Sociedad Quimica y Minera S.A.

Good day and welcome to the SQM first quarter 2021 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 a 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.

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 webcast at our website, www.sum.com. Our earnings press release and our 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. CFO, and Pablo Altimiras, Senior Vice President of the Lithium and Ion Business, will also be available to help answer any questions following the prepared remarks. Before we begin, let me remind you that statements in this conference concerning the company's business outlook, future economic performances, anticipated profitability, revenues, expenses, or other financial items Anticipated cost synergies and product or service line growth, together with other statements that are not historical facts, are forward-looking statements, as that term is defined under federal securities laws. Any forward-looking statements are estimates reflecting the best judgment of SQM based on currently available information and involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those stated in such statements. including our ability to successfully implement the Sustainable Development Plan. Risks, uncertainties, and factors that could affect the accuracy of such forward-looking statements are identified in our public filings made with the U.S. SEC in our earnings release issued yesterday, and these forward-looking statements should be considered in light of those factors. We assume no obligation to update such statements whether as a result of new information, future developments, or otherwise. Thank you.

Good morning. We thank you for joining the call today. Our earnings during the first quarter of 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 I expect an increase in average prices in the lithium market since the inflection point that we saw in the fourth quarter last year. Our diverse portfolio and strong production performance should continue to have a very positive impact on our results 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 the SPN and potassium business lines to be higher than average prices reported during 2020. The IUNI 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 10-15% compared to last year. Finally, lithium market indicators have been very positive over the past few months. The 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 comparing to the fourth quarter last year. We believe that prices will continue increasing each quarter throughout the year. As we mentioned last night, our CapEx plant remains on or ahead of schedule. In Chile, our plants reach 120,000 metric tons of lithium carbonate and 21.5,000 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 have been moved forward to an operating by the end of 2022. Our Monrola lithium project in Australia remains on track. As a reminder, the Board has approved close to $500 million total CAPEX plan for 2021 Thank you, operator. We may now go to the Q&A session.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. First question will be from Corinne Blanchard of Deutsche Bank. Please go ahead.

Hey, good morning, Tim. Thank you for taking my question this morning. I think first I would like to get your view on nameplate capacity versus sales volume for this year. and also maybe for 2022, with both expansions for hydroxide and carbonate now due next year rather than 2023, how do you view USAID versus full capacity and do you anticipate inventory powering up?

Hello. As you may know, we are increasing now to 120,000 metric tons at the end of this year. Considering the good performance on our facility at the end of, during second half last year, I think that it's reasonable to expect to have a total production for this year close to 90 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 120 and at the end of the year we expect to go to the 180. That's why I think having a production, a total production for next year close to the 140,000 metric tons makes sense. It's something in our plan we have today.

Okay, that's very helpful. So, yes, I'm assuming you guys are just trying to save whatever you produce. That's very interesting. The second question is on lithium pricing. Obviously, I think we all agree where I've seen the bottom in 4Q and pricing started to improve in 1Q. If you look at Chinese pricing since late August 2020 and seaborne pricing as well in the past few months, we all see a positive trend. I just wanted to try to get your view on You know, where do you see pricing going toward the end of the year? Do you see it going by close to $10,000 that time? Do you see it still below or above this level?

Thank you. Pablo Andres Ortiz speaking. Well, as you know, price always is a result of the supply and demand. In the demand side, we have been seeing a very positive trend for the demand. Actually, we are increasing our estimation for this year. So in that regard, we see that a positive trend. So you are right, we have been seeing a positive trend in pricing. However, the price always is not a unique price. You need to consider that we have different qualities, different types of customers, different volumes that you commercialize with them, different commercial strategies. So we don't have one price that can reflect the total reality of the market. But having said that, because of the positive trend of the demand, I can say that today we have been seeing prices in a down digit. In the future, well, everything will depend on supply and demand balance.

The next question will be from Joel Jackson of BMO.

Hi, this is Robin on for Joel. I have a few questions. I'll just ask them one at a time. I just had a follow-up on that pricing discussion. and, you know, I appreciate there are legs 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 Argentinian peers who has struggled with quality of the past has even guided to like $7,000 to $8,000 a ton for the June quarter. So is that like a floor expectation for Q2? Is that reasonable?

Well, I mean, first of all, export prices do not capture all the information of the market. So that's one thing that we need to be careful when we take a look to those prices. So that's my first comment. Regarding to our strategy, I can say that in the first quarter, the majority of our sales were agreed. and contracted during 2020. So that explains the result of the price for Q1. However, the reality for the second half is different and more than 50% of the sales will be closed under the prevailing prices reality at that moment. So that's the strategy that we are following.

Okay. And my second question is on the proposed copper royalty changes in Chile. So is the lithium structure viewed as a model for this, or are there changes that could be expected in the lithium royalty structure as well?

Hi. Yes, this is a discussion about some royalties or taxes in Chile, as you may know. We have no information other than what has appeared in the press. As you may know, it has been preliminarily discussed and it has to be analyzed by the Senate and finally by the government. Anyway, we sent our preliminary opinions to the different industrial and mining groups in which we participate. They are finally the ones who raised the opinion of the Mining Ministry regarding these issues. Just I want to add that SCM contributes significantly to the development of the country throughout important factors and other contributions to the country and communities. For sure, there is no other economic activity in Chile that contributes more resources, both in absolute terms and in percentage terms, to the country.

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

Okay, we continue to be very excited about our business strategy and our significant CAPEX program. And we will continue, of course, advancing in our sustainability agenda. We went public with our sustainability agenda last year. We will continue to do so. We think we are perfectly aligned with the demand of the community in Chile and the world's demand in terms of being very active in terms of environmental activities. That's why we think that this Yes, we conferred our roles in terms of implement all our agenda in terms 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.

Thank you.

The next question comes from PJ Juvicar of Citigroup.

Yes, hi, good morning. You know, 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's also trying to get some index pricing in their contracts. So how do you see the market evolving in terms of contracts? Do you think the market and the big buyers, the battery companies, the EV companies are likely to go towards more index-based pricing to some extent?

Okay, thanks for the question. I mean, yes, you are right. I mean, some customers are trying to have more 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 want to produce in different ways related to pricing. So in SQM we are flexible. So in some cases we are considering to Okay.

And then you had good top-line growth in lithium as well as in potash and SPN, but your costs were also higher, and so the leverage did not come to the bottom line. And I was wondering if there are any special costs that were They're in the quarter coming out of the pandemic. Can you talk about the leverage going forward as you get more pricing in the second half?

Yeah, I think it's not one clear message that the costs are higher. You have some product lines where costs are lower, some other product lines where costs are slightly higher. Some product lines where costs are at the same level. We don't foresee any cost situation nowadays. Of course, we monitor, as you know, we're located in Chile. The value of the U.S. dollar is very important for us. That's why if the dollar goes up, it's good for us. And if the dollar goes down, it's very bad because we have a lot of expenses in Chilean pesos. Nowadays the dollar is supporting our original projections, that's why it's not a big news and I think we can continue with our original cost plan. Of course, having this price of copper in the north, that is very high. and the new corporate 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 at the bottom line, we don't foresee any cost issue or a significant issue during this year as compared to the previous year.

Thank you. And just a quick housekeeping question. Thank you very much.

Depending the business line is 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 our volume strategy, inventory volume strategy is a very good one and it continues to be very good for the company in order to perform our business strategy. I don't foresee any big moves in the total inventory during this year.

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

Thank you. Good afternoon, everyone. Ricardo, Gerardo. My question is on the DSPN and the Potash business line. On the Potash side, we are seeing prices rallying, especially in the last couple of months. Your prices are going up, but maybe not as much as we're seeing on the spot prices. Can you provide us an outlook? For the next couple of quarters, how you're seeing Scottish prices performing? And similar questions to SPN. I mean, you are guiding for a volume recovery this year, and of course, high-going prices are supportive of prices, but what sort of acceleration do you anticipate in the coming quarters? Thank you.

Hi Isabella. Yes, you're right in terms of the Potash price is going up. We had some agreements previously to this new price trend. Certainly, I think that prices will be higher during second quarter and I'm very positive about pricing in Potash during second half of the year. I think second half of the year prices will be significantly higher than the prices that we are seeing in our sales of the first quarter. As you know, in the SPN or specifically plant nutrition business, the relation between potash price and potassium nitrate is not so directly. It means that when they go down, we don't go down the same level, and when they go up, we don't go up in the same level. Anyway, having a better potash environment is a very good news. I foresee better pricing, not at the level of the potash in terms of percentage increase, But we think that prices during second quarter this year, especially second half this year, will be better than what we observed during first quarter.

That's clear. Thank you.

The next question comes from Ben Isaacson of Scotiabank.

Thank you very much. I guess my first question is on the election that took place over the weekend. Obviously, the stock market didn't like what happened, at least as it relates to SQM. So, I guess, Ricardo, in your opinion, what are the reasons why the stock market is nervous about SQM? Is it only to do with the potential of increasing royalties, or could it also have to do with issues related to water or extraction rights or maybe... Giving more resources to indigenous population. Is the market wrong to be this nervous right now?

Hi, Ben.

You know, if you review the price of healthcare in the last four days, Monday, Tuesday, Wednesday, and today, We have followed the trend in some way of the Chilean stock market, means there's no big difference between where the Chilean stock market is going and where Esquien 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 banks in Chile, as you may know, have issued various and very good analysis of the factors that may have affected the Chilean stock market. I think it's interesting to be able to read them. I think there's many different opinions. Not all the opinions are the same. That's why it's important to read different analyses. But, of course, there's a lot of volatility today, some uncertainty. I think it's important to wait and see. It's too early to have a clear opinion about where they're moving, where the stock market is moving. But, of course, when you have these big, big moves that we had In the last three or four days, of course, we followed that move. I mean, there's no way we are going to be independent of what's going on in the Chilean market. And again, I think the last two days, I had the opportunity to read different reports from investment banks, local Chilean investment banks, and I think they're very good in order to have an idea of different factors that may or may not affect the stock market today.

That's a good segue to my next question, which is, can you just talk a little bit about diversifying outside of Chile? Obviously, the Mount Holland project is front and center, but are there other opportunities that you're looking at, and are those in lithium? What kind of regions are those in? Are they in potash, et cetera?

Yeah, we are open for doing business, not only because we want to have diversification of Chile. We are very... I think we are doing great investments in Chile. But anyway, our M&A activity is open for opportunities, as always. As you know, it has been a very important decision for us to go ahead with the project in Australia. It's going to be a big project. I hope it's going to be the first big project in Australia. As you know, we have the opportunity to move forward instead of being a 50,000 metric tons total capacity to close to 100,000 in the future. We will decide with West Farmers in the next couple of years, probably, moving forward to maybe 100,000. We'll try to look for opportunities in the business outside the city, of course, yet. We need it in Australia. If we have a good opportunity, an opportunity that can create value, we will do it again. Potash is a very difficult market to be getting in the market nowadays, but of course we are open to new alternatives. In Potash United we are also open for opportunities. It seems like it's difficult to find opportunities outside Chile, but always open for opportunities and I align 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 if we find a good opportunity outside Chile, as we did in Australia, we'll do it. Just two more quick ones for me.

First is copper prices I think are now over $4.50 a pound. I remember in the past you had interest from outsiders that wanted to come and look at what the potential was on your land. Are you seeing a pickup in that activity? I think you had that as a revenue source several years ago and I haven't heard much in the past few years. Is that something that's new or coming back at least?

Yes, you're right. There's a lot of interest in copper in the last, I think, few months. It means 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 activity, geological activity, to find some potential copper. Thank you very much.

Okay, and very last one from me. You have guidance of greater than 85,000 tons for the year. You just did 24,000. So the math would suggest that's about, you know, 20 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 speaking. Thanks for the question. First of all, I think that it's important to remark that during this third quarter, we sold almost three times compared to the same quarter of last year. So I think that it's important to remark that. The second thing that is important to remind is that this year we will grow more than the global demand grows. 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 product. Sometimes they buy more or less, and sometimes it is not in our control. So that may sometimes explain difference among quarters. But having said that, it is important again to remark to say that we sell at least 85,000 megatons, but our intention is to sell more if the market is there. Thank you very much.

And the last question today will be from Cesar Perez-Nabella of BTG Paxual.

Good morning or good afternoon, gentlemen, and congratulations for the results in the first quarter. Regarding the accelerated rollout of your carbon 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 and specifics. And, of course, along these lines, what should we think of the CapEx figure for 2021? Is $500 million still good?

Yeah, we're not seeing a huge difference, anyway, but if you consider, yes, we're doing okay, the project, things are moving in the right direction, sometimes you have delayed projects, and sometimes you have the good news that projects are ahead of schedule. And this is the case, we're not talking about one year, we're talking about some months before expected. It will not change our total APEX for 2021. and 2022 it's going to be 500 million dollars as we explained before and yes it's a good news and of course it's a very good news considering that the market is very good and having more volumes available is always having this flexibility in this market is a very good news for us. That's why we are pushing very hard in order to do it right but to do it as soon as we can.

Okay, no, thank you very much, Ricardo. And just the final one on my end, on iodine. You call for 1,000 tons in incremental volume for this year. What can you tell us about this market in terms of demand recovery and pricing as well? Thank you.

Hello, Cesar. Pablo speaking. As we anticipated before, we have been seeing a recovery in the demand. Our expectation for this year is that the demand will recover by 9%, which is good. However, it still will be lower than the demand that we saw in 2019. But for next year, we will see the entire recovery, so the demand will be in the normal growth rate at that year. Thank you, gentlemen. Thank you, gentlemen.

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

Great. Thank you, and thank you for all the questions. We look forward to seeing you next quarter. Have a nice weekend.

The conference is now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.