智利化工礦業 (SQM) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SQM first quarter earnings conference call. My name is Ayesha and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mark Fones. Please proceed.

Good afternoon, everyone, and welcome to SQM's first quarter 2011 earnings conference call. For your information, this conference call will be recorded and is being webcast live. You may access the webcast later on, on our website, www.sqm.com. Joining me today as speakers are Patricio de Solminihac, Executive Vice President and Chief Operating Officer, and Mr. Ricardo Ramos, CFO.

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 products of 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 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 Executive Vice President and Chief Operating Officer, Patricio de Solminihac, for brief comments before we move to Q&A.

Thank you, Mark. Good afternoon, everyone. Thank you for joining us. During first quarter, gross demand in all of our business lines supported the solid earnings performance. Strong fertilizer market conditions drove growth in our SPN business line, and better pricing conditions in potash markets sustained our fertilizer business lines. Performance in our iodine and lithium segments was also strong, and current conditions in these markets should create unique opportunities to capture growth and increase our presence in the coming months.

We have observed a return to historical growth rates in our main markets, and we expect this healthy demand trend to continue in the following quarters of the year. Although market conditions continue to improve, we will face some pressure in term of higher energy and labor costs. We remain optimistic about the remainder of 2011 as underlying fundamentals in each of our markets remain positive, and SQM continues to position itself to capitalize current market conditions. Thank you very much.

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

Thank you. (Operator Instructions). And our first question comes from the line of Marcus Sequeira representing Deutsche Bank. Please proceed.

Yes. Good morning, everyone, just one question on the margins. You guys had very strong margins in this quarter. I'm just wondering if we can consider that those margins will maintain at those levels going forward? And also if you could comment a little bit on the risk you see, mentioned energy prices also other costs, if you could like just give us a sense of how much to expect those costs to go forward.

Thank you, Marcus. Regarding margins we expect, as we indicated in the press release, that we will continue with those levels of margins. We will see, and we hope also that potash prices in the second half will continue to grow and that also could help us to support better the pressure on cost.

The energy, the increase in energy cost is already reflected in the first quarter. That will depend what happens to the energy prices in the remaining of the year. And regarding the pressure that we talk about in the labor cost, that is related mainly to the exchange rate, exchange rate as being already reflected also in the -- in our cost in the first quarter. So if everything continues more or less the same, we should continue to have these strong margins in the remainder of the year.

Thank you. Yes, thank you. And just finally on potash prices, I think you guys indicated that you expect to see another $50 increase per ton and now into second half. Is that still the case?

Well, you know that we have been reflecting already increasing prices in potash because that depends where you sell. You know that potash price for China was fixed only for the first half of the year and then today the main producers, mainly Russians and Canadians, are waiting to the negotiations to end with the Indians, which will be very important.

And then regarding Brazil, which is a more important market for us, we are already selling it at higher prices because Brazil buys at spot prices. There are indications in the market that prices in the second half of the year for the spot price would -- could increase more, but we have to see that.

Alright. Thank you very much.

And your next question comes from the line of Fernando Ferreira, representing Merrill Lynch. Please proceed.

Thank you. Good afternoon, everyone. My first question would be if you could provide us more details on the regional breakdown of your potash sales, just for us to get a better sense of the realized pricing you will have until the end of the year.

Thank you, Fernando. Regarding our regional sales, we have been also indicated that we, this year, we have a very important project in potash that is regarding a granular plant. And the main objective of adding in a granular plant is that we can shift not only sales from standard grade to granular, which is a better return, but also we can shift our regional sales, meaning that we can sell more in Brazil and South America, mainly Brazil of course, than selling to Asia.

When you sell standard you need to go to Asia, mainly Malaysia, and China and India. So what we are shooting with this project that will be ready for the second half of the year is that will -- we will be selling much more granular percentage wise than standard, then moving that phase from selling in Asia toward more in Brazil.

And what is the capacity of this plant?

This plant we hope that we will have a capacity of close to 900,000 tons per year.

Okay. So today most of your potash is going to Asia, correct?

Not most, but an important quantity.

Okay. And the second question would be on lithium. You mentioned that you started to see a pickup in demand from the battery makers for electric vehicles already. And in the past you have been quite conservative on the pickup of demand from that sector. Is that a change from your previous estimates, or the demand from those customers are in line with what you were expecting before?

No, no. We have not stated that we have seen already important sales for the auto industry. What we have said is that we are seeing recovery for the battery in general, and that probably is mainly still for the small appliance, meaning notebooks, cameras, and cellular phones and other small electronic appliance.

For cars we are not seeing yet. There is a lot of activity going on, all the automakers presenting new models and most of them with the lithium technology in their batteries, but still there are small quantities. So we don't see important lithium quantities there. We continue to be, I wouldn't say optimistic or pessimistic, just realistic about the amount of vehicles that will be electrified in the future, but it's not a reality yet.

Okay. Thank you.

(Operator Instructions). And our next question comes from the line of Juan Tavarez, representing Citi. Please proceed.

Great. Thank you. Good morning, everyone, just a quick question, a follow-up to the recent question on lithium and iodine as well. Could you maybe highlight a bit what your utilization rates are? Because I saw that you noted that you might expect some pressure on pricing, yet the demand seems pretty robust. Could you highlight some of your utilization rates there? And also, could you give us an update on your CapEx spending, as you noted that you are going to have this new granular plant, just want to make the CapEx numbers I have are in line.

Thank you, Juan. First, regarding lithium, our total capacity is in the range of, we have stated, in the range of 44,000 tons. And we have enough capacity for what we are selling and we are prepared to increase that capacity as we see that the demand continues to grow. We have enough capacity to respond to that.

We see the price, as we stated in the press release, stable or, with all the pressure from the new supplier in the world, probably going down a little bit. We don't see increases in prices in the lithium business line.

Regarding iodine, the market is quite strong. The situation is that the demand has been picking up strongly after the crisis in 2009, and continues to be strong. Besides that, we have the situation in Japan, the earthquake and tsunami in Japan that affected, to some extent, the producers there.

So we continue to have strong demands, that we have been reopening some of our operation in Ireland that we closed during the crisis. So we are producing, and we are also in our, as you stated, in our investment plan to do some investment in order to increase capacity in Ireland. So right now the price of iodine has been increasing and we continue to sell stronger volumes. Regarding the investment plan, we have an investment plan for this year of -- in the range of $300 million, and that continues as we have been [in four].

Okay, thanks. And could you maybe give us a little clarity on this margin improvement this quarter? Was it mainly driven by prices? Was there anything within your cost that improved? I know you have been stating that you are seeing some energy and labor costs, but was there anything that you did or initiatives that were in place that offset those costs and stimulated these better margins? Or is it pure pricing?

Regarding margins, there are many effects, as you indicated. The main effect of course is the prices. And then the second effect that is from a market driven, which is that we have been having a better mix, meaning that we have more product of better margins compared with the less product of lower margins.

And, third, from a negative point of view, we do have pressure and we reflect that from the cost in exchange rate reflecting the more cost in the labor, and also in the energy costs. Regarding other costs, we continue with improvement in deals and improvement in some of the performance in our new plants, but the main effects are the ones that I already indicated.

And this better mix should continue in the coming quarters?

Yes.

Or should we see a change in mix?

Yes. I think that that will continue the same way that were reflected in the first quarter. Actually, probably in the case of potash will be better because we will be moving more to granular product. Granular product not only having better margin because of being granular, but also because of the geographical sales.

Great. Thank you, very helpful.

And our next question comes from the line of Craig Shaw, representing HLM. Please proceed.

Hi. Good afternoon. Quick question, on page two of your press release you note a shortfall on the supply side in the SPN market provided you an opportunity to increase sales volumes. Could you comment a little on that situation and what happened, how long it's expected to last? What sort of impact do you think it will, or opportunity you think it will have for SQM? Thank you.

Thank you, Craig. The main issue here, you know our main competitor in potassium nitrate is Haifa Chemicals and Haifa in Israel has a strike during the first quarter. So that means that they had to diminish their production, so consequently they have less supply from their part.

I see. Okay. So it's just kind of a one off kind of situation then?

Yes.

Okay. And could you also comment where iodine prices are today? Hello?

Craig, sorry. Craig?

Yes.

The prices of iodine are increasing in the range of 10% and we are arriving to the level of $13 per kilo.

Okay. Thank you very much.

And our next question comes from the line of Tim Tiberio, representing Chardan Capital. Please proceed.

Hi. Good afternoon. I guess my question is around I guess potash pricing with BPC announcing new pricing this week. I guess what is your opinion on whether that pricing can hold? You are going into the application season. And then, secondly, what is the time delay that you are seeing between SPN price increases and for (inaudible) potash price increases?

Thank you. Regarding potash prices, being that we are not that important in that market as we are in the other business lines. We are a follower in this market. We follow what the general market does. Our impression is that the price could increase the rest of the year and, as always, that depends mainly on the negotiations that the big producers that do with the big consumers, being China that they need to do the negotiation for the second half of the year, which have not been done yet, and the closure with India.

And that is a clear signaling for the spot price. And as you say, there are producers that are start announcing new prices for the spot, but these at the end of the day, in our experience, is always related to the -- what is the final prices that the producer end up signing with the big consumers, India and China. So, in my opinion, we have to wait, which according to what is going on in Haifa meeting this week, should be pretty soon, the closure with India.

And regarding the lag between the price movement in potash and potassium nitrate, the good thing about potassium nitrate being a specialty is that potassium nitrate doesn't have the big swings that potash has. So when potash goes down quickly, potassium nitrate do not do that. And on the other hand, when potash go up quickly, potassium nitrate also doesn't go that quickly. This is a good thing because it is priced much more stable.

With no further questions in the queue I would now like to turn the call back over to Mark Fones for closing remarks. You may proceed.

Well, thank you very much for joining us today. And we hope to have you with us for the next conference call. So, goodbye, everyone. Thank you very much.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.