Good morning, and welcome to the SQM Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]. Please also note this event is being recorded.I would now like to turn the conference over to Gerardo Illanes, CFO. Please go ahead..

Thank you. Good morning, everyone, and welcome to SQM’s Fourth 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 on our website, and it is also available on our webcast.

Joining me today, our speaker is Ricardo Ramos, Chief Executive Officer; Pablo Altimiras, Vice President of Iodine & Lithium Business Line.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 leave you with our Chief Executive Officer, Ricardo Ramos, for brief comments before we move to Q&A..

Thank you, Gerardo. Good morning, and thank you for joining our 2019 earnings conference call. I will begin with some brief comments on our results before opening the line for questions. You can follow along with webcast presentation.Our revenue for the 12 months ended December 31, 2019, reached almost $2 billion.

And our net income reached almost $280 million, lower than the net income reported during the last – the same period last year. Our adjusted EBITDA margin this year was slightly above 33%. Our results were impacted by lower sales volumes in potassium and lower average prices in the lithium market.

We did see higher average prices in the iodine market which had a positive impact in our gross profit by over $30 million.For 2020, we expect volume growth in all our business lines this year exception iodine where prices have been increasing significantly.

In the potassium chloride market, we expect our volumes to increase 20% to 25%, in SPN approximately 5%, in lithium over 20%, and in industrial chemicals, over 80% as we begin delivering the 150,000 metric tons solar salts this year out of the more than 400,000 metric tons project.

In the lithium market, we believe that the prices will be lowered in 2020 when compared to 2019. In the iodine market, we believe that the positive price trend should continue.Of course, these estimates could change given the volatility of the world economy. For lithium, we have already seen an impact in China in the first quarter.

Even though we have seen positive change in the past weeks, our sales volumes in China during the first quarter will be up to 2,000 metric tons less than originally expected.

We hope that we will be able to compensate for these lower sales volumes during the remaining three quarters, reaching 55,000 to 60,000 metric tons this year.We recently approved a CapEx plan for approximately $450 million for 2020.

As we mentioned in our press release last night, we continue to expand lithium operations in Chile, we have decided to complete our lithium hydroxide capacity expansion in two stages, the first one of 8,000 metric tons should be completed next year.

On our lithium carbonate expansion, we feel confident that we will reach the 120,000 metric tons of capacity next year as well. We continue investing in our nitrate capacity to serve the growing solar salts market and our iodine capacity to continue growing our leading position in the market.I will now open the line for questions..

[Operator Instructions] The first question comes from Roberto Browne of Morgan Stanley. Please go ahead..

Hi, Ricardo, Gerardo, thank you for taking our question. Actually, we have a few quick ones. The first one is really to understand our production estimates for 2020, not only on the sales, as you mentioned, that for now you expect between 55,000 and 60,000 tons.

But does this mean you can produce more and continue to build inventories as in the Investor Day, you mentioned your were – you could produce over 65,000 tons of lithium in this year? And also on the decision of changing the hydroxide expansion.

Is this – the decision to break down in two phases, is this really based on market conditions or is this a strategy of producing more carbonate?And just maybe more context on that would be helpful. And finally, just if you could share with us your views on this – on the other expansion beyond the 120,000 tons.

Is this – the plan to go up to 160 in 2023 or is this still under planning? Any updates on that will be helpful. Thank you..

Thank you. First, regarding the production for this year, we do expect that total lithium carbonate equivalent production for the year 2020 would be between 65,000 to 70,000 metric tons, means our production capacity is running today at 710,000. We’re very proud about it. We are improving the quality of our products every month.

That’s why we think that we complete the total expansion to 70,000 and we are ready to produce at the level of 70,000 on an annual basis. Where – as you know, we are increasing to the 120,000 metric tons. We expect that the 120,000 metric tons will be ready during second semester 2021.

And we are working as far as we can in the lithium hydroxide expansion to the 8,000 metric tons.The delay of the other 8,000 metric tons is just a schedule of the investment in our facilities, it’s a mix between the market conditions and what is the best way to approach the construction phase, we are committed to go to the two stages of the – at the end it’s 16,000 metric tons of lithium hydroxide.Finally, I think you asked the 160 – about the 160, as we mentioned last year, is the next step.

We still believe we have to be at the 160 at the end of 2023 as we expected before. We will announce our official plan during second half this year..

Very clear. Thank you..

Next question comes from Lucas Ferreira of JPMorgan. Please go ahead..

Hi, gentlemen. Sorry, I joined a little late on the call, sorry if you answered that question already.

But I wanted to ask more or less, what should be your exposure? What is your exposure in terms of mix to China in lithium today? And more or less, where that should be trending in the first quarter, given the potential disruption there of COVID? And finally, in 2020, where you see – assuming the full ramp-up of the 70,000 tons where this mix – China mix should be? Thanks..

Hello, Lucas, it’s Pablo Altimiras speaking. Okay. So our exposure in China, last year, we sold like the 30% of our total sales, China, and during this year, we expect to increase that fuel and we will reach 40% of – in China from total sales of lithium..

Many thanks.

If you can give a little bit more color on this expectations of lower sales for, let’s say, COVID impact in the first quarter? If you’re already seeing some delays in orders, how demand has been behaving? If you see any accumulation of inventories that is relevant to highlight?.

Yes. Of course, the current situation is impacting our sales. As Ricardo said, now we decreased our forecast is 1,000 tons from the original forecast in the Q1. However, of course, in the last week, we have been in touch with all of our customers and they believe that right now, the things in China are becoming like normal.

So they – most of them see that recovery will come in Q2. So that means that we expect that finally we will have a recovery in demand that will allow us to fulfill with the lithium sales for the whole year.

So, we estimate – we see more positive news from Q2.On top of that – yes, on top of that, and this is something that still is under discussions, but we sought from some news that the government in order to stimulate the demand is discussing to try to give more subsidies.

So also, it’s something that we are following with a lot of attention that could impact in a positive way the demand in China as well..

That’s clear. Thank you very much..

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

Hi, thank you. And first question is, you’ve talked about the coronavirus impacting sales.

Is that impacting sales because of logistics constraints? Or is it underlying end-user demand?.

Well, sure. First of all, you know that it’s about that – originally, people from China at the end of the New Year went back to the office by February 3, but finally this – there was change because of the coronavirus. So first of all, you have less activity because people, workers didn’t came back at the original date. That’s one thing.

The other thing that is because of all the restrictions like quarantine, on this kind of thing, you have lag of workers in different plants, that, of course, are impacting production.

And as you said, logistics is an important issue as well in terms of internal logistics because you know that today, tracks and drivers are really for the basic things like health things, food, that’s the idea to transport things that are priorities. So this is affecting the way to move the product to the customer warehouse and so on.

So logistics is important.But as I said before, we have been seeing the last week in China that everything is getting normal. So, we believe that finally we will be able to sell our products from Q2 of this year.

Thank you. My second question is on – you just said that 70% of sales in 2019 was to China.

Is that 70% of volume or 70 of dollars?.

No, no, no. Sorry the fuels 30% of the volume working china no here..

Okay. 30%, Okay. Okay.

And was that sales dollars or volume?.

Volume..

Volume. Okay. And then finally, on the hydroxide expansion that’s going to go into two modules.

Is there going to be a CapEx increase because of that?.

No. We don’t expect that. We think that the idea of going to stages is better for the total CapEx in order to have – in an ordered schedule of investment..

Okay, thank you..

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

Hi, good morning, good afternoon, everyone. Thanks so much taking my questions. My first one is with regard to the final lithium sales volumes for 2019. If I remember correctly, you had hoped to get close to 47. But in the end, you did around about 45 on the shortfall there. And then on the 55 to 60 target for 2020.

How much of that is sort of already secured, do you feel? And connected with that, in terms of that number, have you got any sort of expectation baked into that on – already on sort of Chinese stimulus, hopefully to get some color around that. Thanks very much..

Okay. So regarding to the sales of last year, yes, I mean, our original target was to reach 47,000 metric tons.

However, the decrease of demand for the last quarter was more than expected, that the main reason is because of the changes in the Chinese subsidies that finally affected the sales of electric vehicles, mainly in the last quarter of the last year. That meant that body manufacturers and cable manufactures reduced the amount of lithium requirements.

So that’s what finally affected our sales. And on top of that, conventional engine gas producers were more aggressive to try to allocate all models into the market.So also, this affected the EV sales in the last quarter. So that affected our sales.

So regarding to the target for this year, yes, I mean, our original idea was to sell more than what we said today. And the reason is that exactly because of the same explanation of what happened with the demand and the Chinese subsidies. We see today some delay in the demand that finally will affect the sales for this year.

However, we still want to remain the same market share that was the original plan last year. So that means that finally, we – anyhow we will prepare to grow significantly compared to the 45,000 metric tons of lithium of this year..

Okay, great. And just one follow-up if I may. On the SPN business, potash prices have been sort of a little bit more challenged in the recent times. How do you see that sort of affecting SPN prices given that you’re seeing strong demand conditions, but these lower potash prices maybe could have an impact.

Just any color you could provide around that would be really helpful?.

Yes. Sorry, but I think that Pablo had something to add to the previous, you’re okay..

No. I’m okay..

Yes, but what is your expectation about second half this year. I think it’s something about the market – about that..

No. Yes, I mean, I would say, we see some effect, because of this coronavirus in the first quarter, but then because of the reasons I already explained, we see the recovery. So we believe that finally, the demand for the second semester of this year will be around 15%, which means that we will start seeing a recovering in the demand..

In annual basis..

In annual basis, yes..

Yes. Well, SPN prices, you’re right. It means that the potash prices are under big pressure and being under big pressure last year and continue to be under big pressure. But we review our strategy for this year with pricing strategy in the potassium nitrate. We maintain our outlook.

Our prices were affected last year as you can see, it means prices of potassium nitrate average during 2019 as compared to 2018 were lower, fourth quarter were lower also than average of the year.

But we think that the average pricing for potassium nitrate this year 2020 will be slightly better than last year, means it depends what’s going on in the potash market, but considering today’s situation of the potash industry, we still believe that we can be – we industry, we still believe that we can be – we can deliver a slightly better price in – pricing in the potassium nitrate for this year as compared to previous one..

Okay, that’s great. Thanks a lot..

The next question comes from Joel Jackson of BMO. Please go ahead..

Hi, good morning everyone. I’m going to ask three questions one at a time. So in lithium, you had talked about trying to hit a $55,000 sales target for this year. You mentioned about, 2,000 ton reduction in China. That doesn’t fully describe reducing your sales target five to 10, while still producing pretty much full out.

So can you just talk about the decision to keep running full out, build the inventory and where the lower volume is coming beyond just the 2,000 in China?.

Yes. You know that the reason why we decreased our original target for this year from 65,000 to between 55,000 or 60,000 is because of that we see lower demand than the demand that we saw before, because of the Chinese subsidies and the things that we already discussed. So this 2,000 of reduction is not something related to that.

This is fuel related to the current situation that we have been seeing in the first quarter because of the virus. But as I said before, we believe that finally, we will surpass that situation and the recovery of the market will come in Q2.

And that’s where we believe that we will have a much better demand that will allow us to fulfill the target of between 55,000 and 60,000..

And why build inventory?.

We are building inventory, I mean, because we will increase a lot of our export to China, as we said before. Today, our basis of total sale is bigger and also our participation will be bigger. We will jump from 30% to 40%. So that means that we will need more product finally to face the sales that we have there..

Okay. That’s helpful. And in iodine, the gross margin in absolute dollars have been very similar for five consecutive quarters, $34 million, $35 million, $36 million. As we go into 2020 and you’ve seen a little bit lower volume, but a little bit better pricing.

I mean, should we expect gross margin per quarter there to trend in the same kind of range we’ve seen? Or should we expect in 2020, a large step-up in quarterly gross margin? Thanks..

Hi, Ricardo Ramos speaking. We think that we will – we expect that the gross margin in the iodine will be better, 2021 – 2020 as compared to 2018. We expect every single quarter better than the previous quarter.

Just keep in mind – you have to keep in mind in the gross margin the total cost of iodine, and Gerardo, you can explain the reason why the cost of the iodine changed per quarter that I think is important to consider in your model..

Yes. Basically, what happens is that, as you know, we produce iodine from caliche. It is the same as the main product that they are included in the SPN business line which is potassium nitrate are the products that are included in the industrial chemical business line.

So, our costing of the initial process of the production process is allocated basically based on IFRS guidance, to the product that is driving their production. In this case, it’s iodine because of the significantly higher prices that we’re seeing there.

So, if you see the trend over the last few quarters, you would see a significantly higher price in iodine. But consequently, a higher cost in iodine because again, we’re allocating more of this common cost from SPN and industrial chemicals to iodine.

But as Ricardo was saying, we expect that the price will continue its upward trend going forward and with relatively similar volumes than last year, the impact of the gross margin of iodine should be higher quarter after quarter over the next few quarters..

Okay. That’s very helpful. Now, my last question would be very broad which would be, if we take all the puts and takes you talked about on this call in your release, will 2020 earnings in terms of gross margin or net income or any way you want to talk about it, it looks like 2020 earnings might not be as high as 2019.

Can you talk about, just generally speaking, directionally, everything you know, do you expect 2020 earnings to be higher, lower or similar to 2019?.

Okay. We’re not giving now a guidance about 2020 gross margin. I think it’s too early. I expect to have better information, I expect to give the guidelines after Q1 when we are going to have better information. But considering today information, I think it’s reasonable to expect a similar gross margin for 2020 as compared to 2019.

You have the negative trend of the pricing of the lithium that is a fact. It means price – average price of lithium during this year, 2020 will be lower than 2019.

You have the positive issue of the volumes of lithium, you have the better pricing of iodine, but at the end, putting everything together, we think that having similar gross margin is a reasonable expectation for this year.

But again, I’m going to be very clear that I prefer to have one quarter, it means to wait another couple of months in order to have a guidance, having one quarter finish in order to have better numbers..

Thank you very much..

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

Yes. Good afternoon, gents. On iodine, can you please provide an update on your expansion program, perhaps starting from the broader fentanyl, iodine and nitrate project. It seems you’re operating somewhat near iodine capacity, but prices seem to be consistently go up in an environment of strong global demand? Thank you..

Okay. As we mentioned before in our expansion in the iodine business, we are working in order to be close to the 18,500 metric tons of iodine capacity at the end of the year 2023. We’re now just below 60,000 metric tons of the total capacity and we want to go to the 18.5 and we’re working very hard on it.

And we maintain our original schedule of investment in order to go there. All right. Thank you..

The next question comes from Isabella Simonato of Bank of America. Ms. Simonato, your line is open. Please go ahead with your question. Okay. There seems to be some trouble there at her location. So, we’ll go to the next questioner, who is Chris Terry of Deutsche Bank. Please go ahead..

Hi, guys. A market based question from my on lithium, you talked about IV supply in 2019 and that situation potentially continuing in 2020.

I just wondered if you could comment on whether you see the biggest issue being existing inventory or whether it’s from continued production that you expect to occur in 2020? And then just as part of that answer, maybe you could talk a little bit about the cost curve and how much more you expect prices to have to fall before you would get some support level from the industry and maybe cutbacks from some of your competitors? Thanks..

Okay. We know that last year, the industry finished with some levels of inventory of lithium, okay? And this is because of last year we had more production than the final actual consumption of lithium. So that means that we have inventory. And of course, that – we know that this is affecting the prices levels.

So regarding to the effect on the cost curve of lithium, well, of course, that – in the current environment, we see that potentially some higher cost producers could be affected by this situation. I would say that today is too early to say what will happen.

So we will have – we will, of course, that we pay attention in the rest of the year about the response of this kind of place..

Okay, thanks for that. Are you able to talk just a little bit about some more details around the inventories that you pick up from your customers and where those inventories are? And how long you think they’ll take work through? Thanks..

Well, according to the information, there we have they are inventories in the whole chain of production. So that means not only lithium, but also cathodes, batteries and so on. So the industry will need to get away from this inventory. But again, we see with better eyes what we have in – from Q2 as to the rest of the year.

So in that regard, we see that finally we have a much better demand than this first quarter..

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 very much for joining us today, and we hope to have you with us in the next conference call. Goodbye..

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