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

Good day, and welcome to the SQM First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Irina Axenova, Head of Investor Relations. Please go ahead.

Thank you, Sara. Good morning. Thank you for joining SQM earnings conference call for the first quarter of 2023. This conference call will be recorded and is being webcast live. Our earnings press release and the presentation with a summary of the results have been uploaded into our website, where you can also find a link to the webcast. Speaking on the call today will be Ricardo Ramos, Chief Executive Officer; and Gerardo Illanes, Chief Financial Officer. Carlos Dias, Executive Vice President of Lithium; Felipe Smith, Commercial Vice President of Lithium; and Juan Pablo Bellolio, Commercial Vice President of Iodine will also be available to answer any questions. Before we begin, I would like to remind you that statements made in this conference call regarding our business outlook, future economic performance, anticipated profitability, revenues, expenses and other financial items along with expected cost synergies and product or service line growth, are considered forward-looking statements under federal securities laws. These statements are not historical facts and may be subject to changes due to new information, future developments or other factors. We assume no obligation to update these statements, except as required by law. For a complete forward-looking statements, please refer to our earnings press release and presentations. I now leave with you -- I'll now leave you with our Chief Executive Officer, Ricardo Ramos.

Good morning, and thank you for joining the call today. Yesterday, we reported our earnings for the first quarter of 2023. The results were affected by lower sales volumes in lithium and specialty plant nutrition business lines, partially offset by higher average prices when compared to the same period last year. We saw a decline in lithium demand in the beginning of the year, especially in China, which affected our sales volumes. High inventory levels across supply chain accumulated in the previous quarter and reduced cathode production volumes resulted in low customer purchasing activity and put pressure on market prices. Coming out of the first quarter, we have seen an increase in market activity with customers looking for more volume to buy, which signals the end of the destocking period and is also being reflected in the spot prices trending upwards in the recent weeks. We believe that the lithium market foundations are intact and have not changed our expectation for the lithium demand growth this year. During the first quarter of the year, the global electric vehicle sales continue to increase when compared to the same period last year, achieving almost 30% growth worldwide, with sales in China increasing almost 22% in Europe, almost 19% and over 50% in the U.S. We expect this growth to continue throughout the year with the total electric vehicle sales increasing over 2.5 million units in 2023. While we see new supply coming to the market this year, we believe that the softer price conditions on the stricter environmental requirements for mining operations have affected the economics of some of the high-cost suppliers as well as impacted the timing of new projects. Consequently, we expect that the lithium market will remain tight throughout the year. We will continue to focus on expanding our production capacity and fostering a strong relationship with our strategic customers. We are committed to investing in these areas to drive growth and maximize our sales volumes. With the reconfirmation of volumes from all our major customers for this year, we anticipate a steady increase in sales volume throughout the year, quarter-over-quarter. Since last year, we have made significant progress in transforming a majority of our contracts into flexible pricing conditions, utilize an index reference price with a lag between. We believe this approach allows us to respond swiftly to changes in the industry and provides greater flexibility to our customers. As I mentioned yesterday, we are very proud of the results in our caliche ore operations and specifically iodine business, which allow us to increase our sales volumes and ensure the supply of iodine to meet the growing demand of the x-ray contrast media segment. While global iodine demand is expected to be flat on the year as a result of the reduced demand in some of the iodine applications, we believe that contrast media segment will grow close to 7% a year. SQM is the only producer that has been able to increase materially its production volumes in the recent year. Sustainability remains at the core of our operations as we continue to focus on reducing the carbon and water intensity of our products. I am pleased to announce that our 2022 sustainability report will be published next week and invite you to explore progress throughout the past year. We take pride in the achievement we have made and remain committed to advancing our sustainability development plan even further. So we will now open the line to questions.

[Operator Instructions] Our first question comes from Tiago Lofiego with Bradesco BBI.

Actually, I have 2 questions. The first one is on lithium supply in the coming years. So how do you see new frontiers evolving? How do you look at Argentina, Brazil, Mexico as potential new frontiers. And still in that question, would you consider eventually exploring potential projects in those regions? And then the second question is about the National Lithium policy. Can you give us an update on how conversations are ongoing with Carrefour with the Chilean authorities? Any hope that a middle ground can be reached. So just want to hear your views on that.

This is Felipe Smith. I will try to answer your first question. So indeed, I mean we have always mentioned to the market that lithium is available everywhere. And there are, of course, today, we are seeing projects arising in different regions. We are, of course, following those developments. And as SQM, we have also said in the past, we are always interested in starting new projects in different parts of the world. So we are potentially also analyzing that possibility. Now one important statement that we have to add is that when we look at new projects, I mean here, the experience and know-how of the one who is responsible of that project is key because we have seen that in some cases, projects take too long or finally do not materialize as originally foreseen.

Ricardo Ramos speaking now. Talking about the Codelco, we expect to start talks with Codelco in the coming weeks. As we have said before, we are looking for an agreement that would be positive for the country, the Antofagasta region, the communities and, of course, for the 2 companies. About the -- what you call the -- we can call the National Lithium policy, as a company, we do not comment or give an opinion about what we call public policies. I think it's in a very interesting discussion, but it's a discussion that corresponds to political parties; you, the analyst; or the study centers that we have a lot of them in Chile; and the different unions that are also giving their opinions. We just want to start this conversation in the coming weeks, as I said before. We will report when it starts to the market.

Fair enough. And if I may very quickly go back to Felipe. Felipe, which one of those regions do you see more potential growth within -- and I asked those specifically because of the geographical proximity to you guys. So Argentina, Mexico and Brazil, which one of those would you think that there is more potential for SQM and for the market in general?

Yes. I would say that today, our main focus is Australia as #1, let's say, potential area of development. We are already developing a project there, and we are studying different potential new projects. So I would say this is our #1 focus today.

Our next question comes from Rafal Barcellos with Banco Santander.

My first question is related to lithium volumes. You mentioned that sales volumes have rebounded in the second Q, but I just would like to understand it's now at normal levels for the second Q or if you believe that it will take, for example, 2 more quarters for us to see volumes returning to normal levels. And my second question is related to CapEx. I just would like to understand how flexible is your 2023 CapEx guidance of $1.2 billion? And in which scenario you would consider reducing this CapEx level?

Okay. Yes. Rafael, regarding the, volumes. Well, as Ricardo mentioned at the beginning of the call, we are very positive today because, first of all, the fundamentals of the demand are strong. The EP sales are showing an increase of 30% on the first quarter, which is already very positive. And we are also seeing that the customer activity has recovered. We are engaged in business discussions with our customers. Customers are buying again. So I would say that from a volume point of view, I can say that the second quarter will be substantially higher in volume than the first quarter, also will be higher than what was the second quarter of last year. And finally, I would say that, as we have said in the previous call, that the second semester volumes should be better than the first semester volumes.

Just about the projects, just one comment. Our projects in the lithium business are so good that we are not even thinking about to reduce it. We don't foresee any scenario where we are going to reduce the CapEx. We are thinking about increasing our CapEx. We have new projects, new initiatives, and probably we have new projects in the lithium industries even in Chile we will announce during the next 2 quarters. But nowadays not forget about reducing, we are thinking about increasing.

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

I have 2 questions. First of all, on the iodine side. You mentioned, Ricardo, that prices should be resilient for the second quarter, but I'd like to hear more your views beyond that, I mean what you're seeing in terms of new supply. You mentioned that no one has been able to add supply. So if you could give a little bit more details on the midterm scenario. And second of all, even though potash prices were down, the premium of SQM was relatively resilient during the quarter. So also, what are your expectations going forward?

Isabella, this is Juan Paolo. I'm going to answer the question about iodine. We believe that, as we mentioned that during the first half of the year, demand of supply is going to be stable. We think the same about prices for the second half of the year. It will depend on the demand and supply of the market finally. But what we see from today and onwards is like is that there is a segment of the contrast media market that is growing strongly, so there is a fundamental on the demand that should keep the market and demand strong. So unless more supply arrives to the market, we see the market more or less stable.

Yes. About the potash and the relation between SPN, means especially the plant nutrition products, potassium nitrate and the relation with potash is important to consider that are not direct competitors. It means it's important to keep these numbers as a ratio, as an important indicator. But its different market, its different outcome, its different uses. But anyway, I think that today, price environment of potash nitrate is not bad, it's good. In turn, if you consider our average prices 2 years ago, whatever it means today, today prices are very good, and we're very positive about the potential demand in the near future. Things are just a little bit better now than what used to be doing in the first quarter, just to comment to you that first quarter this year were mainly affected in the sales in Europe. Europe is affected by the high inflation, high production costs of farmers. We had bad weather that has delayed crops. The uncertainty in the world also have caused agricultural activity to be lower than expected. But if you consider the other markets, mainly for example, United States, Mexico and other ones, we can say that we are more than -- we're close to a normal demand. That's why we think that we are more positive regarding the next 3 quarters, and we expect SPN, it means especially the plant nutrition business, 2023 volumes to slightly exceed higher than 2022 volumes. That's a good news we expect in the next 3 quarters. Pricing, you are right, it will depend also for many conditions. But of course, if the potash price goes down, it will affect the price of potash and nitrate. In some way, yes, it will affect. But we have to see what is going to be the development of the pricing of potash and potassium nitrate still is not so clear for the future.

Our next question comes from Ben Isaacson with Scotiabank.

Just a few questions. I'd like to ask them one by one, if that's okay. You sold 32,000 tonnes in Q1, which was a little bit lower than what most had expected. What does that mean for your overall guidance for the year in terms of volume? Can you give us some kind of range in terms of what we should expect?

Yes, Ben, I agree that Q1 was low, and we anticipated that it would be low. But as I said before in the previous question, we are very positive about the market situation now. So we expect a good second quarter, substantially better than the first, and we also expect that the second semester volumes will be higher than the first semester volumes.

Okay. That's perfect. Second question is, I believe we saw 46,000 tons of exports from SQM, and you recognized 32,000 tons. Does that mean that you've paid CORFO royalty payments on the, whatever the difference is, 14,000 tons? And so you've paid maybe, I don't know, $150 million or something like that? That's as a prepayment. Is that correct?

This is Gerardo Illanes. Well, that figure of 46,000 metric tons of exports, I'm not sure if it's the exact number that we are considering or that we consider during the first quarter exports. But you're right, we pay to CORFO at the moment we export based on the volumes that were exported during the quarter and the average sales price to third parties during that quarter. So in the first quarter, we export more than what we sell. And consequently, we pay to CORFO more than the actual calculation of the tonnage invoice to third parties times the price in with the third party.

Right. Okay. Just 2 more quick ones if I may. In the past, you had mentioned some interest in investing potentially as joint ventures in Canada and the U.S. Earlier on the call, you said you're still most excited about Australia. Are you still looking in Canada and the U.S.? And any progress there?

If you -- we are open to do business almost everywhere in the world if it's good for us. We think that we have competitive advantages in lithium. We have a lot of experience. We know how to do it. We have commercial capacities and a lot of technical know-how. And of course, the U.S., Canada, Australia, everywhere is an alternative to look forward. But of course, Australia, for us, because we have an office there, we have a lot of -- we have some people there, seems like a very interesting place. We are open to review, and we are reviewing alternatives all around the world.

Last question if I may. You said in the press release that you believe destocking has been concluded. Can you just give a little bit more color in terms of what you mean by that? What data points are you seeing? What locations, kind of where in the supply chain have we seen destocking finished?

Yes. I mean, of course, the main issue with lower demand happened in China as you know, as you may know, China concentrated mainly the lower demand. And it's also in China where we are seeing this activity of purchasing restarting strongly. And I would say strongly, I want to highlight that. So the fact that you see also the indexes changing is a very good sign that what we are reading is also what, in general, the market is reading. So the customers are buying again, and that means definitely that they need to start that they reached their lower stock levels and now they are rebuilding stocks and consuming.

Our next question comes from Corinne Blanchard with Deutsche Bank.