智利化工礦業 (SQM) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2012 SQM earnings conference call. My name is [Jeff] and I'll be your coordinator for today. At this time all participants are in a listen-only mode. Later we will facilitate 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, Mr. Mark Fones, Vice President of Finance and Investor Relations and you have the floor sir.

Good afternoon everyone and welcome to SQM's First Quarter 2012 Earnings Conference Call. For your information this conference will be recorded and is being webcast live. You may access to look up 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, CFO.

Before we begin, let me remind you that statements in this conference concerning the Company's business outlook, futures and other performances, anticipated profitability, revenue, expenses or other financial items, anticipated cost synergies, product or service line growth, together with other statements that are not historical fact are forward-looking statements and that term is defined under the 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 cost actual results to differ materially from those stated in such statements.

Risks, uncertainties and factors that could affect the security 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 our CEO, Patricio Contesse for brief comments before we move to Q&A.

Good morning and thank you for joining us. The first strong earnings here in the first quarter of 2012 and we are pleased to be able to discuss them with you this morning.

Our positive start to the year and strong result were a result of increased average prices in all business lines as compared to the first quarter of 2011, and increase in gross margin. In the iodine business line, the market has remained tight and prices were up 10% when compared to the fourth quarter of 2011 while cost pressure has remained relatively stable.

We continue to see strong demand for all users of iodine. In the strengthen market demand continues to grow as a result which we see our sales volume to lithium and derivative increase over 10% compared to the same volume in 2011.

Now to gross market revenue in our potassium business line were up compared to the first quarter of last year. Recently we have seen signs of improvement in global potash demand and new [companies] have been settling in countries like Brazil, et cetera.

In SQM, volumes were down as a result of increase supply and demand was lower than expected. We remain confident that this market will recover during the remainder of 2012.

Capital expenditure plans are moving forward and we still expect to invest over $500 million during 2012. About 70% of our CapEx during 2012 will be related to new expansion projects. We continue to monitor the financial market and developments in Europe very closely and remain optimistic about the remainder of 2012 for SQM. Thank you very much.

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

Thank you. (Operator Instructions). Our first question comes from the line of Ben Isaacson with Scotia Bank. Please proceed.

Thank you very much. Just one question on potash and then I want to turn to the iodine market. Can you talk a little bit about the shift in mix in terms of where your potash was sold this quarter versus last year and how you see that evolving over the next year or two?

Well basically last year where we end up the granular and compacting plant last year that is permitting us to sell more in Brazil, this quarter that we use to sell last year, that remain then the most significant change.

And how much potash do you sell in Latin America, not including the Brazilian market?

Really we sell in not too much but we sell very [big] in Argentina, Chile, Peru, Ecuador and Colombia. And at the end all those volumes should be in the range of 100,000 metric ton of volume there.

Okay, great. And maybe I'll just ask a couple of questions on the iodine market. If I remember correctly, you closed down I think it was one or two iodine plants a couple of years ago. Now I don't know if those are still shut down or not, but obviously the market is starting to tighten up a little bit. Do you think you would open those up again soon?

Well, this year we are pursuing to sell a slightly less than last year. So, still I play there are total capacity in the range of 12.500 but we're selling less than that, even though when additional capacity to 15,000 so we expect to be use some future not too long from today. But clearly this year those capacity not open -- we're not producing our total capacity.

Okay and the iodine prices that have increased quite recently, is that entirely due to demand growth or are there some supply challenges globally?

It's a mixture of both. Demand has increased but also there's some slower supply from our to (inaudible).

Okay, and then just my last question on iodine. Can you talk about your costs and how you see those costs changing? I think you mentioned in your initial comment, you see the cost being relatively stable. Can you provide a little bit more color in terms of costs and therefore margins?

Well I would say that unfortunately we don't disclose our costs in iodine so I apologize for that.

Okay, so in a flat iodine price environment, you expect your margins to stay relatively flat?

Yes.

Okay, thank you very much for your help.

Our next question comes from the line of Rodrigo Ardonez with Santander, please proceed.

Hi, everyone thanks for the call and congratulations for the results. I have two questions. First regarding the SPN division where you saw increasing competition and this affected sales. Can you talk a little bit more about this, you were affected in prices or volumes?

And the second question is about the global market, in the press release you showed that European consolidated sales decreased more than 40% compared to last year for first quarter. Is it a consequence of the economic slowdown in Europe? And in line with this how is affecting the economic scenario to SQM operations regarding the situation in Europe and a chance of a slowdown in China? Thanks.

I just say regarding to SPN we saw [within] for international market a little bit weakened the last quarter 2011 and the first quarter of 2011, not only for SPN but on the products. We see that is not changing significantly so our forecast for the year recently as we had thought in the budget for the year, of course there are some less sales in SPN pursing that Haifa has normalized their operation.

But we see that next quarter, second, third and fourth would be much better than the first quarter than we had -- that you have and we have.

Okay, thanks and regarding the second question of the thing on the economic scenario on the influence to SQM.

The impact of European market today, we have not really been significant to us and the industrial chemicals were selling okay. The fertilizer was relate to what's going on in the market [again] not only in Europe. Clearly the currency of the weakness of the European market affects us our return in terms of the fertilizers that we sell there, not industrial chemicals, because we sell them in US dollar basically.

But the fertilizer we sell in Euro so clearly we are affected there [and we care]. But prices of SPN are really good but potash prices in Europe are really low because of the exchange currency. But we have not seen in our business significantly or importantly we are affected what's going on in Europe till up to now.

Regarding a chance of a slowdown in China?

China we sell very little fertilizer [in amount] so it does not affect us. And lithium has been very strong in China and iodine too. And the fertilizer really, we're not sell too much. And we have diversified more to Brazil than to China because of our activity of our products.

Okay, that's great, thanks a lot.

Our next question comes from the line of Fernando Ferreira with Merrill Lynch, please proceed.

Thank you, I just had a follow-up on iodine. When do you expect the supply demand to be balanced again or the market to be less tight than it is at the moment? It's still 2012 or you think this tightness might continue for the next couple of years?

I think in line today is [equally] with the supply and demand. We -- there has no any plan that is not without iodine today. Even we are slightly increasing our inventories that we have very low. So, we see a quite stable scenario in a sense and some of the problem that have facing our competitors are give us space for next year because demand continue to grow can give the space [value to resolve] the problems. But up to now we see a stable situation where we are today.

Okay, and then related to potash, I'm not sure if I got it right, but do you still plan to sell 70% of your volumes into Brazil this year?

Not 70%, what we are saying that we are selling about 700,000 metric tons of (inaudible) and that's nearly 70% of our total sells, 60 something. But clearly not everything's going to [receive the rate]. So, we're not really selling 70% in Brazil. But we are increasing for 40 hundred thousand metric ton of (inaudible) to 700,000. But it doesn't mean that everything is going to Brazil.

Okay. Thank you.

Our next question comes from the line of Wesley Brooks with Morgan Stanley, please proceed.

Thanks guys. My first question is on SPN, if I'm not mistaken at the beginning of the year, you pushed up prices a bit there. I'm just wondering have those price increases gone through given the slightly weaker demand? And has the restart or at least the production increase from Haifa impacted pricing at all, or do you expect it to impact pricing or just more on the demand side?

I think what happen with SPN, you are right that we increase on spot prices. And but we see that (inaudible) has not been really there being because [annual] fertilizer were weak -- weak in the last quarter of last year and the first quarter of this year. So, it's was not differently in that sense. We see a strong recovery for the next quarter -- second, third and fourth, anyhow there had been a correction price in Europe because of the Euro, new policy.

And the only reason that we should sell some quarter less than last year would be because Haifa has normalized operation. Beyond that we don't see any other arrangement.

Okay, thank you. And then my next question just thinking about the global potash markets, you know we've got -- from a big picture perspective, we've got an interesting situation where Brazil and the US is looking very strong, India, Europe and parts of Asia looking quite weak.

I'd be interested just to get your thoughts on what that means for the global pricing, outlook and also if you think that has -- that might have any impact on the SPN business as that kind of plays out.

Our view as related to potash is that prices will be sustained and we don't see a decrease, and we don't see an increase. Volumes are picking up again, we will witness that you have said anyhow so we have prices stay as they are and we see we are in a good relation with our SPN.

Excellent, thank you very much.

And in our case, I must say that SQM sell 100% of their volume, our potash will reduce.

Yes, thank you.

Our next question comes from the line of Giovana Araujo with Itau, please proceed.

Hi, thanks, thanks everyone. My first question Patricio is about the potential allocations of potash to Brazil. If you can share with us what's the current share of Brazil in your total potash allocation and what's the mix between -- the count mix between granular and non-granular potash?

We are estimating to sell this year in the range of 1.1 million metric ton of potash and that would be 700,000 metric ton of granular compacted and 400,000 standard. We are selling slightly low potash than last year. And we are increasing significantly from granular capacity from 400,000 to 700,000.

Okay.

(inaudible - multiple speakers).

Okay, thanks and a second question. Balancing the prospects for prices and volumes for this year in each of your business line, would you say that your operational performance in the second half of this year will be even stronger than we saw in the first quarter?

I think the operation has been quite well in general to no sides of the Company. We -- so, we see a quite stable situation in terms of cost -- a normal operation clearly I don't see any major problems in that area.

Okay. Thanks.

Our next question comes from the line of [Hilary Brown] with [Lenin Partners], please proceed.

Hey, thank you for taking my question. I want to get back to volumes and prices. I know you said especially about this -- especially [finance] (inaudible) a couple of times, but can you just repeat those numbers of your expectations for volumes for 2012 and prices and then also the volumes and prices in your other businesses? Hello?

No, I didn't heard the word so they were telling me, more or less, your question. Speaking of it. We didn't hear very well. But, the answer, if we had listened you well, we see until now a very good scenario for our volumes and prices in all areas of our business. So, we think we will have average prices in all our products higher than what we have last year and volumes slightly less than iodine and slightly less in SPN because of the high (inaudible).

Okay, volumes slightly less than iodine and slightly less in SPN, but average prices roughly around the same? Thank you.

Less price we think we have seen already higher than what they were last year.

And do you expect that trend to continue here?

We see if you ask me I don't see that prices in the year should move downward or upward. It wasn't the --

I'm sorry, could you please repeat that. I think my line quality is not very good.

I'm telling you that we don't see upward or downward in prices for the next of the year.

Okay, so, no upward and downward movements. And then I have a question about CapEx could you please share with us what you spent in the first quarter and just repeat what you expect to spend for the rest of the year?

We communicate, we looking forward o spend slightly more than $500 million remainder the year, 70% is related to increase capacity. We're working to increase capacity in nitrates, in iodine, lithium, and potash. And (inaudible) for next year to come.

And can you share what percentage of that you spent in the first quarter?

The first quarter we spend, how much? About $80 million we spend during the first quarter. But we are --

(inaudible - multiple speakers)

-- working our [physical] estimate, if you would (inaudible) more free handed only but really we are on time according to our budget.

Okay. And then I have a question about FX. What average level this year would you expect to -- what would you expect to have a positive impact on your margins compared to last year?

Could repeat question please?

Regarding FX, at what level of the dollar would you expect to have a positive increase on your margins compared to last year?

We have increased our margins the first quarter in the range of 45% gross margin. That's I think higher now, we think that trend should be in the rest of the year considering what we see in the market today.

I'm sorry, could you repeat the last thing you said again?

We think that the margins we have obtained in the first quarter are more related to sign than have been the rest of the year.

Okay, thank you. That was it.

Our next question comes from the line of Tim Tiberio with Miller Tabak, please proceed.

Good afternoon. My first question if I recall correctly, you sell a lot of your iodine volumes under contract pricing, seeing that iodine's spot prices really started spiking in the first half of 2011, can you give us an idea of how much of your annual volumes have been re-priced since we saw an upward movement in iodine prices last year?

So, we had last year, we have about 25% of contracts and then just [25%] (inaudible). So, what look the average price last year were the spot market, hovering high at moments, but the spot market today does not exist. So, basically the price that we have today, the average price that we have got for the new modernization we have made of the contracts that were ending last year.

Okay. And where do you think average pricing is on a contract basis? You know we've seen prices on a kilogram basis.

We don't really give, unfortunately in the iodine because [the other] was negotiating so we don't give really and unfortunately we don't disclose this [model impact today].

Okay, but it sounds like you've fully re-priced and taken advantage of the recent pricing move for your volumes in 2012.

Well we were estimating lower volumes because we -- there's a new comer in Chile called [Alberta] belong to traditional producer of [really] Chile for the company [ACF]. So considering that factor that we thought they were going to sell less volume this year. And that was only reason why we are estimating or we're estimating lower volume because we feel they are handling demand's very, very strong.

Okay.

Clearly is a new comer, we [need] volumes.

Okay, and then just shifting to the SPN business, we have see some you know weakness in the Mexican markets related I think to the bumper tomato crop. Can you give us an idea of how much of an impact that was in Q1 and whether you think that's a temporary impact and maybe how long you think that will take to rectify itself in the North American markets?

Well we just had last year our very strong in SPN, it was in our history. And remember we sold as much as we sold last year. And the reason of decline today, we don't see that weakness in the market basically this because Haifa has normalized the operation.

Okay. And just lastly, I know you

But in this average they think in favor and process in [relation one], that's against those are the factors that are -- we are selling more likely in the (inaudible). So, we see the market in the now stagnate the main reason we're selling slightly less is because Haifa operation will normalize.

Okay. And just one last question, I recall over the last two quarters you really stressed the potential for new business in the industrial segment, particularly the solar salts project. Is this going to be more second half waited looking at the decline in the first quarter sales numbers? How should we see -- think about this from the linearity perspective?

We think in 2012 the numbers are going to be what we have said and we are reviewing the numbers for 2013, the total decrease on the situation Spain could become lower than what we are thinking before.

All right, thank you very much for your time.

Our next question comes from the line of Felipe Koh with Citigroup, please proceed.

Thank you, good afternoon all. My first question would be if you guys could give us an update on the capacity increase on the potash you mentioned in the press release that you expect production to grow over than 25% versus 2011. I just wanted to check if the investments and how is proceeding this capacity increase in terms of ramp up.

And also regarding the iodine, we are seeing a strong market for iodine. We have a tight supply. When do we expect -- can we expect capacity increase for 2012 this year or maybe for 2013? That would be my first question.

Okay, we have significant increase [so far] our capacity in capacity in iodine for 2,500 iodine equivalent which should be by 2014, '15 in the range of 15,000 so we're working on that and that can easily will means more nitrate. Also we are increasing our capacity in this year already in potash from 1 point -- slightly less than 1.7 million last year to nearly 2 million this year and we looking forward in the near future to be in the range of 2.5 million considering some SOP also in that production.

Though also we are looking forward to increase our capacity in this.

Okay, and in this capacity increase, how much -- would you guys increase also the SPN capacity along with this potash capacity?

Well we have -- we are the only company with spare capacity. They -- we have about more than 200,000 metric ton of spare capacity. So, we think that in the next four or five years we should increase our capacity at SQM again and not before that.

Okay. My --

But for (inaudible) from now we would see a new capacity.

Okay. My second question -- my second question is regarding --

-- of only one actually that goes to the market.

Okay, my second question would be on prices. We've seen a tight market in iodine and also looks like we'll have very good year for lithium. I just wanted to understand -- to check if you guys are looking for a price increase in this both products or if there is enough -- the scenario or the environment is good enough to have more price increases in this both products.

No, at this moment we are very cautious on that considering all the factors are in the economy so we think stable situation for rest of the year in price.

Okay, thank you.

And it looks like that was our final question.

Well, thank you very much for hearing us today and look to have you with us in the next conference call. So goodbye everyone, good afternoon.

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