Earnings Call: Q1 2021

May 20, 2021

Good day, and welcome to the SQM First Quarter twenty twenty one Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. 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 SKUIM's first quarter twenty twenty one 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.svm.com. Our earnings press release and a presentation with a summary of the results have been uploaded to to our website where you can also find a link to the webcast. Speaking on our call today will be Ricardo Ramos, Chief Executive Officer, Gerardo Orianas, CFO and Pablo Aldimiras, Senior Vice President of the Lithium and Iodine business will also be available to help answer any questions following the prepared remarks. 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 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. SEC in our earnings release issued yesterday, 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. Good morning. We thank you for joining the call today. Our earnings during the first quarter this year increased around 60% when compared to the same period last year, as a result of higher sales volumes in almost all our business lines. We are seeing positive price trends in our fertilizer markets and as expected, an increase in average prices in the lithium market since the inflection point that we saw in the fourth quarter last year. Our diverse portfolio and a strong production performance should continue to have a very positive impact on our results throughout the year. As we mentioned last night, local fertilizer markets have seen stronger demand. As a result, we expect our average prices in both the SPN and potassium business lines to be higher than average prices reported during 2020. The aluminum market is recovering and our sales volumes increased 30% when compared to the fourth quarter last year. We expect this momentum to continue leading to an increase of sales volumes in 2021 of 10% to 15% compared to last year. Finally, lithium market indicators have been very positive over the past few months. Demand growth for electric vehicles in the first quarter of the year was more than double what we saw last year. As a result, we believe that annual demand for lithium chemicals could grow more than 30%, more than previously expected. We also expect our sales volume will increase to at least 85,000 metric tons this year, increasing our market share. As anticipated, prices during the first quarter increased when compared to the fourth quarter last year. We believe that prices will continue increasing each quarter throughout the year. As we mentioned last night, our CapEx plans remains on or ahead of schedule in Chile, our plans to reach 120,000 metric tons of lithium carbonate and 21,500 metric tons of lithium hydroxide by the end of this year remain on schedule. However, our plans to reach the 180,000 metric tons of lithium carbonate and 30,000 metric tons of lithium hydroxide as we move forward to an operating by the end of twenty twenty two. Our Mount Vola lithium project in Australia remains on track. As a reminder, the board has approved close to $500,000,000 total CapEx plan for 2021 related to all our business lines. Thank you. Operator, we may now go to the Q and A session. We will now begin the question and answer session. First question will be from Corinne Blanchard of Deutsche Bank. Please go ahead. Hey, good morning, Tim. Thank you for taking my question this morning. I think first, I would like to get your view on nameplate capacity versus sales volume for this year and also maybe for 2022? With both expansion for hydroxide and carbonate now due next year rather than 2023, How do you view your sales versus full capacity? And do you anticipate inventory piling up? Hello. As you may know, we are increasing now to the 120,000 metric tons at the end of this year. Considering the good performance on our facility at the end of during second half last year, I think that it's reasonable to expect to have a total production for this year close to 90,000 to 95,000 metric tons. That's my target for this year. Next year, it's going to be an average because we will start with 120,000 metric tons. And at the end of the year, we expect to go to the 180,000 metric tons. That's why I think having a production at 80,000 megitons. That's why I think having a production total production for next year close to the 140,000 megitons makes sense. It's something in our plan we have today. Okay. And that's very helpful. So yes, I'm assuming you guys are just trying to save whatever you produce. That's very interesting. I mean, the second question is on lithium pricing and obviously, I think we all agree you are actually in the bottom in 4Q and pricing started to improve in 1Q. And if you look at Chinese pricing since late August twenty twenty and seaborne pricing as well in the past few months, yes, we all see like a positive trend. How I just wanted to try to get your view on where do you see pricing going toward the end of the year? Do you see it going by close to 10,000 kettan? Do you see it still below or above this level? Well, thank you, Pablo. Dimitris speaking. Well, as you know, rice always is a result of the supply and demand. In the demand side, we have been seeing a very positive trend for the demand. Actually, we are increasing our estimation for this year. So in that we are seeing that a positive trend. So how I mean, so you are right. We have been seeing a positive trend in pricing. However, the price always is not a unique price. You need to consider that we have different qualities, different type of customers, different volumes that you commercialize with them, different commercial strategy. So we don't have one price that can reflect the total reality of the market. But having said that, because of the positive trend of the demand, I can say that today we have been seeing prices in a double digit. And in the future, well, everything will depend on supply and demand balance. The next question will be from Joel Jackson of BMO. Hi. This is Robin on for Joel. I have a few questions. I'll just ask them one at a time. I just had a follow-up on that on a pricing discussion. I mean, I appreciate there are legs to the spot market, but even so, the the April export data from Chile, didn't reflect higher pricing yet. So I guess I'm just trying to get a sense of when exactly we can start to see that maybe on a monthly basis even, and by how much. You mentioned quality. One of your Argentinian peers who has struggled with quality in the past has even guided to like $7,000 to $8,000 a ton for their June. So is that like a floor expectation for Q2? Like is that reasonable? Well, I mean, first of all, export prices do not capture all the information of the market. So that's one thing that we need to be careful when we take a look to those prices. So that's my first comment. Regarding to our strategy, I can say that in the first quarter, the majority of our sales were agreed and contracted during 2020. So that explains the result of the price for Q1. However, the reality for the second half is different and more than 50% of the sales will be closed under the prevailing prices reality at that moment. So that's the strategy that we are following. Okay. And my second question is on the proposed copper royalty changes in Chile. So is the lithium structure viewed as a model for this or are there changes that could be expected in the lithium royalty structure as well? Yes, this is a discussion about some royalties or taxes in Chile, as you may know. We have no information other than what has appeared in the press. As you may know, it has been preliminary discussed and it has to be analyzed by the Senate and finally by the government. Anyway, we sent our preliminary opinions to the different industrial and mining groups in which we participate. They are finally the ones who raised the opinion of the mining industry regarding these issues. Just I want to add that SKM contributes significantly to the development of the country throughout the important factors and other contributions to the country and communities. Yes, for sure, there is no other economic activity in Chile that contributes more resources, both in absolute terms and in percentage terms to the country. Maybe just one last quick follow-up to that. Given the recent political changes in Chile as well, do you foresee any potential increased spending for environmental reasons, maybe the tax structure, anything like that? Or is it business as usual on your side no matter what the political climate is like? Okay. We continue to be very excited about our business strategy and our significant CapEx program. And we will continue, of course, advancing in our sustainability agenda. We went public with our sustainability agenda last year. We will continue to do so. We think we are perfectly aligned with the demand of the community in Chile and the world demand in terms of being very active in terms of environmental activities. That's why we think that is yes, we confirm our growth in terms of implement all our agenda in terms of sustainability. All those expenses or investment regarding this sustainability agenda that we made public last year are already included in the CapEx program for the next four years. The next question comes from PJ Juvekar of Citigroup. Yes. Hi, good morning. I look at your lithium contracts and they have tended to be shorter term in nature. Then you look at one of your larger competitors who is also trying to get some index pricing in their contracts. So how do you see the market evolving in terms of contracts? Do you think the market and the big buyers, the battery companies, the EV companies are likely to go towards more index based pricing to some extent? Okay. Thanks for the question. I mean, yes, you are right. I mean, some customers are trying to have more feasibility about the prices. So it's something that in SQM also we are looking at. But the thing is this is still under development. So that means that depending on customers, different customers wants to produce in different ways related to pricing. So in the next year we are flexible. So in some cases we are considering to negotiate contracts under the indexes in other node because it's up to customers. But if it's something that we are following, for sure. Okay. And then you had good top line growth in lithium as well as in potash and SPN. But your costs were also higher and so the leverage did not come to the bottom line. And I was wondering if there are any special costs that were there in the quarter coming out of the pandemic and can you talk about the leverage going forward as you get more pricing in the second half? Yes. I think it's not one clear message that the costs are higher. You have some product lines where costs are lower, some other product lines where costs are slightly higher, some product lines where costs are at the same level. We don't foresee any cost situation nowadays. Of course, we monitored. As you know, we're located in Chile. The value of the U. S. Dollar is very important for us. That's why if the dollar goes up, it's good for us. And if the dollar goes down, it's very bad because we have a lot of expenses in Chilean peso. Nowadays, the dollar is supporting our original projections. That's why it's not a big news. And I think we can continue with our original cost plan. Of course, having this price of copper in the North, that is very high. And the new copper price means that the pressure of the labor force in the North Of Chile is going up. The same with the contractors and something we are working very hard in order to improve our to increase our productivity in order to avoid any additional costs. But as a bottom line, we don't foresee any cost issue or significant issue during this year as compared to the previous year. Thank you. And just a quick housekeeping question. You had built up inventory last year that you are selling now. How much of that inventory is still left? Thank you very much. Depending the business lines with the inventory where we have, we are very comfortable with the level of inventory we have today, even though we are under the increasing sales volumes this year. That's very good news that having inventory allow us to have the flexibility if we have additional volume sales. I think that volume strategy and inventory volume strategy is a very good one and we continue to be very good for the company in order to perform our business strategy. I don't foresee any big moves in the total inventory during this year. The next question will be from Isabella Simonato of Bank of America. Thank you. Good afternoon, everyone. Ricardo, Gerardo. My question is on the ESPN and the potash business line. On the potash side, we are seeing prices rallying, especially in the last couple of months. Your prices are going up, but maybe not as much as we're seeing on the spot prices. Can you provide us an outlook for the next couple of quarters, how you're seeing potash prices perform? And a similar question to SBN, I mean, you are guiding for a volume recovery this year and of course, high grain prices are supportive for prices, but what sort of acceleration do you anticipate in the coming quarters? Thank you. Hi, Isabella. Yes, you're right in terms of the potash price is going up. We had some agreements previously to this new price trend. Certainly, I think that prices would be higher during second quarter and I'm very positive about pricing in potash during second half of the year. I think second half of the year prices would be significantly higher than the prices that we are seeing in our sales of the first quarter. As you know, in the SPN or Specialty Plant Nutrition business, the relation between potash fries and potassium nitrate is not sold directly. It means that when they go down, we don't go down the same level and when they go up, we don't go up in the the same level. Anyway, having a very potash environment is a very good news. And I foresee better pricing, not at the level of the potash in terms of percentage increase. But we think that prices during second quarter this year, especially second half this year, would be better than what we observed during the first quarter. The next question comes from Ben Isaacson of Scotiabank. Thank you very much. I guess my first question is on the election that took place over the weekend. Obviously, the stock market didn't like what happened at least as it relates to SQM. So I guess Ricardo, in your opinion, what are the reasons why the stock market is nervous about SQM? Is it only to do with the potential of increasing royalties? Or could it also have to do with issues related to water or extraction rights or maybe getting more resources to indigenous population. Is the market wrong to be this nervous right now? Hi, Ben. If you review the price of Eskam share in the last four days, in this Monday, Tuesday, Wednesday and today, we have followed the trend in some way of the Chilean stock market. There's no big difference between where the Chilean stock market is is going and where it's going in the last few days. I am not a market analyst and even less a good political analyst, but the main investment bank in India, as you may know, have issued various and very good analysis of the factors that may have affected the Chilean stock market. I think it's very interesting to be able to read them. I think there's many different opinions. None all the opinions are the same. That's why it's important to read different analysis. But of course, there is a lot of volatility today, some uncertainty. I think it's important to wait and see. It's too early to have a clear opinion about where they're moving, where the stock market is moving in Chile. But of course, when you have the big, big move that we had in the last three or four days, of course, we follow that move. I mean, there's no way we are going to be independent of what's going on in the Chilean market. And again, I think the last two days, the opportunity to read different reports from investment banks, local utility investment banks, and I think are very good in order to have an idea of different factors that may or may not affect the stock market today. So that's a good segue to my next question, which is, can you just talk a little bit about diversifying outside of Chile? Obviously, the Mount Holland project is front and center. But are there other opportunities that you're looking at? And are those in lithium? What kind of regions are those in? Are they in potash, etcetera? Yes. We are open for doing business not only because we want to have diversification of Chile. We are very positive about what we're doing in Chile. I think we are doing great investments in Chile. But anyway, our M and A activity is open for opportunities as always. And as you know, we it has been a very important decision for us to go ahead with the project in Australia. It's going to be a big project. I hope it's going to be the first big project in Australia. As you know, we have the opportunity to move forward instead of being a 50,000 megatonnes total capacity to close to 100,000. In the future, we will decide with Westpharmes in the next couple of years probably moving forward to maybe 100,000. We'll try to look for opportunities in the lithium business outside Chile, of course, yes. We did it in Australia. If we have a good opportunity, opportunity that can create value, we will do it again. Potash is a very difficult market to be to get in the market nowadays, but of course, we're open to view our alternatives. And for that, in '19, we are also open for opportunities. It seems like it's difficult to find opportunities outside Chile, but always open for opportunities and Agiline is the same. Means that it's not like we want to run out of Chile. We are very happy with what we are doing here. But if we find a good opportunity of Saicida, as we did in Australia, we will do this. Just two more quick ones for me. First is copper prices I think are now over $4.5 a pound. I remember in the past, you had interest from outsiders that wanted to come and look at what the potential was on your land. Are you seeing a pickup in that activity? I think you had that as a revenue source several years ago and I haven't heard much in the past few years. Is that something that's new or coming back at least? Yes, you're right. There's a lot of interest in copper in the last, I think, few months. I mean, copper is going in the right direction in terms of prices. It seems like it's going to be a long term trend. I hope so. And yes, we do some internal activity in order to geological activity to find some potential copper resources in our land. And of course, we have some agreements with third parties that they are looking for copper. I think it will continue. I think it will be more effective in the next six months considering what's going on with the pricing. And you're right, it means it could be something very important in the future if we find something. But yes, we are quite active about this idea. Okay. And very last one from me. You have guidance of greater than 85,000 tonnes for the year. You just did 24,000. So the math would suggest that's about 20,000 per quarter going forward. But then you also came out and said your expectations for demand is 30% higher than what you originally expected. So it just seems not to match up with respect to selling less in an environment where demand is better than expected. Can you just kind of triangulate those two comments? Yes, Ben, Pablo speaking. Thanks for the question. First of all, I think that it's important to remark that during this third quarter, we sold almost three times compared to the same quarter of last year. So I think that it's important to remark that. The second thing that is important to remark is that this year, we grow more than the global demand growth. So that means that we are increasing our market share. Regarding the split among the quarters, it is important to consider that customers have different strategies to buy the products, sometimes they buy more or less and sometimes it is not in our control. So that may sometimes explain difference among quarters. But having said that, it is important again to remark to say that we said that we will set at least 85,000 megabitons, but our intention is to sell more if the market is there. Thank you very much. And the last question today will be from Cesar Perez Novella of BTG Pactual. Good morning or good afternoon, gentlemen, and congratulations for the results in the first quarter. Regarding the accelerated rollout of your carbonate and hydroxide line in 2022, could you give us some added color on why you're front loading the investment? And I understand it's clearly demand, but perhaps a little bit more color in the specifics. And of course, along these lines, what should we think of the CapEx figure for 2021? Is $500,000,000 still good? Yes. I think we're not looking at huge difference, Cesar. Anyway, good afternoon, Cesar. But if you consider, yes, we're doing okay. The projects, things are moving in the right direction. Sometimes you have delayed projects and sometimes you have the good news that projects are in ahead of the schedule. And this is the case, we're not talking about one year, we're talking about some months before expected. We will not change our total CapEx for 2021 and 2022. It's going to be the $500,000,000 as we explained before. And yes, it's a good news. And of course, it's a very good news considering that the market is very good and having more volumes available is always having this flexibility in this market is very good news for us. That's why we are pushing very hard in order to do it right, but to do it as soon as we can. Okay. No. Thank you very much, Ricardo. And just a final one on my end. On iodine, you call for 1,000 tons in incremental volume for this year. What can you tell us about this market in terms of demand recovery and pricing as well? Thank you. Hello, Jose. It's Paolo speaking. As we anticipated before, we have been seeing a recovery in the in higher end demand. Our expectation for this year is that the demand will recover by 9%, which is good. However, still will be lower than the demand that we saw in 2019. But for next year, we will see the tight recovery, so the demand will be in the normal growth rates at that year. With that, to prices, we have been seeing I mean, we see a stability because the demand growth, as I said before, and also we are not seeing more supply. So we expect to have a stable prices for the rest of the year. And this concludes our question and answer session. I would now like to turn it back to Kelly O'Brien for any closing remarks. Great. Thank you. And thank you for all the questions. We look forward to seeing you next quarter. Have a nice weekend. The conference is now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.