智利化工礦業 (SQM) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SQM of Chile 2006 Third Quarter Earnings conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to the head of investor relations and corporate finance, Mr. Patricio Vargas. Please proceed, sir.

Thank you, Camilla. Good morning, everyone, and welcome to SQM's Third Quarter 2006 Earnings conference call. For your information, this conference call will be recorded and is being broadcast live. You may follow the online presentation we will review this morning by accessing the webcast on our website, www.sqm.com.

Joining me this morning as speakers are Patricio Contesse, President and Chief Executive 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 synergy, 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 include 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 with us this morning.

I would like to just remind you of the most important aspects that have defined the third quarter and what we expect for the fourth quarter.

In slide Number 2, we present the evolution of all revenues in the past three years. Revenues for the third quarter 2006 were at 9.9% higher than the same period of the previous year. And for the first nine months, revenues were 12.6% higher than the first nine months of 2005.

During this quarter, Specialty Plant Nutrition business line was negatively affected by lower sales volumes in Chile, related to delays in the startup of the Chilean system, a situation that we are seeing reverting during the fourth quarter 2006, and by lower sales in Brazil due to increased competition and a strong Brazilian Real.

Offsetting these two effects, prices were higher and we had increased sales to China. Regarding to the iodine business, demand continued with a positive trend, with a continued climb of price increase and with increasing volumes being mainly explained by the acquisition of DSM iodine business. Regarding lithium, higher prices and volume explain the higher revenues in this business line.

Going to the next slide, Number 3, you can see the operating income evolution for the first nine months and for the third quarters of the past three years. Year-over-year third quarter operating income grew 16.6% and 23.3% in the first nine months.

The 23% increase during this period was basically influenced by better prices in our three core businesses, specialty plant nutrition, iodine and lithium and an increase in iodine and lithium sales volume. This positive development was partially offset by lower sales volume of the specialty plant nutrients, a higher cost of energy and raw materials and a unfavorable exchange rate scenario.

On slide number 4, we can see the evolution of net income for the past three years. During the first nine months of 2006, net income reached $111.6 million, 28.7% higher than the $86.7 million reached for the same period of 2005.

During the third quarter of this year, net income increased by 13% to $36.4 million as compared to the year-ago quarter. With this result we have achieved 22 straight quarters of improving results mainly due to the recovery of the pricing conditions, higher volumes and new product over the last year. Those positive effects were partially counteracted by higher costs mainly related with energy, exchange rate and raw materials.

We are committed with the strengthening of our competitive advantages, keeping the focus on our cost leadership. We have several ongoing initiatives related to productivity increases and yield improvements that will help us to maintain and to improve our leadership position.

On the next slide, number 5, I would like to give you a brief outlook for the fourth quarter of 2006. For Specialty Plant Nutrition we expect higher sales volumes than those reached during the fourth quarter 2005. And we will continue with the positive trend in price.

In iodine, we also expect to reach higher sales volume for the fourth quarter 2006 compared with the same figures 2005. And prices for the fourth quarter will be slightly higher than the third quarter 2005.

On the slide number 6, the last slide, you see that lithium should experience a significant increase in prices year-over-year, and volumes for the fourth quarter 2006 will be higher than for the same period of 2005. As I just told you, our production costs will be higher than last year due to the increasing cost of energy, raw materials and a favorable exchange rate. Costs for the fourth quarter 2006 will be slightly higher than those of the same quarter of the previous year.

Let me assure again we are committed with the strengthening of our leading position in our main market based on our competitive advantages, keeping the focus on our cost leadership. Thanks.

Thank you, Patricio. Camilla, we will now go to the Q&A session.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Francisco Errandonea from Santander. Please proceed.

Good morning and congratulations on this quarter's results. And regarding potassium nitrates, in the press release you mentioned that the sales have been affected by increased competition, but at the same time you also mention that prices are better. Do you attribute this apparent decrease in market share to something that is only a one-time event or do you see a permanent change in the competitive structure of the industry?

[As you] say that, Patricio Contesse speaking. As you say that this year some of the producers have been working hard to reach the potential capacity that they were -- had not been successful in the previous year. That is the case of [Cosayach] that is reaching slightly more than 100,000 metric tons and they have a potential capacity to go in the future up to 150,000 and they were not able to reach those numbers years before.

So from last year they have increased their volumes in the market in about 70,000 metric tons in this year, because previously, they were not able to be successful, and they are reaching, gradually, their potential capacity.

The other one is ACF in Chile. They have a capacity of 25,000 and they have reached this year probably in the range of 25 reaching their potential capacity. But they don't have more than that for the future. And then we have Kemapco that is in Jordan, that they made this investment at the end of the '90s for 150,000 metric tons capacity, and they had been moving very slowly, but very successfully, but they are on a yearly basis increasing to 10,000 or 15,000 metric tons more of their capacity and we expect this year they are going to be slightly less than 100,000 metric tons compared to the 70,000 metric tons from last year.

We estimated that this company's really potential capacity is 120,000. Again, they don't have more on capacity. So the new capacity that they were already installed in years previously, they have put more than 100,000 metric tons in the market. But clearly they cannot do that on the same level next year. So we have more competition than we used to have, but also we think we have a lot more competition than we should have in the future.

So the investment plan in potassium nitrate will not change?

No, because in our plans, we thought that this company they were going to reach their capacity and they're getting close to that but after that the market will be needing more potassium nitrate and the only company making investments for new capacity this year.

Thank you very much.

Your next question comes from the line of Mike Harrison with First Analyst. Please proceed.

Good morning, gentlemen. A couple of questions for you on lithium. I noticed your lithium sales were up pretty significantly compared to the previous year. Can you give me any idea of whether those gains were completely price related or were there some volume gains there as well?

Demand has been very strong also of this year. We are getting nearly 6.5 to 7% and we estimate the growth of demand. We are increasing some volume but not significantly because we have a limited capacity that we have by 2008 will be increased [highly]. So the main factor for getting more results on the lithium have been pricing and less the volume.

We are increasing in about 5% our volume so the higher increase, slightly more than 5%, so the higher increase is linked more with price.

Okay. And then are you still experiencing any problems related to lithium product availability that you noted in the first half of 2006? And I also note that one of your competitors mentioned in the second quarter that they were having some lithium sourcing problems related to poor weather in Chile.

Well, this year we are producing somewhat more than last year. We expect next year also to produce somewhat more limited capacity anyhow for next year. And really new capacity on our side would be from 2008 onwards -- mid-2008, because we are investing in increasing our capacity for 28,000 to 30,000 for slightly more than 40,000 metric tons, in that range by 2008.

So I think the situation of lithium next year will continue to be tight instead of in relation of between supply and demand.

Okay. And then in terms of if you're seeing that the lithium supply is going to remain tight, could we potentially see any plans from you to accelerate your lithium capacity expansion that's currently planned to come on stream in 2008?

Well, we are working as fast as we can. Probably some of the lithium would come from China anyhow too, they're increasing their capacity, too. So we will see some lithium from China in the second semester next year, but not enough to [significantly raise] supply and demand for our situation. But, we are working the faster we can.

Okay. Thank you very much.

Gentlemen, your next question comes from the line of Dan Kwiatkowski with Schroders. Please proceed.

Hi. I have got a couple of questions on iodine and then a follow-up on the potassium nitrate. On iodine there was a sharp drop-off from the -- just in terms of sales from the second quarter and you noted increased competition. Should we read from the results that you are losing market share or you're giving market share away to maintain pricing high? That's the first question.

I should say that we cannot react on a quarterly basis in terms of supply and our view related to the iodine situation, [balance] of the iodine situation is in the mid-term. So when we see a quarter that will have more pressure than the other one clearly will not be [inaudible] because we have a long-term view of our potential capacity of our competitors, how the market is flowing, so no for events in the short period we would be having reactions.

Right. Can you give us an idea of the supply and demand dynamics currently and into 2007 in iodine? Where is the competition coming from? What sort of new capacities do you expect?

Well, I think that the market is growing. Exactly we don't know how much next year will be, but it should be in the range of, let's say, a basic of 3% to a maximum 5% as have been in the last years. The only competitor that is increasing capacity today in the iodine business is Cosayach. How much they will increase we don't exactly know. We know their potential capacity and we know that in the medium term they cannot turn or break the supply and demand agreement.

So you expect continued solid pricing in 2007 in iodine?

Our expectation is that is correct.

Okay. Thank you. And then a follow-up question and similar question on potassium nitrate. Can you talk about your outlook 2007 in terms of supply and demand balance and what you expect this to do in terms of pricing?

Well, I think there are two factors related to the potassium nitrate that are pressing. On one hand there are volumes and on the other hand -- the other side in price. In terms of demand, demand has continued to grow relatively well. Unfortunately, this year, most of demand has been picked up by -- all of demand has been picked up by third parties because of, already, I think, I gave already the arguments on that.

Clearly, we don't see the [ACF] in Chile or in Kemapco or any other places to replicate that same growth so we will be able to sell some volume next year, 30,000 to 40,000 metric tons maybe in is growing at 6 to 7% growth this year. We expect that would continue next year, too. But, as I said, that growth was picked up by our competitors this year. So, clearly we have a big pressure on that in terms of market and price and that has affected the price because potassium nitrate has been more stable this year than what they were last year.

And the second factor, also, that has stabilized the price of potassium nitrate meanwhile is the situation of production of potassium chloride itself. So, because of the long term of negotiations with China that took too much main raw material to produce potassium nitrate. So, in the next year things go slightly more smoothly in that term and we will see less pressure from competitors. Maybe we can see a better scenario than we saw this year in terms of volumes and somewhat else in maybe prices too.

I just think this year was not that easy in terms of competition and in terms of situation with the products, but the market was anyhow very strong and good in demand.

In 2006 we've seen some fairly disastrous climatic conditions and harvests have been terrible in a lot of commodities like wheat, corn, etc. I mean, do you see an increase in demand faster than normal increase in demand in 2007 because of these conditions?

Well, I don't know. Farming is very [volatile, variable] but in our case we'll go for a more stable markets that are not related to the commodity type of agronomics or farmer products. We are related with people that are more sophisticated, much more related with cash crop type of farming like fruit or vegetables or flowers et cetera and there in that case we don't see that volatility that you can see in corn or wheat.

So, our products, because of that, have been always increasing in demand and have never decreased in the last 20 years, even in good or bad moments. And we see in the next year the demands continue to grow. Because our products are not that related with the commodity farming-type of products.

Okay. Well, thank you very much.

[OPERATOR INSTRUCTIONS]

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

Good morning. Two quick questions. Would you just be able to give an update on where you are with the capacity expansions in terms of percent completed, any overruns or underruns in terms of timing or CapEx? And the second question I guess relates to some of the potassium nitrate issues, especially from the competition of Cosayach. You're obviously seeing no production issues there from the fact that they seem to be having water problems -- water rights issues in the north of Chile. I guess that's a slight surprise and I just wondered if you have any commentary there? Thanks.

Well, let's just say that in general terms we, maybe in the [inaudible] we'll go more deeply the numbers on that financing. But in terms of growth, let's say, we define three areas of goals in the CapEx program that is already defined that we must increase our capacity in iodine in the range of 30% and the nitrate by 30% and in the lithium by 30%. I think in the iodine we have already made already that growth, we are -- you have to get that we bought DSM we went even further than that. So I think in the iodine more or less is completed what we have said.

In the case of the lithium, we will be by mid-2008 completing the CapEx programs relating to this growth and by the third or fourth quarter 2008 we will be reaching our capacity for the 300,000 metric more of nitrate. In terms of numbers [recurrable], I think that --

Ben, we don't have [inaudible - background noise.] Anyway, we are reviewing our CapEx program for the next three years. We don't expect important changes as compared to the previous figure that we filed a couple of months ago.

Anyway we will disclose the final CapEx program for the '07-'09 period at the end of this year. And, again, I don't expect a lot of difference as compared to the previous figure. I mean, we continue to believe that the total CapEx of the company will be between $500 to $550 million in three years. We will, anyway, we will go with a final number at the end of the year.

Just in the case of --

[inaudible] on potassium nitrate?

I'm sorry, could you repeat it?

Is that the potassium nitrate expansion?

Yes, it's going ahead. As we mentioned before we are producing more nitrate salt in the first region of Chile and we expect to be producing additional potassium nitrate from 2008 onward as scheduled.

Just to confirm, so the lithium potassium nitrate is absolutely on schedule, no delays, no technical problems?

Not at this stage. We -- things were slightly postponed, but the new dates we have, I think, they are already more or less filled. In terms of the iodine, it's almost completed and the lithium will be by mid-2008 and the third or fourth quarter will be the increase of capacity in the nitrate. That is on schedule and we truly believe that those things will be achieved.

Ben in the case of litigation that we have with water with Cosayach, honestly, publicly, I don't want to make any comment on that.

Okay. That's great. Thank you.

[OPERATOR INSTRUCTIONS]

And at this time there are no more questions in queue. I would now like to turn the call over to Patricio Vargas for closing remarks.

Thank you, Camilla. Thank you all very much for joining us today. We hope to have you back on the next conference call. Goodbye, everyone.

Thank you for attending today's conference. This concluded the presentation. You may now disconnect. Good day.