Chemical & Mining Co. of Chile (SQM) Q1 2014 Results - Earnings Call Transcript

May.22.14 | About: Chemical & (SQM)

Chemical & Mining Co. of Chile Inc. (NYSE:SQM)

Q1 2014 Earnings Conference Call

May 22, 2014, 11:00 AM ET

Executives

Gerardo Illanes - Vice President, Finance and Investor Relations

Patricio de Solminihac - Executive Vice President and Chief Operating Officer

Ricardo Ramos - Finance and Development, Vice President

Analysts

Ben Isaacson - Scotiabank

Tim Tiberio - Miller Tabak

Ravi Jain - HSBC

Operator

Good day and welcome to the SQM first quarter 2014 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Gerardo Illanes. Please go ahead, sir.

Gerardo Illanes

Good morning, everyone, and welcome to SQM's first quarter 2014 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.

Joining me today our 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 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 the 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 Executive Vice President and Chief Operating Officer, Patricio de Solminihac, for brief comments, before we move to Q&A.

Patricio de Solminihac

Good morning and thank you for joining the SQM first quarter earnings conference call. I will start with a brief introduction, before we open up the lines for questions.

On Tuesday evening, we posted our result for the first quarter of 2014. Earnings for this period reached $81 million, lower than the first quarter of 2013. Revenues totaled $534.1 million.

As we mentioned in our press release, these lower results are a consequence of declined prices in our major business lines compared with first quarter of 2013. Despite this price decrease, we have been able to increase efficiencies and reduce cost company-wide. And for this reason, gross profit slightly increased when comparing the first quarter of 2014 to the third and fourth quarters of 2013.

We expect sales volumes in the Potassium and Specialty Plant Nutrition business lines during 2014 to exceed sales volume, since during 2013, by approximately 15%. As seen in the previous year, SPN volumes are higher in the first quarter than the average of the other quarters of the year. We also expect to recover some volumes in the lithium business lines during 2014.

In the iodine market price decreased, as a result of the strong competition. Volumes during the beginning of 2014 were lower than the volumes since during the first quarter of 2013, a record quarter, and were similar and even slightly higher than volumes since during the second, third and fourth quarter of last year.

Our strategy is to return to the long-term market share of close to 30%, considering that SQM is one of the lowest cost producer, with sustainable production capacity. As the company announced on Tuesday evening, we agree with Corfo to enter into an arbitration process regarding the methodology used to calculate payment made by SQM to Corfo relating to the lease agreement in the Salar de Atacama. Corfo estimate additions in payment to close to $9 million and our position is that we estimate the aggregate payments.

I would close by saying that 2014 will be a transitional year for SQM, and we will continue to mange the company with a focus on the long-term and remain focused on maximizing shareholder value. Thank you.

Gerardo Illanes

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes today from Ben Isaacson of Scotiabank.

Ben Isaacson - Scotiabank

First question is on the lithium business. You've talked about increasing lithium volumes in the back half of the year, one of your competitors, Canada Lithium, now owned by RB Energy, they are ramping up one of their plants right now with guidance of adding about 10,000 tons to the market in the second half of the year. With other step-change in demand, how do you also accomplish increasing your lithium volumes in light of that?

Patricio de Solminihac

Well, regarding lithium, as we say and as we have been showing, we are recovering some volumes. We keep an eye clearly on what is going on with a newcomer, especially Canada Lithium or RB Energy, as you say. They have not been yet very active in the market. They are in the start-up process.

We also have seen from the demand side that the market is very strong. But we believe that the growth and demand will allow these newcomers to start placing their products, but as always these projects take time in their startup. We'll have to see how much time they will take and how that will relate to the increase in demand. Right now, we continue our sales contract with our customers and we see that the margins for lithium in the next quarter should be similar to the first quarter.

Ben Isaacson - Scotiabank

And then just my second question is on the iodine market. It seems like all Chilean producers, except for one, have cut back the production a little bit, including yourself, and it seems that stabilized the iodine market a little bit. Can you talk about whether you think more customers going to be needed by SQM in particular or by other Chilean producers?

Patricio de Solminihac

The iodine market in the first place and the demand continue to be strong, helping to place more volume for some of the producers. As I stated in my initial remarks, we want to go back to our long-term market share objective. So we will see what the market will react, but in our estimate, as we indicated, is that the price can suffer a little bit more during the rest of the year.

Ben Isaacson - Scotiabank

So do you think $45 is kind of a long-term reasonable price?

Patricio de Solminihac

I will not really state on prices. What we decided as a company is that we will keep our market share. We will go back saying, whether to our long-term market share, and then the price will be a result of the supply and demand. First quarter price as we stated was in the range of $40 to $45, and we think that the rest of the year, the price will erode a little bit more.

Operator

Our next question comes from [ph] Alberto Arratia of Santander.

Unidentified Analyst

First of all, I would like to congratulate you for the over-expected of rationale on vessels. Well, as you already stated you made another expenses provision due to the arbitration process with the Corfo. Can you give us more detailed information? Do you think there might be more problems or provision in the future that we might be aware of?

Patricio de Solminihac

Regarding the situation with Corfo in our Salar de Atacama lead, we are very confident as well as our lawyers are also explaining to us that we really do not have any situation that we have been against the contract. We have different opinion regarding the methodology of how to calculate some of the payment and we discussed it with Corfo and we decided together that the best way was to go as the contract stated through an arbitration process to remind if there is such a difference or not.

Corfo has indicated that their difference is close to $9 million. We are very confident that there is not such a difference, that we are been working for 21 years already in this contract. And we have been quarterly more than the 81x the payments over these 21 years according to the contract. So we feel very comfortable on this and we don't think that we should have any contingency.

Unidentified Analyst

I also would like to ask you if you have any information about the other Chilean competitors in the iodine business. Do you know if the supply from Chilean producers will increase and therefore will impact the total volume of the market?

Patricio de Solminihac

As I indicated before, first, that the demand of the iodine business continued to be strong and that is very important. It's a market that really grows especially in the X-ray contrast media and LCDs and the other pharmaceutical applications. Regarding the other Chileans producers, they are private companies, except for our RB Energy, which is previously Aguas Blancas project, which is a public. We don't have officially mention from them. So we have to just see from the statistic how they are behaving. We have of course some intelligence information from the market, but some of them have been, as the previous question stated has been lowering their effort and some of them have been increasing some of their offering.

Operator

Our next question comes from Tim Tiberio with Miller Tabak.

Tim Tiberio - Miller Tabak

I was wondering if you could just elaborate little bit more on the near-term demand trends that you're seeing, in the specialty plant nutrition business. It doesn't seem like, at least at this point that the California drought has really impacted demand in North America. Maybe you can just give us an update of whether you're seeing better demand out of Southern Europe this season? And how you're thinking about North America for the second half of 2014?

Patricio de Solminihac

Regarding SPN, the good thing about our market is that they are very diversified. We felt in more than 100 countries. Very diversified in North America, Asia, Latin America, Europe. So first answer is that the reason why we have been showing this increase in volume this year is that this diversification help us a lot and a specific situation in one market, given weather condition or crop situations really to not affect that because we can compensate very quickly with other markets.

We are very confident that the total volumes that we will be selling this year will be in the range of 15% more than the previous year. The other important thing that show us during this potash prices in the previous years is that our potassium nitrate product is really an specialty and not the commodity that follow completely the price situation of the potash. We were able not to decrease prices as much as potash price, and now we even are able to recover some of the prices.

Tim Tiberio - Miller Tabak

And then I guess more of a longer-term strategic question. We've seen a lot of the upstream potash miners and other companies buying into increased retail and distribution capabilities within South America. How do you feel that impacting your abilities to service the South American markets?

Do you think you will need to increase some of your downstream capacity? Or do you think that with your current production and your existing relationships that there is really not going to be a meaningful impact even as we see some of your global peers strengthening their retail ties, particularly in Brazil?

Patricio de Solminihac

Well, the good thing, as I say before that we sell and we get with our own brand to all of these markets. So we already have an established nutritional system and also some value-added situation, NPK, soluble NPKs, in many countries through some JVs that we have for instance with Doktor Tarsa in Turkey or with SQM Vitas, the Roullier Group in Brazil, Peru and South Africa.

We also have a relation for selling our products in the U.S. with Yara. So we feel very comfortable with our actual distribution system, our value-added system products, with the NPKs and soluble plants that we have our around the world. And of course, the depending on the development of each of the market, we adjust some of these, but not major changes.

Operator

Our next question comes from [ph] Tom Mckelvey with JPMorgan.

Unidentified Analyst

I have two quick questions for you. First following up on that question of SPN and potash, I'm wondering how was your market share evolution given the volumes growth specifically in Brazil as well. And then the second question is more accounting-oriented, I was wondering, speaking a little more color on the other line below exchange differences was nearly double year-over-year, it's around $8.5 million?

Ricardo Ramos

I'm sorry, Tom, but the line was very noisy, I couldn't understand clearly most of your question. Can you repeat them, please?

Unidentified Analyst

Can you hear me better now?

Ricardo Ramos

Yes, much better.

Unidentified Analyst

I have two quick questions. The first, following up on the SPN and potash market. I was wondering if your increases in volumes allowed you to also gain market share of your North American competitors particularly in Brazil. And the second question is more accounting related. I'm wondering if you can provide a little bit more color on the other line below the exchange difference in the income statement, which more than doubled to $8.5 million for the quarter. I was wondering if you could provide a little more clarity on what we should expect from that, what that is and what we can expect from that moving forward.

Patricio de Solminihac

Regarding your question on SPN, potash lines, we have been increasing the volumes, but not through having less volume from our competitors. Basically this has been growth of the markets developing and also whether help us in our potassium nitrate sales is the shortage that there is in potassium sulfate. So that helped us also to have this increase in volumes. So we have not really affected the volumes of our direct competitors. Regarding to your second question, I will ask Ricardo, the CFO, to comment.

Ricardo Ramos

It's about or in line, the line that you comment that is what we call other and then what we can call non-operating. Really, it's not so different if you compare with previous quarters in the year 2014, and we do not expect that this line is going to be different or significantly different when you compare the full year 2014 with the full year 2013.

Operator

Our next question comes from Ravi Jain of HSBC.

Ravi Jain - HSBC

I had two questions. One was we have been seeing in the news that the President in Chile plans to create an expert panel to work on a state policy about lithium. Could you give us your views on that? And the second question was on potash segment, specifically. Can you give us a little more color as to the cost efficiencies that you were -- was it mainly volume related or what exactly were the cost efficiencies? And should we expect the margin that we saw in the first quarter in potash sustain in 2014?

Patricio de Solminihac

Regarding your first question on the lithium panel that the Ministry of Mining announced and that the President yesterday confirmed. Basically, what they are saying that they will put a group of people to think about how the lithium policy in Chile should change or not for the future and recommend by the end of the year to the President of those strategies.

Our thinking, we have been very open to say that that Chile has a very old law, in 1979, that says that lithium is a strategic product so cannot be explored similar to other mining companies in Chile. And we're seeing that that is not necessary, that there's not any reason for Chile to keep lithium as a strategic material. So we look forward that this panel will conclude that lithium should be more open and there should be more work similar to many other minerals in Chile.

Regarding to your second question, what we have been working since last year is cost efficiency all across our company, from our modernization point of view, from efficiencies, from efficiencies of labor productivity as well as from efficiency in energy consumption and also in deals, following our production processes.

We have been very successful in that. We feel that total cost, less cost is already in the range of $60 million per year equivalent. And we continue to work on this. This is reflected in all our business lines, of course. And regarding your final question on the margin in potash, we think that that should continue during the rest of the year.

Operator

This concludes the question-and-answer session. We have no further questions at this time.

Gerardo Illanes

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

Operator

Thank you. The conference has now concluded. Thank you for attending. You may now disconnect.

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