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

Ladies and gentlemen, good morning, and welcome to our Q2 video conference. We are delighted about the great interest. This is already the second time we hold this event via Microsoft Teams, so we look forward to work with you in this format. I would like to welcome our Chairman of the Executive Board, Dr. Burkhard Lohr. Dr. Lohr will present the highlights of our second quarter 2021 and give an outlook for the current year. I would also like to welcome Thorsten Boeckers, CFO of K+S, who will be available for Q&A together with Burkhard Lohr. Before we start, a few technical notes. This conference is webcasted live, and the replay of the webcast will be available on our website afterwards. After the presentation of Dr. Lohr, you will have, of course, the opportunity to ask questions. [Operator Instructions] With that, we'll get started, and I will hand over to our CEO, Dr. Burkhard Lohr.

Thank you, Dirk. Ladies and gentlemen, welcome to our Q2 call. Before we start with the results, I would like to highlight some achievements of the last quarter. And here, therefore, please move to Slide #3. With the successful closing of the sale of the North and South American Salt businesses of April -- on April 30, we received net proceeds of around EUR 2.6 billion and realized the book gain of EUR 742 million. With the proceeds, we reduced our gross financial debt. In May, we already paid back our drawn credit facility, maturing promissory notes, commercial papers and some credit facilities with a total amount of over EUR 1 billion. Additionally, we offered a buyback program for 3 of our 4 bonds. We targeted a buyback volume of EUR 450 million and achieved a good EUR 100 million more, making a total of EUR 560 million. Finally, the KfW facility had been terminated, which had never been drawn. In total, we achieved a reduction of gross financial debt of around EUR 1.7 billion within 2 months after closing the Americas transaction. Therefore, we could significantly improve our balance sheet and made it much more robust. The leverage improved to a sound net financial debt-to-EBITDA ratio of 2.0x by the end of the second quarter compared with 12.3x at the end of last year. And the equity ratio furthermore improved significantly to 48% coming from 27%. And now please turn to Slide 4. In addition to operational topics, K+S has also taken social responsibility. Until the end of July, our employees and family members at the German sites received more than 3,500 vaccine doses against COVID-19. This is our contribution to the German vaccination campaign. And now please turn to our Q2 results on Slide 5. Looking at the results of the continuing operations, we achieved higher revenues and a significantly higher EBITDA year-on-year. The higher MOP prices since the beginning of this year are rolling into our P&L step by step. In agriculture, the average selling price was moderately higher versus the level of last year's Q2 and also compared to Q1 this year. In total, the increase was higher than we expected before. We saw a strong demand in the Agriculture customer segment. And together with higher product availability, this led to additional sales volumes of more than 100,000 tonnes. In the Industry+ customer segment, we saw a normalized demand for chemical and industrial applications after the lockdowns from last year's Q2. Together with the good early fill season for de-icing, we increased sales volumes by nearly 300,000 tonnes. Combined with strict cost discipline and positive effects from currency hedging, able to more than compensate higher prices for freights and energy. So EBITDA has more than doubled versus prior year to EUR 112 million. Following our impairment on potash assets last year, we will see value fluctuations on these assets quarter-by-quarter. Because of higher potash prices with a positive effect and higher capital costs absorbing parts of this, we increased the value of our potash assets by another EUR 147 million in Q2. Adjusted free cash flow was impacted by higher interest payment due to our bond buyback program. We also had further cashouts for the SG&A restructuring project. Accordingly, it amounted to minus EUR 68 million, including the positive cash flow from the Americas operations until April, it reached minus EUR 24 million. Please turn to Slide 6 for a closer look at the agriculture markets. Since summer 2020 -- observed significantly rising prices for the main crop commodities. Falling stock-to-use ratios, mainly on the corn and soybean have triggered this price development. In the last weeks, we saw some smaller declines from the peak prices, but overall, these price levels, multiyear highs. With higher agriculture prices, farmers' income and their prospects have improved significantly. Along with strong demand, farmers switch from a cost minimized to a volume optimized mindset with still very good affordability, despite higher input costs. As a result, we see a very good potash demand in all regions. The tight supply situation is a limiting factor worldwide volume growth. Now please turn to Slide 7. Especially in June and July, prices in Brazil and the U.S. rose sharply, and Europe as well as Southeast Asia followed this price trend. Based on an already strong demand, concerns on supply from Belaruskali due to sanctions and the shutdowns at Esterhazy K1 and K2 further boosted price increases. We expect the sales volumes worldwide on the record level of last year of about 76 million tonnes, including 5 million tonnes of specialty. Further volume growth will be limited to the tight supply situation. The average selling price for our agriculture customers increased significantly year-on-year. Please turn to Slide 8 for the Industry+ customer segment. Started into 2021 with the strong performance of our de-icing salt business. Due to the favorable winter weather, the customer inventories were quite low. This had a positive impact on the early fills business in Q2 with higher volumes compared to last year. Just to remind you, last year's Q2 was hit by the first lockdowns due to COVID-19. In this year's Q2, we saw a strong recovery of the economy, and our products for chemical and industrial applications benefited with higher sales volumes of around 200,000 tonnes year-on-year. Now please move on to Slide 9, and let's talk about our outlook for the current year. I'm sure you have recognized our ad hoc announcement from last Tuesday with a strongly increased guidance on EBITDA. I've already described the positive market environment for fertilizers. We are, therefore, optimistic to achieve strongly higher average prices for our agriculture portfolio year-on-year. We continue to expect sales volumes in the Agriculture customer segment to rise to more than 7.5 million tonnes. After the good winter, we expect still more than 2.6 million tonnes of de-icing salt sales volumes for the year as a whole. The notable savings of the SG&A restructuring cannot fully compensate for the overall rising costs, especially for freight and energy. Overall, we expect EBITDA from continuing operations to increase to a range of EUR 700 million to EUR 800 million, which is EUR 200 million more than our -- in our last guidance. This continues to include the one-off gain of around EUR 200 million generated at the closing of the REKS joint venture [ expect ] this closing in this year, but now in Q4. Our adjusted group earnings from continuing and discontinued operations are meanwhile expected at significantly more than EUR 1 billion. But we also expect a 3-digit million amount from continuing operations. Our adjusted free cash flow, including the cash in from the sale of operations until -- unit, sorry -- will be significantly above EUR 2 billion. Our free cash flow without these proceeds for 2021 is still be expected negative, but now on the level of the prior year. Last but not least, I would like to inform you that Julia Bock will take over as Head of Investor Relations. You all know Julia for quite a while. She has more than 10 years of experience in our IR Department and 15 years at K+S. On behalf of the entire Board, I wish her great success in her new role. She succeeds Dirk Neumann, who will take over as Head of Corporate Development at K+S. The Board thanks Dirk for all his efforts and wishes him great success in his new role as well. Ladies and gentlemen, this concludes my presentation, and we are now happy to take your questions as usual, one by one, please. Operator, please open the line for the Q&A session.

[Operator Instructions] This brings us to our first question from Lisa De Neve.

Can you hear me? Just checking.

Could be a little bit louder. Good morning.

Can you hear me now?

Yes. Yes.

So I have 2 questions. I will ask them one by one. So the first one is, can you please outline your free cash flow guidance for this year? So I'm particularly interested how we square this EUR 200 million EBITDA upgrade with the sort of mild upgrade to the guidance. And I wonder what factors have changed in there because the CapEx guidance is unchanged. So I'm just trying to understand how the drop-through works?

Yes, Lisa, it's going to be a little bit longer answer, but I think it's important to consider the following items leading to this cash flow guidance. First of all, I want to say, we expect more than EUR 2 billion cash flow, but I know what you mean. You mean the continued operations. And when we think back in March, it was, I gave you the guidance that the cash flow will be somewhere between minus EUR 350 million and minus EUR 400 million. And we raised the EBITDA since then by EUR 300 million and the same drops down to the EBITDA. What we also shouldn't forget is, the EBITDA increase is back-end loaded, so the CapEx is. So the big payouts are ahead of us. And then we do not have the same timing when it comes to P&L income and cash realization. And what we also shouldn't forget is, we have a couple of one-offs in the cash flow. This has nothing to do with the bridge from last guidance to this guidance because this didn't change. But you need to consider the one-offs like the REKS transaction, where we expected EUR 200 million income on the P&L, but only approximately a EUR 90 million cash inflow after closing. Plus, we have this year, the SG&A payout. So the cash costs for the program we have started and executed last year. We have bought back bonds. We have also the finalization of a tax audit. And all of this sums up to more than EUR 100 million of one-offs that are not recurring. I hope this answers a little bit the question how we come to the cash flow guidance and why we don't see a positive number yet.

The phasing definitely helps. And the second question is then, we noted across the sphere, and it comes from MOSAIC, Israel Chemicals and so forth, that quite some volumes have been sold forward. And I'm just trying to understand, have you also sold volumes forward? Can you give some guidance on how much you have sold forward? And how should we think about sequential price increase for you in terms of average selling prices versus what we're seeing in the market?

First of all, we are very happy with the current price development. I gave in my speech the reasons why we see that, and we believe that this is a sustainable development, a development, which would -- should carry into 2022. Yes, there have been some forward deals. We did some as well for the first quarter of 2022, but only small volume, 100,000 to 150,000 tonnes around that. That was early this year. So on a -- from today's perspective, on a low price level, but again, a small number -- and only Q1 '22.

And then we come to the next one to Christian Faitz, please.

I was wondering about the, let's say, your own potash price evolution. I take it, obviously, that you are bound to longer-term contracts. Can you remind us of your contract structure for a typical large customer such as NPK mix up? And when would you see more pronounced price increases coming through for your potash portfolio?

Thank you, Mr. Faitz for your question. Usually, we have a delay between 3 and 4 months between contracting and having the effects in our P&L. And as Thorsten earlier said, the delay between the contracting and the cash in is even longer. And so the first quarter has not shown any significant price effect. We have seen the first effect in Q2, but we should expect a significant development for Q3 and especially for Q4. And this nice price development in Q4 will lead to free cash flow impacts -- positive, of course, in 2022 and not in this year anymore. That's why we have not -- could not take it into account for our free cash flow guidance.

Second and final question. Just pecking on your operations. Everything is running smoothly in Bethune and in Europe?

It's a fair question, because it has not been the case all the time. But, yes, we are very happy with the development on all our sites. And yes, that is one reason why we could increase our sales volumes because we have the product available. And it's a perfect timing because now with high prices we are able to deliver the markets with the volumes, and it looks pretty good.

The next question is from Mubasher from Citi.

Just coming back to the free cash flow bridge. If we look out to 2022, we've already noted some of the one-offs that we've talked about in 2021. But if you look at next year, are there any significant one-offs we should be aware of? Or should we see many of these kind of negatives that we're seeing in '21 unwind? And therefore, the free cash flow being significantly positive compared to where we are now. That's the first question, please.

Not going too much into detail on the '22 guidance today. But I mentioned the one-offs we have, the cash payout for the SG&A program -- this is not recurring. The bond buyback we did this year is not recurring. And we wouldn't expect the other one-off, I mentioned, the settlement or the agreement -- the payment from the tax audit either again. So there is about EUR 100 million just from this one-offs, which will not be recurring. And the effect of the bond buyback is, of course, that we save interest costs next year. And together with the bonds, we are paying back in this year, it's only one bond outstanding in the amount of EUR 500 million in December. So we would save another EUR 30 million - EUR 35 million at least in interest cost.

But there's no significant one-offs that you're already aware of that could impact the 2022?

That was important part of the question that we are aware of, no.

And just the second question, just a bit more kind of at the market level. There's been some news flow around the sanctions and stuff, and then there's kind of -- just trying to get your feel for how you think the market is developing. You talked about the stocks-to-use ratios are quite low, but going into 2022, you talked about -- or would you talk about the volume optimized mindset that the farmer has. Do you see that continuing? Or do you see into 2022 as we go in that the market loosening a little bit and then coming back -- the potash prices coming back from the peak levels that we're seeing at the moment?

Yes. I said earlier that I expect to see that development running into 2022. So this is not only a short-term effect. And we are -- luckily, we are not seeing a development as we have saw it back in 28, 29. Prices have found a plateau on a high level, which is very good. And on this level, it's still affordable for farmers to buy our products. There is not too much in additional volumes running into the markets. If there would be some, it would be absorbed. So to sum it up, we can expect that we will have some good quarters in 2022 as well. That doesn't mean that it will end in 2022, but I think it would not be serious to try to predict the development in the market for more than, let's say, 3, 4 quarters.

Now we have a question from our webcast system from Andreas Heine from Stifel. How is the agriculture volume commitment you already have for Q3 and Q4?

[Technical Difficulty] thing on the well-known market price values. And this, as known, has picked up significantly in Q3 and in Q4. Q3 is completely signed, and we have started contracting good parts of the October, and this is normal course of the business. So November and December is still open, but [Technical Difficulty]

Then another question from Alexander Jones from Bank of America. Can you please give us a sense of the updated freight and energy cost trends for this year? And how much will be offset by restructuring savings?

We expect for this year -- but this is baked in our guidance, of course -- an additional EUR 30 million to EUR 40 million negative effect both from energy and from freight. And we have [Technical Difficulty]

Restructure of the holdings, what is the positive effect on that side?