智利化工礦業 (SQM) 2013 Q2 法說會逐字稿

Good day. And welcome to the SQM Second 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, VP of Finance and Investor Relations. Please go ahead.

Good day, everyone. And welcome to SQM's first half 2013 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, CEO, 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 performances, anticipated profitability, revenues, expenses, or other financial items, anticipated cost synergies and further 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 SGM 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 Company's 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 brief comments before we move to Q&A.

-- for joining the SQM second quarter earnings conference call. I will start with a brief introduction before I open up the lines for questions.

On Tuesday evening, we posted our results for the first six months of 2013. Earnings for this period reached $259.2 million, a decrease from the $342.2 million reported for the same period last year.

Revenues totaled $1,189.9 million, a decrease of 1.9% compared to the $1,213 million reported during the first half of last year. As you know, our results came in lower for the first half of 2013 than for the first half of 2012.

Generally speaking, fertilizer prices declined, and volumes in our chemical business line decreased when compared to last year. We were partially able to offset lower fertilizer price with increased volume.

In respect to our chemical business line, iodine prices were relatively stable. And we enjoy higher lithium prices when compared to the same period of last year.

Following the recent news in the potassium market from Uralkali, which could impact the world fertilizer prices, we remain optimistic about the world demand and expect it to increase in 2013 over 2012.

Additionally, we still expect our sales volume to be about 15% to 20% higher than sales volumes in 2012. SPN volumes were higher during the first half of the year, up 13% compared to the first half of last year.

Prices were lower when compared to the same period of 2012, although there is no significant direct competition between the potassium nitrate and the potassium chloride market. Therefore, lower prices of potash, we expect, will have a moderate impact in the price scenario in the potassium nitrate market this year.

We expect sales volume in our SPN business line for the second half of 2013 to be higher than the ones reported during the second half of last year. With regards to the iodine business, I would like to say that market demand remains strong. And we expect to see growth in 2013 when compared to last year.

However, SQM's sales volumes in the first half of 2013 were lower than expected. This volume decreases result from a higher than expected increase in supply coming from Chilean competitors.

Most of these Chilean competitors are not publicly traded. And we can't speculate about their future sales volumes. As always, we will continue, anyhow, to review our business strategy and keep our options open, focused to maximizing shareholder value.

Regarding lithium, sales volumes were lower than expected as a result of a higher than predicted increase in supply, mainly from the competitors in China.

We expect sales volumes for 2013 to decrease around 10% to 15% compared to last year. As is the case in all our major businesses, we see growth in the world lithium market related to demand. It is expected that we will grow between 5% to 10% this year compared to last year.

We have also seen prices for lithium carbonate and the average price for the lithium business line increase and anticipate that this trend will continue during the remainder of 2013.

In industrial chemicals, we saw increased volume during the first half of 2013 compared to 2012. This is mostly related to solar salt sales during the first half of the year. We sold about around 70,000 metric tons. And this is line with our previous guidance for 2013.

As anticipated, solar salt sales for the second half of 2013 will be negligible, resulting from delays in thermal energy storage projects. We remain confident in the long term prospects in the solar salt market, but are not certain as to when we should expect a return to the previous levels.

Costs to the Company were higher during the first half of 2013 when compared to the first half of 2012. The main drivers of this cost increase were related to the exchange rate and increasing labor costs.

Most of this cost increase was realized during the second half of 2012. And since then, cost has been relatively stable. We are working on diminishing our costs. And we are confident that we will be successful in this task in a timely manner.

We will continue to focus on our unique commercial flexibility and operational synergies to ensure that costs remain low and that we are maximizing our competitive advantages.

Finally, our capital expenditure estimated for 2013 today is $400 million, down from the previous estimate of $500 million. SQM is finalizing its capital expenditures for 2014, but it is anticipated that the amount will be significantly lower than the final amount to be seen in 2013.

We remain on target with our plan to increase potassium chloride production to 2.3 million metric tons over the next 18 months. We also will keep our plans to expand iodine and lithium in the pipeline. And we will move forward with them after a careful review of market conditions and approval from the Board.

Apart from capital expenditures and opportunities related to expansion, we have also signed various agreements with different companies while engaging in exploration within our mining asset in the north of Chile.

Many of these agreements encompass a portion of northern Chilean iron oxide, copper, gold belt, and could offer some diverse value in the future.

As mentioned before, we remain positive that market growth in most of our major business lines -- potassium, potassium nitrate, lithium, iodine -- will see increased demand in 2013 when compared to 2012.

We will maintain our long term management approach in all our business lines and remain focused on maximizing margins and shareholder value. Thank you.

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

We will now begin the question-and-answer session. (Operator instructions). Our first question will come from Ben Isaacson at Scotia Bank. Please go ahead.

Thank you very much. I have three questions. My first question is on your CapEx. You're lowering CapEx by $100 million. And you anticipate lower CapEx in 2014.

Where is that $100 million coming from? Is that coming from lithium, potash, iodine expansion? Can you provide some more color? And also some more color as to what you're anticipating for lower CapEx next year.

Well, related with the $100 million left this year, it's mainly, mainly related to maintenance CapEx. And we are focusing on reducing it significantly.

And we are continuing most of our growth -- CapEx growth.

And related to 2014, we are still studying. We know already that it will be significantly higher, and we will be able -- excuse me -- significantly lower. But more accurate, we will have that informed at the end of the year, when the final CapEx will be approved by the Board formally. But clearly, it will be significantly lower. But exactly, we're not in condition today to formally or officially, publicly say.

My second question is on the potassium nitrate market. Can you provide an understanding -- when the potash or the MOP price goes down by $10 or $20, how does that impact your cost for NOP? And how do you see the relationship in terms of the price that you're able to get for NOP? Do you see that as a fixed percentage or a fixed dollar premium to the MOP market? Can you explain how these parts work?

Well, first of all, there are -- potassium chloride, potassium nitrate, even though they are both potash products, they are not absolutely related, because they go to completely different markets.

And the decline that we have been seeing in the potash in the last times -- last year or more -- has not really had the same proportional impact in the potassium nitrate. Even beyond that, because this market is a market that needs a potassium free of chloride today is quite tight between demand and supply.

So, in that sense, that's why we said in this analysis that we gave you, that for this year, with what we see in the market related to demand and supply that is very tight, we don't see a movement in the potassium nitrate in prices for this year.

So does that mean that you expect margins to expand as your potassium chloride costs go down?

Well, being that this --- if you consolidate -- when you say you can put it here or there, the lower costs, if you have a lower cost than the market in potash, chloride will be lower. So in consolidating related to having a lower cost, potassium nitrate can increase the margin. But on the other hand, you will see a decrease in the margin of potassium chloride.

Okay. That's helpful. And this is my very last question. Obviously, your stock is down significantly year-to-date. And kind of much more than your fertilizer or industrial chemical peers.

I have a lot of value investors that are looking at SQM on a three- or five-year basis. What do you see as kind of the catalyst to kind of turn around your stock? Or kind of how do we give confidence to current and prospective shareholders?

Hard to say at this stage, with all the difficulties in potash, to give any statement in that area. So I'm not in condition to give them related to potash.

The only thing that we can say there -- we are increasing our volumes, and also our costs are going to be reduced. So, in that sense, we will have more competitiveness in the potash business because our costs and quality are improving day-to-day. And also, the growth will be in the range of 15% growth in production -- 15% to 20% -- in that range.

So that in one hand, but exactly the prices, where they will move the next three, four, five years, I just can't say any comment on that, because I don't have a crystal ball. But in terms of our costs and the level of production will be high.

In terms of the iodine, I think that the market is growing. We will see opportunities. And we will act aggressively in the market as SQM, related with our position. And also we are improving our costs in that area significantly.

Then, also as I mentioned, and you put the question, that we have a very stable product -- that is potassium nitrate. And potassium nitrate -- we are not decreasing the prices even though what's going on in the potash business for this year. So that means it's much more stable -- and much more stable. And that means that there is much less volatility. And that has been shown historically, and now even more profoundly.

Also, we see the market growing. Next year, we should be selling in the range of 40,000 to 50,000 metric tons more of potassium nitrate. And that is the forecast -- growing per year in the next years to come in a very stable product. And related with demand growing and prices much less volatile than normal commodity fertilizer.

Also, even though the solar salts are, this year, going dramatically down -- and next year our forecast is the same -- we have seen already a comeback gradually in the market that permits us to say that 2015 onwards, this market is starting again. And that is relevant and will be relevant for SQM.

And then also, I mean, the competitiveness of cores of SQM by -- in the next five years will change also dramatically.

That's a very helpful answer. Thank you very much.

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

Thank you. Hi guys. So the first question on iodine. You talked about prices being down -- only a little bit -- 3%. But can you just give us some more color? Was that broad based? Or was it just in certain, sort of, products?

And what's really causing that there, given that you've been cutting back volumes? Why should prices be easing a little bit? And what should we think about going forward?

Well, I should say -- as we said in the conference -- my statement before that the main situation of volumes coming down because of extra supply of the Chilean producer. And exactly what we are going to do there or not, we don't want to make it public, because it will go against us.

But I would say that we will continue to review, as I said in the statement, our business strategy. And we keep all things open that will permit us, not only in the short term but in the mid and long term, to have a better value for the stock of SQM.

So that means that we are studying different situations. And what will be done or not, it will be according to our estimate what will be better, not only for the short term but the mid and long term, for SQM's shareholders.

Okay. And then on sort of more just a technical -- on potash, your average prices in the first half were $465.00 a ton, which looks pretty good relative to other year global prices. Obviously, you've got some SOP in there.

But just to give us a feel for how prices move, can you give us some idea of where prices in Q1 versus Q2 were? How much lower they were?

Well, how much they will be is hard to tell. But at this moment, we're moving between 5% to 10% lower.

So in Q2, they were 5% lower than Q1?

No. Q2 was quite similar to what you have already there. But what will be in the second semester, exactly, really we don't know.

Okay. Okay. And then the last question just on lithium. I mean, presumably you had a pretty good visibility on Galaxy ramping up.

What's really changed that you had to lower your guidance? Because the idea was they were going to ramp up 17,000 tons [plans]. So how come you've gone from 5% lower to 10% to 15% lower on your volume guidance? Are they just doing better than you expected?

This is Patricio de Solminihac. Regarding lithium, you are right. Galaxy originally had a much more problem because of the [accident] and really being able to ramp up their production. But finally, they have been able to do so. And they are producing more than we expected.

But also, given the acquisition of Tianqi that bought Talison, also there has been more production from other Chinese producers based on Talison following. So that being said, it will be different of what we originally expected. And we continue to monitor exactly how the market will evolve.

However, you have to understand that we have been able to have better prices, that also we have been reflecting that in our Q2.

Excellent. Thank you very much.

(Operator instructions). And our next question comes from Cesar Perez Novoa of BTG Pactual. Please go ahead. And I apologize. It appears that his line has disconnected. So at this time I'm not showing any further questions.

Okay. Thank you all very much for joining us today. And we hope to have you with us in the next conference call. Goodbye, everyone. And thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.