K+S Aktiengesellschaft (SDF) Earnings Call Transcript & Summary

Hello, and welcome to the K+S Conference Call regarding the publication of the Half Year Financial Report Half 1 2020 hosted by Dr. Burkhard Lohr, CEO. [Operator Instructions]. Please note, on Page 2 of the presentation, you will also find the disclaimer. And I am now handing the call over to Dr. Burkhard Lohr to begin. Please go ahead.

Thank you. Ladies and gentlemen, welcome to our Q2 call. I would like to start by pointing out the highlights on Slide 3. Despite difficult market conditions, Q2 was a solid quarter. Due to lower potash prices in agriculture, we lost around EUR 80 million compared to the previous year. But we were able to partially compensate this decline by showing a strong operational performance of our plants to which Bethune in particular made a significant contribution. In addition, we had strong cost discipline and did our utmost to make optimal use of our logistics network. As in the first quarter, where the COVID-19-related burden of around EUR 10 million for the measures to protect all employees and to ensure production. Overall, our EBITDA reached EUR 88 million compared to EUR 130 million in the previous year. Free cash flow is at minus EUR 43 million after the strong figure last year and is impacted by higher CapEx. Please turn to Slide 4 to have a closer look at the agriculture customer segment. As expected, demand in agriculture was good in the Northern Hemisphere and in Brazil. In Southeast Asia, demand did not pick up as a result of the corona pandemic and limited availability of workers. New contracts in China and India have led to a restart of product flow and the expected bottoming out of MOP prices in Brazil followed by slightly rising prices. Prices are still increasing despite higher volumes being absorbed by the market. We expect that this price recovery in most overseas regions will also take pressure off the European market. And price for our special -- fertilizer specialties remained largely stable. And now please turn to Slide 5 to have a closer look at the Communities customer segment. In total, de-icing salt sales volumes in the second quarter were almost 30% below the level of the previous year, largely due to high stock levels of our customers at the end of the winter season, many are in a strong negotiating position in the upcoming bidding season. However, since we have a multiyear contract with many customers and fixed prices, we only assume slight to moderate price decreases overall. In addition, we already signed contracts in some regions with good prices in Q4 2019. And now please turn to Slide 6 to have a closer look at the industry and consumer customer segment. Some products such as food salt for hotels and restaurants or chemical salt are affected by the corona pandemic. Others such as pharmaceutical business have more than compensated for these effects so far. Our product for chlorine production show a positive trend as well. A significant improvement in operational performance, high-cost discipline and an optimal use of our logistics network also contributed to the positive earnings development. What we lost in food salt in the B2B area was more than compensated for by the demand of the consumer customer segment. The more people cooked at home, the more table salt was bought in the supermarkets. Water and pool salt also saw a very strong demand in Q2. In these uncertain times, customers buy well-known brands that they trust. On Slide 7 is our outlook for the year as a whole. For 2020, we continue to expect EBITDA of around EUR 520 million. As in our last outlook, the figure does not take into account onetime restructuring expenses which could result in up to EUR 40 million. Including this one-off effect, we would see an EBITDA of EUR 480 million. Due to the high-cost discipline and the optimized use of our logistics network, EBITDA of the Americas operating unit is now expected to be only slightly lower than in the previous year despite significantly lower volumes for the de-icing salt business. We have assumed a moderate decline. We also saw good operating performance in our Europe+ operating unit, which would help us also in the second half of the year. Furthermore, we have some positive effects from our package of measures. These effects allow us to compensate for the slower recovery in potash prices, opposing currency effects from a weaker U.S. dollar and COVID-19-related efficiency losses. We continue to expect free cash flow around breakeven point with this EBITDA guidance also because the biggest part of the restructuring expenses will not be cash effective in 2020. Now please turn to Slide 8. Ladies and gentlemen, at this point, I cannot tell you anything new about the sales process of our Americas operating unit. You may have heard more details about sales -- of this sales process and the news but please note, we do not comment on market speculation. However, we still expect signing this year and you should see that as positive news. On Slide 9, I would like to briefly outlook what is important for the new K+S. With the sale of the operating unit Americas, a restructuring of the administration is mandatory. The overall target is to have positive free cash flow contribution from every site even in difficult market conditions. The Europe+ operating unit and the holding company will be formed into a leaner and smaller K+S with a focus on fertilizers and specialties. The future organization enables the budget reduction for SG&A functions by EUR 60 million from 2021. In the future, K+S will work in a functional organization with an operational management team. The Executive Board will be supported by 15 direct reports. Without the Americas operating unit, there were 36. The future direct reports are named and the design of the functions is now defined. At the same time, negotiations with employee representatives started. The expected restructuring expenses could be up to EUR 40 million. The reorganization should be completed by the beginning of 2021. I'm convinced that the realignment of K+S will result in a leaner and more performance-oriented company, one that will have a solid financial base for future growth. Now please turn to Slide 10. Ladies and gentlemen, the situation would certainly be much better for us with higher potash prices for sure. We have to focus on everything that we can influence, and to this end, we are making really good progress. We have finally achieved our potash production target. Our German plants are unaffected by wastewater-related shutdown, the nutrient content is good and the food continues to ramp up, thanks to improved product quality. We were also able to cut costs significantly by optimizing the use of our logistics network. The OU Americas transaction and the realignment of the new K+S are on track. Something I would like to add here: we have just reached an agreement with the KFW Bank for a syndicated credit line of EUR 350 million at market conditions. This will help us if there are any additional unforeseen burdens coming from the corona pandemic. Ladies and gentlemen, this concludes my presentation, and we are ready to take your questions and one at a time, please. Operator, please open the line for the Q&A session.

[Operator Instructions] Our first question comes in from the line of Christian Faitz calling from Kepler.

Dr. Lohr, I'm glad to see and hear you back. Three questions, please, so one by one. First of all, how has the Brazilian application season started in potash, obviously.

Yes, that is still a little bit early, but volumes haven't been an issue in Brazil all over the year. As you know, pricing was the issue. But after we have seen the bottoming out and we have seen first increases, we believe that this will not rocket, but it will slightly continue. And we are very optimistic in terms of volumes for the upcoming season.

Okay, great. So second question, I take it that the physical issues with the product quality out of Bethune are solved. Can you confirm this and also elucidate on this a bit?

Yes. Everything that we have done to get to this point was very helpful and successful. And I would really say at this point, and that is confirmation, the product quality issues are history. We are now really on a normal production with high quality. You know that our nutrient anyway is higher than normal, so we are very happy with it. And that was one reason to start shipping into the U.S. And again, this will not be on the plate anymore. And that is another reason why we have increased production so we have taken a big ramp-up cap this year.

Can you name the volumes you are shipping to the U.S.?

It's small volume because you have to start with the logistics, et cetera. We are talking about so far 40,000 tonnes. But anyway, it's a start. And it was a quite promising start, and the customers are happy.

Third and final question, please. Can you elucidate a bit the recent press report about your discussions with the Thuringian government about the payments where you have salt deposition in older mines. I'm specifically referring to the article in the FAZ from this Monday, which suggest that you are declaring data position as preventative measures against mine collapses rather than deposition which triggers payments by the Thuringian government, I take it.

That's a very complex issue. I hope I get this done in this call. And as you know, we will have to stop the deep well injection by the end of next year. And we will, beginning from 2022 on, we will deposit the process waters instead of a deep well injection into an old mine called Springen. This is in Thuringia. And Thuringia at the same time has eternity cost because there is a leak, and they have to handle the water. That is a significant eternity cost for this small country -- state. And when we flood Springen, there will be this problem solved as well. So it's a win-win situation. And we have signed an agreement how to deal with the costs. And I cannot disclose the number, but this will be favorable for us to discharge the waters in the future and favorable for Thuringia as well. Does this answer your question?

Kind of, yes.

The next question comes in from the line of Alexander Jones calling from Bank of America.

The first one would be on the overseas potash price that you've managed to achieve this quarter compared to the Brazilian where you're actually up sequentially quarter-over-quarter. Is that timing in the quarter or was there some kind of improvement in the sales allocation you've managed to do?

So we just found out that we didn't get your question, sorry. Can you repeat it?

Yes, sorry, it was about the overseas potash price for the quarter. You achieved your average selling price, was up sequentially compared to the first quarter, whereas, I guess, Brazilian average prices were down. So was there a factor behind that?

No. We had high volumes in March in the first quarter. And there, we've seen already the lowest price. And from April on, we have seen this slight recovery, and that is flowing into our numbers. And that's the reason why the average selling price overseas in Q2 was $6 higher than in Q1.

Okay. And maybe one other question on CapEx guidance, are you still happy with consensus net CapEx being around EUR 550 million or is there any room for that to come down in order to help your free cash flow guidance?

Alex, it's Thorsten. I can promise we do our utmost in order to keep the cash within the company, but we have to stick to the guidance that the CapEx increases significantly over last year. And we still feel fine with the consensus forecast for CapEx, which, as you said, is around EUR 550 million. Nothing especially elevated compared to the normal level because of this year happening environmental protection measures, which are especially having expansions.

The next question comes in from the line of Michael Schäfer coming from Commerzbank.

Two questions basically. First is on the logistics cost relief experience in the second quarter. I wonder whether you can shed some more light on what you have saved basically compared to maybe the situation you've seen in the first quarter? And what should we expect heading into the second quarter when stronger de-icing volumes are kicking in again and may reverse the trends? So this would be my first question.

It's indeed -- I think 2 things. First of all, one project within our package of measures is dealing with optimizing our logistics networks. And this is in the Americas the case, but this is also the euro -- in Europe the case. And we're talking here about review of sites and the products that we are talking about networks between the sites and to customers or to stockpiles and also ocean freight networks. The benefit -- this is the -- benefit we have from this, we haven't seen yet. So -- but where we have seen a benefit from what I would call it a smarter ocean freight or also truck freight network management. We used free capacity from low-cost de-icing freight contracts in order to ship higher volumes in consumer business, for example. And it's hard to say how much of this we cannot use in the third quarter when higher de-icing volumes kick in again. But we always have enough capacity and freight in order to make use of that. So it's hard for me to give you a concrete number, but I would expect that we see this tailwind also a little bit in the third quarter still.

Okay. Second question is on your cost-saving measures. You thankfully basically indicated the EUR 60 million, 6-0, cost decline from 2021 onwards. I wondered, the first, a, the question is how should we think about the phasing of the EUR 6 million savings in 2021 against presumably EUR 40 million cash out. This would be my 2a question. And 2b would be, do you think that this is sufficient to keep basically the, let's say, remaining, are you -- or your Americas business and basically a free cash flow breakeven -- or sorry, to bring it back to free cash flow breakeven given the current price situation on the potash side.

Okay, first of all, the easier part. So the EUR 40 million will, of course, run into the earnings this year with the provision. We will have -- most of this has a negative cash effect in 2021, part in 2020, but most of it in 2021. Our target is to be done by the end of this year. But of course, some costs will still run into 2021, all of running contracts. So the dominating part of the EUR 60 million savings will be seen in 2021, the full part in 2022, yes. On the current price level, this EUR 60 million is helpful. But of course, not the whole measures we have to take to achieve a free cash flow, balanced free cash flow situation. That's why our package of measures is by far more than only selling the OU Americas and only realigning our administration. We are looking into every site, and we are looking into what has to be done to get this site even on the current price level free cash flow positive. Some are there. In Bethune, it's obvious. We just have to follow our ramp-up path. But in some cases, especially when we are talking about high environmental costs, it's a little bit more tricky, but we are working on all aspects to get there.

The next question comes in from the line of Markus Mayer calling from Baader-Helvea.

Two questions from my side as well. Firstly, could you update us on your U.S. dollar hedging? And also, how should the U.S. dollar sensitivity look like after divestments of your Americans business? That would be my first question.

Yes. Markus, the last question, we are not hedging the translation effects from the U.S. business because we have revenue streams and costs in U.S. dollar, and it's just the translation effect into calculating the euro balance sheet. The second is, from now on, I mean, the dollar weakens. And let's assume it goes down by another $0.10, this would have an adverse effect, which is just double digit.

Okay. Double digit. And this is basically also then the effect if the Americas business would be out? Or is it just the effect right now for the CapEx as it is right now?

No. This is the main effects come from the -- when we talk about 2020, the Americas will still be for the majority of the year, parts of it, right?

No, no, that's clear. I just wanted to know how it's right now and how would it be if Americas would be really out, if this is possible.

There's no big difference, I would say, then.

Okay, thank you. Then my second question would be on the demand situation of your consumer and industry business, which was pretty strong in the second quarter. Is this also going into July as well or was there sequential weakness?

July showed very good numbers as well. We expect that there will -- in the next quarter, in total, still be a development, which is above normal. But maybe below what we've seen in the second quarter.

The next question comes in from the line of Thomas Swoboda calling from Societe Generale.

I have one question left if I may, and it's regarding your new competitor from Russia. They've seen to be producing decent volumes, so -- already. My question is do you see them in any of your markets already or is it directed at mostly for the internal consumption? And do you expect the euro share to become active as a net seller of potash until this year, eventually next year? Would be great if you could share your opinion.

Yes, you're welcome. First of all, maybe you've read that there was -- the one or the other surprised about these volumes. We weren't. What we could read now is in line with our expectation for this year and for next year. Of course, they started to use the MOP by themselves, so it was internal use. And the more they produce, the more they will, of course ship into the market. Most probably not in our European home markets due to the small volumes and the logistical constraints. We will see them in the overseas markets. But take into account, we could expect another 2 million tonnes demand next year. So it is running into a growing market. I'm not seeing this as a significant threat.

The next question comes from the line of Andreas Heine calling from MainFirst.

I would like to -- basically this is follow-on questions on what was asked before. On this U.S. dollar hedging, specifically on potash, could you outline how you do this in the future? So we'll probably deliver much more from Bethune to Latin America and the German mine's more focused on Europe. Maybe you can outline a little bit what your net with dollar exposure in the potash business is? And what for, let's say, 2021 it means if U.S. dollar stays on the current level.

Andreas, I wouldn't see a significant increase of the net position because, yes, we are delivering into U.S. dollar regions. We are using this U.S. dollar in part for paying costs. Also costs from European shipment but also from Canadian shipments. So freight is paid in U.S. dollars which reduces the gross position then. We are securing the U.S. dollar against the euro, and we are also hedging the U.S. dollar against the Canadian dollar in order to cover the costs there. And the net position from '20 to '21 will not change significantly. In the long-term when Bethune ramps up further, we will certainly see the higher increase or an increase of this net position in U.S. dollar, but not in the short term.

Then the second add-on on Christian's question, not going into any detail of this contract you have with Thuringia. But is the change from 2021 to 2022, not using these people injection anymore? Is that adding costs or is the benefit from Thuringia paying something for you is equaling this change?

It's a question from where you're coming from. You know that another alternative was discussed, the pipeline to the Oberweser to replace the deep well injection. That would have been significantly higher costs for us. So we, in a way had this in our CapEx plans and we can take significant part of it out. But of course, it's not for free, but the major portion will be paid by Thuringia.

So there is still a slight negative, but not too much from 2021 to 2022.

Yes. We are starting preparing things already. There will not be a step-up in terms of costs related to that in 2021 compared to 2022.

Then can you share with us what the market conditions are for KfW loan, I don't know what the market conditions are for a company like you are now?

I think what I can say is they are in line with market for a company with a B rating. But we are not laying out the detailed conditions, but that's for understanding.

Then could you remind me, really the last question I'd like to ask, what is now your sustainable production from Germany with the current product mix you have by having solved all the issues you had in the recent years? So what is -- what we can expect from 2021 onwards as a production from the German mines?

I think if you calculate, that's roughly 7 million tonnes, I think that's a good number.

The next question comes from the line of Lisa de Neve calling from Morgan Stanley.

I have 3 questions. The first one is a bit on your average selling prices. So I mean, in terms of the outlook for average selling price, you reduced it from EUR 239 to EUR 231. I'm just trying to understand what you're expecting for the second half of the year. Given obviously Brazil has been quite strong. I mean India has been buying a lot of fertilizer, especially urea. So do you expect an uptick there from India? I know you're not shipping there, but it's a global commodity. And what are you seeing in terms of China? That's my first question.

Yes. The guidance -- the EUR 239 was 3 months old. Meanwhile, we have seen that, yes, there is an increase in the prices but it's slower than we have assumed 3 months ago, that's why we have cut this assumption. But -- so we are still expecting an increase, but a little bit slower than assumed 3 months ago. But I think it's worth mentioning that we have -- that we can cover even with our EBITDA guidance even with the effect. And by the way, it's not precisely EUR 231. It's slightly above EUR 231 what we expect now.

And second question, so very much congratulations on continuing to like manage your cash costs incredibly well. I have a little question if you take the sort of the cash cost per tonne sort of in correlation to your free cash flow. I mean, obviously, you're ramping up, assuming that's bringing down your cash cost. But overall, market prices are still, unfortunately, a little bit low on the MOP side. How should I think about free cash flow generation across your different German mines? I mean are they all currently at free cash flow breakeven? And can you provide sort of any detail around that?

Yes. I think I gave a flavor already with an earlier answer. If you look into our site, again, Bethune is in ramp up and it's only a matter of time until they will be able to be free cash flow even on current price levels. And the situation is very different here on our German mines. Of course, the Werra site has the biggest burden with our environmental CapEx, and that's why they are the farthest off to achieve free cash flow breakeven on the current price level. But we are getting there, I'm sure.

And then final one is a very short one. You had a small uptick in your mining provisions over the first half by EUR 20 million. Is that just related to your environmental CapEx or environmental provisions. Is there anything specific in there? Or just anything you can point out?

It's just the accumulation of interest.

The next question comes from the line of Patrick Rafaisz calling from UBS.

Three questions for me as well, please. The first is a follow-up on your U.S. market access. You mentioned the 40,000 tonnes currently. What's your plan over the next 2 to 3 years for the U.S. market?

It will not rocket. It will be a nice additional business, but maybe get close to 100,000 tonnes in the next -- in 2021, but not much more.

And then also a follow-up on the cost savings in admin, the EUR 60 million, how should we think about that from a modeling perspective? Will that be partly in the recon line and partly in agriculture or all in e-com? And how will you allocate those?

That is mostly in the recon line. But our reporting will look different anyway when we have sold all the Americas because they will not be in Europe anymore. It's only -- it's in one entity. But most probably, we will have, of course, the segmentation -- customer segment. And it will be shown in a way in the recon line.

Okay, and the last question on your financial results in the second quarter, and this was better than expected versus previous quarters. Do you have the guidance for the financial results for the full year?

That's a tough one, Patrick, because it depends, especially on the other financial results. And here, especially on the development of the U.S. dollar to the euro or the Canadian dollar to the euro and even the relation Canadian dollar to the U.S. dollar. And this is -- we saw a strong adverse effect in the first quarter when you compare second quarter over first quarter. We had a slight positive effect because the currencies didn't move much. This makes it difficult to forecast it. But on the levels we are forecasting and using also for our hedging, et cetera, et cetera, we -- I would say, the total financial result should be somewhere in the range of minus 140 to 150.

Next question comes in from the line of Markus Schmitt calling from ODDO.

I have just one question regarding the probably 4% KFW loan. That is for what could you actually use the loan? I understand that you cannot simply use these funds for refinancing, for example, the 2021 bond. Of course, there is a left pocket, right pocket principle applicable. But what can you specifically fund with the facility and must this, for instance, in terms of CapEx, always be an environmental-friendly or CO2 emission-reducing investment and what are potentially other restrictions or EMA in terms of usage?

Yes. Schmitt, I think the main restrictions that are well-known is the one you mentioned already, it's indeed, you cannot use these funds for refinancing of existing debt. And the second is you have to make use of the majority of the already existing credit facility before you can tap the KFW loan. And what I'm always saying is, it is for us a cushion, an additional cushion for financing the running business, yes? And we don't know -- and this is how we always communicated it. What happens in the market, especially with regard to development of corona. And if we -- according to our guidance we have given out, we have sufficient liquidity to run the business. And this is how I look at the KFW line. And yes, that's the information I can give you.

Okay. But could you use the premiums for financing working capital? Is that...

Yes. That's business-related, yes.

The final question in the queue comes in from the line of Chetan Udeshi calling from JPMorgan.

Just one quick question, which is around this administrative cost savings plan that you announced this morning. My question essentially is both the sale of the planned sale of the Americas business. You might have some remnant costs within the organization. So is the intention of these cost savings to essentially address some of those revenue costs? Or are these net positive numbers in terms of contribution to the earning?

I'm not 100% sure if I got this question, but the numbers we are communicating are all completely without OU Americas. So when we are saying we're taking EUR 60 million out coming from EUR 200 million to EUR 140 million, this is the remaining K+S without any administrations from the OU Americas. Did that cover your question?

No. Typically, most companies, when they sell one of the big businesses, they talk about random costs, which are costs that, for instance, some of the common services costs might have been assigned to Americas unit, which unfortunately might not go with the business because it is still within K+S. So my question is, will this EUR 60 million primarily offset some of those costs which are not necessarily going with Americas, so they might be assigned to Americas at this point or are these actual net incremental savings on top?

No, I got it. So the Americas is very independent already. They have all services they need in Chicago and in other locations in the Americas. We only had, if you wish some strategical SG&A costs here to run the business and to integrate the business in the group. So there will not be much of those costs that you're focusing on close to 0 once the deal is closed.

We do have another question coming through from the line of Tom Wrigglesworth calling from Citi.

So my question is, could you just refresh us on your expected schedule of cash cost production for agriculture through the second half and the developments into 2021?

Tom, we were in the last call, still a bit more conservative than we would be today, I would say. We forecasted for 2020 in agriculture, right? Cost per tonne of about EUR 210 per tonne. And we saw a strong cost development in the first half despite corona. We saw record production levels, and this has, of course, both in Canada and in Germany. And I would dare today to say, when I look at the consensus which stands, I think, at EUR 207 or so, I feel comfortable that we can reach this number. And for 2021, it's a little bit too early to give this guidance right now.

There are no further questions coming through. So I'll now hand you back over to yourself, Dr. Burkhard Lohr, for the conclusion of the call.

Yes. First of all, thank you all for joining us today. And for these good questions. We are looking forward to seeing you soon, unfortunately, virtually. But as we learned, that works as well, until then stay healthy, and thank you. Bye-bye.

Thank you. That does conclude today's conference. Thank you for your participation, and have a pleasant day.