Sociedad Química y Minera de Chile - Q1 2020

Transcript

Operator (participant)

Good afternoon, and welcome to the SQM First Quarter Twenty Twenty Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask your question, you may press Star, then one on your touchtone phone. To withdraw your question, please press Star, then two. 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.

Kelly O'Brien (Analyst)

Good morning. I hope everyone is healthy and well. Thank you for joining SQM's First Quarter twenty twenty Earnings Conference Call. This conference call will be recorded and is being webcast live. You may access the webcast later on our website, www.sqm.com. Our earnings press release and a presentation with the summary of the results has been uploaded to our website, where you can also find a link to this webcast. Joining the call today as speakers are Ricardo Ramos, Chief Executive Officer, Gerardo Illanes, Chief Financial Officer, and Felipe Smith, Commercial Vice President, Lithium and Iodine, Asia-Pacific.

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 the 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. 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 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 laws. I now leave you with our Chief Executive Officer, Ricardo Ramos.

Ricardo Ramos (CEO)

Thank you, Kelly. Good morning, and thank you for joining us, our first quarter two thousand and twenty earnings conference call. Before discussing the details of our results, I will first like to reiterate my message from last night. My first concern is, and has always been, the well-being of, and safety of our employees, the families, and the communities in which we operate. We have implemented plans to help protect their health and safety, and do believe that these measures have been helpful in reducing the number of cases and the spread of the virus within our facilities. I will certainly be remiss if did not give credit where credit was due. The hard work and dedication of all our employees in Chile and abroad is the reason that I am able to report that today we continue operating at normal levels.

Production today in all our facilities is above our internal and original budget for the year. The hard work and commitment of our employees does not only pertain to SQM's operation specifically. They have remained diligent in helping and providing support to our neighboring communities in the north of Chile related to health, social well-being, economic recovery, and education. Today, more than ever, these efforts are paramount. Thank you. Last night, we reported earnings for the first quarter of the year of approximately CLP 45 million, lower than the results seen during the same period last year. Our sales during the first quarter of this year were significantly impacted by the COVID-19 pandemic, and it is reasonable to expect that along with the rest of the world, we will continue to see impact in the upcoming months.

During the first quarter, we saw lower average prices in lithium and derivatives. Lithium prices fell significantly during the beginning of the year as we expected. Lithium sales volumes were also lower than what we reported during the first quarter of last year, and lower than what we expected for this quarter. We're working to produce lithium volumes according to our original plan this year and expect increased market share selling more than last year. However, the original expectations of market growth that we all had for this year have changed significantly because of the COVID-19, and now we expect market demand in two thousand and twenty to be similar to levels seen last year. Iodine represented a significant portion of the gross profit of the company during the first quarter.

This increase was a result of higher average prices, which reached approximately $35 per kilogram during the first quarter of the year. The fertilizer industry in some geographical markets has been deemed an essential industry during the COVID-19 outbreak. This could help minimize the economic impacts related to COVID-19 on the fertilizer market. However, it is reasonable to believe that demand growth in the water-soluble potassium nitrate market, a premium fertilizer, will not reach the original expectation of 5% to 6%. In closing, while the COVID-19 pandemic limited our ability to sell during the first quarter, our current global economic conditions are uncertain, making it difficult to predict the future supply and demand of the markets in which we participate. We remain positive and we expect sales volumes in most of our business lines to be higher in the upcoming quarters.

We believe in the fundamentals behind long-term demand growth in the lithium, iodine, potassium nitrate, and solar salts industry. As a result of this, we continue to move forward with our previously announced expansion plans to expect to bring our lithium carbonate and lithium hydroxide projects online by the end of 2021. I now turn the line over to Gerardo Illanes, our Chief Financial Officer.

Gerardo Illanes (CFO)

Thank you, Ricardo. We have always maintained a strong balance sheet, and our current situation is no different. We ended the first quarter with approximately $1.4 billion in cash and cash equivalents. However, it is important to note that in April, we paid a $250 million bond. Our current ratio was approximately 3.2 times at the end of the first quarter. As Ricardo mentioned in the press release last night, our next relevant maturity is not due until April 2023. The robust balance sheet we have always kept gives us flexibility to operate comfortably during turbulent times, like the ones we find ourselves today. While our dividend policy aims to maximize return to investors, it also considers key ratios to ensure a healthy cash position.

On the other hand, we continue to move ahead with our CapEx program and expect it to reach approximately $350 million this year, lower than the $450 million previously announced. This CapEx delay is a result of reduced non-essential activities in our production facilities to help protect the health and safety of our workers. Depending on the evolution of the pandemic, we should be able to accelerate our CapEx plans in 2021 and make up for any delays we see in the upcoming months. Thank you. Operator, we may now go to Q&A.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Lucas Ferreira with J.P. Morgan. Please go ahead.

Lucas Ferreira (Analyst)

Hi, gentlemen. Thanks for the opportunity to ask questions. I wanted to understand a bit better how have been the dynamics of the lithium demand over the last couple of months. So, we are seeing China returning to normality gradually. So if you can speak about the demand and orders from China, how they've been moving? And any outlook, anything you can say about Europe? I think Europe was expected to be a good contributor of a greater demand this year with higher penetration of EVs. So if you can talk about how you're seeing the European market in specific and the orders and the pipeline, that would be my first question. And the second question is on iodine.

I understand it's also hard to predict what's gonna happen, but we have been seeing a very healthy, I would say, price and volume dynamics. Although volumes are not increasing, you know, prices are compensating, and your gross profit overall has been improving. So what's your expectation there? You know, in spite of the impact there on the volumes, would you expect it to keep supply under control? And then do you think the prices should remain at the healthy levels? That would be my second question. Thank you.

Ricardo Ramos (CEO)

Thank you for your question. Let me try to answer the first one about the lithium, to have an outlook what's going on, of what we think is going on in the industry. And after that, I will ask Felipe to give more colors and detail in the iodine business. First, in the lithium, as you may know, our sales in the first quarter, as we reported, were affected by this situation, the COVID-19. And the main effect in the first quarter was China demand. The GDP, as you know, in China, was negative during the first quarter, close to 7%. And our information is that the electric vehicles sales during the first quarter decreased 54% compared to the first quarter 2019. Means it was a strong reduction.

We have to consider that China was almost closed all the quarter and affected significantly the sales in that market. As you may know, our marketing strategy and sales strategy for the first quarter and for the year was very active in the Chinese market. That's why we think that at least we reduced our sales in China during first quarter, close to two thousand metric tons. In other markets, the situation was a slight different, and other Asian demands was slightly affected in the first quarter for us, considering our original plans. And I think that the good news came from Europe during first quarter. Europe sales of our lithium was better than expected and was okay.

But at the end, the negative effect of China, plus some negative effect in the other Asian demand, affected our expected sales during the first quarter. I think that it's important to see what we're looking forward. Chinese economy is getting some recovery, and GDP growth forecast for the Q2 is expected to be positive, close to 5%, probably. Electric vehicle sales is still. We expect to have a negative compared to the second quarter 2019, but not at the level of 15%. We're talking about the level of the 20%-25% decrease. However, it's very important to consider this a big improvement compared to the Q1.

According to our information today, most of the factories in China are producing in a normal way, and after two months of complete shutdown, Chinese subsidies and all the government policies to stimulate the economy should help, and I would think we will see a third and fourth quarter very strong car production in the other markets. It's important to consider that the virus arrived later, then the big impact that started at the end of March and continued during April. Car producers were very affected in April, especially Europe and the U.S., and most of them closed their plants. Electric vehicle sales in Europe and the U.S. were reduced in April, as we know, close to 31% and 55% in the U.S.

During May, car producers started reopening the factories, and today most of them are producing, as far as we know. Korea and Japan were less affected and did not stop production. That's been very positive for us, considering that we are trying to allocate a lot of products in those markets. Regarding the other lithium industries, remember that it's important to consider also the portable device industry, construction and grease. They will be affected, and potentially the demand in this application could be lower than two thousand and nineteen, as we had in the first four months of this year.

With all the information we have and considering the expected reduction of customer inventories, we believe it is reasonable today, with the today information, the demand for this year could be similar to the demand of two thousand and nineteen, which was close to 312,000 metric tons of lithium carbonate equivalent. But regarding all those fact and moving specifically to the SQM situation, we think that we are in a good position to increase our market share this year. It means that we expect to sell more this year as compared to the previous one. Of course, the situation of the market is different than the original expectation of the market.

We have a lot of contract in the, for the year with customers we have been working for many years, and they are confident we can reach our goal. We have started seeing some effects on the supply side today because of the market condition. There are few current operations that can face bad situation, and we expect that we will reach our original target. No, original, but our target to be higher than last year and to increase our market share. Anyway, we are building inventory, and this inventory will help us to have better flexibility and to support our customers. Anyway, our demand in the long term will increase, and the inventory will be very, very positive in order to face the future demand of the market.

For the future, I will ask Felipe to share with us what's your view before moving to the lithium. We are not in the same room with Felipe because the COVID-19, we are in different places in Santiago. Santiago is under lockdown today. Felipe, if you can share with us your view about the future of the lithium, in order to share your opinion about that. I'm talking about 21, 25 onward.

Felipe Smith (VP, Commercial Lithium and Iodine, Asia-Pacific)

Okay, no problem, Ricardo. Hello, everyone. If we look at the outlook of the medium and long term, I believe that the fundamentals are still there. We are estimating that in total, the lithium demand will grow after this 2020 special year, after 2021 to 2025, we should have an average growth of around 20% in lithium demand, meaning that by 2025, we believe that total demand of lithium could exceed 800,000 metric tons. And these fundamentals are basically what we, let's say, expect from the OEM manufacturers. They all seem totally committed to electrification of their fleet. Also, governments are pushing for this kind of a, of this type of cars.

All in all, I think that we have to be optimistic in the long term.

Lucas Ferreira (Analyst)

Ricardo, if I may, just to follow up on that before we go to iodine. Can we say already that the first quarter was the weakest quarter for you in terms of sales in the year, or it's still early to say that, given that we are not yet at the end of 2Q?

Ricardo Ramos (CEO)

Lucas, according to the information we have today, we do expect that the first quarter was the weakest quarter of the year in the lithium business, in volumes, certainly.

Lucas Ferreira (Analyst)

Okay, thank you.

Ricardo Ramos (CEO)

Felipe, please, if you can go ahead with the second part of the question regarding the iodine. Why would you think that the iodine demand this year will be slightly lower than last year, and, of course, lower than originally expected?

Felipe Smith (VP, Commercial Lithium and Iodine, Asia-Pacific)

Yeah. Well, first of all, to give some context, the demand in 2019 we estimated to be close to 37,000 metric tons of iodine. Our last estimation for this year is that this demand will be around 34.5, meaning a reduction of 2,200 tons or 6.1%. How we base this estimation, basically, the main uses of iodine or one of the main uses of iodine is X-ray contrast media. This is an application that is related to preventive medicine. According to our customers, they explained that due to the COVID-19 pandemic, people is reluctant to do examinations, and they prefer to avoid going to the hospital. This definitely has an impact on the demand of this specific application.

Also, iodine is used in other applications that are very linked to the economic situation. For example, there is an application that is related to paints, and definitely construction will be affected, we believe, this year, so that is also an application that will be negatively impacted, and for the rest, there are some uses that are more related with lockdowns. For example, in the case of pharma, pharma is very concentrated in Europe and India, and especially in India, the lockdowns that we saw in March and April are affecting the demand, so we hope that this could revert in the coming months, but so far we try to be conservative.

The only applications in iodine that are more inelastic are those related to nutrition, which they have proven over the years that independent of the economic cycles, they are very resilient. So that is more or less the overview of iodine.

Lucas Ferreira (Analyst)

Many thanks, gentlemen.

Operator (participant)

As a reminder, we ask that you limit yourself to two questions. Our next question will come from Isabella Simonato with Bank of America. Please go ahead.

Isabella Simonato (Managing Director - Equity Research)

Thank you. Good afternoon, everyone. Thank you for the call. I would like to know more about the cost structure, right? How the pandemic or the new environment, right, has led to eventually higher costs in your production or any sort of disruption, if you could update us on that. And, regarding the CapEx that was reduced for this year, can you give us a little bit more details if it is a postponement for two thousand and twenty-one, and where exactly that reduction happened? Thank you.

Gerardo Illanes (CFO)

Hi, Isabella, this is Gerardo. I'll try to answer your questions. Well, because of COVID-19, we have not seen an impact on the cost of production or in any of our business lines. Actually, on the contrary, I mean, not because of COVID-19, but because of other reasons, the cost of every single product in our production process has been coming down over the past few months in iodine, in potassium nitrate, sodium nitrate, and lithium. Of course, the weaker Chilean peso and the lower cost of energy are, of course, helping in this regard, but we are not seeing the higher cost because of this situation.

But of course, it's taking some time for you to see them in the P&L because we have such a high level of inventories. We have more than $1 billion of inventories, and that takes some time to be reflected in the results. But from a cash point of view, of course, it's having an impact right away. Regarding your question about CapEx, what we have been doing more than reducing CapEx because of a financial constraint, we have been reducing the activities that are not essential in our facilities in order to make sure that we comply with the toughest recommendations to protect our people and to reduce the speed at which the virus can spread in our facilities.

So because of that, we have reduced the use of contractors. We have reduced some non-essential activities and some CapEx activities that can be postponed without having a significant financial impact, either on our plans to sell this year or in the upcoming years, or also in the products themselves. That's why the CapEx has been reduced from $450 million to $350 million. But well, to be more precise, the CapEx has not been reduced, but delayed, and we expect that this CapEx or these expansions or these activities will be catch up as soon as the conditions allow us to bring more people in our facilities.

Regarding the most important projects that we're working on, which are the expansions of lithium-related products, we are still expecting that they should be ready by the end of 2021. So we don't see a big impact there.

Isabella Simonato (Managing Director - Equity Research)

That's very clear, Gerardo. Thank you.

Operator (participant)

Our next question will come from Ben Isaacson with Scotiabank. Please go ahead.

Hi, this is Ziad actually on for Ben. Thanks for taking my call. I just have one on potash pricing, actually. You've realized fairly sticky pricing in your segment, despite commodity benchmark prices falling quite meaningfully over the last two quarters. Can you talk about how your potash versus SOP sales mix has evolved, and what should that mix be for the balance of the year as you move forward? Also, has there been a shift in the regional mix to account for the strong realized potash pricing? Thank you.

Ricardo Ramos (CEO)

Yeah, as you may know, the potash price was affected in, I think, in the-

... in the last two or three or four months, mainly on the China settlement of last month. It's in the last two weeks is in the same line. We do expect that potash prices, as everyone expect, to be slightly lower during the next three quarters as compared to the first quarter this year. We are considering that in our projections, but you should consider that we are very small in the potash industry. We are this year, even though this year we do expect to sell more than last year, and we continue with this expectation, we can select the market where we try to approach, and I think that the effect, the net effect will not be as high as originally expected, this price reduction.

But anyway, we are expecting, and we know that the price of potash today is lower of what used to be probably one year ago or six months ago, and we are considering this in our projections for the next few quarters. That we know that we're selling, as you know, a very important volumes in Brazilian market. Brazilian market's been affected probably it's been affected today with the price environment of the potash. And but the volumes, we do know that the volumes for SQM for the rest of the year will be higher, and we expect to be close to 700,000 metric tons of potash sales during this year as a total volume.

I don't mean. It's gonna be affected, the margins due to the price environment, of course, yes.

Perfect. Thank you.

Operator (participant)

Our next question will come from Alex Falcão with HSBC. Please go ahead.

Alexandre Falcão (Industrial Analyst)

Yeah. Hi, guys. Good afternoon. I just wanted to talk specifically on China. You know, and I know that you. You know, I just wanna talk, you know, for the month of May. We've seen a pickup there on at least locally for, you know, at least for production. Seems like there's you know, the supply side has been. Some of these companies have basically shut down, even in Australia. I just wanted to know if, you know, when you talk to your people on the ground and you know, so I know you don't sell really on the spot market, but I just wanted to know specifically for Asia and for China, you know, May seems to be an inflection point.

You comment that probably the worst is over and first quarter is gonna be the worst quarter of the year. But just trying to gauge if you have more details specifically for China and what you sell there. Thank you.

Ricardo Ramos (CEO)

Thank you, Alex. I will ask Felipe. Felipe is in direct touch with the China people, our team there, on a daily basis, and I think he can share with us his thought about what's going on in China as we speak, what he expects in the next month. Felipe, please.

Felipe Smith (VP, Commercial Lithium and Iodine, Asia-Pacific)

Yeah. Well, first of all, we need to remember that we entered 2020 with high stock levels in China, okay? So, we were expecting anyway a lower amount of sales versus the total year in the first quarter. But the pandemic situation that started in China affected seriously the demand, okay? So, this already high inventory levels that were carried over to 2020 would take much longer now in being depleted. As a matter of fact, we believe it will take several months, and therefore, this recovery that we see in the business itself not necessarily will be reflected in a good sales recovery, because again, the demand is affected there, so we will have to see over the next months.

We have to be conservative in our estimations, but we still believe that our sales over the next quarters in China will be increasing. We have good signs from customers that this will be the case. But again, there is a lot of uncertainty, and we need to see.

Alexandre Falcão (Industrial Analyst)

Okay, perfect. Thanks for that.

Operator (participant)

Our next question come from Joel Jackson with BMO Capital Markets. Please go ahead.

Joel Jackson (Managing Director, Equity research analyst)

Hi, good morning. I have two questions. I'm gonna ask them one at a time. Ricardo, so if I listen to your commentary, tell me if I'm right or wrong: So SQM still expects to produce about 65-70 thousand tons LCE this year of lithium. You still expect to gain a bit of share, but if that's the case, in a flat demand environment, you expect to build a lot more inventory this year than you thought three months ago, two months ago. Is that correct?

Ricardo Ramos (CEO)

Yes, of course, that is, that is correct. We do expect to produce between 65 to 70 thousand, even though we are gonna increase our market share, considering the flat environment we expect in the total demand, our inventory will be increased this year. But it's a healthy level of inventory that will help us in the future demand growth environment.

So to follow up on that, I mean, you've got competitors who are also building new supply. You have a bit of a stalling of demand this year. You just talked about, Felipe, just talked about inventory in China has been larger than you would've thought, by now. Do you not get worried on the price of lithium here because a lot of inventory already, you're building inventory, and there's competitor supply additions on top?

I cannot speak about the other competitors' inventories, but considering SQM inventory, of course, is my inventory is not as huge as affecting the financial situation of the company. I have a different opinion. I think that our inventory is a element of flexibility we have. We strongly believe in the fundamentals of the industry, and having this inventory is good news for us. It will not affect our market strategy, our market pricing, the inventory, of course not. We are looking for market share increase. We will get it, and that's exactly what we expect to have. If the market is lower for the specific reason already coming to you for the COVID-19, of course, the total volumes will be lower, but our target of the market share will be there.

And the excess of inventory, it's good news in order to have inventory for the future and affect and having the flexibility for the market. It means that the additional inventory is not an effect of the price environment in the terms of the inventory of SQM. About inventory of our competitors, of course, I cannot comment what is gonna be their business strategy so far.

Joel Jackson (Managing Director, Equity research analyst)

So, are you comfortable running about six months of inventory? Because if I do your math, you will end this year with about six months of your 2020 sales volume, you know, 2020 sales volume. Your inventory will be about half of that at the end of the year. Are you comfortable with that?

Ricardo Ramos (CEO)

Yeah, I'm comfortable with that. You have to consider that, as Felipe mentioned before, we do expect that sales in 2025 will be in excess of 815,000 metric tons of lithium. I mean, having inventory, using my capacity today to produce, is a very good business because we need to increase our capacity in the future anyway. And if we can operate at full capacity our today production facility, is the best way to use our fixed assets. Considering that we do expect that we will significantly increase our sales in the next three years. That's why having inventory, considering the expected volumes, is a very good news.

Joel Jackson (Managing Director, Equity research analyst)

Thank you.

Operator (participant)

This will conclude our question and answer session. I would like to turn the conference back over to Kelly O'Brien for any closing remarks.

Kelly O'Brien (Analyst)

Thank you, everyone, for joining. A summary of the results in this call will be posted on our website. Please stay healthy.

Operator (participant)

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