K+S Aktiengesellschaft ($SDF)

Good day, and welcome to the K+S Full Year 2025 Earnings Call. My name is Barbara, and I'll be your Evercall webinar host. I would now like to hand over to Julia from K+S for some technical notes. Julia, you may now begin.

Ladies and gentlemen, also from my side, welcome to our call. We hope you had a chance to review our posted slides as well as our full year documents available on our website. After the opening remarks by Christian, we will jump directly into the Q&A session. Some technical notes. Please refer to our disclaimer on Page 2 of the presentation. A note on data privacy. Please be aware that the Teams session will be recorded, webcasted and available as an audio replay on our homepage afterwards. People who ask a question in the Teams session should be clear that by switching on the camera and microphone, they agree to the recording and replay of video and audio sequences. Now I'd like to hand over to Christian Meyer, our CEO, for the opening remarks.

Thank you, Julia, and to welcome from my side as well. Starting with the quarter. Q4 EBITDA was 17% above the prior year quarter. Therefore, we reached the upper half of our full year guidance range. Firstly, this was due to better prices in both customer segments. Secondly, EBITDA was affected by a higher drawdown in inventories than last year. This resulted in a negative EBITDA effect, which was overcompensated by a positive FX effect due to our hedging. Full year free cash flow reached EUR 29 million. Full year CapEx, EUR 546 million. In accordance with our dividend policy, we pay out 43% of our free cash flow and therefore, propose a dividend of EUR 0.07 per share to the AGM. In the Q4 impairment test, we saw a value recovery over EUR 484 million. Just to remind you, as long as we remain below the book value, there will be fluctuations with even minor changes in the parameters due to the long term of the valuation model. Regarding our full year guidance, we expect global potash demand to rise again this year, following full capacity utilization in 2025. Potash prices are tangibly higher year-on-year, which will benefit Q1. Further developments will depend on the course of the spring season when demand from many regions must be met simultaneously. Demand for non-de-icing products in the Industry+ customer segment is also likely to develop positively overall in the current year. Here, we continue to expect moderate price increases for our salt products. You have all witnessed the exceptional and prolonged winter weather we experienced in January and February throughout Germany and large parts of Europe. This has resulted in a significant upturn in our de-icing salt business. Therefore, we expect significantly stronger sales volumes than in 2025, assuming average winter weather in Q4 2026. We expect EBITDA to range between EUR 600 million and EUR 700 million. This translates to a midpoint above the 2025 level due to higher potash prices in Q1 and the strong de-icing salt business. Free cash flow should at least break even again despite elevated CapEx. For the upper end of the range, we would need an agricultural volume of 7.6 million tonnes, excluding trade goods and a moderate price increase for MOP in Brazil during the spring season. This has to spill over into other regions and product groups and hold up during the second half of 2026. The lower end would work with a volume of 7.4 million tonnes and prices at the level of the end of 2025. Just to give you some thoughts on the first quarter, which should see a better EBITDA than in 2025. We anticipate positive effects from our strong start in the de-icing salt business and higher potash prices. However, negative effects arise from the fact that Q1 is the last quarter with an effect in the year-on-year comparison due to the collective bargaining agreement, as well as from the significant inventory buildup that benefited Q1 last year. In closing, I would like to briefly outline the outlook for the future beyond 2026. We will position K+S as efficiently as possible in terms of resource allocation, structures and processes to make the company even more robust also regarding costs. We also want to direct attention to our second pillar, the salt business. In addition to the potash business, the European salt market has undergone structural changes due to the permanent loss of Ukrainian capacity. Therefore, I would like to clearly state that salt belongs to our core business. We are focusing on operational improvements as well as further developing our product portfolio and market position. Now I'm looking forward to answer your questions together with my colleagues, Jens and Julia, and I now hand over to the operator to start the Q&A session.

[Operator Instructions] This brings us to our first question. It comes from Christian.

Christian, Jens and Julia and team, just 2 questions. So I'll ask the first one and then wait as asked for. So looking at weather data we had actually -- can you hear me?

Can you put the camera on, Christian?

I can't put the camera on for some reason. I cannot unfortunately.

You can try, Christian. I believe that your camera has been activated.

Alright. Now you can see me in all my beauty. So yes, first question. So I believe looking at current weather data, we had a relatively early start to the, let's say, at least growing season in Europe in the Northern Hemisphere. How -- what are your salespeople telling you about current demand, how that is happening? And also, can you maybe make some comments about in that context, farmer profitability. Farmers are squeezed. I know that farmers are complaining all the time, but they are complaining. So how is potash demand panning out at this point in time?

Yes. So the potash demand, there we see a good demand as our competitors has announced that they are fully sold out for the first quarter, okay, it's already at the end. And that's also the situation for us. And also for the first weeks in the second quarter, where we also have a good demand and that we see more or less globally. And the affordability of the farmers, that depends on the different regions. In general, we can say that the farmers are still earning money with some ups and downs. And if you, for example, see the current palm oil price levels, that's a good and healthy level. And as you know, that's a potash eater crop, there we see also strong demands.

Okay. Perfect. Now my second question, I believe at the end of -- or at the Q3 reporting level, you mentioned the planned big maintenance for Bethune for '26. How is that coming along? And can you tell us about timing there?

That's in the summertime. That's every 3 years, there are 3 months maintenance. But we are on a good way to keep the production level or to increase it a little bit compared to last year.

And our next question comes from Ben.

Great. Ben Isaacson and my research house is Scotiabank. Good to talk to you all. I just have maybe a high-level question on just everything that's going on in the Middle East. I -- when we look at Q4, when we look at fall, we started to see a little bit of resistance to potash demand in some markets, whether it was in North America, a little bit in Europe. And so now we look at nitrogen that's kind of not doubled in price but moving meaningfully higher and presumably other input costs for the farmers such as diesel and whatnot will also move higher. How can we not -- I mean, do you not see a scenario where we could actually have a potash demand destruction in the back half of the year? And I noticed in your guidance, your guidance said that you've included or your assumptions take into consideration what's going on in the Middle East. So maybe you can start by talking about that. And what the guidance have been? Or how are you thinking about those paths for future demand?

Yes. Maybe make a real general picture. With regard to the situation in the Middle East, there are different stories that you can hear in the market. Based on the fact that the fertilizer prices increase, that the energy cost increase, normally, they say that you have a spillover effect also to the crop price, crop prices increase and then it's affordable for the farmers and makes sense to apply fertilizers. The others say, if the prices are too high, then the farmers won't buy any fertilizers, there you have no clear picture. At the end, I expect that we are still 8 billion people on the Earth that there will be a demand for food and that they will apply potash maybe with some volatility. But from our perspective, we don't think that this will have a real big impact on the volumes because we see a good strong demand in Brazil. We see a good demand also in Asia and in Europe and the U.S., we expect a normal level. And with regard to the situation in the Middle East, from our position, it's important to know that we have a real low exposure in this market. So that wouldn't be a problem to shift or relocate the volumes to other markets. And also for the logistics, from our perspective, as we have sites on 2 continents, we won't have big impact, maybe some increases for the oil price for the logistics for the ships that directly go into the real prices with the formula, but this is an impact for all competitors. So that's not a disadvantage, not an advantage for us. And from the region, that's correct. If you have a look to the Strait of Hormuz, 45% of the sulfur has to go through the Strait and it's blocked currently and also a huge volume of up to 30% of nitrogen is coming from this region. So that there are different stories in the market, what effect that finally will have. But...

Yes. Can I -- just one follow-up and then I'll pass it on. This may be difficult to answer. But on a regional basis, can you talk about which farmers or growers are in best shape and which ones are most at risk of seeing pushback, not necessarily to potash from K+S, but maybe just in general.

Yes. If you go through the different regions, as I just mentioned, U.S. and Europe, we expect a normal base. But if you have a look to Asia, especially with the palm oils and so on, the farmers have a good situation. U.S. farmers are not in a great shape with the sanctions. But I think they will apply potash, especially based on the high harvest of last year. And in Brazil, we see a growing acres of the farmers and also a good demand. So we think that's in line with their profitability. So in Brazil, I would say it's okay. And -- but especially Asia has a positive outlook.

And our next question comes from Angelina.

I hope you can see and hear me okay. It is Angelina Glazova from JPMorgan. I have one question, but it consists of two parts. So I will split it in two. I wanted to ask about your SOP business in Europe. What is the environment in general right now in terms of demand? I think in the context of the Middle East situation, there is an understanding that quite a lot of sulfur comes from the Middle East and from the affected regions. So there is possibly an upside risk to sulfur prices. And in this context, I was wondering if you think there is room to increase SOP prices in Europe if that happens, just depending on the demand levels because those prices have been at quite high levels already, and it's not quite clear whether there is room to further increase them.

Yes. As you mentioned, it's very important that around about 40% to 45% of the global sulfurs coming from the Middle East needs to go through the Strait of Hormuz. So they are blocked currently. But at present, you don't see much increases for sulfur prices. But from our perspective, it will stabilize the premium that we had in the past on a pretty good level. And then we -- it depends finally how long it takes. But what's the difference between us and our competitors, the SOP producers, the Mannheim producers have the challenges to get sulfur physically and the risk where the prices will go. And on the other hand, the higher energy costs will affect their production costs too. That's our advantage from our side as we have the sulfur already included in the rock salt. So we don't have higher cost for sulfur or the physical deliveries. And with our gas consumption, we already hedged 70% of our gas that we need for Germany.

That is clear. And the second part is a very quick follow-up. Could you please remind us the exposure of SOP business maybe both in terms of volumes and also to the extent possible in terms of earnings sensitivity to price increases?

Yes. So it is 700,000 to 900,000 tonnes. That is the number that we are having. And therefore, the earnings sensitivity is quite clear, yes, with that number because price increases directly go through here. And with that 700,000 to 900,000, you know that we can always decide intentionally which way we choose, yes. So if we decide for the so-called SOP MAX, that just means that we have a lower volume in total, but we would only decide for that if it makes most sense with regards to EBITDA and margin expansion.

And in addition, it's important to know that the sulfur component is also included in our Korn-Kali and in our Kieserit, but on a lower level. The main effect will come from the SOP.

And our next question comes from Michael.

Yes, happy to do so. Hope you can hear me well. Michael Schaefer from ODDO BHF. So I want to come back to your outlook statement on the ag volume. So you are, I think, projecting an increase compared to last year's level, excluding also trading 7.5% is the lower end, which is even higher than what you reported last year. So I wonder where this is coming from, given where you are also with the major maintenance shutdown in Canada? And can you give us a bit of an indication to what extent netback optimization plays a major role in your planning i.e., more of the specialties maybe then on the potassium chloride, which we have seen in 2025?

So Michael, if you compare our outlook that we had given for 2025, you would have seen a 7.5% to 7.7%, yes. So 7.4% to 7.6% is still not kind of back at that part. And that is why the increased production-wise is totally possible, yes, with the 100,000 tonnes coming from Bethune. And now it's just a question of the product mix, yes, and we did not reach that 7.5% to 7.7% because we decided for SOP Max. And now it's -- the final outcome between the 7.4% and 7.6% will totally depend on SOP MIN or SOP MAX, not the increase in Bethune. That will come with 100,000.

Okay. Good. Understood. Second question is going back to what you what you flagged before, i.e., the overlooked salt business, which you have. So let's divide the question into two. Maybe give us a bit of an understanding. You talked about price increases and obviously strong volume evolution in de-icing. So can you give us a bit of an indication what kind of earnings contribution we should expect from those, let's say, non-de-icing and de-icing type of businesses underlying because obviously, you are not reporting that anymore, unfortunately, but just giving us a bit of a color here to -- on the sensitivities looking into '26.

Yes. We are very happy with our salt business. As you know, that we are not reporting the figures of the earnings, but you see it finally from the revenues, the increases. And as the cost levels are pretty close the same some smaller increases, then you can see that our earnings or netbacks are higher. And we have really low capital because the mines are pretty old. The book rates are written down. So we don't -- even have no high impact from depreciation, neither from CapEx volumes. We don't need higher CapEx volumes in this area. So that's a low capital intensity. And yes, the volumes coming from de-icing, these are not the highest prices or highest netbacks. So if we have high de-icing volumes, then the average price will go down. That's a normal effect. But in total, the absolute earnings will increase, especially if we are able to sell around about 500,000 tonnes more compared to last year with the de-icing business, but that has not the effect like pharma salt.

And our next question comes from Joel.

Joel Jackson, BMO. First of all, thanks for doing a North American-friendly call time.

Just for you, Joel.

I was interested in your FX assumptions where you're assuming a 1.2 exchange rate for the year, Euro-USD, but we're at 1.15. It makes a big difference on earnings. Can you explain that assumption?

Yes, sure, we can. So our assumption is 1.20 for the year. And obviously, we are hedged on a free cash flow level, but just only to some extent on an EBITDA level. So 0.05 lower exchange rate would end up in EUR 20 million higher EBITDA. So that's the sensitivity.

Sorry, the hedge, how much -- I may have missed how much are you hedged this year and at what rate?

Yes. So we have 70% on a cash flow level, so and the revenues...

On the FX?

On the FX, yes. So on the EBITDA level, it's around about 50% and the hedging rate is 1.14 for the worst case and the best case is 1.09.

And you're also 70% hedged for gas? That number is...

Yes, of course.

Okay. Just making sure. Okay. Second question I have for you is like obviously, sulfur is really extended here and might get more extended, and we all know why, and it was extended for March. Are there ways you can capture more because you've got a free use -- a free feedstock of sulfur that doesn't come to the Middle East. I mean is there a way you can -- you create a way -- unique way you can maximize the value of sulfur you have? Or is that just should we expect the SOP premium over MOP to rise substantially? Are you seeing that from customers? And you mentioned Korn-Kali as well, should we expect that premium to rise going forward?

Yes. With the sulfur, that's depending on the situation, if it finally will spill over to the prices. We have limited access to the sulfur because that's included in the rock salt and there we are only able to, as we just explained, switch between 700,000 and 900,000 tonnes with SOP. As I just mentioned, based on the current situation, we expect that the premium will be at least stable for the year. If there will be some higher impact that at the end, our competitors won't have access to the sulfur, then it could increase. But that's also depending on the seasonality when you need the SOP and in this situation, then the sulfur finally is not accessible.

And finally, are you worried about European potash demand? It kind of dovetails a bit of what Ben was asking earlier, but...

No.

Specifically, there's -- No? Okay. Will gas price [ rebound ]? I know the season has been late for fertilizer in Europe. Like should we be worried about it?

No. From Europe, that we expect a normal demand.

And we're going to move to our next question. It comes from John.

Yes, it's John Campbell with Bank of America. I've got two, please, if I can. Could you maybe elaborate on perhaps your potash sales mix by individual regions, say, in 2025, so presumably Brazil, China, Europe, maybe if you could lay out those percentages, that would be helpful. And also if you could maybe give any guidance kind of where you expect volumes to be settling in terms of the different regions in 2026 as well.

Yes. Okay. Pretty close, the half of our volumes we are able to sell within Europe. So euro-based, that's also very important for us. There we are independent from the U.S. dollar FX rate. We have around about 1 million tonnes to Brazil and a little bit lower to Asia. So yes, these are the main areas.

Very good. And any steer on 2026? Would you expect a stable?

Yes, we expect -- yes, it could be stable there we have some volumes to China and to Brazil, but there we permanently optimize our regional mix to optimize the netbacks. So there, we are able to ship, for example, to Brazil or to Asia maybe to keep some more volumes in Europe depending on the price levels. And that also depends finally on the logistics situation and the logistic cost because there, we have the big advantage compared to our competitors that we have lower logistic cost compared to the others with our routes.

Okay. Very clear. Second question, do you have any kind of sense or reading on the levels of inventory in some of the major markets. So I think in 2025, Chinese inventories were a big topic. Presumably, there's a lot of other bigger topics going on at the moment. But do you have any kind of updates in China and Brazil and India?

Yes. Starting with India, the inventories are pretty low currently. Everybody is waiting for signing that India signs the contract with others. We are not at the table for the negotiations. With China, they are catching up a little bit with their port stocks to their strategic volumes. But what we still see is a good demand and keeping the price level at a pretty high level for the cross-border deliveries from Russia to China. So that reflects finally that there will be also a good demand. And Brazil is maybe a little bit lower, but coming back to a normal level. But in total, there we see a strong demand, especially in Brazil.

And our next question comes from Oliver.

Yes. Research house is Warburg Research. My name is Oliver Schwarz, and obviously, I'm taking the questions one by one. First of all, I'd like to challenge you on your guidance, the upper end. You stated that in that guidance is baked in slightly higher prices, both at the beginning of the year and also a sustainable level of those higher prices towards the end of the year, given the situation in the Middle East. Obviously, let's say, shipping rates are bound to go up, bunker oil is getting more expensive. Shipping room is getting more scarce. Transport routes are likely to expand to avoid the bottleneck we currently have at the border of Iran. You, other than your competitors normally don't communicate prices ex factory, but including freight and insurance. Hence, if the freight prices go up, obviously, the prices go up as well because that's just the past-through item for you guys. But on the other hand, the price for your product that you receive for the product isn't increasing despite the overall price increase. So what would you say we will need on top of the current price that you see, for example, in Brazil, the EUR 380 million as a sustainable level for, let's say, the average of the current year to basically reflect the likely higher transport costs.

Yes. Finally, maybe important is that the higher logistical costs, the freight costs based on the mentioned tax from your side, that every -- also our competitors are affected by that could increase the prices maybe furthermore. But what's very important, what we expect for the current year with for the upper end, a moderately higher price compared to the February level. So at the spring season that we see a moderately higher prices and that will be reflected or spill over to other regions and other products. And this moderately higher prices will also last for the second half of the year. That's very important. Then we are able to reach the upper end. And yes, with the higher freight costs, I expect that should be finally reflected because our competitors will be affected, too. So that will be compensated at higher costs and maybe other price [ locations ].

So in the outlook, we have basically based the outlook on the fact that we have normal shipping rates, then the prices need to go up moderately, yes. If you have not normal shipping rates for the upper end, they would probably need to go up a few euros more. It's not much, yes, for the full year and for the ASP to be able to get that.

Excellent. Second question is in regards to your competitors from Israel. Obviously, the route to Europe for them is getting more attractive than the route towards the south. Hence, are we likely to see more competition in the European market from those suppliers?

Yes, you are talking about ICL and the Arabian potash company from Jordan. Israel can use the ports in Haifa, but also go through the Gulf of Aqaba and Suez Canal. But at the end, the ships avoid to go to the East along Yemen also before the Iranian situation. I think that wouldn't change the situation. That's a competition like before.

Okay. Last question is on the, let's say, the impairment in summer and the reversal now in Q4. Obviously, that has very much to do with are those prices that -- or perhaps the prices you take into account for potash on a longer-term basis. Just to get, let's say, a feeling for the sensitivity of your model that you use to calculate the value of your assets. Can you just give us a feeling what you changed in your internal calculations to come up with, let's say, this chunk we saw now in Q4 that's basically written back. I mean we are talking about substantial numbers here. So what did basically trigger that reversal?

Yes. So we have different factors, and we name them all in our annual report through the years. And this time, we had a change in the WACC. So it decreased from 8.7% to 8.2%. And this has an effect of roughly EUR 500 million. That was the write-back we saw in the second half or in the fourth quarter. No changes with regard to the potash assumptions, they stayed the same. No changes there.

[Operator Instructions] And team, it appears as we have no further questions at this point. So I'll hand over the call back to you for any final remarks.

Yes. Thanks to all of you for your questions. And I wish you a real great springtime and a good Easter and see you soon.

Bye.

Bye-bye.

Bye.

Thank you, team. As a reminder, this call was recorded and a recording will be made available shortly after today's conference. Thank you all for your participation, and have a great day.