Good day, and welcome to the SQM first quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touchtone phone. To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Kelly O'Brien, Head of Investor Relations. Please go ahead.
Good morning. Thank you for joining SQM's first quarter 2022 earnings conference call. This conference call will be recorded and is being webcast live. Following this call, you will 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, where you can also find the link to the webcast. Speaking on the call today will be Ricardo Ramos, Chief Executive Officer, and Gerardo Illanes, Chief Financial Officer. Carlos Díaz, Executive Vice President of Lithium Business, and Pablo Altimiras, Executive Vice President of the Iodine and Nitrates businesses, will be available to answer any questions.
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 forward-looking statements as that term is defined under federal securities laws. 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 as 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 in our earnings release issued last night.
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 our new information, future developments or otherwise, except as required by law. I also wanted to mention before I pass the phone over to Ricardo Ramos, that Felipe Smith is also here to answer questions related to the lithium market. Ricardo?
Thank you, Kelly. First, good morning and thank you for joining the call today. Our first quarter results were a milestone for us, a reflection of several positive conditions, higher prices in all our business lines, where significant increases in lithium prices stand out, and benefits of our successful long-term operational and commercial strategy. Today, we can proudly report that we are a leader in the lithium industry. We have almost tripled our production levels in three years while we have significantly decreased extraction of brine. We're the most integrated lithium producer in its country of origin, delivering high-quality products that can be used directly in the production of high-end battery components. Related to our operations in the Salar de Atacama, it is important to remember that SQM began its project by acquiring the participation from other producers.
In 1993, we assumed the risk, developed, invested, and executed the project. It has not been an easy task. The natural resources was not well known, and our project has had its ups and downs. Mining activities require long periods of development, dialogue and collaboration with the neighboring communities, relevant investment from shareholders, and above all, a strong team to innovate and develop technologies to operate the natural resources. Our first quarter results include payments related to the agreement with Corfo and tax provisions that total approximately $800 million. In total, the amount is similar to the earnings reported by all our business during the first quarter of this year. SQM's lithium business is a very good example of a successful public-private partnership. No other operation delivered more resources proportionally to the Chilean coffers.
Approximately 60% of the operating margin from lithium is dedicated to payments to Corfo and taxes. We continue to analyze new ideas and study new projects in all our businesses. We will review our investment plan in the coming months, and we should update our projections following that review. It's very likely that we will increase the resources oriented to the development of business in Chile and abroad. We continue growing and investing in all our businesses. In the iodine market, we remain on target to increase our capacity 1,000 metric tons next year and 2,500 metric tons in 2024. In parallel, we're increasing our nitrate salts production by 320,000 metric tons, which will allow us to meet future demand growth of nitrates for fertilizer and solar salts.
Finally, for lithium, we remain on target to reach 180,000 metric tons in the coming months. Our plan to reach 210,000 metric tons and 40,000 metric tons of capacity of lithium carbonate and lithium hydroxide, respectively, are advancing well. As you know, in April, we held board elections. I look forward to working with this new group of diverse professionals as we work to bring SQM and its participation and contribution to Chile and its surrounding communities to a new level.
Operator, we will now open the lines for questions.
We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Corinne Blanchard with Deutsche Bank. Please go ahead.
Hey, good morning, everyone, and congratulations on the strong quarter and the pricing realization across all the business division. I have two main questions. The first one, if you could give a view on 2Q pricing for lithium and maybe for the rest of the year. Then the second question would be, if you can elaborate and give us your view on inventory and China sentiment in 2Q from the ongoing lockdown.
Hello, good morning, everyone. I am Felipe Smith. I will comment on the first question. Well, of course, it's very difficult to predict what will be the price for the rest of the year. You know that the price is always related to the supply-demand balance. What we can comment is that approximately 50% of our sales are contracted with fully variable price indexes. Around 30% of our sales are still open and about 20% with capped prices. So at the end, our pricing will follow, in general, the market trends. Regarding the second quarter, we could say that we expect the price to be somewhat higher than the first quarter. Regarding the second question, it was about inventories, if I understand well.
In general, in the first quarter, our sales and our production were more or less in line, similar. For the second quarter, we have seen that in the month of April, there was a drop in our sales related to the Shanghai lockdown. In May, we have seen that there is a recovery in the demand. We expect that we will start catching up with our sales. In any case, in Q2, the volume, we believe that will be probably lower than in Q1.
Thank you. That's helpful on the volume. If I may just follow up on the pricing. Obviously I think, you know, following the benchmark and the spot prices, I think it's a given that 2Q would be higher than 1Q. Is there any maybe quarter-over-quarter or year-over-year, like, percentage range that you could help us to understand and frame the pricing? Maybe also if you can comment actually on the 20% of the volume that you have on the legacy contracts. I believe that you may have renegotiated some of the price. Anything would be appreciated. Thank you.
Regarding the 20% that it is within capped prices, what we are doing, we are trying to renegotiate some of those contracts. We expect that we may have a better reflection of what is the market. Again, I would like to insist that it is very difficult to predict what the prices will be for the rest of the year. Our main volume is linked to market price, so it will depend on how the market prices evolve.
Thank you. I appreciate it.
The next question comes from Joel Jackson with BMO. Please go ahead.
Hi, this is George Chen . I'm for Joel Jackson. Thanks for taking my questions. For the first question, I just wanted to follow up and ask maybe the lithium pricing a different way. Given that the pricing may lag up to three months on recently negotiated contracts, could you maybe provide some color on if spot prices were to hold at current levels, maybe where would SQM's realized average selling price move to or like the magnitude of that? For the second question, with respect to lithium sales volumes, I was hoping you could provide some commentary on what may have happened over the past few months that changed your expectations that sales would be greater than 140,000 tons, and maybe to what degree, and were production levels in Chile much higher than previous expectations? Thank you.
Yes. I will start with the second question. We are still expecting that our sales will be around 140,000 metric tons. We are basing this estimation on the fact that the fundamentals of the demand, we believe, are still there. What we saw in, especially in China during the month of April, which had to do with the lockdowns, we see that, this month of May, there is some recovery already, so we are positive about the demand. The supply is, of course, something that is more difficult to anticipate how it will evolve, and at the end, that will be the key of where the price will move for the rest of the year. Regarding that, once again, spot prices will be a result of the supply-demand. Our contracts that are linked to a market price have certain delay in this. At the end, 80% of our sales will follow whatever the market is.
Okay. Perfect. Thank you.
The next question comes from Ben Isaacson with Scotiabank. Please go ahead.
Thank you very much, and good morning. Just wanted to understand your comment on the lockdowns in China and how that's impacting the supply chain. You talked about 140,000 tons this year. If you subtract the 38 from Q1, that gives you around 34,000 tons per quarter for the rest of the year. Given the lockdowns in China, can you discuss the shape of the remaining quarters and how you think that'll look? Are you assuming that there's no more lockdowns in the second half of the year? Thank you.
Indeed, during the second quarter, we expect lower volume. In the second half, we are expecting that we can have a recovery on those volumes, and it will be our best estimation today that for the year we will be in the surroundings of 140,000 tons. Okay.
Yeah. Just to understand.
The first quarter.
You're assuming no lockdowns in the second half of the year. Is that correct? You talk about a recovery.
Yes, exactly. That is our best assumption today because we are seeing that already in this month of May, we are seeing that there is a recovery ongoing. We want to be positive and expect that situation will improve for the rest of the year.
Ricardo, my second question is on your statement that you made, both today on the call and in the earnings release, talking about, you know, SQM's success of a public-private partnership and, you know, you gave a lot of commentary. Everything you said is true and it's been true for quarters and for years. Why did you need to make that comment today? What's the logic behind those statements right now?
Hello, Ben. I think that the main reason is that it's important to consider that this first quarter is a milestone in the company. It means if you review the results are really, really very good results. When you have this kind of numbers, it's important to remember that those numbers are not free, are not from one day to another day. That's why I think it's important to remember, especially for our own people internally in SQM, the press release is not only for investors, it's for everyone. My idea was to recognize the long efforts of many SQM workers, many and very talented people who, over a long period of time, with good years and difficult years, were able to successfully develop new technologies, apply innovation, and develop new process in a project that was very difficult in its origin.
I think when you face these kind of milestones, it's important to say thank you for the people and to recognize that it was a long work, a long way. It's not one day to another day. It was a long effort with difficult days, with good days, and now all these efforts with good and talented people is paying off. That was the main idea because it was a milestone. It was a very important quarter in the SQM record.
It's also, I guess, helpful, and well, it's also a signal to the Chilean government, like, so leave us alone, we're doing things really well and, you know, the Salar de Atacama is in the right hands. Is that also part of the message as well now that the constitution is being worked on?
As you may know, the Constitutional Commission regarding the mining activity is practically finished. Makes no sense to send any signal to the Constitutional Commission nowadays. We don't use press release to send any signal to the government. It means we, when we have the opportunity to meet the government and authorities, we share our opinion, we share our ideas about the country and what we are doing, and I think that the government and local authorities are really well informed. They have the information regarding what is SQM activity. Again, the main intention, and I wanna be very open with you, Ben, is that it's a very good result, it's very important for our own people, our own workers. We are more than 11,000 people working in Chile directly and indirectly.
Our press release is very important for them and I wanna say thank you for a lot of people working very hard in all those years in a very difficult project and trying to deliver good results. Now it's a great milestone for the company getting the results.
That makes sense. Thank you very much and congratulations again.
The next question comes from P.J. Juvekar with Citigroup. Please go ahead.
Yes, good morning. You know, I think you said you paid $800 million in royalties and taxes in one Q. Can you give us what was the amount in four Q for the same thing?
I do not have the name in front of me about the payment to Corfo but we can provide these numbers. I don't think it is a confidential number, and we can provide these numbers later on. We don't have this historical information.
Okay.
You can calculate because the formula we pay taxes to Corfo and the local governments and communities is public knowledge. I think that the agreement we have with Corfo is a public agreement that you can have access to it in our webpage. You can calculate. It is an algorithm. It's a procedure, you know, depending on the volumes and the prices and so on. We can provide the numbers if you wish, but we don't have it exactly here.
Great. No, thank you. That's okay. On your CapEx, you mentioned more investments in Chile and abroad. The question on the abroad part, you know, what plans do you have abroad besides your Mount Holland project? With the increases in cash flows with this lithium pricing, do you have appetite for more M&A? Thank you.
As I said before, we are always looking for new projects and new activities outside Chile or in Chile. We're very committed with our business lines and all our business lines. In terms of outside Chile, we of course are now facing the moment to decide if we are gonna move from 50,000 metric tons to 100,000 metric tons total capacity in our Mt Holland project. I hope that we will have this decision due in second half this year. We need to have a meeting with our partners, with Wesfarmers. Of course it will mean more investment. I don't have the exact number of the additional investment, and we will inform the market at the moment. Of course, this is the most important investment outside Chile that we're thinking today, and we're very optimistic.
We are moving in the right direction in order to do it. Of course, the company is always looking for M&A activity if it is good for the company. If we can generate value for the company and shareholders, of course we are open. And we receive a lot of alternatives on a daily basis from people trying to sell some potential business or natural resources, whatever. We read in detail. As soon as we have something real, we will inform the market. The most important thing here, keep in mind, is not because we are having good profits or we have money, we're gonna get involved in M&A because we want to be big.
We are gonna get involved in an M&A only if we are sure that we can show to you our main shareholders that our shareholders and the company that we have a good project, a project that generate value for the company and shareholders. That's it.
Thank you.
The next question comes from Robert Brown with Morgan Stanley. Please go ahead.
Hi, Ricardo, team. Hope you're all well. Thank you for taking my question. My question actually is a follow-up on the previous questions, but more focused on Chile. I was wondering what business lines in Chile would have more potential to receive those incremental investments you mentioned on the release. Also on lithium. I would be interested to know how you're thinking, you know, about balancing the quota you have allowed to extract in Atacama 2030, and potentially increasing capacity, you know, faster than what will be implied by that quota given the so high returns you may have today at current prices and also considering the very low CapEx you deploy compared to any other project in the world.
First, regarding our opportunities in Chile, it's important to remember that SQM is not only lithium. Lithium is a very important business for us. We produce a lot of nitrates. We're the number one in the world producing potassium nitrate. Potassium nitrate is the best fertilizer you can have for drip irrigation, hydroponics, greenhouse. We're very proud about this product, and we are increasing our capacity. That's why we think that we have new opportunities to increase production, to have better quality, to have new facilities in order to improve the different products in the specialty fertilization division. Second, we are the number one by far in the world in the iodine business. We are close to 30% of the iodine demand in the world and production.
We supply to a very important market that is the iodine, for example, using the X-ray contrast media. We're talking about thousands of people that every year have an early detection of potential cancer using X-ray contrast media. We are very committed to supply iodine to the X-ray contrast media producer. We are, as I mentioned before, increasing our capacity and we will review it again if we will increase again our capacity. Also, if we will provide different quality. We are also, as you know, we have our sustainability projects and we are very aggressive in that. We are very proud about that. We are gonna use seawater in our projects of nitrate and iodine, and we have investment involved in that. We have many initiatives that we are reviewing today that could be included in our next projects announcement.
About lithium, that is important, of course, as you know. It's more of a chemical than a mining business for lithium in Chile. You may know we signed, for example, an agreement with LG. LG is one of the major players in the global battery market. We have a long and very good relationship with them. We believe we can jointly explore new businesses, either in the production of cathode components in Chile or the recycling of lithium abroad, as examples of alternatives that we will study together in order to do more investment. Most of this investment could be a very good idea to do it in Chile, and this could be included in our next CapEx. About the total lithium production coming from the Salar, I don't want to announce every single quarter a new increase in capacity.
Means last quarter announced they were moving in 210,000. At least give me a couple of quarters before announcing a new increase. We are now working very hard, not myself, Carlos Díaz and his team working very hard in the 180,000 and the 210,000. Wait just a little bit and we will inform if we have opportunities to move forward with something better than that. I'm sure considering the quality of the people we are having at the Salar level, that we can inform good news in the future. First, please give me a couple of quarters before moving in that direction.
Makes sense. Thank you, Ricardo. If I just may ask another question, this time related to fertilizers. It looks like that the high prices are hurting immensely in the SPN division. In the past, I understood that the strategy in this at the time was to have more stable prices to keep your clients, your client base closer. Has it changed? Or and it does it make sense maybe to sacrifice volumes a little bit to take advantage of prices? Just wondering how what the strategy today.
Hello. Pablo Altimiras speaking. What you said is true, and of course, when you participate in this specialty fertilizers business, you work close with customers. However, you know, today, to follow a certain strategy is complicated because of the issues that we are facing. I mean, today, you know that the world is not facing normal times. It's really difficult to predict what will happen, you know, with the issues with the war in Ukraine, you know, the restriction that Russia's producers and Belarus producers have. Today, you know, it's difficult to predict. We see that the demand will be affected. What we are trying to do is to continue producing, you know, on our capacity and to supply, you know, the customers that we have with the product.
At the end, you know, price is a matter of supply and demand. We are trying to be there. It's important also to understand that many, Wesfarmers have issues, you know, in order to plan what they want to do, because of different issues, supply chain issues, problems with logistics. You know, today is difficult to answer with a clear answer about what you are asking.
Understood. Thank you very much.
The next question comes from Lucas Ferreira with JP Morgan. Please go ahead.
Hi, everybody. Thanks for the space to ask questions. I have two. The first one in general about your costs, inflation on your raw materials. Inflation in Chile is running around 10% and you probably have some cost linked to the US dollar. If you can comment on the effect of the lease fees, how much your costs overall in your operation should be going up this year. If more than this 10% inflation or less because you're ramping up capacity, diluting fixed costs. How to think about costs ex lease. The second question about the dividends.
If I'm not mistaken, correct me if I'm wrong, but as per your policy, you should be paying at least 100% of your net income, right? As dividends. Looking at the past years, you end up paying more than this, 120%, sometimes 130%. What's the mindset this year? You're cash positive. I know your CapEx could be accelerating a little bit, but do you think it's possible to go back to those levels or 120, 100% of your net income as a payout? Thank you.
Hi, how are you, Lucas? This is Gerardo Illanes speaking. Regarding the cost and the Chilean peso, it's important to remember that, of course, we are located in Chile. We have a lot of Chilean peso related costs. We are a US dollar denominated company. On one end, we have the inflation of the Chilean peso that is affecting our costs. On the other end, the depreciation of the Chilean peso is affecting our costs on the opposite direction. We're seeing, of course, pressure on cost on some of the raw materials that we buy to produce our products, and also impacts because of the logistic differences that we're seeing all over the world.
We are all in all trying to control our costs to make sure that they don't go up following 100% what we're seeing with the inflation. Regarding the dividend, Ricardo?
I think that as you may know, we have a dividend policy that is public after the shareholders meeting. Anyway, the board of director has the obligation to review the policy every quarter, to act accordingly what is in the best interest of the company. Our number one priority is fully committed with our financial strategy. We are a conservative company. As you can review our books, we have a very good financial position, and we expect to continue to have a very good financial position. We are a strong investment grade rating company since 1994. That's a long time, and we expect to continue to be a strong investment grade company in the future. That's why dividend policy is very important in our financial strategies. We review every quarter.
We discuss with the board our numbers. We discuss what is the cash position of the company, and we decide accordingly. Of course, we review our CapEx, our M&A activity, our potential use of cash, and considering all of the above, we review our dividend policy. That's why every quarter we review the numbers. So far, we're using the dividend policy that was presented to the shareholders. It means that considering the current numbers of our balance sheet, 100% was the right number. Again, our idea is to maintain and to continue to be a strong investment grade rating company from a financial point of view. Also, it's important to be ready and prepared to take business opportunity if we have a very good business opportunity in the future.
Perfect. Thank you.
The next question will come from Cesar Perez-Novoa from BTG Pactual. Please go ahead.
Yes, good morning, everyone. First of all, congratulations for the strong performance in the quarter. I'm really happy to see some of the financial investors giving you strong recognition for your well-deserved efforts. Hopefully, we can see the same coming out of elsewhere, considering your social and economic contribution in this country. I will piggyback here on Ricardo's comment regarding the LG partnership with both firms could jointly develop recycling alternatives or a cathode material facility. Can you please comment on when we can see some of these initiatives going forward, and what level of spending would SQM be willing to deploy in this new venture? If I may, just a second question.
High fertilizer prices have turned to be problematic in many countries, and you specifically state that you may encounter some demand erosion. My question is: What level of volume impact are you currently anticipating for the year, if any? Thank you, gentlemen.
First, Ricardo Ramos speaking, Cesar. First, about the LG, it's an agreement to review alternatives, and we have a good team in our local SQM and a very good team in LG working as we speak in order to review the pros and cons of the different alternatives. I expect to receive a report from those teams, I think the next month. Considering the report, they will recommend moving forward in one or two or many alternatives, and we will have the timetable and investment according to their recommendations. Nowadays, we're open. Of course, we're talking about new initiatives, and usually you start with a small scale. If things go in the right direction, you go to the second step and third step and so on. That's why I do not expect huge investment at the beginning.
Usually, what you have at the beginning are small plant facilities in order to prove that you can produce the quality and quantity of the products you are looking for at the investment and cost, and having everything prepared to move to the second, third, and fourth phase. I'm very positive. We're gonna have a couple of at least two or three initiatives moving forward because I'm really impressed with the capacity of LG. They are one of the most capable companies in the world regarding battery productions. They have the technology, they have the know-how, and the most important, that they have a very good relationship with us. They visit us in a huge team with a lot of interest in order to do things together.
It's not what I want to say, it's not something that we have an exclusive relationship with them. We are open to have all the kinds of cooperation with other companies. It's the way as lithium producer to add value to Chile and add value to the industry, that's to cooperate with all the big players. I hope to have the numbers for the next conference call and share with you what we expect for this potential agreement with LG. About the second one, Pablo?
Okay. What you mentioned is totally right, and we have seen an increase of prices in the last quarters in a very important way. I would say that today is a little bit too early to say how the prices will affect, you know, fertilizers, also depend on the fertilizers. Some are commodities, others, like our product, is a specialty fertilizer, so it depends on the application. However, we say that today, with the information that we have today, to see a reduction of 10% of the amount of fertilizer is something that could happen. Anyhow, as I said before, it's too early, but of course that we are following up this quite often in order to see what happened at the end.
Okay. Fair enough, gentlemen. Thank you.
The next question comes from Isabella Simonato from Bank of America. Please go ahead.
Thank you. Good morning, Ricardo, Gerardo. Thank you for the call. My question is on iodine. We also saw a sharp increase in prices, Q on Q, right, in the first quarter. As you said, demand recovery while supply remains tight. I just wanted to get more color on this balance, right, and what we are seeing in terms of the size of the demand increase. While, when we think about potential new supply, right, what you're seeing in terms of marginal cost and an actual risk of supply being added to the market. Thank you.
Yeah, you are right. I mean, the increase of prices was good. I would say that this is more related, you know, with the lack of supply that we have seen in the market. The demand, it's been there despite the high prices where we see that some applications that use iodine sometimes are affected. However, we have seen strong demand in some of the market segments like X-ray contrast media, LCDs, and so on. However, what we are seeing is a lack of the supply. Actually, that explains in part also why we normally, in the case of SQM, we not only increase the price, but also the volume. It's because also we have been able to produce more volume than expected, and we were able to allocate that volume in the market.
Regarding to what will happen, well, again, I mean, you know that in SQM, we are investing to expand capacity. As Ricardo explained before, we are doing our best to be there with our customers and with the market. However, everything in terms of supply and demand will depend on what third parties do. In that regard, we will need to see what happened. So far, we are not seeing new capacity arriving in the short term, so maybe the situation that we have today is something that we could expect that happen in the next month.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Kelly O'Brien for any closing remarks.
Thank you for joining our call. We look forward to hosting you next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.