Sociedad Química y Minera de Chile S.A. (SQM) Q2 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the SQM Second Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded.I would now like to turn the conference over to Gerardo Illanes, CFO. Please go ahead.

Thank you. Good morning, everyone, and welcome to SQM's second 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. A presentation with a summary of the results has been uploaded at our website and it 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 profitability, revenues, expenses, 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. 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 now leave you with our Chief Executive Officer, Ricardo Ramos, for brief comments before we move to Q&A.

Thank you, and good morning for joining us today in the second quarter 2019 earnings conference call. I will begin with some brief comments on our second quarter results before opening the line up for questions. You can follow along with the webcast presentation.Turning to page three of the webcast presentation, we will see a brief overview of our second quarter results. Our revenue for the six months ended June 30, 2019, reached almost $500 million, and our net income reached just over $70 million, lower than the $134 million reported during the same period last year. We saw a lower adjusted EBITDA margin this quarter when compared to the previous quarter, but it’s still above 33%.Turning to the next page, you can see that the main driver of these lower results was primarily lower contribution to gross profit from lithium because of lower average prices, although partially offset by higher sales volumes. Our results were also impacted by potassium chloride volumes, and the lack of solar salts sales during the second quarter. Iodine prices were strong during the second quarter, and we did see a positive change in the contribution to the Company’s gross profit from this business line. SQM is a dynamic and diverse company, which is subject to cycles. We have seen lithium, potassium, iodine and SPN leading the Company’s gross profit.In the lithium business line, the realized average prices we reported in the second quarter were lower than the ones reported in the first quarter, mainly because we have been selling under short term contracts, which expose us more to the ups and downs of the market. Over the past few months, changes in timing and amount of the subsidies, given that the Chinese government to the electric vehicle industry had an impact on the delivery of the demand for electric vehicles in the most important market and consequently on the demand for lithium products. These changes may have a total impact on this year’s demand of 3,000 to 4,000 metric tons, but should not have a lasting effect on the demand for electric vehicles market as we continue to see a strong commitment from the Chinese government and other relevant players in China and abroad to the electrification of the vehicle industry. This can be seen in the sign that demand for electric vehicles in China could grow about 33% this year, when we compare to last year. Slight changes in the demand are the direct impact in our realized prices and we continue to have an impact positive or negative.Despite the current noise we are seeing in the market, our commitment to the lithium industry is stronger than ever. We are increasing our production in the second half this year as we prepare to increase our sales volumes to 65,000 metric tons next year. We’ll keep working on our expansion plan to reach 120,000 metric tons capacity by the second half of 2021. Beyond that our plan is to continue to expand capacity every two years in incremental models of 40,000 metric tons each expansion. Therefore, our next step will be a total capacity of 160,000 metric tons by the end of the year 2023. Since we are already working on the engineering of this project, all this will lead us first to recuperate the market share we lost over the past years and maintain a strong market share in the growing market.It is too early to forecast what may happen in 2020, but there are few things that I think are relevant to discuss at this stage. We have seen higher prices in the iodine business line and believe this positive trend could continue in coming months and quarters. The iodine market is a favorable market with a steady growth rate. And SQM has access to one of the best iodine resources in the world.The SPN market is expected to continue with its healthy growth. The environmental restrictions that we have on the brine extraction in the Salar de Atacama is being released and the resource and our sales volumes of potassium chloride are expected to close to 600,000 metric tons this year that is approximately 20% more than previously anticipated, and we expect to be close to 1 million tons next year, 2020.We believe in the future of the solar salt market. And we will be supplying a very large concentrated solar power plant project in the Middle East with delivery starting in 2020, which will require over 400,000 metric tons. As you can see, SQM continues to take advantage of opportunities across all business lines.I will close my reviewing the CapEx plan that we have announced as of today. On page six of the presentation, the Board has approved a CapEx plan of $360,000 million for 2019. As you can see, this is related to our lithium expansion plans in Chile, both carbonate and hydroxide. We continue to work with Kidman and with farmers on the Mount Holland lithium project in Western Australia, and we look forward to completing the feasibility steady beginning of 2020. At that point, we will have more details surrounding the CapEx, cost and timing of the project. Furthermore, we have previously announced that we are working on the environmental permits necessary to increase iodine capacity in the near future, and we are increasing nitrates to meet the growing demand in industrial and fertilizer nitrate space.I will now open the lines up for questions.

[Operator Instructions] The first question will come from Alex Falcao of HSBC.

Hi. Good afternoon. Thanks for taking my question. My question is regarding prices for lithium, specifically on the regional breakdown. So, if you go into the Chilean data, basically it says that you sold a lot more to China than you have previously done in previous quarters. But, the price is extremely lower, talking about between $6,000 and $7,000. Can you comment on why are you selling lithium so cheap, and if that's the trend that you should continue to see in other quarters? Thank you.

You know that we are significant global player in the lithium industry. Therefore, we need to sell in all markets, including China, which is a key market in electric vehicle and batteries. We sell to different customers in China with different grades, different industries, different volumes. And SPN, lithium production and specifications of course are aligned with this market requirement. China is going to be a part of our business for sure, in the future. We don't expect to get out of the market, keeping in mind that we expect to be at 65,000 metric tons next year and continue to grow with the market; it means a very strong growth by moving to the 120,000 metric tons expansion, to the 160,000 that has been under engineering today, means we need to sell everywhere.China, I will not comment about pricing now, but I do not agree with you about the pricing in China in the $6,000 per metric tons. We’re selling on marketing conditions in China today and we're selling in China according to the needs of the different industries in China.

The next question will come from Chris Terry of Deutsche Bank.

The first one just relates to the pricing strategy. Just wondering whether you could remind us how far in advance, how many months forward, you have color over what you're selling the material at, and whether you can talk a little bit about the fourth quarter. Previously, you’d spoken about the second half being 11,000 to 12,000, as you talked about 3Q specifically. I just wondered whether there is any comments on the rest of the year beyond 3Q?

I explained before for the third quarter, we are almost closing all the pricing today in the third quarter, that's why we have an outlook about third quarter. But -- that's why we have a very good idea about third quarter. But, we're now, as we speak, currently discussing prices for the fourth quarter. And as you know, price is extremely sensitive to slight changes in the short term demand growth. We've seen that in the next two months, we will have a better understanding about a very good outlook over the fourth quarter. Now, we think that it's reasonable to have the outlook of the third quarter out there that is $10,000 per metric tons I've already shared with you, close to.

And just in terms of the China sales, I know you don't want to comment against those -- that previous -- the numbers before. But, can you talk about the mechanism to which you saw into China or is it linked at all to the China spot price, is at a separate price that’s more similar to outside China pricing? Just wondering whether you could talk through how the discussions work within that region? Thank you.

Hi, Chris. Let me comment that China is a market like every single market where you have different customers, and as I explained you before, different customers, we have different industries, different grades. And we sell to every single important customer in China. And it’s the same kind of discussion we -- you have with different customers in Korea or Japan and everywhere. This is no doubt very unique market out there in China, it’s a big market, it’s an important market, because as you may know, an important growth in the electric vehicles is coming from China. That’s why the China producer, budget producers, cathode [ph] producers are very important and will be very important in the future. But, we don’t see a big difference in the negotiation process in the relation with these big customers that we have in China as compared to other countries.

Okay. Thank you. And just the last one for me, just on the public developments in solar salts. Can you talk about how that extra 400,000 tons, should we think about that split evenly over 2020, 2021 and 2022? And what sort of margins should we think about just in terms of the profitability of that division? Is it similar to other tons you saw in that division or is it a separate way of thinking about the profitability? Thank you.

Hi, Chris. This is Gerardo Illanes answering your question. Of course, the final delivery still will depend on production and the final discussions with the customer, when they actually need the product. But, it’s reasonable to expect something in the neighborhood of 150 next year, 250 the next one, and 50,000 [ph] the year 2022. That’s more or less how these contracts should be delivered.Regarding prices and margins, it should be similar than what we have had in previous contracts. So, there should not be a change or a significant change there.

Okay, great. Thank you very much. That’s all for me.

The next question will come from Andrew McCarthy of Citi.

Hi. Good afternoon, everyone. Thanks very much for taking my questions. My first one was, just following up on the comment on the impact of 3,000 to 4,000 tons in lithium this year. I just wanted to try and understand, there you’re referring to your expected sales for 2019, i.e. are you therefore saying rather than sort of 45 to 50 for this year, you may be seeing sort of 3,000 to 4,000 less than that now?And then, my other question was regarding the iodine business. You mentioned tight market conditions. But at the same time, you talked about in the press release that you’re seeing similar to slightly lower levels of sales volumes this year. I just wanted to try and understand why that was the case, given the prices seem to be moving higher, but you’re saying you’re going to sell less this year. If you can provide some color to help us understand that would be great. Thanks very much.

Okay. Thanks Andrew. I want to be very clear about 3,000, 4,000 metric tons. It’s our estimate about the reduction in the total demand of lithium in equivalent -- carbonate equivalent in China. It’s not itself. [Ph] We maintain probably -- and slight increasing our forecast volume sales for this year. From the beginning we said between 45,000 to 50,000 metric tons this year. I think, it’s going to be higher 47,000; that's what I expect today for this year as sales. But this reduction in China is not affecting us in volumes, our total global volumes we think, but it is affecting the price environment. The main reason to mention this 3,000 to 4,000 metric tons is that -- we think is the 13-day conditions and equilibrium between supply and demand and of course affecting the price environment worldwide. This is regarding the lithium question.Regarding the iodine, if you review our sales, last year, our sales volumes grew 5%, I mean in 2018 as compared to 2017, reaching our record year in volume sales. If you compare 2017 and 2018, it’s very important that it’s aligned -- we expect that if you consider both years, the growth we expect this year and the growth we expect -- we had last year will be higher than 2.5% average. That is at the same level of the market condition, means in two years, we are growing according market.

Thanks very much.

The next question will come from Ben Isaacson of Scotiabank.

Hi. Thank you for taking my questions, three of them. First one is on the SPN business. Potash prices look like they're going to be a little bit weaker over the next few quarters. Can you talk about how that will impact SPN pricing and margins?

Hello, Ben.

Hi, Ricardo.

Hi. We expect [indiscernible] when are you going to visit? I hope...

I’ll be down in a few months.

It’s going to be great. Of course, both as you saw, it’s the raw material in the production [Technical Difficulty] for our competitors, that's for sure. And different pricing in the potash is affecting the cost position and of course could affect in some way the potassium nitrate. If you’re review in the past, because we have had a lot of ups and downs in the potash in the last, I don’t know, 10 years, of course in some way affect but it’s not in the same effect of the potash price effect. It means when the potash price increases 15%, we don't expect to increase our potassium nitrate 15%. The same example, when the price goes down 15%, we don't expect to decrease our pricing 15% or the market price decrease 15%. It means our potassium nitrate pricing is more stable from potash pricing. But of course, having a high potash price is better for us; that's for sure. Because not only it affects potassium nitrate, it affects our potash industry. As you know, we are selling today -- we expect to sell 600,000 metrics this year and expect to sell close to 1 million tons next year [Technical Difficulty] sold like 1.3 million tons and 1.5 tons of potash. That's why I expect to be 1 million tons probably 2020 and come back to 1.3 million tons. And it’s important market for me, even though I’m very small in the potash industry. But, for me it’s important, for SQM it’s important and for potassium nitrate it’s important too. It’s a good news having the potash going up, yes. It’s a very good news in terms of the potassium nitrate, no, but it’s okay. [Ph]

Perfect. Thank you. My second question on lithium costs. If we take out royalties, it looks like you've got your costs down quite nicely in Q2 over Q1. My estimate is roughly $4,000 a ton, excluding the royalties. Can you talk about whether that's as low as you expect them to go or is there more room for improvement?

I think, Ben, it’s some mistake in the numbers. If you subtract the royalty to quarter that keep in mind that we put a table of the royalty in our web page, if you want to review it in one press release in the past, it's available for everyone. I think that our cost in some ways similar to the cost of the first quarter, maybe a slightly higher, as far as cost without considering royalties and the reasons that we're selling because the average cost of inventory, we’re selling product from the first quarter, and during the first quarter -- within the first quarter, our cost was slightly higher because it was the [indiscernible] of the new facility and we have some additional annexure. In the future, now we have a very good news from the lithium plant. I'm more than happy today to inform you that the plant is producing at 200 tons per day, means close to the 70,000 metrics tons. The only reason why this year we expect is close to 60,000 metric tons is because we're changing some equipment, improving some areas of supply. That's why we have to maintain on time in order to do it. But the total production capacity, we already reached the 70,000 and more than sure that next year, we will produce something more than 70,000. And the most important thing is that all the production will be according to commercial requirements in terms of spec. That's why the technical spec will be according to commercial need, and we will produce more than 60,000. And the other good news is that of course the total cost I expect will be lower than today because we will be producing more lithium in the same facility producing every single day. That's going to be good. Anyway, let me remind you that the figure with the -- Gerardo, if you can explain where we can find the lease payments to Corfo?

Yes. Remember that the table that we use to calculate the lease payments to Corfo for lithium carbonate is different than the table of lithium hydroxide. And unfortunately, we don't disclose the breakdown between lithium carbonate and lithium hydroxide. So, for you, it's somewhat different -- difficult to get to the precise number. But, as Ricardo was mentioning, the trend that we're seeing in the cost and what we expect going forward.

Very helpful. A very last question, I'm not sure if you want to answer it. You talked about $10,000 roughly in guidance for Q3. Can you talk about how -- and you talked to also that you're already focused on Q4. So, for July and August, how did those dollar values or those prices trend? And maybe you probably have insight into September as well. Really it's breaking that dollars down on a on a monthly basis.

Yes, I understand. But, we don't break -- we don’t give the numbers per month. And I think the best reasonable way to do it is as an average per quarter. There is a different customer and different months, different industry and so on. And I think, the average per quarter is a better number. We don't disclose per month. And I repeat, we expect at an average pricing for the quarter close to $10,000 per ton.

That’s very helpful. Thanks so much, guys.

The next question will come from César Pérez-Novoa of BTG Pactual. César Pérez-Novoa: Good morning, gentlemen. Lithium tonnage in 2020 is expected to grow between 30% or 40%. What demand growth is embedded in that guidance, and is that figure based on hard contracts or how your business -- on your view on how your business should roll in 2020? And if I may have a second question as well and relates to China. Can you please state as a proportion of sales, how much was sold to that specific country in the second quarter, whatever form you may want to express that, in volume or revenue? Thank you.

About your questions on lithium, the first question was -- sorry…

How to get to 65…

Okay. You’re right. I mean, you’re right that we expect a growth for next year higher than the market growth. That’s for sure. The reason behind that is that if you review our volume sales in the last four years including 2019, SQM volume was quite favorable at 47,000, 48,000 per metric ton. It means, of course with the market growing and SQM volume sales stable, the reason behind that was the production restriction. And what we are doing next year is to, in some way, recover our market share participation. And in order to do so, we move to the 65,000 metric tons in order to have this market share participation that I think is a reasonable market -- a strong and a reasonable market share for SQM. And we expect that to grow maybe just a little bit higher than the market, maybe, in the 2021. So, that’s why we are moving to a 120, 150 and probably next step will be 200,000 metric tons. We are working now, as we speak, in the program and our commercial three-year program to allocate 65,000 metric tons. And we know how to do it, we have a clear plan in order to do it and we will execute the plan next year. And the main reason to do it now, next year is, because we’re going to have all the production, we’re going to produced around 70,000 metric tons, that’s very important. Followed then, according to market, technical spec -- specification that will allow us to have the first inventories, increase our sales, and to have a logistic and inventories increased there to sale the 65,000 metrics tons next year. This is the first question.And your second question is the breakdown of our total volume sales per country. We don’t do that -- we don’t have the numbers in front of me anyway of breakdown. Let me check it internally, first if we’re going to release this information. And if we do so, we will publish this information publicly in the 6-K. Let me review it internally with our [Technical Difficulty] we’re going to do so. But anyway, I don’t have it in front of me. César Pérez-Novoa: All right, all right, fair enough. Thank you, Ricardo.

The next question will come from Joel Jackson of BMO.

Hi. Good morning, everyone. I have three questions. I’ll ask one at a time, please. On the brine extraction, so I think you have the right to extract as high as 1,500 liters a second. Because of a couple of reasons the last year or two, that’s gone down to I think a 1,000 or 1,100. You’re now suggesting that you’re getting more relief on that. So, what would you expect your brine extraction to be next year to get to 1 million tons for merchant potash sales volume? And then, what do you expect that to increase beyond that? Thank you.

As I explained during the conference at the beginning, we are now moving in the right direction. It means that total volumes will be 600,000 metric tons this year that is more than originally anticipated. We are working as we’re speaking the technical plans for next year. It’s not so easy because we have solutions, we took the solutions on pond, and we need to wait until we have the final thought. But, my estimate today that could change that we can reach something closer to 1 million tons next year in terms of potash and probably something more in 2021. I expect during the next conference call to have a very accurate number about that and we will release these numbers. What we are having now is going to back to the original approved extraction that we had the approval before the reduction that we had for couple years. That’s exactly what we are doing. It didn’t affect the possibility to produce lithium but it affected our possibility to produce potash and now we are recovering the potash production.

Okay. Back on lithium, I know that the China lithium question has been asked several times. I'd like to ask a little bit different angle, which is -- it does seem like prices are coming really low in China, some of the pricing you sold. Is this because you are having issue, means back for some of your products, and so you have to sell it some of these lower quality opportunities or you are specifying your productions by you're good quality product, but this is where the incremental demand is at these lower priced customers in China?

Joel, as I explained before, we sell to different customers, different specifications, different industries, and all of them, they have different requirements. But anyway, when I said that during third quarter, and I want to be very clear about that, when we said that during third quarter we are expected to be $10,000 per ton, we expect that all the products we sell during the quarter will be according customary specification. We are not selling out of spec product; we are selling different products for different needs of different markets around the world.

Okay. And finally, on hydroxide, you’re looking to more than double hydroxide expansion again here by 2021. Right now, if I calculate rightly, I mean, hydroxide premiums, you are not really making any margin really to upgrade carbonate [ph] hydroxide. You are not going to have the Australian JV for some years. Is this something you have to do right now to meet customer needs? Because I think ideally maybe you’d want to have your hydroxide production coming out of Australia down the road.

You're right in terms that the equilibrium of the needs from the hydroxide and the carbonate is changing, the type of batteries they are going to produce in the near future, plus it's changing because most of the new production from Australia is trying to target hydroxide market. We have this capacity to produce lithium carbonate and some production of hydroxide. And we maintain and we will maintain this capacity in order to have full flexibility considering that we are going to be a full player with that the strong market share and we expect to supply all the needs of our customers. That's why having this capacity for us is very important as a strategy, but, of course we have the ability and the flexibility to sell more lithium hydroxide or to translate from lithium hydroxide to lithium hydroxide carbonate depending what is the real situation of our main customers.

The next question will come from Isabella Simonato of Bank of America.

My questions are lithium as well. First of all, looking more to short-term prices. We saw already a pretty big decline in July prices versus what happened in Q3. And considering your guidance of $10,000, it might seem a little bit optimistic considering where we are seeing the market price. So, is it possible for you to give us a little bit more color how prices should evolve throughout Q3 and Q4? And if possible, also, what do you expect in terms of mix between carbonate and hydroxide? That would be my first question. And the second one, longer term, considering that most of the growth of lithium demand should come from China and the grade, and as we saw this quarter, right, the mix seems to be a little bit worse. It's fair to assume that looking at prices in China should be in the medium term the benchmark to your prices?

First, as I mentioned you before, we are not disclosing today because we don't have the understanding or estimate of the [Technical Difficulty], we’re starting negotiation prices with some of the customers, some of them about third quarter, as I already mentioned to you that it is the average pricing. You have many publications of pricing of people publishing in internet different pricing in China. I don't know where they get it. They say prices -- for example, some publications say pricing in China is $6,000 per metric. And we are not selling at $6,000 per metric ton today in China. I don't know where the numbers are coming from. And when I say that -- the average is the average, and it’s what we expect for this quarter.You are right, the China is important in the lithium industry in the future, it’s important today and will be important in the future but it’s not the only market. Keep in mind, the electric vehicle growth is something very important in Europe, in India, in Southeast Asia, in the United States, going to be very important in next two years. That's why China, even though is, if I am not wrong, close 20% to 25% of the market of the electric -- of the cars today, overall cars, very important, it’s not the only market. And that's why you need to consider a full global average in the market. And that's why China is not the benchmark. It’s part of the average of the world. And I don't foresee that China quality will be lower or China production will be with different quality production than other countries in the world. That's why I don't foresee in the long term pricing in China different than pricing all around the world. It means every single customer in the world will produce high-quality products and they will require high-quality lithium and they will produce high-quality cars, and it means that they will buy at the same price everywhere. It means that price will be quite stable around the world in the long-term. China is going to be part of the game. But again, we expect and repeat our outlook of the third quarter, and we want to have better information to have an outlook of the fourth quarter next year about lithium prices.

That's clear. Just one follow-up. I mean, despite the selloff in prices, you’re still quite profitable on lithium. Is there any price label you would stop expanding capacity?

Definitely not. We -- I want to be very clear that we are the lowest cost producer in the world. We will continue to be the lowest cost producer in the world. I will expand and my capacity will be raised 100% according commercial need at the end of 2021, 120,000 metric tons, and we are moving as fast as we can in order to have the 160,000 metric tons at the end of the year 2023. That’s for sure, we will be there, and we’ll have a lot of profits doing so, because it’s a very good business for us and we have very low cost.

That’s very clear. Thank you.

This 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. Before finishing the call today, let me remind you that we are hosting our Investor Day in New York, on September 10th. Details are on our website, in case you want to register. You can go there and follow the instructions there. Thank you all very much for joining us today. And we hope to see you on September 10th or on our next conference call. Goodbye.

Thank you. The conference has now concluded. Thanks for attending today’s presentation. You may now disconnect your lines. Have a great day.