智利化工礦業 (SQM) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the SQM 2007 second quarter earnings conference call. My name is Camilla and it will be my pleasure to 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 toward the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to the Head of Investor Relations, Mr. Patricio Vargas. Please proceed, sir.

Thank you Camilla. Good morning everyone and welcome to SQM's second quarter 2007 earnings conference call. For your information, this conference call will be recorded and it's 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, Patricio de Solminihac, Executive Vice President and Chief Operating Officer, and Ricardo Ramos, Chief Financial 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 facts 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 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 filings 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 this morning. I want to briefly go over the most important aspects that have defined the second quarter and later on we will go to the Q&A session.

Let's go to slide number two. In this slide we present the evolution of our revenues. On the left side you can see that second quarter year-over-year revenues increased close to 13% from $268m (sic - see documentation) to $322m in line with the trend of the previous year. Year to date, approximately 11% increase in revenues compared to the first six months of 2006. This is a result of higher sales volume in specialty plant nutrition and industrial chemicals and to higher prices of the lithium and iodine business.

At this point we believe that revenues during the second half of 2007 should be similar to those recorded during the first half of 2007.

In the slide number three you can see the evolution of net income for the first half of the year as well as for the second quarter of 2007. During the first six months of this year, our net income increased 25% reaching $94m. During the second quarter of 2007 we expect a similar increase of 24% compared with the second quarter of 2006.

Going to the next slide, number four, you can see the operating income evolution for the first half and for the second quarter of 2007. Year-over-year operating income grew 17% during the first half and 14% during the second quarter of 2007. The higher sales volumes in the specialty plant nutrition and industrial chemicals business and the price increases in lithium and iodine were partially offset by a higher production cost during the first six months.

Considering current market condition with a positive scenario for the fertilizer pricing, we think that the operating income for the second half of this year should be higher than the operating income of the same period of 2006.

Challenges. In the final slide let me summarize what I think will be our focus for the future. In the short-term we have to double our effort in cost reduction. We have been affected by significant gas shortages that had to be replaced by higher-cost alternative fuels. Because of this, we are focusing our most important efforts in the initiatives that improve productivity and save energy. We think this is our most important challenge in the short-term.

In the medium term, the lithium market is expecting new production from Chinese producers beginning from the end of this year, although it is yet -- it is not yet clear at this point exact volumes and timing of the additional production. Our own production capacity expansion of additional 12,000 metric tons should be ready by the second half of next year.

On the other hand, demand for lithium continued to be strong and in the next four or five years we should see additional increases in demand from lithium-ion batteries producers. This is because car manufacturers are in the middle of a process of developing hybrid and electric vehicles with the lithium-ion batteries, of which [experience] lithium carbonate is an essential raw material.

These two elements in supply and demand present an important challenges to us as well as for the whole industry as it will have an impact on market conditions that are yet to be assessed. We think that with the largest reserve within the other (inaudible), SQM is the best player to capture the future growth in this market.

In the long term I think we have a very clear pathway. We have continued strengthening our leading position in our main business line because no one has the scale, the reserve, the financial resources, the synergies both productive and commercial and the knowledge to capture the growth in the years to come. Finally, let me say that at SQM we are happy with the result we have achieved in these past seven years. We think we have done a good job. Now we need to figure out how to maintain this for the future. Thank you.

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

Thank you. (OPERATOR INSTRUCTIONS) And your first question comes from the line of [Don Karodkoski] with Schroders. Please proceed.

Good morning. I've got a question on your gross margin, and especially in specialty fertilizers. It looks like there was significant gross margin compression quarter-over-quarter and indeed year-over-year. Is that sustainable? Do you think that pressure is sustainable over the rest of the year? And I take it the reasons for that is just the price of gas. That's the first question.

Well as you say, that (technical difficulty) the market had not been last year very -- the pricing scenario has been relatively stable for us because [dollar] prices last year were weak and we were able to sustain our prices before that. So now we will see for the future a better pricing scenario of pricing in the quarters.

So having maintained more or less stable our pricing scenario in the last 18 months, and on the other hand we have been highly pressed by the energy costs, clearly margins there have been affected. We think that in the future, in the near future, that could change, on one hand because the market continued to grow in prices so we should continue that trend from now onwards.

But clearly, we will still be affected by cost of energy as we already said and state, make a statement on that. But we are working on that. But clearly today we have almost zero gas. So we are in the worst scenario unless [oil] prices continue to go up.

So under the current scenario would you expect a similar gross margin that you've had in the first half to continue into the second half, specialty fertilizers?

I think gross margins should start to go up because the market scenario really is improving and prices so we will continue that trend. And if the situation of oil doesn't go up any longer and further, we should be able to maintain our cost at least.

Okay, great. And second question is on your SG&A. You've shown extremely good cost retention. Could you talk a little bit about where you expect SG&A costs to go for the rest of the year and what sort of efforts you're making to reduce costs?

We think it should be in the same time we have already. We don't see any change for better or for worse.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Francisco Errandonea with Santander. Please proceed.

Hi. Good morning everyone. I have two questions. The first one is related with the iodine business. You mention in your press release that there is an increased capacity, or production sorry, from other Chilean players. Do you have any estimate on the capacity and demand balance in this business for this year and the next one?

And the second question is related with your CapEx program. Do you have any update on your CapEx program for the next year?

Related to the iodine I will just say that there has been growth in demand this year in the range of 3% to 4%. But (inaudible) are straight in there and have been captured most for our competitors. So we have made the balance to [equiliberate] of supply and demand.

We think we will sell this year slightly less than last year's [25]. But the market is still continuing to grow. Prices have been growing too compared this year to last year. So adding and subtracting, the iodine has been better than last year.

Related to the CapEx I will ask Patricio de Solminihac to talk about it.

Well as we have comment lately, we continue with our three-year program for a little bit over $600m. This year will be an, in total, investment will be in the range of $220m, mainly finishing the big projects we started last year and also starting the new projects and the expansion of -- on lithium carbonate and also the new plant for potassium nitrate. And on the third one that we started this year is regarding the [Gray Road] update.

Regarding the next year, we'll continue with the plan. We have not included new items today. But of course we'll continue working in projecting the investment program for the years to come.

Thanks, but regarding iodine, just to clarify, in the next year do you expect other Chilean competitors to produce more than this year?

No. Our estimate in terms of nitrate, I think they are in the -- they have caught the capacity production more. And in the case of iodine, we have not seen any project now being presenting or developing to increase capacity.

Thanks.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Francisco Schumacher with Raymond James. Please proceed.

Hi. Yes. Well I have two questions. One is regarding lithium prices. What is more or less the market price of lithium nowadays, because it surprised me a little bit, the average price of the semester and regarding the guidance you have gave us in the first quarter

And the other question is regarding iodine. Well I know that [Atacamon Minerals], for example, is expanding its production capacity by year-end by 500 metric tons per year. It's changing heap leach to agitated leaching and how that may affect your possibility to increase your iodine production.

Okay. Just first on the lithium market has been very positive this year, with supply and demand quite [equiliberate] and we are selling more volume than last year in -- related to lithium carbonate in solution with lithium. Prices also have increased. We are in the range of $5,500 to $6,000 per metric. In that range our prices are at this stage.

Related to the iodine, we have studied that project and we are not that optimistic that that project would produce that much as you are say. We think that it will be significantly less than that.

Okay, thanks. And regarding lithium volumes for second half?

We think it's going to be in line with the first semester.

Okay. And then the average price of your lithium business is basically increased by higher sales of derivatives.

We are selling -- if we had what we had in solutions and we had -- when we are producing dilithium or selling dilithium carbonate there is increase in volumes compared to last year. And also, I already said about pricing too. So -- and also, we're selling lithium hydroxide more this year then it has higher revenue stream.

What's your market price, more or less of lithium hydroxide?

That is -- we don't disclose.

Oh, okay. Okay. Thank you very much.

Your next question comes from the line of Jamie Nicholson with Credit Suisse. Please go ahead.

Hi. Thank you for the call. I joined a little late so I'm sorry if you've already addressed this. I'm wondering if you could give a little color on your dividend policy? Specifically whether you are focusing on a certain payout ratio or more of a fixed amount, particularly given that one of your shareholders has a bond issue that depends on this dividend stream. Can you give a little color on that please?

Well the policy that shareholders have defined during the last year, 65% on the net income. And also that was approved in the last shareholder meeting. We know clearly that it's not much that you can make comments on that. So what we will decide in the last shareholder meeting is to maintain the policy on 65% dividends on net income.

Okay. And then given your CapEx budget and your -- I don't know whether you're expecting working capital uses or needs, but what do you expect your free cash flow to be like this year? Do you expect positive free cash flow after dividends or what's your expectation for the year?

If we think about the CapEx program that we have defined for 2007 and through 2009 in the range of $600m and we see the depreciation on one hand, the net income that we save plus already the [most] of SQM we have put in the market, we think we can maintain that policy as management commanded that policy.

Okay, and maintain roughly positive free cash flow as you have in the last several quarters?

Well we think that we have -- we are increasing our debt as a Company. But on the other hand, also, the [value] of the Company is increasing so we think we should maintain the ratio between 1 to 1.4 divided -- net debt divided by EBITDA.

Okay, great. Thanks very much for the color.

(OPERATOR INSTRUCTIONS). And at this time we have no more questions in queue. I'd now like to turn the call back over to Mr. Vargas for closing remarks.

Thank you, Camilla. 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 joining today's conference. This concludes the presentation. You may now all disconnect. And have a great day.