智利化工礦業 (SQM) 2009 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the SQM second quarter 2009 earnings conference call. My name is Noalia and I'll 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 today's 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 conference, Mr. Patricio Vargas, VP Finance and Investor Relations. Please proceed.

Thank you, Noalia. Good morning everyone, and welcome to SQM's second 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 on our website, www.sqm.com.

Joining me this morning as speakers are Patricio Solminihac, Executive Vice President and Chief Operating Officer and Ricardo Ramos, Chief Financial Officer.

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 for the first half of the year and then we will go to the Q-and-A session.

Beginning on the slide number two, we can see that our revenues for the first half fell 15% with respect to the first half of 2008 totaling $665 million. During the first half of this year, demand in our main businesses was negatively impacted by the global economic slowdown. As a result, we observed lower sales volumes compared to the same period of the previous year in line with the prevailing economic trends.

The effects of the lower sales volumes were partially offset by higher prices in iodine and the significantly higher sales volume of potassium chloride.

In the Specialty Plant Nutrition business line, volumes during the first half of 2009 were lower than levels observed in 2008. The end markets in this segment continued to be effected by the economic circumstances and uncertainty surrounding prices in the potassium chloride market.

We have, however, in certain key markets begin to recover and in general we feel that demand will begin to turn around particularly in light of the recently settled contract in India, which has taken some uncertainty out of the market. With the new established market price in India, other important potash related markets have begun to react and to move volumes.

In line with the global trend, we also observed lower demand in iodine. Prices in this business line, however, were higher during the first half of the year, helping to offset lower volumes. We believe that orders for iodine and derivatives for the second half of the year will be higher than those observed in the first half of 2009.

Our lithium business segment was also negatively impacted by lower volumes in the first half compared to the first half of 2008. Prices for lithium carbonate remained in the same level as the year-ago first half. We believe volumes in this segment should be higher in the second half of this year compared to the first half.

In slide number three, we can see that operating income fell approximately 4%, reached $232 million in the first half of 2009. Lower operating costs for the first half of 2009 were due to improved operating efficiencies in some business segments, lower average oil prices, and a strong US dollar. This factor pushed production costs lower in the first half of the year compared with the same period of last year.

On slide number four, we can see that the net income totaled $169 million for the first half in 2009, which is 11% lower than the 2008 period. As we expected, 2009 has proven to be a challenging time for the Company. Results for the first half of the year, it has been greatly influenced by the lagging global economy resulting in less demand in our primary market.

Despite the negative trends observed [in recent] markets, we have been actually seeing signs of recovery in some key markets. Although average price for the potassium related fertilizers should be lower in the second half of the year, we believe that demand in general has reached a [breaking] point and it should begin to recover gradually. As a result, we should see higher volumes in the second half of 2009 than those recorded for the first half of the year.

The year 2009 will continue to be a demanding year for SQM. In light of the challenges ahead, we'll continue our efforts to control costs, to improve efficiencies, and to better position our self to capture future growth as market begin to bounce back. Thank you very much.

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

Thank you. (Operator Instructions) Your first question comes from the line of Christian Contreras with Banchile.

Hi, everyone. First of all thanks for the call. My first question is regarding potash business. Do you have the quarterly potash based volume breakdown -- the second quarter increase regarding the first quarter. And for my second question is in the reported one half potash volumes, do you maintain your guidance of 600,000 tons for the full year? Thanks.

Thank you Christian. First, regarding first and second quarter for potash volumes, are similar in both quarters. And now regarding to your question for the [year], we expect that more volumes in the third and fourth quarters and our estimate continue to be in the range of 550,000 tons to 600,000 tons for the full year.

Okay, thanks.

Your next question comes from the line of Cesar Perez-Novoa with Celfin Capital.

Good afternoon gentlemen. My question relates specifically to your input costs. As we go into -- further into your capital expenditure program, how should we think of costs potentially going down given the dilution that you have on the -- on your growing volumes? I would appreciate it if you could give some guidance on that.

Thank you Cesar. The main factors as we have discussed before that affect our costs, that lower our cost in the first half was exchange rate, energy, and yields. And of course we continue to work in increasing our yields and some of our investment goes in that direction to being able to continually increasing yields that of course have an effect on costs.

However, you also have to remember that the most important part of our CapEx program goes to increased volumes.

Okay, but going beyond, perhaps, maybe as an indication on the long-term percentage wise [rises] if that can be disclosed, how much should we expect of costs going down on a total, on a consolidated basis, not by product, but on a consolidated basis once your CapEx program is fulfilled?

The total cost -- there are areas that of course depend on us and depends on the -- on our investment programs and our efficiency on the day-to-day operation. However, there are other areas that do not depend on us, mainly exchange rates and energy costs. But of course we have to take -- we do things in order to improve our use of energy and the source of energy, the cheaper sources of energy that we use. But the cost -- the basic cost doesn't depend on us. And that of course affected, and affected us in the past.

Regarding the yields, with the new plan for potassium nitrate that we expect to upgrade in Coya Sur by mid of next year, we expect an important increase on the yield of potassium in the production of potassium nitrate. And also with the full operation of our prilling plant, of course we [diminish] also the consumption. So we see there a important effect in the costs. However, we do not disclose exact effects on this, in each business line.

Okay. Fair enough gentlemen. Thank you.

Your next question comes from the line of Luiz Campos with Credit Suisse.

Hi, good afternoon everyone. My first question relates to potash. You state in the release that you want to double volumes for potash sales next year. Just wanted to confirm if that means selling as much as 1.2 million tons?

And also regarding the approval you got by the environmental agency for the expansion of up to 2.2, I wanted to understand if the additional 1 million tons would go all for potash or if anything would go to Specialty Plant Nutrients? And how much of the total CapEx for these expansion is already incorporated in the current investment plan? Thank you.

Okay, thank you Luiz. First regarding the potash sales that we are expecting for 2010, that is true, we are thinking in more or less double what we expect to sell this year. As I say in a previous question, this year we expect to sell between 550,000 to 600,000. So next year, it should be in the range of 1.2 -- 1.2 million tons of potassium chloride.

And regarding the approval of -- we have to remember that we have an approval, a general approval from the authorities in order to have additional extraction of brine till 2030. So what we get as an additional approval are the specific plans that we need to open say facilities that we need to build in order to have additional products with the already approved brine extractions.

The 2.2 that we are -- have this framework approval is already in a -- in our investment plans for 2009-2010 in the range of [$350 million] total for all our operation in this (inaudible).

Okay, but I -- I understood that the total expansion of up to 2.2 would involve as much as $650 million in CapEx. Am I wrong?

Yes, this is the estimate. The numbers that we posted in our approval are indicative. They are not really numbers that need to be exact because there are a lot of engineering to be done in some of the place. However, to answer directly, there are some investments that we expect to continue doing in this plant toward 2011.

Okay, thank you.

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

Hi, thanks for the call. Just curious, given the settlement on the Indian contract price being much lower than where prices were in the first half, are you going to have to give customers any credits on potash sales that were made in the first half to balance out where things have settled as far as potash prices go? And if the answer to that is yes, is that also going to apply to potash related volumes that are in your Specialty Plant Nutrients segment? Thank you.

Yes, thank you Craig. Yes, you are right. The price that was settled in the Indian contract was lower than the prevailing prices. And that's of course meaning what we comment in our press release, that average prices for our potash related products in the second half will be lower to what we were in the first half.

We already have reflected in the first half all the prices. So we don't have any change as you ask that we need to do on those prices or rebates or whatever. So, everything is already reflected on the first half.

Okay, so there's not going to be any adjustments in the second half financials to -- there's no need to give a customer credit because you sold them potash at $750 a ton in the first quarter. You don't have to make up -- give them anything back just because potash prices have fallen since then?

No. We don't have any such things to do in the second half.

Okay, great. And then looking at the second half as far as Specialty Plant Nutrients go, because potash prices have fallen, Specialty Plant Nutrient prices will come down some as well. Can you give a little insight if possible as to what sort of reduction in prices you're looking for? You managed to keep prices quite high in the first half. And then what sort of margin expectation you have given that some of the stuff that you sell especially in the blends, phosphates and nitrogens, have come down quite a bit as well? Thank you.

Yes Craig, you are right. What we have to see is that each of our products goes to different markets than the direct potassium chloride market. So the pricing in each of those products depend -- of course the potash price has an influence, but depend also on many other factors, which is the situation on the cost, the situation on the supply and demand in each of those markets for those at Specialty Plant Nutrition.

So adding everything up, our expectation is that we will see lower prices, average prices of Specialty Plant Nutrition in the second half compared to the first half. Now, in some markets, in some products it will be more, in other product it will be less. But we are thinking that on average, it could be in the range of 12% to 15%.

Okay. And because costs for some things are much lower like phosphate, nitrogen, what not, what sort of margin do you think you would be able to realize on SPN sales in the second half?

Regarding the -- if I understood correctly the question, regarding the volumes related to that, we are seeing that the volumes in the Specialty Plant Nutrition will be higher than the first half. After all, we are not getting yet to the normal volumes that we expect to continue to get high in the next -- in 2010.

But we are seeing already, for instance in Spain, which is a very important market for soluble fertilizer, we are seeing a lot of much activity. Also in Mexico, which are very important markets for us. So we feel comfortable that we will start to see in the second half much nicer volumes than the first half.

Right, I understood that on the volumes. My question was pertaining to margins. You'll have some better margins which -- I'm sorry, you'll have better volumes in the second half which will help margins. You have lower sales prices, which will hurt margins. You also have lower cost for nitrogen and phosphates, which will help margins perhaps. I'm wondering how you see the margin in Specialty Plant Nutrients evolving in the second half of this year.

You are right. You are right and it is very difficult to say in a straight answer on that. But you are right. Volume will help us, price will not help us, and then costs will help us a little bit and there will be a kind of balance of everything. So what the exact result will be, we will have to see. But then we do not like to disclose the exact numbers that we are thinking.

Okay. I guess if you don't mind, I'll try it one other way. Do you think your margins in Specialty Plant Nutrients in the second half will be better or worse than they were in the first half?

I -- yes, you really want to know the answer, so I will do it. The best thing that I can say is that it will be similar.

Okay. That's great. Thank you very much.

(Operator Instructions) Your next question comes from the line of [Phily Pekov] with Citigroup.

Hi, actually it's Tereza Mello from Citigroup. I have a couple of questions, first on your volumes for the Specialty Plant Nutrition products in the second half. In your 20-F, you mentioned that you are expecting volumes this year to decline 10% to 15% in 2009. And then they declined about 30%, 33% in this first half. Do you think you can recover, the higher volumes in the second half is going to be enough to recover this guidance of 10% to 15% for the whole year? Or probably we should look for a little bit less?

Thank you Tereza. What we are expecting is that volumes in Specialty Plant Nutrition in the second half will be better than they were in the first half. And we also expect that those volumes will not get to what "[we said are] normal volumes." Even though markets have recovered, they are not -- we don't expect to be fully recovered during the second half.

Okay.

We've not given an indication on what is the percentage that we expect the volumes to be during the year. What we comment before was regarding the price.

Okay. Thank you. The other question that I had was in the iodine division. You mentioned that your sales in that division declined more than the market sales. And that you -- how is your market share evolving because you lowered your sales more than the -- given your size in the market you've lowered your sales more. You expect to recover the market share going forward?

And the same thing for lithium carbonate, did your sales decline more than market sales? Is your market share declining the first half and you expect to recover already in the second half?

Yes. The dynamics in these two segments are, to some extent for this question, similar.

Okay.

We are a large player. I'm sorry? We are a very large player in both markets. So what we are planning in iodine is to assure that both these lower demand in the market will not affect the price.

So the price has been -- has been higher than it was before. So we are taking a bigger share of our market share in the remaining, [which I mean] in demand. And of course, we believe and we are seeing a much better volume in the second half like all our divisions, but at the same time we expect that we will get back our traditional market share.

Already in the second half?

No, not already in the second half. The second half, as we explained, we are seeing volumes in iodine to grow close to 25% of what was in the first half, which is a very important growth. But still not getting to the total, which is -- we see that in 2010 we'll continue to grow more. And in the case of lithium, which is lagging behind, we expect close to 20% more volumes in the second half than the first half.

Okay. What I wanted to understand is -- I understand your volumes, but do you think the market is recovering at the same volumes or a lower volume and you're regaining market share, or the market recover is lower?

As I indicated, we will start recovering our market share. We don't like to say at this stage the exact numbers.

That's fine.

But we expect to get the -- what we feel is what we need to have as market shares in those both segments.

Okay, thank you very much.

Your next question comes from the line of [Glen Sedoff] with TIAA-CREF.

Hi, this is Glen. Thank you guys for the call. I have two questions. One regarding your CapEx again, you -- I'm understanding that most of it is going towards the potash volume increase. The question is, is there any other segment that you're going to extend the volume, SPN, iodine or lithium?

And the second question is your leverage. Debt to EBITDA has been increasing LTM numbers up to 1.5, which is highest in the recent history. What -- are you comfortable with that number, and what is your target or what would you be comfortable with? Thank you.

Thank you. Regarding the CapEx, as I explained before, we expect a total CapEx this year in the range of $350 million, the next year more or less the same amount. And of those, half is going more or less to our potash related products in the Salar de Atacama.

Of course, we are doing other things and we are preparing ourselves in order to be ready for the bounce-back of the market. And in this respect, one, we finished expansion program for our lithium carbonate plant that we increased total capacity to 40,000 tons per year. And also we are building now our potassium nitrate new plant of 300,000 tons in Coya Sur that will be ready middle of next year. So that also will give us additional capacity for the Specialty Plant Nutrition business line as potassium nitrate.

And also we finish our upgrade in Nueva Victoria, operational for iodine, where we bring that capacity to 4,500 tons per year of iodine. So I will say that we have been increasing our volume, our capacity let's say, in all business lines.

Regarding the question on leverage, yes, we have increased the debt, as we are commenting before. The main drivers for that was of course the dividend that we pay at the beginning of the year because of our profit the year before, also the investment plan. And of course with these downs, we have increased our working capital, mainly inventories because of the lower volume.

But we expect that this -- as volumes start to recover in sales, we expect to lower our inventory (inaudible). We have control our account receivables. So we feel comfortable. We don't expect that the debt will increase in 2010. So to answer the question, we don't have worries in this area.

Okay, but do you -- you increase the debt -- you issued locally, and your debt did go up by a little bit, and obviously now the debt to EBITDA is 1.5 or in that area. Do you expect it to go down to 1.2 one time, or you -- will you keep it around 1.5? And will you keep your debt number where it is right now? That's more of my questions.

If I understood correctly, what we don't expect is to increase a lot the debt, and we expect that the EBITDA will start to recover so that the coverage ratio will start to going down of what it is today.

But the debt will pretty much stay at the current level?

Yes, the debt, I will think that maybe it's going up but marginally during the second half, but then will stay stable during 2010.

All right, thank you.

Your next question comes from the line of Cristian Moreno with Santander.

Yes, hi, good afternoon. First of all, thanks for the call. I would like to know if you can give us more details on the sales mix per region or country of your potash sales, and also if you can give us an update on the cost structure of the Company? Thank you.

Thank you. First of all, regarding the sales of potassium chloride, our initial market of course is Chile. We used to sell in Chile in the range of 100,000 tons of potassium chloride. However, because of the same reason that happen in all the world, that volume this year is lower. Another traditional market for us is Brazil. We have been selling also into Brazil. The next group of countries is Peru and Ecuador. And given the volumes and our increasing heavily on those volumes, besides these neighborhood markets, we need to go farther away. So we are sending also potassium chloride to South Africa, also to -- some to Europe. And also we have some sales in China and India.

Regarding the cost structure, besides what I comment on, the change, there is not changes of what have been.

Okay, thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to hand the call over to management 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. Good bye.

Thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Have a great day.