智利化工礦業 (SQM) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2007 SQM earnings conference call. My name is Katrina and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Patricio Vargas. Please proceed.

Okay. Thank you, Katrina. Good morning everyone. First, I would like to apologize for the delay. We've been trying to connect for more than 20 minutes, so I really apologize for that. It was Thomson's mistake so we will make sure it does not happen again.

Welcome to SQM's third quarter 2007 earnings conference call. For your information, this conference call will be recorded and is being webcast live. You may access this webcast later on at our website, www.sqm.com. Joining me this morning as speakers are Patricio de Solminihac, Executive Vice President and Chief Operating 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 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 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 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 de Solminihac.

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 aspect, which has defined this third quarter result and later on we will go to the Q&A session.

The slide number two, we can see the evolution of our revenues. On the left side, you can see that third quarter year-over-year revenues increased 19%, from US$271 million to US$322 million. This increase was stronger than the trend observed in the previous year, due mainly to higher sales volume of potassium nitrate to China, and blended fertilizers in Chile. In addition to this, we also benefit from better pricing conditions. Year-to-year, the approximate 14% increase in revenues compared to the first nine months of 2006 is the result of higher sales volumes in Specialty Plant Nutrition and to higher prices in the lithium and iodine business. At this point, we believe that revenues during fourth quarter of 2007 should be similar than those recorded during the fourth quarter of 2006.

Going to slide number three we can see the operating income evolution. Year-over-year operating income grew 17% during the first nine months and 16.9% during the third quarter of 2007. The higher sales volume in the Specialty Plant Nutrition and the price increase in our business line were partially offset by higher production costs during the first nine months, mainly due to energy and raw materials. Exchange rates continue to affect us as the Chilean Peso appreciated against the US dollar compared to the same quarter of the previous year. And so far, the trend continues in the fourth quarter. Considering current market condition with a positive scenario for the Specialty Plant Nutrition partially offset by the higher operating costs, we think that the operating income for the fourth quarter of this year should be higher than the operating income of the same period of 2006.

In the slide number four we can see that during the first nine months of the year our net income increased 21.3% compared to the previous year, reaching US$135 million. Similarly, during the third quarter of 2007, we experienced an increase of 14.3% compared to the third quarter of 2006. With this quarter we can achieve the 26th straight quarter in which our quarterly earnings has been higher than those of the same quarter of the previous year. The challenge now is to maintain these trends.

In the final slide, number 5, we summarize what will be our focus for the future. We mentioned this in the past conference call but I think it's worth releasing. In the short-term, one of our main focus is to reduce our production costs. We have to implement different initiatives that will help us in the following year. Natural gas supply from Argentina is very unlikely to improve. Oil and electricity costs are not bound to decrease in the foreseeable future and the exchange rate is not going to help us anytime soon. Therefore, our efforts are focused on initially to improve productivity and save energy. We believe this is one of our most important challenges in the short-term.

In the medium-term, the lithium market is expecting new production from Chinese producer, how much and when is hard to tell. Demand for lithium, on the other hand, continues to be strong and in the next four, five years we should see an additional increase in demand from lithium ion battery producers. This is because car manufacturers are in the middle of a process of developing hybrid and electric vehicles with lithium ion batteries, for which SQM lithium carbonate is an essential raw material. Though we still need to assess the impact on timing of these two elements in supply and demand, we think that with the largest reserve within the Salar de Atacama, SQM is the best positioned player to capture the future growth in this market. Fertilizer market is strong and is expected to continue with the same positive trend. This situation should be reflected in better margin for our Specialty Plant Nutrition product for next year. In the long-term, we'll continue strengthening our leading position in our main business line because no one has the competitive assets that we have in this business. Thank you.

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

Thank you. [OPERATOR INSTRUCTIONS]. Your first question will come from the line of Dan representing [Schroeder]. Please proceed.

Hi, I've got a couple of questions. The first question is can you give us an update on where you are in terms of your capacity expansion in each of the product lines and what the timing for the capacity expansions are? And then could you also -- you commented on the possibility of new Chinese production, can you tell us how you are going to approach the market? Does that mean that you are going to drop volumes to maintain pricing or would you expect pricing to be impacted by the new Chinese capacity? Thank you very much.

Thank you. Regarding capacity expansions, starting with lithium, we are in the middle of contraction of the new capacity of our lithium carbonate operation. We expect to have that ready by the middle of next year or before the middle of next year, and that will allow us to get over 40,000 tons of lithium carbonate capacity. We already have the capacity at the brine level at the Salar, and what we are building now is the plant that will produce the lithium carbonate itself.

Regarding iodine we do have the capacity already in place, so we are not right now increasing the capacity of iodine. We do have idle capacity to respond to the market growth. And regarding Nitrate we are working in the increasing capacity, we are finishing now the engineering and to start the construction hopefully beginning of next year of the 300,000 tons of potassium nitrate new capacity.

On the second question, regarding the new lithium production in China, as everybody knows, getting real hard facts on the Chinese is sometimes difficult. We have been following, of course, that very closely; and up to now what we are seeing is that the volumes that the Chinese producers have announced, they have not been able to produce it yet in the amount and in the quality that they announced. We are, as I said before, following very closely to see really how much volume they will be able to put in the market. So, right now we have seen, of course, the effect within the Chinese market. And we have [diminished] some of our sales within China. We have not seen the effect on our volumes in the rest of the world.

So just one follow-up question. When is the potassium nitrate capacity coming on stream, the new capacity, the 300,000 tons?

Yeah. We, as I have said before, we've finished the engineering. We are working with the [bits] in order to try to start production. This will start the building up. There is a strong competition on all the new projects for cooperating within our country, so we expect that we will be ready for sure in 2010, it will take almost two years to have it completely up and running.

Thank you very much.

Your next question will come from the line of Felipe Mercado representing Santander Investments. Please proceed.

Hi, good afternoon, a couple of questions on prices. What are your expectations on, potash prices looking to 2008, considering that or if -- do you believe that the potential closure of Uralkali's Berezniki mine could contribute to a hike in potash prices, considering that it represents some 10% of the global potash demand? Thanks.

Well, there is a lot of noise on what you just asked. We of course, look forward to what will be going on. The main problem is not really the production of the mine itself, it's their transportation system. And we have seen information coming out from the company itself, that they are not sure that they will continue to get -- to be able to get the product out to their customers, but at the same time they say that they can improve that in some months, doing a new [railway].

On the other hand, also PCS announced last Friday that they will stop selling new contracts until they see what happens. And simultaneously all the new negotiation of potash producer are starting, I think, with the Chinese, which is a very important signal of what is going with the potash price for next year. This year already potash price went up a lot. Our estimate again, looking from a very small player in the market as we are, is that the price will continue to go up. We really don't know exactly how much; will depend on what happen in reality with the Russian producer, and second what happen with the negotiation with Chinese.

Thanks a lot.

Your next question will come from the line of Jamie Nicholson representing Credit Suisse. Please proceed.

Hi, thanks for the call. Can you give us what your CapEx spending was in the fourth quarter in your budget for '07 and '08 please?

Okay. Our CapEx in 2007 will end up in the range of US$200 million. We are doing a lot of work during the fourth quarter. So we are thinking that we will be finishing, as I said before, in the range of US$200 million. And regarding 2008, we have a budget that will -- is in the range of US$200 million. We are working on the details now to have the final numbers for in our budget for next year.

Okay. And then what was the amount spent in the third quarter? And also if you could give me what your gross dividend amount was that was paid out in May? Thank you.

The CapEx during the third quarter was around US$50 million and our payout dividend is 65% of our net income and we pay in May, close to US$90 million.

Great. Thank you very much.

Your next question will come from the line of Felipe Tornero representing BCI. Please proceed.

Hi, everyone. My question is that a few weeks ago, appeared in the newspaper that you were in possible conversations with CODELCO in relation to be one of the consumers of the new natural gas plant in Mejillones. Can you tell us something about that? Thanks.

Yeah, we have talked in the past with CODELCO but the project is really very focused on trying to give liquefied natural gas and natural gas to electricity production. We have not continued the discussion because they want to focus on that in the project.

Okay. Thank you very much.

Your next question will come from the line of Alvaro Pipino representing IM Trust. Please proceed.

Hello, everyone, this is [Emilio Andrade [instead of Alvarez]. What, in specific, action are you taking to improve energy consumption yield, and when do you expect to succeed with these improvements?

Well, regarding our energy, we are working in different fronts. The first one is in all our plants we are trying to increase efficiency. We are working with all our energy consumption equipment to make sure they are operated at the best efficiency rate. That is something from operational point of view.

Second, we are working, of course, in trying to use the more efficient from a cost point of view, final cost point of view, fuel. So, if originally we used natural gas and we do not have natural gas, immediately we have to move to diesel now. We are moving all our equipment to try to consume not diesel but fuel oil, which is much more cost efficient.

Then a third front that we are working is to make sure that we will not run out of electricity, which means that in case that there are some kind of rationalization or blackout in the north we are able to continue with operation, and that we are putting some [own engines] to be able to continue to operate with our own electricity in this percentage.

And finally, a very important consumption for us is in the mining equipment. The equipment that -- the mobile equipment that operates with diesel. We also have implemented important controls to make sure that the efficiency of those mobile equipments are in line with their best practice.

Thanks.

[OPERATOR INSTRUCTIONS]. Your next question will come from the line of Will Hunter representing Neuberger Berman. Please proceed.

Good morning. You guys mentioned that -- in your release the expectation for higher sodium nitrate volumes. I wondered if you could just talk about the nature of the solar project in Spain and how big of an opportunity this could be for you guys?

We are working now in delivering the product that we sold for the first project. We have delivered already half of the order. We are very optimistic - [I think] would like to be very optimistic about this opportunity. We think that the mixture of potassium nitrate and sodium nitrate is a very, very good fluid for this application. The first time that a massive application will be used this fluid, and we think that will work fine and we are expecting that new projects will follow this deploying in Spain and we'll have a new application for our sodium nitrate. But the size will depend exactly on how many projects of this electricity production are built.

Okay. Thanks.

There are no further questions at this time. I am sorry. Your next question will come from the line of [Eugene] representing Longbow Research. Please proceed.

Good morning. I just have a couple of quick questions. If you can just provide some more color on the natural gas situation in Argentina and what's changing there? What do you expect to change?

Well, even though we are a neighbor country, it's difficult to us to really have a good grasp on what is going on in Argentina for the future. Right now, what we know is that we have been for many months without any gas. Sometimes we don't expect it and we get some, depending on how the demand in Argentina is. Unfortunately we don't have hard facts that could allow us to project what will be in the future. From our strategic point of view, we are planning as we will not get any gas next year.

Okay. Thank you. And then another question if you can just talk about incremental capacity in China, I'm talking about lithium capacity that the Chinese brought on line this quarter and year-to-date? Thank you.

Well, the main production in China for lithium is from [ispodomine] from minerals and they are increasing their capacity. We have seen a new plant getting in production with local [ispodomine] and as well as with [inaudible]. And the other new capacity that we have not seen yet important volumes are from their project based on brine. So as we have explained at the beginning, we are following this very closely, but we have not seen yet very, very important volume as they promised to have.

Okay. Thank you.

Gentlemen, there are no further questions at this time.

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

Ladies and gentlemen thank you for your participation in today's conference. This concludes your presentation. You may now all disconnect.