智利化工礦業 (SQM) 2014 Q2 法說會逐字稿

Good morning and welcome to the SQM second-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, Vice President of Finance. Please go ahead.

Thank you. Good morning, everyone and welcome to SQM's second-quarter 2014 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 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 such 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 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 de Solminihac, for brief comments before we move to Q&A.

Good morning and thank you for joining the SQM second-quarter earnings conference call. I will start with a brief introduction before we open up the lines for questions. On Tuesday evening, we posted our results for the second quarter of 2014. Earnings for this period reached $71.1 million, lower than the second quarter of 2013. Revenues totaled $522.3 million.

In the first half of 2014, we have faced many challenges in both the fertilizer and the chemical market. In the potash market, prices were over 20% lower than prices seen during the first half of last year. However, we have seen prices begin to recover in Brazil in recent months, our most important market. With demand expected to reach between 55 million and 57 million tonnes, we are hopeful that price will follow the upward trend in the upcoming quarters.

In the SPN market, we are expecting 2014 volumes in this business line to be similar to volumes in 2013. We have reviewed and received many questions regarding to iodine, more specifically price expectation within the market. As expected, price fell significantly during the first half of 2014, averaging $40 per kilo. As we mentioned in our press release, we will work to recapture our marketshare in the coming quarters. And despite stable demand growth, market price could reflect these efforts.

In the lithium market, demand during the first half of 2014 has been strong and we expect demand growth to reach at least 10% this year. In addition, our sales volumes were up significantly compared to the first half of last year and we hope to finish 2014 with over 40,000 metric tons of sales volume in our lithium business line. There is a new supply announced for this year from other players in the market and this new supply could have slight downward pressure on average price for the year. We continue to work through the orientation process with CORFO related to the methodology used to calculate payment made by SQM to CORFO in relation to the lease agreement and the Salar Atacama. CORFO estimates a different payment of close to $9 million and our position is that we have made the appropriate payments.

Solar salt is another area of question for many of you. We mentioned that we have closed supply agreements for approximately 240,000 metric tons to be supplied to four new projects in Africa and Latin America between 2015 and 2017. We continue to work diligently on our cost-reduction efforts and look forward to finish the year with over $60 million in cost savings.

In short, despite recent challenges, we continue to mitigate risk and remain focused on the long-term value of the Company. We will now open the line for questions and thank you for your time.

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

(Operator Instructions). Ben Isaacson, Scotiabank.

Hi, this is Christine Monroe calling in for Ben Isaacson. Thank you very much for taking my call. I had a question about iodine prices and the iodine market. You mentioned that you were aiming to regain marketshare, but you haven't outlined whether there is a strategy to do that. I also wanted to know if you see a turning point for prices anytime in 2014. Thank you.

Thank you, Christine. As we have stated, we want to get back to our marketshare of 30% more or less and the way we will do that and our strategy is to work on the quality of our product. When you have more supply, customers start to worry much more about quality and service. So we will continue to strengthen our position, which is already very strong on the quality and the stability and the consistency of our product in the first place.

Second, the service. Having the stocks near our customers and also the quantities on time when they need it. On the other hand, we are doing a strong effort on the costs. We already are reflecting in this first half lower cost for iodine. We continue to have more ideas how we will continue to lower our cost. So that is our main strategy. Given that what we see on the market, we feel that the price in the rest of the year could continue to be affected and we will see what happens in the next year.

Thank you.

Fernando Ferreira, Merrill Lynch.

Hi, everyone. Thanks for taking my questions. I had a question on lithium. I just wanted to understand a little bit better this comment you made regarding the commission in Chile that we will evaluate the future of lithium mining. Just wanted to get a little bit more details if you can there. And then I had another follow-up on iodine. Given that prices already declined 20% and we saw volumes down by 8%, just wanted to get a sense when do you expect these volume trends to recover? Can we see that already in 2015 or I mean given what you mentioned right on improving quality and the services and when do you forecast that volumes will rebound? Thank you.

Thank you, Fernando. Regarding your question on the commission of lithium, the new government stated that their program says that they want to have complete analysis of what they want to do as a public policy on lithium. And to do that, as they form a commission of 21 people from different areas, and this commission is doing their work in trying to analyze the different aspects that need to be understood for them in order to propose public policy to the press here.

We, as SQM, as the company that has long-term knowledge of more than 15 years in this market and of course having leadership in the world of course have been invited to give our opinion and our information to the commission. We also invite the commission members to visit our operations in the Salar Atacama and they did that and we continue to offer our knowledge and our understanding what is best for Chile in this area. The commission continue to work. They are supposed to have by the end of the year their conclusion of proposition to the government if they want to do any change on the laws.

Regarding your question on iodine, yes, we have been affected on this supply and demand in the market of iodine that affected the price close to 20% as you commented. We indicated in our press release we expect to get more volume in 2015. We will see how the market reacts. We have given a clear signal to the market to what is our intention. So we have to wait and see and of course to correct our policy if necessary according to the new information in the market.

Okay, no, that's perfect. Thank you.

Cesar Perez-Novoa, BTG.

Good morning, gentlemen. I have two questions. On the iodine front, you mentioned that you will be reducing costs in the entire year between 5% and 10%. Could we know where that effort has been made? And in addition, you further comment on the press release that the costs will likely go down into 2015. Can we get the percent of savings on that program? And also where that is coming from? And on the solar salts, those additional 240,000 tonnes, how should we split that in 2015 through 2017? That would be really helpful. Thank you.

Thank you very much, Cesar. Regarding your first question, cost reduction in iodine, we, in the first half of the year, reflected close to 10% lower cost. We continue to have effort. We expect to have either lower cost during the second half and we expect that the next year we will continue that trend. Where? Everywhere. We have a program that has been very successful up to now where we are increasing the efficiencies, the productivity and also we are increasing production in the plans that are more efficient than others. So we are doing some changes in the total production in the different plants in order to optimize the final total cost. So we are also doing some process change in one of those plants also that is helping us to lower the cost. We are very optimistic that we can deliver. We have to wait and see the results.

Regarding -- what was the next question?

The incremental volumes on the solar salts. How should we split those 240,000 tonnes between 2015 and 2017?

Sorry, that's okay. Thank you, Cesar. Regarding solar salts, we have already agreement with four new projects of 240,000 tonnes. Of those, 40,000 tonnes are expected to be delivered in 2015, around 140,000 in 2016 and around 40,000 in 2017. I think that this is great news. It is something that we were expecting that the solar salt project would come back and they are coming back and we are seeing more optimism in this industry. So we expect that we will be able to agree with other projects in the near future.

All right, gentlemen. That's really helpful. Thank you.

Alex Falcao, HSBC.

Thanks for the question. I just wanted to get a little bit more color on 2015 on lithium prices. Should we expect they are going down still in 2015? Is there any -- and if not, what is the driver for that? Thank you.

Regarding prices of lithium, you have seen that we have already some slight reduction in prices. We have increased the volume and what happens in 2015 will depend heavily on how the two newcomers that are announcing new production really results their startup. We have seen in the past a very difficult startup of other players. So if these two new players, one in Canada, Canada Lithium now RB Energy, is successful and try to put a lot of volume and at the same time, the Argentinian project of [Olaroz Solar], which is (inaudible), that is supposed to start by the end of this year, start also to have a very smooth startup process and try to put a lot of volume in the market, we should see some effect in the price.

On the other hand, if their introduction to the market is more gradual because of their startup process and their own strategy then we should not see that much effect on the price.

And just as a follow-up on that, do you guys see, if they do ramp up faster their projects, do you see your strategy being affected by it? Meaning can you guys cut volumes to avoid a massive oversupply of product in the market?

In the lithium strategy for us, you know that the main issue for us is the limit that we have actually with our contract with CORFO, which we start production in 1996, at the end of 1996 and we already have consumed more or less half of the total amount that we are allowed to produce and market in lithium. So we are of course working in order to get more permits to increase that volume, but if we want to increase a lot of our production now, that means that we will not have enough lithium to get to the 2030 limit of our concession with CORFO. So we have to play with that. We are very optimistic that we will get an agreement with the government because that makes a lot of sense for them to do, but we have to see them.

Okay, thank you.

[Alberto Arricia], Santander.

Hi, thank you for taking my question. Sorry for reiterating in the iodine market, but I don't understand why being one of the lowest cost producers, as you stated, why would you like to maintain and increase production and let prices drop? What is the economic rationality behind of that? Because you spoke about the quality of your products, but if you check the international export information, it doesn't show much better prices for your products.

And my second question is related with the SPN market. Why for this half if you had almost same volumes and pricing, we are looking lower gross margins? What's happening and if you can give us a guidance on that? Thank you very much.

Thank you, Alberto. Regarding iodine, what you just asked is what we ask ourselves constantly. It's very difficult to define the best strategy volume. Given our marketshare, if we tried to put that, and also our cost position, which you just said is one of the lowest cost producers, we can put much more volumes into the market and live with the consequences on the price or we can allow some newcomers to put some more volumes and be at much higher cost, we will then sell less volume.

What we have to do is to define a strategy that optimize and maximize our value long term. I have been in this industry for 26 years and this is not the first time that we go through a process like this. We went through this process at least three or four times in the past and we have learned from those experiences. And according to our best understanding and according to our understanding of the cost position on the other players is the way we define then what will be. And our strategy now is that we want to get a marketshare of close to 30%. We believe, according to our modeling of the market and the industry, that way we will optimize and we will maximize our value long term. Regarding to your SPN question, I will ask Ricardo, our CFO, to comment on that.

Okay, first, it's important that the final price, the price that you review in the press release depend on the mix of the products and the sales condition. Our mix during the first half of this year as compared to the first half of last year is moving to more high price products and our sales condition moving more close to the client. Of course, when you move more close to the client, it means that you have more cost, more cost and logistic cost to go to the client. That is why, as you can see, even though it seems like the prices are better, if you go to the price FOB to (inaudible), it means we go to the same basis to our port facilities. Really our average price is slightly lower this year as compared to last year.

If you consider that it has been quite successful, our strategy in the SPN market, because if you consider that MOP prices, if you compare first half last year and first half this year, is down like $90 per tonne in the MOP price. In our SPN products, the decrease in our return FOB Tocopilla means going to the same basic per tonne of nitrous in our port is close to the decrease, a little bit higher than $30. It means very successful trying not to follow the same negative trend of the MOP.

But if you go to the margins, margins during the first half of the year as compared to first half last year per tonne of products is like $20 lower. It means that we have been able through the cost position of the Company to have a positive in the cost close to $15. That is why be careful, but, at the end, the bottom line is different mix condition of different products, more price products, high quality products being in the first half this year. Second, the sales condition moving more close to the clients with more (inaudible). It means that at the end that lower margins are even lower in the range of $30. Very successful because it is not as close, not even close to the $19 of MOP and we have been able to be very successful in the price and the margins, plus with the cost having a positive effect in cost in the first half.

Yes, thank you very much and do you expect to maintain this strategy on the SPN business?

Yes, but we are quite positive about the second half in terms of volume. We think that volumes for the second half this year we think today are going to be higher than volumes second half of last year. That is something we expect to report in the near future and it will help us because we are not going to have only the cost position that is very positive. We are going to have the volumes, positive volumes second half and we expect that we will maintain today's price environment. And depending what is going on with MOP, we think that we can maintain what is today a today condition on the price.

Okay, thank you very much.

Tom McElwee, JPMorgan.

Good morning, everyone. Thanks for the call. I just have a quick question on what you are seeing for regular potash demand in Brazil. We know that pricing has recovered pretty strongly year to date, but I'm curious to see if you think that this can be sustained in 2015 with the weaker soy and corn outlook and how next year's demand is going to compare to this year. That's all.

Thank you very much, Tom. As you know, we are a follower in potash. We are not a big player in this market, differently in our business, another business line. What we are seeing is that many of the players and the specialists in the industry are very optimistic, some of them even talking of over 57 million tonnes for this year.

Regarding the effect on the lower price in corn, but of course has an effect in the consumption of fertilizer, given that the price came from a very high level, still according to the numbers that we are seeing for the farmers continue to be a good business to fertilizer. We have to see how much the price really goes down if it goes even more down next year, but it is something to be seen. What we read and talk to people in the industry is that if we are able to see this year in the range of 57 million or more tonnes, then we are proving that the volumes are back. That is all that I can comment on this.

That's great. Thank you very much.

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

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

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