智利化工礦業 (SQM) 2015 Q3 法說會逐字稿

Good morning, everyone, and welcome to SQM's Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) Please also note that today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Gerardo Illanes. Sir, please go ahead.

Thank you. Good morning everyone and welcome to SQM Third 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 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 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 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.

Good morning and thank you for joining the SQM third quarter ending conference call. On Tuesday, we post our results for the nine months ended September 30, 2015. Earnings for the third quarter reached $13.7 million. This was strongly affected by the stopping of our mining operation in Pedro de Valdivia, which we announced in September. This event has a one-time before tax effect of $56.3 million.

We reported revenues for the first nine months of the year of $1.3 billion, a decrease of just under 14% compared to last year. The quarterly EBITDA margin was 39.3%, relatively flat compared to the third quarter of last year. For the nine-month period ended September 30, 2015, the EBITDA margin surpassed 42%, significantly higher than the 37% seen during the same period last year. These higher margins reflect lower cost resulting for improving in our operation activities across all business lines. However, while we always look to decrease cost, the bulk of our major cost reduction efforts has been implemented. Commodity prices continue to fall, directly impacting some of our major business lines, particularly in the iodine and fertilizer markets. We expect to continue to feel this price pressure on future margins. I will briefly outline what we are seeing in our five business lines. First, Potassium Nitrate.

Revenues during the first nine months of 2015 were down compared to the same period last year as a result of lower price and lower sales. These lower volumes were a result of weak sales seen during the first quarter of the year, which impacted our year-to-date numbers. We now expect sales volumes in the business line to be flat during the full year of 2015 compared to last year. Although would have been a strong [lower] growth in the water soluble market while average price in the business line for the [first] nine months of the year were similar compared to last year, we did see price decrease slightly during the third quarter and we could see a further impact on Potassium Nitrate prices in coming quarter, if Potassium Chloride prices continue to fall.

Second, Potassium Chloride. Revenues in this business line decreased approximately 23% compared to the same period in 2014, resulting from lower volumes, mainly during the first quarter and lower prices. Comparing the third quarter of 2015 to the third quarter of 2014, average prices in the business line has fallen just over 13%. As an example, today in Brazil, we see prices of granulite potassium chloride below $300 per ton compared with prices of over $350 per ton seen during June last year.

We are a low-cost producer of potassium chloride and therefore are and will continue to be a very competitive player in this market. However, if price continues to fall, this could ultimately impact our future margins. We believe that overall market demand for potassium chloride in 2015 will be lower than demand seen in 2014. For 2016, we expect to (technical difficulty) business line to increase about 15% compared to the 1.3 million tons that we expect for this year.

Third, Iodine. Continuing with the strategy that we have been implementing for the past 18 months, we saw volume increase during the first nine months of 2015 reaching 7,000 metric ton of iodine and iodine derivatives. We still hold to see sales volume reach 9,300 metric tons for the year. As a result of this strategy, price continued to fall during the period, averaging $28 per kilo during the third quarter. Revenue reported for the nine months ended September 30, 2015, decreased as a result of these lower average prices. Market demand continued to grow between 3% to 4% in 2015. We will continue with our volume strategy in 2016 and as a result, we should see our volume increase again next year.

Fourth, Lithium. Revenues for the first nine months of 2015 increased 4% compared to the same period last year, a direct result of higher price. While volumes were slightly down, prices increased approximately 9% compared to the nine months of previous year. This market continued to show robust demand growth.

Finally, Industrial Chemicals. Revenue was down compared to the nine months of the last year as a result of lower sales volumes and prices. However, sales volumes during the third quarter were strong related to solar salt. We sold over 35,000 tons of solar salt during the first nine months, the majority being recognized during the third quarter. We expect future sales in the fourth quarter and expect solar salt sales volume for the year to exceed 75,000 tons, more than twice as much as last year.

I will now open up the line for questions.

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

Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions) Ben Isaacson, Scotiabank.

Thank you. This is Carl Chen stepping in for Ben. Thank you for taking my question. You mentioned you're looking for a 15% volume increase for potash next year. Given the growing competitive pressure that we've seen over the past year, do you expect this to come from on the back of overall demand growth in 2016 or is SQM becoming more aggressive in capturing market shares next year?

Well, the situation why we lowered our sales this year was because we couldn't ship in the first quarter and then we were not able to recover. So we increased some of our inventory and as always, we have been our strategy in potassium chloride, we expect to sell everything that we are able to produce. So next year, we'll catch up with the inventory and also with our production levels, selling in all the markets that we are accustomed to sell.

Okay, great. And how do you see the lithium supply and demand kind of evolve next year? Will the delayed capacity addition you mentioned eventually catch up with the demand growth?

Well, we've seen a strong demand as we expected in the level of 7% to 8% and we have seen also some of the newcomers that have been -- some of them postpone and some of them even stop their increase. So there have been less supply than what the market expected. We think that next year, some of these newcomers will start to bring a little bit more product into the market, but still we see that will be a tight market next year.

Perfect, thank you.

(Operator Instructions) Juan Tavarez, Citigroup.

Hi. Thank you. Good morning, everyone. So, my first question is on the iodine segment. If you can give us some visibility on when would you decide to restart the iodine production? Is there a specific level of inventories that you'd like to see before you restart that production and if there is any incremental cost that could spill over into the fourth quarter from those adjustments in production? And my second question is if you can just give us an update on the whole status of the CORFO review of your lease, if there is an updated timeline or any indication that we can see a conclusion to this over the next few quarters. Thanks.

Thank you. Regarding iodine, as we commented and indicate all the information to the market, we did an important restructuring of our operation, which include the stopping of our mining activity in Pedro de Valdivia and the main reason for that is that we do have a very important capacity in Nueva Victoria, which is a much efficient, a much lower cost. Our total capacity continue to be in place. We do have, as we also indicated, important inventories in iodine. We continue to increase our production, our sales; and we don't see right now the need of putting additional capacity in place. We do have enough capacity for the growth and enough inventory to really support it for quite a while.

Regarding the second question, the CORFO arbitration continued -- it processed as it is defined meaning we entered into the proving stage of the case, they are in the process now where witnesses are in front of the arbitrator and then we also submit all our documents as well as a CORFO deed and then during this period besides they witness the process and the documents supporting the case of each party, there will be also some experts that will do a couple of reports that the arbitrator is asking. All this process should last until beginning of next year and then the arbitrator will have to decide it middle of next year probably to have a definition or ask for more time.

Okay, thank you very much.

Joao Almeida, Bank of America.

Hi, thank you. Good morning, everyone. My question would be on the outlook of iodine and potash prices in 2016. I mean we have been seeing weak pricing in both divisions. It's a challenging environment for potash in many important markets such as Brazil and iodine price has been impacted by the strategy of recovering market share. You mentioned that the strategy on iodine should continue in 2016. So should I infer that prices are still not near bottom. I mean any color on both iodine and potash would be great. Thank you very much.

Well, iodine and potash are completely different different industries and they move of course with different dynamics. First, going to potash, potash, we are a small player. We have decided to sell into the market whatever we are able to produce and that is what we have done in the past and we will continue to do in the future. Total demand according to our reading of the market this year is lower than last year. We expect in 2016 to recover some of those volumes. There is pressure in the price that we've seen, especially in Brazil. We'll have to see how the negotiation ends up with Chinese, which is a very important indication for the market in 2016, but again we are convinced that we are a very competitive player. We are a very low-cost producer, so we will continue to have reasonable margins. Of course, if the price goes down, that will affect our margin, but we'll continue to be very competitive. We do not have today a reading on how exactly the price of potash could move next year, could stay more or less in the same level of the last quarter or could have small downward pressure.

Regarding iodine, clearly, as we have stated, we will continue with our strategy of recovering market share. We are with very good news in our total cost, given the restructuring that we did, so we feel very comfortable being the lowest cost in the market and we will continue to do so. How much did price could still go down in iodine is very difficult to say, but we will continue with the strategy. We (technical difficulty) be some downward pressure next year, but we don't think that will be as high as has been in the past.

(Operator Instructions) Javier Martinez, Morgan Stanley.

Thank you. Thank you, Patricio. So in the last question, I missed the conversation. The sound wasn't good. So I want to ask you again about iodine, two things. So after Pedro de Valdivia, the capacity is still 13,000 tons, just to check this one? And second, what is -- following the devaluation of the peso. I guess that the cash cost of production in Chile, not talking about you, but in general the market of the competitors probably moved down. So I was wondering if it is already approaching $30 per kilo where it's still closer to $35, if you can help with those it will be very useful.

Thank you for the question. Regarding iodine, I was saying first that we continue with our strategy of recovering our market share. We do have a strong position. Our total capacity is in the range of 12,000 ton, immediately capacity is in the range of 10,000 tons to 11,000 tons of iodine per year and we can increase it very quickly in Nueva Victoria expanding in a simple way, but we still have an important amount of inventory. So we, according to our strategy, will first move our own production; then, start to retreat some of our inventory; and then, with time, we can increase very quickly additional capacity if necessary. As we commented, the price in the third quarter is in the range of $28 per kilo and we do not have an exact amount of how much base price could be next year, but it could have some down pressure because of our strategy.

Makes sense to assume that the cash cost, just because of the devaluation of the peso, move down like $5 per kilo, that's a reasonable assumption?

No, I don't think that could be that much just because of the devaluation of the peso.

Okay, clear. Thank you.

Ladies and gentlemen, at this time, in showing no additional questions, I'd like to turn the conference call back over to management for any closing remarks.

Well, thank you. 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.

Ladies and gentlemen, that does conclude today's conference. We do thank you for attending. You may now disconnect your telephone lines.