Good afternoon, and welcome to the SQM 2019 First Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would like to turn the conference over to Gerardo Illanes, CFO. Please go ahead..

Thank you. Good morning, everyone, and welcome to SQM's First Quarter 2019 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.

A presentation with a summary of the results have been uploaded at our website and is also available on our webcast. Joining me today, our 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 or other financial items, anticipated cost synergies and product or service line growth, together with all 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..

Good morning, and thank you for joining our first quarter 2019 earnings conference call. If you turn to page three of the webcast presentation you will see a summary of the results posted last night. Our revenue for the three months ended March 31, 2019, our net income reached $80 million.

We reported a lower adjusted EBITDA this year when compared to the first quarter last year reaching $169 million. On page four, as you can see some highlights for the quarter. In general, we saw higher prices related to the iodine and potassium chloride business lines when compared to the same period last year.

In fact, we reported the highest quarterly iodine revenue since 2013. Sales volumes in the iodine, specialty plant nutrition and lithium business lines also increased. We believe our commercial lithium study was successful during the first quarter.

As a result of our short-term contract on a spot sales approach, we saw average prices in the lithium business line of approximately $14,600 per ton. As mentioned in the press release, we continue with our plans to increase our lithium carbonate capacity in Chile. We currently have a capacity of 70,000 metric tons.

Flexibility is the key for our successful participation in a fast growing market such as lithium. And so, we are working to ensure, we can meet the changing and more demanding requirements of our customers.

Iodine sales volumes reached 3,500 metric tons highly compared to previous quarters, also iodine prices reached the highest levels reported since 2015 suppressing $27 per kilogram. Turning to page five, as I mentioned earlier, our adjusted EBITDA and gross profit decreased in the first quarter 2019.

And as you can see in the chart it was primarily our result of lower margins in the lithium business line. This was in line with expectations and was significantly impacted by higher lease payments to Corfo, which became effective on April 10, 2018.

During the first quarter this year, we paid approximately $30 million more in lease payments to Corfo when compared to the same period last year. We remind you that our variable payments to Corfo are a function of the price of lithium. They lowered the price, they lowered the effective lease payments rate.

Lower sales volumes of potassium chloride also impacted our gross profit and adjusted EBITDA. Sales volumes in the business line decreased approximately 24% in the first quarter 2019 compared to the same period last year.

Additionally, sales volumes in the industrial chemical business line decreased approximately 40% related to lower solar sales volumes. However, during 2019, we expect to report similar sales volumes for the industrial chemical business line as we reported last year.

As mentioned on the previous slide, iodine prices are up significantly, which has positive impact in our gross profit and adjusted EBITDA. When we look back to the first quarter, we continue to believe that demand in lithium market could reach close to one million tons by 2025. We feel that demand in 2019 will grow approximately 17%.

New supply will have an impact on pricing this year and our average price will fall and additionally 20% reaching approximately $11,000 to $12,000 per metric tons during the second half of this year.

Our production for 2019 is expected to be above 60,000 metric tons, and our sales volumes are expected to reach between 45,000 to 50,000 metric tons previously estimated. In 2020, we expect our sales volumes in the lithium business line are to grow approximately 30%.

The vast majority of the growth that we are seeing in the market is related to electric vehicles with batteries coming from Japan both Korea and China. As anticipated we saw little, if any product in China during the early month of the year, it is probable that we will return to the sale in China in the coming quarters.

In the Iodine and potassium nitrate market growth is expected to be 3% and 6% respectively. Our sales volumes will likely grow with the market in both business lines. We hope to see the upward price trend in Iodine continue, but this of course will depend on the supply demand balance.

Turning to page six, as we mentioned in our press release last night. We believe that the operational flexibility is essential for the future success of SQM and this is a key component of our strategy. Both the lithium carbonate and lithium hydroxide markets are growing at a significant and unprecedented levels.

And therefore, we are currently working on our lithium carbonate expansion to produce 120,000 metric tons per year. We believe this expansion will be completed during the second half of 2021 with a CapEx of approximately $280 million.

We're also expanding our lithium hydroxide capacity in Chile to reach 29,500 metric tons in 2021, with an expected CapEx of $100 million. On a separate note, a few weeks ago, we successfully placed a 144A bond in international markets. We issued $450 million ten year bonds with a coupon rate of 4.25%.

We're very pleased with the results and we believe this shows the market continue and strong interest in our company and the markets in which we participate. Before, I open line for questions, I would like to welcome the new board members who were elected last month. With that I will end my prepared remarks and open the lines for questions..

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Isabella Simonato with Bank of America. Please go ahead..

Thank you. Good afternoon, Ricardo and Gerardo. One question on lithium. Your guidance of pricing or the premium declining in the second half of the year. Can you elaborate the pricing dynamics you are seeing for both carbonate and hydroxide? We saw different outlooks from your competitors in the first quarter earnings.

So, we wanted to understand your view on both the carbonate and hydroxide? Thank you..

Hi, Isabella. First, the dynamics of the pricing in lithium carbonate and lithium hydroxide is really dynamic. We don't foresee now a clear path to differentiate both products. I think that is too early to know where they are going.

If they are going to be close or not in the near future, what I want to say is, that when we put the pricing in the second half this year and expected average pricing.

We don't foresee for the moment a difference between carbonate and hydroxide different than the difference we had during the last quarter means for the moment being we don't foresee any big change in the difference between carbon and hydroxide in the short-term. But really something in the short-term probably will be some changes in the future.

We are very open to review the market conditions and that's why as I explained during the press release, we explained we want to have the flexibility in the future to adapt our production for both alternative..

That's clear. Thank you..

The next question comes from Cesar Perez-Novoa with BTG Pactual. Please go ahead..

Yes. Good morning gentlemen, and thank you for taking my questions. I have a few if you don't mind. The first relates to your 120K lithium carbonate expansion, which got pushed out of way by nearly a year. I was wondering if the delays associated by markets of this or has to do more with technical reasons or perhaps permitting.

If you could clarify that would be extremely helpful? My second question comes to pricing. You mentioned in your press release that prices in the second half of the year will converge towards $11,000 to $12,000 per ton.

I was wondering if this is your specific market assessment or if this is hard data as perhaps you may have physical sales already committed at that price range in the second half of the year.

And third and finally you point to a 315,000 metric ton market, lithium carbonate market in the year in your press release, of course, which seems like a surplus for 2019. Please correct me, if I'm wrong. If so, can this excess volume be absorbed in the short-term or medium terms potentially driving up prices again.

Taking in consideration as well the global trade dynamics, which is essentially hitting every single commodity products. So, those would be my questions. Thank you..

Regarding your first question, regarding 120,000 metric tons. As you know the completion of the expansion from 48,000 to 70,000 metric tons took more time than expected. The new expansion from 70,000 to 120,000 is significantly larger and we want to be sure, it will be right.

Additionally, we expect that the new expansion will allow us to have the flexibility at a fast growing market like lithium nit. And as we speak now we're working very hard in the engineering for the third stage that will enable us to reach the 180,000 metric tons.

By the end of this year, we expect to have a clear time length for this new project, this is regarding the 120,000 metric tons expansion. Regarding the pricing for the second half and if it is a hard number or just an idea.

It's both usually you have some projections about the market, but by now we have some negotiations and we closed some sales in the second half of the year. We're working now of course second quarter is already on the middle of the closing procedure with different customers and we are just working of course in third and fourth quarter clients.

That's why our projection for the third and fourth quarter is a mix between what we expect of the future, some business that we expect to close in the next few months plus some business as we already grown in different countries like South Korea, Japan and China for the second half this year. Finally, let me check this.

What was the last question from you?.

Okay, yes, I was asking about the size of the overall lithium market in 2019.

You mentioned 315,000 and that seemed to be a little bit high figure and perhaps a surplus for the year you know if that's the case which I may be wrong, if you would expect this excess volume to be consumed in the short-term?.

We don't have a clear figure of the total ore production for this year. We have a very good, we think, estimate about the demand in the 315,000 metric tons we inform. Probably, the total production will be higher, somewhat higher than 315,000 metric tons.

But in this specific market it's always important to consider that the demand is growing at the level of 20% per year.

We think that next year, means, 2020 demand will grow probably in the close of 20% as compared to this year, and you are starting with 315,000 metric tons, you are thinking about close to 70,000 metric tons of additional demand next year as compared to this year, this is 2020.

And again I noted 20% in 2021, means, in a market that is growing so high like lithium having an additional supply. It's not a big issue one year unless of course you have additional supply or other supply every single year. That's why we don't think that the potential additional oversupply this year is a big issue.

Anyway, it's important to consider that regionally we projected close to 325,000 metric tons and now our projection is 315,000 metric tons. We think the reduction is mainly related with some delay in projection from new battery factories that will be recovered during the next two years.

That's why it's important to consider that we maintain our long-term projection of the demand and that's very important in the long-term view we have of the lithium business..

All right. Fair enough. Thank you very much for your explanation, Ricardo..

The next question goes to Alex Falcao with HSBC. Please go ahead..

Thank you. Good morning, guys. Two quick questions for me. One is, you change your guidance for production in CapEx. So, not only it's costing more, but you look at the numbers for 2021 significantly less, 60,000 less. You comment on you know that you wanted to describe. I just want to explore a little bit further than this.

Do you still see demand for further expansion, should those original volumes or you're going to wait until we get there to see if that's going to happen and then what is the reason behind the increase in the CapEx? Thank you..

Yes, I already explained that some delay in the 120,000 expansion is small delay, but we will be ready at the end of the year 2021, if not, delays not related because of the market or the demand. And second, the total investment we expect for the 120,000 metric tons is because we expect to have a better facility. It's a big expansion.

We're talking about moving from 70,000 to 120,000 means 50,000 metric tons expansion is doubled and the expansion from 48,000 not doubled, but almost doubled and the expansion from 50,000 to 70,000 metric tons that we had early, means, it's a very important more than double expansion that we're facing now.

And we want to be more than sure that the product will be the best product worldwide and will be available to sell to any quality requirement we will have in the future. Thus, we want to be sure, it's going to be the best facility in the world. That's why it's going to be a better plant and a better facility. That's for sure.

Second, our plan – expansion plan is not – we're not waiting until the market give us signal to do it. We are going as fast as we can. Keeping in mind that a 50,000 metric tons expansion is a huge one, it's one of the largest expansion in the world.

And the next step is a 60,000 metric tons and we're working very hard on it, means, that we have to have as soon as I can the 60 additional 60,000 metric tons in order to reach the 180,000 metric tons, means, we will inform at the end of this year with the time table of the new investment, but we will not be waiting until the market signals in order to do it.

We will try to do our best in order to be as soon as we can. But again, trying to have the best facility you can have in order to supply the best lithium to the market. Additionally, as we inform now, we decided to increase our lithium hydroxide capacity and a very important increase in Chile.

We're moving to close to 30,000 metric tons of lithium hydroxide capacity in Chile. That's again a very important signal and probably now we are – as we are reviewing the strategy and the engineering to move from the 120,000 and 180,000. We are also reviewing to increase again the lithium hydroxide capacity in the third stage.

Again, we're doing our best. We're fully committed in the lithium. We are trying to deliver the best facility worldwide, the best quality products and we will do it as soon as we can in order to deliver the best product..

Okay. Got it. And just a quick follow-up, when you said, difficulties in increasing capacity. Is that a quality problem or it's the lithium that you're extracting is not in the same purity or specifications that you had. Is that a fair assumption or and therefore that's why the premium is going to or basically it's production in itself.

So, you're not being able to get there?.

Just to do it right. We have no problem for the Salar de Atacama site. We have the perfect quality solutions in order to move forward, but just to keep in mind we are having – we have a huge, a very important project in Australia. It's a big one. It's a complex one. It's a 40,000, 45,000 metric tons.

We're talking here and a capacity increase from 70,000 to 120,000 means 50,000 metric tons. We took it. It's a serious expansion. It's important to do it and to do it right. Safety requirements, agreements with the vendors, engineering, construction, everything to do it and to do it right, it's a complex project because it is a big project.

And we know how to do it, yes, we know the technology, yes, we learn from the increased capacity from 50,000 to 70,000, yes, we learn a lot. We're going to be great from the beginning. But anyway it's a big project. And the other one moving from 120,000 to 180,000 it's a 60,000 metric tons capacity, means 50% higher than our project in Australia.

It's probably alone a 60,000 metric tons is one of the largest projects worldwide. And, again, if we are going to put every single efforts in order to deliver a great project, a lot of engineering, a lot of contractors, a lot of supplier agreements, and we need to do it and do it right. That's the complexities. Big projects and we have to deliver..

Okay. Perfect. Thank you..

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

Hi, good afternoon. A few questions. So when you last updated the – mentioned in the Q4 call a few months ago. I believe the idea was that you would produce a little more than 60,000 tons of lithium this year and build about 15,000 tons of inventory. Now you're saying you'll do maybe 60,000, a little bit less 50,000.

Are you still expecting to build 15,000 tons of inventory or you will be building less inventory this year?.

Yes, numbers are very similar to last quarter conference call. It means, our original idea was to be close to 60,000 metric tons and we're going to be close to 60,000 metric tons total production. The production will be producing a full rate, annual rate of 70,000 metric tons capacity second half this year.

That's why most of the production of the 60,000 will be at the end of the year. That's why even though we're going to increase the inventory. We're going to increase inventory at the end of the year, yes, it is not a different approach than the approach we have three months ago in terms of having additional inventory at the end of this year..

Okay. And following up on that, where I'm also a bit confused is because I believe that you're also suggesting a few months ago to think about that SQM would run about 90% of the capacity. So you have 70, but you would really run kind of low 60s.

Now, if you achieve 55,000 ton sales volume next year, are you assuming you're running at a 100% at 90% plus maybe reducing your inventory build in 2019 like how do you get 55,000 tons of sales next year?.

Yes, as I mentioned you before we expect to be a 70,000 metric tons annual capacity at the end of – during second half this year. It means that next year, I do expect to produce 70,000 metric tons lithium. And of course this 2020, we do expect to have a significant increase again in volume sales in 2021.

We will increase some inventory next year, but a small amount of inventory in order to face and increase sales of the year 2021..

Okay. And finally when we look at the price guidance for second half of the year 11,000 or 12,000 a ton AFP.

How much of that pricing is locked in right now where you know what your customers are going to pay? And then, there was a big discussion that you presented a few months ago about SQM was achieving better than market prices, but there'll be a step down in 2019 as you would now be achieving market prices.

So, 11,000 or 12,000 a ton, are you now achieving market prices?.

Yes, definitely, we think second half of this year is the market pricing, but we do expect as an average of the market pricing. And, again, we're in the middle of negotiation with many customers. Some of them we have some form of closing. Other of them is preliminary closing.

And we think we estimate that our – we think that our estimates, guidelines between 11,000 to 12,000 is the right one today. I prefer not to disclosure the exact amount of tonnage that is already closed and the tonnage that is under negotiation.

But when I repeated that it's based on both expectation and physical closing and commitment from different customers..

Okay, thank you very much..

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

Thank you very much. First of all, thank you for providing more guidance. That's quite helpful. When I look at your cost of goods sold per ton in lithium, it seems like it's averaged around $5,000 in Q1 and in Q4 less than two years ago with about half of that at around $2,500.

Can you talk about where that run rate should be on a COGS per ton basis and how you see that evolving with the further stages of lithium expansion?.

Okay. Ben, first we have to be careful about where we allocate the cost of the Corfo payment, you have to….

Yes, we're not – I'm not including the royalties..

But that's in the Corfo. Yes, we – because we had the ramp up with start introducing during fourth quarter last year and this year the new capacity.

We have some additional expenses related to this new capacity in order to have – everything working according to expectation, some additional maintenance, some changing in equipment, some stop of the production for days and so on and the deals was not as good as expected in the beginning.

That's why we think, I think, we have some additional or extraordinary cost during the last two quarters. And I expect that in the long-term cost of producing lithium will be similar to the cost of producing lithium that we had probably one year ago..

Okay. So, lithium prices are falling, we've been watching that for a while.

What is your assessment in terms of where there is cost curve support for lithium over the mid-term like from a pricing point of view?.

Yes, it's important to consider that as it's mentioned in our statement the payment to Corfo that is quite important depends on pricing. When you move for example just an example, if you pay, if the price is $10,000 of the lithium, the price – the percentage you pay to Corfo is 13.7% it means $1,400 per ton.

If you move down, we're talking about what happens if the cost, if the price goes down. My cost goes really, really, really down because they're between 7,000 and 10,000. The marginal payment to Corfo is 25%.

That's why the payment to Corfo is being reduced a lot when you go down from $10,000 per ton of course when you go up from 10,000 the payment to Corfo is 40%.

The market cost is something very difficult to estimate and we think considering that the market is growing or the other competitor's cost or new project cost because the market is growing 20% per year.

You have to consider not the marginal cash cost, you need to consider the total cost because you have new projects coming on the market every year or every two years in order to fulfill the need of the market. And in order to get to develop these new projects in Australia or wherever they're going to be develop.

Mainly in Australia, they need to pay the full cost considering investment. And in the long-term, you should consider that what really matters is the total cost of competitors or new competitors when the market is going to be 600,000 or 700,000 metric tons.

Those competitors, those new projects in the future that are being, of course, more – the cost will be higher than today. Those are the ones that really – are the ones that are going to put the long-term pricing in the industry. Again, our cost position is very strong. We maintain a very strong cost position, probably will improve some of it.

And again the agreement with Corfo allow us to have a very strong cost competitive cost position because as I explained you before we reduce the payment. Really, it's not a cost, the one we have with Corfo, you can call it profit sharing system. And that's the way it is, it was the agreement..

Thank you. And my last question is this 120,000 ton expansion, sorry to bring it up again. I think originally you had this coming on at the end of 2019. In March, I think, there was an article in Chile where you gave an interview about it coming at the end of 2020.

And now the second half of 2021, are you comfortable with this date now? Is there a risk that this gets pushed back another year or two, if it's not related to market conditions or technical issues?.

Well, first, I'm not so sure about the article in Chile. If I said 2020, if I said that probably was wrong, because 2021 is the right timing now. What I want to be very sure is that we're really full committed, as we expect to be producing at the end of the year 2021.

We think, we've sold and we take into account all the issues of the previous expansion from 48,000 to 70,000.

I think was a very good idea to delay the project not because the market conditions to delay the project because we learn and we are going to have a better production facility in order to have the best quality worldwide of lithium carbonate and lithium hydroxide. And it's going to be a better facility.

And we have been reviewing the project in a daily basis. May I say now that probably from the 280,000 metric tons close to $100 million are already committed. Some of the new facilities or new equipments had already in the north of Chile, means, where a full production moving very, very fast, but trying to do it right.

That's why I prefer to say that not before the end of the second half 2021, but we're really committed about these timeline, and we're really committed about having the best production facility in the world at the end of the year 2021..

And just a point of clarification when you say you're really trying to make it the best facility. How do you measure that? Does that mean lower cost than where we were a year ago? Does that mean lower maintenance CapEx.

What is that you're trying to achieve that perhaps you didn't in the original estimate of the phase coming on in 2019?.

The lithium business, the lithium market is changing everyday and the requirement from clients especially in the electric vehicles market are more complicated and more difficult requirements. Today it's quite used to be two or three years ago.

That's why having a better facility allow you to have the flexibility to produce better quality products and to be able [indiscernible] in the past – has been in the past and will be in the future.

The best provider of lithium worldwide, it means, who will provide the best lithium, and if you request a very specific quality of lithium, we want to be ready to deliver you the lithium you need in order to produce this specific battery you want to produce, means, a better production facility, means, better deals, yes, of course, better cost, yes, but the most important one is having the flexibility and the quality to deliver the product that is needed by the different customers we have..

Thank you very much. That's helpful..

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

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