Sociedad Química y Minera de Chile S.A. (NYSE:SQM) Q2 2023 Earnings Call Transcript

Sociedad Química y Minera de Chile S.A. (NYSE:SQM) Q2 2023 Earnings Call Transcript August 17, 2023

Operator: Good morning. And welcome to the SQM Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Irina Axenova, Head of Investor Relations. Please go ahead.

Irina Axenova: Thank you. Good morning. Thank you for joining SQM’s earnings conference call for the second quarter of 2023. This conference will be recorded and is being webcast live. Our earnings press release and 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 the call today will be Ricardo Ramos, our Chief Executive Officer; and Gerardo Illanes, Chief Financial Officer. Carlos Díaz, Executive Vice President of Lithium; Felipe Smith, Commercial Vice President of Lithium; and Pablo Altimiras, Executive Vice President of Nitrates & Iodine will also be available to answer any questions. Before we begin, I would like to remind you that statements made in this conference call regarding our business outlook, future economic performance, anticipated profitability, revenues, expenses and other financial items, along with expected cost synergies and product or service line growth, are considered forward-looking statements under federal securities laws.

These statements are not historical facts and may be subject to changes due to new information, future developments or other factors. We assume no obligation to update these statements, except as required by law. For a complete forward-looking statement, please refer to our earnings press release and presentation. I now leave you with our Chief Executive Officer, Ricardo Ramos.

Ricardo Ramos: Thank you, Irina. Good afternoon, everyone, and thank you for being on the call today. Yesterday, we published our second quarter 2023 earnings report, and I would like to highlight the positive impact of significantly high sales volumes in Lithium business and continued strong performance in Iodine business seen during the quarter. Lithium business, we reported record high quarterly sales volumes, which surpassed 43,000 metric tons, driven by strong customer demand recovery and positive market outlook. We expect to deliver higher sales volumes in the second half of this year compared to the sales volumes reported to the first half of the year. Since the majority of our sales contracts are based on price indices which follow market price trends, our realized sales prices moved with the market with some lag, depending on the terms of the contracts.

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This commercial strategy allowed us to capture the price premiums in market last year. After first quarter pricing negative trend, we have seen some price recovery during the second quarter and expect our realized price to follow the market for the remainder of the year. We continue to see strong fundamentals behind lithium demand growth with the global EV sales showing another strong performance during the second quarter, increasing 50% year-over-year. We believe that the total EV sales growth could be close to 30% this year when compared to 2022. And the global lithium demand could increase at least 20% this year compared to the previous year. Signing the long-term agreement with Ford Motor Company and LG Energy Solution was another important milestone of the quarter.

The trust our customers put in SQM’s ability to successfully increase production in a sustainable way and deliver high-quality battery material make us very proud and encourage us to continue with our growth plans in Chile and globally. We expect to produce approximately between 180,000 and 190,000 metric tons of lithium this year from our operations in Chile and China. Our expansions in Chile are progressing on schedule, and we expect to ramp up our lithium carbonate capacity to 210,000 metric tons by the end of next year. The commissioning of our lithium hydroxide refinery in China has been delayed by a few months, and we expect to see the first production volumes coming to the market in the coming months. Simultaneously, our attention is directed towards our exploration initiatives in Australia, guided by SQM’s team of highly experienced geologists and in collaboration with local partners.

We are advancing on securing potential new lithium supply sources. In Iodine businesses, we have seen both a strong market performance as well as successful delivery of new capacity from our caliche operations. Iodine market continues with record high prices, driven by a growing demand of x-ray contrast media segment. While annual global iodine market demand is expected to be flat, we believe we will deliver higher sales volumes during this year when compared to last year. Despite the record high prices seen in the market in the past quarters, SQM has been the only producer to increase materially its production volumes. We remain on track to increase our production of iodine by approximately 800 tons this year to support the future growth of iodine market.

We are also very proud of our contribution to the Chilean treasury during the first six months of this year of approximately $1.7 billion, mainly due to the public private alliances we have with CORFO over the Salar de Atacama operations. And finally, in this quarter, we released our latest sustainable report, outlining the progress we have accomplished in our sustainable journey in the past year, the advances we achieved in pursuing our goals and the upcoming challenges we have set for ourselves. Thank you, operator, and we will now open for the questions. Thank you.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from Isabella Simonato with Bank of America.

Isabella Simonato: I have a couple of questions. First of all, on iodine, we saw a big increase, as you pointed out, right, on prices year-over-year. However, on your presentation, you showed that the contribution to gross profit, right, was only of $30 million, which implies, of course, a significant increase in costs as well. So, I was wondering if you could give us a little bit more color on the cost of production of iodine and how do you see that performing going forward? That would be my first question. The second question is in light of the regulatory change in Chile, right, how do you see strategically the geographies where you are producing lithium, right? And how do you see the potential of diversification going forward, considering the environment in Chile? And final, very quickly, you guys announced the dividends last night as well. If you could give us an indication of the payout for the year? Thank you.

Pablo Altimiras: Hello, Isabella. Pablo Altimiras speaking. Regarding to your questions about the iodine, yes, as you see, prices have been growing, explaining mainly because of lack of supply situation that we see that will continue in the year. Regarding to cost, it’s true, –there have been some pressure on cost. I would say that there are several reasons, but the most important one is that, it’s not any secret that in the whole mining industry we have some pressure on cost because the cost of energy, raw materials, things like that. Also, we opened our new facility, Pampa Blanca, which at the end is a small facility. That means that it has a higher marginal cost. However, with the recovery of the nitrate industry and also we hope because of all the efforts that we have been doing to improve our deals, we see that the situation will start to be under control, so we see positive results in the coming months.

Ricardo Ramos: If I’m not wrong, the second part of the question is regarding the lithium diversification outside Chile. As we can — as we have commented before, the Company is looking for opportunities of lithium outside Chile. We have a lot of expertise in lithium. We know we have knowhow. We’re moving forward with our Mount Holland project. We’re very proud about it. Yes, we’re open for opportunities. And we don’t have any specific new project announced today, but we are working very hard in order to, as we said before and we have said in the last two years, to find opportunities to do business outside Chile. What was your third question, Isabella? We don’t remember.

Isabella Simonato: Yes. It was just about the dividend and if there is a visibility on the payout for the year.

Gerardo Illanes: Hi Isabella. This is Gerardo. The Board yesterday approved an interim dividend of 30%. You know that our dividend policy is — it was presented to the shareholders. It’s on our website. And the dividend — the interim dividend of the first quarter was 30%. The interim dividend of the second quarter was 30%. And we will continue on the rest of the year — or the Board will continue assessing the interim dividends. And at the end, in April next year in the Annual Shareholders Meeting, a final dividend will be decided.

Operator: Our next question will come from Ben Isaacson with Scotiabank.

Ben Isaacson: Three questions for me as well. Number one, on the contracts with Ford and LG, what were the reasons why you need to sign a contract? And can you give us some parameters around those contracts, pricing, volume, how long they’re going to be, et cetera? That’s the first question. The second question, lithium — sorry, iodine prices are around $70 or so per kilogram. Why haven’t we seen much new supply being announced? And do you expect that to change if iodine prices stay where they are? And then the final question is, I think, Ricardo, you mentioned you see EV demand growth of about 30% and lithium of 20%. Why is there a gap between those? Would you expect those over time to come together, or is this something that we should expect going forward? Thank you.