Sociedad Quimica y Minera (SQM) Q2 2018 Earnings Conference Call Transcript

Sociedad Quimica y Minera (NYSE: SQM) Q2 2018 Earnings Conference CallAug. 24, 2018 11:00 a.m. ET

Prepared Remarks:

Operator

Good day, and welcome to the second quarter of 2018 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Gerardo G. Illanes, CEO.

Gerardo Illanes -- Vice President, Finance and Investor Relations

Thank you. I'm not the CEO. Good morning, everyone, and welcome to SQM second-quarter 2018 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 are speakers -- are Patricio Solminihac, chief executive officer; and Ricardo Ramos, CFO. 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 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 from those stated in such statements.

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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. Our forward-looking statements should be considered in light of those factors. I now leave you with our Chief Executive Officer Patricio Solminihac, for brief comments before we move to Q&A.

Patricio de Solminihac -- Chief Executive Officer

Thank you, Gerardo. Good morning, and thank you for joining SQM second-quarter 2018 earnings conference call. On Wednesday night, we post our results for the second quarter. Our net income reached $134 million, an increase of over 30% when compared to the same period last year.

Higher price in lithium contribute significantly to those strong result. When compared to the second quarter last year, we saw higher price across all our business lines and higher sales volumes in almost every business line. In fact, in the iodine and SPN business lines, we sold record quarterly sales volumes. During the second quarter, we made significant progress in our lithium expansions.

We finished the contraction of our lithium carbonate capacity in Chile, reaching 70,000 metric ton per year. And we work to produce at this rate during the fourth quarter of this year. Additionally, after global demand for lithium hydroxide is expected to grow faster than for lithium carbonate in the coming year, we continue to work on the development and innovation of a process to produce lithium hydroxide more cost efficiently in Chile. At the same time, we expect to complete our current lithium hydroxide expansion in the coming months, bringing our affective capacity to 13,500 metric ton per year.

I would also like to note that the new agreement with CORFO became effective on April 10 this year. And consequently, our rent payment reported in the cost of goods sold line in the financial statement increased accordingly. And even though we are producing at full capacity, our production cost remain flat. In Australia, we reaffirmed our strong commitment to the Mt.

Holland project. The time table for project delivery remain on track to produce spodumene in 2020 and lithium hydroxide in 2021. A major milestone for this project was successfully securing the industrial site for the refinery, where we expect to produce at least 45,000 metric ton of lithium hydroxide per year. As announced, our iodine capacity has successfully reached 14,000 metric ton per year, an increase of over 25%.

We continue increasing our nitrate capacity and an important development at the water-soluble potassium nitrate market growth at approximately 10% and the solar salts market continued to evolve positively. During the second quarter, we distributed over $300 million in dividends, which is a reflection of our strong balance sheet, which is also ratified by the upgrade from a Standard & Poor's to BBB+. In summary, strong results during the second quarter, along with a growing demand in our main businesses, give us confidence to keep growing. This has been confirmed by our expansion efforts.

There are lot of exciting things happening in at SQM, and we look forward to working hard to maximize long-term value for all our stakeholders. I thank you for joining the call today, and we'll now open the line for questions.

Questions and Answers:

Operator

[Operator instructions] The first question comes from Joel Jackson of BMO Capital Markets. Please go ahead.

Joel Jackson -- BMO Capital Markets -- Analyst

Good morning, everyone. I had a couple questions. So first, Patricio, last quarter, you talked about 55,000 tons of lithium production this year. Now your guidance is for sales of more than 50,000 tons.

Will you still produce 55,000 tons? Or are you doing inventory build? Or are you doing some market discipline, maybe holding back sales to hold price? Or are you lowering production? What's going on?

Patricio de Solminihac -- Chief Executive Officer

Well, thank you, Joel. Effectively, we continue to think to sell what we were thinking to sell in the second half of the year, together with a new capacity. What happened is that in the second quarter, we sold a little bit less than what we wanted to sell, and we're prepared to sell. Unfortunately, the tight inventory and all the situation for starting up the plant play against that.

So we were not able to sell in the second quarter what we wanted. And that, of course, roll over. So right now, we are thinking to sell as we indicated over 50,000 and less than 55,000.

Joel Jackson -- BMO Capital Markets -- Analyst

So you'll produce 55,000 this year and a little bit of carryover happened into the second half, is that right?

Patricio de Solminihac -- Chief Executive Officer

We'll produce, yes, at the rate of -- we expect to produce at the rate of 70,000 tons in the fourth quarter. And of course, we need to recover inventory.

Joel Jackson -- BMO Capital Markets -- Analyst

OK. Second question has been very topical, of course, the last 24 hours on water and brine. So can you give us an update on, I know, you have been able to pump less brine because the water levels have gone down, I believe, a centimeter. Where are we on that? And then can you talk about some of the headlines about how to come out, maybe, trying to restrict new water rights in Chile out of Atacama? Will this affect any of your current operations? Or more importantly, as you move to 180,000 tons, could this cause some restrictions? Thanks.

Patricio de Solminihac -- Chief Executive Officer

No. Regarding this question, they are two very different question, and I will answer both of them. But before, in general, we don't see any restriction for us to produce as we have planned and to be able to have enough lithium brines in order to be able to produce according to our plan. Regarding the situation on the brine extraction, we are working with authorities in order to comply with the plan, and we see that -- because of that and because of our objective of increasing lithium without more extraction of brine, we will be producing less potassium chloride.

So basically, we continue with our planning, having enough brine for our production plant and, at the same time, adding less production of potassium chloride. A completely different thing is what that was reported yesterday because of an interview of an authority is regarding the freshwater. Freshwater are completely different than the brine. And we today operate wells in the east part of that Salar that allow us to have 250,000 -- 250 liters per second, which is less than 4% of all the rights that are in the complete basin.

And what was reported is a restriction in the south part of the Salar, where there are other companies extracting water for copper production. So we don't see any effect on our -- a small quantity of water. And besides that, according to our production plans, we expect to increase our lithium production without needs of more freshwater than the one that we have.

Joel Jackson -- BMO Capital Markets -- Analyst

That was very helpful. And maybe just on the potassium chloride. You've given guidance of you'd maintain the guidance of selling fewer than million tons of MOP this year. You also gave guidance this quarter saying Q2 will be the highest sale of the year.

If I put those numbers together, Q3 and Q4 sales volumes won't be much different than Q2. Or are you saying your 2018 potassium chloride sales will be much lower, significantly lower than a million tons?

Patricio de Solminihac -- Chief Executive Officer

Yes. In the -- for the second half of this year, we see less volumes to be able to sell in -- as potassium chloride mainly because of less production, but also because of more production of potassium nitrate. So our expectation for the total year will be selling less than a million ton. And for the next year, we are thinking also that, that also will be some less than what we will be selling this year for the same reasons.

More production of potassium nitrate in one hand, then we will use more of our own potassium chloride for that production and also because of the focus on more lithium production.

Joel Jackson -- BMO Capital Markets -- Analyst

Sorry to be greedy with just one more question. Just going back to the first question I asked about the Q2 sales volume for lithium. Just to understand, were you unable able to sell the product in Q2? Or you short the product because of production?

Patricio de Solminihac -- Chief Executive Officer

If you look at the two previous year, we were selling more than our nameplate capacity. So what we did was to force a plant at the maximum in one hand. And in the second hand, diminishing the low optimal or lower inventories around the world. So of course, because of that, we were not able to sell what we originally thought that we will be able to sell during the second quarter.

Now that we sold because we are starting the new plant and with the new capacity, we expect, as we indicated in the press release, to be able to have 50% more in the second half than in the first half.

Joel Jackson -- BMO Capital Markets -- Analyst

Thank you very much.

Operator

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

Isabella Simonato -- Bank of America Merrill Lynch -- Analyst

Thank you. Good morning, Patricio, Gerardo, Ricardo. Two questions on my side. First of all, on SPN.

Of course, volumes continued to be pretty strong, and you've been benefiting from more limited supply from competition. If you could give us an indication for how long that should last? I understand for the second half, outlook remains pretty much the same. But for 2019, how you're seeing demand in your volumes specifically on that line? And on the lithium part of the business, you mentioned in the release, you're expecting new supply from competition in the second half aside from your own. What sort of volume increase are you looking in terms of supply in the second half of this year and in 2019? Thank you.

Patricio de Solminihac -- Chief Executive Officer

Thank you, Isabella. First, SPN, yes, we are very happy with huge growth. And as you indicated, there are two reason for that growth. One is the growth in market.

We continue to see for the total demand ranges of 6% growth. And if you go only to water soluble, we see even higher numbers, like 10% growth. So very healthy growth from the total demand. On the other hand, the other reason is the short supply from one of our main competitors.

That, of course, is solving their problem partly. But they are, of course, we expect that they will be producing more in the second half of what they produce in the first half. So that also will affect our growth -- our continued growth in the second half. But we are continue to increase our capacity mainly because of the strong growth of the market.

And we need to give the assurance to the market that the product will be available like we did when there was this problem in market and the market did not feel short that's because we were able to supply immediately the needs. So we see continued growth for next year according to this growth of the market. Regarding the new supply. As I indicated in previous conference call, we continue to be very optimistic, and we are continue to seeing the strong demand.

This year, the demand will grow more than 20%. And also, we see the actions of the OEMs in the car manufacture industry being every day more committed to introduce new models for electrical cars. So that -- I think, there is a consensus that the market will continue with a very, very healthy and more than healthy growth. Regarding the supplies, where there is more uncertainty, we have been seeing more product coming from Australia, going to be converted in China.

We have been seeing more product also being offered in China. But it is very difficult to have very precise numbers on what we will see. As we indicated, we see that the price will be slightly lower in the second half. And we expect, even though, that those prices in the second half will be significantly higher than it was in the second half of last year.

Isabella Simonato -- Bank of America Merrill Lynch -- Analyst

That's very clear. Thank you.

Operator

The next question comes from Lucas Ferreira of JPMorgan. Please go ahead.

Lucas Ferreira -- J.P. Morgan -- Analyst

Hi, good morning, good afternoon, everyone. First of all, we like to wish a good luck to Patricio in his next step in life career after next year. And I have a question -- my first question regarding the lithium markets and prices. I just wanted to understand a bit, when you look at the prices in the second half and say that you're going to be slightly lower than the prices you had in the first half, is it because you're seeing already your new contracts being set at lower prices and those at much lower prices, but you still have contracts being sold at those levels out for $16,000-plus you posted in the first half? So what I'm trying to understand is, when we look, let's say, 12 months forward, 18 months forward, are you seeing already your new contracts are being set at much lower prices? Just I know those references were made in the past, but we see spot prices in China for carbonate collapsing from the peaks.

If this is something that concerns you, I know it's a very small market compared to the seaborne market. But I just wanted to hear your thoughts on that? And the second question is regarding the cost of production of lithium. This quarter was a bit difficult to read because of the new lease fees. But trying to strip out this effect, we realized that the cost of production was very low.

If that was the case, if -- how to explain that and if there will be, maybe, a bump in the cost again in the third quarter? So what I'm saying trying to understand why costs were significantly lower adjusting for leases?

Patricio de Solminihac -- Chief Executive Officer

OK. Thank you very much, Lucas. First, regarding lithium prices. We do not have long-term contract.

Basically, we have agreement with our customers on volumes and commitment on volumes both sides with certain definitions. And then we define the price for the quarter. So we do not have the visibility on contract for next year. And we do have, already, because we are close there, some agreement on prices for the -- of course, for the third quarter.

And third quarter prices are slightly lower than the -- what it was in the second quarter. And we are also seeing some agreement already for the fourth quarter, which again are only slightly lower than what it was in the second quarter. We see and we heard a lot of rumors on China. But those rumors were similar of what we heard in the fourth quarter of last year, when we were selling in the range of $12,000 and people were saying that was spot prices at $18,000, but I never saw it.

So I mean, the visibility and the transparency on the publication are very low. What we really care is our agreement with our customers. And right now, we are seeing price pressure because of this additional supply, but is in the range of what I just comment. Regarding the cost of lithium.

Yes, you are right. The effect of the new contract of CORFO has an important effect on the cost that we reported because the rent -- the new rent that we put is in the same line. But what I can tell you that our actual cost of production remain more or less the same. We have not seen lower cost, not higher cost in the last quarter compared with the previous quarters.

Lucas Ferreira -- J.P. Morgan -- Analyst

Thank you very much.

Operator

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

Ben Isaacson -- Scotiabank -- Analyst

Great. Thank you and good morning. First question is on the iodine market. We've seen iodine prices moving higher over the last few months.

And one of the things you talked about a few quarters ago was how at the low price levels you started to see interest from new applications. And so there was quite a bit of demand elasticity at this price level. Now that we're rising up to $24, $25, are you starting to see some of that demand pulling away? In other words, how should we think about the momentum of price increases going forward?

Patricio de Solminihac -- Chief Executive Officer

Thank you, Ben. You are right. We have been seeing and we continue to see price increases in iodine. We see that some -- this trend should continue in the second half of this year.

And we are also responding with volume. As we reported, second quarter was the record volume ever we had in a quarter. And we are also looking for a record volume for the year, which will be well over 13,000 tons for the year. So that is looking very nicely.

The demand for the traditional usage continue in the right way. x-ray contrast media is over -- in the range of 5% growth. And we see also disinfectant area going well and LCD also. So most of the application.

Regarding new application, we always, when we look for new application and work and support people to do more research on new application using iodine, we always look for application that will be able to pay a reasonable price for iodine. We don't think that it makes sense to look for application that needs a price of iodine that is in the range of $20 or less. It doesn't make sense. So what we really look is application that are able to pay higher prices.

And of course, they will end up paying market price. And we have seen a couple of application that continue with the interest in increasing. So if those new application really work, we will see even better news for iodine.

Ben Isaacson -- Scotiabank -- Analyst

OK. Thank you. My next question is maybe on your philosophy toward how you produce your lithium. When iodine prices were falling a few years ago, when they were, I think, in the mid or upper $30s, low $40s, you tried to show a disciplined game and wasn't as effective as the volume gain that you've been showing now.

When you look out at the outlook for lithium and given your capital commitments, is it a foregone conclusion that you are going to approach the lithium market with the volume strategy? Or is there going to be room and opportunities to be disciplined?

Patricio de Solminihac -- Chief Executive Officer

Well, I think answering directly within our philosophy. Our philosophy is to optimize the long-term value -- the present value of our business. We -- our philosophy has not that been the largest producer, not being such a specific market share. Our philosophy is to make the most money we can for our stakeholders.

That is our philosophy. And we not only in iodine, but also in lithium, we have been for more than 20 years in the lithium business, not in the battery because that's really more new. But we have gone through cycles. And we have been behaved in the way that we want to optimize the value and that is what we will do in the future again.

And to do that, we feel that it's very important to have the capacity in place. And the second decision will be afterward according to what we face and the information that we have regarding supply demand commitment with our customer, and so forth, is what we will decide how much we'll run that capacity. The good thing for us is that we do have a very low capital cost. If you looked at our capital cost for our expansion will be $4,000 per installed capacity.

That allow us to have this installed capacity at a reasonable low cost.

Ben Isaacson -- Scotiabank -- Analyst

Can you talk a little bit about why your potash realized price went lower quarter over quarter, given that we've been in a rising environment? Was this just a product mix issue? Or was there something else?

Patricio de Solminihac -- Chief Executive Officer

No. What really some time affect us, it's more now that we have less volumes is that when we do some shipment to China, that we need to accomplish some agreement with the customers that we sell other things. And China, of course, as you say, is a mixing. So that is the only situation.

But what we see today is that we are getting to prices over $300, $310 into granular product to Brazil. And you are right, the price continue in that trend. We'll have to see what happen in India and China. But there is nothing special there.

Ben Isaacson -- Scotiabank -- Analyst

OK. And then very quickly, you talked about lower prices in lithium in the second half. Can you give some guidance as to the magnitude of that lower pricing?

Patricio de Solminihac -- Chief Executive Officer

As I indicated in a previous question, we have already some agreement in prices for -- of course, for the third quarter, which is -- are only slightly lower than the second quarter. And we are starting to have already some agreement for the fourth quarter. It's difficult to give you a number. But this is more or less what we are seeing.

That will depend how the new supply continue to evolve in China.

Ben Isaacson -- Scotiabank -- Analyst

Without giving a specific lithium price, is it fair to say that we're going to be within 10% of the realized price in Q2?

Patricio de Solminihac -- Chief Executive Officer

At this stage, yes, but that can change if something evolve decently.

Ben Isaacson -- Scotiabank -- Analyst

OK. Thank you very much. Appreciate it.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Gerardo Illanes. Please go.

Gerardo Illanes -- Vice President, Finance and Investor Relations

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

Operator

[Operator signoff]

Duration: 29 minutes

Call Participants:

Gerardo Illanes -- Vice President, Finance and Investor Relations

Patricio de Solminihac -- Chief Executive Officer

Joel Jackson -- BMO Capital Markets -- Analyst

Isabella Simonato -- Bank of America Merrill Lynch -- Analyst

Lucas Ferreira -- J.P. Morgan -- Analyst

Ben Isaacson -- Scotiabank -- Analyst

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Prepared Remarks:

Questions and Answers:

Call Participants: