智利化工礦業 (SQM) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to SQM third quarter 2008 earnings conference call. My name is Alicia, and I will be your coordinator for today. (Operator Instructions) We will be facilitating 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, Vice President of Finance and Investor Relations. Please proceed, sir.

Thank you, Alicia. Good morning everyone, and welcome to SQM's third quarter 2008 earnings conference call. For your information, this conference call would be recorded, and is being webcast live. You may access the webcast 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 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. Thank you all for taking the time to join us today. I would like to discuss first SQM results for the first nine months of 2008. And then we will go to the Q and A session. I will begin on slide number 2 with consolidated revenues, which total nearly $1.4 billion during the first nine months of 2008. That is an increase of 56% over the first nine months of 2007. During the third quarter our revenues continued to grow thanks to positive development in all of our core businesses.

Beginning with Specialty Plant Nutrition, we recorded revenue growth of 80% in a year to date. We achieved this result because of the favorable pricing condition we have fared in potassium-based fertilizer this year. Average prices during the third quarter were even higher than they had been during the previous two quarters. And this fact was reflected in our results. We also recorded revenue growth of 150% for our direct sales of potassium chloride.

Whereas, SPN revenues are being driven by pricing condition, in our iodine business we achieved revenue growth of 19% in the year to date as a result of higher sales volumes. In the first six months of the year, we saw volumes growth of 15%, and in the third quarter our sales volumes were even stronger.

We have been able to grow in sales volume because iodine demand continued to be very solid. We supply (inaudible). In fact, we recently announced a 25% price increase for iodine in response to the change in market equilibrium. The increase went into effect on October 1st, and we will see the impact on earning beginning in January 2009.

Finally, in our lithium business we also have good news. During the third quarter we record a significant increase in sales volumes. So we were able to recover sales from the first half of the year, growth in lithium batteries continue to be the main demand driver of this business.

On the supply side, we started off the year expecting a significant increase in volume from producers in China. However, the information we have now suggests that the increase will not be as significant as we expected, which means that there should be more of an equilibrium between supply and demand in the coming periods. During the quarter we also completed our lithium carbonate expansion, and we now have a total production capacity of 40,000 tons a year.

Please turn to slide number three, where we can see that operating income grew more than 140% in the first nine months of this year totaling $481 million. As we have seen in recent periods, the primary factor behind growth in operating income has been our strong revenue growth. The higher revenue are considerably [outweighting] our cost increase. In 2008, cost pressure has been coming from energy, raw material, and peso denominated expenses.

If you go to slide four now, we can see that the net income totaled $381 million for the first nine months of 2008, more than 180% higher than the same period of 2007.

In the third quarter alone we recorded net income of $190.6 million which is higher than the full year 2007 net income of $180 million. Given the recent volatility in financial market and exchange rate in particular, I would like to go over SQM's hedging policies. We carry out our accounting in US dollars. All of our debt is denominated in US dollars or hedge to the dollars, and most of our revenues and cost are in dollar as well.

However, we do have some revenues and expenses in other currencies. We hedge foreign exchange exposure when the net difference between assets and liabilities excess a certain [threshold]. The net effect of all the coverage we have outstanding is currently positively in favor of SQM. We do not hedge any kind of commodity. More generally, with respect to our non-operating results, in the year to date we have reported a loss of approximately $12 million, which is an improvement over the $23 million loss we reported for the same period in 2007.

Before we go to the Q and A, I would like to take a minute to discuss SQM's outlook for the coming period. Current economic condition has generated some uncertainty about global demand in general. But as a company, we continue to feel confident about the fundamentals underlying our key markets. One of SQM advantage is our great revenue diversifications; by product, by geographic region, by end markets, and even by customers.

In addition, demand for our products have been growing consistently for the past several years. And we continue to see new applications being developed for our products. Faced with a global recession, we may see lower demands in some of the industries to which we sell. But we believe that many of the end market to which we sell our products are sheltered from an economic downturn.

For example, fertilizer demand has been growing because the world population has been growing, and more people are choosing to consume more protein and better quality food and vegetables. Another example is iodine, where more than half of our end uses are related to the health industry which is necessary to satisfy basic human needs.

We believe the outlook for our core businesses is favorable. And we anticipate that that demand will continue to grow in the medium and long term. In order to satisfy demand for the future we are moving forward with the capacity expansion we have announced across all our core businesses as a part of our CapEx plan for the 2008-2010 period. As I mentioned before, we finished our lithium expansion. Next year we will increase our production of potassium-based products, and we are also expanding nitrate and iodine capacity.

As a final note, I would like to tell you that yesterday the board of directors decided to distribute an interim dividend for an amount of $100 million. Summing up, the results so far this year has been very good, and we maintain our positive view for the future. Thank you very much.

Thank you, Patricio. Alicia, we may now go to the Q and A session.

(Operator Instructions) The first question comes from the line of [Fernando Ferera] with Merrill Lynch. Please proceed.

Thanks. Good morning everyone. Thanks for taking this call. My first question is regarding to Lithium. As you are now seeing a better market than you used to because of lower Chinese supply, what are you seeing in terms of pricing for lithium going forward in 2009?

And my second question is regarding the fertilizer demand, because we are starting to see more signs that the Brazilian farmer is having issues with credit, and is also lowering their fertilizer purchases at this point. So are you seeing any effect on that in the fourth quarter for SQM's volumes? Thank you.

Thank you, Fernando. First regarding lithium, indeed as I explained in this [position], we are seeing much lower volume than we expected before from the Chinese producer, and that of course means that the equilibrium in demand and supply has been more tight than we originally anticipated also.

At the beginning of this year we thought that we will be selling much less volume than we are actually selling, and also we thought that the price could erode some. And we come down and report today that we are selling much more volumes in lithium than we expected, and also that the prices are maintained on the same level more or less than has been during the whole year.

For the near future, we do not anticipate much bigger production from the Chinese, so we feel comfortable that the prices in lithium will continue in the same range that they are today.

Regarding the second question, fertilizer, we continue to believe on the fundamental in fertilizer, which means that fertilizer because of the growth of population, as I explained before, because of the diet will continue to increase demand. We also see a difference between nitrogen and phosphate and potassium.

We are clearly more related to the potassium fertilizer, and we see that the basic fundamental for the demand in potassium in general continue. Of course, this uncertainty and the situation in the financial market in the short term has done some delays on -- in some customers because of their financial situation, and until the situation is more clear. But we are very confident that medium term, will continue with our expectation, and that's why we continue with our expansion program.

Regarding the fourth quarter specifically, fourth quarter normally we sell less volume than the third quarter, and maybe we will see some additional delays to beginning of next year. But we are not seeing that there is something very important in that area.

Okay. Thank you.

The next question comes from the line of Cesar Perez-Novoa with Celfin Capital. Please procceed.

Yes. Good afternoon gentlemen, and congradulations for your outstading third quarter earnings. I have a series of questions here, first on lithium. Could you comment specifically on the third quater volumes and average prices, please? And to conclude, what is your view on potential project development coming again from the lithium carbonate industry, particularly the projects that are associated with Argentina, and now Bolivia is back on the map with a potential new project. And so I would appriciate if you could make some comment there. And on the pottasium nitrate market, again if you could review the 2009 outlook for pottasium nitrate and perhaps comment on potential output by (inaudible).

Okay. Cesar, thank you for the question. First on lithium, volumes during the third quarter were very strong. We were over 8,000 tons of all the -- all of our lithium products that are sold within the quarter. And -- which is an important volume, and prices continue to be the same of what we had during the first half.

Regarding potential projects, given the -- all the expectation that there is on the potential important demand for the development of hybrid cars and electric cars, and plug-in cars, there is a lot of interest in trying to look for new projects.

We continue to believe that the best area and the most cost competitive area and -- that there is (inaudible) is Salar de Atacama by far. We have studied many of these added possibilities to understand their potential cost position, and we feel very comfortable that we really have a strong sustainable competitive advantage cost wise, and also volume wise.

Regarding the possibility that even with that situation some projects could become a reality, yes, there have been some projects in China, they have been much more expensive than they expected with much less volume than they expected. The situation in our neighbor countries will not help to develop this new project. So we feel that at least in the near term we will not see additional competition in that area.

Regarding the potassium nitrate for next year, we feel comfortable in the sense that this is a line of thought like many of our -- the other lines, because it's very diverse. We are selling in very, very different geographical areas, to different crops, and also very diversified from the customer's point of view.

And according to the discussion that we are having with our end customers in order to prepare the budget and our production planning for next year, we feel comfortable that we will not see problems in moving our volumes. We also feel that the situation from a price point of view for the potash related fertilizers will continue to be tight.

Okay. Thank you very much, gentlemen.

The next question comes from the line of Francisco Schumacher with Raymond James. Please proceed.

Hi. Well, congratulations on your excellent results. Some of my questions have already been answered. But basically for potassium nitrate I was estimating sales volumes for the year to drop around 100,000 tons, but this was basically due to the drop in first half '08, and should we expect year over year drop in second half '08, and then by how much?

And besides, if you are planning to decrease prices of your potassium nitrate and potassium chloride or you will wait for customers to resume their purchases at current prices?

Thank you, Francisco. Regarding volumes, as we have commented in our previous conference calls, 2007 was very strong in volumes. We saw much more volumes because it -- we sold even more than our production. We diminished our inventory in 2007, and also we [summon] special cargo to China that we are not selling this year. The total sales volumes in 2008 for that reason will be less, as you say, than 2007.

The fourth quarter, as I explained before, is normally less than the third quarter, because of seasonality of our sales. So we expect some less volume in the second half of this year if you compare with the first half of last year.

Regarding prices, we are not seeing (technical difficulty) for potassium nitrate, strong pressure to be -- to lower our prices. We continue to keep at our actual prices. We don't feel, or we don't see that average price for next year will be less than our average price this year.

Okay. So as in the first quarter they were lower you would expect a slight decrease throughout the year, the next year?

As I said before, today we are selling at the same price that we were selling during the third quarter. We're not seeing pressure on the price yet. So our estimate is that next year price will be same as this year, or even better.

Okay. Thank you very much.

(Operator Instructions) And the next question comes from the line of Paula Vicuna with Santander. Please proceed.

Yes. Good morning. I would like to know if you can give us a little more detail on how the production cost evolved in this quarter compared with the first half of the year, and also what you are expecting for 2009.

Thank you, Paula. Clearly, as we have been explaining in the previous quarters, the pressure that we have on cost has been mainly related to the cost of energy. Second, there was also some raw material that we used that has been also going up. And third, was the exchange rate.

If you look at what has been going on lately in all these three areas, we expect that we will benefit from lower cost. Specifically in the third quarter we -- it was too soon to see an effect on that, and especially because also on the inventories that we have.

Okay. And looking forward to '09, do you have some estimates?

We do have estimate, but we don't share that.

Okay. That's okay. Well, thank you very much then.

The next question comes from the line of Rusty Johnson with Harding Loevner. Please proceed.

Hi. I was -- just following on with the question regarding cost, particularly raw materials, FX, and freight cost. You alluded that we're probably going to cycle through that, should we see that in fourth quarter, or really going to see the major impact on the cost side into '09.

We expect to see some in the fourth quarter. In electricity, no, because even though we see lower prices in oil, that would not reflect in our electricity rate yet. But yes on the -- all our consumption related to oil, for sure. And also in our peso related expenses because of the new exchange rate. So we will see some in the fourth quarter. And for sure depending on what happened on those variables next year we will see if that's in a stronger manner.

What we look for is the major impact that would affect the cost side, because you mentioned there are some costs and revenues, so how big is the peso impact? There is the diesel price, electricity price, and so forth. What is going to be the major swing factor that would really affect margins?

Well, if you notice that our total peso related cost are in the range of $200 million you can see there what will happen with any change in exchange rate. I mean, if you go up in the exchange rate, then we will of course spend much less dollars on those peso related expenses. And that is in the range of $200 million. And regarding energy, total energy expenses are in the range of $150 million.

(Operator Instructions) The next question comes from the line of Fritz Kaegi with CWAM. Please proceed.

Hi. I have two questions. Can you first of all give us some sort of idea of -- with raw material prices declining in a lot of areas, if that has any impact on your CapEx guidance that you just released a few weeks ago?

And second of all, can you just provide your best estimate of nitrates output, the trend for the next few years? I just wanted to update your guidance on that. Thank you.

Okay. Thank you, Fritz. Regarding the change in the cost of some raw materials, for sure we are reviewing the budget of all of our projects. We have seen already diminishing, the capital cost for some of them, and we continue to work on that. It's too soon to see how much the total impact will be. But for sure we are expecting to do the same thing that we were planning to do, it will cost us less, especially in the cost of steel, and the cost of some of the other raw materials that we use that related to the oil price.

Then regarding our nitrate, we expect according to our expansion program to increase by 300,000 tons by the second half of 2010.

Okay. But no impact in 2009, you -- we should expect volumes to be -- in '09 to be roughly the same in '08 for nitrates?

Yes, we see some increase, but not important.

Okay.

But what we will see really, the important increasing volumes will be in potassium chloride.

Okay. And just one more question. In terms of -- in the past times there have been some shipments being delayed, and I was just wondering if the shipment tendency that you had this quarter was roughly the amount of shipments that you do in a normal quarter, or if there is anything strange in terms of more shipments this quarter rather than previous quarters.

Well, as I explained before, fourth quarter normally is less volume than the third quarter. Right now, according to the program we see that the shipment will be more or less as budgeted. But we need to confirm that because there were some delays in customers. And that depend then on reprogramming some of the -- some of them could move to January. We don't know yet.

Okay. Thank you. Thank you.

At this time we have no additional questions. I would now like to turn the call back over to Mr. Patricio Vargas.

Thank you Alicia. 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 your conference call. You may now disconnect. Good day.