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Sociedad Química y Minera de Chile S.A. (NYSE:SQM)

Q2 2014 Results Earnings Conference Call

August 28, 2014 11:00 AM ET

Executives

Gerardo Illanes - Vice President of Finance

Patricio Solminihac - EVP and Chief Operating Officer

Ricardo Ramos - Chief Financial Officer

Analysts

Christine Monroe - Scotiabank

Fernando Ferreira - Merrill Lynch

Alex Falcao - HSBC

Alberto Ariztía - Santander

Tom Mckelvey - JPMorgan

Operator

Good morning, and welcome to the SQM Second Quarter 2014 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Gerardo Illanes, Vice President of Finance. Please go ahead.

Gerardo Illanes

Thank you. Good morning everyone, and welcome to SQM's second 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 speakers are 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 performance, anticipated profitabilities, 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 such 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 and 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 Solminihac, for brief comments, before we move to Q&A.

Patricio Solminihac

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

On Tuesday evening, we post our results for the second quarter of 2014. Earnings for this period reached $71.1 million, lower than the second quarter of 2013. Revenues totaled $522.3 million.

In the first half of 2014, we have faced many challenges in both the fertilizers and the chemical market. In the potash market, prices were over 20% lower than prices seen during the first half of last year. However, we are seeing price begin to recover in Brazil in recent months, our most important market. With demand expected to reach between 55 million and 57 million tons, we are hopeful that price will follow the upward trend in the upcoming quarters.

In the SPN market, we are expecting 2014 volumes in this business line to be similar to volumes seen in 2013. We have received many questions regarding to iodine, more specifically price expectation within the market. As expected, price fell significantly during the first half of 2014, average $40 per kilo. As we mentioned in our press release, we will work to recapture our market share in the coming quarters. And despite stable demand growth, market price could reflect these efforts.

In the lithium market, demand during the first half of 2014 has been strong and we expect demand growth to reach at least 10% this year. In addition, our sales volumes were up significantly compared to the first half of last year. And we hope to finish 2014 with over 40,000 metric ton of sales volume in our lithium business line.

There is a new supply announced for this year from our players in the market. And this new supply could have slight downward pressure on average price for the year. We continue to work through the arbitration process with Corfo related to the methodology used to calculate payment made by SQM to Corfo in relation to the lease agreement in the Salar de Atacama. Corfo estimates additional payments of close to $9 million and our position is that we have made the aggregate payments.

Solar salt is another area of question for many of you. We mentioned that we have closed supply agreement for approximately 240,000 metric tons to be supplied to four new projects in Africa and Latin America between 2015 and 2017.

We continue to work diligently on our cost reduction effort and look forward to finish the year with over $60 million in cost basis. In short, despite recent challenges, we continue to mitigate risks and remain focus on the long-term value of the company.

We’ll now open the line for questions and thank you for your time.

Gerardo Illanes

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question is from Ben Isaacson of Scotiabank. Please go ahead.

Christine Monroe - Scotiabank

Hi, this is Christine Monroe calling in for Ben Isaacson. Thank you very much for taking my call. I had a question about iodine prices and iodine market. You mentioned that you were aiming to regain market share and you haven’t outlined whether there is a strategy to do that. I also wanted to know if you see a turning point for prices anytime in 2014. Thank you.

Patricio Solminihac

Thank you, Christine. As we have stated that we want to get back to our market share of 30% more or less and the way we will do that and our strategy is to work on the quality of our product when you have more supply customers start to worry much about quality and service. So, we will continue to strength our position which is already very strong on the quality and stability and consistency of our product in the first place, second the service having the stocks near our customers and also the quantities on time when they need it.

On the other hand we’re doing a strong effort on the cost, we really are reflected in this first lower cost climate. We continue to have more ideas that we will continue to lowering our cost, so that is our main strategy. Given that what we see on the market, we feel that the price in the rest of the year would continue to be affected and we will see what happens then in the next year.

Christine Monroe - Scotiabank

Thank you.

Operator

Our next question is from Fernando Ferreira of Merrill Lynch. Please go ahead.

Fernando Ferreira - Merrill Lynch

Hi everyone. Thanks for taking my question. I had a question on lithium. I just wanted to understand a little bit better this comment you made regarding the commission in Chile that will evaluate the future of the lithium mining, just wanted to get a little bit more details if you can there? And then I had another follow-up on iodine. Given that prices already declined 20% and we saw these volumes down by 8, just wanted to get a sense when do you expect these volume trends to recover? Can we see that already in 2015 or -- I mean given what you've mentioned right on improving quality and then the services and when did you forecast that volumes will rebound? Thank you.

Patricio Solminihac

Thank you Fernando. Regarding your question on the commission of lithium, the new government has said they've stated in their program, saying that they want to have a complete analysis of what they want to do as a public policy on lithium. And to do that they've formed a commission of 21 people from different areas and this commission is doing their work in trying to analyze the different aspects that need to be understand for them in order to propose a public policy to the President.

We as SQM as a company that has a long-term knowledge of more than 15 years in this market and of course having a leadership in the world of course has been invited to give our opinion on our information to the commission. We also invite the commission members to visit our operations in Salar de Atacama and they did that and we continue to offer our knowledge and our understanding what is best for Chile in this area.

The commission continues to work, they supposed to have by the end of the year their conclusion of proposition to the government if they want to do any change on the loss.

Regarding your question on iodine. Yes, we have been affected on these supply and demand in the market of [iodine] and effected the price close to 20% as we comment and we indicated in our press release. We expect to get more volume in 2015. We will see how the market there we are. We have given a clear signal to the market to what is our intention, so we have to wait and see. And of course do correct our policies if necessary according to the new information in the market.

Fernando Ferreira - Merrill Lynch

Okay. Now that's perfect. Thank you.

Operator

Our next question is from (inaudible) of ETG. Please go ahead.

Unidentified Analyst

Good morning gentlemen. I have two questions. On the either front you mentioned that you will be reducing cost in the entire year between 5% and 10%, could we know where that effort is being made? And in addition, you further comment on the press release that the cost will likely go down into 2015. Can we get the percent of savings on that program and also where that is coming from?

And on the solar salts those additional 240,000 tonnes, how should we split that in 2015 through 2017? That would be really helpful. Thank you.

Patricio Solminihac

Thank you very much [Caesar]. Regarding your first question, on cost reduction in (inaudible) we in the first half of the year reflected that half, close to 10% lower cost. We continue to have effort. We expect to have even lower cost during the second half and we expect that the next year we will continue that trend; where, everywhere. We have a program that has been very successful up to now where we are increasing the efficiencies, the productivity and also we are increasing production in the plants that are more efficient than others. So we are doing some changes in the total production in the different plants in order to optimize the final total cost.

So we are also doing some process change in one of those plants also that is helping us to lower the cost. We are very optimistic that we can deliver, we have to wait and see the results. Regarding -- what was the next question?

Unidentified Analyst

The incremental volumes on the solar salts, how should we split those 240,000 tonnes between ‘15 and ‘17?

Patricio Solminihac

So that’s okay, thank you -. Regarding solar salt, we have already agreement with four new projects of 240,000 tonnes of those 40,000 tons are expected to be delivered in 2015 around 140,000 in 2016 and around 40,000 in 2017. I think that this is a great news, it’s something that we were expecting that the solar salt project would come back and they are coming back and we are seeing more optimist in this industry. So we expect that we will be able to agree with other projects in the near future.

Unidentified Analyst

Alright gentlemen, that’s really helpful. Thank you.

Operator

Our next question is from Alex Falcao of HSBC. Please go ahead.

Alex Falcao - HSBC

Thanks for question. Just wanted to get a little bit more color on 2015 on lithium prices. Should we expect a going down still in 2015, is there any and if not, what is the driver for that? Thank you.

Patricio Solminihac

Regarding prices of lithium, you have seen that we have already some slight reduction in prices. We have increased the volume. And what happens in 2015 will depend heavily on how the two newcomers that are announcing new production really results this product. We have seen in the past very difficult start-up of other players. So if these two new players, one in Canada, Canada Lithium, now RB Energy is successful in try to put a lot of volume and at the same time their lithium projects also overall Salar, which is for recovery that’s supposed to start by the end of this year, start also to have a various moves, start-up process and try to put a lot of volume in the market, we should see some effect on the price. On the other hand, if their introduction to the market is more gradual, because of their start-up process and their own strategy, then we should not see that much effect on the price.

Alex Falcao - HSBC

And just as a follow-up on that. Do you guys see and if they do ramp up faster their projects, do you see that your strategy being affected by it, meaning can you guys cut volumes, if -- to avoid a massive oversupply of product in the market?

Patricio Solminihac

In the lithium, strategy for us, you know that the main issue for us is the limit that we have actually with our contract with Corfo, which we [started] production in 1996, at the end of 1996. And we already have consumed more or less half of the total amount that we are allowed to produce and market lithium. So, that’s -- we are of course working in order to get more permit to increase that volume but if we want to increase a lot of our production now, that means that we will not have enough lithium to get to the 2030 limit of our concession with Corfo. So, we have to play with that. We are very optimistic that we will get an agreement with the government because that makes a lot of sense for them to do, but we have to see that.

Alex Falcao - HSBC

Okay. Thank you.

Operator

Our next question is from Alberto Ariztía of Santander. Please go ahead.

Alberto Ariztía - Santander

Hi. Thank you for taking my question. Sorry for reiterating in the iodine market, but I don’t understand why being one of the lowest cost producers, as you stated, why would you like to maintain an increased production and let prices drop. What’s the economic rationality behind of that? Because you spoke about the quality of your product, but if you check the international export information, it definitely shows much better prices for your product.

And my second question is related with the SPN market. Why for this half if you had almost same volumes and pricing, we’re looking lower gross margins, what’s happening and if you can give us guidance on that? Thank you very much.

Patricio Solminihac

Thank you, Alberto. Regarding iodine, what you just asked is what we ask ourselves constantly. It’s very difficult to define the best strategy volume. Given our market share, if we try to put and also our cost position, which you just said is one of the lowest cost producers, we can put much more volumes into the market and leave with the consequences on the price or we can allow some newcomers to put some more volumes and being much higher cost, we will then sell less volume.

What we have to do is to define a strategy that optimize and maximize our value long-term. I have been in this industry for 26 years and this is not the first time that we go through processes like this. We went through this process at least three or four times in the past and we’ve learned from those experience. And according to our best understanding and according to our understanding of the cost position on the other players is the way we define then what will be.

And our strategy now is that we want to get a market share of close to 30%. We believe according to our modeling of the market and the industry that way we will optimize and we will maximize our value long-term.

Regarding to your SPN question, I will ask Ricardo our CFO to comment on that.

Ricardo Ramos

Okay. First, it's important that the final price, the price that you review in the press release depend on the mix of the products, on the sales condition. Our mix during the first half of this year as compared to the first half of last year, it's moving to more high priced products and our sales condition moving more close to decline. Of course, when you move more close to declining, it means that you have more cost, more cost in logistic cost to go to decline. That's why as you can see, even though it seems like the price out there, if you go to the price (inaudible) it means you go to the same basis to our port facilities really our average price is slightly lower this year as compared to last year. If you considered that, it has been quite successful strategy in the SPN market because if you consider the MOP prices. If you compared first half of last year and first half this year, it's down like $90 per tonne in the MOP price. In our SPN products, it has decreased in our return (inaudible) to the same basis per tonne of nitrate in our port is closed, the decrease, it is little higher than $30 I mean very successful trying not to follow the same negative trend of the MOP. But if you go to the margins, margins during the first half of the year as compared to first half last year per tonne of products it’s like $20 so it means that we have been able to through the cost position of the company to have a positive in the cost close $15. That's why be careful but the end, the bottom line is different mix condition of different products, more priced products, high quality products in the first half this year. Second, the sales condition moving more close to declines with more cost it means that at the end it lowers margins are even though are in the range of 30 very successful because it’s not that close not even close to the $90 of the MOP and we have been able to be very successful in the price and the margins plus with a cost having a positive effect in cost in the first half.

Alberto Ariztía - Santander

Yes thank you very much. And do you expect to maintain this strategy in the SPN business?

Ricardo Ramos

Yes but we are quite positive about second half in terms of volumes, we think that volumes for second half this year we think today are going to be higher than volumes of second half last year that’s something we expect to report in the near future and it will help us because we are not going to have only the cost position but it’s very positive we’re going to have the volumes, positive volumes second half and we expect that we will maintain today’s price environment and depending what is going on with the MOP we think that we can maintain what is today condition on the price.

Alberto Ariztía - Santander

Okay, thank you very much.

Operator

Our next question is from Tom Mckelvey of JPMorgan. Please go ahead.

Tom Mckelvey - JPMorgan

Good morning everyone, thanks for the call. I just had a quick question on what you are seeing for regular potash demand in Brazil, we know that the pricing has recovered pretty strongly year-to-date but I am curious to see if you think that this can be sustained in 2015 with the weaker soy and corn outlook and kind of how next year’s demand is going to compared to this year? That’s all.

Patricio Solminihac

Thank you very much, Tom. As you know we are a follower in potash, we are not a big player in this market differently in our business in our other business line. What we are seeing is that many of the players and especially the industry are very optimistic, some of them even so in over 57 million tons for this year. Regarding the fact on the lowering price in corn but of course as an effect in the consumption of fertilizer given that the price came from very high level still according to the number that we are seeing for the farmers continue to be a good business to fertilizer. We have to see how much the price really goes down, if it the goes even more down next year, but it’s something to be seen. What we even talk to people in the industry is that if we are able to see this year in the range of 57 or more million tons, then we are proving that the volumes are but, that's all that I can comment on this.

Tom Mckelvey - JPMorgan

That's great. Thank you very much.

Operator

This concludes our question-and-answer session. I'd like to turn the conference back over for any closing remarks.

Patricio Solminihac

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

Operator

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

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