智利化工礦業 (SQM) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to fourth quarter 2008 earnings for SQM conference call. My name is Noalia, and I will be your coordinator for today. At this time all participants are in a listen-only mode. 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.

Thanks Noalia. Good morning everyone, and welcome to SQM's fourth 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 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 SVP.

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. Hello everyone. Thank you for join us this morning. I would like first to take a moment to discuss SQM's 2008 full year result, and then we will continue with the Q and A session. I will begin with consolidated revenues on slide number two, with the 12-months period ending December 31, 2008, consolidated revenues reached nearly $1.8 billion. This is an increase of 49% over full year results in 2007.

Starting with Specialty Plant Nutrition, revenue grew by approximately 69% compared to 2007. Results in this business line were positively impacted by substantial price increases seen throughout the year which more than offset lower sales volumes. A considerable price increase can be attributed to the specialized material in this business line, and a general increase in prices for potassium related fertilizers. Potash revenue grew substantially on the back of the slightly higher volumes and considerable higher prices also.

While SPN revenues were driven by pricing considerations, the 15% revenue growth in our iodine business was achieved through higher sales volumes. The first half of 2008 saw volume growth of 15%, a trend that continued during the second part of the year. Growth in sales volume can be attributed to consistent demand and our ability to capture market share.

The previously announced price increase of 25% was prompted by the changes in the market dynamic and market tightness seen in 2008. The Company has already started to implement these higher prices.

Finally, full year revenues in the lithium business line were similar to those seen in 2007. Additionally current market information indicates that previously announced additional capacity from Chinese failures did not materialize as anticipated.

SQM on the other hand completed its expansion of our lithium carbonate plant, which now total production capacity of 40,000 tons per year. This new capacity position SQM as the largest more reliable producer to meet increasing supply needs in the future.

Turning now to slide number three, we can see that operating income grew more than 144% for the full year, reaching $632 million. As with previous periods, operating income for the year once again surpassed the 2007 results. Growth in operating income was driven by better pricing condition in fertilizers and industrial nitrates as well as higher iodine volume. This factor more than offset the decline in fertilizer sales volumes.

We saw improvements on the cost side during the second half of the year compared with the first half due to lower energy and raw material cost as well as increased efficiency and Chilean peso depreciation.

On slide number four, you can see that net income in 2008 totaled $501.4 million for the full year, more than 179% higher than 2007. While markets in recent periods have seen a certain level of volatility we continue to have a strong and sound financial position and good access to the capital market as evidenced by our recent bond issuance.

Before moving to the Q and A, I would like to outline SQM's outlook for the coming period. The current market situation has generated some uncertainty about the global demands in general. As a company, we continue to feel confident about the core fundamentals in all of our business lines.

As we confront the global economic downturn we could potentially see lower demand in some industry. And on the other hand we feel that certain other end market which use our product will more -- will be more resilient to market fluctuation.

[Furthermore], diversification of our clients, products, and markets continue to be one of our great trends, and will more likely improve to be a valuable attribute as we face these uncertain times. In spite of significant market volatility and uncertainty generated by the global economic situation we expect that net income for the first quarter and first half of 2009 will be higher compared to the same period of the previous year. We continue to believe that volumes in the second half of the year will rebound compared to the first half of 2009.

While 2009 will undoubtedly pose new challenges for SQM we continue to maintain a positive view of our future and to remain confident about the underlying fundamentals in our key markets. Thank you very much.

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

Thank you very much. (Operator Instructions) Your first question comes from the line of [Fernando Ferreira] with Merrill Lynch.

Good morning everyone. Thanks for taking the questions. I have two questions. First one, can you give us some guidance of how much volumes were down in the fourth quarter alone? And for 2009 can you commit to any numbers, or can you say how much volumes could be down, especially for lithium and iodine?

And my second question is related to iodine prices. Until when do you think these prices -- these new prices will hold, especially when you started to see the demand cooling off for iodine? If you think that in the second quarter and second half of 2009 these new prices will continue to be stable? Thanks.

Okay. Thank you, Fernando. Regarding volumes, as you see, we have in Specialty Plant Nutrition volumes in 2008 lower than 2007, and that was in the range of 20%. And the main reason to have this lower volume was two-fold. One, that 2007 was much higher volume than normal because we sold stock. So the first half of the year less volume was mainly affected for that reason, having sold much more in 2007, selling some stock that we had.

And regarding the second part of the year, especially the last quarter, of course we have some customers that were postponing their decision because of the economic situation, and we were sending less product to our end market.

The most important thing on Specialty Plant Nutrition for 2009 -- and we see the first quarter coming -- is that we will have at the end of the day the same -- better results than the previous -- the same quarter of the previous year, and also that we are talking to our customers, and we see in the fertilizer industry a start to move again the products.

We have seen in the last two weeks lot of new movement in the nitrates area and the phosphates area, so we believe that the products will continue in the same direction. We are -- as I say in the introduction -- quite optimist that in the second half of the year we will see the remount and normalized volumes for our Specialty Plant Nutrition.

If you look volumes on the potassium chloride -- potassium chloride volumes were more or less similar, so we did not have any specific situation in the fourth quarter, and of course as we have indicated we plan to sell much more during 2009. Given that we are not such an important or a minor player in this industry we don't see a problem to place those volumes.

2008 was less than 200,000 tons, and for 2009 we are thinking in the range of more than 500,000 tons, more than double the volume of potassium chloride.

Regarding iodine we have a very strong volume in 2008. We have seen less volume -- some less volume in the fourth quarter, and that will continue to some extent in the first quarter of 2009. We feel very strong also that we will be able to keep our pricing policy; we have done in the past. Surely we will sell during 2009 less total volume of iodine than we sold in 2008. But the average price that we are getting will more than offset the diminishing volumes. Also in the cost side we are seeing less cost, so finally iodine will -- we expect to have a better margin during 2009 than 2008, even with less volumes.

And regarding lithium, lithium -- we -- from the supply side we have seen that the Chinese were not able to put the new volume that they were promising, and from the demand side, in the fourth quarter we start to see, because of the economic downturn, less demand in some of the applications. But given that we talked directly to the end customers they are already giving us their programs for the second and -- second quarter and second half of the year. And we see that lithium should start to recover also in the volumes. But of course the total volumes of 2009 in lithium we see that will be lower than total volumes in 2007.

Okay. Thanks.

Your next question comes from the line of [Lewis Campbell] with Credit Suisse.

Hi, good morning everyone. I have one question on the gross margin side. Given that first quarter should probably be a weak one in terms of volumes, do you foresee any contraction in gross margins because of potential lower dilution of fixed cost, or would you expect margins still close to the levels you reached in fourth quarter? Thank you.

We don't see an important change on that. There are many factors of course that will move around, but on average we don't see a major change in that. We have seen an important effect in the cost from of course the exchange rate situation in Chile, of course on the price of oil also and in the price of some of other raw materials that we buy. We have been able also to increase significantly some of our efficiency rates and then recovery rates in the operations, so that is helping us.

The most important thing for us, as I said in the previous question is that we feel very comfortable that the bottom line in the first quarter will be much better than the first quarter of previous year.

Okay. Thank you.

Your next question comes from the line of Rusty Johnson with Harding Loevner.

Hi. I think you touched on the issue regarding the demand shortfall on volumes. And my question relates to the amount of credit that's coming into the agricultural community, and to what degree you feel that the lack of credit reduced the demand for particularly Specialty Plant Nutrition, and whether that credit has come back, or whether the farmers just took the decision they didn't want to plant because of pricing or general uncertainties or volatility. So could we maybe differentiate plant-farmer behavior, and the credit availability, and whether you seemed to change there?

Thank you for the question. Yes, this has been an issue, especially at the beginning of the crisis when there was lot of uncertainty. Many of the farmers did not have the immediate access to cash in order to buy the raw materials that they need for their seasons. But what we see as a company -- that is a general thing.

What we see as a company is that we are very, very diversified. And having this specialty situation, we deal with more sophisticated farmers in general. So those are more well-established companies that have also better access to the financial market. And also they have, per se, a much better financial situation themselves. So they can also work with their own money.

So at the beginning -- and that was -- affected the fourth quarter, and some of the first quarter, but we see -- talking to them we are seeing them coming back. As I say in the first question, we are seeing now already coming back and with more access to the credit lines, and also to their own -- using their own money.

Yes, thank you.

Your next question comes from the line of Craig Shaw with Harding Loevner.

Good morning. You noted in your results release that you took an inventory write down, could you just comment on the size of that write down? And secondly, I think on the first call you noted that you are expecting potash -- potassium chloride sales volumes of close to 500,000 tons in '09, could you confirm that that is indeed, just to make sure I didn't misunderstand. Thank you.

Regarding the inventory write down it's in the range of $20 million -- $20 million - $25 million in the fourth quarter. And this is related mainly with some -- related to the product that we have in SQM commercial in Chile of commodity growth. Mainly product related to urea and to phosphate that we sell as a training activity in Chile.

And regarding the other question, potassium chloride, yes, this year we sold close to 190,000 tons. Now our plan is to sell in 2009 more than 500,000 tons.

Wonderful, thank you very much.

Your next question comes from the line of Francisco Schumacher with Raymond James.

Hi, yes, congratulations on the results. Basically talking about the potash volumes you plan to sell, you mention in the press release some flexibility to where to sell that. If you can expand a little bit more on that. You are selling to, for example, to China or just continue selling regionally? Also regarding the joint venture there in China, how is the development?

And also in the counterpart of increase in potash, obviously there is -- there will be some decrease in potassium sulfate, what are the volumes you are expecting for 2009?

Regarding the sales of KCl, you know that we sell close to 100,000 tons in Chile. We continue to sell that, and the rest of the volume we are planning to sell using our extensive distribution network around the world.

So we will try to go to as many markets as we can in order to have a better entrance to these markets, even though it's not a huge quantity. We don't want to flow just in one market. So we will go over depending on the situation in each of the markets.

We are working already on that, and we feel very confident that we will not have any problem to place that volume at the market price.

Regarding the JV in China, we continue to work on that. There is not any news to report. Of course with all these situations in the world things are taking a little bit longer, but we will continue with the original plan. And regarding potassium sulfate, we expect to sell during this year more than what we sold in 2008.

Okay, and just one follow-up. The internationalization of your potash sales has to do with higher prices and lower freight costs, and higher volumes --?

No, the main reason is that we are able to produce more. We explained in the previous conference call and press releases is that we were able to increase our production in Salar de Atacama, and Chile is a market of 100,000 tons, and that's it. So if we will produce 500,000 tons or more, we need to place in a different market.

Perfect, thanks.

Your next question comes from the line of [Bryan Chase] with JP Morgan.

Hi, good morning. Can you please discuss the high-value crop, farmer economics as it relates to your pricing strategy? Do you think you'll be able to keep your SPN prices high even if potash prices contract?

I saw that that was the case in the fourth quarter with your premium for the SPN products nearly doubling compared to the third quarter? Another second question, just if you could elaborate a bit on the cost structure, we saw that margins improved in the fourth quarter, especially in the SPN division as well as in iodine. Just wanted to get some specifics on what costs are actually coming down.

Okay, thank you. Regarding the high-value crops, first, this has been an issue that we have been able to handle from the very beginning when we started to specialize our fertilizers in the sense that we give to the farmers more features that -- in our fertilizer meaning free of chlorine, meaning more soluble, meaning some micro nutrients that are inside the product that allow them to have better yields. So, finally, having this better yield he is able to pay more.

Of course, this is not with unlimited. So if the price of potash goes down, we of course will be affected on our SPN prices. However, this -- and this also has been seen in the past when you see how the prices are fluctuated; this is less strong thus in the prices of the commodity. So we do not go down as fast as they go, and we don't go down that much as they go, because we are able to maintain these -- more this stability.

And regarding the cost structure, the two or the three areas that we highlight is first the exchange rate. You know that we as a company try to keep everything in dollars. We keep our accounting in dollars, and hedge everything against the dollar in general, meaning that having $200 million cost in peso related any depreciation of the peso will affect immediately in those quantities our cost.

And regarding energy, total energy cost for 2009 will be in the range of $120 million. So any change in the price of energy (inaudible) will affect also in those amounts. And the third area of course is the raw materials that we buy like soda ash, or sulfuric acid, or sulfur, or other products that we buy that have been lowering their prices.

(Operator Instructions) Your next question comes from the line of [Francisco Errandonea] with Santander.

Hi, good afternoon. I have actually two questions. This first one is related with increase in volumes in potash for 2009. Had you foreseen any risk that you don't receive the approvals or you don't need any approval for increasing your capacity?

And the second question is related to -- is a follow up on what Bryan asked, do you believe that there is some elasticity on the demand of higher value crops because if we could expect that under this scenario, people are more willing to buy and -- I don't know -- uglier potatoes rather than the best. I don't if you have a feeling on that.

Regarding volume of KCl, we are already producing. We have all the approvals that we need. So there is not any issue on that. Regarding the elasticity, well, everything has some kind of elasticity or some kind of replacement when relative prices change.

We feel very comfortable that the level of prices that we have been handled, we have been able to get those premiums. So as I said before, if there is important changes on those relative prices, of course we will be affected, and we will have to decide what to do.

But up to now we feel very comfortable on what we are seeing, and our best estimate is that average price of our SPN line of product for 2009 will be similar to that of 2008.

Another question related to your CapEx plan. Your CapEx plan was announced last year -- early last year. With this new raw material prices, are any changes on how much money you're going to spend in this CapEx plan?

We have reviewed in the last months at length our CapEx plans for all those reasons. And we -- the first decision that we have been taking and we continue to review always that is that we continue with our original plans. We have not stopped any of our investments.

Of course, we have been able now to diminish the investment cost. There are many things that cost much less than we expected at the middle of last year. So of course we will invest some less money doing the same thing that we're planning to do.

Thank you very much.

Your next question comes from the line of Borja Claro with Celfin Capital.

Hi, good morning. Congratulations on your results. I would -- I have two questions. Could you give us an indication of the decline in volumes during the first quarter of 2009? And my second question is, what is the impact you're expecting during 2009 from declining costs?

Regarding declining volumes of 2009, I really commented that in an extent in the first question. But of course we are seeing some decline in our business line that we expect to recover during the second half.

But again those declining cost doesn't mean that we feel that first quarter results which is what we really work for, of 2009, will be much greater than the first quarter of 2008. Regarding the increase on cost in 2009, I refer to the three main areas that we see less cost.

First is the energy cost. Last year we spent in energy in the range of $150 million, and this year we are projecting at the actual level of oil price and the other energy components in the range of $130 million.

Again on the exchange rate, what we have seen in the last few weeks a lot of change in the exchange rate in Chile. But again, the best way to calculate -- and you can do that -- is that we have $200 million expenses in peso. So any change that you want to see in the exchange rate regarding to the exchange of last year you will have the saving.

And the third area of less cost, or the two --- two other areas, additional areas, one is less cost in some of the raw materials that we're buying. You see that sulfuric acid really went down, soda ash also, and sulfur, and many of the products that we buy, that have been --- that we have been able to buy now much lower price than we need to buy.

The final, which also is increased, and we have seen already in our cost structure, is improvement in our recovery rate in different operations, and also in the efficiency that we are working. And this is mainly because we are getting the payback of the investment plans that we have been doing in the last year.

Thank you very much.

Your next question comes from the line of Anne Milne with Deutsche Bank.

Hi, good morning. Thank you very much for the call. I know you mentioned that your CapEx plans for this year would probably be a little bit lower. Would you mind reviewing what you think the amount would be, and what the main projects would be? That's the first question.

And the second one is, could you just remind us again what your current dividend payout ratio is, and if that policy is going to be changing in 2009? Thank you.

Okay, thank you, Anne. Starting with your last question, our dividend policy is 65%. We have this dividend policy approved by our shareholder meeting last year, April last year, and we pay an interim dividend in December, and we have to pay the final dividend after the decision of the shareholders meeting in next April. And they will decide then that -- what the final dividend will be.

Regarding the investment plan, during 2008 we invested close to $290 million. And for 2009 we are thinking in the range of $300 million, little bit more than last year. And the main projects are, first, the new plant with additional capacity of 300,000 tons for potassium nitrate, the plant that is being built today in Coya Sur.

Also we continue with the plan of increasing capacities with production of potassium chloride. We are finishing the project to increase the capacity of iodine. And then we have project of infrastructure. We are finishing the --- or continue with the project to increase our --- or improve the efficiency of our railroad system given the additional volumes from the Salar, railroad going to our port. And also we have different projects that will continue to look forward increasing the efficiency, the recovery rate and at the end of the day our cost.

Great. Thank you very much.

Ladies and gentlemen, this concludes the question and answer session. I would now like to turn the call back over to Mr. Patricio Vargas for closing remarks.

Thank you, Noalia. Thank you all very much for joining us today. And we hope to have you with us in the next conference call. Goodbye.

Thank you for your participation in today's conference, this concludes the presentation. You may now disconnect, have a great day.