智利化工礦業 (SQM) 2013 Q3 法說會逐字稿

Good day, and welcome to the SQM Third Quarter Earnings 2013 Conference Call. (Operator Instructions). Please, note this event is being recorded.

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

Good day, everyone, and welcome to SQM's third quarter 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 on our Website, www.SQM.com.

Joining me today as speakers are Patricio Contesse, CEO; 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, future economic performance, anticipated profitability, revenues, expenses, or other financial items, anticipated cost synergies, and product 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. 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 go to Q&A.

Good morning, and thank you for joining the SQM third 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 nine months of 2013. Earnings for this period reached $399.1 million (sic - see press release, "$398.1 million"), a decrease from $508.4 million reported for the same period last year. Revenues totaled $1.71 billion, a decrease from 6.4% compared to the $1.828 billion reported during the nine months of last year.

As you know, our results came in lower for the first nine months of 2013 than for the first nine months of 2012. Generally speaking, we saw significantly lower volumes in our chemical business lines, such as lithium and iodine and lower prices in both of the potassium and SPN business line. We were partially able to offset lower fertilizer prices with increasing sales volumes in potassium chloride and potassium nitrate compared to the first nine months of last year. Additionally, we saw relatively stable iodine prices and increased lithium prices when compared to the same quarter of last year.

As mentioned in our press release on Tuesday, there has been a lot of noise, both good and bad, surrounding the potassium chloride market in [advance] following the announcement from Uralkali. During the third quarter, we saw prices pressure on the potassium chloride in various geographical markets, and we'll continue to monitor this trend.

Our third quarter sales volumes were over 50% higher than sales volumes seen in the third quarter of 2012. We continue to believe that the market demand is the most important indicator when assessing the potash market and trust that total demand levels in 2014 will surpass the year's level. We remain confident about the long-term prospects for the potassium chloride market.

On the last earnings conference call, I said that we expected that lower prices of potash could have a moderate impact on the prices scenarios in the potassium nitrate market. This held true. Potassium nitrate prices have remained relatively stable within an unstable and uncertain potash market.

The market for chlorine-free potassium-based fertilizer remains healthy and strong. And, for this reason, we saw sales volume up for the first nine months of 2013 when compared to 2012.

In the iodine business, sales volume were lower than expected as competitors sold more volume as a result of new capacity. With limited public information available from our competitors, we do not have a clear view on supply growth in the future. In addition to this new supply, demand growth in 2013 is expected to be less than what we had originally anticipated. Looking towards the future, we still believe in the fundamentals behind the iodine market and believe demand should grow.

Regarding lithium, our sales volume are down for the first nine months of 2013 compared to 2012, but prices have crept up when compared to last year. Our sales volumes in the third quarter were up close to 30% more than the average sales volume seen during the first half of 2013. We believe this market to be stable. Market growth is expected to be between 5% to 10% in 2013 compared to 2012.

In industrial chemicals, volumes are down as solar salt sales are expected to be approximately 100,000 metric ton less in 2013 than in 2012. However, we do see a big interest in the market and expect sales volume for solar salts to return through negotiations that are going on at this time. And we expect that commitment to be seen in 2015 on. The long-term prospect in the solar salt market remain positive.

Recently, we teamed with a leading global management consultant in an effort to reduce costs Companywide. We are proud of the results we achieved as the various initiatives were implemented at all level of SQM. The Company is moving in the right direction, reducing costs and improving its productivity.

Finally, our capital expenditure estimate for 2013 is $400 million, down from the previous estimate of $500 million. SQM is finalizing its capital expenditure for the plan of [2012], and we'll make this public after the board of directors has reviewed and approved it. It is anticipated that the amount will be significantly lower, anyhow, than the final amounts to be seen in 2013.

Apart from the capital expenditure opportunities related to expansion, we have also signed various agreements with different (inaudible) for engaging in exploration within our mining asset in the north of Chile. Many of these agreements encompass a portion of the northern Chilean iron oxide copper gold belt and could offer some diverse values in the future.

As I have said it before and I will reiterate it in this morning, for all of the major markets in which we sell potassium chloride, potassium nitrate, lithium, and iodine, we expect market demand to be greater in 2013 than in 2012. For this reason, we are optimistic about the long-term fundamentals of the Company. We have access to (inaudible) natural resources, and we will maintain our long-term management approach in all our business lines. We remain focused on maximizing margins and shareholders' value.

Thank you very much.

Operator, we will now go to the Q&A session.

(Operator Instructions). Juan Tavarez, Citi.

My first question is regarding your pricing over volume strategy. Just wondering if there's a limit in terms of your market share losses in lithium and iodine to where you'll revisit that strategy and maybe we'll start seeing better volume activity with potential pricing pressure more aggressively here going forward and if you can share your thoughts on that.

Just, clearly, we are limited on what can be done in the (inaudible) supply and demand. And we are always focusing ourselves what measure could be the best result in SQM not just for one year but for the medium term. So, clearly, this policy is revised every time, and our conclusions will be in the best results for SQM. Exactly what we will do or not -- I will not make any comment on that. But we are reviewing always this policy, and we will take the decision that could make the best benefit for SQM.

And, just to understand in the lithium segment, specifically -- I know you noted that you expect the market to grow by around 5%. But what's your expectation in terms of your potential market share in that environment?

Well, we see that we are going downward because of action, the newcomers in the market. There is more production in China, some newcomers in Canada, Australian. So we see a trend that our participation in relative terms will not increase.

Okay. Great. And just my last question, on CapEx. You're saying here you're reducing CapEx by, essentially, $100 million from your initial guidance. Where are you reducing that CapEx specifically? Should we be kind of looking at your future volume growth impact on that? And then, second, could you give us a sense how much is your maintenance CapEx?

Well, related to CapEx, of course, due to the situation, we have become much more strict in reviewing what is absolutely necessary. And also, in some way, the trend in the market of cost of CapEx have declined to Chile because the investment in mining is declining. So, in that sense, it is helping us to invest somewhat less.

Related to the maintenance CapEx, I will give you just -- the depreciation we have is $220 million approximately. That doesn't mean that the maintenance CapEx is that. We think it's significantly lower than that.

Great. Thank you.

Cesar Perez-Novoa, BTG Pactual.

Just continuing with the CapEx guidance, I know that you're not providing any specific number here. But would that bring any implication on your iodine and lithium expansions, which, if I recall correctly, on the second quarter conference call, you mentioned that you were actually discussing this on the board? If you could provide your outlook, that would be very helpful.

And I have another question there. If you could, also provide some indication on where potassium nitrate prices stand today and what outlook could we see from that division in 2014. Thanks.

Related to the CapEx in iodine and lithium, the basic things are done. When I say the basic things are done, first, environmental approvals are done. Secondly, a major, [incredibly], and very important part of that investment has already been done that is related with (inaudible). So that installation already exists. So what you can postpone, let's say, to try more mines with more tracks, et cetera. And, clearly, those things have been postponed. But that can be put in place very rapidly if there is the need in the market. But the basic things of the investment, the more strategic thing of the investment has already been done. But, of course, we will not carry on all those things that, today, we see a situation of oversupply in the market. So those things, clearly, will be postponed. But, for us to go to the -- to do the volumes we said before is relatively easy in time and money.

In terms of the price of potassium nitrate, I will not like to -- the price of potassium nitrate today are in the range of $970 to $1,000 per metric ton. This is about $40 less than previous year. And, if you compare to [that much] has declined potassium chlorine, really, we have been able more or less to set a way to maintain (inaudible) price. On the other hand, we had increased marginal volumes to even that situation.

Okay. Thank you very much. And, if I may, just a final question here.

On your solar salts, you actually mentioned earlier that your volume growth -- you're expecting some pickup in volume growth in 2015. What about next year?

Not next year because we are today in a negotiation, a new contract that we estimate, but just estimates, in the range of 100,000 metric tons come back in 2015.

All right. Thank you, gentlemen.

But not for next year.

Okay. Thanks.

Ben Isaacson, Scotia Bank.

Three questions. My first question is -- can you describe the cost savings program that you are undertaking with these management consultants? What specifically are you targeting, and what kind of costs are we seeing?

Well, we are reducing -- (inaudible) -- we have done this -- it's not the first time. We have done several times in our history a restructuring of Company and work hard on our costs and clearly review the situation. We saw that it was an effort that the Company should do again. We think that our objective -- we think that we should be in cash saving next year in the range of $50 million.

Okay. Thank you. That's helpful.

My second question is shipping potash to the US market. Are you doing that right now? And can you kind of describe the difference in the netback between Brazil and the US? Obviously, Brazil prices have fallen quite rapidly, but, in the US, they haven't. And so maybe netbacks are seeming more attractive there.

We sell not too much in the US. The main market has been Brazil. But we really sell all around the world. But our main market has become Brazil.

But is the netback there better than the US, given the fact that the Brazilian prices have fallen much faster?

We don't see a significant difference.

Okay. Thank you.

And then my final question is just on iodine. You talked about it's difficult to see how future supply develops over the coming years. Can you talk about what the state of the market is right now? How much excess supply do you see? And where are prices right now?

The prices are today in the range of $45 to $50 at this moment. We thought at the beginning of this year demand would grow in the range of 8% to 4% -- between 2% and 4%, but it came at the lower range of just 2%.

In the case of supply, it's not easy for us to have information because some of the companies are private companies. There is no availability of public information. We have seen that, anyhow, Algorta that now is making publicly their information that the volume has not increased that much. In the case of (inaudible), we see a stable situation in terms of supply, a little bit increased this year from more production. We don't know exactly how much of that production are selling anyhow. We see Cosayach increasing their volumes and Bullmine too. But exactly the numbers -- how much more are producing is hard to tell.

Okay. Thank you very much.

Fernando Ferreira, Bank of America Merrill Lynch.

Patricio, I wanted to understand a little bit better the volume decline that you saw in lithium beginning of this year and, then, the improvements that you saw in the third quarter. Was there any specific reason for this improvement in volumes? And, also, you mentioned that prices were 22% higher during the third quarter. So I wanted to understand a little bit better there on the price and volume for lithium.

Clearly, we entered the negotiations at the end of last year to try to increase prices to our customer, and that create difficulties in terms of they accepted those new prices. So that create about -- well, the first semester, a tendency in having lower volumes.

But, finally, demand has been growing and even though there are more suppliers. On the other hand, prices that we tried to allocate at the beginning of the year now also the customer are accepting because of equilibrium between supply and demand. So we see we were able to obtain those -- these volumes already by third quarter. Clearly, it was not easy to introduce this new price because we felt lower volume sales during the first semester because of this main reason.

Great. Thank you.

And then I just wanted to confirm. What's the current share of Brazil in your overall potash sales?

It's in between 35% to 40%.

Okay. And do you still expect to reach near 50% or not?

We will see. We are really not looking for an exact number. What we look for is what is the best economic combination. If it comes out to be that 50% is the best, we will do 50%. If it come out to be 30%, we'll do 30%. So that depends on the opportunities and better return that we can obtain with our product. So the objective is not a real number; it's an economical number.

Perfect.

I just had one last question, a follow-up on the CapEx side. Do you think we could see CapEx going closer to maintenance levels over the next two years? Or we should still expect higher than maintenance?

In general, I would say, conceptually, we will go to maintenance CapEx.

Okay. Perfect. Thank you.

Wesley Brooks, Morgan Stanley.

Just one question from me on iodine. Just -- you talked about prices easing partly because of the higher supply but also demand being at the low end of the range. Do you think that the lower demand has been due to the high prices in the last year or two? Or were there other factors that were really impacting the demand?

Our view that we think that high prices have affected -- (inaudible) explanation.

Okay. So I guess this comes down to you've been testing the elasticity of demand, and those prices were a bit high. So how should we think about this going forward? At what level do you feel demand starts to pick up again to be running at sort of 4% plus?

We have our numbers in our mind, but will I apologize that I cannot give it to you because, at this same moment, we are in negotiation with our clients for the contracts for next year.

Okay. Thank you very much.

I cannot give you the range of what we think would be a price that could stabilize the situation that you're talking about.

Okay. Understood. But, then-- so, I guess, from Q1, we should be able to see whatever the -- or have a good indication of what the new level will be?

Yes. Absolutely.

Okay. Thanks very much.

Okay. At this time, this will end our question and answer session. Thank you.

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

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