智利化工礦業 (SQM) 2016 Q3 法說會逐字稿

Good day everyone and welcome to the SQM Third Quarter 2016 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. Please note that this event is being recorded.

I would now like to turn the conference over to Gerardo Illanes. Please go ahead, sir.

Thank you. Good morning everyone and welcome to SQM's third 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. Patricio Solminihac, Chief Executive Officer, is joining me today as speaker.

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 any -- and forward-looking statements should be considered in light of those factors.

I will 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 third quarter 2016 earning conference call. On Wednesday evening, we post our results for the third quarter of 2016. We report quarterly net income of $55.8 million, much higher than the result posted for the third quarter last year. Of course, it's important to remember that last year third quarter results were impacted by a one-time effect related to the stopping of the mining operation at Pedro de Valdivia.

During the third quarter this year, our results were also impacted by a non-cash one time before tax amount of approximately $33 million related to the stopping of the operation of our railway between Coya Sur and Tocopilla. This will not have an impact on our operation as we will continue to transfer our products using trucks as we have done since the railway was damaged in 2015.

We also announced that a provisional dividend of $235 million will be paid in December of this year. Our ability to generate substantial amount of cash was shown again in this financial statement reported on Wednesday. In this financial statement, it can be seen that the net financial debt to EBITDA ratio was reduced to 0.55, probably the lowest in our history. The fundamentals that allow us to generate large amount of cash should continue to be strong. We will continue to be a very low-cost producer in everything we do and our maintenance CapEx should remain in the neighborhood of 50% of our depreciation.

In general, the trends we have observed in recent quarters continued during the third quarter of 2016 as outlined in our press release. However, before we move to Q&A, I would like to emphasize some highlights of the quarter. We saw higher sales volume in all of our business lines, excluding industrial chemicals when compared to the last year figure. In fact, we reported our highest quarterly volumes in iodine in the last 13 quarters and our highest quantity ever in potassium business line.

Unfortunately we expect to see great price pressures going forward in the potassium nitrate market as we saw during this third quarter. However, we can report that demand is growing, especially in the water soluble market. In the lithium business, price and volume exceeded expectations. We feel confident that demand growth will surpass 12% this year and believe that the market will grow 8% to 10% in the mid-term. With demand growing 15,000 metric ton to 20,000 metric ton per year, we believe price for the remainder of this year and for the first part of next year should remain in line with prices seen during the third quarter of 2016.

In this exciting environment, we recently announced a project to more than double our lithium hydroxide capacity to13,500 metric tons. The total investment for this project is expected to be around $30 million and should be completed during 2017. Also, the joint venture with Lithium Americas to develop the Cauchari-Olaroz lithium project in Argentina continued. We have progressed with engineering and design of the project, including the hydrological model. We already have more than 120 people in total working in the project with around [50] coming from SQM. And we are confident that we will begin construction as planned during the first half of 2017.

I thank you again for joining the call today and we will now open up the lines for questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Andrew McCarthy, Citi.

Thanks for the question and good morning everyone. My first question was regarding the decision to increase the dividend payout ratio. I was just wondering if you could provide some background on why that decision was taken and why the capital allocation in that way, why not in an increased CapEx perhaps in other areas like, for example, lithium. Just some color on that would be great. Thanks.

Thank you, Andrew. The Board decided to pay a provisional dividend of $235 million which is higher than the 50% of the net income of the first nine months and the decision was taken by the Board vis-a-vis on the cash position that the Company has. And as I indicated in my previous word, we are in a very strong cash position and also we are continuing generating cash. And we of course have presented -- the management to the Board what are our future cash generation and future cash uses. And with that information the Board has decided to pay that provisional dividend.

Okay. Thanks a lot. And just one follow-up question. You mentioned that as regards to lithium prices expectations are that they should remain roughly similar in the fourth quarter and early next year versus what you saw sort of $12,000 per ton in the third quarter. I was just wondering if you had a view looking a bit further out into the second half of 2017 and afterwards what your sort of feelings were on where lithium prices might go.

Thank you, Andrew. Basically we are very confident on the demand side on the lithium. We have seen that all the projection on the electrical cars is going the way we expected. So we think that around 10% growth in the demand will be there which is one side of the equation of course. And the second is the supply. The track record of the industry, not SQM, has not been that good, project has been delayed and projects have not accomplished what they have been announcing in the past. However there are now projects in line to be producing more. So our expectation today is that next year we'll start to see more supply from the two projects (inaudible) projects in Australia and then also we think that some of [our 12] producers will produce some more. So that's why we are saying that the pressure on the demand will be satisfied with new supply next year. So, we think that at least we will not see pressure for higher prices next year. And if the price could go down or not and how much this is something that we'll have to wait and see.

Very clear. Thanks a lot.

Fahad Tariq, BMO.

This is Fahad on for [Joe]. Just a quick question on the lithium side. Just looking at the lithium revenue and gross profit information in the release, on our math it looks like lithium costs were quite high, perhaps the highest they have ever been. Can you comment on why that might be and how to think about lithium costs going forward? Thanks.

Thank you, Fahad. Basically we did have a situation in the third quarter with a special distribution cost that was higher. This is not something that will be repeated. And on the other hand, the other thing that really increased the cost has also been the royalty which is related, of course, to the price. So, that is also affecting the cost and if we keep on the higher price, of course the royalty that we paid to CORFO will be higher.

Okay, great. Sorry, I might have missed that. Did you say the distribution costs were higher, like one-time distribution -- can you give a little more color on what you mean by that?

Yes, we have additional costs that we have in the distribution cost worldwide and this is something special that we don't expect to be repeated further.

Okay, great. And just a quick follow-up on iodine. You mentioned that you're hoping to exceed 9,600 tons. What's the thinking for next year's volumes? I know the goal is to try to get the 30% market share again. So maybe any color you have or thoughts on 2017 volumes would be greatly appreciated. Thanks.

Well, we think that our strategy is working. We have been gaining market share. We grew -- well, our volumes in the third quarter were very good. And if you compare the volume of the year to date in iodine it's 8% higher than the year before and also the market is not growing that much of course. It's growing between 2% to 3%. So, we are gaining market share for sure and we expect that that will continue up next year. We are seeing that the price is eroding but, of course, the rate is much less now. We don't see important erosion in the last time. So, our answer related to your question, we see our volume next year should continue to increase.

(Operator Instructions) Cesar Perez-Novoa, BTG Pactual.

In terms of capital expenditures, what figure should we model in 2017 and 2018 considering the numerous amounts of projects that you have on board? Thank you.

Thank you, Cesar. Basically, first we have to remember that our maintenance CapEx is between $100 million to $120 million which is less than 50% of our depreciation. So that will continue on in that level we think. I have to say that we have not presented yet our budget for CapEx next year to the Board. We will do it soon. But basically we are thinking on the $30 million next year investment in the lithium hydroxide that we already announced. We expect going forward in the project in Argentina to spend close to $100 million next year from our part and then also regarding the nitrate expansion that we also commented that should be next year also in a range of $30 million.

All right. That's good enough. Thank you.

(Operator Instructions) It looks like we have no further questions. So this will conclude 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. Goodbye.

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