智利化工礦業 (SQM) 2007 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the SQM Full Year 2007 Earnings Conference Call. My name is Mike, and I'll be your operator today. At this time, all participants are in a listen-only mode, and we will be taking questions at the conclusion of the presentation.

(OPERATOR INSTRUCTIONS)

As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Patricio Vargas, Vice President of Finance and Investor Relations. Please proceed.

Thanks, Mike. Good morning, everyone, and welcome to SQM's full year 2007 earnings conference call. For your information, this conference call will be recorded and is being webcast live. You may actively look at it later on 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 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 de Solminihac.

Good morning, everyone. I would like to thank you all for taking the time to join us today. I want to briefly go over the key indicators and highlights from the four quarters, and then we'll go to the Q&A session.

I will start with revenues on slide number two. In 2007, we recorded a revenue increase of around 14%, both in the fourth quarter and in the full year with respect to 2006. Revenues climbed to over $300 million in the fourth quarter and nearly $1.2 billion for the year, making the eighth consecutive year of revenue growth.

A significant part of the growth in revenue was driven by pricing in just about every business line. We have seen an increase on the order of approximately 9% in the Specialty Plant Nutrition segment. Our Lithium prices increased close to 50% in the year. We also saw higher prices in our Iodine and Industrial Chemicals business.

Specialty Plant Nutrition price increases were part of a worldwide phenomenon in the market for potassium-based fertilizer, where demand is growing and supply is tight. We started to see the positive effect of pricing reflected in our results during the third quarter of 2007, and the effect in the fourth quarter was even greater. Prices for the quarter were approximately 20% higher than they were in the fourth quarter of 2003.

We believe we will continue to see price increases in 2008, which is why Specialty Plant Nutrition should be an important driver of our revenue this year.

In addition to higher prices, we also saw an effect on the volume side. We sold more potassium nitrate in China and in Brazil than we did in 2006. And in Europe, weather conditions were better in 2007 than they were in 2006. So demand in that market improved, and we sold more water-soluble potassium nitrate.

Volume in the Lithium business were slightly lower than they were in 2006, but the pricing more than made up for that. Sales volumes of iodine were lower in 2007, but the pricing helped make up most of the difference. Finally, we expect to increase our iodine volume sales in 2008.

From the next slide, slide number three, you can see how operating income has grown progressively over the past four years. In 2007, we achieved 18% growth in our operating income for the full year, with higher prices being partially counteracted by operating costs.

The costs that are adding the most significant impact continue to be the same three -- energy, raw materials and Chilean peso denominated costs. We'll repeat practically no natural gas from Argentina in 2007. So we have to use diesel and fuel oil as a permanent source of energy. And as we have mentioned before, these are considerably more costly than natural gas.

We also continue to see price increases in raw materials, especially sulfuric acid, sodium carbonate and sulfur. Those prices more than doubled in the last couple of years.

And the sustained appreciation of the Chilean peso against the U.S. dollar has had material effect on costs in Chilean pesos, which were slightly more than 20% of the total cost of the year.

A solid performance on the revenue side in 2007 helped to offset the rise in costs, but we must continue with our cost containing efforts. These continue to be an absolutely fundamental part of our strategy, and we will maintain our focus on cost-cutting initiative and on improving our productivity.

Moving to the slide number four, we can see that net income for 2007 was $180 million. That is 27% increase over 2006, and we achieved this through a combination of higher operating income which, as we saw in the last slide, increased 18% in the year, and on lower non-operating loss in 2007 than in 2006.

On the non-operating side, one of the most important factors that was the effect of lower average debt during 2007, causing our financial expenses to decrease 28% year-over-year. Overall, our non-operating loss decreased close to 25% for the year.

Before we go to the Q&A, I would like to touch on a few key points, summarizing 2007, and looking ahead to 2008 and beyond.

Please go to slide number five. Between the years 2004 and 2006, SQM's growth was driven largely by iodine and lithium. In 2007, lithium continued to experience impressive growth in revenues, over 39% in the full year. But we also started to see the effect of an important trend in fertilizers. We have seen a strong increase in prices, and we believe there are more to come.

This is just the result of a simple supply and demand economics. As I have mentioned, supply in world potassium market is tight, and as long as people want better agricultural products and as long as farmers want to improve the return on their land and their investment in farming technology, demand will continue to grow. Therefore, we expect that 2008 will be significantly better in the fertilizer business.

I think it is important to comment on the challenges that are coming up in the lithium business. As we have mentioned a number of times in the past, Chinese producers have been expanding their capacity. So we will have to wait and see what happens there during 2008.

We are confident about our long-term advantage, especially given our advantages on the cost side as well as the quality of our reserves. We are optimistic about long-term potential in this business, given the substantial growth in rechargeable batteries and, of course, the potential coming from hybrid and electric cars.

The other significant challenge comes from our production costs. As I mentioned before, energy costs continue to be an issue, and we also have the raw material costs and the appreciation of the peso to deal with.

Looking ahead, in light of our view of what's to come in our core business line and also taking into account the importance of our cost-cutting initiative, our CapEx plan is focused on capacity expansion in potassium nitrites and lithium, as well as increasing productivity across all our operations.

Thank you very much. We'll go over to the Q&A session now.

Thank --

Mike, sorry. Yes, we may go to the Q&A session.

Thank you, sir.

(OPERATOR INSTRUCTIONS)

And we have a question from the line of Felipe Tornero with BCI. Please proceed.

Good morning, everyone. My question is if you have an amount or estimation for the cost by the earthquake that happened the last quarter? Thank you.

Well, we did an effect on the earthquake in our plant, physical plants. We did not have that much damage. We did have some stops. We have to stop some of our plants for some days, and all of those costs was reflected during the fourth quarter that we already reported.

We have some damage in our camp, and that will imply an investment to repair the camp in the range of $2 million. But at the same time, we decided to accelerate our project of a new camp for single workers, and that will start to be built during this year.

Thank you.

(OPERATOR INSTRUCTIONS)

We have a question from the line of Chris Willis of Impala Asset Management. Please proceed.

Good morning. Just a quick question about lithium pricing. Have you begun to see any weakness in lithium pricing early in this year, and are you beginning to see any incremental volumes coming out of some of your competitors, particularly after the strong price run of 2007?

We do not really have any new information of what we commented in the last quarter regarding what is going on in China. Everything that could happen on the prices, as well as on the volumes, will depend exactly what the actual production of the new projects in China are.

For the first quarter of 2008, we are seeing a little bit of pressure on the price of lithium, but as we expected. So we really do not see something different of our original expectations.

Okay, thanks. Next, if I could ask a follow-up, if I'm still on the line here? Can you just talk a little bit about your energy situation? Can you run without Argentine gas, and is it just simply a higher cost from different sources, or is there any contaminant issues that might occur if the gas situation is continued in the region?

Yes, as I explained in my previous talk, we almost did not have any gas during 2007, and the year before, we took all the necessary steps and investments to make sure that all our equipments are able to run not only on natural gas, but also on diesel or fuel oil. We tried that most of them are run on fuel oil, but some need to be run on diesel, a cleaner fuel.

But the answer is, yes, we can run completely our operation without any gas from Argentina, but, of course, at the highest cost, which is what we are facing today. And our challenge in that respect is to try to be more efficient from an energy point of view and more productive, which our work is in that direction.

Great. Thank you very much.

(OPERATOR INSTRUCTIONS)

Mr. Vargas, currently no other questions.

Okay. Then thank you all very much for joining us today. We hope to have you with us in the next conference call.

Good-bye, everyone.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. Thank you very much, and have a very good day.