Earnings Call Transcript - SQM Q1 2025

Operator, Operator

Hello, everyone, and welcome to the SQM First Quarter 2025 Earnings Conference Call. After the speakers' presentation, there will be a question-and-answer session. Please note, this event is being recorded. Now it's my pleasure to turn the call over to the Investor Relations Officer, Isabel Bendeck. The floor is yours.

Isabel Bendeck, Investor Relations Officer

Thank you, operator. Good morning, and thank you for joining SQM earnings conference call for the first quarter 2025. This conference call is being recorded and is being webcast live. Our earnings press release and presentation with a summary of the results have been uploaded on our website, where you can also find a link to the webcast. Today's figures include CEO Ricardo Ramos; CFO, Gerardo Illanes; Carlos Diaz, CEO of the Lithium Chile division; Pablo Altimiras, CEO of the Iodine and Plant Nutrition Division; Andres Fontannaz, Commercial Vice President of the International Lithium Division; Felipe Smith, Commercial Vice President of the Lithium Chile Division; Pablo Hernandez, Vice President of Strategy and Development of the Lithium Chile Division; and Juan Pablo Bellolio, Commercial Vice President of Ireland and Industrial Chemicals. Before we begin, I would like to remind you that statements made in this conference call regarding our business outlook, future economic performance, anticipated profitability, revenues, expenses and other financial items, along with expected cost synergies and product or service line growth, are considered forward-looking statements under the Federal Securities Laws. These statements are not historical facts and may be subject to changes due to new information, future developments or other factors. We assume no obligation to update these statements, except as required by law. For a complete forward-looking statement, please refer to our earnings press release and presentation. I am now leaving you with our Chief Executive Officer, Mr. Ricardo Ramos.

Ricardo Ramos, CEO

Thank you. Good morning, everyone, and thank you for joining us today. We are pleased to report that SQM began 2025 with solid operational and commercial performance. In the first quarter, we achieved the highest first quarter lithium sales volumes in our company's history, driven by a 20% year-on-year increase. This growth reflects sustained strong demand, particularly from the electric vehicles market in China and Europe, as well as growing adoption of energy storage systems worldwide. Lithium prices, on the other hand, were relatively stable during the first quarter of 2025. However, over the past few weeks, we have seen a decline in prices that we don't think is sustainable. In the industry, we were already showing negative results. As a result, our average realized prices for the second quarter of 2025 should be lower than the levels seen in the first quarter. In Australia, the production of spodumene concentrate at Mt. Holland is progressing well, and the commissioning of the Kwinana refinery is also moving forward with the expectation to see the first product in the coming months. In Chile, we continue working on our capacity expansions to reach capacity of 240,000 metric tons of lithium carbonate and 100,000 metric tons of lithium hydroxide. Moving to our Iodine business, we are pleased with another strong quarter. Prices have reached a record average amidst tight supply and steady demand, primarily driven by X-ray contrast media applications. Our seawater pipeline construction is advancing rapidly and will be key to expanding production capacity. In the meantime, we are investing in operational efficiencies to respond to customer needs and optimize output. In Specialty Plant Nutrition, sales volumes grew at a healthy pace. We have also noted an upward trend in prices early this year, mainly due to strong demand for potassium chloride and some supply disruptions. Market dynamics remain favorable across Latin America, the U.S., and Europe. In our potassium business, as anticipated, volumes were significantly lower compared to the same period last year. This reflects our strategy to reduce potassium production to prioritize high lithium content brands and focus on the production of more value-added products within our SPN business lines. To summarize, SQM delivered strong commercial results in the first quarter despite a complex pricing environment. Our long-term fundamentals remain intact. We are confident in our strategy, our investments in capacity and innovation, and our commitment to sustainable, high-quality growth. Thank you all.

Unidentified Company Representative, Company Representative

Operator, we can now move to Q&A.

Operator, Operator

One moment for our first question, please. And it comes from the line of Ben Isaacson with Scotiabank.

Ben Isaacson, Analyst

Thank you very much. Three questions. First one, just a very straightforward, simple question. You talked about the ASP in Q2 being a little bit lower than in Q1. Do you expect that on an operating cash flow basis, you will be breakeven or positive per metric ton in lithium in Q2?

Gerardo Illanes, CFO

We are far from breakeven costs. We were not expecting to be close to breakeven and significantly above that in the second quarter this year and in the upcoming quarters. We believe we are one of the lowest cost producers. So we are far from that position.

Ben Isaacson, Analyst

Perfect. Perfect. And then another question for you, Gerardo. Lithium prices are obviously lower than a lot of people expected this year. Your growth plans haven't changed. And so what the plug is now going to mean is less operating cash flow to fund that CapEx growth and a greater reliance on accessing capital markets. Can you talk about how your mind may or may not be changing in terms of capital structure or funding future projects now that lithium is coming in a little lower than expected?

Gerardo Illanes, CFO

Well, just before answering your question, I want to highlight that we have other business lines and products that are doing quite well. So the capacity to generate cash that the company has is quite strong. On top of that, we have a strong balance sheet. We have a track record of having a very strong balance sheet, and we plan to continue having a strong balance sheet. We are constantly assessing all the projects in our portfolio, of course, understanding what is happening in the market. But so far, the financial situation has not been a constraint, and we don't expect it to be a constraint in the future either.

Ben Isaacson, Analyst

Okay. And finally, Ricardo, perhaps you can help with this. There's a lot of political noise coming from Chile regarding the outcome and future of the Codelco joint venture. I'm perplexed as to why this is up for debate since I believed it was a signed agreement, and we were just finalizing the details for it to take effect on January 1. Can you explain why this issue is being discussed in Chile right now and what the possible paths forward are?

Ricardo Ramos, CEO

Okay. I mean as you say at the beginning, it's a lot of noise. And I think that's the perfect word to describe what we are witnessing. A lot of noise. When you start digging into the numbers, it's a great deal. It's a great deal for the country. It's a great deal for the region and for the communities; for Codelco, it means something very good. Sometimes when you are in an election year, you have a lot of noise from everything. It's not the only noise in Chile; if you look at a Chilean newspaper, we have a lot of different noises. In an election year, you always have different discussions. But what is the real fact? The fact is that we are advancing according to our original plan with Codelco, working very hard. We are near the end of the process, not us, CORFO is at the end of the process of consultation with the towns near the operations that's being carried out by CORFO. We have also submitted all the documents required by the regulatory authorities of free competition in Chile. Therefore, we think that the timeframe for the transaction to be finally executed will be during the second half of this year. No changes about that. And again, it is a big transaction. Chile is a small country, and these kinds of transactions are important in a country with not many things going on, but at the end, it's just noise. I don't foresee any real reason or fundamentals to have any debate about the transaction.

Operator, Operator

One moment for our next question that comes from the line of Joel Jackson with BMO Capital Markets.

Joel Jackson, Analyst

I'll ask my questions one by one as well. Team, I noticed in this slide deck in this release that you maintain your view that lithium demand will grow 17% globally as a market this year. Would you no longer show your commentary from a few months ago? Do you think that SQM sales themselves for lithium will grow about 15% year-over-year? Can you maintain that you will grow 15% sales this year? And if not, what's your new number?

Felipe Smith, Commercial Vice President

Yes. Hello, Joel. This is Felipe Smith. Look, considering the current market conditions, with uncertainty derived from geopolitical and trade tensions, we have not really updated our annual volume forecast for 2025. However, regarding Q2, I can comment that we expect a similar or slightly lower volume versus the first quarter.

Joel Jackson, Analyst

There's been some commentary in the market as prices in China have decreased significantly. You sell products to China and have contracts with floor prices. There's discussion about customers wanting to negotiate lower prices as spot prices fall below those floors. Can you provide insights on this situation and how you are addressing it?

Felipe Smith, Commercial Vice President

Yes. Joel, I would like to start by saying that we have more than 200 customers worldwide. Each of these customers has a different type of price mechanism. I'm talking specifically about China.

Joel Jackson, Analyst

You're talking about typically in China. I know, I recall just China, I know if you could talk about China specifically, it would be very helpful.

Felipe Smith, Commercial Vice President

Yes, what I want to highlight is that with each customer, and this happens in China too, each customer has different price mechanisms and conditions that are all confidential. I cannot comment further. So I would ask you to please understand that I will not go into any specifics about that.

Joel Jackson, Analyst

Okay. And just finally, to follow up on Ben's question a little bit. I think that SQM's philosophical approach has been that we're going to double our production over the next seven years because global demand is growing threefold. We’re just growing double our own capacity. So there you go, we're not really adding to the market. But when I look at your commentary and you talk about the markets being oversupplied, and the market is probably caught by surprise how weak it is. As stewards of capital here, do you not have to think about what is the right amount of capacity to add when it seems like there's a lot going on in this market that maybe is not easily visible or understood?

Carlos Diaz, CEO of Lithium Division

This is Carlos Diaz, CEO of Lithium Division in Chile. Yes, we're still working on our final capacity. We're the leader in the production of lithium in the world, and we have the lowest cost in the industry. We continue with our program to expand capacity in Chile to produce more in surface related to converting in China. It's been a successful business for us. So we are really confident about the demand, and we feel confident that we will continue expanding our capacity. We don't see an issue there.

Joel Jackson, Analyst

Sorry, I have one more question. I understand your confidence in demand, but it appears that no one in the industry is addressing both supply and some of your comments this quarter. Are you not concerned that your perspective on supply might be incorrect?

Carlos Diaz, CEO of Lithium Division

Yes. We know that we had a number of supplies, but I said we know there is a chart, and we are confident in the long-term that kind of oversupply is going to disappear, and we have a good position to supply this time. What I said before is that we are the leader and the lowest cost producer in the industry.

Operator, Operator

Our next question comes from Lucas Ferreira with JPMorgan. One moment for our next question, Lucas, if you can queue up again. Our next question comes from Corinne Blanchard with Deutsche Bank.

Corinne Blanchard, Analyst

The first question would be on Mt. Holland. We saw in a recent presentation from Wesfarmers that they decreased their volume guidance by 9% or 10%. So I wanted to see what your view is and how you think volume would be for 2025 and going into 2026.

Andres Fontannaz, Commercial Vice President of International Lithium Division

Yes. Thanks. This is Andres Fontannaz from SQM International Lithium. You need to be careful with what Wesfarmers reported because they follow a fiscal year. Our guidance for this calendar year for SQM's share is between 150,000 to 180,000 tons, which is around 10,000 tons lower than our range provided in November last year. This revision is primarily due to the impact of bushfires and limited equipment availability. As you know, during January, we were impacted by a regional bushfire around the mine, and it was a significant event in the region where tens of thousands of hectares were affected. However, we are prepared for this kind of risk. We have implemented procedures and established management scenarios, and I’m proud to say that nobody was hurt, and we are extremely proud of the performance of the team, which was recognized by the authorities in Western Australia.

Corinne Blanchard, Analyst

And then a second question. Can you please remind us of the dividend policy? I think we're getting some questions about whether you're going to restart doing quarterly dividends or annual dividends. So just if you can comment on the policy and the cadence of it.

Gerardo Illanes, CFO

The dividend policy that was approved by the Board and presented to shareholders established that the company will distribute 30% of its net income for 2025. The dividend policy also established, according to the law in Chile, that dividends have to be paid or approved by shareholders in the ordinary shareholders meeting scheduled for April next year. Companies can pay interim dividends during the year. In the past, we, SQM, have paid interim dividends. But at this moment, we are not considering those payments, at least for the first quarter, and that will be assessed in the future. The policy establishes a 30% dividend payment.

Operator, Operator

Our next question comes from Emerson Vieira with Goldman Sachs. Please proceed. And one moment for our next question, comes from Alejandro Demichelis with Jefferies.

Alejandro Demichelis, Analyst

I have two brief questions, if I may. First, regarding your growth plans, could you confirm your capital expenditure requirements for this year and next year? The second question is a follow-up on pricing: how should we expect your realized prices to behave if lithium prices continue to decline? Should we anticipate them to decrease accordingly, or do you expect a more moderate adjustment than what is currently reflected in market prices?

Gerardo Illanes, CFO

This is Gerardo. We usually review our CapEx plan once a year, and once that is reviewed, it's shared with the market. We should review our CapEx plan in the upcoming months, and of course, we will share our conclusions with the market. Today, we don't have any updates from what was shared a few months ago. We're working on the expansion of our lithium production facilities in Chile, carbonate and hydroxide, also expanding our capabilities to produce lithium sulfate. Additionally, we're working on the Mt. Holland commissioning of the refinery, and we are also focusing on the initiatives on the nitrates and iodine side, with the most important one being the seawater pipeline that should allow us to expand our capacity to produce more iodine in the future. So no update at this moment.

Ricardo Ramos, CEO

Yes. Hello, Alejandro, regarding prices. As you probably know, after remaining relatively stable during Q4 '24 and Q1 2025, with some daily fluctuations up and down, lithium prices in China started to go down about one and a half months ago, and prices in Asia outside China have also been declining. Our sales volume is largely concentrated in China, and our realized prices remain mainly linked to price indices. Consequently, we do expect a lower average sales price in Q2 compared to Q1.

Alejandro Demichelis, Analyst

Okay. So the answer is that your prices will be linked to those indices, yes?

Ricardo Ramos, CEO

Yes. Yes, indeed.

Operator, Operator

Our next question is from Julia Zaniolo with Bank of America.

Julia Zaniolo, Analyst

My question is about your investment in a lithium project in Chile. But as we know, the market has an oversupply and prices under pressure. So if you could share your thoughts on how you see your competitive positioning in Chile?

Pablo Hernandez, Vice President of Strategy and Development

Julia, this is Pablo Hernandez. During 2025, we expect demand to reach around 1.4 million metric tons, representing over 15% year-over-year growth. China remains with a significant lead in the EV market with more than 40% year-over-year growth and roughly 70% of the EV global sales. On the other hand, the European Union has had a very strong first quarter with the U.S. having a slight decrease, but we continue to evaluate potential impacts on the corresponding new regulatory environment. Overall, the market should continue to shift slightly towards some carbonate production with LFP continuing their dominance in China and starting to expand abroad. During 2025, supply is expected to grow close to 15% as well, reaching between 1.5 million to 1.6 million metric tons, assuming no significant production delays occur in the market due to the current low price environment.

Operator, Operator

One moment for our next question. And it comes from the line of Juraj Domic with LarrainVial.

Juraj Domic, Analyst

Okay. Perfect. So we have two questions. The first one is regarding the lithium competition you are facing in China from other producers because it seems that several of them should be struggling at these prices. But production seems to be continuing. That's my first question. And my second is you mentioned in the fourth quarter that you were seeing some optimism over a positive trend in 2026. Has this view changed with the information so far in 2025?

Pablo Hernandez, Vice President of Strategy and Development

This is Pablo Hernandez. Regarding competition in China, of course, we face significant competitors in China. They have a large portion of the market. However, many of the competitors that we see in the lithium industry overall have had not very good results due to the lithium price environment. Overall, the industry is struggling with this current pricing. As for your question on prices for 2026, of course, prices will be a consequence of the supply-demand balance. We will see how this year develops and what impacts this will have for next year.

Operator, Operator

Our next question is from Lucas Ferreira with JPMorgan.

Lucas Ferreira, Analyst

Hi, everyone. I hope you can hear me now. I apologize for my line dropping earlier. I'm not sure if my question was addressed while I was offline, but I wanted to confirm your capital expenditure numbers for this year and the next few years, if possible. Additionally, could you highlight the main projects in the pipeline that are utilizing this capital? My second question pertains to the production cost of lithium. Specifically, regarding Atacama, does the ramp-up to 240 provide a fixed cost dilution effect, or are there any initiatives at the Carmen plant aimed at reducing costs in the future? If you could provide any estimates for cash costs this year, that would be excellent. Furthermore, any initial insights on the cost of production at Mt. Holland and how it has been changing would be appreciated.

Ricardo Ramos, CEO

Lucas, your CapEx question was answered already. If you want, we can discuss that later.

Carlos Diaz, CEO of Lithium Division

Hi, Lucas. This is Carlos Diaz. Regarding our cost in Chile, I have to mention, you already know that we have been facing very low prices during this year. In terms of that, we have been working on several cost reduction initiatives to maintain our cost leadership in the market. We have been working at the same time increasing the capacity, working on quality and all of that we have been improving the yield. Therefore, we expect to reduce our operational costs during this year and the coming year.

Lucas Ferreira, Analyst

Perfect. So should we expect declining nominal costs for lithium this year and the coming year? Is that fair to assume?

Carlos Diaz, CEO of Lithium Division

Yes. We expect declining costs, and I mean, as of the cost, yes. So what we have in the first quarter.

Andres Fontannaz, Commercial Vice President of International Lithium Division

Yes. Lucas, Andres Fontannaz here. Regarding your question on Mt. Holland. Let me start by saying that even at current prices, our Mt. Holland operation is cash positive, and we are executing as planned. We continue to be in ramp-up mode in the concentrator. Every operation in ramp-up is facing higher costs, but we are confident that over the long term our project will generate satisfactory returns because we do have an attractive cost structure. Additionally, we will have integrated lithium hydroxide production. We are currently commissioning the refinery, and we are very happy with the results, as the commissioning is currently at 95%.

Ricardo Ramos, CEO

Okay. Lucas, Ricardo Ramos speaking here. I just want to summarize that we have a positive view about the long term in the lithium industry. The current price environment is not sustainable, and there is no way the industry can survive these prices. SQM is probably the only one, or one of the few, that can have reasonable profits at today's pricing. We are well prepared to take advantage of the market once it recovers. We have successfully increased our capacity, and we are in a very favorable position in terms of quality, alternatives, and market. We believe that the demand is stronger than ever. The uses of electric vehicles are better than expected in terms of quality and performance. We think that, although we are currently facing challenges in the second quarter in terms of pricing, we are the best positioned to supply lithium to the market. We remain optimistic about the medium and long term, and I believe that prices will revert to a reasonable level, sustaining our ability to grow in this market.

Operator, Operator

Thank you so much. Our next question is from Constanza Gonzalez with Quest Capital.

Constanza Gonzalez, Analyst

Hi. Thank you for taking my question. I have a question regarding Mt. Holland that is not so clear for me. I appreciate if you can verify the information of passcode that you are considering right now by assuming in the case of the Mt. Holland project? Or could you give us more details about the levels that you are seeing this quarter?

Andres Fontannaz, Commercial Vice President of International Lithium Division

Hey, Constanza, Andres here. As I mentioned earlier, we are still in ramp-up mode, and during that period you are facing higher costs. However, I want to emphasize that our project is cash flow positive even at these prices. We are confident and very satisfied with its evolution.

Constanza Gonzalez, Analyst

Okay. Just to clarify, are you considering the depreciation in the Mt. Holland project too? Because if you look for the information comparison with the first quarter of 2024, the depreciation has risen a lot; that's why I was asking if you are considering that.

Gerardo Illanes, CFO

Hi, Constanza. This is Gerardo. Andres was referring to cash costs in his statement.

Operator, Operator

Alright. And this will conclude our question-and-answer session for today and our program as well. Thank you all for participating, and you may now disconnect.