智利化工礦業 (SQM) 2017 Q4 法說會逐字稿

Good morning, and welcome to the SQM Fourth Quarter 2017 Earnings Conference Call (Operator Instructions). Please note, this event is being recorded. I would now like to turn the conference over to Geraldo Illanes. Please go ahead.

Thank you. Good morning, everyone, and welcome to SQM's Fourth Quarter 2017 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 as speaker is Patricio de Solminihac, Chief Executive Officer. 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, or forward-looking statements are factored and 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'll now leave you with our Chief Executive Officer, Patricio de Solminihac, for brief comments before we move to Q&A.

Thank you very much, Gerardo. Good morning, and thank you for joining SQM 2017 Earnings Conference Call. Last night, we post our results for the year. Our net income reached $428 million an increase of over 50% when compared to the $278 million seen the year before. For the fourth quarter of 2017, we reported earnings of over $110 million. Our strong results were based on several factors seen during the year. Record sales volumes in potassium nitrate and iron, higher solar salt sales volumes and most importantly, higher lithium prices. Excellence and flexibility of our operations combined with the responsiveness of our sales and marketing teams supported the post [deal] dynamic seen in the market allow us to capture the incremental growth.

We started 2018 with very positive views for the company and broader lithium market. When we announced the termination of the arbitration process with Corfo and reaching an agreement allowing us [produce and sell up to 2.2 billion tons of lithium carbonate [if we were in] to 2030. This new production allowance comes at a higher lease payment on other cost which would be applied from the moment that lithium becomes effective that could be as early as in March 2018. This agreement has opened up new growth opportunities for the company and Chile as a global leading (inaudible).

We believe that lithium demand will remain strong. We foresee an aggregate channel growth of approximately 18% in the next 5 years, 18% a year. We estimate that the market will need at least 50,000 tons per year of additional supply to maintain (inaudible). Based on that, we will increase in our current carbonate production capacity in this (inaudible) to reach 100,000 metric ton per year in 2019. This expansion of 52,000 metric ton will require a total investment of $170 million. Potential future expansion will depend on market conditions and our goal is to maintain around 25% market share over the next few years.

In short terms, having already close price negotiation contracts for the first half of 2018, we see that the price for this period are more than 20% higher than the price seen in the fourth quarter of 2017. That confirms that the market remains tight and the demand is strong. We estimated that total lithium chemical demand could grow over 20%, reaching almost 260,000 metric tons in 2018. The development of the electrical vehicles is driving this growth and we expect EV demand to grow around 35% per annum in the next 5 years, and the total demand for lithium chemicals to more than double in the same period.

Despite the potential new capacity is coming online in the second half of 2018. We expect average price for that period to be higher than the price seen in the second half of 2017. The cost of our continued commitment to the lithium markets with progress our development of our lithium projects in Argentina and Australia, with objective to start production in 2020 and 2021, respectively. In 2018, we continue to focus on growth opportunities in all of our 5 core business lines and the completion of the expansion of our announced production capacity. Our capital expenditure in 2018 is expected to be around $517 million and will improve approximately $157 million investment in projects outside Chile. Along with our strong earnings, we are also proud of the strong balance sheet which we finished the year. During 2017, we paid approximately $370 million in dividends, at the same time, we were able to reduce the net financial debt-to-EBITDA ratio to 0.3 from 0.6 and reported almost $1 billion in cash.

I look forward to another year of challenges and business opportunities to working along with my team on continued growth of the company and maximizing its value for all of our stakeholders.

I thank you for joining the call today and we'll now open the line for questions.

(Operator Instructions) The first question comes from Ben Isaacson with Scotiabank.

Its Oliver on for Ben. How much lead time would you need to be able to go beyond that announced 100,000 tons in Chile? If you see demand shaping up better than expected, are you still able to process more of the existing facility? Or would you need to build a new facility? And how long would that take?

As we indicated, we increased the announced expanding capacity for this year to 70,000 tons. So we will end 2018 with 30,000 tons, and then 2019, we expect to have an additional 30,000 to end up with 100,000. To move to a next stage, we could need less than 2 years in order to increase an additional 20,000 or 30,000 tons.

The next question comes from Joel Jackson with BMO Capital Markets.

I have 3 questions. Patricio, you're seeing a lot of patterns now put out very large expansions in the last few weeks and they now have your competitors, very large demand assumptions for lithium for 2025, 800,000 tons, 1 million tons. You've commented that lithium demand growing -- is growing at about 30,000 or 35,000 tons a year. Your competitors are now saying it's a 70,000 tons a year. Do you think the 70,000 tons a year is reasonable? Or do you believe its 30,000 or 35,000 a ton in a year and can you please elaborate?

Okay, Joel, and thank you very much for the question. We -- what we have indicated is that we believe that the demand will increase in the next 5 years by an average of 50,000 tons per year. In the past, where we have projected some of the demand, we have been short. So we'll have to see how the electrical vehicles really develop. We have seen news very often from the product manufacturers as well as from the country from a regulation point of view. So we'll have to continue more rhythm. With information that we have right now, our best estimate is that the new demand means an average for the next 5 years or 50,000 tons additional per year.

Okay, that's helpful. Let me elaborate on Oliver's question that he just asked. So to get above 100,000 tons, do you need -- you need -- how much brine do you have? So to get above 100,000 tons you need to pump more brine, do you have enough brine to get you to 150,000 tons? I mean, if you want to get the 215,000 tons that Corfo suggests you may be able to get to, how much more brine do you need to pump? How many more ponds you need to dig? I mean can you give us an idea of the work that needs to be done to get to 150,000 or even 200,000 in Atacama?

Basically, we do -- given that we were injecting a lot of brine because of our production of products, our plan is that we will not need to pump any additional brine. What we do is to optimize and (inaudible) the deals. We have a new ways of doing it as that -- it allow us to produce all the additional lithium that we want to produce. We're now pumping more brine. So in that respect, most of investments to do are the additional lithium that we will be producing will be at the chemical plant site.

But Patricio, I'm asking above, let's say you get 100,000 tons and now you need to go above 100,000, you want to go 130,000 or 150,000 or 200,000, to go beyond 100,000, how much brine do you need to pump more? How much ponds you need to dig? What do you need to do to get to an extra 50,000 or 100,000, beyond 100,000?

My answer is Joel what's exactly that. Beyond 100,000, we will not need to pump more.

So you can get the 200,000 without pumping more brine?

Yes.

Okay, that's helpful. And one more question, your capital intensity is extremely low versus competitors. You can bring on 50,000 tons for just under $4,000 a ton. Your competitors are planning large expansions for $10,000 a ton, $15,000 a ton. Does it not make sense for you to just go to 200,000 tons in Atacama, not do Australia, not let competitors take the share from you? You have the best capital intensity, so what stops you from going bigger?

When we have defined our strategy and even besides that we have given the importance that we have for most of our customers, we decided to have jurisdiction diversification. We think that this is a right move from our side to have at this kind of diversification from technology and from jurisdiction in order to be able to, of course, evaluate the risk. And that's why we will continue with the development of the projects in Australia, in Argentina, which now in our opinion they are also in the lower part of the cost curve compared with the -- what are the other suppliers in the supply line. On the other hand, one thing is the investment and another thing is the OpEx and also the rent that we need to pay. In the case of Atacama, of course, we have a very good CapEx position, we have a very good OpEx position but we will need to pay much more rent.

The next question comes from Andrew McCarthy with Citi.

My first question, just following up on that point on the geographical diversification. Could you elaborate a little more on why that's so important to you and to your customers? And whether there is any relationship there with the types of lithium chemicals that you're seeing in particular demand from your clients? May be from example you're seeing more demand in hydroxide or battery grade, lithium carbonate. Just to get your thoughts on that point please?

I'm sorry, Andrew, I cannot listen to you very well. Can you repeat the question please?

Yes, sure. So I was just wondering if you could provide some more color, elaborate a little further on why geographical diversification is important to you and to your clients. And related to that, if it's to do with perhaps the type of products where you are seeing, the higher growth rates in the future maybe hydroxide, I don't know whether given the new, as you're referring to the new royalties that you'll be paying to Corfo, whether that makes producing hydroxide maybe not as competitive anymore in Chile versus other territories. Just to get your, sort of, thoughts on thinking on that point please?

Okay, thank you. Basically, more than geographically, it's also jurisdictionally. We want to -- we are -- for some of our customers we represent more than 50%, in some cases its even 70% of their needs and they of course, rely on us not only on the growing of their needs but also they do a lot of investments in order to produce the final for our lithium chemicals. So they want to make sure that the risk or -- of not being able to supply for some time or whatever in the future is well-balanced. When you are in one only geographic location, you have risk of an earthquake, risk of port, risk of a strike, risk of regulations and so forth and so on. So when you supply to those customers and you are able to bring product from different jurisdiction and different geographies, you are well-balanced in order to be able to assure with less risk with the future demand. Of course, that is balanced together with the total cost, which includes the CapEx, includes the OpEx and includes the rent, and that is what we are doing. We want to be flexible, we want to keep this and this is very welcome by our customers. But also its important that we see that the lithium market will continue to grow. There is a lot of discussion today how much the supply will be, the track record of the industry depart has not been good from that respect but we have more than 20 years experience, we think that we are an important player and the industry is believing us and the industry is also want us to continue growth. So that's why we will continue to look at the growth and also at this diversification.

Regarding the relation or what we see on lithium market side compared with lithium carbonate, yes, there is no more demand on lithium market side because of the new cargoes and especially in (inaudible) that prefer to start their production with lithium hydroxide as I can get it. So we are increasing our capacity here in Chile. Nearly we expect to end this year with a capacity of 13,500 tons from the 6,000 tons that we used to have last year, and that we are also analyzing what is best to produce in Australia.

Are those the 52,000 that you're adding now, following the announcement, the press release or to put it another way, are you planning to increase your hydroxide capacity in Chile above the 13,500 along the lines of the current plans you have?

We do have the (inaudible) payments to do that but we have not decided yet. We want to see how the market revolves, they're going from 6,000 to 13,500 is a big thing and we expect to be running at that hopefully next year but having the capacity by the end of this year.

Okay, very clear. And just my final question is on the guidance you gave on the prices. You referred in the press release to the market price being still strong in the first half of this year and then maybe stabilizing or falling slightly in the second half, just trying to understand when you talk about market price, what specifically are you referring to? Is that the price realizations you're expecting? Or is that current contract negotiations? Or is that the spot prices in China? Maybe if you can elaborate a little bit on what that refers to please?

When we refer to prices that given our size, we refer always to the price that we realize on average and we think that, that is a good representation of what the market price is. As you were referring, of course, there are some difference between -- some big, very big consumers with small spot consumers but interestingly, average price that we realized in our sales price. And again, given our size, given our diversification of our sales geographically and also for industries, I will think that it's well to (inaudible) the marketplace.

The next question comes from Chris Terry with Deutsche Bank.

First one is just on the production profile that you've outlined. So for this year, you said that you'll get to 70,000 tons by the end of the year and that you'll produce around 5,000 tons more than last year. So implying 55,000 for this year. For 2019 given that you were expanding by an additional 30,000 tons to go a 100,000 total, what sort of production would you expect in 2019? And then how or what's the ramp up time to get to the actual 100,000 tons? Does that comes through in 2020? Or is that longer than that before it actually flows through? So that's my first question.

Thank you, Chris. Basically, what we are (inaudible) happened in the last year so this marketing region is that we are operating at full capacity and even in some cases over main place because of the market situation. But in the future, that could not be the case as we are seeing many other of our business line in general terms in the market. So one thing always is important -- what is your capacity and another thing is you're efficient and how much you want to produce and sell. Right now what we're seeing this year is that we will continue to produce as much as we can and trying to move as fast as we can and turn to the market. And that is in 2018 where our total capacity at the end of the year as you say, we expect it to be 70,000, and (inaudible) will be producing some more than 55,000 but regarding the inventory that we need to keep and also the ramp up, we are expecting to sell 55,000. Regarding next year, we will end up in 2019 with 100,000 and that will not be [ready] from first of the year. So probably we could be able to sell let's say 80,000 if we want but that will be an addition that we will be taking when the time comes.

Okay, that's helpful. And then you answered this I think partly before but you're saying for the hydroxide mix for this year that the additional 6,500 tons will take you to 13,000, you don't complete that until later in the year? Will you get any benefits from that, a mix effect on the hydroxide side in the second half of this year at all?

Yes. We expect to sell some more than the previous year, not that much. And then we'll have to decide if next year, how the reach will be depending on how the market evolves.

Okay. So we should just -- and from a mix perspective you get 13,000 of hydroxide from next year onwards and minimal included in 2018?

Yes, we expect to sell more, of course, that's why we're doing the expansion to 13.5. So in 2019, we expect to sell much more than we sold this year.

Okay. And just a high-level question on the production profile and the way you're thinking about the business. So you obviously have the capacity now to go -- the option to go above 200,000 tons and you're saying that you'll expand at a rate that matches with what customers want. If you were to see some of your competitors announce more supply expansions going forward, would you react to those expansions by doing more yourself to keep the market share? Or how would you think about that interaction as opposed to what the actual customers want?

Well, I, first think that the company that will have the real possibility of increasing the capacity every once at the lowest cost and we understand and we believe that we are one of the lowest cost producers. So our initial thinking that we indicated is that we will keep our market shares and market is growing a lot and in order to keep the market share, we will need to grow a lot. And that is exactly what we're doing. Now there are many dynamics that we'll have to see in the market. If you remember, at the beginning of last year, we indicated that we saw that a lot of new capacity was announced and capacity could be in the second half of the year and that really did nothing. The market continued to be very strong first because the growth of the market was higher than it was expected and second, because the supply was not as fast as something was promised. So that is the thing that we will have to continue monitoring. We want to be prepared, we want to have the installed capacity to respond to our customers on time and also to continue the increase as the market needs more products.

The last one for me, just in terms of balancing the growth and the CapEx you've got coming out with dividend potential, can you just restate the goals on dividend side? And how you plan to get that balance?

Well, the shareholders have approved the last -- in shareholders' meeting at dividend policy that basically stated that we will contribute to 100% of our profit (inaudible) paying some financial (inaudible) that are specified in that quality. So right now that is indication that we have from our shareholders. Right now, of course, we're increasing our investment in the plan. This year will be 517 the lowest opportunity. But at the same time, we have been generating strong cash. We do have today $1 billion in cash, we do have a very low net financial debt-to-EBITDA but we are increasing our investment plan.

Okay, is there a set policy there though?

Sorry, regarding the dividend policy, that was the one that the shareholders approve last April in 2013. According to the Chilean regulations the shareholder meeting this April, we'll have to again establish what will be the goals.

The next question comes from Danniela Eiger with Bank of America Merrill Lynch.

I have actually 2 questions. The first one is on potash, what is your expectation of your long-term production of potash assuming that this focus on lithium production continue? And also moving towards lithium, could you provide more details on the additional lithium volumes expected for the second semester from competition other than your own? How you are seeing that impacting the market?

Regarding, potash, as we have indicated, we are right now operating in a rate (inaudible) lithium production without pumping more brine. So of course, that's is effecting our production of potash and of course, economically makes a lot of sense. Last year, we sold in total potassium chloride and potassium sulfate close to 1.35 million tons and this year we expect to sell less than 1 million. At the same time, we are using more product in our own production of potassium nitrate, which means that we have less potassium chloride to sell to the market. But in general terms, I think that, that was continue to be (inaudible) but not that much. We will be able to sell in the range of 900,000 tons more or less of that potassium chloride. And regarding the reaction from competitors as I indicated, we are being 20 years in this market. We have went through from many different stages and we have been always a lot of promising of new production in China or in Canada or even in the U.S. and other places and always the track record has not being that good. So right now, of course, there is much stronger demand, the price is much higher, there is a lot of incentive for other people to look at (inaudible), there are many (inaudible) in the market right now. But we will have to see. We follow them, of course, and try to understand how competitive they are but we don't want to make the mistake that maybe we did in the past that we will not have the new capacity in place to respond to the market.

The next question comes from Lucas Ferreira with JP Morgan.

My first question is regarding your views for long-term prices. I -- since your agreement was (inaudible), your stock is down like 25%. As investors are becoming more bearish on the long-term price view and this fast expansion in -- potential expansion in brines. I guess my question is where you see your, let's say, incentive price for keep expansion in the brines and in the same price -- incentive price for expansion in spodumene and different regions of the world? And how fast you're seeing this, let's say, industry cost curve could be flattening out? Or how fast the brines could be displacing spodumene? And in other words, do you still the spodumene could be seen as, let's say, long-term support to the cost curve. So that's my first question. And the second question is regarding your price outlook for the year. You said you are optimistic, just to make sure I understand, as you said in the beginning that you're seeing like (inaudible) set 30% higher than fourth quarter numbers. Is that like up to 30% or on average 30% higher? Can you give me a bit more color on that? And also elaborate a little bit on the inventories and across the value chain? How they look like and how tight the market is?

Regarding the long-term price, this is a one million dollar question, of course, and that depends finally on the -- as always on the supply and demand balance. In the past, we have been short on what the demand has grown. Demand is growing much more than everybody expected and I personally have the view that thoroughly the demand will continue to grow even more of our best case scenario. Regarding the supply, as I always indicated that the industry has not been with a good track record. Probably it tend to be more complicated, tends to be -- take more time and some of them tend to not work basically. In my opinion, when you compare a brine-based chlorate and a sodium-based chlorate, or a hardrock-based chlorate, I do not like the picture of saying that the one is worse than another one. And I think that like in many case there are very good hardrock projects like (inaudible) for instance and there are really bad hardrock projects. At the same time, in brine, there are very good brine project like Salar del Carmen and there are very bad brine projects because of the -- clinically, because of the ideology, because of the way we get it right now, because the technology that we use. So I think you have to look each project in its own make. So I insist that my view for the long-term price is that of -- and we have been saying that from the very beginning that the actual situation is a very, very tight market and that will not (inaudible). If this will mean to start at the end of this year or to start in 2019, we'll have to wait and see. I mean if we don't have really precise information to be able to give on that, but of course, in the long term, we also have been very clear about that the prices will not stay in the levels that are today of $16,000 per ton but that we'll of course -- we'll ask (inaudible) the new supply. Regarding the price outlook for 2018, what we indicated is that we already have closed most of our sales for the first semester and the average price that we are getting in the first semester of 2018 is 20% higher than what we got in the second semester of last year. That is the first thing that is the average price that we will be getting. And regarding the second semester, even though there are possibilities of new supply, our estimate today is that the average price which probably will be low in the first semester with domestic that anyway will be higher than what it was in 2017.

And there's another question, a very simple one. That $20 million charge -- one-off charge related to the Corfo that you guys announced, just wanted to make sure where that was allocated? Is this was below the -- actually below the EBITDA line or above the EBITDA line? And when we look to breakdown of the cost of each operation that you published on the (inaudible), if that was allocated in the leaching business or in others? Just to make sure how that impacted your results in the fourth quarter?

The payment that we did to Corfo, $20 million more or less that was reflected as we indicated in 2017 and was below the margins.

The next question comes from Alexander Falcao with HSBC.

I have a question on the rationale on the first -- see that the first phase of expansion. Is this first 50,000 is in contracts is there? I just wanted to know if you could walk us through after that, what is the -- what is going to be the decision-making process in order to go full on and just deal with that? Or is there something contingent to where the market's going to be or the price is going to be? Or given that you guys are allegedly the lowest cost producer in the world, really doesn't matter where the price is, the rationale makes sense just to go ahead and do that. So what -- is there any IRR threshold? Any decision-making process that you could walk us through? That will be awesome.

Basically, our decision is chemical decision. We are increasing the capacity of our asphalt plant and that's the reason we optimized from an engineering point of view to have a very low CapEx that you view. So that's why we are growing. We can grow, as I indicated also with an additional choice over 100,000 and we will decide that on time. We have time to do that. We need first to run our plant at 70,000 and then the next year at 100,000 and then of course, we will have time before that and we are preparing all these corresponding engineering to go whether if that makes sense and the additional process basically is optimizing the value of the company for the long term. We do have experience with our other business lines. We have experience in the past with lithium and we learned from that and we will try to apply all that in order to make it as efficient towards market value.

Okay, understood. Just on the next year's expansion, how's going to be the ramp up? Can you tell us -- can you expect already for everything growing full throttle? It's going to be a gradual -- what's the best way to model that expansion?

We'll stick to have the 70,000 ton capacity ready at the end of this year. So we can that (inaudible) to next year and then we will be building the capacity of the 30,000 additional to 100,000 and that will be ready in the second half of the year, probably will be able to produce some of those in the next year.

This concludes our question-and-answer session. I would like to turn the conference back over to Geraldo 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.