智利化工礦業 (SQM) 2009 Q1 法說會逐字稿

Thank you, everyone, for joining us to the First Quarter 2009 SQM Earnings Conference Call. My name is Erica and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of this conference.

(Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Miss Mary Laverty, Head of Investor Relations. You may proceed, ma'am.

Thank you. Good afternoon, everyone, and welcome to SQM's First Quarter 2009 Earnings Conference Call. For your information this conference call will be recorded and is being webcast live. You may access the webcast later at our website, www.sqm.com.

Joining me this afternoon are Patricio Contesse, Chief Executive Officer, and Ricardo Ramos, Chief Financial Officer. Before we begin, let me remind you that statements in this conference call 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 defined under the Federal Securities Law.

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 Contesse.

Good afternoon, 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 first quarter and then we will go to a Q&A session.

Beginning on slide number two, we can see the revenues for the first quarter reached $321 million, similar to those of the first quarter of 2008. Sales volume in Specialty Plant Nutrition, Iodine and Lithium were affected by the global economic downturn and the reduction of inventory level and distribution of clients.

Additionally, the delaying [for tonight's] consumption. Some of our customer had (inaudible) bond sales during the first quarter. These effects were offset by a better pricing condition compared to the same period of last year, especially with the Plant Nutrition, iodine and potash. Additionally, the increase in potash shares volume contributed to the revenues in the first quarter.

Moving on to the operating income on slide number three; we recorded an increase of approximately 38% in the first quarter. The substantial increase in operating income was mainly driven by the higher sales in potash and the increase in the average price in the Specialty Plant Nutrients and iodine compared to the first quarter of 2008.

Following the trend observed during the fourth quarter of 2008, (inaudible) costs were lower in all of our business lines due to lower energy and raw material cost and depreciation of the US dollar. Furthermore, during the last six months we have been able to significantly increase the productivity of our main production facilities with a corresponding positive effect on our operating margins. We are certain that the efforts we are making to reduce costs will continue to positively impact the Company in the following quarters.

On slide number four, as a consequence of the improved operating profit as compared to the first quarter of 2008, we can see that net income grew approximately 33% compared to the first quarter of 2008, continuing the positive trend of the last few years. The Company's different business lines prevent us from depending on one single product or market and provide us with different supplied sources of revenue that allow us to deliver high operating margins. Thank you.

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

(Operator Instructions). And your first question comes from the line of Fernando Ferreira from Merrill Lynch. You may proceed.

Thanks. Good afternoon, Patricio and Ricardo and Mary, and congratulations for the quarter. I have two questions, the first one is regarding potassium chloride or potash. We saw that this quarter was the first time that we saw potash being the second most relevant product for SQM. And my question is what is the potential for the future production that you see in expansion and sales to the market of potash and if PotashCorp has any sort of control on that? And my second question would be on the cost side. We saw a steep decline in the cost of goods sold in this quarter and I'd like to ask if you expect the same sort of cost control going forward for 2009? Thank you.

As a company, we have been increasing our production. Last year considering potassium sulfate and MOP, both things together were slightly more than 800,000. This year will be much harder but we're thinking by 2011 to be in the range of 1.2 million to 1.3 million metric. But we're increasing our capacity in between 450,000 metric tons in two years more of what it was last year. And this is related to the volumes exactly become more important to (inaudible) as such, differently from the other products.

Last year we sold a total of 190,000 metric ton and this year will be almost reaching the 600,000 metric ton of sales in potash directly. That will give us by itself a source of -- to analyze itself, by itself. Related to our relation that this with potash, we are absolutely independent in the way we can sell; we can sell in any place in the world, we can sell to them too of course, but clearly we are not making any kind of production at all. We are producing and selling what we produce.

And related to our cost, we have fortunately go beyond what have been the good effects of lower net cost in several other raw materials, plus higher value of the dollar compared to last year. We have increased productivity significantly and that has been a big achievement in terms of costs in nitrate and in iodine and also some in potash too. And we think that this number should improve in the future because they're not just related with the cost of the dollar or of the oil, but we are increasing our yields in general and productivity in these three fields. So we feel quite comfortable, as we said, that in the future quarter we will be able to improve even more than the costs that we have already achieved.

Okay, thank you.

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

Hi, good afternoon. Well, my question is related to potash and the gross profits you are reporting. I'm making a simple calculation and it gives that the gross margin of that business unit is around 58% over sales in the first quarter and this compares with between 70% and 80% in the previous two quarters. What's the explanation of this? Is it because you're extracting potash from sodium nitrate or what's the explanation basically?

When we talk about margins, we haven't taken potash itself. And I'm confused about your question related to potash with a knife, it really didn't cut the point exactly.

No, sorry. I meant from the potassium sulfate rich brine. I understand that you are also extracting potash from the potassium sulfate rich brine.

Yes, we have in the Salt Lake, we have two provision. One is related with potash that we will use about 360,000 metric ton last year and about 170,000 metric ton in another place in the same (inaudible); about 30 kilometers separate one with the other, where we produce a year 870,000 metric ton of SOP. That makes the 815 total potash producing primary of potash production. This year we'll be reaching between 970 and 1 million metric tons here. Our costs there are lower than last year. Prices in the first quarter are higher than what they were. The price of the last quarter was the same as previous year.

So the explanation is solely a decrease in prices for the lower gross margin?

We -- prices have not decreased; in potash, the average price is lower this quarter because most of our potash last year was sold in Chile. And clearly because of the size and the volume we're selling of potash, this year also are going to places where the potash prices are lower, like in China and other places. So the average doesn't mean the price in those markets have decreased, but here those markets have lower costs -- lower prices than the other markets.

I thought you were not selling to China. What was the percentage of sales that were destined to China and India in potash?

We don't disclose exactly when we are selling volumes to China.

Okay. Thank you.

Your next question comes from the line of Craig Shaw from HLM. You may proceed.

Hi, good afternoon. Could you please talk about -- at the end of last year you gave some outlook on volumes and prices. Could you please talk about how the first quarter figures for the various divisions, potash, specialty, nitrates, what not, how those measure up against what you were expecting at the end of 2008? And if you have any changes in your outlook?

We think volumes are more negative compared with what we talk about at the end of last year. People have been reducing their inventories significantly on one hand. Of course pricing or financial too. So, we thought that those inventories were not going to decrease as much as they have been. So that has delayed demand for our products. That is in general, not just the difference only potash, but that's in general for all the products we have.

So, but clearly they can review their inventory for once; that's why we expect for the second semester that the market should be more normal than what has been the first quarter, even though the second quarter should be better and the second semester should come to a more reasonable levels of demand and what I have to recognize that some consumption is less, but most of all people are looking forward to work with much lower inventories than what I thought at that moment.

Okay, so if I understand you correctly, the destocking effect, if you will, has been bigger than you thought, but you think --

It has been much bigger than what I thought.

Much bigger, yes. But you think second quarter --

Also consumption has been lowered, so adding both things, that has been very negative in terms of what I was seeing at the October, let's say, November last year. But we think the destocking will be ending already, since [Wednesday], and that's why we see not as we would like, but a better second quarter than the first one and we see much stronger second semester than the first semester because of that.

Okay, and then on pricing are you seeing price weakness anywhere?

Pricing of iodine have increased, as we said. The price of lithium has been maintained, and the prices of nitrate have been equivalent to what we have in the fourth quarter last year. And of potash, the average slightly less because we're sending to a market that is cheap.

Right.

So the prices in the other market is more or less the same. If we take out the China market where we sell some, the rest of the pricing are relatively similar to ones that we had in the fourth quarter last year.

Okay, and if my memory is right, you do a lot -- for the export portion of those sales volumes, most of those are done CIF, so freight rates are down. On an FOB basis, though, if I understand you correctly, your prices are holding up, they're flat.

In terms of FOB's burden but because as you said one reason is logistic but also our costs are lowered so the FOB return (inaudible) is better.

Right, but with pricing in mind, your FOB --

If you take out -- if you compare fair with fair, because it of course it was selling in the market that is less prices. Of course this lower costing in logistic or cost doesn't neutralize or the less price so that those market have. But if you compare the same markets with the same market; clearly there we are having a better return.

Right, I understand the returns are better, I just want to make sure the pricing was holding up.

Okay.

Okay, thank you.

Okay.

Your next question comes from the line of Brian Chase from JPMorgan. You may proceed.

Hi, good afternoon. Just very quickly, we talked about this second half recovery thesis after a potentially weaker first half. What exactly is fueling this recovery thesis and what do you think are the key factors or potential inflection points that will basically result in this recovery in the second half of the year?

We can separate, let's say, consumption to demand to put it differently, conceptually. We have seen that the consumption has not decreased as much as the demand. And so the higher consumption related to demand is because people are destocking. So if consumption is just maintained the level it is, the amount would be anyhow higher. I'm not sure if you got the point.

No, I got that point, but I'm just wondering what is going to create that inflection point; is it just the fact that -- people will be forced to consume?

I think there are two factors there. One is the financial situation, I think looks like starting to be less bad, so that should help. And second one is the people they will not have inventories, so even if they maintain the same consumption of the first semester, then [that] would be higher the second semester.

Okay, and do you see the contracts for potash in China and India as the key to sort of setting off --

No, I think exactly we don't control that at all, we are not part of an [organization, not] at all, as you can imagine. So what is the main reason; it's what (inaudible) at the end will be done. And I always have think that prices should be maintained, you have read my story before, but we will see that in the next future.

Okay, and --

But what is the main risk of course is the price of potash.

Right, of course. Okay, thank you.

And then we would have to see that realization in China and India.

Great, thank you.

Okay.

Your next question comes from the line of [Tyler Gentry] from 40/86 Advisors. You may proceed.

Just a quick question about your balance sheet; your debt has increased here a little bit over the past couple of quarters. You got that downgraded by S&P here this week. Do you guys have any kind of internal leverage metrics that you manage to or ratings targets that you have? And also on another note, what kind of dividend payouts are you guys targeting for 2009? Thanks.

Thank you. First let me point you that about the downgrade from S&P. We really think that today has [came] financial situation our [ship will be glass] reflect better what is the company situation, business or financial situation. So, of course, we are disappointed about the downgrade and we are working in order to get an upgrade. I would think we are going to get the BBB-plus back in the near future. Let me remark that for SQM business strategy having a strong investment grade is a key part of our business strategy.

About what are the metrics we are following? First, we expect not to increase the relation between debt and EBITDA, we are very strong about cash flow generation, as you can check our numbers during last year, the relation between debt and net financial debt was very low, even lower than 0.5, and we expect that this metric will not be higher than 1 in the future. That's why we do expect to keep a real strong cash flow generation, a real strong relation between debt and cash flow in the future.

Thanks, that helps. Do you plan to term out any of the debt that you guys added here lately?

Would you repeat your question?

Sorry, on speaker there. Do you guys plan to term out any of that debt that -- I'm just looking at the press release here, I haven't really dug into it. But it looks like you have $300 million of short-term debt, do you guys plan to term out any of that?

What we are doing now and as you may see in our balance sheet at the end of March, is we're increasing our cash and cash equivalents. I think it's part of the financial policy of the Company due to the uncertainty of the financial markets to have better cash position. And second we expect to decrease our short term debt and increase our long-term debt. I think both, keeping strong cash in our balance sheet and reducing our short term debt we will get a better liquidity in the future.

Do you think you'll do that in the US debt markets or there in Chile?

We are working in the Chile market now, I think the market in Chile is quite good. The interest rate and the terms you can get now here in Chile are positive, but of course we're working with banks in order to have syndicate loans, for example. And in the near future, probably second half, if it's an opportunity we can review alternatives in the US market. But for the moment being, we don't expect to go to the US market.

Okay, thank you for your help.

(Operator Instructions). Your next question comes from the line of Eugene Fedotoff from Longbow Research. You may proceed.

Good afternoon. I just had a question on your lithium business. Can you provide a little bit more color, what you think what portion of the volume decline in the quarter was due to inventory destocking and what portion was due to lower demand in your end markets. And also if you can give a little bit more color about the markets that they're weakest in the quarter?

Lithium we have been able to sustain prices, but clearly I think the market has been more affected in terms that it is related the big percent of debt to construction. And some also batteries related to what we could call laptops, as a matter of fact [products] use batteries. So that has been most affected in terms of demand and also consumption. And of course our all [material dye] there is a destocking situation, so that's why we think volumes as an average will improve in the next month. But clearly, I think it's one of the market that is a higher decline, which we think it would take longer to recover too.

Are you already seeing higher volumes in April versus March and February, and also what are your projections for this year volume growth?

We don't see volume growth this year, we think it's going to be negative. But, the second semester should be better than the first one because of the stocking situation and basically because of that. So even if the consumption is maintained, because of the stocking bad, clearly in all the business of the Company, this is the area has been more affected.

Okay, thank you.

Your next question comes from the line of Luiz Campos from Credit Suisse. You may proceed.

Hi, good afternoon, everyone. I understand that you were able to keep prices for lithium and iodine, but do you see any chance if consumption, let's say, remains low that you have to reduce prices? So for example, could the price increase that you had in iodine in the fourth quarter and even reduce lithium prices? Thank you.

We don't see that --

Okay, thanks.

Okay, your next question comes from the line of Geoff Gilbert from Peak Investment. You may proceed.

Hello, just a follow-up with the iodine sector. Is it a similar consumption is maintained and it's just a destocking, or do we think there's a possibility that the consumption is a little bit lower on the iodine given the end markets?

We're estimating demand be declining between 7% to 8% and we think consumption is declining in the range of 3% to 4%.

Okay. And would you be able to comment on the new applications you spoke of in your release in the agrichemical business for iodine?

Unfortunately because of -- we cannot disclose exactly because there is a new use so we have a say -- in the contract we have, we have a non-disclosure clause.

No problem. Great quarter, thanks for your help.

I apologize on that, but I can't.

And this concludes the Q&A portion. I would now like to turn the call over back to Mary Laverty for closing remarks.

Thank you all very much for joining us this afternoon. We hope to have you with us in the next call. Good afternoon.

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