智利化工礦業 (SQM) 2014 Q1 法說會逐字稿

Good day and welcome to the SQM first-quarter 2014 earnings conference call. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Gerardo Illanes. Please go ahead, sir.

Good morning, everyone. And welcome to SQM's first-quarter 2014 earnings conference call. For your information, this conference call will be recorded, and it's being Webcast live. You may access the Webcast later on at our Web site 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, (inaudible) economic performance, anticipated profitability, revenues, expenses, or other financial items, anticipated (inaudible), and product or 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 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 that statement. ` Risk, uncertainties, and factors that could affect the (inaudible) 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 executive vice president and chief operating officer, Patricio Solminihac, for brief comments before we move to Q&A.

Good morning. Thank you for joining the SQM first-quarter-ending conference call. I will start with a brief (inaudible) before we open up the lines for questions.

On Tuesday evening we posted our result for the first quarter of 2014. Earnings for this period reached $81 million, lower than the first quarter of 2013. Revenues totaled $534.1 million.

And we mention in our press release these lower results are a consequence of a decline in prices in our major business lines compared with the first quarter of 2013. Despite this price decrease, we have been able to increase efficiencies and reduce costs company-wide.

And for this reason, gross profit slightly increased when comparing the first quarter of 2014 to the third and fourth quarters of 2013.

We expect sales volumes in the potassium and especially plant nutrition business lines during 2014 to exceed sales volumes seen during 2013 by approximately 15 percent.

As seen in the previous year, [SBN] volumes are higher in the first quarter than they are (inaudible) the other quarters of the year. We also expect to recover some volumes in the lithium business lines during 2014.

In the iodine market, price decreased as a result of the strong competition. Volumes during the beginning of 2014 were lower than the volumes seen during the first quarter of 2013, a record quarter.

And we're similar and even slightly higher than volumes seen during the second, third, and fourth quarter of last year. Our strategy is to return to the long-term market share of close to 30 percent, considering that SQM is one of the lowest cost producer (inaudible) to sustainable production commodity.

As the company announced on Tuesday evening, we agreed with [Corfo] to enter into (inaudible) process regarding the methodology used to calculate payment made by SQM to Corfo relating to the lease agreement in the [Sala de Dagam].

Corfo estimates a difference in payment to close to $9 million. And our position is that we have made the every day payments.

I will close by saying that 2014 will be a transitional year for SQM. But we will continue to manage the company with a focus on the long term, and remain focused on the maximizing shareholder value. Thank you.

Thank you, Patricio.

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

Thank you.

We will now begin the question and answer session. [Operator Instructions].

At this time, we will pause momentarily to assemble our roster.

Our first question comes today from Ben Isaacson of Scotiabank. Please go ahead.

Thank you very much.

First question is on the lithium business. You've talked about increasing lithium volumes in the back half of the year. One of your competitors, Canada Lithium, now owned by RB Energy, they are wrapping up one of their plants right now with guidance of adding about 10,000 tons to the market in the second half of the year.

Without a steep change in demand, how do you also accomplish increasing your lithium volumes in light of that?

Thank you, Ben. Well, regarding Lithium, as we say and as we have been showing, we are recovering some volumes. We keep an eye clearly on what is going on with the newcomers, especially Canada Lithium, or RB Energy, as you say.

They have not been yet very active in the market. They are in this startup process. We also have seen from the demand side that the market is very strong. So we believe that the growth in demand will allow these newcomers to start placing their products.

But, as always, these projects take time in their startup. We'll have to see how much time they will take, and how that will relate to the increase in demand. Right now we continue our sales contract with our customers.

And we see that the margin for lithium in the next quarter should be similar to the first quarter.

OK. Thank you. And then just my second question is on the iodine market. It seems like all Chilean producers, except for one, have cut back their production a little bit, including yourself.

As he's about the stabilized diet, [I'd mark] it a little bit, could you talk about whether you think more cuts are going to be needed by [S Gem] in particular, or by other Chilean producers?

[island] market in the first place, the demands continue to be strong, helping to -- to place more volumes of some of the producers. We, as I stated in my initial remarks -- we want to go back to our long-term market share objective. So, we -- we will see what the market will react. But in our estimate, as we indicated, is that the price -- it can suffer a little bit more during the rest of the year.

So, do you think $45 is a kind of a long-term reasonable price?

I -- I will not really state on prices what we decided. I think (inaudible) is that we will keep our market share. We will go back, staying better to our long-term market share. And then the price will be a result of the supply and demand.

First quarter price, as we stated, was in the range of $40 to $45. And we think that the rest of the year, the price will erode a little bit more.

Okay. Thank you, very much, Patricio.

Our next question comes from [Alberto Eriskia] of Santander.

Good morning, Mr. Patricio.

First of all, I would like to congratulate you for the over-expected operational results.

Well, as you already stated, you made another expenses provision due to the -- I will try to post this with (inaudible).

Can you give us more detailed information? Do you think there might be more -- more problems or [pollution] in the future that we might be aware of?

Thank you, Alberto.

Regarding the situation with [Corfu] in our (inaudible) lead, we are very confident, as well as our lawyers are -- are also stating to us that we really do not have any situation that we have been against the contract. We have a different opinion regarding the methodology of how to calculate some of the payment. And we -- we discuss it with [Corfu], and we decided together that the best way was to go at the contract as stated to an arbitration process to the other mine if there is such a difference or not.

[Corfu] has indicated that the difference is close to $9 million. We are very confident that there is not such a difference. That we are -- been working for 21 years already in this contract. And we have been paying quarterly more than 81 times the payment over this 21 years, according to the contract.

So, we feel very comfortable on this, and we don't think that we should have any contingency.

Thank you, Mr. Patricio. I also would like to ask you if you have any information about the other Chilean competitors in the [island] business. Do you know if the supply from Chilean producer will increase, and, therefore, will impact the total volume of the market?

As I indicated before, first, the demand of the [island] business continues to be strong. And that is very important. It's a market that really grows, especially in -- in the [x-ray-conscious] media and LCD's and the other pharmaceutical applications.

Regarding the other Chilean producers, they are private companies except for R.V. Energy, which is previously [R.S. Blancas] project, which is public. We don't have official information from them. So, we have to just see from the (inaudible) statistics how they are behaving.

We have, of course, some intelligence information from the market. But some of them have been, as the previous question stated, has been lowering their offer. And some of them have been inclusive some their offering.

Thank you, Mr. Patricio.

Once again, if you'd like to ask a question, please press star, then one.

Our next question comes from [Tim Tiberia] with [Miller Tay Bank].

Good morning, and thanks for taking my question.

I was wondering if you could just elaborate a little bit more on the near-term, you know, demand trends that you're seeing in especially plant nutrition business.

You know, it doesn't seem like, at least at this point, that the California drought has, you know, really impacted, you know, demand in North America. Maybe you can just, you know, give us, you know, an update of, you know, whether you're seeing better demand out of Southern Europe this season, and how you're thinking about North America for the second half of 2014.

Thank you.

Regarding SPN, the good thing about our market is that they are very diversified. We sell in more than 100 countries. Very diversified in North America, Asia, Latin America, Europe. So, first answer is that the reason why we have been showing this increasing volume this year is that this [bureaucification] help us a lot. And a specific situation in one market, given weather condition or crop situations, really do not affect us because we can compensate very quickly with the other markets.

We are very confident that the total volumes that we will be selling this year will be in the range of 15 percent more than the previous year.

The other important thing that show us during this (inaudible) crisis in the previous years is that our potassium nitrate [probe] is really a speciality, and not the commodity that follow completely the price situation of the [bordex]. We were able not to decrease prices as much as (inaudible). And now, we even are able to recover some of the price.

Thanks. That's very helpful.

And then, I guess more of a longer-term strategic question. We've seen a lot of the upstream -- you know, Potash Miners and other companies buying into, you know, increased retail and distribution capabilities within South America. How do you see that, you know, impacting your abilities to service the South American markets? Do you think, you know, you will need to increase some of your downstream capacity? Or do you think that with your current production and your existing relationships, that there's really not going to be a meaningful impact even as we see some of your global peers strengthening their retail ties, particularly in Brazil?

Well, the good thing, as I said before, that we sell and we get with our own brands to all of these markets. So, we already have an established distribution system and also some value added situation, [NPK], (inaudible) [NPK] in many countries through some (inaudible) that we have for instance with (inaudible) or with (inaudible) the (inaudible) group in Brazil and Peru and South Africa. We also have a relation for selling our products in the U.S. with [Jarra].

So we feel very comfortable with our (inaudible) [tuition] system, our value added system products through the [NPKs] and (inaudible) plants that we have around the world. And of course, depending on the development of each of the markets, we adjust some of this, but not (inaudible) changes.

OK. Thanks for your time.

The next question comes from [Tom Magelwey] with J.P. Morgan.

(Inaudible), everyone. Thanks for the call.

I have two quick questions for you. The first following up on the question of [SPN] and [potash]. I'm wondering how was your market share evolution, given the volume's growth, specifically in Brazil as well.

And the second question is more accounting oriented. I'm wondering if you could give a little more color on the -- other line (inaudible) exchange (inaudible) which was (inaudible) doubled year over year to around $8.5 million.

Thank you.

I'm sorry, [Tom], but the line was very noisy. I couldn't understand clearly most of your question. Can you repeat them, please?

Sure. Can you hear me better now?

Hello, can you hear me better now?

Yes, much better.

Excuse me. Sorry about that.

I had two questions. The first following up on the [SPN] and [potash] markets, I was wondering if your increases in volumes allowed you to also gain market share over your [North] American competitors, particularly in Brazil?

And the second question is more accounting related. I'm wondering if you can provide a little bit more color on the other line below the [exchange] difference in the income statement, which more than doubled to $8.5 million for the quarter. I was wondering if you could provide a little more clarity on what we should expect from that, what that is, and what we can expect from that moving forward.

OK. Thank you, [Tom].

Regarding your question on the [SPN] [potash] lines, we have been increasing the volumes, but not through having less volume from our competitors. Basically, this has been growth of the markets developing, and also what helped us in our production (inaudible) sales is the shortage that there is potassium sulfate. So that helps us also to have these increasing volumes.

So we have not really affected the volumes of our (inaudible) competitors.

Regarding to your question, I will ask Ricardo, the CFO, to comment.

Yes, about the (inaudible) line, the line that you comment (inaudible), that is what we call (inaudible) what we can call non-operating. Really, it's not so different if you compare with previous quarters in the year 2014 and we do not -- we do not expect that this line is going to be different or significantly different when you compare the full year 2014 with the full year 2015.

OK, great. Thanks again. And congratulations on the quarter.

Our next question comes from Ravi Jain of HSBC.

Hi, good morning. I had two questions. One was we have been seeing in the news that the president in Chile plans to create an expert panel to work on a state panel about [lithium]. Could you give us your views on -- on that?

And the second question was on [potash] segment specifically. Can you give us a little more color as to the cost efficiency that you (inaudible)? Was it mainly volume-related? Or what exactly were the cost efficiencies? And should we expect the margin that we saw in the first quarter in [potash] sustain in 2014?

OK. Thank you.

Regarding your first question on the [lithium] panel that the minister of mining announced and that the president yesterday confirmed, basically what they're saying is that they will put a group of people to think about how the [lithium] policy in Chile should change or not for the future, and recommend by the end of the year to the president those (inaudible).

Our -- our thinking, we have been very open to say that, that Chile has a very old law in the 1979 that says that [lithium] is a strategic product so cannot be [exploit] and [explore] similar to other mining components in Chile. And we think that that is not necessary. There are not any reasons for Chile to keep [lithium] on a strategic material.

So we look forward that this panel will conclude that [lithium] should be more open and there should be more work similar to many other minerals in Chile.

Regarding to your second question, what we've been working since last year is cost efficiency all across our company, from an organization point of view, from efficiencies -- from efficiencies of labor productivity, as well as from efficiency in energy consumption, and also in [deals] that follow our [collection] processes.

We have been very successful in that. We feel that total cost -- less cost is already in the range of $60 million per year equivalent. And we continue to work on this. This is reflected in all our business lines, of course.

And regarding your final question on the margin in [potash], we think that that should continue during the rest of the year.

Thank you so much. That's very helpful.

This concludes the question and answer session. We have no further questions at this time.

Thank you (inaudible), Operator.

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

Good-bye, everyone.

Thank you. The conference is now concluded. Thank you for attending. You may now disconnect.