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Sociedad Química y Minera de Chile S.A. (SQM) Q1 2021 Earnings Call Transcript | The Motley Fool

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Sociedad Química y Minera de Chile S.A. (NYSE:SQM)
Q1 2021 Earnings Call
May 20, 2021, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the SQM First Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Kelly O’Brien, Head of Investor Relations. Please go ahead.

Kelly O’BrienHead of Investor Relations

Good morning. Thank you for joining us for the first quarter 2021 earnings conference call. This conference call will be recorded and is being webcast live. Following this call you will be able to access the website — the webcast at our website www.sqm.com. Our earnings press release and a presentation with a summary of the results have been uploaded 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 Illanes, CFO; and Pablo Altimiras, 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 US 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.

Ricardo RamosChief Executive Officer

Thank you. Good morning. We thank you for joining the call today. Our earnings during the first quarter this year increased around 50% 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 expected 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 the strong production performance should continue to have a very positive impact on our resource throughout the year. As we mentioned last night, global fertilizer markets have seen stronger demand as a result, we expect our average prices in both SPN and potassium nitrate business lines to be higher than average prices reported during 2020. Gradually 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 during 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 will 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 the prices will continue increasing each quarter throughout the year.

As 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 2022. Mt. Holland lithium project in Australia remains on track. As a reminder that Board has approved close to $500 million total capex plan for 2021 related to all our business lines.

Thank you, operator, we may now go to the Q&A session.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] First question will be from Corinne Blanchard of Deutsche Bank. Please go ahead.

Corinne BlanchardDeutsche Bank — Analyst

Hey, good morning, team. 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?

Ricardo RamosChief Executive Officer

Hello. As you may know, we are increasing now to the 130,000 metric tons at the end of this year, considering the Group performance in our facility at the end of — during second half last year, I think that its reasonable to expect to have a total production for this year close to 90,000 metric tons to 95,000 metric tons. That’s my target for this year. Next year is going to be an average, because we will start with the 120,000 metric tons and at the end of the year we expect to go to 180,000 metric tons. That’s why I think having a production — total production for next year close to the 140,000 metric tons makes sense, which is something in our plan we have today.

Corinne BlanchardDeutsche Bank — Analyst

Okay. That’s very helpful. So yes, I’m assuming you guys are trying to say is, whatever your projects, that’s very interesting. I mean the second question is on lithium pricing and obviously I think we all agree what’s in the bottom in 4Q and pricing and such to improve in 1Q, and if you look at Chinese crossing since late August 2020 in fee borne pricing as well in the past few months, we all see like a positive trend. How — just wanted to try to get your view on where do you see pricing going to at the end of the year? Do you see it going by close to 10,000 per ton, do you see it is still below or above this level?

Pablo AltimirasSenior Vice President, Sales, Lithium and Iodine

Corinne, thank you. Pablo Altimiras speaking. Well, as you know, price always is the 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 only see that a positive trend. So I mean, so you are right, we have been seeing a positive trend in pricing. However, the price always is not an unique price. You need to go see it whether we have different qualities, different type of customers, different volumes that do commercialize with them, a 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 priced in double-digit. In the future, well again, everything will depend on supply and demand balance.

Operator

The next question will be from Joel Jackson of BMO.

Robin FiedlerBMO Capital Markets — Analyst

Hi, this is Robin on for Joel. I have a few questions. I’ll just ask them one at a time. I had a follow-up on that pricing discussion. I mean I appreciate there are lags to the spot market, but even so 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 Argentinean peers who has struggled quality in the past has even guided to $7,000 to $8,000 a ton for the June quarter. So is that like a floor expectation for Q2, is that reasonable?

Pablo AltimirasSenior Vice President, Sales, Lithium and Iodine

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 get closed under the prevailing prices reality at the moment. So that’s the strategy we have now.

Robin FiedlerBMO Capital Markets — Analyst

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?

Ricardo RamosChief Executive Officer

Yes, there is a discussion about some royalty structure 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 opinion to the different industrial and mining groups in which we participate. They are finally the ones who raised the opinion of the mining industries reagarding this issue. Just I want to add that SPN contributes significantly to the development of the country, throughout important factors and other contributions to the country and communities. Yes, for sure, there is no older economic activity in Chile that contributes more resources both in absolute terms and in percentage terms for the country.

Robin FiedlerBMO Capital Markets — Analyst

Maybe just one last quick follow-up to that. Given the recent political changes in Chile as well, do you foresee any potential increase spending for environmental reasons, maybe the tax structure or anything like that? Or is it business as usual on your side, no matter what the political climate is like?

Ricardo RamosChief Executive Officer

We continue to be very excited of our way our business strategy and our significant capex programs 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’re 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 this, just we confirm our role in terms of implementing all our bank charge of sustainability. All those expenses or investment regarding the sustainability agenda that we made public last year are already included in the capex program for the next four years.

Robin FiedlerBMO Capital Markets — Analyst

Thank you.

Operator

The next question comes from PJ Juvekar of Citigroup.

PJ JuvekarCitigroup — Analyst

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 toward more index-based pricing to some extent?

Ricardo RamosChief Executive Officer

Okay, thanks for the question. I mean, yes you are right. I mean, some customers are trying to have more visibility about 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 relating to pricing. So even if in SPF we are flexible. So in some cases, we are considering to contract under the indexes or not because its up to customers, but it is something that we are following for sure.

PJ JuvekarCitigroup — Analyst

Okay. And then you had good topline 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?

Ricardo RamosChief Executive Officer

Yes, I think it’s not one clear message that the costs are high. You have some product lines where the costs are lower, some of the product lines where costs are slightly higher, some product lines where costs are at the same level. We don’t foresee any costs situation nowadays, of course, with monetary, as you know we’re located in Chile, the value of the US dollar is very important for us. That’s why if the dollar goes up its good for us and if the dollar goes down, its 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 these price of copper in the north and it’s 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 cost. But as a bottom line we don’t foresee any cost issue or a significant issue during this year compared to the previous year.

PJ JuvekarCitigroup — Analyst

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.

Ricardo RamosChief Executive Officer

Depending on the business lines these 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 in volume strategy in inventory volume study is a very good one. 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.

Operator

The next question will be from Isabella Simonato of Bank of America.

Isabella SimonatoBank of America — Analyst

Thank you. Good afternoon, everyone, Ricardo and Pablo. My question is on the SPN 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 are 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 SPN. I mean, you are guiding for a volume recovery this year and of course high growing prices are supportive of prices, but what sort of acceleration do you anticipate in the coming quarters? Thank you.

Ricardo RamosChief Executive Officer

Hi, Isabella. Yes, you’re right in terms of the potash price is going up. We have had some agreements previously to this new trend — price trend. Certainly I think the prices will be higher during the second quarter and a very positive pricing in potash during second half of the year. I think second half of the year prices will be significantly higher than the prices that we are seeing in our sales for the first quarter. As you know in the SPN or Specialty Plant Nutrition business, the relation between potash price and potassium nitrate, is not sold directly. It means that when they go down, we don’t go down at the same level and when they go up, we don’t go up in 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 the second quarter of this year, especially second half this year will be better than what we observed during the first quarter.

Isabella SimonatoBank of America — Analyst

That’s clear. Thank you.

Operator

The next question comes from Ben Isaacson of Scotiabank.

Ben IsaacsonScotiabank — Analyst

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, one of 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 giving more resources to indigenous population? Is the market wrong to be this nervous right now?

Ricardo RamosChief Executive Officer

Hi, Ben. We — if you review the prices has changed for sure in the last four days, this Monday, Tuesday, Wednesday and today, we have to follow the trend in some way of the Chilean stock market, there is no big difference between whether the Chilean stock market is growing and where SQM is going in the last few days. You know I am not a market analyst and even less a good political analyst, but the main investment bank still 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 is interesting to be able to read them, I think, there is many different opinions, not all the opinions are the same, that’s why it is 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 and its too early to have a clear opinion about where it is moving, where the stock market is moving in Chile, but of course when you have these big, big moves that we had in the last three or four days, of course, we follow that move. I mean there is 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, I had the opportunity to read different reports from investment banks, local Chilean investment banks and I think that’s very good in order to have an idea of different factors that may or may not affect the stock market today.

Ben IsaacsonScotiabank — Analyst

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 Mt. 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, etc?

Ricardo RamosChief Executive Officer

Yes, we are open for doing business not only because we want to have diversification of Chile. We are really positive about what we’re doing in Chile, I think we are doing great investments in Chile. But anyway, our M&A activity is open for opportunities as always. And as you know, its been a very important decision for us to go ahead with the project in Australia is going to be a big project. I hope it is 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 metric tons total capacity to close 100,000 metric tons in the future, where we decide with Wesfarmers in the next couple of years, probably moving forward to maybe 100,000 metric tons. I will try to look for opportunities in the lithium business outside Chile, of course, yes. We did it in Australia, if we have an good opportunity, opportunity does then create value we will do it again. Potash is a very difficult market to be to getting in the market nowadays, but of course, we are open to review alternatives. In potash nitrate we are also open for opportunities. It seems like its difficult to find a plan outside Chile, but always open for opportunities and adding the same, it means that it’s not like we want to run out of Chile, we are very happy with what we are doing here, but easily find a good opportunity outside Chile as we did in Australia with this.

Ben IsaacsonScotiabank — Analyst

Just two more quick ones from me. First is copper prices, I think are now over $450 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?

Ricardo RamosChief Executive Officer

Yes, you’re right, there is 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. Yes we do some internal activities in order to — geological activity to find some potential copper resources in our land. And of course we have so much meeting 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. You’re right, it means there could be something very important in the future if we find something. But yes, we are quite active about this idea.

Ben IsaacsonScotiabank — Analyst

Okay. And very last one from me. You have guidance of greater than 85,000 tons for the year. You just did 24,000 tons, so the math would suggest that’s about 20,000 tons 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?

Pablo AltimirasSenior Vice President, Sales, Lithium and Iodine

Yes, Ben, Pablo speaking. Thanks for the question. First of all, I think that it’s important to remark that during this first quarter, we sold almost 3 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 will 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 say that and we said at least 85,000 metric tons, but our intention is to sell more, if the market is there.

Ben IsaacsonScotiabank — Analyst

Thank you very much.

Operator

And the last question today will be from Cesar Perez-Novoa of BTG Pactual.

Cesar Perez-NovoaBTG Pactual — Analyst

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 on the specifics and of course along these lines, what should we think of the capex figure for 2021? Is $500 million still good?

Ricardo RamosChief Executive Officer

Yes, I think we’re not taking a huge differences, anyway, good afternoon. But if you consider, yes, we are doing OK, the projects seems to be moving in the right direction. Sometimes projects you have delayed project and sometimes you have the good news that are pretty exciting. Actually this is good. And this is the case we’re not talking about one year, we are talking about some months before expected will not change, our total capex for 2021 and 2022 is going to be the $500 million 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 and this market is very good news for us. That’s why we are pushing very hard in order to do it right, in order to do it as soon as we can.

Cesar Perez-NovoaBTG Pactual — Analyst

Okay. No. Thank you very much Ricardo. And just a final one on my end on Iodine. You call for a 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.

Pablo AltimirasSenior Vice President, Sales, Lithium and Iodine

Hello, Cesar, Pablo speaking. As anticipated — as we anticipated before, we have been seeing a recovery in value and demand. Our expectation for this year is that iodine will recover by 9% which is good, however, it will still be lower than the demand that we saw in 2019. But for next year we will see a tight recovery, so the demand will be in the normal growth rates at the end of the year. Regarding to Brexit, 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 are expecting to have stable prices for the rest of the year.

Cesar Perez-NovoaBTG Pactual — Analyst

All right, thank you gentlemen.

Operator

And this concludes our question-and-answer session. I would now like to turn it back to Kelly O’Brien for any closing remarks.

Kelly O’BrienHead of Investor Relations

Great, thank you and thank you for all the questions. We look forward to seeing you next quarter.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Kelly O’BrienHead of Investor Relations

Ricardo RamosChief Executive Officer

Pablo AltimirasSenior Vice President, Sales, Lithium and Iodine

Corinne BlanchardDeutsche Bank — Analyst

Robin FiedlerBMO Capital Markets — Analyst

PJ JuvekarCitigroup — Analyst

Isabella SimonatoBank of America — Analyst

Ben IsaacsonScotiabank — Analyst

Cesar Perez-NovoaBTG Pactual — Analyst

More SQM analysis

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