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

Ladies and gentlemen, welcome to the K+S Second Quarter 2023 Earnings Call. We hope you had a chance to review our posted slides as well as our Q2 documents available on the website. After some opening remarks by Dr. Lohr, we will directly jump into Q&A. Just some technical notes. Please refer to our disclaimer on Page 2 of the presentation. Then a note on data privacy, please note that the Team session will be recorded, webcast and be available as replay on our home page afterwards. People asking a question in the Team session have to be aware that by turning on the camera and microphone, they give consent to saving and replaying video and audio sequences. Now I'd like to turn over to Dr. Lohr for the opening remarks.

Thank you, Julia. Good morning, everybody, and welcome to our Q2 earnings discussion. After my opening remarks, we will directly start with the Q&A session, and I will answer these together with my colleague, Christian Meyer, our CFO. We have good news for you. The potash market finally found the bottom and the worst is behind us. We thought that we would see the turnaround already with the Chinese contract, but MOP selling price in Brazil initially continue to fall and only, but finally bottomed out at the end of the quarter. If the positive demand and price trends continue in the further course of the year, EBITDA would reach the upper end of the EUR 600 million to EUR 800 million range. Free cash flow will see a significant working capital inflow and therefore, a range between a strong EUR 300 million to EUR 450 million is what we expect. So -- and now we are ready for your questions, Julia?

If you would like to ask a question, please use the hand signal in Teams and write your name and the name of your research house in the chat function. We will then call you individually, and you can address your questions to us live. Please switch on your camera if you start asking a question. One more request, as usual, we would like to answer your questions one by one. So if you have multiple questions, please ask 1 question at a time, and we will answer it first. After that, you will have the opportunity to ask other questions. This brings us to the first question of Markus Mayer.

Can you hear me?

Yes, we can hear you. Now we can see you as well.

Very, very warm welcome from Munich. I have 1 question to the free cash flow guidance range. You have basically nearly reached the lower end of your guidance range. Can you help us understand how to come to the midpoint, still EUR 100 million I'm missing of the EUR 550 million CapEx guidance, you have already spent, I guess, it was around EUR 200 million, so it's still something to come. And also with this indication over the quarters of EBITDA would be helpful to get average here.

Okay. If -- you really answered -- nearly answered the question. If you start by the midpoint of the EBITDA of around about EUR 700 million, then you reduce the CapEx that will be higher in the second half, round about EUR 550 million we expect. Then you deduct the taxes, then you see that we need a working capital effect of around about EUR 330 million to EUR 350 million. And -- so then you can calculate the expected midpoint from our side. So these are the main effects. Finally, if you have a look at the higher CapEx, we will spend in the second half of the year. So that's...

My question was more related to the assumptions on prices and volumes for the upper and the lower end of the guidance range.

Okay. Okay. Then -- and you also asked for the development of the quarter 3 and 4, if I remember.

Yes, exactly.

So -- what I'm saying now is true for the range, EBITDA and free cash flow, of course. At the upper end, and that is what I indicated is possible still. We expect that the prices continue to rise as we see them rising currently for the rest of the year and that we will be able to sell roughly 2 million tonnes product per quarter. That is -- would be 2 strong quarters in volumes, but volumes that we have even exceeded in the first, so possible. If we look at to the midrange, then we see lower volumes and prices is still rising, but not as strong as in the upper range assumption. And the lower end assumption would even mean that the prices would come down again. I personally believe, as we see the indications in the market that this is more or less probable, but it's not the probability of 0. And when we come to the quarters, one thing is, of course, for sure, we will have, like always, maintenance breaks in Q3, and we start into that quarter 3 with low pricing. So the third quarter will be significantly weaker than the fourth quarter in our assumptions. Does that answer your question?

Yes.

That was all your questions, Markus. Then I'm asking Thomas Swoboda from Societe Generale.

Yes. I have 2 questions. The first question is on pricing and how fast does it drop through your P&L? On the way down, the drop-through was almost immediate. I think that was one of the things that surprised us. How should we think about the delay going up?

Yes. We are on the way back to normal. What we have seen over the last, I would say, 18 months was really not normal in any way in terms of high pricing, the speed where prices came back, the shyness of the customers wait -- the time where the customers fall into a wait-and-see behavior, but now we are back to a normal behavior. And that means we expect what we sell now in Q3, at least until the mid of Q3 will run in the P&L of the fourth quarter.

Understood. My second question is on specialties and the volume weakness in Q3, you also say in your press release that you are optimizing your production. Is the weakness in demand, something structural? And is -- are those production measures are somehow related to the specialty situation or is this related to drought in Europe?

Now first of all, we had demand and sales volumes, which were significantly below our expectations. And that, of course, had an impact on capabilities to produce because warehouse volumes are limited. That was one impact. And then we have seen MOP and Korn-Kali in Germany is now running very well. SOP and [indiscernible] is still -- we see they're picking up but much slower, and that is the reason for other adjustments as well. Adjustment does not mean stopping production, but focusing in our sites, especially Werra, Neuhof different and taking some measures to support the development in the markets.

The next question comes from Christian Faitz from Kepler.

Yes. A couple of questions, please. First of all, can you remind us of the -- or can you give us an update on the harbor strikes in Vancouver and how that affects your volumes out of Bethune potentially? And in that context, how flexible would you be to ship potash from Europe to Brazil rather than the usual, what is it, 1 million tonnes or so of Bethune volumes to Brazil? That is my first question, then I'll have the second one.

Okay. Thank you, Christian for that question. It's an important question because we have always said, as we are the only producer in 2 continents, we are more flexible than others. And this shows now if we can prove it now, the strike is over. It was for Canadian fares quite long, but it's over. We have not seen any impact on Bethune. And we are very flexible to use other harbors. Our logistics, our supply chain did a marvelous job. And I personally believe that we will not have any impact. There's a remaining risk because there are miles of railcars waiting for be unloaded in Vancouver that could have an impact when it takes longer than expected. But as we have shown, that flexibility already during the strike, I don't believe that there will be a negative impact. And yes, we are, of course, and not only able, we are doing it. We are shipping volumes from [indiscernible], meaning Germany via Hamburg to Brazil.

All right. Very helpful. Then I have a second question, a modeling question. Maybe you can help us. In terms of EBITDA sensitivity, I mean, if you took the current costs now, everything else being equal from here on and potash prices moving by, let's say, $10 per tonne, how much impact would that be on your EBITDA annualized roughly?

So that would not be enough to reach the upper end of the range. So we are assuming a much stronger price recovery. But I guess...

I mean if you could get like a ballpark figure for every $10 price move, that is your EBITDA sensitivity annualized roughly?

$10. So we are expecting 4 million tonnes sales volume. And if you take $10 on 4 million tonnes, you're pretty close to it.

Yes. But this is for the second half, the annualized number is a bit higher and also considering the product portfolio, but yes.

Yes, yes.

The next question comes from Andreas Heine from Stifel.

Actually, I have 4, but very short. I'd like to start with European season. So you said it is strong. Is that what you expect? Or is that what you already see, the season I think in Europe, has not started yet the autumn season as we are in the summer period. Is that what you were talking about, what you have, what you already see in your order books? Or is that your assumption?

Now we see it already. We have adjusted our prices a couple of weeks ago already, and we have seen strong reaction on that. And now we have even to -- we are quite shy with public announcements to be sold out, but I think that is the right phrasing for Europe. So supply chain could not do more what we currently have in our books for Europe. And we are quite happy about that, especially Korn-Kali in Germany and MOP in the rest of Europe. So we are almost back to normal demand and you know how weak the demand was, especially in Europe. So that is really a good trend that we are seeing.

That was first. On specialties, also here going into the second half, do you think that then the split will be different specialties and MOP. And what do you expect in this terms for the SOP premium over MOP?

Yes, we expect and work on that to have a normal premium by the end of the year again. But we are quite reluctant with -- so in our assumptions, we are cautious with volumes because we see a big customer for us is a European NPK industry, and they are coming back, but slowly. So we are cautious for the rest of the year in terms of SOP, but there is also a positive trend, but it's lower and not in that speed as the MOP development currently.

Okay. That brings me then to the third question. You talked about normalization of the market. I don't know what the last really normal year was. 2021 was a very strong one and '22 and '23 volume wise less so. What would you say if 2024 turns out to be normal. What would you say, is there a normal market volume next year?

So we discussed in the team earlier that it's too early -- August, we have August too early to indicate anything for 2024. And I think I should keep to that promise that I gave.

That's why I didn't want to ask for a forecast just what is normal. But you're right, I might have taken this and as a forecast. Last point. Last point is on costs. Well, it's again, a '24 question, of course. What we're seeing this year on the cost side, you are hedged, and that's what you have said already on the energy side. Other costs like material costs, trade rates and service costs and so on. I would assume that all of them come down. Is it fair not talking our numbers that we can expect a normalization, so to speak, lower unit cost next year than this year.

Yes. I think that is not giving a guidance when I elaborate on costs, especially as -- we have 2 -- the 2 biggest items are HR and gas. HR costs, of course, will not come back. We have -- but already fixed a 2% rise for 2024, which is, I think, appropriate. And we have already fixed 80% of our gas consumption for 2024 on a price level below EUR 40 per megawatt. So this is definitely a decrease. And other items, yes, I see the industry -- the industry is coming down, and it's a fair assumption to expect that all other cost items are rather lower than higher in 2024 than 2023.

I have no more.

The next questions come from Alexander Jones from Bank of America.

Great. Two. I'll take one by one. The first, just to follow up on costs on personnel expenses. I think in the quarter, it was up 14% year-on-year. Could you give us a bit more color on that? Was that related to maintenance, FX? Think there's slightly more than the labor inflation rate you've been guiding for the year.

14%.

Yes, you are referring to unit costs, Alexander. Is that right?

To the absolute personnel expenses in the P&L, I think it's up from something like EUR 207 million last year to EUR 237 million this year.

Okay. We had some extraordinary items which were paid in the second quarter. But for the full year, it levels out on around 8% increase. So it's -- if you only look into the quarter or half year, you will have a higher number, that's correct. But the full year HR cost increase is 8% and next year, 2%.

And only 4% of that 8% are one-off and 4% are remaining. That's also important...

Great. The second on the market. You talked a little bit about some of the regions, but I guess, Southeast Asia might be one region where demand has taken a little bit longer to come back. Can you talk any sort of what you're seeing there and when you might expect an uptick in that region as well?

Yes, you're correct. That is currently the only region where we are not seeing a significant uptake of demand. And in addition, it's a region where a lot of Belarusian and Russian product is placed. That's why we are shy to expect here big movements in the next couple of weeks or months, and that is not part of our forecast, strong Southeast Asian business.

The next question comes from Rikin Patel from BNP Exane.

Just 2 follow-ups. Firstly, on demand, and I appreciate it's tough to give a view on next year. But I think one of your Canadian peers said last week that they expect mid-cycle demand of about 70 million to 75 million tonnes. Is that something you would describe to as well? And if so, what sort of gets you to that number?

Yes. I'm. Sorry, again, I don't want to elaborate on the potential market volume, market volume in 2024. We can talk about that in our November call, but not now. Sorry.

But my question was more sort of mid-cycle. Do you see demand recovering back to sort of 70 million to 75 million tonnes?

Yes. The big question will be -- will the supply be a limiting factor? If there are still 7 million to 10 million tonnes missing from Eastern Europe, then the demand of the -- in this range is impossible. And so it's very tricky and difficult to put all pieces together because that is currently a little bit underestimated. We have between 10% and 15% of a normal demand missing in supply, and that is -- that's why I'm shy to answer that question.

Okay. Understood. And secondly, just following up from earlier around sort of the Q3 dynamic. I think you mentioned the time lag is now widening with sales been sort of just in time in Q2. Can you maybe give an indication on where you see earnings going in Q3 relative to Q2? Should you be assuming sort of a marginal step up sequentially and then a bigger step-up in Q4?

Yes. That will definitely be the case. Again, and that is important. So I'm grateful for that question, give me the chance to again point out. We have 2 effects in Q3. In early July, we had the weakest prices. We said bottom was met at the end of the quarter. So we started with weak prices. Now we are in August, seeing prices rising and we expect to continue them. But compared Q3 to Q4, prices will be significantly lower in Q3 than in Q4, and the production volumes due to the maintenance break. All our sites will have the maintenance break. And that will, of course -- that's normal that we have every year, but that will have also an impact on EBITDA. So if we look into the midpoint, there's another EUR 220 million EBITDA to come and a midsized double-digit number will be expected in Q3, the rest in Q4.

The next question comes from Aron Ceccarelli.

I joined late, so apologies if my questions have been already asked. I have one on China with Belarus and Russia, rerouting most of their volumes there, would you be able to some color about inventories in the region and how this could impact global prices? And the second one would be on Brazil. We got industry data suggesting that for the first half, volumes were down 10%, how do you see them going into the second half?

Yes, to China, we see also a pickup in demand in China. And that means that there is enough room for all suppliers to supply into China. And we also see that the Chinese are not keen in only having Belarusian and Russian product, but the market is so big that we all will ship into the market even on that price level. We ship from Bethune, less than normal because netbacks are higher in other areas, but it's an important market and message is very positive. Demand is picking up. And the assumption that the next Chinese price is a higher one is a fair one from today's perspective. Brazil was...

Yes, it was 10% down in the first half, how will it be in the second half?

Yes, Brazil has a perfect environment. They will have a strong harvest. They have high prices for their products to farmers. And we believe to see a very strong second half. So it could -- yes, could match what we have lost in the first half.

Right now, I'm not seeing any further questions. Does anyone want to raise their hand and ask the question? Yes, there is another one. Lisa De Neve from Morgan Stanley.

I'm sorry, I can't put on my camera. I apologize, so that doesn't allow the MS system to do that. But I just have one. I'm aware you're not selling huge volumes into India normally. But what is your view that in your contract hasn't really been formally resettled. Any thoughts you have on that would be great.

Final question is a tricky one. So India is an interesting story. We know that they have negotiated very, very long for the old contract. And then they found out that prices have fallen further and start a new negotiation round. And until today, there is still no end. Now prices are picking up again. And obviously, the negotiations are always following the current market trend. So I have no idea when they come into the market with a new price. But the longer they wait, the higher compared to China will be the Indian price. I just elaborated on China on the import of the Chinese market. India is another animal, if you wish. So we are able to avoid Indian shipments if the prices are not fair. And currently, we are not doing much.

I have 1 more question from Christian Faitz from Kepler.

Yes. Just a small follow-up question on your customer segment industry. It looks like a very solid performance. I would hope and believe also on the bottom line. Can you differentiate between the various end customer industries a bit and how you see prices holding up into the second half of this year?

Yes. Thank you for that question because we -- as we did today, we usually only talk about the agriculture business, but the industry PLUS is a very nice add-on. And as you know, a mix from salt business and potash business. We have seen potash prices following the market trends, so coming down a bit. And now we expect always a bit of a little delay to see prices increase in the segment as well. The potash products run into very -- many segments, industrial applications. The salt business is still a little bit driven by desalting -- de-icing salt business, which is currently not a big issue. What we are also seeing is that the chemical industry, which is a key player for us, is weakening. But all in all, taking that into account, we are very happy with the performance of the industry PLUS business, and the margins are on a very healthy level.

Very helpful. Thank you, and good luck for H2.

Yes. We don't have any further questions.

Yes. I say thank you for the participation. We had no big surprises today as we announced our numbers earlier, but you see the team being optimistic, and we are looking very forward to see you on the road show or whatever. And we wish you all the best. Bye-bye.