智利化工礦業 (SQM) 2022 Q2 法說會逐字稿

Good day, and welcome to the SQM Second Quarter 2022 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Ms. Kelly O'Brien, Head of Investor Relations. Please go ahead, ma'am.

Good morning. Thank you for joining SQM's earnings conference call for the 6 months ended June 30, 2022. This conference call will be recorded and is being webcast live. Following this call, you will be able to access the webcast at our website, www.sqm.com. Our earnings press release and our presentation with a summary of the results have been uploaded to our website as well.

Speaking on the call today will be Ricardo Ramos, CEO; and Gerardo Illanes, CFO; and Philip Smith, Vice President of Lithium and Iodine Asia Pacific.

Before we begin, let me remind you that statements in this conference translating the company's business outlook, future economic performances, 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 laws.

Any forward-looking statements are estimates reflecting the best judgment of SQM based on the current 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, including our ability to successfully implement and sustain a -- sustainable development plan, risks, uncertainties and factors that could affect the accuracy of such forward-looking statements are identified in our public filings made with the U.S. Securities and Exchange Commission and in our earnings release issued last night, and these forward-looking statements should be considered in light of those factors.

We assume no obligation to update such statements, whether as a result of new information, future developments or otherwise, except as required by law.

I now leave you with our Chief Executive Officer, Ricardo Ramos.

Yes, maybe one extra clarification that also Felipe Miranda, who is the Head of Business Intelligence, is joining the call.

Sure.

Okay. Thank you, Felipe. Thank you, Kelly. Good morning, and thank you for joining the call today. We are very pleased with the results. These results were influenced by positive market conditions of fertilizers, iodine and lithium, where we saw historical high prices during the first 6 months of the year. Lithium represented 73% of our gross profit. This comes at a great moment as this year, we are celebrating 25 years in the lithium industry. After debating the public-private alliance with CORFO, both parties, along with a lot of communities and the country as a whole are enjoying the benefits of our investments through know-how, R&D and harder work.

In the lithium industry, we continue to see strong indicators related to the demand growth, particularly in China, where it was reported at elective vehicles, sales were over double during the first half of 2022 of 113% growth when compared with the same period last year. Recent months show that this trend remains, electric vehicle sales in China were probably over [132%] higher in June 2022 compared to June 2021. We believe that demand for the year will grow at least 35%, pending there are no negative news related to the pandemic or a global recession.

Given all of this, it seems likely that prices will remain relatively stable during the remainder of 2022. While financial contribution of $2.2 billion will be paid to public funds as a result of our leasing operations during the first half of the year, we are even more proud that we are a leading player in the green revolution through our lithium production, sales and expertise. Our state-of-the-art lithium plant is producing lithium that is used directly in cutting-edge battery technology throughout the world, positively supporting a global CO2 reduction through an electric vehicle transition.

Chuck, we are now ready to open the line to questions.

(Operator Instructions) And the first question will come from Corinne Blanchard with Deutsche Bank.

Congratulations on the good quarter. I have 2 questions. The first one would be on pricing. It seems you have renegotiated some of the contracts, you move away even further from the long-term contracts to move to the shorter-term contract. Can we expect further contract negotiation in 3Q and 4Q? Meaning could we see even closer to 90% or 95% of benchmark index prices?

Then my second question would be on the cost. It seems like there was a significant cost increase in this quarter, so I would like to go into detail on this.

Corinne, this is Felipe Smith. We are indeed talking with some of the customers with whom we have a contract that we're restricted in terms of moving with the market price. We hope that in the coming weeks, we can improve that situation. We have already successfully agreed to modify those contracts. We appreciate also the openness of our customers who understand that it makes more commercial sense to be able to follow the market. So yes, I would say that, hopefully, we can improve that position in the coming months.

Just maybe following up on that. Would you like to say like going into 2023, are you still going to have any of those legacy or like long-term contract in next year?

I would say, first of all, that we will try, of course, to have the maximum possible amount of contract following the market. As you know, SQM has a very good position in terms of cost. So for us, it makes a lot of sense to have customers that -- sorry, contract that can follow the market. This is also -- gives us flexibility, and we feel comfortable with market index price contracts. I think it makes sense also again to our customers, to have something that can offer that possibility. Now some of these contracts, of course, will still remain -- some of the let's call it, restricted contact will probably remain over the next year, but it will be a very small portion.

Corinne, regarding your question about costs. Well, the main contributor to the account costs you are seeing is related to the payments we made in the quarter reasons explained.

We take the quarter for all the function of our exports from Chile and the average sales product in third quarter. As we keep on increasing capacity and we keep our feasibility more, we're exporting more volumes from Chile that skewed in the near future, this goes to customers as prominent regions, the different markets in which we participate. Remember that our integrated operations of value-added lithium products [are made] in Chile, while the main markets are in the other end of the world [relation].

The effect was particularly relevant this quarter as we exported close to 53,000 metric tons while our sales were approximately 34,000 metric tons. All of these, coupled with other payments and contributions we make under the public private alliance with CORFO has an accounting impact on our reported cost of goods sold in the lithium business side. But bear in mind that part of this was also reflected as an increase in our cost of synergy.

If prices keep on increasing automatically as we saw during the first half of the year or the ratio between the sales and exports during each quarter doesn't change, we may see impact by this in the future. Anyway, our holding cost that is cash, cash flow and depreciation is around $3.50 per metric ton, slightly higher than last year, but this is despite -- I mean, this cost is despite inflationary pressures that we are seeing in quality improvements that we are making in our production and our ESG.

Your next question will come from Joel Jackson with BMO Capital Markets.

A few questions. This question you sort of touched on a little bit, but how much visibility do you have in the first half of '23 pricing right now? So you have a little bit of fixed pricing that sticks around. Otherwise, the rest is all going to be market-based. So you don't really have visibility? Or do you have some visibility into the first half of the year on lithium pricing?

Look, first of all, I would like to comment that the demand this year has shown to be very strong. Actually, we are estimating that demand will be 30% higher than last year, which is a little bit above our previous estimation. At the same time, we have seen some delay in the supply of lithium on new capacities coming on stream. So that is what is explaining today the upward pressure on the price, okay? Now it is, of course, I could say maybe for the coming months of this year that we believe that this pressure could probably remain to some extent, but it's difficult to predict what will happen next year.

One thing for sure is that demand will remain strong. As a matter of fact, if we look at 2025, we are expecting that demand will be well above 1 million metric tons. And by 2030, around 2.5 million tons. So this is something we cannot deny. Demand is very strong. And it will depend on how the supply can catch up with in demand, what will be the price. Maybe one additional piece of information, we are estimating that by 2025, around 40% of the supply will need to come probably from junior or newcomers. And this represents, of course, some risk to the supply.

So my next question would be, you got some customers some OEMs, I guess, to agree to reprice up lithium pricing that already been settled in a fixed contract that I guess was really low, below 10,000 tons, whatever you want to tell us. So you got them to do that. What did you give them in return for them paying a higher price right now? Did you commit to some volume next year at a certain price? Did you commit to some volume maybe not at a price but guaranteed volume over a few years? What did you -- what did they get? What do the customers get for paying more now?

Well, first of all, I would like to comment up this contract that you're asking for represent a small portion of our business, as you saw in our release. Most of our contracts today are following market prices. But okay, as you can imagine, we are seeing a tight market situation in the coming months, and there are some risks if you look at the long term. So volume is probably the most important asset for any customer today. I mean our customers need volume to grow. So the way we can have a good understanding and a good win-win solution with these customers is by offering more volume. This is the best way we have been able to renegotiate this contract.

Okay. That's helpful. And my next question would be this. So it would seem that lithium demand can't be any tighter than it is right now. You have OEMs now running around making deals with lithium companies. Some are nonbinding MOUs, as you know. Some are -- look more legit and have some upfront payments. So can you talk about a couple of things, the leverage that you now have with OEMs and customers that maybe you never had before? And then is there going to be enough lithium in the short term to satisfy demand, therefore, EV forecast over the short term need to go down?

Well, I think that my first comment would be that SQM has been successfully increasing production capacity. We are reaching 180,000 metric tons per year capacity now in this moment, and we are going to start our next stage of expansion to reach 210 next year. In terms of the lithium hybrid hydroxide, we are also reaching 21,000 metric ton capacity in Chile, and we're also going to start the next stage.

And I start commenting this because SQM has been one of the few players in the market that have been able to deliver more lithium. And this is, of course, something that all the customers, big and medium and small customers, are valuing from us. So our value proposition today is volume. Okay? And this is the way we are discussing with our customers is because we can commit to volume and receive that we can deliver.

Next question will come from Guilherme Palhares with Bank of America.

Just one quick question on SPM. You said on the press release that you expect volumes to fall by 10% this year, right? So -- but at the same time, we see volumes going down more than that in the first half of the year. So if you could explore a bit what is the outlook for the second half. And are you expecting some pickup in terms of volumes? Or do you expect a change in terms of the market share that the company has in that division?

Okay. Thank you. Let me try to give you a global view of all the fertilizer what we see today. As you may know, the whole industry has been affected by the war in Ukraine. On the one hand, we have the lack of gas in Europe, significantly affect the local production of fertilizers and of course, the limitations on potash exports from Russia to Belarus Russia and of Belarus Russia that have affected the market for us in worldwide. Considering latest developments, it's very difficult because we have very unique situations to have a prediction of the churn of the industry in the medium term.

In any case, if we go to the potash first, as you know, we sell an important volume of potash, even though we are very small in the market. In the last months, we have observed a lower demand for potash. It is likely that prices for the second semester will be lower than the prices of the second quarter of this year. That's what we expect.

But in the case of the specialty fertilizer, Europe, as you know, is one of our main markets, and current price environment have affected the demand growth. That's the situation, the growth being affected by today's price environment. Again, it is very difficult to have a medium-term projection. However, we think that the situation with specialty fertilizers is different than potash, and we believe that prices are likely to remain relatively constant during the second half of the year. And volumes, we think, will be similar to those we've seen during the first half of the year.

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

And again, congratulations for your results. Just a basic question here on your ongoing capital investments -- when will the 180,000 metric ton lithium carbonate capacity be completed? And what specific milestones do you require for final tie-in? And would this maybe perhaps restrain some production into the third quarter? And then on the incremental 30,000 metric tons that you're expecting to deliver, has there been any alteration to the $250 million cost associated with this expansion and perhaps provide a time line for final completion? That would be my question.

First is about the lithium milestone for the 180,000, is that continuously increasing production capacity every month because it's that, we are improving the production in every step of the process. That's why there's no key one milestone that we are expecting in order to be in the 180,000. I do expect that there will be a continuous production close to the, 180,000 million tons probably September onwards. Keep in mind that some months, we reach the 180,000 metric tons capacity. Some months that will little bit lower because we're in the fine-tuning in order to meet the 180,000. That's why my best guess is that we will be close to the 180,000 as the total capacity in September -- second half of September onward.

About the 210,000 [ionics], I think in the CapEx from you have, we already included the investment in order to reach the 210,000, the one that we announced we've been producing in first half next year. Anyway, we are working in a new 3-year CapEx program, and we are working as we speak.

I expect next conference call to inform the market when it's going to be the net CapEx for the next 3 years because the ones we have is '21, '22, '23, '24. And we will have this new update probably after the results of -- September results. But again, it's -- we will be in the same way trying to increase capacity, probably increasing the quality, increasing the capacity of lithium hydroxide side. We have a lot of initiatives we expect to announce in the next CapEx program.

We are in the final step in order to have a final agreement in order to move forward in Australia in order to move from 50,000 to 100,000 metric tons. I expect we will publicly announced together with Wesfarmers, this increase during this year anyway.

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Kelly O'Brien for any closing remarks. Please go ahead.

Thank you, everyone, for joining. Before we close, I wanted to remind you that we will hold an Investor Day on September 15. So please visit our website or contact us for more detail. Have a good day.

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