智利化工礦業 (SQM) 2015 Q2 法說會逐字稿

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

I would now like to turn the conference call over to Mr. Gerardo Illanes, Vice President of Finance and Investor Relations at SQM. Mr. Illanes, the floor is yours, sir.

Thank you. Good morning everyone and welcome to SQM's second quarter 2015 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, 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, anticipated profitability, revenues, expenses, or other financial items, anticipated cost synergies and production or service line growth, together with other statements that are not historical facts are forward-looking statements. 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 risk, 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 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 second quarter earnings conference call. On Tuesday, we post our results for the six months ended June 30, 2015. Earnings for this period reached $155 million, higher than the amount seen during the same period in 2014. Revenues for this period totaled just over $872 million, down approximately 17% when compared to the first half of 2014, mainly because of lower sales volumes in the fertilizer segments and lower iodine prices.

I would like to highlight the high margins seen during the first six months of the year. Gross margin reached 33.9% compared to 28.4% seen during the same period last year. On the similar note, EBITDA margin was over 44% during the second quarter. Our margins increased as a direct result of lower cost, which were impacted for several reasons. Our lower cost reflect the important work that we have done to make improvements in our operating activities across all business lines, like developing new technology, creating value, implementing lean manufacturing and working diligence to be the most cost effective competitor.

Specifically, in the iodine business line, we have further improved our efficiency and cost position. We produced the majority of our iodine on Nueva Victoria, our lowest cost facility. During the first half of the year, we had a positive impact on cost of about $60 million compared to the first half of last year. We believe that around 50% of these savings were a result of a weaker Chilean pesos and a lower oil prices. Finally, our costs are calculated using an average cost accounting method. Therefore, during the first half of this year, we recognized important cost savings which in turn positively impacted our margin. As production costs continue to decrease, we would see additional benefit in the future.

I will briefly outline what we have seen in our five business lines. First, potassium nitrate. As expected, volume during the second quarter of 2015 were significantly higher than volumes seen during the first quarter of the year. However, we don't think we will be able to compensate for the weaker volume seen during the first quarter of the year after regionally anticipated. And sales volume for 2015 should be similar to sales volumes seen in 2014. Average prices for the six-month period decreased around 4% compared with the first half of 2014. Going forward, we expect market demand in potassium nitrate business to grow around 5% led specifically by the order soluble market. The fundamentals of this market continue to be strong.

Potassium chloride. Revenues decreased compared to the first six months of 2014 impacted by significantly lower sales volumes in the first quarter. Although sales volumes recovered during the second quarter, volumes for the first half of this year were about 30% less than sales volumes seen in the same period last year. We expect to end the year with sales volume about 10% lower than last year. Overall market demand for potassium chloride in 2015 is expected to be lower than the amount seen in 2014. This lower demand could increase competition in the market and present price pressure in the coming quarters.

Iodine. Revenue reported for the six months ended June 30, 2015 decreased as a result of lower average price. Prices continued to fall during the first half of the year, and as mentioned in the press release, average price fell to $29 per kilo. Volumes were as strong as lower price has helped to stimulate demand, and this along with a more aggressive volume strategy has helped in higher sales volume during the first half of the year. The majority of our iodine production is coming out of our Nueva Victoria facility, the most efficient iodine plant in the world as we estimate. Despite this, we have been able to lower our cost in this facility even further enhancing our position in this challenging environment. Going forward, we could see further downward pressure on price, but we expect market demand growth to exceed 3% this year. Iodine sales volume in 2015 should be approximately 5% higher than volume sales last year. We are moving then in the right direction to return to our historical market share of around 30%.

Lithium. Revenues for the first half of 2015 slightly decreased as a result of lower sales volume. Volume in the lithium business were down approximately 10% when compared to the first six months of last year. Average price in the business line were up over 7% compared to the first half of last year. It is expected that sales volume during the second half of this year will be higher than sales volume seen in the first half. This market continues to show robust demand growth.

Revenues in industrial chemicals was down compared to the first six months of last year as a result of lower sales volume. As reported last quarter, we see positive signs in the solar salt business. And in the second half of 2015, we expect to recognize some sales originally anticipated for 2016, boosting volumes this year. This shift should bring solar salt sales volume expectation for 2015 to over 75,000 metric tons. A total 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 2017. Following the inclement weather in the north of Chile, our production facility were not affected, but the railway that transport nitrate from Coya Sur to the port in Tocopilla was damaged. It is currently not operating. We are assessing that -- assessing the damage and transporting our product to the port by other means of transportation. We do not expect sales volume to be materially impacted.

There remain a lot of interest in the market about the arbitration process with CORFO. During the first half of the year, we worked diligently in an attempt to reach an agreement with CORFO through a consolidation stage of their arbitration process. No agreement was reached by the parties and the arbitration procedure will continue to follow its normal course. The arbitrator will review the facts of the case and make a decision. We expect a decision from the arbitrator next year.

SQM maintains and reaffirms its conviction that it has fulfilled in a timely manner, all of the obligation of the lease agreement, and therefore, it has no outstanding debt with CORFO. Nevertheless, SQM once again expresses interest in collaborating with CORFO and continuing the operation of Salar de Atacama in a way that benefits both parties as well as the Company's workers.

In conclusion, I think it is important to mention that we will continue to focus in our cost reduction efforts, optimizing our operation and strengthening our cost position. I will now open the line for questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Ben Isaacson, Scotiabank.

Just two, three questions from me. Patricio, can you talk a little bit about where the next round of cost reductions will come from, how much you're thinking and over what time period?

Well, thank you, Ben. We are working in all areas. The area that's giving us a lot of good news has been the lean manufacturing process that we are implementing since already 18 months or more, we are seeing the results. We have not implemented that way of operating in all our plants. We will continue to do so in the rest of this year and next year. So we hope to get some additional benefit that way. Second, we are reviewing all our plants in order to see how to optimize the productions that we need to do. We can see there also some additional cost benefit. And third we continue to work even though we are facing lower energy cost. We continue to work in energy saving and especially also in improving processes to get better deals. Better deals really have also an important effect on our total cost.

That's great. My second question is you realized quite a high potash price this quarter, and I'm guessing some of that was due to selling more SOP. Have you guys thought about doing more in the SOP business and less in MOP? I mean, you obviously have a very good distribution network because of your potassium nitrate and SPN business. Are the margins more attractive or have you thought about that from a strategic point of view?

Yes, we are reviewing and we are doing some upgrading in our SOP plant. And we are reviewing exactly how much we can do. This is something that -- we have some flexibility to do it, however you understand that we need to change the way we pump from different areas in the Salar, so that take times. And then go through the brine process and get the salts for -- in one way for the MOP or the SOP. So this is something that we are working on. We won't disclose yet how much we can do it, but of course, we are looking today at a much nicer margin in SOP.

Great. And then just my very last question on the arbitration. Has CORFO -- I mean you had a negotiation process that wasn't successful for quite a long time. Was CORFO always seeking to terminate its agreements or did they offer conditions to you in which they would agree to settle and that wasn't agreeable with you?

Basically we have the disagreement with CORFO at different views on how to calculate the rent, and they decided instead of trying to get an agreement on that with us, they decided that was better to go through the arbitration process that was in May 2014. And when they placed the arbitration process, they indicated that we have this different, up to now it was $9 million difference in the payment of the rent. And also they say that given that they wanted to also to terminate the contract, which was indicated in their request for arbitration.

Then during the arbitration process, it's not the negotiation. Basically it's what is called a process of trying to agree through the arbitration, a conciliation process. So during the first part of 2015, we tried to conciliate, trying to agree, and CORFO and we were advancing on that and trying to get to an agreement. And we were well advanced in an agreement, but unfortunately then CORFO decided to -- not to continue, then we didn't have an agreement. And we continued with the process of normal arbitration, which we are right now.

That's great. Thank you very much.

(Operator Instructions) Again, we'll just pause momentarily. Ravi Jain, HSBC.

So I have two questions, one on the iodine. As you mentioned in the call that you expect the prices to be under more pressure in going forward, with the weaker Chilean pesos now, we would expect the marginal cost of even the competitors to have come down pretty materially. So would you also say that there is a relevant downside to prices before we see a bottom in iodine, in the short term here?

Thank you, Ravi. It's difficult to say exactly how the price will be. We have a clear strategy from our end. We are the largest producers, but not only the largest; we have -- in our calculation and estimate, we are the lowest cost producers. We have increased our competitiveness as we indicated and our strategy is to recover our historical market share. So we will continue, and we are growing our volumes and then we'll see what happens to the price.

Sure. Okay, thank you so much. And my second question is on the arbitration process as a follow-up. Now, I understand it's in the third stage of the process which is the arbitration, the actual arbitration. The question I had is, is increasing the biannual royalties on the table as a part of this arbitration process or is it only going to be a decision whether the lease is terminated or not?

Basically what CORFO asked in the arbitration process was, one, that they see a difference, so they want us to pay the difference that they believe we owe them. We believe and we are sure in our part that we have paid exactly what the contract says. Second, they asked that we should pay them let's say a fee or something additional because of not paying that amount that they thought we should have paid. Third, they say that we need to repair some of the things in the mining rights. And fourth, they say that they terminate the contract.

So the arbitrator will have to answer to the four requests to the four things that CORFO recited. And that will be the decision of the arbitrator that we are now, and CORFO as well, given all the arguments to the arbitrator to decide.

Thank you. That's helpful.

(Operator instructions) Emilio Acevedo, GBM.

I would like to know regarding the arbitration proceeding, particularly how long time do you think the evidentiary phase will last regarding -- your idea regarding that phase? And how will be the phase in particular regarding how many states will be that evidentiary phase? Thank you.

Thank you. Basically, the arbitrator is finding exactly what the parties need to prove and testify on, and then there is not exact date. Originally, the arbitration procedure should finish beginning of next year, but the arbitrator by his own decision can extend it for a year.

Thank you.

At this time, we'll go ahead and conclude our question and answer session. I would now like to turn the conference call back over to management for any closing remarks. Gentlemen?

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.

And we thank you, sir and to the rest of management team, for your time also today. The conference call has now concluded. At this time, you may disconnect your lines. Thank you and have a great day, everyone.