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

Ladies and gentlemen, welcome to the K+S Fourth Quarter and Full Year 2023 Analyst Conference. We hope you had a chance to review our posted slides as well as our documents available on the website. After some opening remarks by Dr. Lohr, we will directly jump into Q&A. Some technical notes. Please refer to our disclaimer on Page 2 of the presentation. Then a note on data privacy. As you know it, please note that the Teams session will be recorded, webcasted and be available as replay on our home page afterwards. People asking a question from the room or in the Teams session, 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. Welcome to our full year and Q4 earnings discussion. Overall, Q4 was a solid quarter with agriculture sales volumes of more than 2 million tonnes and a good de-icing salt business. We saw a very strong European and specialty demand in agriculture so that we could focus on Europe. In 2023, EBITDA reached EUR 712 million and was a bit above the midpoint of your forecasted range. Free cash flow reached EUR 311 million. Thereof, we will pay out 40%, which leads to a dividend proposal of EUR 0.70 per share to the AGM in May. In 2024, there are good chances that supply and demand on the potash market return to balance. We expect EBITDA to range between EUR 500 million and EUR 650 million in the 2024 financial year. At the upper end, we are assuming a price recovery overseas from spring onwards and rising agriculture sales volumes. In case of potash prices remaining at the current level overseas and going down in Europe, EBITDA could be at the lower end of the range. We will gain higher visibility on the price development during the spring season. The adjusted free cash flow should at least break even in 2024. The optimization of our existing business is focused on 2 projects. The transformation of our Werra plant and the ramp-up of our Canadian plant in Bethune. These projects will keep CapEx in the years 2024 to 2026 elevated. Afterwards, however, K+S will be stronger and more efficient than ever before on both sides of the Atlantic. And we can benefit much more than before from the potash price increases expected by external market experts.

Thank you very much. Now we would like to start the Q&A session. [Operator Instructions] This brings us to the first question from Microsoft Teams from Aron Ceccarelli from Berenberg.

Congratulation on the set of results, which was quite solid. My first question is on cost. You showed sign of relief in Q4. I would like to have a little bit of color around moving parts of the costs into 2024 from logistics to gas and also to wages, please?

Yes. Thank you for that question. As you know, we are hedging gas. So we have a pretty high visibility what the cost in 2024 will look like. And the nonhedged portion will be pretty good as well, as the gas price came down significantly. And we saw a favorable development in the freight cost segment as well, so that we expect both items together to be EUR 100 million below 2023. We have assumed a stable development in the other cost items besides HR costs. Here, we have a slight increase and we expect all the other items to be stable. Maybe there's a chance for some cost items to come down as well. But it's too early to adjust that assumption.

So SG&A, basically, I should expect flat year-over-year?

Can you repeat that, Alan?

Yes. So that means that you are expecting minimal wage growth and so SG&A should be flat year-over-year, roughly.

We have a 2% increase in 2024, already agreed.

Okay. My second question is on demand. Maybe it would be helpful if you can provide some color around the first sign of the planting season in the U.S., what you guys have seen in Europe as well, what you've seen over the last few weeks of February and the initial weeks of March, please?

Yes. So as you know, we are expecting -- not only us, the total -- the whole market is expecting higher demand in 2024 than in 2023. And the first weeks of this year underpins this expectation. Of course, that is not in all regions in the same magnitude. For us, very important is Europe. As you know, our market share has grown in Europe. And we are very happy to see that the prices are quite stable and the demand is higher than it was 1 year ago, still not on the volume that we saw in the past before the war but it's very promising what we are seeing. We also see strong demand in almost all other areas so that the assumption, as I said, that we will see in our expectation, we expect 4 million tonnes more demand in '24 than in '23. And again, the first weeks have underpinned that expectations.

A final one is on, if I may, is on supply. You said at the beginning of the call that you are expecting supply/demand to be pretty balanced. We usually focus on Belarus and Russia. So I would like to understand what kind of assumption you are making for supply for 2024. And it looks like there is also Laos bring in incremental capacity in 2024. I would like to understand if you consider that in your assumption.

Yes. I was speaking of 4 million tonnes higher demand and almost the same amount will be additional supply, mostly from Belarus and Uralkali, who have found ways to get the full capacity, not only produce but also in the markets. But with a total different setup than in the past, which is good for us because Europe, again, our home market is more or less safe and we can increase our market share. And yes, that is the main portion. You mentioned Laos but there's not much more besides -- on the other hand, Mosaic has announced that they would shut down 1 site. So I think it's a fair assumption to believe 4 million tonnes more demand and 4 -- roughly 4 million tonnes more supply.

The next question comes from Joel Jackson from BMO.

I'll ask some questions one by one. So I noticed the low end of your EBITDA guidance range, like you said, assumes that European prices -- potash prices fall but non-European prices stay the same. So your bear case doesn't assume any reduction in potash prices. Can you talk about why that's the proper bear case today?

Yes. Joel and thank you for that question. So the lower end -- you have already repeated correctly. We expect that this -- in this scenario, we expect the Brazilian price to be at more or less $290. And we have seen in the last weeks that the prices are recovering but you never know. It's -- 2 weeks is not long enough to describe a trend. And if this should be the case, that will have an effect on the European prices. So European prices would come down EUR 20 or 30. And that would be the scenario for the lower range or lower point of the range.

I mean, is there any reason why, like, when you talk about $285, $290, Brazil as being a low case scenario, so kind of spot, do you have any commentary on what you think cost curve is, Belarusian tonnes, Russian tonnes, your own tonnes? I mean that would maybe have some cost curve support to suggest that $285, $290, Brazil is a reasonable bar case if things would deteriorate.

Yes, it's always difficult to assume what the reaction of Belarus and Uralkali is in their cost calculation. But what we are seeing is that there are more or less -- that they are more reluctant to accept prices below $300. And we have seen the disclosure of Uralkali, which showed higher volumes but significant less earnings. And I'm sure they also want to make money. So more or less the $300 seems to be the lower end of a cycle. And assuming that this is more or less the price for the rest of the year, I don't know how probable it is, it's too early in the year. That is what describes our lower end of the range.

And then just finally, what should Bethune production look like this year? And maybe what might it look like in 2025? Just give us an update on Bethune operations.

Yes. After 2.1 million tonnes in last year, we expect more or less 2.3 million tonnes this year and we want to add 100,000 to 150,000 tonnes every single year.

The next question comes from Alexander Jones of Bank of America.

Great. The first one, just on the mix of sales. Can you give us any indication, particularly on the MOP side, if you're able to tilt your mix a little bit towards Europe and how that works out in terms of percentage of sales to Europe versus other regions this year, relative to last year?

Yes, Europe is a strong specialty market. So I would rather give you a flavor of the mix of the total -- of our total portfolio in the regions. And as Europe is currently a very interesting market and is a strong specialty market as well, we will have a European stake higher than 50%. That is our expectation for this year. We are currently not doing much into Brazil, might be that in the first quarter, we shipped less than 100,000 tonnes into Brazil, that shows you how flexible we are. And we expect the growth in 2024, not out of MOP but out of specialties. And that shows you how -- so we have the perfect footprint for the current environment. We have a strong European footprint and we have specialties. And that is what makes us optimistic for 2024.

And the second one, just on the dividend. You used to have a policy of EUR 0.15 per share as a minimum and then you changed that to a free cash flow payout. But I guess given your free cash flow outlook, 40% of free cash flow may be even below some of those prior flows. How do you think in that context about the dividend policy later this year and at this early stage, whether you'd put a floor on that, if free cash flow did come in close to 0?

Yes. As we announced, our dividend policy is that the basis will be the adjusted free cash flow for the calculation of the dividend. That is in the range, as we explained, between 30% to 50% and that should be also our strategy in the future. But we have to see where, finally the free cash flow will end at the end of the year and then we'll discuss in the Board and Supervisory Board. And finally, at the AGM, what the level -- final level will be but that should be also for the future in this range.

We have another question coming in from a telephone number. So I don't have the name behind it but I'm sure you will tell us. So I would now call the only dialed in telephone number who has raised the question. I think it's coming. Oh, it's Lisa. Okay.

Okay. I mean, in the absence of -- no questions from that number, let me just start with the 2 questions. I hope you can hear me. So I have 2 questions. So one, I mean, you said this sort of earlier in a conversation that Europe demand is not back to prewar levels. Why do you think that demand is not yet back to normal levels? I mean given your previously quarterly comments that European farmers have taken application holiday. So we've been for that last year. I'm just trying to understand here, is there a change in the underlying demand dynamics in European continent?

Yes. I'm afraid there are a lot of reasons, a lot of reasons for that. Some have some economical problems because they are growing products which have lower prices. Some effects come and I believe, especially from Germany come from the legislation, limiting the usage of fertilizers, which the focus of this legislation is nitrogen but also it has an impact on the other fertilizers. And I could raise a lot of reasons but the good news is that the demand is increasing year-by-year in absence of supply from Russia and Belarus, more or less, Belarus 0, Uralkali, only very limited.

Okay. And then the second question, I mean, can you please provide some details on the building blocks on that free cash flow guidance. I mean how much flexibility you have in terms of the CapEx spends? I mean, is the, pursuing the growth CapEx committed? And also, would you potentially use factoring to produce a positive net working capital inflow if needed?

Yes. When it comes to CapEx, you know that there is -- there are a lot of items that you could think of aside CapEx. Free cash flow, of course, if you talk about free cash flow, CapEx is one but our ability to act in the CapEx segment is limited but it's not 0. Then OpEx is something, then the duration of our receivables and payables is something, of course, factoring is also something. So have a big toolbox and we are sure that we would be able to safeguard a breakeven free cash flow even at the lower end. Nobody knows if it comes to the lower end but then we would be ready to use that toolbox.

And sorry, can I just quickly follow up on the OpEx comment. I mean how would you be able to leverage your OpEx? Could you just share some details on that?

Yes. For example, one big item is maintenance. So you can always shift some maintenance, if you early enough know that it has to happen. And so we have done that in the past already, so we can really safeguard the breakeven.

The next question comes from Tristan Lamotte from Deutsche Bank.

I was wondering if you could please provide some color on the margins in ag versus the margin in the Industry+ and then some of the moving parts on those margins into 2024 and the different cost items.

Yes. Traditionally, the margins in the ag business are much higher than Industry+ but we are quite happy to see that the Industry+ margins are on historically high levels. And we are working hard to remain them on the high levels. And of course, the margins in the ag business are very volatile. It depends on the potash price. In our discussion with the press, I have remind them that we came from $1,200 in the mid of 2022. That it's not that long ago, that we came down to $290. Who knows what the price will be in the course of this year. I'm quite optimistic that it will be higher than what we are seeing currently but it's too early so that the margin is as volatile as the potash price. But maybe to give you a number also, our strategic target -- one financial target is to have a higher than 20% EBITDA margin over a cycle of 5 years. And we have managed to achieve that pretty good in the past.

I think we now have the question from the line and I know meanwhile that it's Chetan Udeshi from JPMorgan. Chetan, can you hear us?

Yes, I can. Can you hear me?

Yes. Perfect.

Okay. Cool. Apologies, if this was discussed previously. But I was just curious, when you look at your cost bucket in the potash business this year, can you help us understand what sort of magnitude changes are you expecting in the energy cost because I do know you guys do hedge to some extent. So how are you thinking in terms of the cost buckets, whether it's energy, the logistics? And on the other side, maybe you have OpEx inflation from wages and maybe bonuses. So just how are you thinking broadly the cost buckets for your potash business? And then just coming to your...

Sorry, sorry, we said one by one. So I wouldn't -- start with the first one. Yes, we assume 2 cost items to decrease. That is energy, mostly gas and freight. We said both together will be a release of EUR 100 million compared to 2023. We achieved a hedging of less than EUR 40 per megawatt hours in gas. And we see that the unhedged part will be even below that. That was very favorable when we closed the hedges but it's much less than it was in 2023. We have a 2% agreement with the unions on wages, which is, in the current environment we have strikes and we have totally higher bargain agreements in other industries. So we are very proud on that. And all the other items, we have more or less -- we have assumed a more or less flat development.

So did you say EUR 100 million savings from energy and logistics this year?

Yes.

Okay. Understood. And the other question was, you didn't -- or maybe I didn't hear it but what are the conditions you see in your industrial business? Because there is, of course, the de-icing part but we also know the other industrial salt part, there is a correlation to potash pricing in that business as well. So how are you seeing the development in that business? Are the earnings in that business also likely to be down from last year?

We had a very good year 2023. We had a very good de-icing season in Q4 last year but we had an okay icing season in Q1 this year. And we are seeing a slight recovery of chemical industries. So the chemical salt should pick up. We hope to keep the prices on the high level that we have them currently and that is also true for the potash part of the industrial business. So we are very happy to have that business. It is a nice add-on to the ag business and delivers nice cash flows.

The next question comes from Konstantin Wiechert from Baader.

I just wanted to get back to the EUR 100 million savings in logistics and energy costs. What is the base tonnes basically that you have in there, just like on your range of 7.3 million tonnes to 7.6 million tonnes and also potentially with regards to logistic costs from the industrial segment as well. So yes, where should we put that on the high and low end? That would be my first question.

Yes. First of all, it's not only the freight part of the cost release, it's not only a matter of volume, we also see prices coming down, which is very important for our business. But the volume assumptions, when we give you a number, it's always the midpoint. So it's a midpoint between 7.3 million tonnes and 7.6 million tonnes that we assume for the guidance, it will be in total less -- total EUR 100 million less than in '23.

Okay. And again, on the industry segment, I think in the past, you always had about 600 kilotonnes of KCl 99% to the industry segment. And I was just wondering if you could also give some details on how this business was developing last year and what you expect for this year?

First of all, we can sell every single tonne that we have available. And the 600,000 tonnes is not so bad. So it's the volume actually -- really the volume that we are doing and that is our expectation for '24 as well.

And you expect to keep the prices there stable as well but I guess they have come down over '23.

Yes. That also depends on the -- so it's not decoupled from the ag business. So when we see rising prices in the ag business, then we also have a chance for higher prices in the Industry+ business.

So I think I still have a question from Tristan Lamotte from Deutsche Bank in the system.

Another one, please. I was just wondering if you could provide some additional context on price. So from my understanding, the bottom end of the guide for this year assumes the potash prices stay the same as today and you see this as a kind of low cycle price for potash. From what I can see, the Brazil potash price is still actually 5% above the historic price from 2015 to 2020. So I was wondering if you could provide some background on what drives the assumption that the current price is low cycle. What do you think is the floor price? And what are the drivers of that -- of this price being at the floor? And why couldn't it drop more?

Yes. First of all, the price assumption of the lower end is a little bit below the current price. We said in the mid of February when we put together our forecast, it was more -- $290 in Brazil. Now we are talking slightly higher prices. And we also said if this happens, then the European prices should come down as well. And I elaborated earlier on the capability of Uralkali and Belaruskali price-wise. And we believe, of course, this is only reading what our sales force is seeing in the markets but that is a very good indicator that the price below $300 is not -- there's not much supply, as we speak, for prices below $300. And that is the reason why we said that is a fair assumption for the lower end of the range. And to give you the full picture at the upper end of the range, we should see a price of $350 in Brazil. And the European price should be as strong as it is currently.

Currently, there are no further hands raised in teams, maybe here in the room. Yes.

[indiscernible]. Question on CapEx. Could you shed a little bit more light on the uplift in CapEx you are planning? And what is the phasing? If most of the CapEx will be done or will be proceeded in the coming year or '26 or '25?

Our CapEx level this year, what we expect is around about EUR 550 million. In the last year, it was EUR 525 million. We explained that we expect for the next 3 years, a level of round about EUR 600 million. A little bit of a ramp-up. You see that we now start with EUR 550 million over the years. But that's in line with our investments, we are planning with Werra 2060 on the one side and with the ramp-up in Bethune. And so you will see over the next 3 years, around about EUR 550 million our CapEx volumes we want to spend.

And there's no inflation behind this calculation [indiscernible]

No, no, we want to have this level.

I don't have any further questions from Microsoft Teams. And if there are no further from the room, we would hand over to you for the closing remarks.

I close, as I always close. First of all, I thank you all for being dialed in or even present. It's very important for us to be in touch with the market and the analysts. And now we are going on the road. We will have road shows and hopefully see you -- many of you personally and we can then answer much more questions. But you see that we are cautiously optimistic that 2024 could be, maybe will be a good year. Thank you and goodbye.