智利化工礦業 (SQM) 2016 Q2 法說會逐字稿

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

Thank you. Good morning everyone and welcome to SQM's second quarter 2016 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 any 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. 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.

Thank you, Gerardo. Good morning and thank you for joining SQM's second quarter 2016 earnings conference call. Yesterday, we posted our results for the second quarter of 2016. We reported net income of $83.1 million, similar to the second quarter of 2015. Revenues for the second quarter of this year totaled $489.6 million, slightly higher than the second quarter of last year. EBITDA margin for the second quarter of 2016 was approximately 38%, which is lower than the second quarter of 2015.

In general, the trends we have observed in recent quarters continued during the second quarter of 2016, higher volumes in nearly every business line, but lower average price. Of course, the exception on pricing is little, where average price increased over 60% compared to the second quarter of last year.

I will briefly describe what we are seeing in the different business lines, starting with the fertilizer segments. First, potassium. In the potassium business revenues were around 18% lower compared to the first half of 2015. We did see a recovery in volumes, which were approximately 14% higher, but this effect was overweighted by the lower average price, which were down by approximately 28%. The good news is that the other potash producers recently closed contract in China, which seemed to have provided some stability to the market and we are now starting to see slightly recovering in pricing.

Specialty plant nutrition. In specialty plant nutritions, revenues were relatively flat compared to 2015 and sales volume was slightly higher. We are departing the water soluble fertilizer market and that is where we are achieving the growth in sales volume. However, pricing for this business line as a whole is under pressure and this is mainly related to the lower prices in the potash market.

Iodine, in the iodine business, revenue decreased by about 15% as the downward trend in prices continued. The average price for the second quarter was $23 per kilo, which was 5% lower than the first-quarter average price.

Volumes were up and, in fact, the second quarter sales volume were the strongest we have reported in years. However, we expect pricing to continue to have negative impact in this business line.

Lithium. In the lithium business, revenues for the first half of 2016 were more than 90% higher compared to the first half of 2015 as we reported significant increase in both sales volumes and average prices. The higher volumes and prices are both being driven by the strong demand growth in the global lithium market. We believe demand growth could exceed 10% -- 10% to 15% this year as our sales of lithium for the full year 2016 could be more than 25% higher than 2015.

Industrial chemicals. In the industrial chemical business line revenues for the first half of this year were approximately 48% lower compared to the first half of 2015 which is in line with the 45% decrease in sales volume. The lower sales volumes are mainly explained by the fact that we have not reported the sales of solar salt in 2016 yet. We are lowering our estimate of solar salt sales for 2016 as some of the 70,000 tons we originally expected will most likely be pushed back to 2017 as a result of delay in these projects.

Finally, although gross profit for the year to date has been lower than it was last year, we continue to expect gross profits for the full year 2016 to be higher than 2015 gross profit.

With respect to the arbitration proceeding with CORFO, the process continues. We now expect the decision to be delayed as both CORFO and we have initiated additional arbitration proceeding related to the regional arbitration. But we remain confident that we have fully complied with all our contractual obligation with CORFO.

I will finish with an update of our joint venture with Lithium Americas in order to develop the Cauchari-Olaroz lithium project. We have been hard at work updating the feasibility study and we now expect that this project production capacity could reach 50,000 metric tons per year, instead of 40,000 metric tons that we originally announced. Construction is still expected to begin during the first half of next year and we are planning to start with the first stage of 25,000 tons per year and then add the remaining 25,000 tons per year. We expect the CapEx for the first stage to be in the neighborhood of $435 million, the value-added tax.

I will now open up the line for questions.

(Operator Instructions) Ben Isaacson, Scotiabank.

It's Oliver Rowe calling in for Ben. Thank you for taking my question. I have a couple on your expansion projects. Maybe I could start with a couple on the lithium and then follow up on the nitrate expansion. So with the Argentina lithium project, you gave the CapEx for the first stage. Do you have an estimate for both stages combined? And then, on top of that, what are the next steps on actually committing the capital to move forward or have you already made those steps?

Thank you very much for the question. Regarding our expansion program, we are doing all the studies for the total 50,000 tons per year capacity. We will start with first stage, as I indicated, of 25,000 tons with close to $435 million CapEx. Our estimation for the second half is in the range of $250 million additional for the second 25,000 tons, of course, because all the infrastructure will be in place.

We are right now working in drilling in order to get the better knowledge on how we'll proceed with the construction. We are committing now close to $18 million, $20 million in this stage and we expect to have the decision to go ahead with the construction first half of next year.

And then just on the nitrate expansion that had come up over the last quarter. Now, the CapEx guidance that you have for 2016 looks like it's pretty close to your sustaining CapEx level, but you had mentioned that 100,000 tons of nitrate capacity would come on in 2016. So my question is, did that volume increase get pushed back or is it just a very inexpensive project? And then, could you also comment on how you would break out the $140 million for the remaining nitrate expansion across 2017 and 2018?

Well, we took the decision strategically that we want to continue growing our work in the potassium nitrate business, especially plant nutrition business and for that we want to be ready and have the capacity installed. You know that we have the total capacity today of close to 1 million tons and our idea is to bring that capacity to 1.5 million tons. Of that, 200,000 additional capacity will come from upgrading our actual operation, which is quite low in capital intensity and then, of course, a new plant, which is the one that will take most of the capital of $140 million that I explained, that we will be doing in 2017 and 2018.

Isabella Simonato, Bank of America Merrill Lynch.

I have two questions on lithium first. We continue to see this quarter the prices performed very well and continued to go up. I'd like to get an updated view from you on where do you think they could stabilize once new supply comes to the market? And the second question is we saw that CORFO and Rockwood sign a new contract for expansion and there was news a couple of months ago mentioning that maybe SQM would be willing to talk to CORFO again about expanding the business and what would be the terms? I'd like to understand better from you where does this stand for and if expanding in Chile at this point is really an option? Thank you.

Thank you very much, Isabella. Regarding the price of lithium, it's difficult to have a straight answer to that. We have been looking how the demand has been evolving. We have seen in the last couple of months less pressure than at the beginning of the year. And on the other hand, also, we have seen some of the supply that was supposed to come that is actually coming, although there has been a delay. So, we'll have to see how that evolves the rest of the year.

We think that the prices that we are right now selling, we don't see upward pressure on that. So we will have to really monitor the rest of the year to know what the next year could be. On general terms, we continue to see a strong demand and, of course, a lot of interest of new projects, but we also know that new projects are not that easy to come on line. So, we continue to be optimistic about the market, the volumes, but probably not continue a strong pressure for higher prices.

Regarding the Rockwood announcement agreement with CORFO, we read also publicly what it was said. We understand that they have a general agreement, but it is not signed yet. So, we'll have to see how that evolves in the next month. I think they announced it could be ready for that. We, of course, have indicated that we will like to increase our production of lithium in Chile. We are prepared to do it, but, of course, we need to agree with CORFO.

Right now, as you know, we are in the middle of our arbitration process and we are concentrated in trying to, of course, finish that procedure in order to be able to sit down with CORFO and increase the production together.

Andrew McCarthy, Banchile.

Thanks for taking my questions. Two questions on lithium. First one, I was wondering if you can give us maybe some insights into how the volume mix is evolving in terms of whether you are seeing more spot sales now versus contract sales; whether you're seeing more sales into certain geographies such as China than previously; and also in terms of the product mix if you -- maybe more hydroxide and carbonates today than previously?

And my second question was on the projection of possibly increasing sales volumes this year by more than 25%. Given the production constraints that you face, does that, therefore, imply that you'd probably be reducing somewhat inventories this year in lithium? That's it. Thanks.

Thank you very much, Andrew. First, regarding volumes, yes, we are taking the opportunity of the strong market and the good prices. That's why we are increasing our volume. As you indicated, we expect to have a total volume this year of 25% more than last year. We are diminishing our inventory, actually. We did have some old inventory that we would process in order to be able to sell more this year and we are also producing more.

Most of the additional demand comes for the batteries and all kinds of producers for batteries are mainly in Asia. So, geographically, we are increasing our sales in Japan, Korea and China, mainly. And regarding the product mix, we are increasing our sales in lithium hydroxide given that some of the new technologies for cathodes are using more hydroxide and carbonate. So, in proportion, we are now selling more hydroxide.

Jose De Gregorio, Santander.

Thank you for taking my question. Now, regarding the iodine market, what are your expectation for the iodine market? Have you seen any bottom level or do you estimate a bottom level where (inaudible) shutting down production?

Thank you very much. Regarding the iodine market, we have been very clear in our strategy. Our strategy is to recover our market share. So, we are putting more volumes into the market and, of course, the price we sold is the balance between supply and demand, and has been, of course, pressure on the prices and the prices you have seen that has been going down. Average price for the first half in the level of $23 per kilo.

We see that for the rest of the year we will continue to see some pressure. We'll continue to increase our volumes according to the market and hopefully a little bit more. We want to increase our market share and the price will be the result of the supply and demand. And we, of course, in our internal part, continue to put a lot of effort in our cost. We have been very successful in lowering our cost, especially after the operation restructuring that we did last year. So we feel very comfortable and we still handle reasonable margins for our business -- for this business line.

Lucas Ferreira, JPMorgan.

I have a question on your expansion project in Argentina. I was wondering if you could share some expectations regarding your margins or cost of production or profitability, return -- level of returns you would expect to have in this expansion project. Thank you very much.

Thank you, Lucas. We reviewed many different alternatives where to expand our lithium and we found that the project in Cauchari-Olaroz is a very competitive project. Of course, it's intensive in capital, but, according to our estimate, we will have a very competitive cash cost that will allow us to be within the lower cost curve in the supply. So we feel very comfortable that we will have an extremely competitive situation in this project.

(Operator Instructions) David Wang, Morningstar.

Thank you for taking my question. I just had one on the new Argentinian expansion. Previously, I think, you guys were targeting 40,000 tons for about 40 years and now that you're targeting a higher production capacity, does that mean the mine life decreases or is it greater reserves as well?

Thank you very much for your question. Clearly, what we have determined is that we have more reserve. That's why we determined that we can go up to 50,000 and keep the length of the project. And, of course, given the size of the market and the way we want to enter to the market with this additional capacity, we design in two stages, 25,000 tons first and an additional 25,000 tons afterward.

And is it still the expectation to have about $1,332 of operating cost per ton including the potash credits?

We have not disclosed yet the operating costs. We are doing our work. We are optimizing our actual estimate, as I indicated before, and very competitive, but we have not disclosed the exact number yet.

This concludes our question-and-answer session. I would 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. Goodbye, everyone.

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