Sociedad Quimica y Minera S.A.

Good day and welcome to the SQM first quarter 2023 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 telephone keypad. 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 Irina Axnova, Head of Investor Relations.

Please go ahead. Thank you, Sarah. Good morning. Thank you for joining SQM's Earnings Conference Call for the first quarter of 2023. This conference call will be recorded and is being webcast live. 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 the call today will be Ricardo Ramos, Chief Executive Officer, and Gerardo Yanez, Chief Financial Officer. Carlos Diaz, Executive Vice President of Lithium, Philip Smith, Commercial Vice President of Lithium, and Juan Pablo Belolio, Commercial Vice President of 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 presentations. I now leave you with our Chief Executive Officer, Ricardo Ramos.

Good morning and thank you for joining the call today. Yesterday, we reported our earnings for the first quarter of 2023. The results were affected by lower sales volumes in lithium and specialty plant nutrition business lines, partially offset by higher average prices when compared to the same period last year. We saw a decline in lithium demand in the beginning of the year, especially in China, which affected our sales volumes. High inventory levels across supply chain accumulated in the previous quarter and reduced capital production volumes resulted in low customer purchasing activity and put pressure on market prices. Coming out of the first quarter, we have seen an increase in market activity with customers looking for more volume to buy, which signals the end of the stocking period and is also being reflected in the spot prices trending upwards in the recent weeks. We believe that the lithium market foundations are intact and have not changed our expectation for the lithium demand growth this year. During the first quarter of the year, the global electric vehicle sales continued to increase when compared to the same period last year, achieving almost 30% growth worldwide, with sales in China increasing almost 22%, in Europe almost 19% and over 50% in the U.S., We expect this growth to continue throughout the year, with the total electric vehicle sales increasing over 2.5 million units in 2023. While we see new supply coming to the market this year, we believe that the softer price conditions and the stricter environmental requirements for mining operations have affected the economics of some of the high-cost suppliers, as well as impacted the timing of new projects. Consequently, we expect that the lithium market will remain tight throughout the year. We will continue to focus on expanding our production capacity and fostering a strong relationship with our strategic customers. We're committed to investing in these areas to drive growth and maximize our sales volumes. With the reconfirmation of volumes from all our major customers for this year, we anticipate a steady increase in sales volume throughout the year, quarter over quarter. Since last year, we have made significant progress in transforming the majority of our contracts into flexible pricing conditions, utilizing indexed reference prices with a lag between. We believe this approach allows us to respond swiftly to changes in the industry and provides greater flexibility to our customers. As I mentioned yesterday, we are very proud of the results in our Caliche operations. and specifically iodine business, which allow us to increase our sales volumes and ensure the supply of iodine to meet the growing demand of the X-ray contrast media segment. While global iodine demand is expected to be flat on the year as a result of the reduced demand in some of the iodine applications, we believe that contrast media segment will grow close to 7% a year. SKM is the only producer that has been able to increase materially its production volumes in the recent year. Sustainability remains at the core of our operations as we continue to focus on reducing the carbon and water intensity of our products. I am pleased to announce that our 2022 Sustainability Report will be published next week and invite you to explore and progress throughout the past year. We take pride in the achievement we have made and remain committed to advancing our sustainability development plan even further.

Sarah, we will now open the line to questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. If you're using a speakerphone, please pick up your handset before pressing the key. At this time, we will pause momentarily to assemble our roster. Our first question comes from Thiago Lofiego with Bradesco BBI. Please go ahead.

Thank you, gentlemen. Thank you for taking my question. Actually, I have two questions. The first one is on lithium supply in the coming years. So how do you see new frontiers evolving? How do you look at Argentina, Brazil, Mexico as potential new frontiers? And still in that question, would you consider eventually exploring potential projects in those regions. And then the second question is about the national lithium policy. Can you give us an update on how conversations are ongoing with Corfo, with the Chilean authorities, any, you know, hope that, you know, a middle ground can be reached? So just want to hear your views on that. Thank you.

Yes. Hello, Diego. This is Felipe Smith. How are you?

I'm good. How are you, Felipe?

Yeah, I will try to answer your first question. So indeed, I mean, we have always mentioned to the market that lithium is available everywhere. And there are, of course, today we are seeing projects arising in different regions. We are, of course, following those developments and as SQM, We have also said in the past, we are always interested in studying new projects in different parts of the world. So we are potentially also analyzing that possibility. Now, one important statement that we have to add is that when we look at new projects, I mean, here the experience and know-how of the one who is responsible of that project is key because we have seen that in some cases, projects take too long or finally do not materialize as originally foreseen.

Ricardo, I'm speaking now. Talking about the CODELCO, we expect to start talks with CODELCO in the coming weeks. As I said before, we are looking for an agreement that will be positive for the country, the Antofagasta region, the communities, and of course, for the two companies. About what we can call the national lithium policy, as a company, we do not comment or give an opinion about what we call public policies. I think it's a very interesting discussion, but it's a discussion that corresponds to political parties, you, the analysts, or the study centers that we have a lot of them in Chile, and the different unions that are also giving their opinions. We just want to start this conversation in the coming weeks, as I said before. We will report when it starts to the market.

Fair enough. And if I may very quickly go back to Felipe. Felipe, which one of those regions do you see more potential growth within? And I ask those specifically because of the you know, geographical proximity to you guys. So Argentina, Mexico and Brazil, which one of those would you, you know, think that there is more potential for SQM and for the market in general?

Yes, I would say that today our main focus is Australia as number one, let's say, a potential area of development. we are already, you know, developing a project there and we are studying different potential new projects. So I would say this is our number one focus today.

All right, thank you.

Our next question comes from Rafael Castillos with Banco Santander. Please go ahead.

Good afternoon, and thanks for taking my questions. My first question is related to lithium volumes. You mentioned that sales volumes have rebounded in the second Q, but I just would like to understand if it's now at normal levels for a second Q, or if you believe that it will take, for example, two more quarters for us to see volumes returning to normal levels. And my second question is related to CapEx. I just would like to understand if How flexible is your 2023 CapEx guidance of $1.2 billion? And in which scenario you would consider reducing these CapEx level? Thank you.

Okay. Yeah. Hi, Rafael. Regarding the volumes, well, as Ricardo mentioned at the beginning of the call, We are very positive today because, first of all, the fundamentals of the demand are strong. The EB sales are showing an increase of 30% on the first quarter, which is already very positive. And we are also seeing that the customer activity has recovered. We are engaged in business discussions with our customers. Customers are buying again. I would say that from a volume point of view, I can say that the second quarter will be substantially higher in volume than the first quarter, also will be higher than what was the second quarter of last year. And finally, I would say that, as we have said in the previous call, that the second semester volumes should be better than the first semester volumes.

Just about the projects, just one comment. Our projects in the lithium business are so good that we are not even thinking about to reduce it. We don't foresee any scenario where we are going to reduce the capex. We are thinking about increasing our capex. We have new projects, new initiatives, and probably we have new projects in the lithium industry. Even in Chile, we will announce during the next two quarters. But nowadays, forget about reducing. We are thinking about increasing.

Okay, thank you.

My next question comes from Isabella Mamatu with Think of America. Please go ahead.

Hi, good afternoon. Hi, Ricardo, everyone. I have two questions. First of all, on the iodine side, you mentioned, Ricardo, that prices should be resilient for the second quarter, but I'd like to hear more your views beyond that. I mean, what you're seeing in terms of new supply. You mentioned that no one has been able to add supply, so if you could give a little bit more details on the mid-term scenario. And second of all, even though price were down, the premium of SPN was relatively resilient during the quarter. So also, what are your expectations going forward? Thank you.

Hello, Isabella. This is Juan Pablo. I'm going to answer the question about iodine. We believe that, as we mentioned, that during the first half of the year, demand and supply is going to be stable. We think the same about prices. For the second half of the year, it will depend on the demand and supply of the market finally. But what we see from today and onwards is that there is a segment of the contrast media market that is growing strongly. So there is a fundamental on the demand that should keep the market and demand strong. So unless more supply arrives to the market, we see the market more or less stable.

Yeah, about the potash and the relation between SPN, it means especially the plant nutrition products, potassium nitrate, and the relation with potash is important to consider that are not direct competitors. It means it's important to keep these numbers as a ratio, as an important indicator. But it's a different market, it's a different outcome, it's different uses. But anyway, I think that today's price environment of potassium nitrate is not bad, it's good. If you consider our average prices two years ago, whatever it means, today's prices are very good. And we're very positive about the potential demand in the near future. Things are just a little bit better now than what used to be doing in the first quarter. Just to comment to you that first quarter this year, we're mainly affected in the sales in Europe. Europe is affected by the high inflation, high production costs of farmers. We had bad weather that has delayed crops. The uncertainty in the world also have caused agricultural activity to be lower than expected. But if you consider the other markets, mainly, for example, United States, Mexico and other ones, we can say that we are more than we're close to a normal demand. That's why we think that we are more positive regarding the next three quarters and we expect SBN and means especially the plant nutrition business 2023 volumes to slightly exceed or higher than 2022 volumes. That's a good news we expect in the next three quarters. Pricing, you are right, it will depend also for many conditions. But of course, if the potash price goes down, it will affect the price of potassium nitrate in some way. Yes, it will affect. But we have to see what is going to be the development of the pricing of potash and potassium nitrate. It still is not so clear for the future.

Thank you.

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

Thank you very much and good afternoon, everybody. Just a few questions. I'd like to ask them one by one if that's okay. You sold 32,000 tons in Q1, which was a little bit lower than what most had expected. What does that mean for your overall guidance for the year in terms of volume? Can you give us some kind of range in terms of what we should expect?

Yeah, Ben, I agree that the Q1 was low and we anticipated that it would be low. But as I said before in the previous question, we are very positive about the market situation now. So we expect a good second quarter, substantially better than the first. And we also expect that the second semester volumes will be higher than the first semester volumes. Okay, that's perfect.

Second question is, I believe we saw 46,000 tons of exports from SQM and you recognized 32,000 tons. Does that mean that you've paid Corfo royalty payments on the whatever the difference is, 14,000 tons. And so you've paid maybe, I don't know, $150 million or something like that, that's as a prepayment. Is that correct?

Hi, Ben. How are you? This is Gerardo Yanez. Well, that figure of 46,000 metric tons of exports, I'm not sure if it's the exact number that we are considering or that we consider during the first quarter exports. But you're right. We pay to Corfo at the moment we export based on the volumes that were exported during the quarter and the average sales price to third parties today. during that quarter. So in the first quarter, we export more than what we sell. And consequently, we pay to Corfo more than the actual calculation of the tonnage invoice to third parties times the price invoice to third parties.

Right. Okay. Thank you. Just two more quick ones, if I may. In the past, you had mentioned some interest in investing potentially as joint ventures in Canada and the US. Earlier on the call, you said you're still most excited about Australia. Are you still looking in Canada and the US and any progress there?

If you... we are open to do business almost everywhere in the world if it is good for us with india we have competitive advantages in in in lithium we have a lot of experience we know how to do it we have commercial capacity capacities and a lot of technical know-how and of course the us canada australia Everywhere is an alternative to look forward. But of course, Australia for us, because we have an office there, we have some people there, seems like a very interesting place. We are open to review and we are reviewing alternatives all around the world.

Last question, if I may. You said in the press release that you believe destocking has been concluded. Can you just give a little bit more color in terms of what you mean by that? What data points are you seeing? What locations, kind of where in the supply chain have we seen destocking finished?

Yeah, I mean, of course, the main issue with the lower demand happened in China. As you may know, China concentrated mainly the the lower demand. And it's also in China where we are seeing this activity of purchasing restarting strongly. And I would say strongly, I want to highlight that. So the fact that you see also the indexes changing is a very good sign that the What we are reading is also what, in general, the market is reading. So the customers are buying again. And that means definitely that they need to start or that they reach their lower stock levels. And now they are rebuilding stocks and consuming.

Thank you very much.

Our next question comes from Corrine Blanchard with Deutsche Bank. Please go ahead.

Hey, good morning or good afternoon, everyone. I missed actually the beginning of the call, so I hope my question hasn't been asked or you haven't made comment on this. I was trying to get maybe some clarity on your negotiation with CODELCO or the government. And, again, I'm not sure if you shared something on the prepare remote because I was not able to join, but just really trying to understand where we stayed, what could be the likely scenario coming out of those negotiations would be helpful.

Okay, sorry, but we expect to start the talks with CODELCO in the coming weeks. I think we need to wait until we have an idea about the conversation. But I think both sides, CODELCO and SQM, we're open to look for alternatives that are going to be, if they are positive for the country, the Antofagasta region, the communities, and of course the two companies. At today's, I think it's not possible to have an estimate of the time it will be required in the negotiation or what kind of negotiation we will have. I think we need to start the process and it's going to start in the next, in the coming weeks.

Great, thank you. And then, you know, maybe trying to understand a little bit better like the volume and pricing that we could expect for lithium for the remaining of the year. I mean, obviously, you mentioned the stocking being nearly done. And I think, you know, based on market shakes, it seems to really have happened. Do you still feel comfortable with the cadence of capacity in your production cadence that you have versus the sales that you can realize for the rest of the year?

Yes, Corinne. Well, as I said before, we are positive about the volumes in the second semester and also in Q2. Regarding pricing, you know, I mean, we will repeat this as a mantra. So supply demand, the prices are basically following the supply demand balance. So it's very difficult to predict. And the market has shown this year that it has been very fluctuating. We started the year with high prices. Then by mid-April, we reached very low level prices in China. We have seen those prices recovering now in the range of mid-30s. But what will happen from now till the end of the year is something definitely we cannot predict. It will depend not only on the continuation of the customer activity, but also on the supply coming at the right time and so on. So...

Felipe, you can comment to us about your mood, your personal mood.

That's very important for me. Ricardo, I am in a very good mood.

Better than one month ago, no?

Yes, better than one month ago, for sure. I was in China and I will go to China again. So I see that the activity is much, much higher today. So, Corinne, we expect good volumes. That's what I can say.

That's what really matters for me. Yes.

Great, thank you. I appreciate it.

For the other side, sorry, Karin, Carlos, you mentioned that our production plan is not changing. That means we're running at full capacity in Chile and we expect to start producing soon in China at the end of the year in Australia. So it doesn't change anything regarding to keeping producing at full capacity.

Yeah, probably we will change and we will increase some of our projects. That's what we expect from Carlos to announce everyone that we expect to do something better and to move forward in production, move forward in new technology, move forward in new qualities. It means we are very, very positive in order that we will increase our capex in order to do something better. That's what we expect for the near future.

Thank you.

our next question comes from joel jackson with bmo please go ahead hey good afternoon guys this is joseph i'm for joel um so just in terms of lithium pricing can you just discuss please how q2 is trending so far versus q1 realizations um and also we've seen recently very big uh disparity obviously between chinese spot prices and the broader asian and european prices so we're just wondering which regional benchmarks would be

um the most relevant for us to look at for sqm and which ones do you guys follow primarily yes hi joel um well you know we we have sales more or less uh in in all the main markets so and and our contracts we have explained in the past our contracts are

Pardon me, this is your conference operator. Please stand by while we reconnect. Again, please stand by while we reconnect. Thank you. Thank you. . . . Pardon me. This is your conference operator. You may proceed with your call. Thank you.

Yeah, thank you. We're back. Any more questions from Joe?

Joe, are you there? Yes. Sorry, we had a problem with the connection in the skin.

Don't worry. Is it missing? Yeah, so just in terms of pricing, first, just wondering kind of how Q2 has been trending so far versus Q1 realizations. And yeah, just given the disparity that we've seen in Chinese bought prices versus Asian and European prices, which regional benchmarks would be the best for us to follow and most relevant for SQM. And we're just wondering which ones you guys look at primarily. Thanks.

Yes, I don't know how much you heard from my previous comments, Joel, but basically I was trying to explain that depending on where we sell, we follow different indexes. Most of our demand is concentrated, same as the global demand. Our sales is also concentrated in Asia. So that's what I can comment. Yes.

Our next question comes from Lucas Ferrerio with J.P. Morgan. Please go ahead.

Hi, guys. Good morning. Good afternoon. I have two questions, pretty much two follow-ups. One is on the realized price. Again, I think that realized price that you posted in the first quarter, correct me if I'm wrong, but implies that most of your sales happened probably in the month of March, right, when prices were lower, probably because with prices on a free fall, your clients maybe wait a little bit to put orders, and then you probably sold most of the volumes towards the end of the quarter. So my question is, looking at the second quarter, if we can expect something similar to happen, so most of your sales happening more towards the bottom, we saw in Asia. And if not, if you're being able to sort of a capitalizing way to sell at the better prices more towards the end of the quarter, since the prices are up more than 50% already from the lows. So just to say, we can better calibrate here our expectations for the realizing pricing to kill, given all the volatility. And the other question, maybe to Ricardo, sorry to come back to the same issue of the Colerco negotiations. And I know that it's just starting It's a very sensitive issue to the company. But I just wanted to understand from you and the company, if there's any aspect of this negotiation that is sort of innegotiable for you. For instance, the control of the Atacama. Is this something that you would be willing to give away in exchange for better economic terms? Or for whatever reason you think the company needs to keep the control of the operations? or how you deal with the cotton in plants. Is that something that you are willing to contribute to an eventual negotiation or the plant could not be part of negotiation. So how to think about sort of the big level important things for these stocks. Thank you very much.

Okay, regarding your first question, Lucas, in general, LQ1 tends to concentrate towards the end of the quarter because you have always the Chinese New Year in between at the end of January sometimes early February and in particular this year the start was even slower because of the things you know we have explained in the past about the some pre-buying occurred at the end of last year, okay? But in Q2, the situation is different. Situation is, so far, it's showing that it is a more stable volume pattern.

Yeah, I think I want to repeat, sorry, it's repeating the same, but we expect to start the meetings and conversation with COVID in coming weeks. We are not in the middle of the process as we speak. That's why we have to wait until we sit together and we start talking about opportunities. We think we can create value, both companies. We think that if we have an agreement, this agreement has to be good for everyone, has to be good for communities, for the region, for the country, for Codelco and for SQM. I have to answer my shareholders. all of my shareholders that if we have an agreement, it's going to be a good agreement for us. But I think it's important to go to the meetings and understand different positions. And of course, I think it's a very bad idea to send any message to CODELCO indirectly. It means if I have something to say to them, I will do it during the table, during the negotiation in a confidential basis. I think keep it confidential and keeping a process that we can and reach an agreement is very, very important. If we start publicly discussing alternatives, it will not be a very good idea, not in terms of confidentiality, not in terms of having a productive negotiation. But again, it's going to start in the coming weeks and we will keep everyone informed. If it is necessary to inform, we will, but we will try to keep it confidential because it's going to be good for the process. That's my main statement about that.

That makes total sense. Ricardo, thank you very much for the answers.

This concludes our question and answer session. I would like to turn the conference back over to Irina Akhmedova for any closing remarks.

Thank you for joining our call today, and apologies for some technical issues we're having. We look forward to having you at our next conference, and have a great day, everyone.

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