智利化工礦業 (SQM) 2015 Q1 法說會逐字稿

Good morning, and welcome to the SQM First Quarter 2015 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 Gerardo Illanes, Vice President of Finance and Investor Relations. Please go ahead.

Thank you. Good morning everyone, and welcome to SQM's first quarter 2015 earnings conference call. For your information, this 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 Solminihac, Chief Executive 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 and anticipated profitability, revenue, expenses or other financial items, anticipated cost synergies and product or service line growth together with other statements that are not historical facts. Our forward-looking statement are, 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. Risk and uncertainties and factors that could affect accuracy 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 Chief Executive Officer, Patricio Solminihac for brief comments before we move to Q&A.

Thank you, Gerardo. Good morning and thank you for joining the SQM first quarter earnings conference call. Last night, we post our results for the first quarter of 2015. Earning for this period reached $72 million, lower than the amount seen during the same period in 2014. Revenues for the quarter, totaled just over $388 million, down approximately 27% when compared to the first quarter of 2014, mainly because of delays of shipments in the fertilizer business line and lower price in iodine. EBITDA margins for the first quarter were very high reaching 45.7% compared to EBITDA margin of 35.6% seen during the same period of 2014.

I will now outline what we see happening in our five business lines. First, potassium nitrate, revenue were significantly lower compared to the first quarter of last year. Revenues were impacted by considerable lower volumes, which were caused by treatment delays to Brazil. About 30,000 tons were not delivered during the first quarter, but should be recovered during the second quarter of this year. Price were up when compared to the fourth quarter of 2014 because demand is strong and there was less supply from other place. Going forward, we expect market demand in potassium nitrate business to grow at above 5% this year and we expect price to remain stable.

Potassium chloride, revenue decreased compared to the first quarter of 2014 impact by important lower sales volume, which were down approximately 48%. As mentioned in the press release, this volumes decreased as result of delay that to be recuperated in the coming quarters. Although we anticipated recoveries of sales volume in subsequent quarter, volume for the year should be between 5% to 10% less than sales volume seen in 2014. We expect our average prices in the business line to be similar to price seen in 2014.

Iodine, revenues reported for the first quarter were in line with expectation given our current strategy. Lower average price has been held to stimulate the demand and these along with a more aggressive volume strategy has had in higher sales volumes during the first quarter. Price which were down 30% compared to the first quarter of last year were anticipated, and are also in line with this strategy. Going forward, we expect iodine volumes in 2015 to exceed volumes in 2014 by around 5%.

Lithium, revenues for the first quarter of 2015 compared to the first quarter of 2014 was down around 7%. Volumes in the lithium business were down approximately 8% when compared to the first quarter of last year. Demand was strong and some new projects have been delayed creating a [suspension of the time market]. Average price in the business line were up about 10% compared to the fourth quarter of last year. Volume for the next three quarter will be higher than volumes since in the first quarter and therefore, our volumes for the year should be slightly higher this year compared to last year.

Industrial Chemicals, revenues were down compared to the first quarter of 2014 by approximately 28%, volumes were down 30% compared to the first quarter of 2014 and were up about 34% compared to the fourth quarter of 2014. Going forward, we see very positive signs in the solar salt business and expected to recognize some sales anticipated for 2016 in 2015 boosting our volume this year. This shift should bring sales volume expectation for 2015 to over 75,000 metric tons. An increase of over 50,000 metric tons when compared to last year. We have closed contracts for projects in Chile and South Africa for 2016 and 2015.

Before I open up the line for question, I would like to reiterate that on April 24, our shareholders elected a new Board of Director. The Board members have been working diligently over the past month to understand the challenges and opportunities that the company face. I'm confident that their expertise in various fields, including corporate governance will be invaluable in supporting and guiding SQM in the future. Thank you.

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

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Isabella Simonato, Merrill Lynch.

I have two questions. First, Patricio, if you could go over and give us more color about what caused those delays in the shipments of SPN and potash, why that happened in those business lines? And then for potash, specifically why you think volumes are, you won't be able to recover those volumes in the coming quarters like SPN?

And secondly my question is on lithium. We understand there that (inaudible) might be close to vote for the proposed change in the lithium regulation. Do you have a specific date for that to happen? Indeed that should happen in the short-term. Those are my questions.

Regarding the potassium chloride delays, we generally sell a large volume of potassium products to Brazil during the beginning of the year. We were facing some production problems as a result of the rain in the north of Chile in March and consequently, our production was delayed in that month. Additionally, we did a special maintenance in our dryer granulator plant. Our port because of bad weather was closed at the end of March for some days, adding to the delay of the first quarter. We hope to recover the production according to our plan for the year by the end of the year, but we will not reach our originally anticipated volumes. Of course, we are already recovering the volumes that we did not ship in the first quarter, but for the total year, it will be some kind of less of the previous year. Regarding SPN wasn't a specific delay of about two to Brazil, that we are recovering in the second quarter. So we see bigger volumes in this year, if you compare with the last year in SPN.

Regarding to your second question of lithium, we do not have any specific. We heard the same information that you said, but we don't have any specific on that, we'll have to wait. We of course review the report of the Commission and we expect that we shouldn't be directly affected.

Cesar Perez-Novoa, BTG Pactual.

Could you give us a little bit more color on your cost break down? You had a very interesting cost reduction in the quarter. And I would like to know how you achieved those cut in cost and whether those will be attainable in and if we could extrapolate the margin for the rest of the year? If you could provide some color, that would be quite helpful. And I would also have a follow-up question regarding your CapEx guidance for 2015 and 2016. And if you could provide some breakdown there that would be really helpful as well.

Regarding the cost, we do reflected a very good EBITDA margin as we indicated in the press release and that was in one hand because of the cost reduction, but also because of the mix in the different businesses that we have in the first quarter. We are seeing the result of our cost saving effort of the last six quarter now. We also, have been seeing lower energy cost and better exchange rate that is helping us. We continued to work in our program and we are very happy with the result. People in all our plants are really taking this as a personal challenge and we are seeing the result. We expect to see an additional of $40 million saving, additional of what we already accomplished during this year. So we feel that this of course is an effort that we'll continue, and we can project for the future these kind of cost reductions.

Regarding the CapEx, we do have an original CapEx in 2015 of close to $170 million or $180 million more or less, we have started our investment plan, which is mainly related to maintaining CapEx and some specific efficiency projects. We have the capacity in all our business lines, so we are planning to consolidate our cost cutting efforts and this is what the CapEx is for, much less than our depreciation. For 2016 we are starting to work in the new ideas, we don't have still a CapEx to comment, but we, of course, want to review our strategy for the future and of course, bringing new ideas that we'll comment when we have it developed.

And if I may just with those $180 million that you have budgeted for this year, does that include, of course, exploration and specifically, would that -- there is a statement on the press release where you're budgeting $5 million for the metallic side of the business, would that allocate, would that be included in the $180 million?

Yes, that's included in our CapEx.

Giovana Araujo, Itau BBA.

So my question is about the potash market. You seems to be a little bit more bearish in terms of prices for 2015 than you were in the last quarter. So I would like to better understand, so what is driving this weakness in prices, if it is indeed linked to more competition among players or if it is linked to weakness, weaker than expected demand, so, especially here in Brazil? And then looking more medium term, when do you expect this price secondly going to improve? That's my first question.

Regarding potash, you know that we are a small player. So we just are completely price taker. And of course, what we try to optimize is our netback, meaning trying to allocate where we get better netbacks in our distribution of clog going better to market where we get the better price like Brazil, like also granular instead of standard products.

What happened this year is that the total market is expected to be lower than the total market of last year. Last year was close to 63 million tons in the world and this year what the analyst and some of the big player are thinking that will be in the range of 58 million tons or 59 million tons. So we will see a total lower demand because of the stocks that were accumulated the last year and also maybe because an influence on lower crop prices.

Second, the increased price in the contract in China was only $10. People were expecting that will be over $15. So it's only $10, which is a good, it's an increase. However, we are seeing that the difference between the contracts price in China, and the other markets like Brazil is now diminishing. Previously, the difference used to be a more between $40, in some cases $50. Now, It's going to a difference, that is more close to $30 or even less dollars. So that is affecting the price of potash market. For our sales, we are thinking that the price is more or less the same. What we will see as our price this year, we think that it will be very similar what we saw as price last year.

Regarding iodine market, it seems the year-over-year drop in prices were higher than originally expected. So I would like to understand the main driver behind that and if it is more supply than the market than we originally expected, and if there is upside risks in your guidance for volume more upside or downside, which is your guidance for volumes growth in 2015?

No, we are saying that prices has been moving the way we expected according our strategy. We indicated when we started this strategy that we wanted to regain our market share, that we are by far the lowest cost producer. We have the installed capacity. So we were not prepared to continue losing the market share, and that was our strategy, a very clear signal to the market and support to our customers. And we have been doing that and the market has been reacting the way we expected. Demand is been very strong, some new application are out in the market and we have been seeing more volumes.

Prices at the end of the day, we are not the ones that set the price. The price is set according to balance of supply and demand. We will have to see what happen in the rest of the year, but today, we're seeing prices in the range of $30. Probably, we will see some small deterioration during the rest of the year. We expect that demand will continue strong and we see that there are some probabilities that we can sell even a little bit more of what we are indicated.

Ben Isaacson, Scotia Bank.

Just a couple of follow-up questions. On the iodine price, you talked about how it could deteriorate a little bit further. Can you talk about how low can iodine go in theory, maybe talk a little bit about the cost curve? I mean, could we go to $25, could we go to $22, what's actually driving that right now?

This is a very difficult question as always you do. I mean it's very difficult to answer. We of course have some estimate of our cost growth that we don't share because it is very small market. We are very confident for sure that we are not only the lowest cost but by an important difference. With our cost reduction program in the last year-and-a-half, we have improved even more our cost position in iodine, so we feel very comfortable. We are not thinking that the price could go as far as you indicated, but this is something that we cannot say for sure. We feel that the additional demand, we feel that some of the marginal producers are suffering already. So we'll have to wait and see.

And my second question is, maybe a follow-up on Isabella's question. On the National Lithium Commission, they gave their ruling, I guess or the recommendation at the end of January. Could you just remind us what are the two options that the government is looking at? What does it -- and then under both scenarios, what does it mean for SQM and what does that mean for new entrants?

Well, basically what the Commission has indicated first is that, politically they decided that the lithium will not be -- they don't recommend to put as a material that will be similar to any other mineral but that will continue to be "a strategic". Second that the government should have more action in these through different alternatives that they analyze and propose to the President. But they also recognize in what we understood from the report that the actual contract should continue working. So we don't see any specific effect on us. We always have been proposing that, that should open up to have more production from us or from other people, but we will have to see and wait what will be their final decisions.

Ravi Jain, HSBC.

A couple of quick questions. So first thing is a follow-up on the lithium angle. Looking at strategically, do you also considering like doing M&As beyond Chile? Do you think that there are opportunities for you to grow your lithium capacity outside Chile or do you think that Chile's lower cost, is that is going to be the main driver for your growth going forward in terms of new auctions?

And the second question is on the free cash flow generation. So you're going to be generating similar to last year pretty good amount of free cash flow. Should we expect another extraordinary dividend this year or are there some other uses of cash in your mind?

Regarding to your lithium question, we like in our other business in iodine and potassium nitrate where we are one of the most important players in the world, we continue to look for opportunities in Chile as well outside Chile. That is our -- anything that smell lithium, that smell iodine or potassium nitrate of course, we look at. We've been looking at different alternative. We've not found something that really fit us yet, but we will continue to do so.

Regarding growth, specifically in lithium, we think that the logical growth for us is producing more in our actual operations. And to do that, we need to agree with -- from the government agency where we rent our mining rights for that operation. And I hope that we could do that in the near future.

Regarding your second question on free cash flow, we hope that we will be generating free cash flow (inaudible). There is no special dividends on sight, there is no decision on that and we expect to really propose new projects in the future.

A quick follow-up on the lithium and the iodine as well. So have you -- just I would love to hear your thoughts of, have you looked at the RB Energy asset that was for sale in Canada as well as their iodine operations. And if you had any comments on the asset?

As I indicated, we have to look at everything and in detail, but even our confidentiality agreements, we cannot comment details on that.

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over Mr. Illanes 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.