Earnings Call Transcript - SQM Q2 2025

Operator, Operator

Good day, everyone, and welcome to the SQM Second Quarter 2025 Earnings Conference Call. Please note, this conference is being recorded. Now it's my pleasure to turn the call over to the Investor Relations Officer, Isabel Bendeck. Please proceed.

Isabel Bendeck, Investor Relations Officer

Thank you, operator. Good day, everyone, and thank you for joining SQM Earnings Conference Call for the second quarter of 2025. This call is being recorded and webcast live. Our earnings press release and results presentation have been uploaded to our website where you can also find a link to the webcast. Today's participants include Mr. Ricardo Ramos, Chief Executive Officer; Mr. Gerardo Illanes, CFO; Mr. Carlos Diaz, CEO of Lithium Chile Division; Mr. Pablo Altimiras, CEO of the Iodine and Plant Nutrition Division; Mr. Mark Fones, CEO of the International Lithium Division. Also joining us today are members of our commercial and business intelligence teams. Mr. Felipe Smith, Commercial Vice President of the Lithium Chile division; Mr. Pablo Hernandez, Vice President of Strategy and Development of Lithium Chile division; Mr. Juan Pablo Bellolio, Commercial Vice President of Plant Nutrition and Specialty Products; and Mr. Max Vial, Head of Studies of International Leasing Division. Before we begin, please note that statements made during this 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 lines growth are considered forward-looking statements under the U.S. federal securities laws. These statements are not historical facts and are subject to risks and uncertainties that could cause actual results to differ materially. We assume no obligation to update these statements, except as required by law. For a full discussion of forward-looking statements, please refer to our earnings press release and presentation. With that said, I will now turn the call over to our Chief Executive Officer, Mr. Ricardo Ramos.

Ricardo Ramos Rodríguez, CEO

Good morning, everyone, and thank you for joining us. I would like to take a few minutes to share some highlights and provide a bit of color before we move to your questions. As expected, during the second quarter, we faced lower lithium prices compared to earlier this year, which drove revenues down by more than 3% year-on-year. More recently, we have seen a change in market dynamics with prices improving in the past few weeks compared to the levels observed in May and June. We're seeing strong demand growth coming from electric vehicles and battery electric vehicles, particularly in China, but also Europe has surprised us with a stronger-than-expected demand growth. I'm pleased to share some positive news from Australia. Despite the expected lower sales volumes seen in the second quarter, we are updating our sales guidance for the International Lithium division to approximately 20,000 metric tons of lithium carbonate equivalent for the full calendar year 2025 as the mine is reaching full capacity. In addition, the Kwinana refinery is now complete and delivered its first product on specification, on budget, and on time last month. The ramp-up is underway and once at full capacity, the project is expected to produce 50,000 metric tons of lithium hydroxide annually, with half attributable to SQM. Lithium sales volumes from product coming from the Salar de Atacama were almost flat compared to last year as lower prices triggered contract floors that impacted volumes. Nevertheless, we expect the yearly sales volume from our Chilean operations to increase by at least 10% compared to 2024. Beyond lithium, our business continued to deliver solid results. Iron was our most profitable segment in the second quarter with an adjusted gross margin of 57% and contributing more than 50% to the total company gross profit. Prices remain strong, supported by healthy demand and tight supply, and we expect this strength to continue into the coming years. In fertilizers, our Specialty Plant Nutrition business remained stable, reflecting resilient demand across our key markets, while potassium volumes are lower as guided, but prices remain firm. Overall, our diversified portfolio positions us well to navigate a volatile environment. We are confident that SQM is well placed to capture the strong fundamentals of the lithium market while continuing to deliver solid results across all our businesses. Thank you, and we look forward to your questions.

Operator, Operator

And it comes from the line of Ben Isaacson with Scotiabank.

Benjamin Isaacson, Analyst

I have three questions, and I'll ask them one by one, if that's okay. The first question is on SPN. Ricardo, we don't talk about it much, but it continues to be a really solid contributor of gross profit to the business. Can you talk about what your midterm or long-term goal for where you want SPN to be? And in your answer, is that based on volume goal, an EBITDA goal, or maybe a margin per ton goal?

Juan Pablo Bellolio, Commercial Vice President of Plant Nutrition and Specialty Products

Ben, this is Juan Pablo. Look, first of all, it is important to mention that our business in SPN is not only the potassium nitrate that we sell. Also, we have been developing for a couple of years, a complementary business of blends based on NPKs that we have been deploying in our markets. So that has been giving us the chance to keep growing in this market, keeping the margins that we are having and the success to remain a main player in this industry. Our midterm and long-term goals are related to the same strategy to keep growing, adding services and products to our customers in different regions, giving us the chance to maintain our brand as a solid one and to keep being able to keep the prices where we want to have them. So I would say it's an idea of having more products, more services available for our customers, growing in volume, but remaining with a solid brand to sustain prices at this level.

Benjamin Isaacson, Analyst

That's great. My second question is about Mt. Holland. If you had asked me two months ago, I probably would have thought the expansion wouldn't proceed, but that may not be the case now with lithium prices beginning to improve. Can you share your current thoughts on the expansion? Additionally, how does the CapEx outlook affect your considerations regarding Salar Futuro?

Mark Fones, CEO of International Lithium Division

Mark here. Yes, as you probably have seen on our webpage, we made a recent announcement that the expansion decision will not be taken during this year, 2025. We continue to progress, of course, with the approvals relevantly and engineering studies over that project. The final decision will be periodically reviewed during next year, and we will consider not only market context, but also how we're progressing with those engineering studies and particularly the approvals. Finally, with all that information on the table, we will make a decision informed by the financial evaluation and also on the progress of the refinery.

Benjamin Isaacson, Analyst

That makes sense. And then just my last question, and I've asked this question before regarding iodine. It's a simple question. What is going to break iodine prices? Are we starting to see any signs of demand destruction? Any changes to the new supply outlook over the next couple of years? Can you talk about that? It just continues to be so strong, and I'm not sure if anything will break it soon.

Pablo C. Altimiras, CEO of Iodine and Plant Nutrition Division

Ben, Pablo Altimiras speaking. Well, regarding the iodine, for this year, as we said in our earnings release, we expect that the demand will grow less than 1%. But the main reason is because we don't have supply. That is the reason also that the demand is being impacted. Having said that, for the next year, we expect that the growth will be there if the capacity is also there. We see solid fundamentals in all applications, especially in x-ray contrast media, which is needing more iodine every year. For the next year, we expect some capacity coming because some capacity should arrive this year. However, because the demand is strong, we don't expect a big change in the dynamic of the market as we see today.

Benjamin Isaacson, Analyst

And just in theory, the last time iodine prices were high, I can't remember how long ago, maybe about 12 years ago. When iodine prices started to fall, you started to cut your production, and that strategy didn't seem to work, and then you went full volume. Can you talk about if iodine prices start to break, have you thought about your strategy?

Pablo C. Altimiras, CEO of Iodine and Plant Nutrition Division

Well, I would say that you cannot compare the dynamics of the market that we have today with some years ago. We see new applications that are growing much more than before. Our strategy is clear; it is always to have the capacity to be prepared to provide the best iodine to our customers. That we have been doing in the last year. We are growing Nueva Victoria. We built Pampa Blanca, and we are also opening a new facility. We are growing with our seawater pipe project because our strategy is to have enough capacity to respond to the demand. So not a significant change on that.

Operator, Operator

Our next question comes from the line of Joel Jackson with BMO Capital Markets.

Joel Jackson, Analyst

I have a few questions too, and I will also ask them one by one. Just going back to Mt. Holland and Kwinana, can you just confirm, so we have the numbers right, to hit 20,000 tons for your share in 2025. What would the volumes be in the second half of the year? And then some of the earlier hydroxide plants that came out in Australia, as we all know, have had lots of problems. Do you have a sense yet if you will have a similar ramp-up compared to the two plants that came ahead of you?

Mark Fones, CEO of International Lithium Division

Joe, Mark here. Regarding your first question about the volumes for this year, what we announced in the press release about being 20,000 tonnes of lithium carbonate equivalent for this year in sales mostly comes from sales of spodumene concentrate, and it will be mainly centered in the second half of this year, probably evenly distributed between quarters three and four. Regarding your second question, which is probably a longer one to answer, I think let me start first with the factual perspective. We announced a very relevant milestone last week, which is first product, first product in quality, on budget, and on specifications. That result arose from a lot of work done during the years between the teams, and it was a collective effort from planning to engineering to execution, which counted with the support and contribution of the knowledge from SQM in lithium processing from Chile and China, also with knowledge from partners regarding their processing technology and experience in Kwinana strip, and that's how we reached that relevant milestone. As we now look ahead at the additional challenge we have for ramping up operations in Kwinana, we will face it the same way. I cannot talk about third parties or others and how they have done it, but I can tell you that we are facing that challenge again with a lot of planning and expertise. We only started the construction of the refinery when we had 80% of engineering in detailed design, which is not what is usually done in the market. We only started when we were ready and knew what we were doing. In addition to that, we have established provisions for the refinery that come in having additional capacity on critical equipment, as well as additional physical space to install more equipment for refining if needed. Finally, I can name our relevant vendors; we have very good vendors supporting us in this ramp-up period, particularly two technology partners, who are working closely with us today in the refinery, particularly in the areas of pyro calcination and crystallization. This is a collective effort that started many years ago, and we will tackle it together with our partners and our great team.

Joel Jackson, Analyst

Obviously, we've seen a turn in the lithium market in the last couple of months; everyone sees it, everyone knows it. Can we talk about your order book and your discussions with customers and how they've changed in the last month or two? So you were going into the end of Q2, early Q3; your selling prices were going below the floors in your contracts, volumes were being changed. Suddenly, prices have gone up now a lot, maybe RMB 20,000 a ton for LCE. Can you talk about how the discussions have changed, how your order books have changed? Have some of your short-term contracts now been broken because the customers didn't pay the floor and now you went out and sold elsewhere? Just tell me whatever, what's changed in the last two months, if anything?

Felipe Smith, Commercial Vice President of Lithium Chile Division

Joel, this is Felipe. Look, I would like to comment, first of all, what we see for the second semester. I think it's important to share that with you. I will speak about the volume and the prices. Regarding the Chile Lithium Division, I would like to say that sales volume reached 51,700 tonnes in Q2, which is similar to Q2 last year and slightly lower than Q1. However, I am very optimistic, and I expect our sales in Q3 to be at least 10% higher than Q2. Also, sales in the second semester of this year are expected to be higher than the first semester and higher than the second semester of last year, which would allow us to increase the yearly volume by at least 10%. Regarding prices, during Q3 2025, lithium carbonate prices in China have been recovering at high speed following news about potential supply reductions. Prices in Asia, excluding China, have also been recovering, but at a reduced pace compared to Chinese prices. Since our sales volumes are concentrated in China and our realized prices remain mainly linked to price indices, we expect that with the recent price recovery in China, our sales price in Q3 should be higher than Q2. The good news here is that we will have better volume next quarter and a better price next quarter. Regarding our strategy, I will not go into the details of the contracts because these are confidential, but regarding our strategy, as we have done always, our strategy remains to produce at full capacity, to expand such capacity in line with the expected market growth. We do not speculate, and we sell and serve the needs of our customers.

Joel Jackson, Analyst

Maybe just following up on that, one last try here. So going into Q3 and Q4, are your prices really reflective of spot prices at this point? Like if we follow the spot prices, should we really get your price about right?

Felipe Smith, Commercial Vice President of Lithium Chile Division

Well, depending on the contracts, we tend to be very close to the spot price. We only have small differences or gaps from the moment you apply the index calculation in the contract and the actual spot, but we are really close to the spot levels.

Operator, Operator

Our next question is from Cesar Perez-Novoa with BTG Pactual.

Cesar Perez-Novoa, Analyst

Could you please comment on Mt. Holland mine economics, namely your short-term costs, maybe your start-up costs, and long-term costs when the asset is fully ramped, I believe, 18 months from now? How comparable is that OpEx relative to the Salar de Atacama? And if I may, a second question on Salar Futuro. Where do we stand on its implementation? Has SQM already presented the conceptual engineering design? And if so, what CapEx deployment should we think of on an annual basis?

Mark Fones, CEO of International Lithium Division

Cesar, Mark here again. Well, as you know, we continue to be in ramp-up mode, both in the refinery and also still to reach 100% capacity production in Mt. Holland. As such, our current production cost is not yet reflective of our long-term projections. We are, though, profitable in the current scenario, but our business remains to produce lithium hydroxide, and our sales of sodium concentrate is a temporary solution while we ramp up the refinery, and we remain flexible to sell between one and the other. In terms of long-term projection for sodium concentrate, we expect to be among the top producers in Western Australia concentrate. Regarding the refinery, the successful development of the refinery production in the long term will generate satisfactory returns considering the structure, where we expect to be around the middle of the industry cost curve.

Ricardo Ramos Rodríguez, CEO

About Salar Futuro, we are working very hard with Codelco to be ready to submit our environmental study to the authority during next year. It's a huge project. It's a complex project, a beautiful project. But we are not going to be ready until probably the beginning of the second half of next year. At that moment, when we file the environmental study, just before that, we will disclose the CapEx in detail together with Codelco. Because this is a complex project and it will require an interesting analysis and study at different levels, we think it's reasonable to expect to have an approval of the project during the beginning, maybe during the first half of 2030. I hope in the first half of 2030. As you may know, we cannot invest in Salar Futuro until we have the total approval. You cannot start investing in the project without approval. That's why the CapEx of Salar Futuro will start to be reflected probably during the second half of 2030, the beginning of the project, the CapEx. Most of the CapEx will be reflected in '31, '32, and some in '33, which is why it will not affect the CapEx of next year, 2026, or 2027, or '28, or '29. Anyway, of course, we have some expenses and CapEx related to the environmental study, but compared to the full project CapEx, it is not relevant.

Operator, Operator

And it comes from Isabella Simonato with Bank of America.

Isabella Simonato, Analyst

I wanted to go back a little bit to the iodine business. I think it's pretty clear, right, your views on demand and how strong the market is. But when you talk about supply, what is mapped in terms of supply for the next couple of years? How do you see the balance of the market? I think it's still a little bit unclear what type of supply additions we're talking about in this environment, right, and considering these prices? And what do you see as the bottleneck for that supply to continue to grow more sustainably, given where prices are? That is my first question. And the second one, back to the deal with Codelco, right? I think there was an expectation that this would get done by September. Just wondering if there is any new update in terms of timing?

Pablo C. Altimiras, CEO of Iodine and Plant Nutrition Division

Isabella, Pablo Altimiras speaking. Well, as you've seen in the last year, we've had a lack of supply. It's not the case for SQM. Actually, we have been one of the only companies that have been able to provide more iodine in the last eight years. That is our plan. As I said before, we are not only growing in Nueva Victoria; we have also opened Pampa Blanca. Now we are working on a new greenfield project where the idea is to provide an additional 1,500 metric tons of iodine. On top of that, we are continuing to grow in our seawater pipeline to provide more iodine and significantly increase capacity in Nueva Victoria. So regarding SQM, we are investing a lot of money to be prepared to supply more iodine because of the needs of our customers. Regarding the other players, we expect some supply in the next year. Concerning the upcoming years, we are monitoring the situation. What's important here is to consider the capacity for planning because today, environmental restrictions and similar issues may be the primary bottlenecks for seeing new supply. Therefore, planning is crucial, and that's what we have been doing as a company to plan and have a good understanding of demand and then build the new supply.

Ricardo Ramos Rodríguez, CEO

About the project with Codelco, just to inform you that we are very positive about the results of the process. We are moving really fast and maintain our schedule, which means that it should be ready during September, maybe October, but it's going to be ready during this year anyway.

Operator, Operator

One moment for our next question, and it comes from the line of Emerson Viera with Goldman Sachs.

Unidentified Analyst, Analyst

I have two questions. The first one on the cost curve of the sector. If I recall, in the previous earnings conference, you mentioned that you estimate about 40% of the supply was under the water at the low prices at that time. Can you provide us an update on what the supply amount is right now that could still be underwater at current prices? So that's question number one. And question number two, can you please provide us an update on CapEx expected for 2026 and '27, given that the construction of the refinery was already completed and you have the seawater pipeline coming in line with expectations?

Pablo Hernandez, Vice President of Strategy and Development of Lithium Chile Division

This is Pablo Hernandez speaking. Regarding your first question on the cost curve, today, prices have increased significantly since what we saw a couple of weeks ago. We still believe that there are some competitors in the space that have costs that are higher than current pricing. Therefore, in the long run, if we think about long-term pricing, the consensus in the industry is that prices should be a little bit higher than where we are today.

Gerardo Illanes, CFO

Hi Emerson, this is Gerardo. Regarding your question about CapEx, usually, once a year, we make a full review of our CapEx plan for the next few years. Once we do that, we present it to the market. We expect to do that during this quarter and be in a position to share updates with the market during the third quarter earnings call. It's also important to remember that out of approximately $1 billion of CapEx that we have announced for the years '25 to '27, the vast majority of that CapEx is growth CapEx. Maintenance CapEx is approximately $250 million per year across all our divisions. What we do in this exercise is to review other opportunities and how each of these projects is evolving to see whether we can expand or adjust our plans. As soon as we have that, we will share it with the market.

Operator, Operator

Our next question is from Corinne Blanchard with Deutsche Bank.

Corinne Jeannine Blanchard, Analyst

Two questions here. Can you first give us an update on the progress with the conversation with Codelco and the local groups? Anything helpful here regarding future steps and when you expect to have that completed would be beneficial. The second question, can you speak about your current lithium inventory level? Just to give us an idea, that would be helpful.

Ricardo Ramos Rodríguez, CEO

Corinne, regarding Codelco, the process, as I mentioned before, is moving in the right direction, and we're making good progress. As you may know, the process with the communities, which is led by CORFO, is going according to the stated deadlines. We're very positive; we expect a resolution in the next few weeks. Everything is looking positive in our opinion. We must keep in mind that the SQM-Codelco project is very positive for Chile, the Antofagasta region, and mainly for the nearby communities. This is a strong point in our relationship with the communities, and we're optimistic about the review, expecting a positive conclusion in the coming weeks. Those are the main points pending, and we are advancing on other smaller matters. As for the inventory, we have a healthy position that aligns with our production this year. We expect to be close to 230,000 metric tons, and our sales, as Felipe already explained, will be 10% higher than last year. Our inventory aligns with that sales projection, and we are really optimistic about business this year. The demand remains strong, and the price environment, although extremely volatile, has shown positive signs of recovery. SQM is a long-term player, and we are cost-competitive. We are a high-quality producer, and we have developed robust commercial and logistic infrastructure.

Operator, Operator

All right. Ladies and gentlemen, thank you. This concludes our Q&A session and conference for today. Thank you all for participating. You may now disconnect. Everyone, have a great day.