Sociedad Química y Minera de Chile S.A. (SQM) Earnings Call Transcript & Summary

Good day, and welcome to the SQM Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would like now to turn the conference over to Kelly O'Brien, Head of Investor Relations. Please go ahead.

Good morning. Thank you for joining SQM's Third Quarter 2020 Earnings Conference Call. This conference call will be recorded and is being webcast live. Following this call, you'll be able to access the webcast at our website, www.sqm.com. Our earnings press release and the presentation with a summary of the results have been uploaded to our website. Joining the call today as speakers are Ricardo Ramos, CEO; Gerardo Illanes, CFO; and Pablo Altimiras; Vice President of Lithium and Iodine businesses. Before we like -- 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 and 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 the term is defined under federal securities laws. Any forward-looking statements are estimates reflected -- 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, including our ability to successfully implement the sustainable development plan. Risks, uncertainties and factors that could affect the accuracy of such forward-looking statements are identified in our public filings made with the U.S. Securities and Exchange Commission and with our earnings release issued today, and these forward-looking statements should be considered in light of those factors. We assume no obligation to update such statements, whether as a result of new information, future developments or otherwise, except as required by law. I now leave you with our CEO, Ricardo Ramos.

Thank you, Kelly. Good morning. Thank you for joining our earnings call today. Our gross profit, as you know, was approximately $115 million, similar to average gross profit during the first half. Our average iodine prices held steady, and our sales volumes in the lithium business line were up over 40% compared to the last quarter and almost 60% higher than what we sold in the third quarter last year. Recent months, we have been very busy and dedicated to our efforts related to sustainability. Last month, we proudly announced our sustainability development plan, which includes voluntarily expanding our monitoring system, promoting embedded and more profound conversations with neighboring communities and becoming carbon-neutral and reducing water by 65% and brine extraction by 50%. As part of this plan, we also made a goal of obtaining international certifications and participating in international sustainability indices. In September, we began the self-assessment process in the Salar de Atacama under IRMA, which is the first step in the certification process for this strict standard. And last week, we were accepted into the Dow Jones Sustainability Index Chile and the Dow Jones Sustainability Index MILA Pacific Alliance indices. We have always been committed to environmental protection and social responsibility. And now we feel prepared and proud to share our commitments and goals with all of you. I invite you to visit our company website to learn more about the sustainability development plan and online monitoring system, and I encourage you to reach out to us with any questions or concerns about this plan. I will now pass the call to Pablo Altimiras, who will comment more on the iodine and lithium market.

Good morning, everyone. Thank you, Ricardo. In the iodine market, we saw a more negative impact on the iodine demand, expecting to decrease approximately 8% or 9% in 2020 compared to last year as a result of COVID-19. This impact was seen in the iodine market as a whole, but mostly in the x-ray contrast media segment. We believe that demand will recover when the impact of the pandemic fades away. After a slow start of the year, our lithium sales have been gaining momentum. As Ricardo mentioned, our lithium sales volumes surpassed 17,700 (sic) [ 17,600 ] metric tons in the third quarter, and we expect this strong volume growth to continue into fourth quarter. This growth is a result of the strong demand recovery in the second half of the year and, more importantly, our ability to sustain relationships with existing clients and acquire new customers around the world. We have been able to do this as a result of improving the quality of our products and being able to meet all of our customers' requirements, all while increasing efficiencies in our production process and ensuring our low cost position. The demand recovery seen in recent months, most of which was in Asia, were as a result of the pandemic. We have seen an increase in the demand of e-bikes and scooters and personal computers. This demand was in addition to a significant increase in electric vehicle sales in Europe and Asia. To quantify this a bit, in the third quarter, we believe electric vehicles unit sales increased in China approximately 40%, and in Europe, more than 170% year-on-year. Although there is still uncertainty surrounding the pandemic and the economic impact on the lithium market in the near future, we remain optimistic about the long-term growth perspective in the lithium space. We expect to see a strong demand growth in 2021 and beyond. Because of this, we expect to increase our sales volumes by more than 30% in 2021 when compared to our expected 2020 sales volume, which is aligned with our strategy to grow our lithium market share. For this reason, we have laid out a robust CapEx plan, for which I will let Gerardo Illanes, our CFO, to comment.

Thank you, Pablo, and thank you, everyone, for joining the call today. Last night, in our press release, we described details of our 2021-2024 investment plan, which will require approximately $1.3 billion in Chile. This plan will include the completion of our lithium expansion plans that are currently underway at our facilities near Antofagasta requiring approximately $240 million. Additionally, yesterday, the Board approved an expansion plan to reach 180,000 metric tons of lithium carbonate and 30,000 metric tons of lithium hydroxide capacity in 2023, requiring an investment of approximately $150 million. In short, we will invest just under $400 million in lithium expansions in the coming years. As mentioned last night, our plans to develop the Mt. Holland lithium hydroxide project continues. We have been working diligently with our partners finalizing some studies, and we'll make a definitive investment decision in January 2021. Any potential future CapEx related to this project is not included in the $1.3 billion CapEx outlined in the press release yesterday. Given our history of maintaining a diverse portfolio, we are working to increase our production of nitrates and iodine as well. We plan to increase our annual production of nitrates and iodine by approximately 250,000 and 3,000 metric tons per year, respectively. To achieve this, we will modify our operations to incorporate the use of seawater and update our mining equipment and operational centers. It is expected that these investments at the mining site and plant facilities will require approximately $440 million. This expansion plan give us the assurance that we will be able to meet the future needs in the iodine, potassium nitrate and solar salt markets. In addition, maintenance for the 4-year period from 2021 to 2024 will be approximately $120 million per year, while depreciation and amortization should be between $200 million to $250 million per year. We have a strong balance sheet, and we have always been conservative in our financial investment policies, being always a strong equity-weighted company. The financing strategy will be discussed in December and relevant information will be shared with the market in a timely manner. Thank you, operator. And now we can go to the Q&A session.

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

I have a few questions. I'll ask them one by one. So I guess I'd like to know that you finally now approved the lithium expansions to 180,000 tons carbonate. How do you expect to place those tons in the market? I know because of the iodine experience, you have not liked contracts. It has to mean one of your larger lithium competitors seems to be doing quite well under price realizations versus you with contracts. Will you seek to go out to get longer-term contracts to be able to ensure you can sell up to 180,000 tons at attractive prices?

Okay, Pablo Altimiras speaking. Regarding to long-term contracts, yes, you're right that we have been some competitors that today have some long-term contracts with some customers. We are working on that as well. We are trying to have long-term contracts. And well, today, that we believe that our position is better because exactly what we are doing, expanding capacity and producing more volumes. We believe that and a step-like expansion will allow us to secure long-term contracts for sure. We are working hard in order to do that. Regard to your question on prices, yes, today, maybe we have some difference regarding to prices. In the past, when we have the boon of the lithium demand, you saw that the price was so high in some markets. And if you have a long-term contract, well, the price of your contract was different to the spot price. That's happened with the long contract. But at the end, our customers, what they want is to secure the supply, and we are aligned on that. And that's why we will continue to secure some long-term contracts in the near future.

Okay. And as you triple sales volumes over the next 5 years, wherever it's going to be, can you talk about how your cost of -- assuming kind of, let's take the price of lithium out and just talk about kind of like a non-royalty, non-CORFO, just non-community payments, just cash costs for lithium. You're going to triple your volume over 5 years, let's say. You also have a lot more things going on for sustainability, producing brine, you're changing how you do things, you're changing the potash you produce. What will cost look like as you ramp your volume a lot, but now have a lot more sustainability costs and network changes?

Joel, this is Gerardo speaking. Well, you have seen on our financial statements, we have been lowering our production cost of lithium quarter after quarter, as promised when we finish our ramp-up expansion to reach 70,000 metric tons. Of course, I'm excluding CORFO effects in there. And you see that the prices -- sorry, the costs we reported in the third quarter were ex CORFO, were under $4,000. We are working in these projects that will let us expand our capacity significantly. And this expansion of capacity will also come with more efficiencies in production that will let us keep on lowering our cost. Now regarding your question about sustainability and how that may impact our cost. Well, we have been working on sustainability initiatives for a long time. And part of these costs are already included in the cost of what we're doing. And the challenge for us and the challenge for everyone in the industry is to be able to produce in a sustainable way without having a strong impact on the cost.

Okay. And just finally, you've done really well in iodine. You have really done well the last several years to push up the price of iodine every quarter. COVID happened this year. You took a step back in the third quarter on sequential pricing. How do you see -- when do you think iodine prices can get back to $35 a kilo? What's the -- say with volume, like when do you see coming back to the level you achieved not that long ago? Is it going to be 2 years? 3 years? 1 year? What's your base case?

Okay. Well, you know the demand was affected by COVID-19, but the first thing that is important to say is that we believe that this is something temporary, which is not related with the fundamentals of the market. We believe in the fundamentals. We don't see any important change in the fundamentals of the demand. And actually, remember that when prices started to go up because of the growth, the demand was bigger than the growth of the supply. Regarding to the supply, we have not seen any big change. So what we are doing today is to reveal our inventories, that will allow us to reach healthy levels once the demand recovery arise. And regarding to the recovery, well, we are optimistic because of the news. So we expect that in the near future, and we believe that will happen in the next year, we will see a recovery of the demand levels to reach similar levels to 2019.

Just one more question. When you talk about the long-term lithium contracts you might seek, would you be seeking fixed contracts, fixed-price contracts or floating price contracts?

Well, you know that it is important at the end to try to get good contracts, and when I say good contracts, it's from the customers but also from the suppliers' point of view. And in that regard, the needs of the different customers are different. So depending on the customers, depending on the strategy that you have with these specific customers, we do different things. So you have alternatives which is related to quality, pricing, volumes. So I would say that it is specific to -- for every customer.

Our next question comes from P.J. Juvekar with Citigroup.

Can you talk about how much inventory do you -- are you carrying, either in terms of months of supply or in terms of dollars? And when do you think inventories will return to normal? And what is normal for you?

Okay. So regarding to inventories, as you know, we have been producing at a very good production rate in the last month, which has been allowing us to recover our inventory positions in order to face the sales forecast that we have today. We announced that we want to excel 30% more next year compared to this year. And we will have -- and today, we have enough inventory to go ahead with this program. So we don't see any issue regarding to our inventories.

That was, I think, last quarter, you mentioned, I think it was close to $1 billion of inventory that you had -- sorry, not billion. Sorry, I meant $100 million of inventory you had. Can you just sort of talk about how much inventory do you have in lithium?

P.J., this is Gerardo Illanes. Yes, we do have more than $1 billion of inventories across the board. You can see that in our financial statement. That includes inventories of iodine, lithium, nitrates, basic materials and so on and so forth. Regarding the specific level of inventories that we have in each particular business line, we don't disclose that information. But as Pablo was saying, we have enough inventories to be able to comply with the growth we are projecting for next year.

Okay. And my second question is, other companies are talking about a trend towards regionalization of supply chain, speak after COVID. So how much of your lithium exports go to China? And let's say, Europe is certainly kicking into higher gear. EV sales are high. And as the European market develops, what's your strategy towards selling into Europe? And how are you positioned there?

Well, you know that in SQM, as a lithium producer, we have been in industry for many, many years, so that means that we supply to many, many customers around the world. But today, you are right, our exposition and exposure in China is big. I would say that more than 40% of our sales today are in China. But this is -- it's plainly because you know that more than 50% of the lithium demand is in China, and that is explained because of the EV's revolution and battery manufacturers and car manufacturers. But our strategy will continue to be for all the customers. Remember that we are talking about here not only demand of lithium for electric vehicles and batteries. We have the industrial applications. For us, it is important to remain relationship with those customers and to support those customers in also their expansion plans.

Our next question comes from Isabella Simonato with Bank of America.

First of all, I'd like to ask about iodine. You also mentioned in the release, right, you're ready to -- with the expansion plans by 3,000 tons. I just like to get more details of the time frame for that. And when we think about sales, right, in the long term, these 3,000 tons additional should yield about 16,000 tons potentially of sales when the expansion is ready. Just wanted to confirm that. And also, I would like to know how -- what's your outlook for prices of potash and SPN. We understand that demand for SPN is actually quite resilient but prices have been coming down. How are you thinking about pricing in 2021?

Isabella, Ricardo speaking. About our CapEx in the iodine business, we are working very hard as it's imputed in the $1.3 billion already mentioned by Gerardo. We expect to be higher than 15,000 metric tons of iodine at the end of 2024. That's very important for us to be at that level, and we are more than ready in order to be prepared for the market and demand recovery that we do expect next year. We have inventories of iodine today, and we think that the market will recover, and we will have more capacity included in the CapEx that is already mentioned. And I think it's going to be ready 2023, 2024. On price of the fertilizer, first, in order to answer this question, you have to consider first that the demand in some way this year was -- has been lower than originally expected to the effect of the COVID in some specific markets. Second, the low price of MOP. MOP means potash pricing this year is lower than last year. And you have to consider MOP is the main raw material using by our competitors in order to introduce potassium nitrate. We had some due to the fact that demand was lower. We faced more competition in some markets. My short-term outlook here is that the pricing that we are having today is reasonable to expect to have some price recovery maybe next year as compared to what we are having third and fourth quarter this year. And certainly, we think that all the signals are going in the direction that the demand will increase. Some of the demand that was not there this year will be recovered during next year. Your next question, I think?