智利化工礦業 (SQM) 2013 Q1 法說會逐字稿

Good day and welcome to the SQM first quarter 2013 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note, this event is being recorded.

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

Good day, everyone. And welcome to SQM's first quarter 2013 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 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, future economic performance, anticipated profitability, revenues, expenses or other financial items, anticipated cost synergies and further service line growth. Together with other statements that are not historical fact are forward looking statements, as that term is defined under the federal securities laws.

Any forward looking statements or estimates are set in 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 our CEO -- sorry, COO, Patricio Solminihac for brief comments before we move to Q&A.

Good morning and thank you for joining the SQM earnings conference call. I will start with a brief introduction before I open up the lines for questions.

For the first quarter, gross profit was slightly better than both the first and the last quarter of 2012. Having said this, we expect the remainder of 2013 to be lower than the first part of this year.

In the SPN business line, we saw increased demand during the first quarter of 2013. During this strong quarter, our volumes increased over 35% when compared to the relatively weak first quarter of 2012. Most product within the SPN business line saw higher sales volume during the first three months of 2013, which contributes to our increased revenues. However, as anticipated, average price for the business line fell about 3% when compared to the fourth quarter of 2012.

On the potash side, it is anticipated that the total market demand will exist -- will exceed market demand seen in 2012. Although we have seen the impact of lower prices. We believe this market condition will continue throughout the years as market demand is expected to surpass 54 million metric ton during 2013, an increase of about 8% over last year.

As suspected, the first quarter of 2013 showed strong sales volume of potassium chloride. Volume increased over 25% when compared to the first quarter of the previous year. We expect our total sales volume of MOP and SOP fertilizer from the Salar de Atacama to be over 20% higher than the sales volume seemed last year.

In the chemical market, we are seeing healthy demand growth, which we expect to continue into 2014. However, new engines to the lithium and iron markets will capture some market share this year.

In iodine, this new supply will continue to have an impact in our sales volume during the remaining of the year. As in the past, we are focused on maintaining our margin and our first priority is to making sure the market demand is met -- is met.

Average price during the first quarters remained at similar levels to those seen during the fourth quarter of 2012, this was in line with company expectations.

Serious speaking, iodine market condition were positive during the first quarter 2013 and we expect this trend to continue in the future. Demand in all main uses continue to grow, x-ray contrast media, LCD, and consumption related to pharmaceutical remained prominent use for iodine.

As mentioned above, new lithium supply has also been added to the market. As a result, as seen during the first quarter of 2013, our sales volume for lithium and delivery may decrease overall in 2013 to level lowers to those posted in 2012.

Notwithstanding, prices for lithium carbonate during the first quarter of 2013 were about 8% higher than average prices for lithium carbonate sales during fourth quarter of 2012.

Demand in the lithium market remains strong and we expect demand in 2013 to be around 10% higher than demand seen in 2012. The lithium market continued to be driven mainly by battery growth, historical demand driver for the lithium market, but with little impact from electrical carts today.

For industrial chemical business line, our sales volumes were higher than sales volume in the first quarter -- we seen during the first quarter of 2012. However, we still expect volume in this business line to decreased significantly during 2013 compared to 2012. Based primarily on the delay of the sales of solar salts, a powerful element used for alternative energy sources as the market has seen higher financing costs for projects in the United States and Europe.

Average price in the business line remained relatively flat compared to fourth quarter of 2012. Our CapEx plan this year is total about $500 million as mentioned in our press release, this amount includes general maintenance of our plant facilities, expansion at the Salar de Atacama to increase our potassium production.

I thank you again for joining today. We will now answer any questions you may have.

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

Thank you. We will begin the question-and-answer session. (Operator Instructions).

And our first question will come from Fernando Ferreira of Bank of America/Merrill Lynch. Please, go ahead.

Thanks and good morning everyone. I had two questions today that called my attention from your press release. The first one is the comment that you expect to lose market share this year in both lithium and iodine to other players in the industry. I'd just like to know for both lithium and iodine who those players are and what amount of new product that you're expect to come on stream this year? That's my first question.

Well, thank you, Fernando. Regarding lithium, we did have a weaker first quarter, but we think that we will recover volumes during the years and volume we expect to be in the range of 5% less only than the year before. There was delays in achievement in the first quarter that we expected to catch up in the next quarters.

Regarding the new entrants in lithiums, we have Galaxy that have been producing in China, however with the many different problems that there have been that publicly stated regarding the stop of their mine and buying from [Talison desposimine] for their plan, also the plan that they need to stop because of the accident. So there are many issues on that. They have been announcing that they will being going through yet to their capacity of their plan.

This is the short term, a little bit more longer term are the plan that's expected to start in Canada, which is Canada lithium, that during this year they are announced that they will be ready to start sending product to the market and the next one will be a recovery in Argentina that we don't think that there will be keeping any product during the year, but they will do so after that.

Regarding iodine, we have a good first quarter. We expect that the production of Algorta, which is the expansion of the ACF here in Chile will continue to ramp up their production to their capacity. So we expect that during the year in iodine, we should be around 5 to 7% lower in volume than 2012.

That's very clear, thank you. And my second question is the comment that you expect the remainder of the year, in terms of results to be weaker than the start of the years, also if you could provide some more details on that front as well? That more related to this weaker volume factor or is also counting the fact that potash prices have trended down. Thank you.

Well, there are -- there are many factors that influence that. As you know, in -- clearly potash prices are lower. We expect that during the year we would not continue to drop, we expect that the price will continue more or less at the level that they are right now. That also influence prices in our SPN business line that we are seeing -- we see average price during this year in the range of $50 less than the year before.

And then, of course, which is important for the rest of the year is in our industrial chemical business line, which we have a very good first quarter because it was the last achievement for the solar salts that we have during the first quarter, but as we have indicated, we don't see more achievement of solar salt the remaining of the year. So, total volume in industrial chemical will go down in the range of 100,000 tons, so that's also what'll influence that.

And finally, of course, we continue to have pressure and cost. We are working on that, but of course the exchange rate together with the pressure in labor cost have also influenced us.

Perfect. Thank you.

Our next question is from Wesley Brooks of Morgan Stanley. Please, go ahead.

Morning, guys. So, just to follow on from the last comment you just made on your costs. I know you don't talk about costs by segment individually, but can you give us some costs of the cost inflation you're seeing in some of your main likes like labor, energy and how that's -- you see that trending over the next few quarters versus Q1, please?

Well, as I said before and you are right, we do not disclose the cost structure in each of the business lines. But in general, we have many common costs that affect all the business lines, and as indicated in the previous question, one of the important factors that are -- push our costs up is the labor costs. Chile, as you may know, is almost at full employment. Besides that, there is a lot of activity in the copper sector in the north where we have our operations.

And third, the exchange rate has also influenced our cost in dollars because peso -- we of course have our labor costs in peso related currency.

We can say that we are expecting around 5% more cost in total if we compare cost from this year to the previous year. We don't -- we don't see that we will have much higher costs the next quarters than -- that we have in the first quarter. We don't see nothing special in that respect.

Perfect. Thank you. And if I could ask another question on these lithium start ups, please? Do you have a good feel for what -- like galaxy, obviously they've been ramping up, they've had some issues like you said, but do you have a good feel for where their costs might be and basically, how profitable they can be with current prices?

I do not have any real specific information on their cost structure. Of course, I have some estimates because of the costs they have in desposimine which we know how much are they're paying now buying desposimine from Talison. So in our opinion they have, of course, a much higher cost than us.

But they have been given a lot of public information that clearly you have seen regarding their situation, first in the situation on the higher cost that they have in their own mine operation that finally they decided to stop. And second, with the axiom that implied that they had to stop the plant for almost three -- three months. Now, they are going through, trying to do an increase in capital I understand. They are also publicly state that. So I think it's a question mark that will have -- what will happen with them in the future. I do not have any specific more information that what they are published.

Thank you very much.

Our next question is from Ben Isaacson of Scotia Bank. Please, go ahead.

Thank you very much. My first question is on your market share erosion in lithium and in iodine. Can you just remind us in both of those markets where you are on the cost curve? Where on the cost curve the new capacity is coming in and I believe you're very low, if not first quartile on the cost curve. And so, while your market share might erode, your volumes shouldn't change much. And so I just wanted to kind of get some color on why you're seeing lower volumes.

Thank you. First, as you know, there is not really public information like in any other -- or many other industries where you can see the exact cost structure of the different competitors. I will say that we are one of the few, if not the only one, competitor in the lithium as well as in the iron industry that publishes results and have this conference call.

So we really do not have access to our competitors. We have of course, estimates. And going to the first part of your question, yes, our estimate is that in both of this business line, we are one of the lowest cost producers. So, for sure, we are in the first quarter -- the first part of the cost curve, in iodine, as well in lithium.

Regarding our strategy. Well, it's different between this two business line in iodine as we indicated in our press release we are trying to of course optimize our margins. There has been an important change in the price level in the last two years, and especially in the last year. So, right now, we are following very closely what is the reaction of the market and especially the price sensitive to this new price levels.

We have seen that the market is accepting and is working with this new price level, which is very important for our margins, and of course, if we want to optimize our margins, we work on the volumes accordingly. We also think that long term, we are the -- and as we have proven in the past, we are the Company that has the reserves and the technology and the possibilities to support the -- the market growth -- the market demand growth and allow on the few entrants that from time to time have come in. Our -- or increase capacity from some of our competitors.

And regarding lithium, as I say before, first quarter of this year was extremely weak, but basically because we have some volumes that we will recover during the second, third, and fourth quarter. So we don't expect to have that kind of lower volumes in lithium the rest of the year, on the contrary, we will recover some. But we are seeing an increase in price in the range of 8%.

Okay, thank you. That's very helpful. And my second, and final question is on Potash. I believe you're expanding your capacity to about 2.4 million tons and I was wondering, the incremental capacity that you are bringing on, what is the specific CapEx for that? And then, of the amount that's coming online, how much of it is going into the merchant potash market and how much of it is going to go into your nitrates business?

Thank you. Basically, we don't know exactly how much will be the total new production. We think that will be in a range between 300 and 400,000 tons, so arriving to 2.3 or maybe 2.4. But right now we are more caution and conservative saying that probably by the end of next year we'll have a 2.3 million ton total capacity.

The total investment that we are doing in order to bring this up [SLR] are in the range of $240 million, that will allow us to have these new volumes. And regarding how much of those will go to final -- to be sold at the end [of gold], that will depend on how the SPN market evolves and of course, the -- I will say that the most will be going as a MOP sales.

Okay, and maybe I could just ask one final, final questions. Which is, what is the limiting factor to potash expansion at SQM? What is preventing you form going to three, four, five, six million tons? Is it permitting issues in the solar? I mean what's the kind of long term potash strategy?

You are right. It's a permitting issue. Its regarding the environmental study that we approved when the start the progress that we updated some -- in 2005. What we have -- the permits of the solar is regarding the amount of brine that we are allowed to pump out, which is related of course to the amount that we can produce that is regarded to -- you calculated that with three factors, one is the amount of volume that you take out with solar, which is the limit that we have and second, the concentration of this brine.

And third, the [gile]. So, of course, we have a limit and according to an environmental study, if everything behaved the way we anticipated, we can increase this limit. We are this year a new step increase and that's why we are increasing in this 300,000 tons and then in -- I don't remember exactly by heart, but in two or three years, we will have an additional step if everything behaves, our model is a logical model anticipated. So, that is the limit and that's why we are -- we are due to work with this framework.

Thank you very much.

(Operator Instructions). And our next question is from Cesar Perez-Novoa of BTG Pactual. Please go ahead.

Good afternoon, gentlemen. My question relates to your CapEx guidance for 2013 and 2014, and also updating on your expansions on lithium and iodine and what capacity levels would you obtain post completion?

In addition, what would that mean in terms of mine optimization and cost levels post completion? Thank you.

Okay, thank you Cesar. Regarding the CapEx, as we indicated in the press release, in 2013, we have an estimated CapEx of $500 million and of that, we have an important part this year that is related to maintaining CapEx, we have around $180 million of maintaining CapEx in order to upgrade some of our older operations and then we have the investment -- the most important part is regarding our increased capacity in potash, in the Salar de Atacama, that is the main issue for this year.

Regarding the investment plan for next year, we are of course working, we have not disclosed that yet, and we expect by the middle of the year or at the most during the third quarter we will comment on the plan for next year.

We -- on principle, we think that the investment plan will be lower than this year.

Okay. Any relation to your expansions?

I'm sorry, you have a question also on iodine and lithium.

Yes.

Iodine, we are finishing the final step in our operation in Nueva Victoria, so we complete the full capacity of 12.5 thousand tons of iodine. And also, we finish all the water supply for an additional expansion of 2.5 thousand tons, but we will not do it until is necessary by the market, but we wanted to be read in -- from the permitting point of view, which we are ready, and also from the water supply, which was the most important thing to do.

Regarding lithium, we have a total capacity of lithium carbonate today in place of 48,000 tons and we have -- we are finishing a possible expansion up to 60,000 tons that we will decide during the year of we don't proceed or not or when we proceed with that.

Okay, gentlemen, thank you very much. And in relation to that, if you proceed with those projects, would that actually dilute costs? Could we see an improvement on the cost structure of the Company?

Well, in the case of lithium yes, because you could use more if it was just in the same plan that we will do some de-bottlenecking and addition of some equipment so of course that will imply a total lower cost. And in regarding iodine, I mean we'll be completely new facility, so we'll be in the same rates that we have today. I don't see dilution there.

Okay, thank you very much gentlemen.

This concludes our question and answer session. I'd like to turn the conference back over to Mr. Fones for any closing remarks.

Well, thank you all very much for joining us today and we hope to have you be with us for the next conference call, so good bye everyone.

The conference is now concluded, thank you for attending today's presentation, you may now disconnect.