Good day and welcome to the SQM First Quarter 2022 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Kelly O’Brien, Head of Investor Relations. Please go ahead..

Good morning. Thank you for joining SQM’s first quarter 2022 earnings conference call. This conference call will be recorded and is being webcast live. Following this call, you will be able to access the webcast at our website, www.sqm.com.

Our earnings press release and the 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 Illanes, Chief Financial Officer; Carlos Diaz, Executive Vice President of Lithium business; and Pablo Altimiras, Executive Vice President of the Iodine and Nitrates businesses will be available to answer any questions.

Before we begin, let me remind you that statements in this conference concerning the company’s business outlook, future economic performances, anticipated profitability, revenues, expenses or other financial items, anticipated cost synergies product or service line growth, together with other statements that are not historical facts are forward-looking statements as the term is defined under federal securities laws.

Any forward-looking statements are estimates reflecting the best judgment of SQM based on currently available information and involve a number of risks, uncertainties and other factors that could cause actual results to differ materially as those stated in such statements, including our ability to successfully implement this sustainable development plan, risks, uncertainties and factors that could affect the accuracy of such forward-looking statements are identified in our public filings made with the U.S.

Securities and Exchange Commission and in our earnings release issued last night. These forward-looking statements should be considered in light of those factors. We assume no obligation to update such statements whether as a result of our new information, future developments or otherwise, except as required by law.

And I also wanted to mention before I pass the phone over to Ricardo Ramos that Felipe Smith is also here to answer questions related to the lithium market.

Ricardo?.

Thank you, Kelly. First, good morning, and thank you for joining the call today.

Our first quarter results were a milestone for us, a reflection of several positive conditions, higher prices in all of our business lines, where significant increases in lithium prices have standout a benefit of our successful long-term operational and commercial strategy. Today, we can proudly report that we are a leader in the lithium industry.

We have almost tripled our production levels in 3 years while we have significantly decreased extraction of brands. We are the most integrated lithium producer in its country authority, delivering high-quality products that can be used directly in the production of high-end at components.

Related to our operations in the Salar de Cama, it is important to remember that SQM began this project by acquiring the participation from other producers. In 1993, we assumed the risk, developed investors and executed the project. It has not been an easy task. Natural resources was not well known and our project has had its ups and downs.

Iodine business require long period of development, the dialogue and collaboration with the neighboring communities, relevant investment from shareholders, and above all, a strong team to innovate and develop technologies to operate the natural resources.

Our first quarter results include payments related to the agreement with CORFO and tax provisions that totaled approximately $800 million. In total, the amount is similar to the earnings reported by all of our business during the first quarter of this year. SQM’s lithium business is a very good example of our successful public private partnerships.

No other operations delivered more resources proportionally to the Chilean copper. Approximately 60% of the operating margin from lithium dedicated to payments to core fund taxes. We continue to analyze new ideas and study new projects in all our businesses.

We will review our investment plan in the coming months, and we should update our projections following that review. It’s very likely that we will increase the resources oriented to the development of business in Chile and abroad. We continue growing and investing in all our businesses.

In iodine market, we remain on target to increase our capacity 1,000 metric tons next year and 2,500 metric tons in 2024.

In parallel, we’re increasing our nitrate sole production by 320,000 metric tons, which will allow us to meet future demand growth of nitrates for fertilizer and solar soles Finally, for lithium, we remain on target to reach the 180,000 metric tons in the coming months, our plan to reach the 210,000 metric tons and 40,000 metric tons of capacity of lithium carbonate and lithium hydroxide respectively advancing well.

As you know, in April, we held Board elections. I look forward to working with this new group of diverse professionals as we work to bring SQM and its participation and contribution to Chile and its surrounding community to a new level..

Operator, we will now open the line for questions. We will now begin the question-and-answer session..

The first question today comes from Corinne Blanchard with Deutsche Bank. Please go ahead..

Hey, good morning everyone and congratulations on the strong quarter and the pricing organization across all the business division. I have two main questions.

The first one, if you could give a view on 2Q pricing for lithium and maybe for the rest of the year? And then the second question would be if you can elaborate and give us your view on inventory and China sentiment in 2Q from the ongoing lockdown?.

Hello. Good morning, everyone. I am Felipe Smith. I will comment on the first question. Well, of course, it’s very difficult to predict what will be the price for the rest of the year. You know that the price is always related to the supply/demand balance.

And what we can comment is that approximately 50% of our sales are contracted with fully variable price indexes. Around 30% of our sales are still open and about 20% with capped. So at the end, our pricing will follow, in general, the market trends.

Regarding the second quarter, we could say that we expect the price to be somewhat higher than the first quarter. And regarding the second question, it was about inventories, if I understand well. In general, in the first quarter, our sales and our production were more or less in line, similar.

For the second quarter, we have seen that in the month of April, there was a drop in our sales related to the Shanghai lockdowns. In May, we are seeing that there is a recovery in the demand, so we expect that we will start catching up with our sales. In Q2, the volume, we believe that will be probably lower than in Q1..

Thank you. That’s helpful on the volume. If I may just follow up on the pricing, I think following the benchmark and the spot prices, I think it’s a given that 2Q would be higher than 1Q.

Any maybe quarter-over-quarter or year-over-year percentage rate that you could help us to understand and frame the pricing? And maybe if you can comment actually on the 20% of the volume that you have on the legacy contracts, I believe that you may have renegotiated some of the price. Anything would be appreciated? Thank you..

Regarding the 20% that it is, I would say, within capped prices. What we are doing, we are trying to renegotiate some of those contracts, and so we expect that we may have a better reflection of what is the market.

But again, I would like to insist that it is very difficult to predict what the prices will be for the rest of the year, but our main volume is linked to market prices. So it will depend on how the market price has evolved..

Thank you. I appreciate it..

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

Hi, this is Alex Chen on for Joel Jackson. Thanks for taking my questions. So for the first question, I just wanted to follow up and ask maybe the lithium pricing in a different way.

Given that the pricing may led up to 3 months on recently negotiated contracts, could you maybe provide some color on if spot prices were to hold at current levels, maybe where would SQM’s realized average selling price move to or like the magnitude of that? And for the second question, with respect to lithium sales volumes, I was hoping you could provide some commentary on what may have happened over the past few months that changed your expectations that sales would be greater than 140,000 tons and maybe to what degree.

And were production levels in Chile much higher than previous expectations? Thank you..

Yes. I will start with the second question. We are still expecting that our sales will be around 140,000 metric tons. We are basing this estimation on the fact that the fundamentals of the demand we believe are still there.

What we saw in – especially in China during the month of April, which had to do with the lockdowns, we see that this month of May, there is some recovery already. So we are positive about the demand. The supply is, of course, something that is more difficult to anticipate how it will evolve.

And at the end, that will be the key of where the price will move for the rest of the year. So regarding that, once again, spot prices will be a result of the supply/demand. Our contracts that are linked to the market price have certain delay in this. So at the end, 80% of our sales will follow whatever the market is..

Okay. Perfect. Thank you..

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

Thank you very much and good morning. So just wanted to understand your comment on the lockdowns in China and how that’s impacting the supply chain. So you’ve talked about 140,000 tons this year. If you subtract the 38 from Q1, that gives you around 34,000 tons per quarter for the rest of the year.

Given the lockdowns in China, can you discuss the shape of the remaining quarters and how you think that will look? And I’m just trying to – and are you assuming that there is no more lockdowns in the second half of the year? Thank you..

Yes. So indeed, during the second quarter, we expect lower volume. But in the second half, we are expecting that we can have a recovery on those volumes, and it will be our best estimation today that for the year, we will be in the surrounding of 140,000 tons..

Yes. But just to understand, you’re assuming no lockdowns in the second half of the year. Is that correct? You talked about a recovery..

Yes, exactly. That is our best assumption today because we are seeing that already in this month of May, we are seeing that there is a recovery ongoing. So we want to be positive and expect that situation will improve for the rest of the year..

Ricardo, my second question is on your statement that you made both today on the call and in the earnings release, talking about SQM success of a public-private partnership, and you gave a lot of commentary. Everything you said is true, and it’s been true for quarters and for years.

Why did you need to make that comment today? What’s the logic behind those statements right now?.

I think that the main reason is that it’s important to consider that this first quarter is a milestone in the company. It means if you review, the results are really, really very good results. When you have this kind of numbers, it’s important to remember that those numbers are not free, are not for 1 day to another day.

And that’s why I think it’s important to remember, especially for our own people in general in SQM, the press release is not only for investors, it’s for everyone.

And my idea was to recognize a long effort of many SQM workers, many and very talented people, who over a long period of time with good years and difficult years were able to successfully develop new technologies, apply innovation and develop new process in a project that was very difficult in its origin.

I think when you face these kind of milestones, it’s important to say thank you for the people and to recognize that it was a long work, a long way. It’s not 1 day to another day. It was a long effort with difficult days with good days, and now all these efforts with good and talented people is paying off.

That was the main idea because it was a milestone. It was a very important quarter in the SQM record..

And so it’s also, I guess, helpful. And well, it’s also a signal to the Chilean government, like, to leave us alone. We’re doing things really well, and the Salar de Cama is in the right hands.

Is that also part of the message as well now that the constitution is being worked on?.

As you may know, the constitution, commission regarding the mining activities practically finished. Makes no sense to send any signal to the constitutional commission nowadays. We don’t use press release to send anything to the government.

It means we – when we have the opportunity to meet the government and authorities, we share our opinion, we share our ideas about the country and what we are doing. And I think that the government and local authorities are really well informed. They have information regarding what is SQM activity.

And again, the main intention, and I want to be very open with you, Ben, is that it’s a very good result. It’s very important for our own people, our own workers. We are more than 11,000 people working in Chile directly, non-directly.

And our press release is very important for them, and I want to say thank you for a lot of people working very hard in all those years in a very difficult project and trying to deliver good results, and now it’s a great milestone for the company getting the result..

That makes sense and thank you very much, and congratulations again..

The next question comes from P.J. Juvekar with Citigroup. Please go ahead..

Yes. Good morning. I think you said you paid $800 million in royalties and taxes in 1Q.

Can you give us what was the amount in 4Q for the same thing?.

I do not have the name in front of me about the payment to CORFO, but we can provide these numbers. I don’t think it’s a confidential number, and we can provide this number later on, but we don’t have this historical information. But you can calculate because the formula we pay taxes to CORFO for the global governments and communities.

It’s a public knowledge, and I think that the agreement we have with CORFO is a public agreement that you can have access to it in our web page, and you can calculate this is an algorithm. It’s a procedures depending on the volumes and the prices and so on. But we can provide the numbers, if you wish, but we don’t have it exactly here..

Great. No, thank you. That’s okay. And on your CapEx, you mentioned more investments in Chile and abroad. And so the question on a broader part, what plans do you have abroad besides your Mt. Holland project? And with the increases in cash flows with this lithium pricing, do you have appetite for more M&A? Thank you..

As I said before, we are always looking for new projects and new activities outside Chile or in Chile. We’re very committed with our business lines and all our business lines.

And in the term of outside Chile, we, of course, we are now facing the moment to decide if we are going to move from 50,000 metric tons to 100,000 metric tons total capacity in our Mt. Holland project. I hope that we will have this decision during second half of this year. We need to have a meeting with our partners, with farmers.

And of course, it will mean more investment. I don’t have the exact number of additional investment, and we will inform the market at the moment. But of course, this is the most important investment outside Chile that we’re thinking today, and we are very optimistic. We are moving in the right direction in order to do it.

And of course, the company is always looking for M&A activity if it is good for the company. If we can generate value for the company and shareholders, of course, we are open. We receive a lot of alternatives in the daily basis of people trying to sell some potential business on natural resources, whatever. We will leave it in detail.

But as soon as we have something real, we will inform the market. But the most important thing here, keep in mind is not because we are having good profits or we have money. We are going to get involved in M&A because we want to be big.

We are going to get involved in an M&A only we are sure that we can show to you, our main shareholders, our shareholders and the company that we have a good project, a project that generate value for the company and shareholders. That’s it..

Thank you..

The next question comes from Roberto Browne with Morgan Stanley. Please go ahead..

Hi, Ricardo. Seeing hope you are well. Thank you for taking my question. My question actually is a follow-up on the previous question but more focused on Chile, and I was wondering what business lines in Chile would have more potential to receive those incremental investments you mentioned on the release.

And also on lithium, I will be interested to know how you’re thinking about balancing the quota you have allowed to extract come 2030 and potentially increasing capacity faster than beyond what will be implied by that quota given the so high returns you may have today at current prices and also considering the very low CapEx you deploy compared to any other project in the world?.

First, regarding our opportunities in Chile, it’s important to remember SQM is not only lithium. Lithium is a very important business for us, but we produce a lot of nitrates. We are the number one in the world producing potassium nitrate. And potassium nitrate is the best fertilizer you can have for tract irrigation housing.

We are very proud about this product, and we are increasing our capacity. That’s why we think that we have new opportunities to increase production, to have better quality, to have new facilities in order to improve the different products in the Specialty Fertilizer division. Second, we are the number one by far in the world in the iodine business.

We are close to 30% of the iodine demand in the world and production. We supply to a very important market in the iodine, for example, using the x-ray contrast media. We are talking about thousands of people that every year have an early detection of potential cancer using X-ray contrast media.

We are very committed to supply into the x-ray contrast media producer. We are, as I mentioned before, increasing our capacity. And we will review it again, we will increase again our capacity Also, if we will provide different quality. We are also – as you know, we have our sustainability projects, and we are very aggressive in that.

We are pretty proud about that. We are going to use sea water in our projects of nitrates and iodine. We have investment involved in that, and we have many initiatives that we are reviewing today that could be included in our next project announcement. About lithium, that is important.

Of course, as you know, we are always – it’s more chemical than mining business, lithium in Chile. As you may know, we signed, for example, an agreement with LG. LG is one of the major players in the global battery market.

We have a long and very good relationship with them, and we believe we can jointly explore new businesses, either in the production of cathode components in Chile or the recycling of lithium abroad as examples of alternatives that we will study together in order to do more investment.

Most of this investment could be very good idea to do it in Chile, and this could be included in our next CapEx. About the total lithium production coming from the Salar, I don’t want to announce every single quarter, a new increase in capacity.

It means last quarter announced we are moving in 230,000, at least give me a couple of quarters before announcing a new increase And we are now working very hard. Not myself, Carlos Diaz and his team working are very hard in the 180 and 210.

But wait just a little bit, and we will inform if we have opportunities to move forward with something better than that. I am sure considering the quality of the people we are having at the Salar level that we can inform good news in the future. But please, give me a couple of quarters before moving in that direction..

Makes sense. Thank you, Ricardo. If I just may ask another question this time related to fertilizers. It looks like that the high prices are hurting demand in the SQM division. So, in the past when we said the strategy in this business line was to have more stable prices, to keep your client base closer.

Has it changed, or does it make sense maybe to sacrifice volumes a little bit to take advantage of prices? Just wondering how – what’s the strategy today..

Hello. Pablo Altimiras speaking. What you said is true. And of course, when you participate in this specialty fertilizer business, you work close with customers. However, today to follow a certain strategy, it’s complicated because of the issues that we are facing. I mean today, you know that the world is not facing normal times.

It’s really difficult to predict what’s going to happen with the issues, with the war in Ukraine, the restriction that Russian producers and Belarus producers have. So, today, it’s difficult to predict. We see that the demand will be affected.

What we are trying to do is to continue producing our capacity and to supply the customers that we have with the product. At the end, price is a matter of supply and demand. We are trying to be there.

But it’s important also to understand that many farmers have issues in order to plan what they want to do because of different issues, supply chain issues, problems with logistics. So, today, it’s difficult to answer with a clear answer about what you are asking..

Understood. Thank you very much..

Your next question comes from Lucas Ferreira with JPMorgan. Please go ahead..

Hi everybody. Thanks for the questions. I have two. The first one, in general about your costs and inflation on your raw materials. So, inflation in Chile is running around 10%, and you probably have some costs linked to the U.S. dollar. So, if you can comment on ex of obviously the effect of the lease fees.

How much your costs overall in your operations should be going up this year, if more than this 10% inflation or less because you are ramping up capacity also diluting fixed costs? So, how do you think about costs ex-lease? And the second question about the dividend.

So, if not mistaken, correct me if I am wrong, but as per your policy, you should be paying at least 100% of your net income, right, as dividends. But looking at the past years, you end up paying more than the 120%, sometimes 130%. So, what’s the mindset this year? You are cash positive. I know your CapEx could be accelerating a little bit.

But are you – do you think it’s possible to go back to that – those levels of 120%, 100% of your net income as a payout? Thank you..

Hi. How are you Lucas? Gerardo Illanes, speaking. Regarding the cost and the Chilean peso, it’s important to remember that, of course, we are located in Chile. We have a lot of Chilean peso-related costs. We are a U.S. dollar-denominated company. So, on one end, we have the inflation of the Chilean peso that is affecting our cost.

But on the other end, the depreciation of the Chilean peso is affecting our cost on the opposite direction. We are seeing, of course, pressure on cost on some of the raw materials that we like to produce our products and also impact because of the logistic disturbances that we are seeing all over the world.

We are, all-in-all, trying to control our costs to make sure that they don’t go up following 100% what we are seeing with the inflation.

Regarding the dividend, Ricardo?.

I think that, as you may know, we have a dividend policy that is public policy of the shareholders’ meeting. Anyway, the Board of Director has the obligation to review the policy every quarter to act accordingly what is the best interest of the company. We are – first, our number one priority is fully committed with our financial strategy.

We are a conservative company. As you can review our books, we have a very good financial position, and we expect to continue to have a very good financial position. We are a strong investment-grade rating company since 1994. That’s a long time, and we expect to continue to be a strong investment-grade company in the future.

That’s why dividend policy is very important in our financial strategies. We review every quarter. We discuss with the Board our numbers. We discuss the cash position of the company, and we decide according like that. Of course, we review our CapEx, our M&A activity, our potential use of cash.

And considering a lot of the above, we review our dividend policy. That’s why every quarter, we review the number. So far, we are using the dividend policy that was presented to the shareholders. It means that considering the current numbers of our balance sheet, 100% was the right number.

But again, our idea is to maintain and to continue to be a strong investment-grade rating company from a financial point of view. And also, it’s important to be ready and prepared to take business opportunity. We have a very good business opportunity in the future..

Perfect. Thank you..

The next question will come from Cesar Perez-Novoa from BTG. Please go ahead..

Yes. Good morning everyone. First of all, congratulations for the strong performance in the quarter. I am really happy to see some of the financial investors giving you strong recognition for your well-deserved efforts. Hopefully, we can see the same coming out of elsewhere considering your social and economic contribution in this country.

I will piggyback here on Ricardo’s comments regarding the LG partnership with both firms could jointly develop recycling alternatives or Carmen Lithium facility.

Can you please comment on when we can see some of these initiatives going forward? And what level of spending would SQM be willing to deploy in this new venture? And if I may, just a second question, high fertilizer prices have turned to be problematic in many countries, and you specifically state that you may encounter some demand erosion.

My question is, what level of volume impact are you currently anticipating for the year, if any? Thank you, gentlemen..

Okay. First, Ricardo Ramos speaking, Cesar. First of all, about the LG, it’s an agreement to review alternatives, and we have a good team in SQM and a very good team in LG working as we speak in order to review the pros and cons of the different alternatives. I expect to receive a report from these – those teams, I think the next month.

And considering the report, they will recommend moving forward in one or two of many alternatives, and we will have the timetable and investment according to their recommendations. Nowadays, we are open. Of course, we are talking about new initiatives. And usually, you start with a small scale.

And if things go in the right direction, to go to the second step and third step and so on, that’s why I do not expect huge investment at the beginning, usually, what you have at the beginning are small brand facilities in order to prove that you can produce the quality and quantity of the products you are looking forward at investment and cost and having everything prepared to move to the second and third and fourth stages.

I am very positive about something that’s going to – we are going to have a couple of lease two or three initiatives moving forward, because I am really, really impressed with the capacity of the team. They are one of the most capable companies in the world regarding battery productions. They have the technology, they have the know-how.

And the most important that they have a very good relation with us, and they visit us in a huge team with a lot of interest in order to do things together. But it’s not – what I want to say, it’s not something that we are an exclusive relation with them. We are open to have all the kinds of cooperation with other companies.

It’s the way as lithium producer to add value, add value to Chile and add value to the industry just to cooperate with all of the big players. But I hope to have the numbers for the next conference call and share with you what we expect for this potential agreement with LG.

About the second, Pablo?.

Okay. So, what you mentioned is totally right, and we have seen an increase of prices in the last quarters in a very important way. I would say that today, it’s a little bit too early to say how the prices will affect fertilizers, also depend on the fertilizers, some commodities others like our product is specialty fertilizers.

So, it depends on the application. However, we say that today with the information that we have today to see a reduction of 10% of the demand of fertilizer is something that could come in. Anyhow, as I said before, it’s too early. But of course, that we are following up at this point also in order to see what happened at the end..

Okay. Fair enough gentlemen. Thank you..

The next question comes from Isabella Simonato from Bank of America. Please go ahead..

Thank you. Good morning Ricardo, Gerardo. Thank you for the call. My question is on iodine. We also saw a sharp increase in prices Q-on-Q, right, in the first quarter. As you said, demand recovery, while supply remains tight. Just wanted to get more color on this balance, right, and what we are seeing in terms of the size of the demand increase.

When you think about potential new supply, right, what do you see in terms of marginal costs and the actual risk of supply being added to the market? Thank you..

Okay. Yes, you are right. I mean the increase of prices was good. I would say that this is more related with the lack of supply that we have seen in the market. The demand, it’s been there despite of high prices where we see the salification, but saline sometimes are unaffected.

However, we have seen a strong demand in some of the market sectors like , LCDs and so on. However, we are seeing is the lack of the supply. Actually, that explains in part also why we normally – in the case of SQM, we would not only increase the price but also the volume.

And it’s because also we have been able to produce more volume than expected, and we were able to allocate that volume invest in the market. Regarding to what we have in, well, again, I mean you know that in SQM, we are investing to expand capacity. As we have explained before, we are doing our best to be there with our customers and with the market.

However, everything in terms of supply and demand will depend on what third-parties do. And in that regard, we will need to see what happens. So far, we are not seeing new capacity arriving in the short-term, so maybe the situation that we have today is something that we could expect that happen in the next month..

Thank you..

This concludes our question-and-answer session. I would like to turn the conference back over to Kelly O’Brien for any closing remarks..

Thank you for joining our call. We look forward to hosting you next quarter..

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