Sociedad Quimica Y Minera De Chile SA ADR SQM
Q4 2012 Earnings Call Transcript
Transcript Call Date 03/07/2013

Operator: Good morning and welcome to the SQM Fiscal Year 2012 Earnings Conference Call. All participants will be in listen-only mode. 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.

Mark Fones - IR: Good morning, everyone, and welcome to SQM's fiscal year 2012 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 Joining me today our speakers are Patricio Contesse, our Chief Executive Officer; Patricio 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 considered forward-looking statements as that term is defined under the Federal Securities Laws.

Any forward-looking statements or 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 CEO, Patricio Contesse for brief comments before we move to Q&A.

Patricio Contesse - CEO: Good morning and welcome to SQM '12 earnings conference call. I will start with a brief introduction before I open up the lines for questions. We are pleased with our performance throughout 2012. We posted higher sales volume and revenues in our potassium, industrial chemicals, and lithium and derivatives business line when compared to 2011.

In addition to this strong result we finalized some major capital investment during 2012 and plan to keep this momentum during the next year. In 2013 we expect lithium iodine demand to continue growing at healthy rate. We also expect new supplies mainly from existing competitors who has been under development in recent years to enter the market. Furthermore, as we saw for our recent expansion we will increase our sales volume in 2013 in potassium business line and expect to see market demand recover. We do see some new challenges related to the fertilizer side when the markets (indiscernible) closed at the lower price than seen in the early months of 2012.

We also believe that the product delay for solar terminal energy storage probably will have an effect on our industrial chemical business line. In general, we believe our unique synergies delivers products and our various competitive advantages will support us in our effort to maximize shareholders value and profits in the coming years.

I thank you for joining today. We will now answer any question you may have.

Patricio de Solminihac T. - EVP and COO: Thank you, Patricio. Operator, we may go now to Q&A session.

Transcript Call Date 03/07/2013

Operator: Andy Cash, SunTrust Robinson Humphrey.

Andrew Cash - SunTrust Robinson Humphrey: A question around lithium. Could you talk about any plans that you might have to expand your lithium carbonate or lithium hydroxide capacity? And when do you plan to do that, if you plan to do that?

Patricio de Solminihac T. - EVP and COO: (indiscernible) have expansion in the lithium capacity. We have to be at total capacity of 48,000 and we are looking forward to be in the range of 60,000 in the near future.

Andrew Cash - SunTrust Robinson Humphrey: So near future, probably in the next 12 months?

Patricio de Solminihac T. - EVP and COO: Next year.

Andrew Cash - SunTrust Robinson Humphrey: Next year being 2014?

Patricio de Solminihac T. - EVP and COO: I was just up at the lithium – well, the conference up here in Canada – Toronto, Canada, the mining conference and Lithium Americas was up there and Canada Lithium also up there. Are you expecting either one of those companies to be successful making lithium carbonate or do you think that they'll be unsuccessful?

Patricio Contesse - CEO: I can't make any statements. You know too many news from the world saying that they are going to come with new expansions or new facilities, and in the last year, the only one that really had a peer and with a lot of problem is with Galaxy. So far it's hard to comment because what will happen with the reality of new product coming on stream. But anyhow the demand on the other in terms of lithium is very strong, is over (two days). That means that there's space without creating big disturbance for new comers if that happened to be.

Andrew Cash - SunTrust Robinson Humphrey: Well who do you expect will add capacity this year and next year?

Patricio Contesse - CEO: Excuse me?

Andrew Cash - SunTrust Robinson Humphrey: Which companies do you think will add capacity – lithium capacity…

Patricio Contesse - CEO: (indiscernible) what would happen with Australian operation in Talison (indiscernible) seen too. Of course, the Canadian company talked about there's a chances of possibility that we have in our mind. I think those are the ones that we can see coming on stream.

Andrew Cash - SunTrust Robinson Humphrey: So I want to just make sure I understand, you expect Talison and Galaxy to add capacity.

Patricio Contesse - CEO: Galaxy I'm not sure about that.

Patricio de Solminihac T. - EVP and COO: I don’t think so.

Patricio Contesse - CEO: I think Talison because the acquisition with the Chinese company that could develop some new possibility of producing more in China which is possible.

Andrew Cash - SunTrust Robinson Humphrey: And then…

Patricio Contesse - CEO: It is something to be seen. I am just speculating on that.

Patricio de Solminihac T. - EVP and COO: The only one we've heard is the one we have mentioned in Canada that could come on stream. The other ones are still beside ourselves, I don’t see any other in a good way coming on stream in the near future.

Andrew Cash - SunTrust Robinson Humphrey: So Canada Lithium is a possibility?

Patricio de Solminihac T. - EVP and COO: Yeah.

Andrew Cash - SunTrust Robinson Humphrey: Okay. And then FMC has been having some difficulties in their plant in Argentina. Do you think that situation is corrected, do you think they are producing now or is that…?

Patricio de Solminihac T. - EVP and COO: We're not quite aware. We know they do have problems. They closed out the operation of powders. They have announced that they have solved the problem. So they have announced, so it must be true.

Operator: Fernando Ferreira, Bank of America Merrill Lynch.

Fernando Ferreira - Bank of America Merrill Lynch: Patricio, I just had a question on iodine, if you can discuss a little bit how the supply evolving recently we've seen spot prices come to a closer level to contracts. And then you mentioned in the press release that you saw new supply come into the market and also new expansion in 2013. So, just from a supply perspective, what should we expect in 2013 and '14, please?

Patricio Contesse - CEO: Just that our price is normal, but once things start to stabilize, the principal market should come nearer to what it is normal contract prices. And that really has going on. On other hand we have announced it's been public, you know by anyone that El Gordo belong to ACF and develop a new plant and then it's producing more this year than last year, and clearly that in the supply side will affect our supply sales and volumes. That is probably the (number) we have said so and we and El Gordo have announced since long time ago than expansion plans and what they were doing in that operation.

Fernando Ferreira - Bank of America Merrill Lynch: Sure. And the strategy going forward will be like 2009, to try to – I know it's difficult to say but to try to keep prices stable and take volumes as a result?

Patricio Contesse - CEO: We certainly we cannot discuss that logic, because it's part of the strategy.

Fernando Ferreira - Bank of America Merrill Lynch: Okay. Thank you.

Patricio Contesse - CEO: That I'm not being transparent, not because I don't want to be, but clearly I don't want to give tools to our competitors.

Operator: Craig Shaw, SLM.

Craig Shaw - SLM: I had a couple questions on SPN. I was wondering if you think we have seen the worst of the impact from I believe it's Haifa getting back into the market last year. And the second question I had on SPN was, it looks like gross margins came down a bit in the fourth quarter and I was just curious if you could explain why that was?

Patricio Contesse - CEO: Haifa was producing the most it could in 2012. They don't have extra capacity, so the more they can do this year what they did last year. And anyhow, we've heard that we have not put in, in any (indiscernible) they are facing some problem with someone. But anyhow the worst case scenario, they can't affect the market more than they did last year because there is no extra capacity of potassium nitrate in any other place in the world, but just in SQM. In terms of margins, we have to say that potassium nitrate is somewhat related with potassium chloride, not in the nitrate but in the chloride. So as chloride goes down, we will have ratios (indiscernible) and the pricing of potash inside the formula and it was historically high and they're still historically high, but anyhow they have an adjustment related to the potash chloride scenario in the world in terms of price. So that clearly affect miners. Also, in terms of (and that is just) speaking not only for potash or potassium nitrate, whatever. In Chile, we have very recently cost being increased, one is the U.S. dollar value and one is a very tight situation of employment and more importantly in the mining, but really as general economy, unemployment in Chile is practically none. It's at 6.2 but from practical point of view, it's almost none. And that create a big tension between supply and demand of labor force and skillful people are even more scarce. So that has been affecting the general course of the mining industry and we are not an exception of that.

Operator: Juan Tavarez, Citi.

Juan Tavarez - Citi: First question is regarding your potash segment. Specifically, could you remind us how much new capacity was added in 2012 and how much still has to be executed for 2013? And maybe give us a sense of your overall utilization rates in this segment for this year and next year.

Patricio de Solminihac T. - EVP and COO: We still have production Juan in the range of 2 million metric tons. We are making investments to go to 2.2, 2.25 in the next year and half now. So that is the situation in terms of supply, in terms of production of our potash situation.

Juan Tavarez - Citi: Do you see a normal ramp-up phase for this production or are you expecting to utilize less of your installed capacity?

Patricio de Solminihac T. - EVP and COO: This year is going to be more of the same as last year in terms of production. We don't see – but clearly, we are going to sell much more this year compared to last year as we mitigate somehow the less return because of price. We are estimating in terms of volumes and potassium MOPs will be in terms of 20% more volume, even though the production is same that is due to the quality of it eventually went up in 2012 but now we are improving and we are going to be able to service in.

Juan Tavarez - Citi: And can you remind us how much are you forecasting for CapEx for this year and how much will be towards expansion and how much is maintenance CapEx?

Patricio Contesse - CEO: I will let in the details to Ricardo Ramos, CFO, but we are in the range of $500 million investment toward this year.

Ricardo Ramos - CFO and Business Development: We have our investments for this year close to $500 million during 2012, well it's close to $440 million, and most important probably were on the development today is the expansion of potash as Patricio explained we expect to increase our potash capacity close to 250,000 metric tons of capacity. The other main projects are related to the nitrate, (iodine) and potassium where we are finishing our expansion in the first region. We are finishing some key projects in quality and new capacity and new products in the nitrates area, probably we said we are started I think one and half years ago and we are finishing now during 2013. That are the main projects that we have for this year.

Operator: Fernando Ferreira, Bank of America Merrill Lynch.

Fernando Ferreira - Bank of America Merrill Lynch: I just had a follow-up on the potash side. These volumes that you mentioned, Patricio, how much do you think or you expect to sell to the market this year in MOP and then how much you expect to sell into Brazil as well, please.

Patricio Contesse - CEO: Well, in terms of volume we reached the volume of 2.2 almost in 2012 so we are looking for 1.5 that ranked for this year about 300,000 metric tons or more. So we are estimating in the sale of volume in the range of 700,000 metric tons.

Operator: Michael Harrison, First Analysis.

Michael Harrison - First Analysis: I was just hoping to dig in a little bit deeper on the lithium pricing activity scene that second half pricing looks like it was down versus the first half. And I was wondering if that could be attributed a little bit to differences in price activity in battery grade lithium carbonate versus technical grade lithium carbonate. Did you see any differences in how those prices were tracking during the year?

Patricio de Solminihac T. - EVP and COO: Well, I must say that we have a different information than you in terms of price. Prices were in 2011 in the range of 4,500 and last year the pricing was in the range of 5,000. It could be maybe $10 less average one semester, one quarter to the other, but pricing has been more or less at the same level and they increased more than 10% during 2012 and '11. And so the market of lithium is very, very strong and demand and it's growing very, very fast. So we see – we're quite optimistic in that business.

Michael Harrison - First Analysis: If I do the math, though, around your volumes and sales during the second half of 2012 compared to the first half of 2012, it does look like pricing came down during the course of the year. Is that not correct?

Patricio de Solminihac T. - EVP and COO: (Indiscernible) the different mix. You have lithium hydroxide or lithium carbonate or lithium chloride, and clearly those have different price and they do some more volume than the other. Maybe the average sounds last, but it does have lithium carbonate equivalent. We have been selling in a very conservative price during the year and higher than 2011. The market also – we grow the volume loss here in about 10%, so a very strong demand in 2012 compared to 2011. The market is growing over two digits. (That's the demand).

Michael Harrison - First Analysis: And as I think about the difference in pricing between battery grade materials and technical grade materials, are you seeing greater pricing strength right now in battery grade materials and maybe a little bit weaker pricing in technical grade?

Patricio Contesse - CEO: No, we are seeing a strong position, as I told you before.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mark Fones for any closing remarks.

Mark Fones - IR: Well, thank you all very much for joining us today and we hope to have you'll with us in the next conference call. Thank you. Good bye.

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