智利化工礦業 (SQM) 2007 Q1 法說會逐字稿

SQM First Quarter Earnings Conference Call. Your speaker will now be Patricio Vargas.

Okay, good morning everyone and welcome to SQM's First Quarter 2007 Earnings Conference Call. First, I would like to apologize for the delay. Apparently, Thomson had some technical issues that we hope will not happen again. And for your information, this conference call will be recorded and is being webcast live. You may access the webcast later at our website www.sqm.com. Joining me this morning as speakers are Patricio Contesse, President and Chief Executive Officer; 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 and 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 facts are forward-looking statements as thus 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. This morning, rather than presenting analysis of the first quarter, which we can address in the Q&A session later, I want to touch some issues regarding what we expect for the rest of the year. The specialty plant nutrition business, we expect an important increase in sales volume this year, between 7% to 10% compared to the previous year.

As it was stated in the third quarter release, our sales volumes during the first quarter of 2007 were lower than last year due to a delay in our shipment to Brazil. Therefore, we expect a significant increase in sales in the last three quarters of the year compared to previous year. The most important volume increases are expected to come from the water soluble segment, mainly in Europe, Mexico and in the United States.

Regarding prices, we expect the average prices are going to be similar or slightly better this year even considering the additional sales volume. As we have explained before, price behavior in the specialty plant nutrition business is different to that of commodity fertilizer. Prices are more stable and do not suffer the volatility of those markets. As a consequence, [as explained] more stable scenario has been able to steadily increase prices during the last three years.

In terms of iodine, we expect that sales volumes for the last three quarters of 2007 will be similar to the last three quarters of the last year. Considering the volumes in the first quarter 2007 were lower than the first quarter of 2006, sales volume for the full year should be lower than in 2006. The expected demand increase for the year 2007 was mainly captured by the iodine producers during the first -- by our iodine producers during the first quarter. In terms of pricing, we expect our iodine prices for the last three quarters should be slightly higher than in the first quarter of this year.

Finally, the lithium business, we expect an important increase in volume in the first quarter of this year compared with the first quarter 2006. Considering our current capacity constraint, we expect that lithium sales volume for the full year should be similar or slightly lower than in 2006. Therefore, volumes for the last three quarters should be lower than those registered in the same period of last year. The demand growth for the year 2007 should be captured by additional volumes coming from China.

As you know, we are working on the expansion of lithium carbonate facility with a total capacity increase of 40,000 metric tons that is expected to be ready by second half of 2008. And we expect, considering the tight supply scenario, we have been facing in the last two years, the price of lithium carbonate has continued to increase. Prices for the first quarter were significantly higher than the prices prevailing in the same period of 2006. And we expect that prices for the last three quarters of the year should be at similar level of the first quarter 2007.

As detailed in our earnings release, we have recently updated our CapEx program, which should be approximately total $230 million during 2007 and the main projects will be the completion of the Maria Elena project, the investment in a new potassium nitrate production facility at Coya Sur; the completion of the granular and prilling facility located at Coya Sur; the renewal of our railroad and rolling stock, the investment in the expansion of lithium carbonate production and the Salar de Atacama operation; the development of new mining areas at Pedro de Valdivia and various projects designed to maintain capacity, increase yields and reduce costs. Additionally, we expect to invest approximately $400 million in the following two years.

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

Thank you, sir. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Francisco Errandonea with Santander. Please proceed.

Good morning. First, congratulations on the results and my question is related with your CapEx plan. I don't know if you can give us a little more color on this $230 million CapEx plan, on the capacity that it will change, on when this new capacity will come into stream?

Francisco, Ricardo Ramos speaking here. First, as you know, probably the most important one in capacity is regarding -- is related to lithium. You know we expect to be producing, to have a total capacity of lithium in excess of 40,000 metric tons during second half 2008. In nitrates, you know we are with a new project in the first region, that is Nueva Victoria and we expect to have a full capacity with the new potassium nitrate facility in Coya Sur in order to produce between 200,000 and 300,000 metric tons of additional nitrate.

And in the iodine, you know we completed our investment during last year and we have the capacity now to produce close to 11,000 metric tons of iodine per year. It is important to consider that also in the capacity idea, we have the project related to the new granular and prilling facility in Coya Sur that would allow us to have the new capacity in order to increase our production.

So there is no other additional operations included in this $230 million?

No, if you consider the three years' outlook projects and between $600 million and $650 million, we are not expecting during this period to increase again our capacity, means to reach in excess of 5,000 in the lithium, to be close to the 11,000 in the iodine and in the nitrates, to have this 300,000 metric tons of additional capacity.

Okay. Thank you.

Your next question comes from the line of [Gavin Tippenton] with Deutsche Bank.

Hello, good morning. Patricio, could you give us a bit more details on the cost side? We have seen some cost pressures as of late. I would like to know if you could give us some more color on the percentage of peso-related costs? Also on the energy side, fuel and electricity, you have an estimate of how much that is going to be affected during 2007 and perhaps going forward?

And also if you could give us some color on the costs of transport? We have seen the Baltic driving go up somewhat as of late. However, Vapores, which is a shipping company here in Chile, has mentioned that container tariffs have been going down and PCS has signaled that they have seen increases in transport. I just would like to get a feel of how much of that that could affect and if you have seen cost pressures there? And if there are any other costs that you think would be relevant to monitor going forward?

First of all, I just say that regarding costs in general, we think that this year should be in the same range as we were last year. We don't see an increase in costs considering all the factors that you have tell us. Related to the Chilean peso, we had approximately $180 million that are related to Chilean pesos expenditure. So 180 -- $180 million in that range.

Related to the energy, last year for us was a very expensive year because we had a significant growth of gas, expense, diesel and fuel in a very considerable way. Today, average of energy generally has not been higher than last year, even the first January and February, they were lower than last year. And so on average, we think that this year [concerning] oil, and gas, whatsoever should be in the same range. The electricity we have considered, we depend on the final arbitration whatever we have probably will be higher than last year. But considering those factors, we still maintain that our costs of our material will be in the same range than last year, not high.

And then related to cost of transport, we have some contracts already settled for the year, so we don't see new costs of transportation on the logistics going up because most of our volume already have been set. We have some spot but they are not that significant that it could change the return of the value of our product FOB [ inaudible]. So just I repeat again the first statement I make that, that size we don't see until now any trend in new variables, that we have not seen any change in that respect.

Your next question comes from the line of Cristian Ramirez. Please proceed.

Good morning, Patricios and Ricardo. I have a follow-up question from what Gavin asked. If there are -- I saw a very important increase in your operating and EBITDA margin in the first quarter. When you compare it to the last quarter of last year and I wanted to know what was the improvement in terms of cost that are triggered this increase in margins? That's the first question.

I just say that in terms of cost in the last quarter, same as last year, in iodine were slightly lower and in lithium they were slightly higher. But if we put all the variables in and mix, the total costs of the company were in the same range. So the margins didn't change for cost -- were not diminished by cost and were basically driven by pricing.

Okay. And with regards to that, could you please clarify what is the current average price for iodine and iodine derivatives in first quarter '07?

Cristian, Ricardo Ramos speaking here. You know we try to have a complete release about pricing every six months.

Yes, I know.

You know that. But I can tell that our pricing in the iodine business in the first quarter is something between $23.5, $24. That's the average price for --

Okay, more than enough. And I would like to know if there are some changes with regards to your environmental impact study for increasing the capacity in lithium? I can remember that it was something close to 48,000. Correct me if I am wrong.

No, we are asking for that environmental permission but the volume has not changed.

Okay, and finally, what is the level of sales that you expect this year for lithium hydroxide?

We have about the same as last year.

Okay, thank you very much.

In the range of 4,000 metric tons..

Okay, thank you.

Your next question comes from the line of [John Westmont]. Please proceed.

Hi, good morning, good quarter guys. I was hoping that you could discuss some of the permitting hurdles associated with the lithium plant expansion? You could speak to lithium volumes and average realized price for carbonate, hydroxide and chloride in the quarter and maybe just discuss the potential for Chinese lithium, carbonate production coming from the brines into that, if you've heard anything from that front? Thank you.

We think that prices -- not we think -- pricing in lithium in general has decreased more than 20% compared to last year. Related to our capacity, we have already state that this year will be more or less the same than last year and the new capacity will be on stream from mid-2008 onwards. Regarding the China has been increasing their capacity on a [mineral] base significantly, it will continue probably to do in the future and how much, that is the big question here. Because they have announced [plenty time]sometime it has been been successful, sometimes not. But clearly the announcement of more production of lithium in China and exactly what will be is hard to tell.

Okay, and can you just discuss the permitting issues with the lithium plant expansion?

Well, we had a approval already, environmental approval, to [pump more potash] in Salar de Atacama that would permit us increase our capacity of lithium volume in the future, also some at [Fino Pitu] and we have also asked for the permission in the authority to increase our capacity in the plant up to 48,000 metric tons from the 30,000 metric tons we have.

Okay.

We don't foresee there any major problems why this should not be approved. So that is why we are -- part of our CapEx program to make this investment and to be -- install this capacity by the mid-2008.

Thank you very much.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Dan Kwiatkowski with Shroder. Please proceed. Mr. Kwiatkowski?

Hello, I am sorry about that. I believe you have got a lithium contract rolling off in March of this year, something like 4.2 thousand tons? Is that correct?

Yes, that contract has ended. Last year we sold to that contract slightly more than 4,500 and we sold to that contract during the first quarter 1.4 thousand approximately and that has ended.

So what will the impact be on your average price going forward? Because obviously that was done at a lower price than this one?

The average will increase significantly because we were selling approximately that volume in 1,500 and prices are over 5,500.

Excellent. Okay. Second question is, I mean a real feature of your results was your cost control on the SG&A level, not on the gross margin level. Are these cost savings that you had in the first quarter, are they sustainable going forward and is this a sort of sustainable level of SG&A going forward?

No, we think that it is reasonable to expect that total SG&A costs and taxes for the year '07 will be at the same level of '06.

In nominal terms?

In terms of -- in total terms. In terms of purchases. Of revenues, it will be slightly lower.

Yes, excellent. Okay. And that was it. Well, thank you very much.

Welcome.

There are no further questions in queue at this time, sir.

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

Thank you for joining today's conference. You may now disconnect. Good day.