智利化工礦業 (SQM) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SQM 2006 fourth quarter earnings conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to the Chief Financial Officer, Mr. Ricardo Ramos. Please proceed, sir.

Good morning, everyone, and welcome to SQM's fourth quarter and year 2006 earnings conference call. For your information, this conference call will be recorded and is 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 as a speaker, Mr. Patricio de Solminihac, Executive Vice President and Chief Operating 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 products or service line growth, together with other statements that are not historical facts are forward-looking statements as that term is defined under federal security 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 Securities and Exchange Commission and forward-looking statements should be considered in light of those factors.

And now, I'll leave you with Mr. Patricio de Solminihac.

Good morning, everyone. I would like to thank you all for taking the time for being here this morning. I want to briefly go over the most important aspects that defined year 2006. So, going to slide number two, in this first slide, you can see the evolution of our revenues and net income for the fourth quarter. In both charts, you can appreciate the upward trend that we have achieved, mainly the trend of improving our results in the last -- maintaining the trend of improving our result in the last 23 quarters in relation with the same quarter of the previous year. Year-over-year, fourth quarter revenues grew to approximately $267 million, which is 23% higher than the fourth quarter 2005. And net income increased 10% as compared with fourth quarter last year.

In slide number three, you can see the evolution for annual consolidated revenues and net income through the years 2003, 2004 and 2005. We have increased revenue 16%, and net income 24% during 2006 as compared with the previous year. We reported consolidated revenues for the year 2006 in the amount of $1,042.9 million. In the specialty plant nutrition business, the revenues during the year 2006 are mainly influenced by the revenues -- by the recovery in price that more than offset lower sales in volume. In the iodine and lithium business, revenues are mainly explained by better prices condition and higher volume as compared with 2005. The increase of 24% in the net income during the last year presents an important challenge to us in order to continue with the positive trend during 2007.

In the next slide, number four, we can see the operating income and the EBITDA evolution 2004 to 2006. As you can see, SQM is increasing operating income, which is the outcome of better price conditions, new products, additional volumes and the effort made by SQM to contain the pressure on cost, like energy, exchange rate and raw materials. We are committed to sustain our competitive advantage, keeping the focus on our cost leadership. Prices in the specialty plant nutrients increased an average of 5%. Iodine prices increased close to $3.50 per kilogram and lithium carbonate price was significantly higher than 2005.

Year-over-year EBITDA grew by approximately 23%. This growing cash generation will allow us to finance most of the CapEx program, maintaining our financial indication at healthy levels.

Okay, operator. Now, we can go to the Q&A session. Thank you.

[OPERATOR INSTRUCTIONS] And your first question comes from the line of Cristian Ramirez with Larrain Vial. Please proceed.

Hi. Good morning, Patricio and Ricardo, and congratulations on your results for 2006. And I've got a few questions and I will ask them one by one. The first one is related to the kind of squeezing margins that we are seeing in your results. Even though year-over-year results are showing a positive trend in terms of margins, we see that, by year end, margins are kind of squeezing. And I would like to know what are you foreseeing for '07 and the years to come with regards to margins and, specifically, with regards to issues like energy costs, oil and exchange rates and other. Do you foresee that the increase in prices from all your product lines will be able to offset the increasing costs?

Thank you, Cristian. We'll answer the first question, then, regarding the margin in the fourth quarter. You are right and the main explanation are that the pricing of specialty plant nutrients were slightly lower in the fourth quarter of 2006 compared with the fourth quarter of 2005. Production costs, of course, were higher, as we have explained and therefore this affected the operation margin in this business line. Additionally, during the fourth quarter of -- the last quarter, we have a one-time charge of approximately $2 million related with the shutdown of the old prilling facility in Pedro de Valdivia that we are replacing by the new plant in Coya Sur that will be operating beginning of this year.

And also, regarding the old crushing system in Maria Elena, that also has been replaced by the new plant in [Otoco]. We are now in the start-up process of these two projects and we expect them in full production by the first half of this year. Regarding our projection for next year, we are expecting that we will recover our margins and they will be increased regarding what we saw in the last quarter.

Okay. The second question is related to the potential threat that you foresee because of the interest of [Mi Metals] to explore the lithium business in Tibet in China. They say that they might have reserves that will be the second largest in the world after the ones that you have in the Salar de Atacama. Do you perceive that as a threat in the years to come or do you think that it's only some news to take into consideration, but not to worry in the near future?

Regarding the lithium in China, we have always been aware of what is going on there and we have been following very closely. And clearly, they have been increasing their production in the last years. There are a couple of projects and they have not accomplished up to now what they have been promising to the market. And that was one of the reason of the volume in supply and demand in lithium in the last years. We think that they will increase their production. They'll continue producing more. But up to now, regarding the information that we have, we don't see that that should be a major supply for the market. On the other hand, we continue to see a very healthy demand for our lithium products.

Do you have an estimate of the cash cost of extracting lithium in China?

It's very difficult, as you may know, to have real numbers of cost in China. We have some estimate. Their operation are quite isolated, so they have important costs because of that. And also, they -- the process they have been using are, to some extent, some energy intensive. We would not disclose because it is very difficult to be sure about this -- our estimate.

And the final issue is related to your new CapEx plan, the one that we have been waiting for some time. When do you plan to release your new CapEx plan after 2008?

Well, we, as you know, we are planning to invest in 2007 in the range of $250 million. For the year 2008 and 2009, the estimates that we have, according to the projects, are in the range of $150 million each year. But we are working right now in trying to have a better picture on what projects and the timing, especially, of the projects that we are working on. And we expect from midyear to have a -- together with the issue of the 20-F -- our CapEx details.

And the final question, what is the kind of state of the expansion of the 48,000 tons in the lithium business? How is that working, the environmental impact study?

Well, regarding the environmental study at the Salar it is approved, so we have the approval at the Salar for all the brines. And regarding the plant itself in Salar del Carmen, we are in the process and we expect to get approvals in the next 60 days. We already have been working with all engineering and we continue to believe we will have it ready for 2008, end of 2007.

Okay. Thank you very much.

[Operator INSTRUCTIONS] Your next question comes from the line of Ben Laidler with UBS. Please proceed.

Hi. Good morning. Just two small questions. Would you talk a little bit about some -- the water rights issue. You seem to be having some -- a couple issues there. Just whether you have rights, the surface rights you do have. And secondly, just what you're seeing on freight costs, transport costs with whether these contracts are repricing and what sort of impact that might have.

Ben, Ricardo speaking here. Can you repeat the second question, please?

Just on your -- just on your freight costs, how those contracts are working and when they're repricing.

Which contracts, sorry?

Which contracts?

Shipping. Shipping.

Shipping. Okay. Well, starting with the last one, the shipping contract. We do have for our shipping contract -- most of them is in long-term contract -- two to three years -- that, depending what their estimation is, we renegotiate. For the year 2007 we have almost all of our shipping contract already negotiated and we don't see an important price effect of what we had last year.

Regarding the water rights, as we have explained in the past, we do have our water rights in line and -- for all our operation in the Salar del Carmen, in our Maria Elena, Pedro de Valdivia, Coya Sur operation and also in the first region. What happened in the last month and had some press coverage was that given that the Bolivian winter has not been with enough water, the Rio Loa has diminished its amount of water and the authorities wanted that all the people in the Rio Loa give some water for some towns down the river. And they are reviewing everything. We feel very confident that we don't have any problem with our water rights and any problem with that region.

Okay. That's great. Thank you.

[OPERATOR INSTRUCTIONS] And your next question comes from the line of [Chris Marvin] with Oak Tree Asset Management. Please proceed.

Good morning, gentlemen. Could you talk briefly about your market development amongst the automakers for their use of your lithium? Is it -- do you do it directly or do you it through intermediaries and are you getting more focus from North America or from Europe or Japan at this point? Thank you.

This has been an important issue for us. We see that the technology trends for the -- especially for the hybrid cars, as seen in the last time, going more to the lithium base batteries. So, we have been very interested in following what is going on. As today, as the consumption of lithium for that application is not that important. But we foresee that everything goes as energy experts are projecting the lithium use in hybrid cars would really become an important new consumption for lithium. So, it's important for us.

Given that we are supplier of lithium carbonate, which is the base chemical for the production of cathodes and afterwards the production of the battery itself, we do not deal directly with the automakers. We deal with the producer of cathodes and after -- and some with the producer of batteries themselves. But given the importance that this supply that could have in the future, we have had some direct contact with automakers in order to convey to them the availability -- the sureness of availability of enough lithium for this application in the future. That is what is more important for us -- to make sure that automakers really understand that if this application will grow as they're expecting, they do not worry that there will be enough lithium to supply to them.

[OPERATOR INSTRUCTIONS] And at this time, there are no more questions in queue. I would now like to turn the call back over to Ricardo Ramos for closing remarks.

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

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