Sociedad Química y Minera de Chile S.A. (SQM) Q1 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to the SQM First Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Gerardo Illanes, he's the Vice President of Finance and Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to SQM's First Quarter 2016 Earnings Conference Call. For your information, this 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 speakers are: Patricio de Solminihac, Chief Executive 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 performance, anticipated profitability, revenues, expenses or other financial items, anticipated cost synergies and product or service line growth, together with other statements that are not historical facts, are forward-looking statements, as that term is defined under federal securities law. Any forward-looking statements are estimates reflecting the best judgment of SQM based on currently available information and involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. Risk, uncertainties and factors that could affect the accuracy of such forward-looking statements are identified in the public filings made with the Securities and Exchange Commission. Any forward-looking statement should be considered in light of those factors. I now leave you with our Chief Executive Officer, Patricio de Solminihac, for brief comments before we move to Q&A.

Good morning, and thank you for joining SQM's First Quarter 2016 Earnings Conference Call. Yesterday, we post our first quarter results. We reported net income of $58.5 million, down from the $71.7 million we reported for the first quarter of 2015. Revenues for the first quarter of this year totaled $391.8 million, similar to the first quarter of last year. EBITDA margins for the quarter was approximately 40%, which is lower than the first quarter of 2015. Overall, the main trends we saw during the quarter were lower prices and higher volumes. The higher volumes helped keep revenue stable, but the lower prices put pressures on margin. The exception is our lithium business, where higher prices and higher volume led to higher revenues and margins. I would like to point out that although our gross profit of $114 million for the quarter was lower than expected, we expect that gross profit for the full year 2016 will be better than 2015 gross profit. I will briefly describe that what we are seeing in the different business lines, starting with the fertilizer segment. In specialty plant nutrition, revenues and sales volume were flat compared to the first quarter of 2015, however, the total mix demonstrated the positive results we are obtaining from our strategy of targeting the water soluble fertilizer market, focusing on this market has allowed us to make up for the lower sales volume of specialty field fertilizers, which compete with lower priced commodity fertilizers. In addition, since water soluble fertilizers are more value added products, increasing our sales in this segment helped to support average prices for the business line. In the potassium business, higher sales volume helped to compensate for lower price, however, margin has been impacted. In the first quarter of last year, our sales volume were much lower than normal, due to shipping and production delay. This year, we reported higher volumes despite some shipping delays due to weather-related issues at the port. Volumes should be higher in the coming quarters, and as we have said before, we expected volumes for the full year to be similar to the 2014 volumes. However, the weak pricing will continue to have a negative effect in our margins. We expect uncertainty in pricing to continue at least until negotiations between China and the big product producers are concluded. Lower prices have also had an added impact on our iodine business line. Average prices for the quarter were down by more than 7% compared to the previous quarter, and we believe the downtrend may continue. We continue to focus on regarding market share and we believe that volume for the full year of 2016 will be higher than full year 2015 volumes. In the lithium business line, we have seen a strong demand growth, and we are pleased to report a 52% increase in revenues compared to the first quarter of 2015. Average price for the quarter were up nearly 30% compared to the first quarter of 2015. We have seen price increase in both our spot sales and our contract sales. The majority of our lithium sales are covered by contract that set annual volumes with price adjustments. Our volume for the quarter increased by approximately 25%, and for the full year, we expect to report an increase in sale volumes of close of 20% as we work to satisfy the strong demand in this market. In the industrial chemicals business line. Sales volume were lower than last year's, as this quarter we did not report sales of solar salt. We do expect sales of solar salt to exceed 70,000 tons for the full year of 2016, but we expect to see those sales in the second half of the year. I would also like to comment on the joint venture we announced at the end of the quarter with Lithium America to develop the Caucharí-Olaroz lithium project in Argentina. We recently met with the Argentinian authorities, and they are as excited as we are about this project. Our team has been hard at working on developing this project. I will now open the line for questions.

[Operator Instructions] The first question comes from Ben Isaacson of Scotia Bank.

This is Oliver Rowe sitting in for Ben. I have a couple of questions on lithium. First, can you discuss what's happening to lithium prices worldwide? And how do we bridge the prices that we've heard at over $20,000 to your realized prices? And then secondly, on lithium, as you accelerate your lithium production, you said you're going to increase it by 20% this year. How will that affect your extraction limit? I believe you already had a pace on that, and are you confident and getting an extension on that limit?

Thank you, Ben. First, regarding pricing. Clearly, during the end of last year, there was less supply in China because of, not kind of a lithium coming in to the project, that a delay on Orocobre start up. And also, some less production within China itself. And together with that, an additional demand because of the subsidies that the Chinese government put on their electrical buses. And that made a shortage within China of lithium, and that, of course, affected their spot prices. Clearly, this situation was not -- went all over the world, of course, [ph] and effect, but not in the level that we saw some transaction within China. We are selling some of our product on a spot basis, and we get much higher prices, but we do have contract that we, of course, honor, and we have also increased -- as it was reflected in our average prices, the prices on the contract where we can start increasing the prices. We expect to see higher prices in the next quarters of this year, but also, we see that new production will be coming in, especially from additional production in the ramp up of Orocobre, and also additional production from the 2 mines that are started in Australia. Regarding to your second question. We do have a total amount of lithium that we can produce according to our contract with Corfo, which is close to 1 million tons of lithium carbonate equivalent. Of that, at the end of 2015, we have used 55% of that. So we have still volumes to produce. We think that given the capacity that we have in our plants in Salar del Carmen, which is 48,000 tons, we can take the opportunity now given the demand to produce more, that's what we are doing within the, of course, the limits that we have in our contract with Corfo.

The next question comes from Isabella Simonato of Bank of America.

I have a question, following up on lithium and given the scenario that at some point new projects should come online, what are your expectation in terms of more normalized prices for lithium going forward? I'm looking more towards 2017, 2018. Where do you think prices can stabilize? And also, if you could give us an update on how the arbitration process with Corfo is evolving.

Thank you, Isabella. Regarding your first question. It's very difficult, like in any product, trying to guess what the price in the future will be. What we can say is how we see the demand and the supply, and how that will evolve in the next years. We are seeing that the electrification of cars, which has been something that we had been talking for the last 10 years at least, now really is a reality, in our opinion. And the electrical cars will start growing, even though they are small still, they continue growing and will support an interesting growing of the market for the next 5 to 10 years, in our opinion, in the range of 10%. So that means that we will need new supplies for lithium in the range of 15,000 to 20,000 tons per year more. There are many projects on the pipeline. If you look at the history, of course, trying to bring from junior companies new projects is not easy technologically and also to get the appropriate quality of the product and to get the financing and get the product going. But we're seeing that the actual players will increase their production, and in the timeframe that you are describing, there will be a new supply, enough to support the growth of the industry, and that is our responsibility. And that's why, also why we decided to develop the project in Argentina to complement our production in Chile. So I think that the price in the future, of course, will not be -- the price we are seeing in some spot transactions today, but will be reflecting the marginal cost of the higher cost new [indiscernible] producers. Regarding the second question, the arbitration. The arbitration, continuous process. There is not any important issue to report now. There is in the process of the truth, and we still expect that end of the year, beginning of next year, hopefully, we should have a conclusion of this procedure. We still feel very comfortable of our position.

The next question comes from Juan Tavarez of Citigroup.

Maybe if I can first just follow up on lithium. What are your targets within the lithium segment? Is there anything that we should be thinking about long-term as it comes to relative to your current cash flows? Or what contribution does lithium have on there, or are you thinking about what your market share is long term within the whole industry? Like how we should be thinking about your strategy going forward with this segment? And then second, if maybe you can give some details on the specialty plant nutrient segment that you -- you noted that this quarter, you sold a little bit more on the water soluble fertilizers. How much within this segment is, are water soluble fertilizers in volumes? And also, what's the price gap between those types of fertilizers and let's call it MOP, just to have a sense how we should be thinking if you continue to focus on this segment specifically.

Thank you, Juan. Regarding to your first question. We feel that we are an important player in the lithium industry. We have been in this business for more than 20 years. We have developed an important know-how, not only technologically from -- to produce, first from brine. Second, in the chemical production, in order to be able to produce the qualities of the different customer's needs and the different application. So we have a very important know-how from a production and from the technical point of view. Also, we have a very important know-how commercially. We know all the industry. We know all the customer, they know us, and we have been developing long-term relation with most of them. So clearly, we see lithium as a long-term business for us, in which we want to grow and want to continue to support the growth and the needs for volumes in the industry. And that's why we expect that we will resolve our difference with Corfo. We expect that will be after that, to extend the contract, to keep the contract, that is our objective. And we hope that we will do that, I'm sure it's -- the benefits for all the parties to do that. Simultaneously, we are going to complement the base production that we have in Chile, and hopefully increasing the production in Chile, also with increasing production in our second project in Argentina. And given the growth that I explained answering this question to Ben before, we -- and Isabella, we see that slowly we'll be looking afterward for a third location. This is our growth. I cannot tell you now on a specific target because we also want to grow in our other business lines. This is our objective, of course, in the other business lines. Regarding to your question in the SPN. Our sales in SPN, 2/3 more or less today, correspond to water soluble products from a volume wise. That has been increasing in the last years. We will continue to develop. We -- this is a market that continues to grow because of the need of this fertilizer that are free of chlorine, that are soluble and that can be used in this modern agriculture technique like fertigation and others. So we want to extend the uses of this product geographically as well as to other crops that are not using it today. And this is our target. We want to continue to supply, of course, the field fertilizers. Today, given that the price drop in potassium chloride or the commodity fertilizer has been high, our price in our [indiscernible] have not moved in the same level. So, of course, the relation -- the price relation between our fertilizers and the commodity fertilizers have increased. They, of course, are affected, but affected much, much less. We are monitoring that very closely, and we have to see what is the future of the price of potash. And as I say in my previous remarks, an important indication will be what happen in the contract with the Chinese, which should be, according to some major players in the next month or so.

Next question comes from Andrew McCarthy of Banchile Inversiones.

First, you just follow up on the specialty plant nutrition division. Just in terms of what you're thinking, maybe you could help us understand for what full year volumes might be, perhaps in comparison with 2015 volumes, especially considering, sort of the greater focus on the water-soluble business line, which seems to be sort of, maybe lower volume but higher-margin. And also, just in terms of -- on the pricing, obviously, you saw sort of 3x versus the spot price, the potash spot price. Would you anticipate sort of being able to maintain sort of differential in existing markets? That's my first question. And then just secondly, on iodine. Maybe if you could just give an update on what you're seeing there in terms of whether prices should be perhaps falling even further given where they are now, slightly below $25 a kilo. And if you have an idea as to timing on when we might be reaching the sort of the trough in that segment. That would be great.

Thank you very much, Andrew. First, regarding specialty plant nutrition. Even though we are moving to the small value added products, we expect the total volumes in this segment, the year 2016 to be higher than volumes that we saw the year before, 2015, in the range of 5%, which is good and it reflects the work that we have done, doing all around the world with our NPK facilities and our closeness to the customers. Regarding price, you are right. We have seen in the history, different price ratios between our products and net potassium chloride today it's over 3. And we have seen in the 2.6 level, 2.6, but up to now and what we saw last year, we were able to support that difference, and that prices of our product, even though they dropped some, they dropped very little, if you compare with the amount that potassium chloride diminished. The benefit that the farmers get from this justifies the difference and make any changes not difficult, but we are following that very closely as I indicated before. Regarding to your second question, in iodine. Iodine, we have stressed in all our communications that our strategy is to get our market share back. We are in the range of 27% market share. Our market share objective is in the range of 30%. We will take some time to get there, but we focus on to continue diminishing the cost. We have been very successful, especially with all the restructuring that we did last year, [indiscernible] together with Nueva Victoria arrangements. And those lower prices, even though are not reflected accounting yet because of the inventories that will be, start to be reflected in the near future. And we continue to work on the cost. And our strategy will be that we'll have more volume of iron this year compared to previously -- year. It's difficult to say if the price will continue to be lower or not. Our expectation is that there is still some space to go down, but we have to see that during the year.

This would be the last question. And that concludes our question-and-answer session. I would now like to turn the conference back over to Gerardo Illanes for any closing remarks.

Thank you, all, very much for joining us today. And we hope to have you with us in the next conference call. Goodbye, everyone.

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