智利化工礦業 (SQM) 2016 Q1 法說會逐字稿

Good morning and welcome to the SQM First Quarter Earnings Conference Call. All participants will be in a listen-only mode. (Operator instructions) After today's presentation they'll 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. He is the Vice President of Finance and Investor Relations. Please go ahead.

Thank you. Good morning everyone and welcome to SQM First Quarter 2016 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 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 SQM First Quarter 2016 Earnings Conference Call. Yesterday, we posted our first quarter results. We reported net income of $58.5 million down from the $71.7 million we reported for the first quarter of 2015. Revenues for the first quarter of this year totaled $391.8 million, similar to the first quarter of last year. EBITDA margin for the quarter was approximately 40%, which is lower than the first quarter of 2015. Overall, the main trends we saw during the quarter where lower prices and higher volumes. The higher volumes helped keep revenue stable, but the lower prices put pressures on margin. The exception is our lithium business, where higher prices and higher volume led to higher revenues and margins.

I would like to point out that although our gross profit of $114 million for the quarter was lower than expected, we expect that gross profit for the full year 2016 will be better than 2015 gross profit. I will briefly describe that, what we are seeing in the different business lines starting with the fertilizer segment.

In specialty plant nutrients, revenues and sales volumes were flat compared to the first quarters of 2015. However, the product mix demonstrate the positive result we are obtaining from our strategy of targeting the water-soluble fertilizer market. Focusing on this market has allowed us to make up for the lower sales volume of the specialty fertilizers, which compete with lower prices commodity fertilizer. In addition, since water-soluble fertilizers are more value-added product, increasing our sales in this segment helped to support average prices for the business line.

In the potassium business, higher sales volume helped to compensate for lower price. However, margin has been impacted. In the first quarter of last year, our sales volume were much lower than normal due to shipment and production delay. This year we reported higher volumes despite some shipment delays due to weather-related issues at the port. Volumes should be higher in the coming quarters. And as we have said before, we expected volumes for the full year to be similar to 2014 volumes. However, the weak pricing we continue to have a negative effect on our margin. We expect uncertainty in pricing to continue at least until negotiations between China (inaudible) concluded.

Lower prices have also had negative impact on our iodine business line. Average prices for the quarter were down by more than 7% compared to this quarter, and we believe the downtrend may continue. We continue to focus on regarding market share and we believe that volume for the full year of 2016 will be higher than full-year 2015 volumes. In the lithium business line, we have seen a strong demand growth and we are pleased to report 62% increase in revenues compared to the first quarter of 2015. Average price for the quarter were up nearly 30% compared to the first quarter of 2015. We have seen price increase in both our export sales and our contracts sales. The priority of our lithium sales are covered by contract that set annual volumes with price adjustment. Our volumes for the quarter increased by approximately 25%. And for the full year, we expect to report an increasing sales volumes close to 20% as we work to satisfy the strong demand in this market. In Industrial Chemical business line, sales volumes were lower than last year. And this quarter, we did not report sales of Solar Salts. We do expect sales of Solar Salts to exceed 70,000 tons for the full year of 2016, but we expect to see those sales in the second half of the year.

I would also like to comment on the joint venture we announced at the end of the quarter with Lithium Americas to develop the Cauchari-Olaroz lithium project in Argentine. We recently met with Argentinian authorities, and they are as exactly excited as we are about this project. Our team has been hard at working on developing this project.

I will now open the line for questions.

(Operator instructions) Ben Isaacson, Scotiabank.

This is Oliver Rowe, sitting in for Ben. I have a couple questions on lithium. First, can you discuss what's happening to lithium prices worldwide, and how do we bridge the prices that we've heard it over $20,000 to realize prices? And then secondly on lithium, as you accelerate your lithium production, you said you're going to increase it by 20% this year. How will that affect your extraction limit? I believe you already had a pace on that. And are you confident in getting an extension on that limit?

Thank you, Ben. First regarding pricing, clearly during the end of last year, there was less supply in China because of not kind of lithium coming into the project, a delay on our recovery startup, and also some less production within China itself. Together with that, an additional demand because of the subsidies that the Chinese government put on the electrical buses, and that made shortage within China of lithium. And that of course affected the spot prices. Clearly, this situation was not when all over the world, of course (inaudible) but not in the level that we saw some transactions within China. We are selling some of our product on spot basis and we get much higher prices but we do have contract that we of course honor, and we have also increased as it was reflected in our average prices, the prices on the contract where we can start increasing the prices.

We expect to see higher prices in the next quarters of this year, but also we see that new production will be coming in especially from additional production in the ramp-up of our recovery and also additional production from the two mines that are started in Australia.

Regarding your second question, we do have a total amount of lithium that we can produce according to our contract with Corfo, which is close to 1 million tons of our lithium carbonate equivalent. Of that at the end of 2015, we have used 65% of that. So we have still volumes to produce. We think that given that the capacity that we have in our plant in Salar del Carmen, which is 48,000 tons, we can take the opportunity now even the demand to produce more and that's what we are doing within of courses the limits that we have in our contract with Corfo.

Isabella Simonato, Bank of America.

Good afternoon, Patricio. Good afternoon, everyone. I have a question following up on lithium. And given the scenario that at some point new project should come online, what are your expectations in terms of more normalized prices for lithium going forward, I mean looking more towards 2017, 2018 where do you think prices can stabilize? And also if you could give us an update on how the arbitration process with Corfo is evolving? Thank you.

Thank you, Isabella. Regarding your first question, it is very difficult like in any product trying to guess what the price in the future will be. What we can say is how we see the demand and the supply, and how that will evolve in the next years. We are saying that the electrification of car, which has been something that we have been talking for the last 10 years at least, now really is a reality in our opinion, and that the electrical cars will start growing, even though they are small still, they'll continue growing and will support an interesting growing of the market for the next five years to 10 years in our opinion in the range of 10%. So, that means that we will meet new supply for lithium in the range of 15,000 tons to 20,000 tons per year or more.

There are many projects on the pipeline. If you look at the history of course, try to bring from junior companies new projects, it's not easy technologically and also to get the proper quality of the product and to get the financing and get the product going, but we think that the actual players will increase their production. And in the time frame that you are describing, there will be new supply enough to support the growth of the industry. That is our responsibility. And that's also why we decided to develop the project in Argentina to complement our production in Chile. So I think that the price in the future of course will not be the price we're seeing in some spot transaction today, but will be reflecting the marginal cost of the higher cost new common producers.

Regarding the second question, the arbitration, the arbitration continues the process. There is not any important issue to report now. There is in the process of the truth and we still expect that end of the year or beginning of next year, hopefully, we should have a conclusion of this procedure. We still feel very comfortable of our position.

Juan Tavarez, Citigroup.

Hi, thank you. Maybe if I can first just follow up on lithium, what are your targets within the lithium segment? Is there anything that we should be thinking about long-term as it comes to relative to your current cash flows, what contribution does lithium have on there or are you thinking about what your market share is long-term within the whole industry? Like how should we be thinking about your strategy going forward with this segment? And then second, if maybe you can give some details on the specialty plant nutrient segment that you, you noted that this quarter you saw a little bit more on the water soluble fertilizers. How much within this segment are water soluble fertilizers in volumes, and also what's the price gap between those types of fertilizers and let's call it MLP. Just to have a sense how we should be thinking if you continue to focus on this segment specifically? Thank you.

Thank you, Juan. Regarding to your first question, we feel that we are an important player in the lithium industry. We have been in this business for more than 30 years. We have developed an important know-how, not only technologically to produce first from brand, second in the chemical production in order to be able to produce the qualities of the different customers need and different applications. So we have a very important know-how from a production from a technical point of view.

Also, we are very important know-how commercially. We know all the industry, we know all the customers, they know us, and we have been developing long term relation with most of them. So clearly we see lithium as a long-term business for us in which we want to grow and we want to continue to support the growth and their needs for volumes in the industry. And that's why we expect that we will solve our difference with Corfo. We expect that we will be after that to extend the contract, to keep the contract. That is our objective. And we hope that we will do that. I'm sure it's benefit for all the parties to do that.

Simultaneously, we are going through complement the base production that we have in Chile and hopefully increasing the production in Chile, also with increasing production our second project in Argentina. And given the growth that I explain answering this question to Ben before, and to Isabella, we see that probably will be looking afterwards for a third location. This is our growth. I cannot tell you now on a specific target because we also want to grow in our other business lines. This is our objective of course in the other business lines.

Regarding to your question in the SQM, our sales in SQM, two-third more or less today correspond towards soluble products on volume wise. That has been increasing in the last years. We will continue to level up. This is a market that continues to grow because of the needs of this fertilizer that are free of chloride, that are soluble, and that can be used in this modern agricultural technique like fertigation and others. So, we want to extend the uses of this product geographically as well as to other crops that are not using it today. And this is our target.

We want to continue to supply of course field fertilizers today. Given that the price drop in potassium chloride or the commodity fertilizer has being higher, our price in our product does not move in the same level. So of course the price relation between our fertilizers and the commodity fertilizer has increased. They of course are affected, but affected much, much less. We are monitoring that very closely. And we have to see what is the future of the price of our potash. And as I said in my previous remarks, an important indication will be what happened in the contract with the Chinese, which should be according to some major players in the next months or so.

Andrew McCarthy, Banchile Inversiones.

Hi, good morning everyone and thanks for taking my question. Firstly, just to follow up on the specialty plant nutrition division. Just in terms of what you're thinking, maybe you could help us understand what full year volumes might be perhaps in comparison with 2015 volumes, especially considering sort of the greater focus on the water soluble business line, which seems to be sort of maybe lower volume, but higher margin.

And also just in terms of on the pricing, obviously you saw sort of three times versus the potash spot price. Would you anticipate sort of being able to maintain that sort of differential in existing markets? That's my first question.

And then just secondly on iodine, maybe if you could just give an update on what you're seeing there in terms of whether prices should be falling even further given where they are now slightly below $25 a kilo, and if you have an idea as to timing on when we might be reaching sort of the trough in that segment, that'd be great. Thank you.

Thank you very much, Andrew. First, regarding specialty plant nutrition, even though we are moving to this small value-added product, we expect the total volumes in the segment in the year 2016 to be higher than volumes that we saw in the year before 2015 in the range of 5%, which is good and it reflects the work that we are doing all around the world with our NPK facilities and our closeness to the customers.

Regarding price, you are right. We have seen in the history different price ratios between our product and potassium chloride today (inaudible) and we have seen in the 2.6% level, but up to now and what we saw last year, we were able to support that different and that prices of our product even though they drop some, they drop very little if you compare with the lower -- that the amount that the potassium chloride they manage. The benefit that the farmers get from this justify the difference and that making a change is not difficult, but we are following that very closely as I indicated before.

Regarding to your second question in iodine, iodine we have stressed in all our communication that our strategy is to get our market share back. We are in the range of 27% market share. Our market share objective is in the range of 30%. We will take some time to get there, but we focus on continue diminishing the cost. We have been very successful, especially with all that restructuring that we did last year and paid Olivia together with Nueva Victoria arrangements. And those lower prices even though are not reflected in accounting yet because of the inventories, that will be starting to be reflected in the near future. And we continue to work on the cost.

And our strategy will be that we will have more volume of iodine this year compared to previous year. It is difficult to say if the price will continue to be lower. Our expectation is that there is still some space to go down, but we have to see that during the year.

This will be the last question, and it concludes our question-and-answer session. I would now like to turn the conference back over to Gerardo 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. Good-bye everyone.

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