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Sociedad Quimica y Minera (SQM) Q4 2018 Earnings Conference Call Transcript

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SQM earnings call for the period ending December 31, 2018.

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Sociedad Quimica y Minera ( SQM -0.86% )
Q4 2018 Earnings Conference Call
Feb. 28, 2019 10:00 a.m. ET


Prepared Remarks:


Good morning and welcome to the SQM fourth-quarter earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Gerardo Illanes, chief financial officer. Please go ahead.

Gerardo Illanes -- Chief Financial Officer

Thank you. Good morning, everyone, and welcome to SQM fourth-quarter 2018 earnings conference call. For your information, this conference call will be recorded and is being webcast live. You may access the webcast later on at our website,

Joining me today as speaker is Ricardo Ramos, chief executive officer. Before we begin, let me remind you that statements in this conference concerning the company's business outlook, future economic performance, anticipated profitability, revenues, expenses, all 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 law. 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 the public filings made with the Securities and Exchange Commission, and forward-looking statements should be considered in light of those factors.

I will now leave you with our chief executive officer, Ricardo Ramos for brief comments before we move to Q&A.

Ricardo Ramos -- Chief Executive Officer

Thank you, Gerardo. Last night, we post our results for 2018. Our net income reached almost $440 million. This was a slight increase compared to earnings reported in 2017.

Our high-grade sales volume in ESPN, high-grade iodine and high grade average price of lithium contributed to our 2018 results. Lithium market is surrounded, as you know, by positive news. Full electric vehicle penetration level reached approximately 2%, and these rates are expected to grow probably in the future. Demand growth in 2018 surprised us again, surpassing 27%, and it's expected to grow rates above 20% in 2019.

Beyond 2018, demand growth continues to look extremely healthy, making us believe that the 1 million ton per year lithium market may happen sooner than originally anticipated. The lithium market is a dynamic one, and one of my main priorities is maximizing value in this space. As was expect, new supplies come into the market; make it more difficult for us to capture the price premiums that we had in 2018, as was stated yesterday. There are several lithium grades of different qualities available in the market, and not all products are sold at the same price.

We believe that our sales volumes in 2019 will be slightly higher than those reported in 2018 just under 50,000 metric tons. Bear in mind, it is very difficult to predict our sales volume in 2019 and 2020 as it demands on supply and-demand equilibrium. Also, the timing of the start and the ramp-up of new projects is difficult to assess. The iodine markets in which we participate remains strong.

In the iodine market, prices reach almost $26 per kilogram in the fourth-quarter 2018, exceeding expectations and we reported record sales volumes for the year. In fact, contribution to gross profit from the iodine business line over -- doubled in 2018 when compared 2017. The gross profit associated with the specialty planning nutrition business line increased by approximately 20% this year when compared to last year. Before opening the line for questions, I want to thank you, all our people in the north of Chile for the help they have provided to their local communities as they recover from the impacts of the heavy rain seen in the region and in recent weeks.

We thank you for joining our call today and we will now open the lines for -- up for questions.

Questions and Answers:


We will now begin the Q&A session. [Operator instructions] The first question comes from Joel Jackson with BMO Capital Markets. Please go ahead.

Joel Jackson -- BMO Capital Markets -- Analyst

Hi, good afternoon. And congrats, Ricardo and Gerardo, on your new positions. I had a few questions on lithium that are a little confusing. What is your current expected lithium production for 2019? We all thought it to be about 70,000 tons.

You said you will sell about less than 50,000 tons. You talk about inventory build. So, how much inventory will you build and how much will you produce in 2019? And if it's a lot less than 20 --if it's a lot less than 70,000 tons, can you let us know what's happening? Thank you.

Ricardo Ramos -- Chief Executive Officer

Thank you, Joe. First of all, as we we stated in the press release, we think our sales -- volume sales in 2018 will be slightly higher than 50,000 metric tons. Sorry, will be slightly higher than 2018. It means close to 50,000 metric tons.

And really, we have a total capacity the one that we'll build in 2018 close to 70,000 metric tons. We know that part of our strategy is to have this spare capacity and to continues to grow. Next step would be the 120,000 that we are working as we speak today. With the procurement of some of the equipment is already done.

We're working on it. The third step will be moving forward to the 180,000 metric tons. From the build of inventory, we don't know exactly what is going to be the total inventory of building inventory in 2019 but, of course, we will produce more than our expected sales. It was part of our strategy.

We want to recover some inventory. I think having some strategic inventory in the future is a ways to have more flexibility. The same reason we want to have some spare capacity, not only this year, 2018. We expect to have a spare capacity every single year in the future in order to be ready and to have the flexibility to the uncertainty in the markets.

But certainly this year, we will produce, we expect, more than 60,000 metric tons. The difference between sales and production will go to the inventory [Inaudible].

Joel Jackson -- BMO Capital Markets -- Analyst

OK. That's helpful. Do you feel the need this year to balance the markets? Is that based in your projections that you can't produce -- let me try this again. Could you produce 70,000 tons this year if you want to? But you choose to produce a little bit more than 60,000 to balance the market in view of your -- the new supply coming on?

Ricardo Ramos -- Chief Executive Officer

First, I don't want to confuse production with sales. I would decision to sell the volumes I already explained. It seems slightly higher than the year 2018. It is -- this decision is not efficient.

In fact, this is what we expect to be an equilibrium between supply and demand. As you know and we have stated in the press release and was stated now, we are very optimistic about the demand of lithium in the long term. Anyway, I want to be very clear that we think we have very good estimates about the different new lithium projects coming on the market, either the ones on the development and the ones under study, and we follow all the announcements relative to projected capacity increase from current players and -- but again, we strongly believe in the long-term demand projections. Even if it's somewhat strange, our projections of the sales volumes in the relatively short term, [Inaudible] in the next 30 months, is more difficult than long-term projections.

That's something very difficult because even though we have good estimates about potential capacities of the different lithium projects, there are significant uncertainties about the dates, the initial quality and the [Inaudible] those volumes and those projects. [Inaudible] in the industry has really a negative chart record in their projected dates and volumes, so their initial production. That is a fact. Anyway, I'm really proud of all this.

[Inaudible] are very good in that matter. That's the reason why even though we said that we expect a slightly higher sales volume, it will depend what's going on in the second semester of this year. It's difficult to know because it depends on these new products. But again, these estimate is the -- is what we think is the reasonable supply and-demand equilibrium for all the different players that are today on the market.

Yes, we can produce more and that's the reason why we are going to produce more and we're going to increase our inventory.

Joel Jackson -- BMO Capital Markets -- Analyst

OK. And just a final question. On price guidance, you talked about some erosion in price premium. Should we expect lower average pricing in the first half of the year versus the fourth quarter? And how does hydroxide versus carbonate mix play on that? Thank you.

Ricardo Ramos -- Chief Executive Officer

Certainly the -- when I think about the difference between hydroxide and carbonate, it's the difference between the margins [Inaudible]. That's what is important for us. And the margins are not so different in terms of what we are getting from different products. Certainly at the beginning, the pricing of lithium hydroxide and lithium carbonate, mainly two years ago and some of last year was quite different, not any more.

Our more similar products in terms of their marketing and the way they are selling them in the program. Their margins are quite similar in defense of the cost of production for us. As we explained in the conference call during last year, we had what we call this premium. And the main explanation of this exceptional difference is related with the different commercial strategy.

On the one hand, SQM sold its products made it through spot pricing and on the other hand, our main competitors mainly through long-term contracts agreed during the previous year. That explained the main difference. If we consider our main competitor's lithium average prices, their average price is in 2018 as their market price of the previous, market price of 2018, we believe it is reasonable to project that the market price for 2018 will be similar or slightly higher than the average price of the year before of this market price that is the average price of the -- our main competitors. In 2019, it really -- we do not expect important differences between our prices and the market average price.

It means we don't expect these high premium pricing in SQM. Therefore, we think that the -- what we call, the average market prices of the fourth quarter, it's -- the average prices of fourth quarter will be similar to the first quarter this year concerning the market price, the average prices of the main competitors in the market. It's important to consider that we do not in detail what is the cheap China price. I know there is a lot of questions regarding what is the sales price of the lithium carbonate and lithium hydroxide inside China.

We don't have reliable sources about the pricing in China, internally China. We are not exporting now, as we speak, products to China. We don't know exactly the quality of the different products that is trading internally in China but, of course, we compete with the lithium carbonate produced in China in different markets in the world because most of the lithium produced in China is coming from the [Inaudible] from Australia. It mean, so we -- not all but most of the new projects and the current projects in Australia use its facilities in China [Inaudible] the lithium carbonate.

That's the lithium that is export from China and [Inaudible] is the product that is sold in China. We compete all around the world with them but we don't know internally China a reliable source of all the pricing. We don't have an answer about. The only pricing that is already common to you, everything is what we call ex China situation.

Joel Jackson -- BMO Capital Markets -- Analyst

OK. Thank you very much.


The next question comes from Danniela Eiger with Bank of America. Please go ahead.

Danniela Eiger -- Bank of America Merrill Lynch -- Analyst

Hi, good morning and thank you for the question. Actually, I have two questions. The first, you mentioned that your main competitor or -- made use actually a long-term contract, and that allows them to have like more stable pricing. Maybe in 2018, that wasn't a good way because [Inaudible] actually lower than spot prices.

But then again, they won't have much volatility in terms of prices. I just wanted to understand your strategy regarding long-term contracts. From what we have been hearing, OEMs are looking for a long-term contracts even better potential supply gap that we should see in -- going forward in 2022, more or less. So just to understand your strategy regarding long-term contract.

And my second question, just on the heavy rains that you experienced in Chile. You mentioned that it shouldn't have a long-term impact. But just to understand, should we expect any impact on volumes in Q1? And that's it. Thank you.

Ricardo Ramos -- Chief Executive Officer

Hi, Danniela. First, about the long-term contracts are not, first let me say that we -- I think today that our strategy -- commercial strategy in 2018 was that right one. It was the right one because it's -- starting market is difficult to know what is the long-term agreement. You need to understand the market before having these long-term agreements, happens to be that was very good in the economic point of view, this strategy for this year.

But for not even concerning the economic situation of the pricing that was good. I think was good to wait and see to start having these long-term agreements. We are more than open for long-term agreements. We're in different conversation with the turning clients, from different potential buyers in the future to long-term agreements.

As we speak, we're doing so. Probably, we will have a long term -- significant long-term agreements in the near future, yes, we will and we're working on it as we speak. It's very important and I think that today we understand better and our clients understand better the market and it's a -- we're in both sides in better positions to agree in the terms and conditions not in a very productive way for both sides for long-term agreements. And we're working on it now.

I don't think it's about strategy. It's a different one and it's the right moment to go ahead with this strategy and we're working on it. About your question of the rain in the north, no -- yes, there were significant rain in some of the areas of the north. We're working very hard to to help all the communities close to SQM, and we have been very successful.

I'm very proud about that. Our people working with the communities, helping them. I'm very proud that our facilities were prepared for these kind of situations either in the [Inaudible] business. On the [Inaudible], we have a very good preparation in our [Inaudible] operations to have these kind of climate situation.

I don't expect significant impacts in our production process. We've had some issues. Of course, we stopped our production during the week, maybe more in some areas, less than a week ago in other areas. The north of Chile is very big.

We have different production facilities all around the north. These heavy rains were very focused in different areas. Yes, some production will be affected but nothing that will affect our capacity to go to their market in the short term. Keep in mind our previous question regarding the spare capacity and inventory.

We want to have and we will have flexibility in our main business. We have inventory of iodine, we have inventory of [Inaudible], we have a spare capacity for iodine, we have a spare capacity for [Inaudible]. We have some inventory -- I want to have more inventories of lithium and some we have some spare capacity and I want to have more spare capacity in lithium market. This has been the historical strategy of SQM.

It will continue to be our way operational and business strategy in order to face our main markets.

Danniela Eiger -- Bank of America Merrill Lynch -- Analyst

That's perfect. Thank you so much.


The next question comes from Ben Isaacson with Scotiabank. Please go ahead.

Ben Isaacson -- Scotiabank -- Analyst

Thank you and good morning. First question is on iodine. You talked about closing the fourth quarter at around $26 per kilogram. Can you talk about at what price does new supply start to come back into the market? Thanks.

Ricardo Ramos -- Chief Executive Officer

Hi, Ben. Firstly, I don't think that is significant amount of iodine went out of the market in the past. And you think that you considered all the different producers that maintain the production. Most of them, there's no big ones or import or significant ones that shut down their facilities.

The reason why we're increasing volumes on the price is being increased is that the volume -- the demand has been increasing. That's the most important issue here too conceited not this shut down of all the producers. The second situation you should consider is the cost of producing iodine. For most of our competitors, their cost is increasing.

They don't have by-products as we have. They don't have this economies of scale as we have and the technology as we have. That's why cost is going up, I think. The reason -- the question here is not if they will come back to the markets and producers because it's not relevant.

What is relevant is the current producers, they will increase or not their capacity. Probably they will. I don't think there's a clear price up, right, that said in excess of this price, you will have more producers or below this price, you have a shutdown of some producers. I think it's more important to focus in the market -- in the demand.

I really focus now -- more focus in the elasticity of the demand. We need to be very careful not to damage the long-term growth of the demand of iodine. If you have a strong iodine market growing, let's suppose 3.5% a year, it means close to 1,000 metric tons of additional iodine per year. If you go to that direction.

That's great. That's very good for us. What I don't want to do is to put the price in a way that some of the demand will be affected and the increase will be instead 1,000 be 200 tons or 300 tons. That's why my most relevant point today is the elasticity of the demand.

What I want to say is that we have been looking very hard adding detail about potential elasticity of the demand at different pricing. We think that today's price environment and the prices that we're working now during 2019, we think that we will face a very strong demand. That's my first statement. We think so.

That's the most important issue we're facing and we will continue to check the situation in the iodine market in the future, of course.

Ben Isaacson -- Scotiabank -- Analyst

That's great. Next question is on the potassium nitrate market. Can you just give an update in terms of what that market looks like right now. You talked about a bit of new supply coming on.

What type of impact will that have? When does it come on? Who's bringing it and what does that mean for you?

Ricardo Ramos -- Chief Executive Officer

Yes. As you may know, one of the main competitors [Inaudible] potassium nitrate is [Inaudible] Chemicals in Israel. They have had in the past some issues regarding their production, some environmental issues, different issues. Probably you can check in the Internet.

There's a lot of information regarding this situation going on, I think, in the [Inaudible] production. We think they are more -- they are coming back in -- with some tonnage in the market, as expected. There's nothing new about that. It's not additional production.

It's recovering some of their production even though we continue to estimate believe that this year 2019 we're gonna to increase our volumes in the specialty planned nutrition business. So we're -- our budgets for this year is having an additional tonnage is the same as we had last year at an additional storage probably in the last three or four years. We will continue the same trend. That's good pricing.

We maintain a very healthy price environment. The only question mark in the pricing is distribution of the euro exchange rate in Europe. An important portion of our sales goes to Europe in countries related with the euro exchange rate that today, nowadays, the exchange rate in Europe is not as good as what used to be one year ago. And in some way, this will affect our pricing in U.S.

dollar in the Europe. But -- that's one thing you have to consider in the specialty [Inaudible] business. But the other thing that in some way affect this business is the price of the MOP. In the last few weeks, news of the MOP market is slightly better than expected in terms of pricing.

That's good because the buyer is one of the main costs of production for potassium nitrate. That's why it will help us to maintain a healthy price environment. About the solar source -- what's the question about solar cells?

Gerardo Illanes -- Chief Financial Officer

No, no, no.

Ricardo Ramos -- Chief Executive Officer

No, no? OK. OK. That's only potassium nitrate. OK.

That's it, Ben. Do you have any follow-up question?

Ben Isaacson -- Scotiabank -- Analyst

No. No, that's helpful. Thank you so much.

Ricardo Ramos -- Chief Executive Officer



The next question comes from Javier Martinez with Morgan Stanley. Please go ahead.

Javier Martinez -- Morgan Stanley -- Analyst

Thank you. Hello, Ricardo. Sorry to ask again about lithium, Ricardo, but I'm a little [Inaudible] this morning. I want to make sure I understood it well.

So two questions. First of all, you mentioned in the release that the demand -- you expect the demand to be growing more than 20% and you say that your delivery will be just slightly higher. So that means that SQM will lose market share in 2019, right?

Ricardo Ramos -- Chief Executive Officer

We -- I want to be very clear that our main focus in the lithium market market in the short term is not market share. It means market share is not an objective at all. We have a long-term strategy. If you think in the long term and we -- when I say long term -- sorry.

Well, I thinking 2025. Why 2025? Because I strongly believe there's a third chance on a significant -- I expect that the demand in 2025 will be close to 1 million tons. If you consider that today's 300 metric tons, we're talking about 700,000 metric tons of additional demand of lithium carbonate and lithium hydroxide, whatever, in the market in the next six years. That's a lot and we have been preparing SQM to be ready to take a big portion of this and get the advantage of these additional demand.

Of course, as you may know, and everyone knows and we follow, we have some projects. And we know every single projects. We study them, we follow them. The new projects, that ones that are in development and the ones that are the study of lithium carbonate, most of them in Australia.

We follow those projects and as expected, during this year on during next year, we will have some new producers, the projects that we already know, going to the market with additional capacity. An at the end, you have in the short term in the next 30 months, that's why I put that next 30 months. That's where we are going to have most of the new projects go into the market. This between supply and demand.

This, I prefer, I really prefer to be 10% of 5 million funds market that's been a 90% of a 500,000 metric tons market. I mean, market share is not my target. Volumes is my market in the long term. Margins is my market -- is my target in the long term.

We are even better positioned today, in my opinion, in terms of my projections about competitors and my projections about the market. We are going to be in 2025. Today I'm more optimistic than what it used to be one year ago and that's my target. And our volumes strong increasing volumes and having a strong pre-season in the margins.

If the margins, instead of being 1 million tons, it's 1.5 million tons, and we have a lot of newcomers, who cares? I mean, I don't care having 20% or 10% of the market. It's not my target. It's not what I'm looking forward. What I'm looking forward for margins.

I'm looking forward for volumes. That's the one that we expect to have in the future.

Javier Martinez -- Morgan Stanley -- Analyst

Understood. That's clear. Ricardo, a second question please, if you don't mind. So you say that the the premium you get versus competitors will converge.

This is because your prices will go down. This is because competitive prices will go up to converge or both?

Ricardo Ramos -- Chief Executive Officer

I don't know what my competitors are doing in detail but big, as far as I know, they say publicly that they expect prices for them to be similar or slightly higher than that. I know that they say something like that. And I think that it sounds reasonable considering that today market situation is my same expectation of the market and I see you before we had these additional premium prices in 2018. And I think that I will get more close to their pricing, our competitor prices in 2019.

Therefore, of course, my prices, our SQM pricing premium will decrease. The average estimate of sales prices in 2018 will be -- I expect to be a lower than the year before. But keeping in mind not because the price of the market itself is going down is mainly because SQM premium prices is not going to -- I don't think it's reasonable to expect that we're going to have these additional pricing in 2019. But the reasons that are already explained during the conference.

Thank you.

Javier Martinez -- Morgan Stanley -- Analyst

Very clear. Thank you, Ricardo.


The next question comes from Josh Falco with HSBC. Please go ahead.

Unidentified speaker

[Inaudible] It's all good. Just following up on Javier's call, sorry to keep [Inaudible] on the lithium. Is there any problem -- when you announced the expansion and the fact that you couldn't get there, is there anything to do -- and this premium going a way, is there anything to do with the purity, the quality? I know that there's range of quality of material and where you can stand and where you produce there is something to do with that? That's question No. 1.

And question No. 2 is talking to some of your competitors, they say that there is a softness in the Chinese market. [Inaudible] this "premium" is a result [Inaudible] market but at least the spot market seems to be a little bit softer. Is that what you referred to or is it something else? Thank you.

Ricardo Ramos -- Chief Executive Officer

Ricardo. First about the first question, I have some doubts about the second question anyway. But let's go to the first question. As I explained before, the main reason of these premium pricing in the year 2018 as compared to our main competitors is related to this commercial strategy where we had these spot sales and they had this long-term contract.

And that's the main reason. Of course, our geographical sales, our customer base is probably different customer base. It is different. Maybe helps us to have this premium price maybe.

But again, I want to be very clear that I think that the most important reason was this commercial -- different commercial strategy. That's the one. The second question, if I'm not wrong, because we had some connection problems with your call, is regarding the China situation and I think I explained before that we're not selling in China. We don't have reliable information -- we have a lot of information every day coming from China.

People say that the price is whatever. I don't remember one year ago, some people say that in China lithium was close to $30 per kilogram. I'm not even sure whether this was true or not. We didn't sell out $30 lithium not in China, nowhere.

But now of course, there's some people that say in China that are in China is selling very low prices. But again I'm saying us with big lithium everywhere everywhere in the world. China can export the lithium anywhere in the world. That's why I think that this sounds has changed for me that prices in China are so low.

Good quality pricing. If the price is so low, why they don't export these high-quality lithium to the market? I don't know. It means, I don't know what kind of lithium they're trading at these low prices that I don't know are real low pricing. And I prefer that someone with real experience on selling -- real setting lithium in China can answer this question.

I really can not answer the question, what's going on in the China internally pricing. I don't foresee any reasons to believe that the pricing that we expect today or what we are looking at the market today would be quite different in the future. I don't have information in order to short something like that.

Unidentified speaker

Super clear. Thank you.


This now concludes our question-and-answer session. I would like to turn the conference back over to Gerardo Illanes for any closing remarks.

Gerardo Illanes -- Chief Financial Officer

Thank you. Thank you all very much for joining us today and we hope to have you with us in the next conference call. Goodbye, everyone.


[Operator signoff]

Duration: 35 minutes

Call Participants:

Gerardo Illanes -- Chief Financial Officer

Ricardo Ramos -- Chief Executive Officer

Joel Jackson -- BMO Capital Markets -- Analyst

Danniela Eiger -- Bank of America Merrill Lynch -- Analyst

Ben Isaacson -- Scotiabank -- Analyst

Javier Martinez -- Morgan Stanley -- Analyst

More SQM analysis

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