智利化工礦業 (SQM) 2013 Q4 法說會逐字稿

Good morning and welcome to the SQM fourth quarter earnings conference call. All participants will be in 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 Gerardo Illanes, Vice President of Finance and Investor Relations. Please, go ahead.

Good day everyone and welcome to SQM's fourth 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 at our website www.sqm.com.

Joining me today, our 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 defined 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 the SQM fourth quarter earnings conference call. I will start with a brief introduction before we open up the line for questions.

On Tuesday evening, we posted our results for 2013. Earnings of this period reached $466.1 (sic - see press release, "$467.1 million"), a decrease from $649.2 million reported for the same period last year.

Revenues totaled $2.2 billion, a decrease of 9.3% compared to the $2.4 billion reported during 2012. The slower results of 2013 reflect the typical condition which surround our main business lines through the year.

Generally speaking, increased volumes in the potassium chloride business line help us to partially offset lower prices seen during the year. Prices fell above 15% year on year.

Our margins anticipated were impacted. Our SPN business lines fared very well in 2013. Volume increased, and even though prices are not directly related to the potassium chloride prices, prices fell just in light of the potassium chloride market condition.

We look forward to higher volumes in both business line during 2012 --

2014.

Excuse me, 2014. We are aware that there has been a lot of interest surrounding the iodine and lithium market in the recent months. Following the positive trend during the past several years, we saw demand growth in both lithium, and also iodine market during 2013.

However, new supply of iodine in excess of market growth has been added by existing competitors. This ultimately had a negative impact on our sales volumes in this business line during 2013 when compared to 2012.

Continuing with iodine, we did see lower prices as anticipated during the first months of 2014. We were likely to continue to face challenges considering the uncertainty related to the production and sales volume for our competitors in this market throughout the year.

We are confident in the -- on our long-term position in the market as the largest producer with significant cost advantages. And although our volumes might be lower in 2014, we will protect our market share in the long term.

In the lithium market, we expect market growth between 8% to 10% in 2014. We continue to be the world's largest producer and lower cost producer. But we assessed new suppliers and its potential impact on the market in the short term.

In industrial chemicals, we saw sales volumes and revenues significantly lower than in 2012. This was in line with our expectation.

Our solar salts sales reached approximately 70,000 metric tons during 2013 compared to the 170,000 metric tons in 2012. On a positive note we see increased interest in the market, and are currently negotiating contracts for 2015 and 2016. We remain confident in the long-term prospect in the solar salts market.

Our capital expenditure in 2013 reached $371.7 million, which were below our estimate of $400 million. In 2014, it was anticipated our CapEx would be close to $150 million.

In 2014, we will benefit from recent investments specifically investments made to increase production for the potassium-based fertilizer from the Salar de Atacama. We will keep our plans (inaudible) iodine and lithium in the pipeline, and we will move forward with them after careful review of market conditions and approval from the Board.

I would close by saying that 2014 will be a transitional year for SQM. As I mentioned in the press release, we are well-positioned to move quickly to meet any changes in market demand and market dynamics in all of the main businesses which we sell.

Rest assured we will act on what we believe to be in the best interests for the long term of the Company, and remain focused on maximizing margins and shareholders' value. Any strategic decision will reflect these goals. Thank you.

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

Thank you. (Operator Instructions) Ben Isaacson, Scotia Bank.

I have several questions. The first one is on iodine. You stated that you are prepared to fight for long-term market share, but I think it's apparent that you've actually been giving up some market share by cutting back on your volumes.

So can you just kind of discuss what your strategy is right now? I mean, why not cut the price and ramp up your volume and get back that market share and clean up this industry a little bit?

Well, I think what we have said is exactly what we're trying to do. Of course, we see different (inaudible) as you suggest. That was evaluated, and we decided in the long term not to go that -- as you said, more gradually, and that's what we're doing, even though we can lose some further market share, but we've taken a net present value over one decision.

We have not -- to the best estimate we have that was the best [initiative]. So as I said, we are looking our position not for short term, but also the long term what is the best for the Company.

Also we have to see -- for the policy regarding iodine that was in place, we told before, but what was going on in the market, it doesn't make decision for -- people to make decision so rapidly, even if you do very aggressive.

To those accompany or to those people, diminishing those volumes or what (inaudible) to the market, elasticity, those are factors to be seen not in three-four months, but in the longer period. And we are continually doing that job, and if we -- and we can change our -- if we feel that our best policy to go and proceed or what we have said, and as you suggest, maybe sometime we can see that that is the better alternative of what we have evaluated up till today.

And we will -- then we will change. We are always, and we will -- looking forward to the best interest in the long run to have the best present value for the -- and economical for the Company, and (inaudible) also with that.

So your suggestion, yes, has been studied and we have decided that that doesn't (inaudible) tomorrow we don't go -- proceed that way.

That's very helpful. My second question is on the metallic exploration. You've talked about how you're going to explore 1 million hectares over kind of the next five years, and you expect about $150 million to be invested.

Can you just give us a sense as to how meaningful is 1 million hectares? I mean, how much land do you guys actually control right now? And is that $150 million going to be -- is that all SQM money, or is that what you expect some of your partners to pay for? Can you just give some clarification?

Well, SQM have over 2 million hectares of mining rights. Clearly the potential possibility of developing some metallic mining industry, we are thinking on that.

So we have done for several years -- more aggressive lately -- some work on it. And in Tocopilla that was good -- they have the mastery, really the result of working very hard during the '90s, but that's now the -- at the end we were able to make high economic value for the Company last year.

So what I'm saying is that this is a long-term business. Something we have done in the '90s was making real money in 10 years afterwards or even more than that. But clearly it's a challenge.

We have made some contracts -- as we made in our press release, two more contract with third party to explore, we have taken some money on that and when we said the $150 million it's related with the compromise of the third parties to make these explorations, got our money back.

And clearly there are different type of contracts. One that we participate at the end of -- or we could participate as an option because we could have as a partner or just royalties so that every contract is quite individually and characterized related to what is counterpart.

But clearly that is the, I think, one of the largest exploration program in Chile and we have the potential because we're in the area with more thrust on mining resources in Chile and part of the world, so -- but in mining and fields, if you don't find it, you don't have. Exploration is a major part in clearing investment $150 million that we hope to increase with third party, but with our money, and in that sense relatively low risk is the policy that we have agreed on these business. As we find that Tocopilla was very good for us. We hope, and we're working to find newer Tocopilla.

And then just very quickly my last question. Maybe, I mean, your stock has done incredibly well over the past couple of months and maybe I'd just like to kind of find out what your view on that is. I mean, you have obviously had a bit of a difficult quarter and fundamentals are challenging some of the businesses right now. What do you think has really driven your stock up over the past several weeks?

Yes, it's difficult to be the person in the mind of investors, what are they seeing. All what I can say here in this conference call, what we are seeing and then people make the conclusions or -- to make (inaudible) or no on SQM.

But here what exactly are in the mind of the -- the decision made in the minds of investors, for me hard to tell. What I can say here, what is our view, and after that people make decision to buy or sell or whatever. But I don't want to make what is -- exactly what is in the mind of people buying our shares.

Juan Tavarez, CitiGroup.

My first question, just to touch on iodine again, could you remind us what is your current market share in iodine? And I guess your comments of noting that you could see the iodine market grow, but your volumes are likely declining; could you give us a sense of kind of what's your threshold of minimum market share within the market?

The minimum is of course, we would like to be at least 30%. That's the minimum, it could be lower than that. But as a minimum and on minimal, SQM should be at least 30%. But that -- maybe a year we -- it could be lower than that depending on situations that the patient, and he can (inaudible) that can happen at any moment. But clearly as a policy is the Company want to be in the range of 30% to one-third of the market share.

And where are you today?

Well, last year, we were slightly in the range -- nearly 30% or slightly below that.

And for the lithium, if we can touch on that, I know you noted that you expect the market to grow 8% to 10%. Could you give us a sense of how you expect your own volumes to trend? Do you think you will trend in line with your overall market view or slower or faster? Could you give us a sense?

Well, we have to consider not only the demand, but also the supply side. Clearly in lithium at least three projects, one of them already working and two also with (inaudible) the situation of Australia by (inaudible).

So things are to be seen how much supply will be in the market on one hand, and on the other hand demand. And in that sense we are as close as should be. This year anyhow we see a market better than last year and volume of what we are forecasting, we're seeing for this year, in our case relatively higher than last year.

But also we see our volumes coming upstream, not only ours, but of third parties too. So we cannot say the only one getting the growth of the market.

Got it, understood. And just my last question, I think you mentioned some of your cost initiatives that should start to materialize, or you should start reaping some of those benefits this year. Could you help quantify that for us in terms of either monetary value or basis point moving your gross margin?

Well, as we told in the last conference call, we have made a big effort and study to cut the Company related to cost. And as I said in the last conference call that we expect $50 million reductions for this year and that we are -- well, we have not stopped there. We are continuing effort to go even beyond.

How much will be reflected this year, you have to see that cost go to inventories and that go to an average price, so we don't -- we'll not be able to see fully those 50 years in 2014, some of that in 2014, completely in 2015. But I must say that we continue with the effort and we see that we have yet a lot to do in terms of reducing continually our cost and we are very optimistic on that.

Giovana Araujo, Itau BBA.

First I'd like to hear views about the implication of this Tesla lithium battery factory on the global lithium demand. In your view, is there any reason to be more positive about long-term growth of lithium carbonate demand on the back of that or this is a type of project needed to support a long-term growth range between 8% and 10%?

Well, we have seen lithium grow in general, but maybe in a year not over two digits. Maybe in 2009 was not the case, or 2008, but general market has grown over two digits.

We view that the market should continue in the range of, let's say, [interest to be]. I'm not talking 20% at some time (inaudible) in the range of 10% to 11%, that is our main -- it could happen the other way or the other, but that is our best view. So in that sense we are optimistic in what's going on in the market.

Okay. My second question is about the iodine market. You were mentioning there will be -- that iodine sales could decrease in 2014, but you also mentioned pressures on pricing in the recent months. So my question is, is there a risk of a decline in volumes and prices in the same extent we saw in 2013, 15% in volume, 6% in price?

Well, risk is always part of the game, but I must say that the iodine, we are optimistic in the long run. We are I think -- some way where in we say that 2013 is a decision time for SQM, well, part of the concept behind that is what's going on in the iodine business because it is very relevant to the Company.

So when we take transition also we have to do that for the iodine business. So our forecast for the iodine is optimistic in terms of growth in the market, and I think the strategy we have, we have implemented what's going on in the market. We will see significant -- we would see some changes and a positive trend, again not in pricing, but in volumes for next year anyhow. We are confident on that.

And then we will reach performance to be in the 30%-33% in the near future, let's say, at least next year. So we are working for that and we will make policy (inaudible) to get those volume back again, or getting very near those volume back again next year.

[Alexander Pohl], HSBC.

Just wanted to -- again to follow up on lithium what's the maximum amount that you can extract with -- as per the current agreement with the government? And given that we probably are going to see with the factory from Tesla and orders coming from China, if that's the case of an increase in the type of production. What is the strategy here, more concession in Chile or an M&A in Argentina or other countries?

The main focus is in Chile figures, the Atacama Salar is the best place to produce lithium at a lower cost. We have been trying until now without success to negotiate with government for a new condition. We hope that this effort will be accomplished to be in a better position in our leadership in the lithium business.

Even though rare, we can -- when we stay and we look for other possibility in different places, but our focus on -- more important focus are related to what can be done and we are negotiating in Chile.

What's the maximum amount that you can take out right now with the current agreement, can you give some color on that, thank you?

We have -- still we have take in the contract about 50% of what the contract permit us.

Tim Tiberio, Miller Tabak.

With a lot of your growth CapEx behind you and some of your comments around additional lithium supply suggests that maybe you are a little bit concerned about some of the greenfield -- your projects that have been percolating in the background.

Is there any hurdle or issue with your policy that would prevent you from actually doing some outbound acquisitions? A lot of these smaller companies are not very expensive, but if they are getting closer to production, have you considered that as maybe a strategic defense in the market in the near term?

We study all of them and we have seen all the chances and opportunities that have come to us and some of them have been both [residual] chances although more real and we have (inaudible) economic terms that permit us to make those M&A as you suggest.

So clearly, as a Company, in any of our core business we are ready to act and we have the financial capacity to act if we see an opportunity. And always we are looking for those opportunities, sometimes proactive, sometimes not, but clearly it's part of our view.

We also on the other hand find natural resources for iodine out of Chile very difficult. And the potassium, well, today the market is complex to do any step on that beyond when we are already doing on our resources. But we have studied and we will be monitoring anyhow if there is an opportunity.

In lithium, that's a true reality too. As I said before, we are seeing things that could be potentially some possibility for us outside Chile, but our main focus is to see what can be done with the contract in Chile, whether we can be successful or not of course.

Just staying on lithium for a moment, I guess your strategy historically is to remain upstream in the lithium carbonate production arena, but obviously with some of the recent industry news would you ever consider trying to expand your reach further downstream in the value-chain, looking at maybe the five-year outlook, or is the strategic vision still to stay further upstream in lithium going forward?

Well, I think the more attractive area for downstream is there. It's a very complex market and we see that as (inaudible) to do that step. If we do that we have to do it maybe abroad, but clearly on the other hand you cannot (inaudible) the way you sell to customer completely with that. So also you have to take that into account.

Juan Tavarez, Citigroup.

Just following up on iodine, you released the market update in December and you kind of highlighted that the first quarter you were seeing price pressures between 5% to 15%. I'm wondering now that we're into the third month of the quarter, if you have any sense of where you are trending towards, on the higher end of that balance or the lower end?

And also if you can give us an update on how the potash market is short term and your perception here of potential bottoming in pricing?

Okay. To [further understand] we went to the lower part of the potential (inaudible). They are more or less where we are, more or less because there are particularities, some quarters and characteristic, but in general speaking we are in the lower range of what you said before.

On the other hand, we have -- we are in the potash business today, related to what we thought in January, we are slightly better. That included in objective, I can say. That we will continue in the year or not, something to be seen.

Our best guess is that more important factor here is the loss of demand, and we see let's say a market that is growing more in demand. We all know that the capacity of potassium in the world is there is a lower capacity.

So the major factor here to have an assumption for the future or during the year is how demand is going on; three months or two months still too short period of time to see that the higher demand that we have being seen the last two months will continue or not during the whole year.

If we see the demand as it is today, we think that we are pleased to have the prices we have today and there is a high possibility that -- to the further increase of what has happened already in the first two months.

But demand hasn't been (inaudible) here in our view, and that is something to be seen during the year. Until now we are really optimistic, but two months is not enough time to be optimistic.

This concludes our question-and-answer session. I would now like to turn the conference back over to Gerardo Illanes for any closing remarks.

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

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