Good morning and welcome to the SQM Fourth Quarter 2017 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 Gerardo Illanes. Please go ahead..

Thank you. Good morning, everyone, and welcome to SQM's Fourth Quarter 2017 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, www.sqm.com. Joining me today as speaker is Patricio Solminihac, 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 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 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 now will leave you with our Chief Executive Officer, Patricio Solminihac, for brief comments before we move to Q&A..

Thank you very much Gerardo. Good morning and thank you for joining SQM's 2017 earnings conference call. Last night, we post our results for the year. Our net income reached $428 million, an increase of over 50% when compared to the $278 million seeing the year before. For the fourth quarter of 2017, we reported earnings of over $110 million.

Our strong results were based on several factors seen during the year.

Record sales volumes in potassium nitrate and iron, higher solar salt sales volumes and most importantly higher lithium prices, excellence and flexibility of our operations combined with the responsiveness of our sales and marketing teams supported a positive dynamic theme in the market allow us to capture the incremental growth.

We have started 2018 with very positive news for the Company and a broader lithium market, when we announced the termination of the arbitration process with CORFO and reaching an agreement, allowing us to produce our sales up to 2.2 billion tons of lithium carbonate if we were in 2013.

This new production allowance come at a higher lease payment and other cost, which will be applied from the moment that lithium becomes effective that could be as early as in March 2018. This agreement has opened up new growth opportunity for the Company and Chile as a global leading [indiscernible]. We believe that lithium demand will remain strong.

We foresee an aggregate channel growth of approximately 80% in the next five years, 18% per year. We estimate that the market will need at least 50,000 tons per year of additional supply to maintain [indiscernible].

Based on that, we’ll be increasing our current carbonate production capacity in the [indiscernible] to reach 1,000 metric ton per year in 2019. This expansion of 52,000 metric ton will require a total investment of $170 million.

Potential future expansion will depend on market condition and our goal is to maintain around 25% market share for the next few years. In short term having already gross price negotiation contracts for the first half of 2018, we see that the price for this period are more than 20% higher than the price seen in the fourth quarter of 2017.

That confirms that the market remains tight and the demand strong. We estimate that the total lithium chemical demand could grow over 20%, reaching almost 260,000 metric tons in 2018.

The development for the electric vehicles is driving this growth and we expect EV demand to grow around 35% per annum in the next five years, and the total demand for lithium chemical to more than double in the same period.

Despite the potential new capacity coming online in the second half of 2018, we expect average price for that period to be higher than the price seen in the second half of 2017.

Because of our continued commitment to ready to market, we will progress with our development of our lithium projects in Argentina and Australia, with the objective to start production in 2020 and 2021 respectively.

In 2018, we continue to focus on growth opportunities in all of our five core business lines, and the competition of the expansion of our announced production capacity. Our capital expenditure in 2018 is expected to be around $517 million and will include approximately $157 million investment in projects outside Chile.

Along with our strong earnings, we are also proud of the strong balance sheet which we finished the year. During 2017, we paid approximately $370 million in dividends, at the same time, we were able to reduce the net financial debt to EBITDA ratio to 0.3 from 0.6, and reported almost $1 billion in cash.

I look forward to another year of challenges and business opportunities. To working along with my team on continue the growth of the Company and maximizing its value for all of our stakeholders. I thank you for joining the call today and we’ll now open the line for questions..

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] The first question comes from Ben Isaacson with Scotiabank. Please go ahead..

It's Oliver on for Ben. Thanks for taking my question.

So, how much lead-time would you need to be able to go beyond the announced 100,000 tons in Chile? If you see demand shaping up better than expected, are you still able to process some the existing facility? Or would you need to build a new facility and how long would that take?.

As we indicated, we increased the announced expanding capacity for this year to 70,000 tons, so we will end 2018 with 70,000; and then in 2019, we expect to have an additional 30,000 to end up with 100,000. To move to the next stage, we could lead less than two years in order to increase an additional 20,000 or 30,000 tons..

The next question comes from Joel Jackson with BMO Capital Markets. Please go ahead..

I have three questions. Good morning, Patricio. Patricio, it seems a lot of competitors now put out very large expansions in the last few weeks and they now have your competitors very large demand assumptions for lithium for 2025, 800,000 tons a million tons. You've commented that lithium demand growing is growing at about 30,000 to 35,000 tons a year.

Your competitors are now saying its 70,000 tons a year.

Do you think the 70,000 tons a year is reasonable? Or do you believe its 30,000 to 35,000 tons a year and can you please elaborate?.

What we have indicated is that we believe the demand will increase in the next five years by an average of 50,000 tons a year. In the past where we have projected some of the demand we have been short. So, we will have to see how the electrical vehicles redevelop.

We have seen news very often from the carbon factor as well as from the country in the relation point of view. So we will have to continue more lithium. With the information that we have right now, our base estimate is that the new demand means an average for the next five years of 50,000 tons additional per year..

Let me elaborate on Oliver’s question that he just asked.

So to get above 100,000 tons, do you need -- how much brine do you have? So get up to 100,000, you need to pump more brine, do you have enough brine to get you to 150? I mean if you want to get the 216,000 tons like CORFO suggest you may be able to get to, how much more brine you need to pump? How many more ponds you need to dig? I mean, can you give us an idea of the work that needs to be done to get 150 or even 200 in Atacama?.

Basically given that we were injecting a lot of brine because of our production of product, our plan is that we will not need to pump any additional brine. What we will do is to optimize and keep the deal. We have a new ways of doing it that will allow us to produce all the regional lithium that we want to produce. We're now pumping more brine.

So in that respect, most of investment to do the additional lithium that we will be producing will be at the chemical plant sites..

But Patricio I’m asking above, let's say you get 100,000 tons and now you need to go above 100,000, you want to go 130,000 or 150,000 or 200,000.

To go beyond 100,000, how much brine do you need to pump more? How much ponds you need to dig? What do you need to do to get to an extra 50,000 or 100,000, beyond 100,000?.

My answer is Joel what's exactly that. Beyond 100,000, we will not need to pump more..

So you can get the 200,000 without pumping more brine?.

Yes..

Okay, that's helpful. And one more question, your capital intensity is extremely low versus competitors. You can bring on 50,000 tons for just under $4,000 a ton. Your competitors are planning large expansions for $10,000 a ton, $15,000 a ton.

Does it not make sense for you to just go to 200,000 tons in Atacama, not do Australia; not let competitors take the share from you? You have the best capital intensity, so what stops you from going bigger?.

When we have defined our strategy and even decided that we have given the importance that we have for most of our customers, we decided to have jurisdiction diversification.

We think that this is a right move from our side to have at this kind of diversification from technology and from jurisdiction in order to be able to, of course, evaluate the risk.

And that's why we will continue with the development of the projects in Australia, in Argentina, which now in our opinion, they are also in the lower part of the cost curve compared with the -- what are the other suppliers in the supply line.

On the other hand, one thing is the investment and another thing is the OpEx and also the rent that we need to pay. In the case of Atacama, of course, we have a very good CapEx position, we have a very good OpEx position but we will need to pay much more rent..

The next question comes from Andrew McCarthy with Citi. Please go ahead..

My first question, just following up on that point on the geographical diversification.

Could you elaborate a little more on why that's so important to you and to your customers? And whether there is any relationship there with the types of lithium chemicals that you're seeing in particular demand from your clients? May be from example you're seeing more demand in hydroxide or battery grade, lithium carbonate.

Just to get your thoughts on that point please?.

I'm sorry, Andrew, I cannot listen to you very well.

Can you repeat the question please?.

Yes, sure. So I was just wondering if you could provide some more color, elaborate a little further on why geographical diversification is important to you and to your clients.

And related to that, if it's to do with perhaps the type of products where you are seeing, the higher growth rates in the future maybe hydroxide, I don't know whether given the new, as you're referring to the new royalties that you'll be paying to CORFO, whether that makes producing hydroxide maybe not as competitive anymore in China versus other territories, just to get your sort of thoughts and thinking there on that point please?.

Basically, more than geographically, it's also jurisdictionally. We want to -- we are for some of our customers, we represent more than 50%, in some case it's even 70% of their needs.

And they of course rely on us not only on the growing of their need but also they do a lot of investment in order to produce their final product with our lithium chemical, so they want to make sure that the risk of or not being able to supply for some time or whatever in the future is well balanced.

When you are in the one only geographic location, you have risk of earthquake or risk of port, risk of a strike, risk of regulations, and so forth and so on.

So when you supply to those customers and you’re able to bring forward from different jurisdictions and different geographies, you’re well balanced in order to be able to assure with less risk the future demand. Of course that is balanced to get with a total costs which includes the CapEx includes the OpEx and includes the rent.

And that is what we're doing, we want to be flexible, we want to keep these, and this is very welcomed by our customers.

But also important that we see that the lithium market will continue to grow, there's a lot of discussions today how much the supply will be, the track record of the industry depart has not been good from that respect but we have more than 20 year experience.

We think that we're an important player and the industry is believing us and the industry is also want us to continue growth, so that's why we will continue look at the growth and also at this diversification.

Regarding the relation of what we see on lithium market side compared with lithium carbonate, yes, there's more demand on lithium market side because of the new cargoes and especially in [indiscernible] that prefer to start their production with lithium hydroxide as I can get it.

So we are increasing our capacity here in Chile merely, we expect to end this year with a capacity of 13.5 thousand tons from the 6,000 tons that we used to have last year, and we are also analyzing what is best to produce in Australia..

And of the 52,000 that you’re adding now following the announcement in the press release or to put it another way, are you planning to increase your hydroxide capacity in Chile above the 13.5 thousand along the lines of the current plans you have?.

We do have [indiscernible] to do that, but we have not decided yet. We want to see how the market evolves that growing from 6,000 to 13.5 thousand is a big thing and we expect to be running that hopefully next year but having the capacity by the end of this year..

And just my final question is on the guidance you gave on the prices. You referred in the press release to the market price being still strong in the first half of this year and then maybe stabilizing or falling slightly in the second half.

Just trying to understand when you talk about market price, what specifically you referring? Is that the price realizations you are expecting? Or is that current contract negotiations? Or is that spot prices in China? Maybe you could elaborate a little bit on what that refers to please?.

We referred to prices and given our size, we refer always to the price that we realize on average. And we think that it’s a good representation of what the market price is.

As you were referring, of course, there are some differences between some very big consumers with small spot consumers but interestingly, average price that we realize in our sales price. And again given our size, given our diversification of our sales geographically and also for industry we think that is 200% of the market price..

The next question comes from Chris Terry with Deutsche Bank. Please go ahead..

First one just on the production profile that you've outlined, so for this year, you said that you will get to 70,000 tons by the end of the year and you have produced around 5,000 tons more than last year.

So, implying 55 for this year, for 2019 given that you are expanding by an additional 30,000 tons to go to 100 total, what sort of production would you expect in 2019? And then how -- what's the ramp-up time to get to the actual 100,000 tons? Does that come through in 2020? Or is that longer than that before it actually flows through? That’s my first question, thanks..

Basically what we are estimating the last year of this market in lithium is that we are operating at full capacity and even in some cases over main place because of the market situation. But in the future that could not be the case as we are seeing many other of our business line in general terms in the market.

So, one thing always is important, what is your capacity; and another thing is you are efficient on how much you want to produce and sell. Right now, what we are seeing during the year is that we will continue to use as much as we can and trying to move as fast as we can and turn to the market.

And that is in 2018 where our total capacity at the end of the year as we say, we expect it to be 70,000 and totally we will be producing some more than 55, but regarding this inventory that we need to keep and also the ramp up we are expecting to sell 55.

That means next year we will end up in 2018 with 100,000 and that will not really from the first of the year, so probably we could be able to sell let’s say 80,000 if we want, but that will be taking efficient that we will be taking when the time come..

And then you have answered this I think partly before, but you're saying for the hydroxide mix for this year that the additional 6,500 tons to take you 13,000, you don't complete that until later in the year.

Will you get any benefits from that, a mix effect on the hydroxide side in the second half of this year at all?.

Yes, we expect to sell some more than the previous year, not that much. And then we'll have to decide if next year, how the reach will be depending on how the market evolves..

Okay, okay.

So we should just -- and from a mix perspective you get 13,000 of hydroxide from next year onwards and minimal included in 2018?.

Yes, we expect to sell more, of course, that's why we're doing the expansion to 13.5. So in 2019, we expect to sell much more than we sold this year..

Okay. And just a high-level question on the production profile and the way you're thinking about the business. So you obviously have the capacity now to go -- the option to go above 200,000 tons and you're saying that you'll expand at a rate that matches with what customers want.

If you were to see some of your competitors announce more supply expansions going forward, would you react to those expansions by doing more yourself to keep the market share? Or how would you think about that interaction as opposed to what the actual customers want?.

Well, I, first think that the Company that will have the real possibility of increasing the capacity every once at the lowest cost and we understand and we believe that we are one of the lowest cost producers.

So our initial thinking that we indicated is that we will keep our market shares and market is growing a lot and in order to keep the market share, we will need to grow a lot. And that is exactly what we're doing. Now, there are many dynamics that we'll have to see in the market.

If you remember, at the beginning of last year, we indicated that we saw that a lot of new capacity was announced and capacity could be in the second half of the year and that really did nothing.

The market continued to be very strong first because the growth of the market was higher than it was expected and second, because the supply was not as fast as something was promised. So that is the thing that we will have to continue monitoring. We want to be prepared.

We want to have the installed capacity to respond to our customers on time and also to continue the increase as the market needs more products..

Okay. Thanks, Patricio. The last one for me, just in terms of balancing the growth and the CapEx you've got coming out with dividend potential.

Can you just restate the goals on dividend side? And how you plan to get that balance?.

Well, the shareholders have approved the last -- in shareholders' meeting at dividend policy that basically stated that we will contribute to 100% of our profit each one with paying some financial breaches that are specified in that quality. So right now, that is indication that we have from our shareholders.

Right now, of course, we're increasing our investment in the plan. This year will be 517 the lowest opportunity. But at the same time, we have been generating strong cash. We do have today $1 billion in cash. We do have a very low a net financial debt to lead that but we are increasing our investment plan..

Is there a set policy there though?.

I am sorry, regarding the dividend policy that was the one that the shareholders approved last April in 2017, and according to the Chilean regulation, the shareholder meeting this April will have to again establish what will be the goal..

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

I have actually two questions the first one is on potash.

What is your expectation of your long term production of potash, assuming that this focus on lithium production continue? An also moving towards lithium, could you provide more details on the additional regional volumes expected for the second semester from competition other than your own? How are you seeing that impacting the market?.

Regarding potash, as we've indicated we're right now operating in a rate flow demand our lithium production, we are pumping more brine, so of course that is affecting our production of products and of course economically make a lot of sense.

Last year, we sold in total the potassium chloride and potassium sulfide close to 1.35 million tons, and this year we expect to sell less than 1 million. At the same time, we are using more products in our own production of potassium nitrate, which means that we have less potassium chloride to sell to the market.

But in general terms, I think that that will continue to be a little bit but not that much, we will be able to sell in the range of 900,000 tons more or less of potassium chloride.

And regarding the reaction from competitors as indicated, we've been 20 years in this market, we went through many different stages, and we've been always a lot of promising of neutral action in China or in Canada, or even in the U.S. and other places. And always the track record has not been that good.

So, right now of course there's much stronger demand, the price is much higher, there's a lot of incentive for people to look at choice, there're many choices in the market now, but we’ll have to see it, we follow them of course, and try to understand that how competitive they are, but we want to make the mistake of maybe we did in the past that we did not had the new capacity in place to respond to the market..

The next question comes from Lucas Ferreira with JP Morgan. Please go ahead..

My first question is regarding your views for long term prices, I -- if you see that since your agreement with CORFO, your stock is down like 25% as investors are becoming more bearish on the long-term price view and this fast expansion in -- potential expansion in brines.

So I guess my question is, where you see your, let's say, incentive price for keep expansion in the brines and in the same price -- incentive price for expansion in spodumene and different regions of the world? And how fast you're seeing this, let's say, industry cost curve could be flattening out? Or how fast the brines could be displacing spodumene? And in other words, do you still the spodumene could be seen as, let's say, long-term support to the cost curve.

So that's my first question. And the second question is regarding your price outlook for the year. You said you are optimistic, just to make sure I understand, as you said in the beginning that you're seeing like [indiscernible] set 30% higher than fourth quarter numbers.

Is that like up to 30% or on average 30% higher? Can you give me a bit more color on that? And also elaborate a little bit on the inventories and across the value chain? How they look like and how tight the market is?.

Regarding the long-term price, this is a $1 million question of course and that depend finally on the as always on the supply and demand balance. In the past we have been short on what the demand has grown. Demand is growing much more than everybody expected.

And I personally have a view that thoroughly the demand will continue to grow even more of our base case scenario. Regarding the supply, as I always indicated that the industry has not been with a good track record. Probably, it tends to be more complicated tends to be -- take more time and some of them tend to not work basically.

In my opinion when you compare a brine-based chlorate and a sodium-based chlorate or a hardrock-based chlorate, I do not like the picture of saying that the one is worse than another one. And I think that’s like many cases, there are really good hardrock projects like Monhollon [ph] for instance and there are really that hardrock chlorate.

At the same time in brine, there are very good brine project like Salar del Carmen and there are very bad brine project because of the chemistry because of the ideology, because of the way we get it right now, because the technology that we use. So I think you have to look each project in its own make.

So I insist that my view for the long-term price is that -- and we have been saying that from the very beginning that the actual situation is a very, very tight market and that will not continue. If this will be in fact at the end of the year or to start in 2019, we will have to wait and see.

I mean we don’t have really precise information to be able to get on that. But of course in the long-term we also have been very clear about that the prices are not in the levels that are today of $16,000 per ton, but that will of course we will ask you the new supply.

Regarding the price outlook for 2018, what we indicated is that we already have closed most of our sales for the first semester and the average price that we are getting in the first semester of 2018 is 20% higher than what we got in the second semester of last year. That is the first thing that is the average price that we will be getting.

And regarding the second semester, even though there are possibilities of new supply, our estimate today is that the average price which probably will be low in the first semester with domestic that anyway will be higher than what it was in 2017..

And there's another question, a very simple one.

That $20 million charge -- one-off charge related to the CORFO that you guys announced, just wanted to make sure where that was allocated? Is this was below the -- actually below the EBITDA line or above the EBITDA line? And when we look to breakdown of the cost of each operation that you published on the [indiscernible], if that was allocated in the leaching business or in others? Just to make sure how that impacted your results in the fourth quarter?.

The payment that we did to CORFO of $20 million more or less that was reflected as we indicated in 2017 and was below the margins..

The next question comes from Alexander Falcao with HSBC. Please go ahead..

I have a question on the rationale on the -- I think that the first phase of expansion is this first 50,000 is in contracts it is there.

I just wanted to know if you could walk us through after that, what is the -- what is going to be the decision-making process in order to go full on and just deal with that? Or is there something contingent to where the market's going to be or the price is going to be? Or given that you guys are allegedly the lowest cost producer in the world, really doesn't matter where the price is, the rationale makes sense just to go ahead and do that.

So what -- is there any IRR threshold, any decision-making process that you could walk us through? That will be awesome..

Basically, our decision is chemical decision. We are increasing the capacity of our asphalt plant and that's the reason we optimized from an engineering point of view to have a very low CapEx that you view. So that's why we are growing. We can grow, as I indicated also with an additional choice over 100,000 and we will decide that on time.

We have time to do that. We need first to run our plant at 70,000 and then the next year at 100,000 and then of course, we will have time before that and we are preparing all these corresponding engineering to go whether if that makes sense and the additional process basically is optimizing the value of the Company for the long term.

We do have experience with our other business lines. We have experience in the past with lithium and we learned from that and we will try to apply all that in order to make it as efficient towards market value..

Just on the next year's expansion, how's going to be the ramp up? Can you tell us -- can you expect already for everything growing in full throttle it's going to be a gradual -- what's the best way to model that expansion?.

We will have -- we expect to have the 70,000 tons capacity ready at the end of this year, so we cannot fully operate that next year and then we will need building the capacity of the 30,000 additional to 100,000 and that will vary in the second half of the year. Probably, we’ll be able to produce some of those with the next year..

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

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

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