智利化工礦業 (SQM) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the SQM third quarter earnings conference call. My name is Chanel and I will be your operator for today. At this time, all lines are in listen only mode. Later, we will conduct a question and answer session. (Operator Instructions).

I would now like to turn the conference over to Mark Fones, Vice President of Finance and Investor Relations. Please proceed.

Good morning everyone and welcome to SQM's third quarter 2010 earnings conference call. For your information, this conference call will be recorded and is being webcast live. You may access the webcast later on at our website www.sqm.com.

Joining me today as speakers are Patricio Contesse, Chief Executive Officer; 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, revenue, expenses, or other financial items, anticipated costs, synergies and products 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 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 filings made with the Securities and Exchange Commission and forward looking statements should be considered in light of those factors.

I now leave you with our CEO Patricio Contesse for a brief comment before we move to Q&A.

Good afternoon everyone. Thank you for joining us. We have continued to observe positive demand recovery across all of our business lines as market moved past 2009 lows. The market uncertainty that characterized 2009 has dissipated and consumer confidence has returned to market as the global economic situation improves.

During the first nine months of 2010, demand for all of our business segments has recovered much more robustly than we initially expected, reflecting the strong underlying fundamentals in each market. We anticipate that this momentum will continue during the remaining months of the year and through next year. And considering that the Company is in a unique position to capture growth in each of these markets, we remain optimistic about the long-term prospects of SQM.

Thank you very much.

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

(Operator Instructions). Your first question comes from the line of Francisco Errandonea of Santander. Francisco, your line is open.

Sorry. Good afternoon. I have one question on the margin side. The fertilizer, the Special Fertilizer division posted a significant decline in margin, from less of 33% last quarter to a little bit above 23%. Do you have any reason of that decline? Do you expect that to be permanent or is this a one-time effect?

Francisco, Ricardo Ramos speaking. First, it's important to consider that the Company's total operational costs after third quarter 2010 is close to $870m. And an important part of these costs are common costs, or fixed costs, that need to be allocated between our business lines.

We have made some small adjustment in cost allocation during the third quarter; an increase of about $5m in the Specialty Plant Nutrient cost with a consequent decrease in the same amount in MOP.

Additionally, we had an increase of approximately $3m in lithium cost with a consequent decrease of the same amount in the iodine cost. Therefore, if you make the previous adjustments, margins for third quarter in iodine, lithium and MOP are similar than those observed during second quarter.

In the case of the Specialty Plant Nutrients, third quarter margins are in some way lower mainly because the significant increase of sales of blended fertilizer during this quarter with margins lower than our core business production nitrate. Anyway, remember that we are talking about reallocation between $3m to $5m over $870m.

Thank you. But looking forward, with the new classifications you did, do you expect the margins, if prices don't move, to maintain at the current level or do you expect some increase in margins, especially in the Fertilizer business?

We expect that, probably Patricio will explain in detail, that we expect some increase in margins considering the price trend in our business.

Great.

Your next question comes from Suzanne Lanharit from Banchile.

Hi. Good afternoon. I think it's basically a follow-up on Francisco's question regarding margins. There was a sudden slowdown in the cash flow generation during the quarter. Was this mainly due to volume decreases or price decreases? I think for the Fertilizer segment, you already said like there was a strong -- there was strong volume, so I assume prices were below what you would have accepted. But for the other segments, what would you say was the main driver? Thank you.

Your next question comes from the line --

Sorry. Ricardo Ramos speaking here, just the answer of the question. As you know, margins during third quarter are similar to the one registered during first quarter and lower than the second quarter. First, we have to consider that revenues during third quarter are lower than second quarter, with a consequent effect of fixed costs in the overall margin.

Second, volumes of lithium during third quarter that anyway are significantly higher than third quarter 2009 are lower than second quarter 2010. Lithium margins are higher than SPN average margins.

Third, revenues related to trading activity, including blended fertilizer with lower margins than our core business, are relatively higher than the one observed during second quarter 2010.

Finally, costs are slightly higher due to the energy cost and Chilean peso exchange rate during third quarter this year as compared to the previous second quarter.

On the other hand, prices of fertilizers, lithium and iodine are similar, or slightly higher, during third quarter compared with the previous quarter.

Thank you.

Your next question comes from Fernando Ferreira of Bank of America.

Good afternoon everyone. I had a question on volumes. You mentioned in the press release that some of your businesses like iodine and lithium you've seen a restocking happening up until the third quarter of 2010 and that has subsidized. So does that mean that we're going to see lower volumes in the fourth quarter, or not necessarily? So how are you looking into volumes in your different business segments in the fourth quarter and also in 2011?

Fernando, we didn't hear you from the beginning. Something happened with the communication. Can you repeat the question please?

Absolutely. You mentioned in the press release that the restocking that happened in some of your business might come to an end, or has already subsidized. So does that mean that we're going to see lower volumes in the fourth quarter, some of your business lines or not? And can you comment as well for 2011 what you see for volumes in your different segments?

First of all we have you know some seasonality in some of our business related basically with nitrogen activity. But we think we're seeing the impact of that maybe in nitrogen. We can see some slowdown because it should start higher in the first quarter next year in Europe and now we have been aiming with (inaudible). But anyhow, the projection in the fourth quarter are higher than what we were expecting, much higher than what they were last year.

Instead, in terms of the iodine, there we think there has been some restocking in the range of -- during the year, in the range of 1,000 metric tons. But in general, the market has been historically high. So we don't see, in the case of the iodine, as strong as it was in the third quarter. That should be in the average of the first half.

And then in lithium, we think it's going to be equivalent. We saw some restocking in the second quarter, in the second semester, but not in the -- we think that's already been done, so we see higher.

And in the case of MOP, we're looking forward to some more. So earning -- and also, we are seeing anyhow, a return on our pricing in general are improving in the average of our business. Not in lithium, but in iodine somewhat and also in the nitrogen. So we're making a really good quarter, considering volume are not so different from the third quarter, and because prices start to catch up a little bit, basically in MOP and also production nitrogen.

In the case of the next year -- that was your other question -- we see a big rebound in 2009. We think that in the next year. In the case of iodine, I think demand will be strong. But there is a possibility of a third party here in Chile coming on-stream with some production. That should maintain our volume in the same level or slightly less next year, compared to this year but the scenario price in there could change.

In lithium, also we see a relatively strong year. So we think that volume could increase and will depend on how -- when the operation of Galaxy will come on-stream. That, we think, should be by the third or fourth quarter next year. If that's so, we think that the volume from business should be higher, but prices there probably some decline.

In the case of MOP, we are on a gradually, every year, increasing our capacity. And you know that the scenario of MOP, in terms of pricing, is changing quite rapidly. And so we are optimistic at the end of the day, for next year.

Okay. Thank you Patricio.

Your next question comes from the line of [Celine Moscera] of BICE.

Hi. Good afternoon everyone. According to information that you just published in the press release, we have seen some recovery in prices for the segment of Specialty Fertilizers and some MOP. But I would like to know when we'll see some recovery in the other segments, especially in lithium and iodine.

We have seen, as you, also a recovery in the Fertilizer business, mainly quality or special. We think lithium will not increase prices. It probably will decline prices because of the supply/demand situation in the market. There's an extra capacity worldwide compared to the demand. So we see that price of lithium should come down slightly a little bit next year. In the case of iodine, we should see some increase in price.

Okay, thank you.

Your next question comes from the line of Tim Tiberio of Chardan Capital Markets.

Good afternoon. I guess my question surrounds potash pricing trends and what you're seeing in South America. What is your expectation on a per tonnage basis for initial price increases, going into early 2011?

Today, we have to estimate. But clearly the US has been in the leading position in terms of pricing. We think that gradually that reality should come on-stream here in 2011. We see the consolidation of the industry in Russia. We see also very strong demand and it should come some restocking that we have not seen in 2010 in MOP.

So we are not very optimistic, or not optimistic with any of them. Shows an increase of 15% to 20% of prices for next year in MOP. That is our estimate at this moment.

Okay, so 15 --

15% to 20% increase in prices.

Okay. Thank you. And then --

That is our best estimate with a lot of question marks behind in the sense that market is to continue strong, maybe we can see better than that. And until now it has been very, very strong in terms of demand. And in terms of inventories, we see very little, even coming down in the US, coming also down in some of the futures around the world. So we see an MOP very, very strong considering also the price of the commodity ag products.

Sure, thanks. That's very helpful.

Today what I should assume and that's what I was telling you before, it's an average price higher next year than this one.

Okay. And then I guess as far as current production within potash, can you remind me of what your current output is and how that potentially can ramp?

We are today in 1.6m metric tonnes. And that should be increasing by 2014, in the range of 2.1m, 2.2m metric tonnes. Considering that production, 200,000 metric tonnes of SOP.

Okay. But should we assume that --

I mentioned also -- excuse me. SOP has much more margins than MOP and this year we have just reduced MOP. So a tonne of SOP in terms of margins has more value than 1 tonne of MOP.

Okay. So with potash applications returning to very strong levels, should we expect that your utilization is pretty much close to 90% of that current capacity?

In MOP, we are 100% capacity. We are increasing part of our CapEx. I think the main part of our CapEx is related to the increase of capacity that I was telling you before in MOP.

Okay. Well thank you very much for your time and the good quarter. Thanks.

Your next question comes from the line of Francisco Errandonea of Santander. Francisco, your line is open.

Yes. I have two additional questions. The first one is on the CapEx. Have you changed your CapEx estimates for the coming year?

And secondly, if you can remind us what's the breakdown on cost between peso and dollar and between energy, labor and other costs?

Well we have not yet defined officially the CapEx for the next three years. Probably that will be done by January. All I want to mention constantly behind the CapEx that is related with increase of products not only in volume but also in quality in terms of we are going to produce more granular than crystallized. And that is very important because it permits us to be more nearby the market with higher prices and less costly to go for us like in the steel in the US and going to China, for example because today we have mostly standard. And we're moving, in this period of time, to more granular.

So basically, the volume and also the characteristic of all quarters.

And then, because of the higher demand we have seen in iodine and nitrate, we are also looking forward to increase our capacity of those products too for the next years besides the economic depreciation and improve of process and cost that we're working around. So basically, those are the costs behind the CapEx. The numbers, we're still making the [badges] and we think a month or two months from now we'll be able to have a number for the next three years, officially.

In terms of cost, in terms of the energy, we have an influence in the range of 8% to 9%, in terms of costs related to energy. And in terms of the Chilean peso, we have in the range of 25% of our costs are related with Chilean peso. But also, we have not exactly, but some certain hedge with the income that we have, revenues that are related with euro and Europe that are also in the same number in the range of $240m, $250m. I'm not saying it is exactly hedged, but it helps quite a lot to diminish the effect of the revaluation of the Chilean peso.

The 8% to 9% in aggregate, that is mainly the electricity or the other energy related costs?

Electricity is about 3% to 4% and the rest is related with oil that are related with the track of ourselves and contractors.

Thank you very much.

Just about 50/50.

Okay, thank you.

Ladies and gentlemen, that concludes your Q&A session. I'd now like to turn our call back over to Mr. Mark Fones, your Vice President of Finance.

Well thank you all very much for joining us today. We hope to have you with us in the next conference call. So goodbye everyone.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day and enjoy your Thanksgiving.