智利化工礦業 (SQM) 2015 Q4 法說會逐字稿

Good morning and welcome to the SQM 2015 Earnings Conference Call. All participants will be in 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 call over to Mr. Gerardo Illanes, Vice President of Finance and Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to SQM's fourth 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, 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 accuracies of such forward-looking statements are identified in the public filings made with the Securities and Exchange Commission. Any 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 2015 earnings conference call. On Tuesday, we post our results for the year. Our earnings reached $213 million, a decrease of 28% compared to last year. Lower prices and lower volumes in some of our major business lines influenced this result. In addition, our results were significantly impacted by the stopping of our mining operation in Pedro de Valdivia. This event had one-time before tax effect of $57.7 million on net income. Our revenues reached $1.7 billion, an increase of just under 14% compared to last year.

We have been focused on cost over past two years and this remained our important efforts in 2015. We successfully reduced our costs. As proof, our EBITDA margin in 2015 was 42%, up from the 37% of last year despite significantly lower price in almost all of our business lines. These higher margins reflect lower cost resulting from improvement in our operational activities across all business lines. Additionally, we are seeing some financial benefit related to the weaker Chilean peso and lower energy cost.

Looking to 2016, we do expect to see pressure on margins due to lower-priced fertilizers and [iron margins]. I will now briefly outline our five business lines. Potassium Nitrate, revenues for 2015 were down compared to the last year as a result of lower prices and lower sales volumes. These lower volumes were a result of weak sales since during the first half of the year. While sales volume in the field fertilizer market decreased in 2015, our sales volume in the water soluble fertilizer market increased. Price were down slightly last year in this business line, but [being that across] our specialty fertilizers, prices are less volatile than prices in the Potassium Chloride market. While the numbers are down, the future in the specialty plant nutrition market look positive. We are expecting market growth of approximately 5% in the volume soluble market in 2016.

Potassium chloride, revenues in this business line decreased approximately 26% when compared to 2014. This result from lower volume which fell over 20%. We expect our sales volume to see recovery in 2016. Price are a concern and average price will be lower in 2016 than in 2015.

Iodine, revenue reported in 2015 were decreased as a result of a lower average price. Price during 2015 continue to see downward pressure. Our average price for the year was $28 per kilogram, a decrease of over 26% compared to 2014. We expect some solid price deterioration in 2016. Price today are around $25 per kilo. Our sales volume in this business line increased by approximately 6% compared to 2014 and we expect this trend in volume increase to continue in 2016.

Lithium, revenues for 2015 increased almost 8% compared to last year, as a direct result of higher prices. Prices increased 10% when compared to last year, offsetting the slightly lower sales volume. This market continue to show robust demand growth related to the bulk of the industry and while we do expect some new supply to enter the market during 2016, we still expect to see higher average price and higher sales volume in 2016.

Industrial Chemicals, revenues were down in this business line in 2015, the most important product in this business line is solar salts. In 2015, we sold approximately 37,000 tons prospect in this market remains positive and expect to see sales volume related to solar salt almost double in 2016.

I will now open the line for questions.

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

Good morning, Patricio; good morning, Ricardo. I have a couple of questions. First, on the Lithium business, if you could anticipate some of the new supply that come in 2017 and what do you expect to see in terms of prices more towards the end of 2016 and 2017? And if you could give an update also on the arbitration process with CORFO, that would be my first question. My second question, it's on the SPN business and the focus that you are now giving to water soluble fertilizers, if you could provide us more color in terms of the margin difference between the products within the SPN line? Those will be my two questions. Thank you.

Thank you, Isabella. Regarding your first question, basically we're expecting some of the new supply like Orocobre from Argentina to start production and selling actually more pros during 2016, but they have delayed, we expect them to start to move more product during 2016, we'll have to see if they solved all their problems that they announced, but they are indicated that they will try to get to their nameplate capacity during 2016. This is the most important new entrants. There are also a couple of additional production in China of the actual producer, but it's not that important. We are seeing a very strong demand, basically from their battery producers. So we think that the market will continue within 2016 to be tight and that's been that we will -- and we are seeing now higher prices. We believe that this should continue during 2016 - the full year of 2016. What happened in 2017 depends on, finally, if there are this new capacity or not. We are seeing that the new projects are not easy, so we are optimistic about the future in the lithium market. We expect to sell more volume from our side during 2016 and of course, are seeing higher prices on our [results] in 2016 versus 2015.

Regarding the arbitration process, the process continue as established. We are in the process of the proof. We expect that we should have some kind -- we don't have a specific date for finishing in it, but the expectation is that should be near the end of the year.

Regarding to your second question in SPN, water soluble is the higher margins product within this line and also the line of product that grows more. So, we are being putting more efforts in the growth of this business line. And if you look at the margins that we have during 2015, that is the clear result of the strategy.

Thank you.

Alexandre Falcao, HSBC.

Hi, there, good morning. So, I have two questions. First one is, can you comment on how the competitive environment for the Brazil market, specifically just wanted to know anyone is being a little bit more aggressive or not or is the market really more softer in the potash level? That's the first question. And second question is on your dividend policy and the cash generation. Just wondering if -- is there any change on what you're planning to do with the excess cash and the cash generation, specifically for next year. Thank you.

Thank you, Alexandre. Regarding to your first question, clearly, Brazil has not been easy. Brazil is going through tough times. So, the market of potash has not been an exception. Traditionally, Brazil used to be a market that used to pay more than the contract price that the Chinese are, this yearly contract price, because it was a more attractive spot market. But what we have seen in the last year is that that gap has been narrowed and the price in Brazil are tending to go more close to the Chinese contract price. And also, given the uncertainties that are in the market, they have been less aggressive at taking inventories.

On the other hand, given that there is not a closure on the Chinese contract yet, most of the producer of potash also are trying to move their volumes more aggressively into Brazil and that make it a more competitive market. Regarding the dividend policy, they are not being a change. We have our shareholder meetings in April and that is a decision that the shareholders should have to make at that time.

And just a quick follow-up on that. So, do you think this is more dependent on the decision on the arbitration and what's going to happen with that than anything else or it's going to be something independent? Thank you.

No. We are very confident on the situation of the arbitration. We think that we have a strong case that we perform all our duties to the contract. So, we feel confident on that process. We have a very strong balance sheet. We have a very good financial position. We are looking for some M&A activity. So, both should consider all these issues in order to propose to the shareholder meetings. We have a dividend policy in place that is 50% of our net income.

Thank you.

Ben Isaacson, Scotiabank.

Hi, thank you. Patricio, my first question is on the iodine market. Prices are about $25 per kilogram right now. Can you talk about what that means in terms of whether or not you're starting to see some of the high cost producers shut down or at least talk about it? What are you seeing out there? Is the rationalization on the way?

Hi, Ben. Iodine market, our strategy has been very clearly established. We are getting [back out of] the market share. We are increasing volume. We did increase our volumes in 2015 and we will increase our volumes more than the market growth in 2016, and the price will be a result of the demand and supply, demand continuing in the main application of iodine.

Regarding supply and going directly to your question, they has been already one high-cost producer that closed their operation as we understand in Chile, and there have been also some other information saying that other producers or high-cost producers are being preoccupied about the level of price that we're seeing today.

That's great. My second question is in the Solar Salts market, you talked about possibly doubling your sales this year. Why is there is going to be such a big increase in sales and what's the potential for the market and what's your capacity to sell into that market?

You know the solar salts is a mixture of sodium nitrate and potassium nitrate. We do have capacity in place to serve this market. This market is a project market, meaning once a power company built a solar plant, we sell the solar as a part of the plant, when it's built in order to be able to operate. So what we were expecting this year, one, a specific project that was delayed for next year. So we have the purchase order and the only problem was that the building of that project took a little bit more time and then we delayed the delivery of the solar salts. This technology has been improving a lot and they are in some locations that it can operate without subsidies. So we are very confident that we will start to see and we are seeing and we are talking to the people, to the power companies that are pursuing those projects that this market could continue to increase next year with respect to sell in the range of 70,000 tons and we believe that we can go over 100,000 tons per year in the following years.

Great. And then, just my very last question on the lithium industry. Can you just remind us what the Government of Chile is doing in terms of growing the industry and what are SQM's plans with respect to Lithium growth over the next several years if any?

Well, in the lithium industry, the most important thing for us is that we have to finish the arbitration with CORFO. We expect that, that could be finished by the end of the year, as I said before and of course our idea of being able to produce more volumes in Chile. We also continue looking other opportunities around the world. We do have a strong know-how technically and commercially and in the industry. So we are an important player in the lithium industry and our strategy is to continue to be so.

Thank you.

Andrew McCarthy, Banchile Inversiones.

Hi, Patricio. Good morning everyone and thanks for taking my question. I was just looking at the press release and saw the part about the development of potential new business initiatives. I was just wondering if you could maybe add a little color to what areas in particular you are looking at maybe in general terms? And also whether that relates to the outcome of the arbitration process with CORFO?

Thank you, Andrew. No, it's nothing to do with the arbitration of CORFO. We have been developing a growing strategy. You know that we had a very important investment in our capacity for our current business lines, and we went through a couple of years of consolidation. We wanted to make sure that all the investment that we did are operating in a well manner and also are diminishing the costs which have been very successful as in our focus as we have stated before, and will start -- which was very good. All this process much before of all the other industry in Chile, the copper industry that also facing similar challenges than us.

And at the same time, we continue to look as we had planned opportunities around the world in all the business that we know that we have a competitive advantage. We do not want to grow just to grow. What we want to be is to have profitable business, to increase our returns. So, if we are not sure that that will be the case, we are to some extent conservative in these new businesses.

What I can comment is that we continue to do our exploration of our mining rights for metallic minerals directly and also through the agreements that we have with junior and medium-sized companies and that they continue to be a lot of activity. This is a long-term plan that has had already good results like the discovery (inaudible) and we also see that could have interesting results in the future.

Okay, that's great. And just one follow-up question, if I may. You mentioned in the STATUS Financieros that there is a potential or a possibility of a 50% to 300% fine against the taxes you paid to the Chilean tax authority last year. I was just wondering if you could explain or give a bit more color on what that means and what amounts they're talking about there?

Basically, as you know, we did some rectification, some expenses that we didn't not found there the support, and that's been that they are not considering, they are not considered by the tax authority as expenses needed to generate the income and we have to pay the tax of 35% plus some interest and fine and that we pay in total close to $10 million in the fourth -- four rectification that we did. And according to our lawyers the reason why we don't see it as a possible to get to pay this but this is in the regulation that there is a possibility that could be a 50% to 300% fine on the tax date, which is in the range of $5 million. So will be 50% or $5 million up to 300% off $5 million.

Okay, that's great. Thank you very much.

Cesar Perez-Novoa, BTG Pactual.

Good afternoon, gentlemen. Could you please provide some breakdown of the stated $150 million CapEx program and is part of that amount also going to Pampa Hermosa? Thank you.

Thank you, Cesar. You know that our depreciation is $260 million. So the $150 million is basically related to sustainable capital. We plan to continue to strengthen our position in Nueva Victoria. We also need to do some investment in the Salar to be able to produce a little bit more SOP than MOP, in order to optimize the margins and also some expenses that we are doing in the iodine plant as I said in Nueva Victoria. Regarding lithium, we also are doing some investment improving the capacity of (inaudible) products vis-a-vis the industrial products and in Lithium Carbonate and Lithium Iodine. that's mainly the $150 million. The Pampa Hermosa is including which is a development that goes by stage. We do have enough capacity today of nitrate and iodine. So we will continue to do the project expansion in Pampa Hermosa that we have room if we see that we will need the additional volumes in the market.

Alright. Okay. Thank you, gentlemen.

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. You may now disconnect.