智利化工礦業 (SQM) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to SQM's Second Quarter 2008 Earnings Conference Call. (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, Vice President of Finance and Investor Relations. You may proceed, sir.

Thanks, Erica. Good morning, everyone, and welcome to SQM's Second Quarter 2008 Earnings Conference Call. For your information, this conference call will be recorded and is being webcast live. You may access the webcast later on our website, www.sqm.com.

Joining us 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 fact 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.

Thank you, Patricio. 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 for the first half of this year, and then we will go to the Q&A session.

Beginning on slide number two, we can see that our revenues for the first half grew 40.9% with respect to the first half of 2007, totaling $787 million.

In our earnings conference call for the first quarter of this year, we highlighted the importance of potassium chloride, or potash, price increase for SQM to 2008 results in the specialty plant nutrition and potassium chloride business. During the first quarter, we saw important price increases being announced in the market. That trend continued during the second quarter, where large potash producers settled important sales contracts, and price increases were announced for markets all over the world, including China, North America and South America.

Some of the price increases that have been announced will go into effect during the third or fourth quarter of the year, which means that during the first half we still haven't seen the full extent to which our results should benefit from the favorable price scenarios.

The increasing prices allow us to achieve revenue growth of 62% in our specialty plant nutrition business and 96% in our sales of potassium chloride.

In addition to this strong performance in the fertilizer businesses, we also had positive development in our iodine business, in our iodine division, where revenues grew 15% on the back of higher sales volumes. These results are better than we expected, and we believe volume will remain as strong in the second half of this year.

In the past few years, we have been seeing demand growth of around 6% per year in this business, and we now have a new application for iodine salt within the agrochemical segment. So demand will continue to grow.

Our outlook for lithium volumes for 2008 is also better than we originally expected. Last quarter, we said volumes should be slightly lower than they were in 2007, and we now believe total volumes for the year will be similar or slightly higher than 2007 levels. We continue to see solid demand in this market, with batteries being the most important end use with two-digit demand growth.

With the use of lithium-based batteries for vehicles looking increasingly more promising, we believe the battery market will keep increasing in importance--

Hi, everyone. We apologize for the inconvenience, we had a problem here on our end. So we will continue -- Patricio will continue right where he left.

Going back to our lithium comments. Our outlook for lithium volume for 2008 is also better than we originally expected. Last quarter, we said that volumes should be slightly lower than they were in 2007, and we now believe that total volume for the year will be similar or slightly higher than 2007 level. We continue to see solid demand in this market, with batteries being the most important end use with two-digit demand growth.

With the use of lithium-based batteries for vehicles looking increasingly more promising, we believe the battery market will keep increasing its importance in coming periods. In the short and medium term, the development of the lithium market will continue to be subject to the effect of potential capacity increase by Chinese producers.

Quarterly revenue totaled $461 million, 43% higher than the second quarter of 2007. In slide number three, we can see that operating income jumped more than 80% to $242 million in the first half of 2008.

The main driver here is price. We saw an increase in costs that was more than offset by the growth in revenues. The primary sources for our higher costs continue to be the same three -- energy, raw materials, and the effects of the exchange rate. With these results, our operating margin for the period has increased from 23.7% to 30.8%.

If you go to slide four, you can see that the net income totaled $190.5 million for the first half of 2008, which is 103% higher than the net income for the first half of 2007. Our net income for the second quarter of 2008 totaled $125.7 million, 147% higher than the second quarter of 2007 net income.

We're now, we are pleased with the result we have achieved so far this year. Net income for the first half is already higher than our net income for all of 2007, and we believe that the second half will be even better.

I would like to finish up by stating a few of the most important factors that we believe will drive our growth in the medium term. I think it's worth pointing, once again, the importance of the upward price trend in potassium. We believe pricing is responding to a tight supply and demand scenario, and that it will continue that way in the coming year. Nitrate demand is strong, and the capacity expansion under way will enable us to satisfy that demand.

Finally, we continue to see a strong demand in iodine and lithium, and we believe SQM has the resources to capture a significant part of this growth in the future. Given the condition in our market, we believe the lithium outlook in the short to medium term is very promising.

Thank you very much.

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

Yes, sir. (Operator Instructions). Your first question comes from the line of Jules Mort from Threadneedle. You may proceed.

Thank you very much. I was wondering if you could give us some guidance on the outlook for the second half. You mentioned that you hadn't put -- you hadn't received in the first half all the price increases in the second quarter. I was wondering if you'd give us a feel for the quarter-on-quarter improvement that we may expect in the third quarter versus the second quarter. And related to this, if you'd give us an idea of how much visibility you have in pricing dynamics, how quickly it can change, either improve or get worse.

Thank you, Jules. Well, again, like always, we have to look at independently to each of the businesses.

If we talk first on our specialty plant nutrition, for the second half we see, in the case of nitrates, that they will be selling similar -- we are now selling similar volumes to our production levels. Second half, because of the delay of some of the achievement, will be higher than first half, slightly higher than first half. You maybe can see that last year was higher, but the reason was that last year we reduced our inventory.

Regarding pricing, we see that the pricing in specialty plant nutrition will be higher in the second half than the first half. And even, we think, that it will be higher than the second quarter.

Regarding the volumes, of course, we are working on increasing our capacity, but that will not be ready until the second half of 2010.

Regarding the world prices that we are following in the case of potash, if you see what most of the international analysts of this industry are saying, they continue to be strong in the sense that they don't see any reason why there will be a change on this market situation of demand and supply. The demand continues to be strong in places like Brazil, China and India, and the new capacity cannot be in place until some years.

So we follow that and we agree, in the sense that we see that the price of potash will continue the way it is. We don't see that big risk on an important decrease.

Regarding volumes in the second half for potash, we will sell more in the second half, so that we feel that the total volumes in potash for the year will be more or less the same of what it was in 2007.

For iodine, pricing looks stable. You have seen first half is stable regarding last year. We continue to see that, continue to be stable for the rest of the year.

And regarding volume, as I have stated, as we have stated in the press release, volumes are being better than we expected, and we see that we will have -- or we should have a second half similar to the first half. Which is good news, because the first half was very strong.

And in lithium -- for lithium, the price is more an uncertainty. We continue to follow what is going on in China, and again, the situation will depend on how much volume these new producers in China really put into the market.

For volumes in the second half in lithium, we see a strong second half, and as I stated in my words at the beginning, we should have, again, good news in the sense that originally we expected during the year less volume than last year, and now we're expecting slightly higher.

Okay, thank you very much.

Your next question comes from the line of Borja Claro from Celfin Capital. You may proceed.

Firstly, I would like to congratulate you for the good results this quarter. I have two questions. My first question relates to the delay in shipments in the SPN business and in the lithium business. Could you give us further comment on that and what's the impact of that delay in the next quarters?

And my second question relates to the 25 increase in iodine capacity we've seen in the CapEx breakdown. How is that increase impacting iodine prices?

Thank you, Borja. Regarding your first question, as I stated in the previous question, we expect to sell in the case of SPN more volumes in the second quarter to catch up with the delays that there were in the first half. So in the second half we will increase our volumes. But again, in nitrate we're selling our production level, so second half will be higher than first half just to catch up on that.

In the potassium sulfate also, we expect to catch up some of the delays that we had.

Regarding lithium, we expect to end up the year, as I said before, higher, slightly higher of what last year was. First half was lower, so we will catch up on that too.

Regarding the iodine increased capacity, our strategy is to have enough capacity to be able to have the product for the market growth. Of course our commercial strategy is not to put volume more than the market needs. So we don't see that that in our strategy should affect the price.

Thank you very much. Could I ask one thing, please? Could you comment the change of guidance in lithium prices?

Well, regarding lithium, what happened this year is that our expectation, and according to the announcement of the Chinese producers and also because of the earthquake that they have in Sichuan province that hit some of our competitors there, the total volume that the Chinese were able to put into the market in the first half was much less of what we expected. That means then that we are selling more, and also the price pressure that we expected from those producers end up to be less.

Okay, thank you very much.

Your next question comes from the line of Francisco Schumacher from Raymond James. You may proceed.

Hi, everybody. Thank you very much. Congratulations on the results. Just wanted to have more or less guidance on current lithium prices and also on current potassium nitrate prices. And if this hike in prices will fully impact on third quarter, or you're also expecting an increase in the fourth quarter?

Thank you, Francisco. Regarding lithium, basically we are seeing more stable prices. Originally at the beginning of the year, we saw that the prices will be lower this year than the previous year. Right now, we are not seeing that effect because of the reason I explained in the previous question. So right now, we are seeing more stable price in lithium.

As a total final price for the year, still we think they will be slightly lower than the average of last year.

Regarding our nitrate, the potassium nitrate prices, as I explained, we have been following the potassium prices in the market. We were able to capture important price increases in first quarter; again, price increases in the second quarter.

And we see now that we have not fully reflected in our sales the announced price increase in the world. So we will have better prices in the second -- in the third quarter and also in the fourth quarter.

And in the third quarter -- in the fourth quarter, you could be expecting an increase regarding the third quarter?

Yes.

Okay, thanks very much.

Your next question comes from the line of [Saudine Shaw] from Neuberger Berman. You may proceed.

Good afternoon. Can you tell us if you've updated your CapEx plans and what it is for the next year to two years?

And secondly, also what do you envision is the competitive response going to be to the high potassium potash prices? Do you envision a lot more supply coming on from your competitors as well?

And last question is -- what percentage of the lithium market is batteries today and when -- and also LCDs for iodine? Thank you.

Okay, thank you, Saudine.

First, regarding our CapEx, we did a press release some weeks ago indicating our CapEx for the next three years, 2008-2010, and that is approximately $1 billion, and that includes a little bit over $350 million for 2008. And the main project in these three years includes the capacity increase for the potassium based products in the Salar de Atacama, where we expect to have an increase of 250,000 metric tons in the next three years.

Then also the iodine and nitrate capacity increase, according to our long-term strategy for Nueva Victoria and Pampa Blanca, that we expect to have a 25% increase by the end of 2012.

Also, we have within this program our new potassium nitrate plant that we are already erecting in Coya Sur that will allow us to increase the capacity for potassium nitrate to 300,000 tonnes per year.

Finally, we are still (inaudible) increasing the lithium carbonate capacity from 30,000 tonnes per year to 40,000 tonnes per year, and that plant is already in the start-ups. We expect to have it completely running during this third quarter.

And of course, there are other improvements through activity projects and infrastructure, like the railway system and others within this program.

Regarding the competitive [reforms] for potassium nitrate -- well, in the potassium industry, there are a lot of announcement of people trying to look for greenfield projects, but everybody agrees that these projects will take time to be a reality and a much higher CapEx investment.

Regarding potassium nitrate itself, we have not seen important announcements from some of our competitors yet. So we don't have specific information on that.

Finally, LCD (technical difficulty) around 9% of the total iodine and the batteries around 25% of the total lithium production.

Okay. Thank you so much.

Your next question comes from the line of Francisco Errandonea from Santander. You may proceed.

Yes, hi, good morning. I actually have three questions. The first one is related with the cost pressures that the Company has been facing. I don't know if you can give us a little more color on that, on what are the sources of the cost pressures, if they are related to logistics or to energy costs?

And the second one is related with the Pampa Hermosa project. I don't know if you have a schedule for the $1 billion you're planning to spend there. If this is something that will come into the stream gradually, over the years, or is this a project that you plan to build in one stage in the future?

And finally, and this is related with the question that was recently asked. Do you expect the premium between potassium nitrate and potassium chloride to be affected by your new capacity that you're putting into the market?

That's it (technical difficulty).

Okay, thank you, Francisco. Regarding the first question on costs, of course we are being hit by the cost pressures like every company that's a company in the world, and in Chile especially.

The main factors there are being energy in the first place, and energy for basically two areas. One area is electricity, where we went to an arbitration to our suppliers, and finally we had to increase the prices of our contract, for the rest of the contract given the costs that these are facing.

Second is the price of oil that has affected our oil consumption related costs, and within the oil is of course that we don't have any access to the natural gas from Argentina.

The second, besides energy, the other area where we're having cost pressure is in raw materials. For instance to produce lithium carbonate, we use soda ash; soda ash has been growing in prices in the international market. We import this raw material, and we need to pay then these international new prices.

Also, there are other materials for production of the item. For instance sulfur or sulfuric acid, that also have been having a very important price increase in the last year. And then the exchange rate has also affected us in our cost base in pesos, or in [other] currencies.

Regarding logistic that we also comment on that, we of course have been affected by the increasing prices in the freight, in the ocean freight. Ocean freight has been increasing, and all export of our specialty plant nutrition business is affected on the [margins].

The second question regarding Pampa Hermosa, what we have done is to ask for all the informations, all the environmental permits for this project. And of course, our idea, we'll explain it in our press release of CapEx, will be that we will implement it gradually according to how we see that the market evolves in those days.

And finally, regarding the question on the premium between potassium nitrate and potassium chloride, if that would be affected or not or increase capacity, we don't think so. We think that there are other factors that we are the ones that define these premiums.

Thank you very much.

This concludes our question-and-answer portion of the call. I would like to now -- I would like to turn it over to Patricio Vargas for closing remarks.

Thank you, Erica. 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 your participation in today's conference. This concludes your presentation. You may now disconnect and have a wonderful day.