智利化工礦業 (SQM) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter SQM earnings conference call. My name is Alicia, and I will be your coordinator for today. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes. I would now like to introduce your host for today's call, Mr. Ricardo Ramos, Chief Financial Officer. Please proceed, sir.

Good morning, everyone, and welcome to SQM's second quarter 2006 earnings conference call. For your information, this conference call will be recorded, and it's being webcast live. You may follow the online presentation we will review this morning by accessing the webcast at our website, www.sqm.com. Joining me this morning is Patricio Contesse, Chief Executive 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 of our structure and is defined under federal securities laws. Any forward-looking statements are estimates reflecting the best judgment [inaudible] based on currently available information and involve a number of risk, uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. Risk, uncertainties and factors that could affect the accuracy of such forward-looking statements are identified in the public filings made with the Securities and Exchange Commission. Forward-looking statements should be considered in light of those factors.

I now leave you with Patricio Contesse.

In regards on slide number 2, on this slide, we present the evolution of our [EBIT]. We saw a second quarter year-over-year increase of 22.7% and the first half higher than the first half 2005 by 14.2%. These increases were mainly explained by better price conditions and increased volume of Iodine. We see that the market dynamics remain solid across our main business line, and therefore we think that possibly pricing trends should continue. As stated in our release, we expect the sales volume for the second half of 2006 will be higher than the volumes reported in the second half of 2005 for all our main business lines, Specialty Plant Nutrients, Iodine and Lithium.

Going to the next slide, number 3, you can see operating income evolution and for the first half and the second quarter 2005 and 2006. Year-over-year operating income grew 27% during the first six months of this year and 26% during the second quarter of 2006. The main reasons behind the total in operating income are related to the better pricing conditions all across our main business lines, and the effect of the acquisition of the DSM iodine business. These positive effects were partially counteracted by higher production costs, mainly due to the increasing energy-related costs and the continued restriction on the supply of natural gas. We expect that operating income for the second half of this year would be higher than the operating income of the second half of last year and similar to that recorded in the first six months of 2006.

On the next slide, number 4, you can see the EBITDA evolution for the first half from the second quarter 2006 and 2005. The EBITDA for the first half 2006 reached $157 million, approximately 28.6% higher than the $122 million of the same period of the previous year. EBITDA for the second quarter of the 2006 reached $87.4 million, approximately 28% higher than the $67.6 million of the same period on the previous year. The strong growth in the cash flow generation will allow us to finance most of the capital program, maintaining our financial indicator of health [inaudible].

In the final slide, we can see the evolution of net income for the first half of the year as well as for the second quarter for 2005 and 2006. During the first six months of this year, our net income increased 38.1%, reaching $75.3 million. During the second quarter of 2006, we experienced a similar increase of 38%, compared with the second quarter of 2005.

With these results, we have achieved 21 straight quarters of improving results, and we expect that the positive market conditions observed in the first half will continue in the future. Thank you.

Operator, we may now go to the Q&A session.

[OPERATOR INSTRUCTIONS]. The first question comes from the line of Cristian Ramirez. Please proceed.

Congratulations on your results. I have a couple of questions. The first one is related to the spectacular results which I saw on the Lithium business. I would like to know if there is anything beyond the fact that there is scarcity in terms of product availability and in terms of the growth and demand. Is there anything else that triggered this average price of roughly $3.8 million per ton? Is there anything else, rather than the things that you-- aside from the things that you mentioned on the press release? That's the first one. And then the other one-- what are the expectations for the Specialty Plant Nutrients business on the second half, because I saw that both your volumes and average price was not that high? I expect that that's because you didn't sell that much of potassium nitrate, basically. Those are the first two.

Let's just say that in this market, there is not any significant new news. What has been going on in the prices we've been getting were what they were ten years ago, so we're not having any extraordinary price lift - just nominal value, more or less the same as they were in '96. The market is strong. Demand is strong. And, clearly, we have got advantage of that and, of course, the prices are better than what they were but not as strong.

In the case of Specialty Plant Nutrients, the one factor that they had continued to be growing demand of the market, but our competitors have taken most of the tonnage the increasing demand orders. We think demand will increase in the range of 65,000 or 70,000 metric tons and that most of that is being taken by our competitors. Imasco has improved their volume, ACF and [inaudible] too. So, we are maintaining slightly more or less our volume. The prices, because of the same, more competition, on one hand, and also how much time we take to get the new prices, of course, in the negotiation with China and [inaudible] increasing prices of potassium nitrate. So, we have got more competition, and potassium chloride that is the main raw material to produce the potassium nitrate - it has a lot of delay in establishing the new pricing scenario that we just reached about two weeks ago.

Do you see any effect of the lithium hydroxide effect on the average price for your mix during the first half '06?

That's not the main reason. The prices have-- Lithium hydroxide uses the raw materials. So, the main cost of it isn't lithium hydroxide; it is lithium carbonate. So, the main factor is not there. It's the lithium carbonate itself.

Okay. Another important aspect to me is what are the provisions that you're making or the impact that you are estimating on the increases in the gas price, which doesn't imply that you will have more gas availability on the second half of this year and during the upcoming years? And, also, on the impact on the higher oil prices-- what do you think that you're estimating on that side?

First, about the fuel oil. On this, you may know-- we have said increasing price in the last 12 months. We explained before we have expenses related with fuel oil and diesel close to-- between $8 to $8.5 million per quarter-- and we have been affected by the new prices in oil in, I think, the last 9 months. About the natural gas, we are facing, first, restriction from natural gas from Argentina. We think and we expect that we will receive close to 60% of the regional volumes during the second half of the year. And we are going to face the new taxes imposed in Argentina. We think total, we are going to face an additional cost because, first, the taxes and, second, the replacement of natural gas using fuel oil - close to $1.1 million per month. We think that we face during first half of the year a value - an amount close to $800,000 per month - $700,000 or $800,000. It means that we will have an additional cost probably close to $300,000 per month during second half of this year due to the taxes on the replacement of natural gas using fuel oil.

Okay. The final issue. I saw that your sales on the Iodine business were 5.2 thousand tons, so the impact of the DSM operations are quite marginal. DSM operations are, going through what I know, 2 thousand metric tons per year. So, it seems like there was not a full impact of those operations on your results. Is that true, or is there something else?

We have sold [800 tons] more than last year, and we expect to sell 2 thousand metric tons more of iodine compared to last year. DSM was producing in the range of 2 thousand, but they were selling 1.8 thousand. So, we are taking all that volume. We are selling [inaudible].

Okay. Thank you very much.

The next question comes from the line of Francisco Errandonea with Santander Investment. Please proceed.

Congratulations on this quarter's results. I wanted to know if you have any-- or could you give us any color about the capacity expansion program? Thank you.

We already almost have reached our capacity in the Iodine, in the range of 11.5 thousand metric tons. We are working in the CapEx program to have 300 thousand metric ton more capacity by 2008, the second half of 2008, of nitrates. And that is still on-- we think that objective should be achieved by that time. We are also working to have 40 thousand metric tons of lithium carbonate also by 2008. At this stage, we feel real confident that that also could be achieved.

And another question is related with something that Cristian asked. What would the level of natural gas do in the quarter?

Francisco, could you repeat your question, please?

What was the level of cap in the supply of natural gas in the second quarter? How much gas did they [inaudible]?

It varied, of course. There are some days with serious problems related to some issues regarding the pipeline. But, as an average, as I explained to you before, I think that we received close between 60% to 80% of the natural gas. We expect that for second half this year, we expect to receive close to 60% of the regional natural gas agreements.

Are you going to invest in new sources of energy?

Could you repeat? Sorry; we have problems here with your telephone.

My telephone. Are you planning to invest in new sources of energy, like solar energy or something like that?

We had some things that-- We are looking forward to have, let's say, a [final] investment by 2008, but that will be a really small operating in comparison with our other [inaudible]. If that works okay, then in the medium term, then we'll increase that capacity.

Thank you very much.

The next question comes from the line of Ben Laidler with UBS. Please proceed.

I've got three quick questions, if I may. The first one would just be-- Any indirect impact from the fact that it took so long for Potash Corp. and the Canadian producers to get a supply deal with the Chinese? Or, turning it around, the fact they've now got one - is that some-- does that have any impact at all on your business in the second half?

Sure. That delay on establishing that price did affect us because we were in a period of time there was a big pressure on pricing related on potash and also on potassium nitrate. The establishment of this new separation clearly will clarify and help us to have a more stable situation related to pricing.

Okay. Any update--? We've talked a little bit before about potential lithium supply coming out of China. There's been some anecdotal reports that there is more capacity coming on there. Have you heard anything? Have you seen anything in the market? Did you expect to see anything coming on in the second half of the year?

No. We try to have the best information we can from China and the best order producing every year slightly more, some more. But, what we are-- Our estimate at the beginning of the year is they are with some delays. They're not coming with all the volume they were telling us. They're coming with less volume.

Okay. And, I guess, the final question. Would you just be able to remind us of where you are with unions, your labor situation in the north? Obviously, there's probably some debate at the moment.

Okay. We have union contract that legally lasts for three years. So, we are obliged to make negotiations next year. Even though that traditionally [inaudible], we have confidence already in two years term. We start to have, let's say, what we call monetary negotiations. So, those things we will try to make during this year, but they not compelling. So, if we don't agree, nothing should happen. Then we'll have to wait until next year. In this stage, we have no news about nothing negative. We have not yet started our monetary negotiations with the union, and we have to stay close to what will be in the next month. If we don't achieve any agreement, then that is postponed because the labor contracts are valid until next year.

Great. Thank you very much.

[OPERATOR INSTRUCTIONS]. We have a question from the line of [Dan Krakowski] with [Schroeders]. Please proceed.

Just one question on pricing. Do you have any contracts that are coming to an end in the second half of 2006 or in 2007 that might impact your-- might impact overall pricing in any of your product lines?

Yes. We have a contract with lithium carbonate that will end by March next year that was in the range of 4.5 thousand metric tons per year that we are selling compared to current price in the market in a very significant-- a very significant pricing. We expect related to current prices that that should have an impact for us in the range of $10 million, possibly.

Okay; great.

If pricing should even go further, of course, then the impact is [inaudible]. But, I'm telling the price - that number in the-- considering carbon price.

Excellent. There's a second more general question. In the product lines-- In your major product lines, could you give us an idea of expectations for 2007? Do you expect to see a continuation of the positive pricing momentum that we've seen over the last couple of years?

I think we already have made comment on this conference call about the continued trend of petroleum pricing and scenario for the second half. At this stage, we think that next year also we'll see a better scenario of pricing, if things go normal [inaudible].

Right. Great. And--

Excuse me. There is still high demand for our products.

Great. Okay. Well, thank you very much.

Those are all the questions we have at this time, sir.

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

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