Sociedad Química y Minera de Chile S.A. (SQM) Q1 2013 Earnings Report, Transcript and Summary

Good day, and welcome to the SQM First Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mark Fones, Vice President of Finance and Investor Relations. Please go ahead.

Good day, everyone, and welcome to SQM's first quarter 2013 conference call. For your information, this conference call will be recorded and is being webcast live. You may access the webcast later on under our website www.sqm.com. Joining me today as speakers are Patricio de Solminihac, Executive Vice President and Chief Operating 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 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, and that term is defined under the Federal Securities Laws. 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 filing 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 CEO -- sorry, COO, Patricio de Solminihac, for brief comments before we move to Q&A.

Good morning, and thank you for joining the SQM earning conference call. I will start with a brief introduction before I open up the lines for questions. For the first quarter, gross profit was slightly better than both the first and the last quarter of 2012. Having said this, we expect the remainder of 2013 to be lower than the first part of this year. In the SPN business line, we saw increased demand during the first quarter of 2013. During this strong quarter, our volumes increased over 35% when compared to the relatively weak first quarter of 2012. Most product within the SPN business line saw higher sales volume during the first 3 months of 2013, which contribute to our increased revenues. However, as anticipated, average price for the business line fell about 3% when compared to the fourth quarter of 2012. On the product side, it is anticipated that the total market demand will exceed market demand seen in 2012 although we have seen the impact of lower prices. We believe this market condition will continue throughout the years as market demand is expected to surpass 54 million metric ton during 2013, an increase of about 8% over last year. As expected, the first quarter of 2013 showed strong sales volume of potassium chloride, volume increased over 25% when compared to the first quarter of the previous year. We expect our total sales volume of MOP and SOP fertilizers from the Salar de Atacama to be over 20% higher than the sales volume seen last year. In the chemical markets, we are seeing healthy demand growth, which we expect to continue into 2014. However, new entrants to the lithium and iodine markets will capture some market share this year. In iodine, this new supply will continue to have an impact in our sales volume during the remaining of the year. As in the past, we are focused on maintaining our margins and our first priority is to making sure the market demand is met. Average price during the first quarter remained at similar level to those seen during the fourth quarter of 2012. This was in line with company expectations. Seriously speaking, iodine market condition were positive during the first quarter 2013, and we expect this trend to continue in the future. Demand, in all main uses, continue to grow, x-ray contrast media, LCD and consumption related to pharmaceutical remained prominent use for iodine. As mentioned above, new lithium supply is also being added to the market. As a result, as seen during the first quarter of 2013, our sales volume for lithium and derivatives may decrease, overall, in 2013 to a level lower to those posted in 2012. Notwithstanding prices for lithium carbonate during the first quarter of 2013 were about 8% higher than average prices for lithium carbonate seen during the fourth quarter of 2012. Demand in the lithium market remains strong, and we expect demand in 2013 to be around 10% higher than demand seen in 2012. The lithium market continue to be driven mainly by battery growth, historical demand driver for the lithium market, but with little impact from electrical cars to date. The industrial chemical business line, our sales volume were higher than sales volume in the first quarter -- we've seen during the first quarter of 2012. However, we still expect volume in this business line to decrease significantly during 2013, compared to 2012, based primarily on the delay of the sales of solar salts, a powerful element used for alternative energy sources as the market has seen higher financing costs for projects in the United States and Europe. Average price in the business line remained relatively flat compared to fourth quarter of 2012. Our CapEx plan this year is to total about $500 million. As mentioned in our press release, this amount includes the maintenance of our plant and facilities, expansion of the Salar de Atacama to increase our potassium production. I thank you, again, for joining today. We will now answer any questions you may have.

Thank you, Patricio. Operator, we may go over now to the Q&A session.

[Operator Instructions] And our first question will come from Fernando Ferreira of Bank of America Merrill Lynch.

I had 2 questions, today, that caught my attention from your press release. The first one is the comment that you expect to lose market share this year, in both lithium and iodine, to other players in the industry. I just like to know, for both lithium and iodine, who those players are and what amount of new product that you expect to come onstream this year? That's my first question.

Well, thank you, Fernando. Regarding lithium, we did have a weaker first quarter, but we think that we will recover volumes during the year, and volume we expect to be in the range of 5% less only than the year before. There was a delay in the shipment in the first quarter that we expected to catch up in the next quarters. Regarding the new entrants in lithium, we have Galaxy that has been producing in China. However, with the many different problems that they have been publicly stated regarding the stop of their mine and buying from Talison, the [indiscernible] for their plant, also the plant that they need to stop because of the action [ph]. So there are many issues on that, they have been announcing that they will -- been going through to get to their capacity of their plant. This is the short-term, a little bit more longer-term are the plant that's expected to start in Canada, which is Canada Lithium. But during this year, they announced that they will be ready to start sending product to the market. And the next one will be oil recovery in Argentina, but we don't think that they will be shipping any product during the year, but they will do so after that. Regarding iodine, we have a good first quarter. We expect that the production of Algorta, which is the expansion of their ACS here in Chile, will continue to ramp up their production to a capacity. So we expect that during the year, in iodine, we should be around 5% to 7% lower than volume than 2012.

That's very clear. And my second question is the comment that you expect the remainder of the year, in terms of results, to be weaker than the start of the year, also if you could provide some more details on that front as well. Is it more related to this weaker volume effect? Or it's also counting the effect that potash prices have trended down?

There are many factors that influence that. As you know in, clearly potash prices are lower. We expect that during the year we would not continue to drop. We expect that the price will continue more or less at the level that they are right now. That also influenced prices in our SPN business line, that we are seeing -- we see average price, during this year, in the range of $50 less than the year before. And then, of course -- which is important for the rest of the year, is in our industrial chemical business line, which we have a very good first quarter because of the last shipment for the solar salts that we have during the first quarter, but as we have indicated, we don't see more shipments of solar salts the remainder of the year. So total volume in industrial chemical will go down in the range of 100,000 tons, so that also will influence that. And finally, of course, we continue to have pressure in cost, we are working on that, but, of course, the exchange rate, together with the pressure in labor cost, have also influenced that.

The next question is from Wesley Brooks of Morgan Stanley.

So just to follow on from the last comment you just made on your costs, I know you don't talk about costs by segment, individually. But can you give us some thoughts of the cost inflation you're seeing in some of your main lines like labor, energy and how that's -- you see that trending over the next few quarters, versus Q1, please?

Well, as I said before, and you are right, we do not disclose the cost structure in each of the business line. But in general, we have many common costs that affect all the business lines, and as indicated in the previous question, one of the important factors that pushed our costs up is the labor cost. Chile, as you may know, is almost at full employment. Besides that, there is a lot of activity in the copper sector in the north where we have our operations. And third, the exchange rate have also influenced our costs in dollars because we, of course, have our labor cost in peso-related currency. We can say that we are expecting around 5% more cost, in total, if we compare cost from this year to the previous year. We don't see that we will have much higher cost the next quarters than that what we have in the first quarter. We don't see nothing special in that respect.

Perfect. And if I could ask another question on these lithium startups, please. Do you have a good feel for what their -- like Galaxy, obviously, they have been ramping up, they have had some issues like you said. But do you have a good feel for where their cost might be? And basically, how profitable they can be with current prices?

I do not have any real specific information on their cost factor. Of course, I have some estimates because of the cost they have in this [indiscernible], which we know how much are they paying now buying this [indiscernible] from Talison. So in our opinion, they have, of course, a much higher cost than us. But they have been giving lot of public information that clearly you have seen, regarding their situation, first in the situation on the high cost that they have in their own mine operation that finally they decided to stop. And second, with the action [ph] that implied that they have to stop their plant for almost 3 months. Now, they are going through a -- trying to do an increase in capital, I understand, they have also publicly stated that. So I think it's a question mark that will -- what will happen with them in the future. I do not have any specific more information than what they have published.

The next question is from Ben Isaacson of Scotiabank.

My first question is on your market share erosion in lithium and in iodine. Can you just remind us, in both of those markets, where you are on the cost curve? Where on the cost curve the new capacity is coming in? And I believe you're very low, if not first quartile, on the cost curve, and so while your market share might erode, your volumes shouldn't change much. And so I just wanted to kind of get some color on why you're seeing lower volumes.

First, as you know, there is no really public information like in any other or many other industries where you can see the exact cost structure of the different competitors. I will say that we are one of the few, if not the only one competitor in the lithium and as well as in the iodine industry that publish results and have this conference calls. So we really do not have access to our competitors. We have, of course, estimates. And going to the first part of your question, yes, our estimate is that in both of these business lines, we are one of the lowest cost producers. So for sure we are in the first quarter -- or the first part of the cost curve in iodine, as well as in lithium. Regarding our strategy, while is different between these 2 business lines, in iodine, as we indicated in our press release, we are trying to, of course, optimize our margins. There has been an important change in the price level in the last 2 years on, especially in the last year. So right now, we are following very closely what is the reaction of the market and especially the price sensitive to these new price level. We have seen that the market is accepting and is working with this new price level, which is very important for our margins. And, of course, if we want to optimize our margins, we work on the volumes accordingly. We also think that long-term, we are the, as we have proven in the past, we are the company that have the reserves and the technology and the possibilities to support the market growth, the market demand growth and allow the few entrants, from time to time, have come in, or the increased capacity from some of our competitors. And regarding lithium, as I say before, first quarter of this year was extremely weak, but basically because we have some volumes that we will recover during the second, third and fourth quarter, so we don't expect to have that kind of lower volumes in lithium, the rest of the year. On the contrary, we will recover some. But we have seen an increase in price in the range of 8%.

That's very helpful. And my second and final question is on potash. I believe you're expanding your capacity to about 2.4 million tons, and I was wondering the incremental capacity that you're bringing on, what is the specific CapEx for that? And then of the amount that's coming on line, how much of it is going into the merchant potash market? And how much of it is going to go into your nitrates business?

Basically, we don't know exactly how much will be the total new production. We think that will be in a range between 300,000 and 400,000 tons. So arriving to 2.3 million or maybe 2.4 million. But right now, we are more caution and conservative saying that, probably by the end of next year, we will have a 2.3 million ton total capacity. The total investment that we are doing in order to bring this up at the Salar, are in the range of $240 million that will allow us to have this new volumes. And regarding how much of those will go to final -- to be sold at the end of goal, that will depend on how the SPN markets involve. And, of course, I will say that most will be going as a MOP sales.

Okay. And maybe I can just ask one final question, which is, what is the limiting factor to potash expansion at SQM? What is preventing you from going to 3 million, 4 million , 5 million, 6 million tons. Is it permitting issues in Salar, I mean, what's this kind of long-term potash strategy?

You are right, it's a permitting issue, it's regarding the environmental study that we proved when we project that we have some in 2005. What -- we have the permits of the Salar is regarding the amount of brine that we are allowed to pump out, which is related, of course, to the amount that we can produce. That is regarding to -- you calculated that, 3 factors. One is the amount of volume that you take out the Salar, which is the limit that we have; and second, the concentration of this brine; and third, the yield. So, of course, we have a limit and according to an environmental study, if everything behave the way we anticipated, we can increase this limit. We are this year a new stepped increase, and that's why we are increasing in this 300,000 tons, and then I don't remember exactly by heart, but 2 or 3 years, we will have an additional step if everything behave, if our model is a logical model anticipated. So that is the limit, and that's why we are -- we have to work with this framework.

[Operator Instructions] And our next question is from Cesar Perez-Novoa of BTG Pactual.

My question relates to your CapEx guidance for 2013 and 2014. And also updating on your expansions in lithium and iodine, and what capacity levels would you obtain post completion? In addition, what would that mean in terms of mine optimization and cost levels, post completion.

Okay. Regarding the CapEx, as we indicated in the press release in 2013, we have an estimated CapEx of $500 million. And of that, we have an important part this year that is related to maintaining CapEx. We have around $180 million of maintaining CapEx in order to upgrade some of our older operations. And then we have the investment, and the most important part is regarding our increased capacity in potash in the Salar de Atacama. That was the main issue for this year. Regarding the investment plan for next year, we are, of course, working. We have not disclosed that yet, and we expect by the middle of the year or the most during the third quarter, we will comment on the plant for next year. We, on principle, we think the investment plan will be lower than this year.

And in relation to your expansions?

I'm sorry. You have a question also in iodine and lithium?

Yes.

Iodine -- we are finishing the final step in our operation in Nueva Victoria, so we completed the full capacity of 125,000 tons of iodine. And also, we finished all the water supply for an additional expansion of 25,000 tons that we will not do until it's necessary by the market, but we wanted to be ready from a permitting point of view, which we are ready, and also from the water supply, which was the most important thing to do. Regarding lithium, we have a total capacity of lithium carbonate today in place of 48,000 tons, and we have -- we are finishing a possible expansion up to 60,000 tons that we will decide during the year if we'll proceed or not or when we proceed with that.

And in relation to that, if you proceed with those projects, would that actually dilute costs? Do we see an improvement on the cost structure of the company?

In the case of lithium, yes, because you produce more if it's just in the same plant that we will do some de-bottlenecking and addition of some equipment. So, of course, that would imply total lower cost. And regarding iodine, I mean, will be completely new facilities. So we'll be in the same range that we have today. I don't see dilution there.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Fones for any closing remarks.

So thank you all very much for joining us today, and we hope to have you with us for the next conference call. So goodbye, everyone.