Good day, everyone, and welcome to the SQM Third Quarter 2019 Earnings Conference Call. [Operator Instructions]. Please also note today's event is being recorded.At this time, I'd like to turn the conference call over to Mr. Gerardo Illanes. Sir, please go ahead.

Thank you. Good morning, everyone, and welcome to SQM's Third Quarter 2019 Earnings Conference Call. For your information, this call -- 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 have been uploaded on 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 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. 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, Gerardo. Good morning, and thank you for joining our third quarter 2019 earnings conference call. I will begin with some brief comments on our third quarter results before opening the lines for questions. You can follow along with the webcast presentation.Turning to Page 3 of the presentation. You will see a brief overview of our third quarter results. Our revenue for the nine months ended September 30, 2018, reached almost $1.5 billion, and our net income reached just over $211 million, lower than the $331 million reported during the same period last year.We reported 33% adjusted EBITDA margin this quarter, slightly lower when compared to previous quarters. On the next page, you can see that the main drivers of these lower results were primarily lower margins of the SPN business lines, lower lithium prices and the lack of solar source during the third quarter. These results were partially offset by higher average prices in iodine business line. In the lithium business line, the reported average prices in the third quarter were lower than those seen in the first half of the year. This was mainly due to the change in Chinese government subsidies to electric vehicle market and high levels of inventories combined with lower electric vehicle sales volumes, which resulted in delayed demand growth in lithium market. We also continue to see the impact of new supply, which has entered the market during this year.We are negotiating our fourth quarter sales of lithium. Therefore, I cannot comment on our price expectation for the next quarter. However, it is reasonable to expect our fourth quarter average prices to be lower. Our long-term outlook on lithium market remains positive as we advance on our capacity expansion in Chile, which is on track to reach the 120,000 metric tons by…

[Operator Instructions]. Our first question today comes from Joel Jackson from BMO Capital Markets.

I have a few questions. I'll ask them one by one. Ricardo, how do you see lithium inventory right now? Do you think that we're past the point of inventory accumulation? Or do you think that we're going to have inventory in lithium build across 2020? And what is SQM's role in limiting inventory accumulation?

Considering the uncertainty -- First, Joel, I think that considering the uncertainty of the lithium prices in the medium term, in the short term, I don't foresee customers increasing their inventory. I think that they will try to reduce their inventory. That's what we expect they are doing today, and they will do it in the -- during next year. That's why I don't think it's going to be an issue that they will try to accumulate inventory. I think that the issue will be that they will try to keep low inventory in terms of lithium.It's different in terms of the batteries because it's a different industry. When you produce batteries, you have to produce and start having an inventory of batteries in order to supply your customers. But that's a different picture. But about lithium itself, I don't foresee any accumulation of inventory for the customers.

Okay. So we've seen, I think, low-grade carbon into China sell for something like $5.50 per kilo. And we've seen prices in Japan be maybe below $9,000 a ton. So where do you think is the marginal price right now, the floor price? And do you see some of the higher cost producers in Australia and China in terms of the spodumene supply and the conversion supply being rational yet? Or do you think we still need to see some rational behavior?

First, I don't want to comment about the pricing, as I mentioned before. Now we're in the middle of the negotiation of the pricing in the fourth quarter, and thus, starting the negotiation of pricing for next year. Of course, price in fourth quarter will be lower than third quarter. Of course, average prices next year will be lower than this year. I think I always believe that everyone is rational in terms of what they are doing. I don't know what they are going to do, the other competitors in Australia. I don't know what is going to be their reaction. Some of their reactions or the decisions, it's a public knowledge. But at the end, I think that everyone is rational, everyone has their own forecast, their own business model, and they try to follow their business model, their rationale. I don't foresee a crazy industry. I think that everyone is doing what they think is the right thing to do.

Okay. And finally, in potassium nitrate, you talk about demand growth being 5% this year and then moving back to kind of a mid-single-digit or low to mid-single-digit growth next year as usual. What is the inflection point that's going to happen in the next few months that's going to change from this low-growth scenario to now back to normal growth?

I think that there was a very unique situation during 2019, especially at the beginning of the year that affected the demand for this year. I think that the weather condition is better now. We have the first signal for the next season in Europe that is coming better in terms of volumes. That's why I think it's going to be better. That's why we put in our press release that we expect to be better. The commercial situation in the Europe, the uncertainty of the Brexit and the uncertainty between -- the trade war between the United States and China and so on, I think marketing fertilizers moving in the normal way now in the specialty fertilizer business. Also we -- our main competitor in Israel, they recovered some market share because they recovered production capacity for one time during 2018. That's not going to happen. We expect again in 2020. That's why if you put everything together, we think it's reasonable. Now we expect having a market in the range of 4% to 5% growth, and we can recover a growth trend in SQM volumes, probably better pricing.

So 4% to 5% is more your own volume, not the overall market, correct?

No, I think that the total SPN market, the whole market would be between 4% to 5%. And we are working in our business plan for 2020. We don't have yet what is going to be our target for 2020, but the whole market, I think, is going to be between 4% to 5%.

Our next question comes from Roberto Browne from Morgan Stanley.

I have three very straightforward questions today. The first one on lithium. We saw in the customs data that the hydroxide contracts are still way above the levels we see in the Chinese market. And as you gain exposure to China, should we expect those prices to converge to the Chinese price levels? And there, we also see a hydroxide and carbonate at a more similar price levels. Is this something you expect to happen to your contracts? And is there a level that would make you change your decision on the investment in Australia? And I can go in with the indirect questions later on.

Roberto, first, it's important to consider in lithium -- lithium is a wide market. We have different products, different qualities, different markets, different users. That's reasonable to expect that in the future, you will have different pricing depending the market conditions, depending the use of the product, depending the quality of the product. But of course, however, next year, average prices will be lower than this year. That's definitely.And the relation between hydroxide and lithium carbonate is not so clear yet. I think we're still on the move. I don't have a clear -- we don't have a clear final picture about what's going to be the pricing of both products, the relative pricing of both products. But of course, China is very important. And we are in China. We will continue to be in China. China is the most important market in the lithium business in the electric cars. Electric vehicles market will be -- China by far the most important market in the future. That's why we're going to be there anyway. Of course, pricing in China, even it is high quality or low quality are lower than other markets. And we know that. But there's no way not to be in China if you're a global player. We want to be. We are going to be 18% of the market share next year. And in order to do so, we need to be there, and we need to be everywhere. It's difficult to have a long term -- it means -- that's the most important issue.Second, let me take a review. And about the -- our project in Australia, it's moving ahead. It's a long-term project. We have a long-term partner in Australia. As I expressed in our meeting in New York in September, we're really positive and optimistic about the future of this industry. We foresee a very good environment in the future. That's why our project is one of the best spodumene projects in Australia. We are sure about that. We will continue with the project. It's a very good one.

And just two other very straightforward questions. On iodine, how further do you think prices can go up? And if you can give us an update on the timing of the expansions. And then on solar salts, when you think the Dubai volumes will start hitting results next year?

Okay. On the pricing of iodine, definitely, price of iodine next year will be high as an average as compared to this year. I think pricing in iodine will be probably as compared to fourth quarter this year a couple of dollars higher next year. It's difficult to know now. It's going to be an equilibrium between supply and demand. Anyway, we are producing -- in next year, my forecast of production of iodine is slightly higher than this year in terms of production for next year. And my capacity increase -- our capacity increase, the first step of the capacity increase, we will have more iodine and important volume, I think, second half 2021. But 2020 is going to be better in terms of production because we had some issues of production during 2019 that we do not expect to have next year. But it's difficult to say what is going to be the equilibrium price. At the end, it's supply and demand equilibrium. We don't have a clear picture now. The second question was -- let me check it.

About Dubai...

Dubai. Gerardo, you have the details about that.

Yes, Roberto, we expect to start delivering across this project in the Middle East in May. So from a reporting point of view, the second quarter should have the first impact of this higher bond and then more heavily reflected on the third and fourth quarter and then going forward to the next year and the year after next [indiscernible]. For next year, we're expecting somewhere in the neighborhood of 150,000 tons of solar salts during the whole year.

Our next question comes from Ben Isaacson from Scotiabank.

I'm going to try not to ask any lithium questions. My first question is on iodine. And I remember several years ago when the price of iodine was quite high, there were a lot of people looking at bringing on capacity in the $32, $33, $34 cash cost range. Is there a risk that if prices go any higher, we will start to see some demand disruption and we'll start to see some new capacity wanting to come on?

It's a very good question. You were right. It means that pricing -- iodine has many different applications, as you know. And of course, all of them has their own, what we can call, price elasticity. I don't think there's a magic price. So magic number, we can say at that price, we'll have destruction of demand. Every single variation of price you have, some price elasticities -- some price elasticities are in the short term, some price elasticity in the medium term. That's why it's very difficult to have an outlook about that. But at the end, it's important. Means the price has some effect in demand. Yes. It's a magic price where, at this price, you have demand distraction, I don't think. So you have some variation of the total growth. We -- as a company, we expect and we want to support, and we encourage demand of iodine close to 3% to 4% per year. That's what we think, 3.3%, 3% is a very reasonable target. But price is one element of the demand growth, but more important than the demand -- than the price, is the -- it depends on the world economy. Means if you consider all the applications of iodine, the growth of the iodine demand depends on the growth of the world economy. If the economy is going in the right direction, you will have a strong iodine growth. That element is more important than the short term or some pricing.About supply. Yes, it's difficult to say if you are going to have additional -- of course, better pricing means more potential, more competitors. That's real. It means increasing their production on new projects. Something that will happen. I don't think again there is a magic number. That's where newcomers will go to the market at $30-something. It depends on different projects. It depends in own expectations of the different projects. We feel comfortable what we are doing today at the today price environment and what we expect for next year. We're comfortable of both scenario -- both objectives. First, having a market growing at close to 3% that I think is very important to keep it and maintain in the long term. And second, SQM maintaining its market share. I think both objectives are the ones that we're looking forward in the short term, in the medium term. And of course, demand and supply elasticity, world growth of the economy, both are very important. Plus, the entrance or capacity increase of competitors also is important. But anyway, if you consider that we are keeping our market share, and our market share is lower than 40%, as you know, means that someone else has to supply the other 60% growth of the market. That's why having a strong market growth close to 3% solves a lot of situations because you have a space for new producers, additional capacity and space for SQM to maintain its market share.

That was helpful. My second question is you guys are going to produce or -- and sell roughly 500,000 to 600,000 tons of potash, and your realized price has been very high this year. And my guess is that because a significant portion has been going to SOP rather than MOP. So as you go to 1 million tons in 2020, should we expect the -- your realized price to decline quite rapidly as you sell more into the MOP market versus the SOP market?

Yes. Not exactly. I don't think that -- I don't have it in front of me the number of SOP. But SOP has not been so important this year in terms of volumes. You are right that because our volumes was low this year, lower than the previous year, we focused our sales in some markets where we have some logistic advantage. That's why we have better price return, better price margins coming from those markets where we have some logistic advantage.And SOP, we have some trading. Most of it is very small trading activity where our production is very small now. We don't expect to increase a lot of our SOP production. Mainly MOP is what we are doing today. But again, next year, we expect to have significant growth in terms of volumes of MOP sales. And of course, when you increase your volumes, you go to a different growth market around the world. And in order to do so, probably our logistic advantage, we have some logistic advantage in Brazil, in Chile, in some South American countries, we need to go to other markets where the returns are going to be lower than the today margins. If you consider pricing of MOP at today pricing, I don't think that the average margin will be probably $10 lower than this year, but no more than that.

My last question is on the social unrest that we read about and seen in Chile. Can you give some details in terms of how that has or could impact you with respect to strikes, port activity? Is there disruptions to any of your labor or logistics? Is there -- eventually when you think longer term and how the government will pay for reforms, is there a risk of higher corporate taxes or royalties?

As we have informed, we have had some issues with transit of our products, workers and contractors. We have had some issues. But safety -- as you know, safety is our main focus. But anyway, it's important to consider that we maintain our previous internal sales forecast for the fourth quarter this year. It means we are going to deliver our products to our customers according to our previous forecast even though the situation in Chile. We have a very good relation with our unions. We are in direct talk with them. There's no issues about strike with our unions today. But of course, there are some issues about transit. Today, the situation is better than what used to be a couple of weeks ago, as you may know. I'm optimistic. It means definitely, I'm optimistic that situation is moving in the right direction in Chile in order to solve these differences. As you may know, more than 90% of the Chileans are against violence of any kind. That's why I don't foresee that this will be a strong issue in our business goals in the medium and long term.But as you mentioned and we expect more taxes in Chile, it's too early to know. I cannot speculate about that. The government and the opposition are working on it now as we speak about what is going to be the tax situation. We haven't heard about any tax that will affect companies so far, but you don't know. I mean, taxes are always something open, and we have to see about that. But for the moment being, I repeat, I'm optimistic. We have been solving our main issues that are mainly transit to the ports. The ports are open. Our workers are working. Today, the situation is -- it's okay. It means we're working, no problem. And again, we maintain our forecast -- our previous forecast, even previous than these social unrest, forecast of sales and volumes for the fourth quarter this year.

Our next question comes from Chris Terry from Deutsche Bank.

Two questions from me. Just firstly, on the balance sheet. As you go through a period of lower cash flow on the back of lower lithium prices at the moment and you still have the CapEx for the next 1 to 2 years on the expansion projects, I just wondered if you could comment on the optimal balance sheet and dividends and how you get the balance between the dividends and the CapEx coming out. That's my first question. I'll ask the second question after that.

Chris, this is Gerardo. Thank you for your question. We have had a track record over the last -- more than 25 years of being a very conservative company from the balance sheet point of view. You can see the fact that we have Baa1 with Moody's for a very, very long period of time. And BBB+ with S&P also for a long period of time. We have a set of targets that we closely monitor, and we present them to the Board to make sure that we continue to have a strong balance sheet that let us capture opportunity growth going forward, like the ones we have now. We have a very strong cash flow efficiency. We have a very challenging CapEx coming in the next few years. But we are convinced that we will not have any major issues to fund these projects.Now regarding the dividend. The dividend policy, as you may know, in Chile, is defined once a year. The one that we currently have is a function of our balance sheet, which keeps the market in certain -- degree of certainty on how the company's balance sheet is going to be over the next two years in regards to the dividend distribution. We announced yesterday that 100% of the net income of the third quarter is being distributed, but going forward, of course, it will be a function of the dividend policy and shareholders' approval.

Okay. And then my final question is just around lithium. Coming back to the Chinese sales, just to put a little bit more of a framework around your strategy there. Is the strategy to sell as much material as you can to South Korea, to Japan, to other areas outside China and then sell the remainder or whatever is left to China? Or is your strategy to actively grow your -- percent of your overall sales into China?

Our lithium strategy is a long-term strategy. And considering that we are 18% of the world market and China is the most important market in the electric cars, most of the growth of the lithium is coming from the electric cars. Of course, China is a key market for us. It's not a margin on the market. It's not like -- definitely, we are not selling in China, the product we cannot sell in other markets. China is a very important market. We want to know in detail the customers in China. We want to work with them in the long term. We want to develop new products with them. It's the most important market for us. Even though we are selling everywhere, we're selling in Korea, we're selling in Japan, we're selling in Europe and United States, everywhere, China is the most important market in the lithium for -- in the future. It's a long-term strategy. And China's very important in our long-term strategy.

Our next question comes from Andrew McCarthy from Citi.

First one is on lithium. I just want to follow up on that point on the sale split geographically going forward. I mean, the last couple of quarters, we've seen sales or at least from the export data, we've seen sort of 20% to 25% going into China. Is it reasonable to expect that trend to follow into the fourth quarter? And then given your 65,000 sales volume target into 2020, is it likely that the share will increase in 2020 that's going into China? Maybe you could take that question first, please.

Andrew, I don't have in front of me a percentage of our lithium we expect to sell in China. We're working in our business plan. We have a business plan, but we're in the detail of the business planning for next year. But of course, we're moving from 47,000 metric tons expected this year to close to 65,000 metric tons next year. It's an important increase. China being the most important market in terms of the future growth. Of course, I think that the percentage of sales to China will be a percentage higher next year as compared to this year. It doesn't matter -- it doesn't mean, sorry, that we don't want to sell in other markets. We're selling everywhere. We have people, very good people in Korea, in Japan, United States, everywhere selling our lithium. But of course, China is a market that is growing and will grow, and we expect to increase our sales to China next year. Yes, we think so. Thank you.

Great. And just my second and final question. Just a follow-up on the social crisis and issues we've been having in Chile in the last few weeks. You mentioned there's been some transit issues. Just wondering if there's any sort of preliminary financial economic impact you can disclose there. And then on the other side, obviously, the Chilean FX has -- the Chilean peso has depreciated. Just wondering if there any -- are you seeing any impacts in terms of the financial statements from that effect as well, please.

Okay. The impacts, if any, were reflected in the third quarter. The one -- we're not putting a lot of -- it's a lot of problems and issues more than costs, but we had issues in order to coordination, in transportation, in waiting line, in some transit, it's not relevant in terms of the cost, but it's relevant in terms of the potential disruption of our operation that is -- it was okay. It means we produced. That's why we didn't disclose. We haven't disclosed any economic impact so far. That's the main reason. And about the exchange rate, I will ask Gerardo.

Yes. Well, of course, the Chilean peso has depreciated a lot over the last few days. Approximately $400 to $500 million of our costs are directly related to Chilean peso and that may have a positive impact on our results in the fourth quarter. But from a balance sheet point of view, everything is hedged and will cover. So we don't think that we will have a significant impact from that regard.

And ladies and gentlemen, with that, we've reached the end of today's question-and-answer session. At this point, I'd like to turn the conference call back over to management for any closing remarks.

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

Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.