智利化工礦業 (SQM) 2019 Q1 法說會逐字稿

Good afternoon, and welcome to the SQM 2019 First Quarter Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would like to turn the conference over to Gerardo Illanes, CFO. Please go ahead.

Thank you. Good morning, everyone, and welcome to SQM's First Quarter 2019 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. Our presentation with a summary of the results have been uploaded at our website and is also available on our webcast. Joining me today, our speaker is Ricardo Ramos, 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 profitabilities, revenues, expenses or other financial items, anticipated cost synergies and product or service 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 other factors that could affect 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, Ricardo Ramos for brief comments before we move to Q&A.

Good morning, and thank you for joining our First Quarter 2019 Earnings Conference Call. If you turn to Page 3 of the webcast presentation, you will see a summary of the results posted last night. Our revenue for the 3 months ended March 31, 2019 and our net income reached $80 million. We reported a lower adjusted EBITDA this year when compared to the first quarter last year reaching $169 million.

On Page 4, as you can see some highlights for the quarter. In general, we saw higher prices related to the iodine and potassium chloride business lines when compared to the same period last year. In fact, we reported the highest quarterly iodine revenue since 2013. Sales volume in the iodine, specialty blends and lithium lines also increased. We believe our commercial lithium strategy was successful during the first quarter as a result of our short-term contract and spot sales approach. We saw higher prices in the lithium business line of approximately $14,600 per ton. As mentioned in the press release, we continue with our plans to increase our lithium carbonate capacity in Chile. We currently have a capacity of 70,000 metric tons. Flexibility is key for our successful participation in a fast-growing market such as lithium and so we are working ensure you can meet the changing and more demanding requirements of our customers. Iodine sales volumes reached 3,500 metric tons, higher compared to previous quarters also higher in prices reached, the highest levels reported since 2015 price surpassing $37 per kilogram.

Turning to Page 5. As I mentioned earlier, our adjusted EBITA and gross profit decreased in first quarter 2019. And as you can see in the chart, it was primarily a result of lower margins in the lithium business line. This was in line with expectations and was significantly impacted by higher lease payments to CORFO which became effective on April 10, 2018. During the first quarter this year, we paid approximately 30 million more in lease payments to CORFO when compared to the same period last year. We remind you that our variable payment to CORFO are a function of the price of lithium. The lower the price, the lower the effective lease payments rate.

Lower sales volumes in -- of potassium chloride also impacted our gross profit and adjusted EBITDA. Sales volumes in the business line decreased approximately 24% in the first quarter 2019 compared to the same period last year. Additionally, sales volumes in industrial chemical business line decreased approximately 40%, related to lower [solar] sales volumes, however, during 2019, we expect to report similar sales volumes for industrial chemical business line as we reported last year. As mentioned on the previous slide, iodine prices are up significantly, which has positive impact in our gross profit and adjusted EBITDA.

When we took -- we look back to first quarter, we continue to believe that demand in lithium market could reach close to 1 million tons by 2025. We feel that demand in 2019 will grow approximately 17%. New supply will have an impact on prices this year, and our average price of full and additionally 20% reaching approximately $11,000 to $12,000 per metric tons during the second half of this year. Our production for 2019 is expected to be about 16,000 metric tons and our sales volumes are expected to reach between 45,000 to 50,000 metric tons. Previously estimated, in 2020, we expect our sales volumes in the lithium business line to grow approximately 30%. A vast majority of the growth that we are seeing in the market is related to electric vehicles with batteries coming from Japan, South Korea and China. As anticipated, we saw a little, if any, problem in China during the early months of the year. It is probable that we will return to the sale in China in the coming quarters.

In the iodine and potassium nitrate markets, growth is expected to be 3% and 6%, respectively. Our sales volumes will likely grow with the marketing involved business line. We hope to see the upward price trend in iodine continue. But this, of course, will depend on the supply-demand [bottom].

Turning to Page 6, as we mentioned in our press release last night, we believe that the operational flexibility is essential for the future success of SQM. And this is a key component of our strategy, both the lithium carbonate and lithium hydroxide markets are growing at a significant and unprecedented levels and therefore, we're currently working on our lithium carbonate expansion to produce 120,000 metric tons per year. We believe this expansion will be completed during the second half of 2021, with a CapEx of approximately $280 million. We're also expanding our lithium hydroxide capacity in Chile to reach 29,500 metric tons in 2021 with an expected CapEx of $100 million.

On a separate note, a few weeks ago, we successfully placed our 144A bond in international markets. We issued 450 million 10-year bond with a coupon rate of 4.25%. We were very pleased with the results and we believe this show the market continue a strong interest in our company and the markets in which we'll participate.

Before I end -- open line for questions. I will like to welcome the new Board members who were elected last month.

With that, I will end my prepared remarks and open the lines for questions.

(Operator Instructions) The first question comes from Isabella Simonato with Bank of America.

One more question on lithium. Regardless of pricing or the premium declining in the second half of the year. Can you elaborate the pricing dynamics that you're seeing for both carbonate and hydroxide? We saw different outlooks from your competitors in the earnings -- in the first quarter earnings. So we wanted to understand your view on both the carbonate and the hydroxide.

Isabella, first, the dynamics of the pricing in lithium carbonate and lithium hydroxide is really dynamic. We don't foresee now a clear path for -- to differentiate both products. I think that it's too early to know where they are going, if they are going to be close or not in the near future. What I want to say is that when we put the pricing in the second half this year, as an expected average pricing, we don't foresee for the moment a difference between carbonate and hydroxide, different than the difference we had during last quarter, means for the moment being, we don't foresee any big change in the difference between carbonate and hydroxide in the short term. But really something in the short term, probably will be some changes in the future. We are very open to review the market conditions and that's why as I explained during the press release, we explained, we want to have the flexibility in the future to adapt our production for both alternatives.

The next question comes from Cesar Perez-Novoa with BTG Pactual.

I have a few, if you don't mind. The first relates to your 120,000 lithium carbonate expansion, which got pushed out of way by nearly 1 year. I was wondering if the delay is associated by a market softness. Or has to do more with technical reasons or have perhaps permitting? If you could clarify, that would be extremely helpful.

My second question comes to pricing. You mentioned in your press release that prices in the second half of the year will converge towards $11,000 to $12,000 per ton. I was wondering if this is your specific market assessment. Or if this is hard data as perhaps you may have physical sales already committed at that price range in the second half of the year?

And third and finally, you point to 315,000 metric ton market, lithium carbonate market in the year in your press release, of course, which seems like a surplus for 2019. Please correct me if I'm wrong. If so, can this excess volume be absorbed in the short term or medium terms potentially driving up prices again, taking in consideration as well the global trade dynamics which is essentially hitting every single commodity product. So those will be my questions.

(foreign language) Regarding your first question regarding the 120,000 metric tons. As you know, the completion of the expansion from 48,000 to 70,000 metric tons took more time than expected and the new expansion from 70,000 to 120,000 is significantly larger and we want to be sure that it will be right. Additionally, we expect that the new expansion will allow us to have the flexibility that a fast-growing market like lithium need. And as we speak now we're working very hard on the engineering for the third stage that will enable us to reach 80,000 metric tons. By the end of this year, we expect to have a clear time line for these new project, it's regarding the 120,000 metric tons expansion.

Regarding the pricing thing for the second half, and if it is a hard number or just an idea, it's both. Usually you have some predictions about the market but now we have some negotiations, some we closed, some sales in the second half of the year. We're working now, of course, second quarter is already on the middle of the closing procedure of -- with different customers and we're just working, of course, with third and fourth quarter client. That's why our prediction for this, third and fourth quarter is a mix between what we expect of future -- some business that we expect to close in the next few months, plus some business as we already -- in different countries like South Korea, Japan and China for the second half this year. Finally -- let me check. What was the last question for you?

Yes. I was asking about the size of the overall lithium market in 2019. You mentioned 315,000 and that seemed to be a little bit high figure and perhaps a surplus for the year. If that's the case, which I may be wrong, if you would expect this excess volume to be consumed in the short term?

I think if you -- we don't have a clear figure of the total work production for this year. We have a very good -- we think estimate about the demand in the 315,000 metric tons we informed. Probably the total production will be higher, somewhat higher than 315,000 metric tons. But in this specific market, it's always important to consider that the demand is growing at the level of 20% per year. We think that next year means 2020, and demand will grow probably in the close of 20% as compared to this year and we are starting with 315,000 metric tons, we are thinking about close to 70,000 metric tons of additional demand next year as compared to this year, this is 2020. And again, another 20% in 2021, it means in a market that is growing so high like lithium having an additional supply is not a big issue one year unless, of course, you have additional supply or adverse supply every single year. That's why we don't think that the potential additional over supply this year is a big issue. Anyway, as you know, it's important to consider that originally we predicted close to 325,000 metric tons and now the prediction 315,000 today. We think the reduction is mainly related with some delay in production from new [budget] factories that will be recovered during the next 2 years. That's why it's important to consider the we maintain our long-term prediction of the demand. And that's very important in the long-term view we have of the lithium business.

The next question goes to Alex Falcao with HSBC.

Two quick questions for me. One is, you changed your guidance for production and CapEx so not only, it's costing more, but if you look at the numbers of 2021 significantly less, 60,000 less. You comment on that you want to do this right. I just want to explore a little bit further than this, do you still see demand for a further expansion should those original volumes? Or you're going to wait until we get there, just see if that's going to happen? And what is the reason behind the increase in the CapEx?

Yes. I already explained that there is some delay, the 120,000 expansion is small delay. But we will -- it will be ready by the end of year 2021. It's not -- the delay is not related because the market or the demand. Second, the total investment we expect with 120,000 metric tons is because we expect to have a better facility. It's a big expansion. We're talking about moving from 70,000 to 120,000, means 50,000-metric-tons expansion. It's double than the expansion from 48 -- not double but almost double that the expansion from 50,000 to 70,000 metric tons that we had early, means it's a very important, more than double, the expansion that we're facing now. And we want to be more than sure that the product will be the best product worldwide and will be available to sell to any quality requirement we will have in the future. Thus, we want to be sure it's going to be the best facility in the world. That's why it's going to be a better plant, a better facility. That's for sure.

Second, our plan, expansion plan is not -- it's -- we're not waiting until the market give a signal to do this, we're going as fast as we can. Keep in mind that 50,000-metric-tons expansion is a huge one, it's one of the largest expansion in the world. And the next step is a 60,000 metric tons, and we're working very hard on it, means that we have to have as soon as I can the 60 additional -- 60,000 metric tons in order to reach the 180,000 metric tons, means we will inform at the end of this year, our timetable of new investment but we will not be waiting until the market signals in order to do it. We will try to do our best in order to be as soon as we can, but again trying to have the best facility you can have in order to supply the best lithium to the market. Additionally, as we inform now, we decided to increase our lithium hydroxide capacity and a very important increase in Chile. We're moving to close to 30,000 metric tons of lithium hydroxide capacity in Chile. That's, again, a very important signal. And probably now as we are reviewing this strategy and the engineering to move from the 120,000 and 180,000, we are also reviewing to increase again the lithium hydroxide capacity in the third stage. Again, we are doing our best, we are fully committed in the lithium, we are trying to deliver the best facility worldwide, the best quality product. And we will do it as soon as we can in order to deliver the best product.

Okay. Got it. And just a quick follow-up. When you say difficulties in increasing capacity, is that a quality problem? Or it's the lithium that you're extracting is not in the same purity or specifications that you had? Is that a fair assumption? Or -- and therefore, the (inaudible) of premiums is gone or basically, it's production in itself so you've not been able to get there?

You have to do it right. And we have no problem at the Salar de Atacama site. We have the perfect quality solutions in order to move forward. But just to keep in mind, we are having -- we have a huge, a very important project in Australia, it's a big one, it's a complex one, it's 40,000, 45,000 metric tons. We're talking here and a capacity increase from 70,000 to 120,000, means 50,000 metric tons. We took it -- it's a serious expansion. It's important to do it and do it right, safety requirements, agreements with the vendors, engineering, construction, everything to do it and to do it right. It's a complex project because it is a big project. And we know how to do it, yes. We know the technology, yes. We learn from the increased capacity from 50,000 to 70,000, yes. We learned that all, a lot. We're going to be great from the beginning. But anyway, it's a big project. And the other one, moving from 120,000 to 180,000, it's at 60,000 metric tons capacity, means 50% is higher than our project in Australia. It's probably alone a -- 60,000 metric tons is one of the largest projects worldwide. And again, if we are going to put every single effort in order to deliver a great project, it's a lot of engineering, a lot of contractors, a lot of supplier agreements and we need to do it and do it right. That's the complexities. Big projects and we have to deliver.

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

A few questions. So when you last updated the -- when we had the Q4 call a few months ago, I believe the idea was that you would produce a little more than 60,000 tons of lithium this year and build about 15,000 tons of inventory. Now you're saying you'll do maybe 60,000, a little bit less, 50,000. Are you still expecting to build 15,000 tons of inventory? Or you will be building less inventory this year?

Yes. Numbers are very similar to last quarter conference call. It means our original idea was to be close to 60,000 metric tons. We're going to be close to 60,000 metric tons, total production. The production will be producing a full rate, annual rate of 70,000 metric tons capacity second half this year. That's why most of the production of the 60,000 will be at the end of the year. That's why, even though we're going to increase the inventory, we're going to increase inventory at the end of the year. Yes, it is not the different approach than the approach we had 3 months ago in terms of having additional inventory at the end of this year.

Okay. And following up on that, where I am also a bit confused is because I believe that you were all suggesting a few months ago to think about that SQM would run about 90% of the capacity. So you have 70,000, which is running kind of low-60s. Now for you to achieve 65,000 tons sales volume next year, are you assuming you're running at 100%, at 90%, plus, maybe reducing your inventory build in 2019? But how do you get 65,000 tons of sales next year?

Yes. As I mentioned you before, we expect to be a 70,000 metric tons annual capacity at the end of -- during second half this year, it means that next year I do expect to produce 70,000 metric tons lithium. And of course, this 2020, we do expect to have a significant increase again in volume sales in 2021. We will increase some inventory next year, but a small amount of inventory in order to phase an increase sales of the year 2021.

Okay. And finally, when we look at the price guidance for the second half of the year, 11,000 to 12,000 a ton [ASP] . How much of that pricing is locked in right now where you know what your customer is going to pay? And then, there was a big discussion that you presented a few months ago about SQM was achieving better than market prices but there will be a step down in 2019 as you would now be achieving market prices. So 11,000 to 12,000 a ton, are you now achieving market prices?

Yes. Definitely, within second half this year, it's the market pricing but we do expect as an average of the market pricing. And again, we're in the middle of negotiation with many customers. Some of them, we have some formal closing. Other of them is preliminary closing. We're saying -- we estimate that our -- we think that our estimates, our guidelines between 11,000 to 12,000, is the right one today. I prefer not to disclosure, the exact amount of tonnage that is already closed and the tonnage that is under negotiation. But I'm going to repeat that it's based on both expectation and physical closing and commitment from different customers.

The next question comes from Ben Isaacson with Scotiabank.

First of all, thank you for providing more guidance, that's quite helpful. When I look at your cost of goods sold per ton in lithium, it seems like it's averaged around $5,000 in Q1 and in Q4. Less than 2 years ago with about half of that of around $2,500. Can you talk about where that run rate should be on a COGS per ton basis? And how you see that evolving with the further stages of lithium expansion?

Ben, first, we have to be careful about where we allocate the cost of the CORFO payments. We -- remember, you have to...

Yes. We're not -- I'm not including the royalties.

But deducting the CORFO. Yes, we -- because we have the ramp-up, we starting producing during fourth quarter last year and this year, the new capacity. We have some additional expenses related to this new capacity in order to have everything work according to expectation, some additional maintenance, some changing in equipment, some stop of the production for days and so on and the [geos] was not as good as expected in the beginning. That's why we think -- I think we have some additional or extraordinary cost during the last 2 quarters and I expect that in the long-term cost of producing lithium will be similar to the cost of producing lithium that we had probably 1 year ago.

Okay. So lithium prices are falling. We've been watching that for a while. What is your assessment in terms of where there is cost curve support for lithium over the midterm from a pricing point of view?

Yes. It's important to consider that as it's mentioned in our statement, the payment to CORFO that is quite important depends on pricing. When you move for -- just an example, if you pay -- if the price is $10,000 of the lithium, the price -- the percentage you pay to CORFO is 13.7%. It means $1,400 per ton. If you move down -- we're talking about what happens if the cost, if the price goes down, my cost was really, really, really down because between $7,000 and $10,000, the marginal payment to CORFO is 25%. That's why, the payment to CORFO is being reduced a lot if when you go down from $10,000 per ton. Of course, when you go up from $10,000, the payment to CORFO, it's 40%. The market cost is something very difficult to estimate and we think considering that the market is growing of the other competitors cost of new project cost because the market is growing 20% per year, you have to consider not the marginal cash cost, you need to consider the total cost because you have new projects coming on the market every year or every 2 years in order to fulfill the need of the market. In order to get to develop this new projects in Australia, or where ever they are going to be developed, mainly in Australia, they need to pay the full cost, considering investments. And in the long term, you should consider that what really matters is the total cost of competitors or new competitors when the market's going to be 600,000 or 700,000 metric tons. Those competitors -- those new projects in the future, that are being of course more -- the cost will be higher than today, those are the one that really -- are the ones that are going to put the long-term pricing in the industry. Again, our cost position is very strong. We maintain a very strong cost position, probably we'll approve some of it. And again, the agreement with CORFO allows us to have a very strong cost competitive -- competitive cost position because as I explained you before, we reduced the payments. Really, it's not a cost the one we have with CORFO, you can call it a profit-sharing system. That's the way -- this was the agreement.

And my last question is, this 120,000 ton expansion, sorry to bring it up again, I think originally you had this coming on at the end of '19. In March, I think there was an article in Chile where you gave an interview about it coming at the end of '20 and now the second half of '21. Are you comfortable with this date now? Is there a risk that this gets pushed back another year or 2, if it's not related to market conditions or technical issues?

What -- first, I'm not so sure about the article in Chile. If I said 2020, if I said that, probably was wrong because 2021 is the right timing now. But I want to be very sure is that we're really full committed as we speak to be producing at the end of the year 2021. We think we've sold and we take into account all issues of the previous expansion from 48,000 to 70,000. I think it was a very good idea to delay the project not because the market conditions, to delay the project because we learned and we are going to have a better production facility in order to have the best quality worldwide of lithium carbonate and lithium hydroxide. And it's going to be a better facility. And we have been reviewing the project in a daily basis, may I saw now the project from the 280,000 metric tons close to $100 million are already committed. Some of the new facilities or new equipment are already in the north of Chile, means we are full production moving very fast but trying to do it right. That's why I prefer to said that not before the end of the second half 2021, but we're really committed about this time line and we are really committed about having the best production facility in the world at the end of the year 2021.

And just a point of clarification, when you say you're really trying to make it the best facility, how do you measure that? Does that mean lower costs than where we were 1 year ago? Does that mean lower maintenance CapEx? What is it that you're trying to achieve that, perhaps, you didn't in the original estimate of the phase coming on in 2019.

It -- the lithium business, the lithium market is changing every day and the requirements from clients, especially in the electric vehicles market are more complicated and more difficult requirements today to -- quite used to be 2 or 3 years ago. That's why having a better facility allow you to have the flexibility to produce better-quality products. And to be able (inaudible) in the past -- has been in the past and will be the future, the best provider of lithium worldwide, it means we will provide the best lithium. And if you request a very specific quality of lithium, we want to be ready to deliver you the lithium you need in order to produce this specific battery you want to produce. Means a better production facility, means better deals? Yes, of course. Better cost? Yes. But the most important one is having the flexibility and the quality to deliver the product that is needed by the different customers we have.

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, 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.