materials, etc.?

This is Ricardo Ramos speaking. The main cost including our cost of goods sold first is barter [ph] rates that we pay in Chile to our workers; if I’m not wrong, close to $40 million per year. We have energy, total energy included in our cost of goods sold is close to $50 million to $60 million per year; that’s direct energy and indirect energy through our supplier that we have in our mining [ph] facilities. And I think that the number 3 most important what we call logistic expenses are included in the cost of goods sold; we’re talking about shipping, handling of the products, bagging, all of the costs we have from our port facility to the final customer. That’s why it’s important, probably in the range of $70 million to $80 million per year in the logistics cost.

The other costs are mainly we have suppliers, different contractors in our facilities. We have material and spare parts of our equipment; maintenance costs of our main equipment; and some raw materials that we use in the production process. We buy some potassium chloride in our process; we buy soda ash in order to produce different carbonates. And we have different raw material usage in our main production process.

Okay, I mean the reason I asked is that I’m very surprised that in the second quarter your cost of goods was completely flat in real terms despite increase in volumes and despite the increase in shipping costs, etc. So how do you explain that?

First you should consider the volumes during the second quarter, the second quarter 2005 as compared to second quarter 2004 mainly in specialty plant nutrients were lower than second quarter last year. We did explain in our press release, and most of the logistics cost are related to what we call the [indiscernible] side of business; a reduction in volumes, and we expect that volumes will go back in a positive way during second half 2005. And volumes of iodine are slightly higher than second quarter last year, and volumes of lithium are slightly lower. So that’s why on the year as an average, volume sales during the second quarter to [inaudible], it was explained in the press release is lower than volumes of second quarter 2004, something that we think is going to be different during the second half. And that’s why total cost of goods sold is quite similar, and the increase in operating income is mainly explained, as we put in the press release, due to the price scenario.

Right, okay; so looking into the second half we should expect some gross margin contraction due to volume growth and less price increase.

I would say that we think the positive trend of the price increase will continue during the second half. As we stated, it’s important to consider that operating income should be slightly higher than first half operating income. That’s why we don’t foresee reduction in our present state of gross margin during the second half; we don’t foresee any of that impact in the gross margin.

Okay, excellent; and second question can you give us a breakdown about the outlook for capacity, production capacity in 2007 per general business line?

I should say that by the beginning of 2008, given their capacity, nitrogen 300,000 metric tons; iodine about 2,000 metric tons; and lithium 10,000 metric tons; and in nitrate 300,000.

Excellent, thank you very much.

Francisco Errandonea, Santander Investment.

Hi, you recently built a live plant in [inaudible]. Do you have any plans to follow with [inaudible] in that area, and is there an estimate of the market size?

Regarding the [indiscernible] acquisition, this is in line with our specialty plant nutrient. This is a plant of 30,000 ton capacity for phosphates. This product we used to buy in large quantities in order to use it in our APK [ph] plants around the world. So our idea is to instead of buying the stuff and use it ourselves and increase the use of that in our plant, and also to sell directly to our customers. This is the plan; we are taking control of the company and everything is according to the original plan.

And regarding the tax rate, do you have any [inaudible]?

Can you repeat the question?

[Inaudible].

Regarding our Chilean sales on Europe?

Exactly.

Yes we have, we are closely regarding the exchange rate and the risk of the exchange rate. This policy in [inaudible] trends we tried to cover these changes in the Euro and changes in the local currency, the peso against the U.S. dollar in our balance sheet. Anyway, if we have a big change in the Euro or the Chilean peso, of course we are going to be affected in the future because we tried to cover what is the assets and liabilities incurred with the difference in U.S. dollars, but future exposure to Euros or Chilean peso we consider it as part of our business and we have unlimited coverage.

Thank you.

[OPERATOR INSTRUCTIONS]. Cesar Perez-Nova, Celfin Capital.

Gentlemen just going back into the [inaudible] acquisition here, you have closed right now the empty equation so my interpretation here is that, or what I interpret as an analyst is that you may want to grow further into this business. Is this correct? Should we expect further acquisitions of this business? We also understand this is a very [inaudible]; it’s very complex. I don’t know if you could give some insight on my views or what I’m thinking. And also if you could provide a little more detail about the operation in the Emirates. Thank you.

We don’t have any intention to go into the phosphate business. What we bought there is a small operation, it’s a niche operation for specialty plant nutrients; it’s a complementary product for our application [indiscernible] as I explained before. SQM has no intention at all to enter into the phosphate business.

Okay, and just going through the operation, does this have just a production facility, or also it contemplates a mining operation?

No, this is just a plant, a chemical plant.

A chemical plant, okay. Thank you.

Ben Laidler, UBS.

Hi, just a quick question with tax rate; the lower tax rate we’re seeing the last could of quarter, is this just a function of the [inaudible] tax loss carry forward, or is there something else at work there?

No, we think it’s the tax interest, the tax that we are going to pay in the future. We think that the tax percentage that we are paying in the first quarter and second is going to be similar during the third quarter and fourth quarter. We don’t expect an important change in the tax rate.

Did it change the first half of ’05 versus last year? What’s driving that change?

It’s not a significant change Ben. It’s important to consider the tax rate in Chile, you calculate tax not according to our financial books; we calculate taxes according to our tax books that are slightly different. And in the long term our rate is similar, but in the short term you have some variations between one quarter and another quarter because you have different accountings for tax purposes than you do for financial purposes. That’s according to Chilean tax rules. That’s why I think that if you considered the average of the first half of this year as a tax percentage, I think it’s reasonable to expect that this will continue in the future.

Okay thanks.

Craig Shaw, HLM.

Good morning; a question for you on lithium with new lines of power tools coming out, lithium-ion battery powered tools; Milwaukee is coming out with a new line, Black and Decker, DeWalt is supposed to follow sometime next year. Do you see this having a meaningful impact on supply and demand for lithium, and in turn lithium prices?

Well all of the applications in rechargeable batteries have been affecting of course the demand on lithium. But the use of lithium batteries used to be close to 2% and now it’s going up towards 15% or 20%. So of course now all the battery applications in lithium are very important. If the growth is more, of course it will affect the demand and could have a better support for the pricing. We saw especially in the big growth of the cellular phones; cellular phones made a big change and now, of course all the laptop and digital cameras, and now as you correctly said we saw this year with power tools. Given that the growth is in the range of 20% in these applications, I think that the cellular phones will not continue to grow at the same rate they used to grow and they will be replaced by this other growth.

The other thing that we are looking for the even longer term is what will happen with the hybrid cars. There is a lot of new research providing how the electric or the hybrid car, what kind of technology and battery they will use. And of course, there are a couple of technologies competing, but they are also lithium is competing for that application. And if that application goes forward, there will be also an important new demand for lithium.

Okay, so if I understand you correctly, then these power tools will certainly perpetuate the growth rate we’ve seen historically for lithium but with cell phone battery growth rate slowing down, you don’t expect any major change in the historic growth rate?

Yes, more or less it’s the rise in the historical rates in only the last couple of years, not more than that, first. And second, we really do not have a clear assessments how successful will be these power tools new growth. If it’s much higher than we think, of course it could have a much important effect. We really do not have a real understanding how big this could be.

Okay great, thank you very much.

[OPERATOR INSTRUCTIONS]. Ladies and gentlemen this ends our q-and-a session. I’d like to turn this call back to our host, Carlina Perez for closing remarks.

Thank you all very much for joining us today, and we hope to have you with us in the next conference call. Good by everybody.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.