K+S Aktiengesellschaft
Q2 2021 Earnings Call Transcript

Published: 12 Aug 2021

[Dirk Neumann:]

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 presents 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. With that, we'll get started and I will hand over to our CEO, Dr. Burkhard Lohr.

[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 number three. With the successful closing of the sale of the North and South American Salt businesses of April -- on April 30th, we received net proceeds of around €2.6 billion and realized the book gain of €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 €1 billion. Additionally, we offered a buyback program for three of our four bonds. We targeted a buyback volume of €450 million and achieved a good €100 million more making a total of €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 €1.7 billion within two 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 2.0 by the end of the second quarter compared with 12.3 at the end of last year. And the equity ratio furthermore improved significantly to 48% coming from 27%. And now please turn to slide four. 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 five. 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 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 €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 €147 million in Q2. Adjusted free cash flow was impacted by higher interest payment due to our bond buyback program. We also had further cash outs for the SG&A restructuring project. Accordingly, it amounted to minus €68 million including the positive cash flow from the Americas operations until April it reached minus €24 million. Please turn to slide 6 for a closer look at the agriculture markets. Since summer 2020 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 US 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 product 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 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 €700 million to €800 million which is €200 million more than our -- in our last guidance. This continues to include the one-off gain of around €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 €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 €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.

[A - Dirk Neumann:]

This brings us to our first question from Lisa De Neve.

[Lisa De Neve:]

Hi good morning guys. Can you hear me? Just checking.

[Burkhard Lohr:]

Could be a little bit louder. Good morning.

[Lisa De Neve:]

Can you hear me now?

[Burkhard Lohr:]

Yes. Yes.

[Lisa De Neve:]

So I have two 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 €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? Thank you very much.

[Thorsten Boeckers:]

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 €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 €350 million and minus €400 million. And we raised the EBITDA since then by €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 €200 million income on the P&L, but only approximately a €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 €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.

[Lisa De Neve:]

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, there is 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? Thank you very much.

[Burkhard Lohr:]

Yeah. Thank you for that question. 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 tonnes 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 2022.

[Lisa De Neve:]

Thank you very much.

[Burkhard Lohr:]

Thank you.

[Dirk Neumann:]

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

[Christian Faitz:]

Good morning everyone. I hope everyone can hear me? 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? That's it from my side.

[Burkhard Lohr:]

Yeah. Thank you, Mr. Faitz for your question. As usually, we have a delay between three and four 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 leads 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.

[Christian Faitz:]

Okay, great. Perfect. Thank you. Second and final question just pecking on your operations. Everything is running smoothly in Bethune and in Europe? You got that?

[Burkhard Lohr:]

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 yeah, 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.

[Christian Faitz:]

Okay, excellent. Good to hear. Thank you very much.

[Burkhard Lohr:]

Thank you.

[Dirk Neumann:]

The next question is from Mubasher from Citi.

[Mubasher Chaudhry:]

Hi. Hope you can hear me. 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 2021 unwind? And therefore, the free cash flow being significantly positive, compared to where we are now. That's the first question please.

[Thorsten Boeckers:]

Yeah. Thanks for the question. Not going too much into detail on the 2022 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 €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 €500 million in December. So we would save another €30 million, €35 million at least in interest cost.

[Mubasher Chaudhry:]

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

[Thorsten Boeckers:]

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

[Mubasher Chaudhry:]

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?

[Burkhard Lohr:]

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, three, four quarters.

[Mubasher Chaudhry:]

Okay. That’s all. Thank you.

[Burkhard Lohr:]

Thank you very much.

[Operator:]

Okay. Now we have a question from our webcast system from Andreas Heine from Stifel.

[Andreas Heine:]

How is the agriculture volume commitment you already have for Q3 and Q4?

[Burkhard Lohr:]

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 .

[Operator:]

Thank you. Then another question from Alexander Jones from Bank of America.

[Alexander Jones:]

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?

[Burkhard Lohr:]

Thorsten?

[Thorsten Boeckers:]

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

[Alexander Jones:]

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

[Thorsten Boeckers:]

Okay. So it's – well in total, we say we want to save €60 million in steady state. And we are in a good run up this year. So it's maybe a little bit less like €50 million for 2021.

[Operator:]

Okay. Then we have one question of Torsten Philip who asks.

[Unidentified Analyst:]

What plans do you have regarding the 2021 dividend?

[Burkhard Lohr:]

Yeah, this is too early to give a precise answer on that. But one thing is obvious, due to our impairment impacts we see movements in our net profit which in the past was a base for the dividend strategy. And we are thinking about the change. But how this looks precisely, it's too early because we have to discuss that with the Supervisory Board and then we come up with the proposal.

[Operator:]

Then we have a question of Markus Mayer from Baader.

[Markus Mayer:]

How much do you expect the net working capital outflow in H2 2021 on current potash prices?

[Thorsten Boeckers:]

Markus, when I look at H1 we had a positive – positive change in working capital of €30 million. I would expect for the second half a negative swing of minus €100 million approximately. So that, we end up at about minus €80 million minus, €90 million approximately?

[Operator:]

Then we have a question from Elena Don from UBS.

[Unidentified Analyst:]

Are you able to give an update on roughly how long you see the delay from spot pricing to realize price for your potash sales?

[Burkhard Lohr:]

Yeah. I think, I've answered that earlier, but why not one more time. So the difference between contract and the P&L effect is three – rather four months. And depends on the region the difference between the contract and the cash in is six months even – partially even more especially when we sell into Brazil and this is currently the hotspot with our very high prices.

[Unidentified Analyst:]

What is the proportional exposure to India, China this year versus normal?

[Burkhard Lohr:]

Yeah. We are not selling anything into India for two reasons. First of all, the price is not at all a market price currently. And India has the highest freight costs from our destinations. And that's why we have decided not to ship it to India – some specialties but these are more or less small amounts. And the second destination?

[Unidentified Analyst:]

China.

[Burkhard Lohr:]

In China. China here we have decreased volumes as well. But this is of course for Bethune a very important destination that we cannot strip it down to zero entirely. But I would say, it's up to 200,000 tonnes less than in normal years for the same reasons – pricing and freight costs.

[Unidentified Analyst:]

Roughly, what kind of SOP premium are you seeing in Europe this year?

[Burkhard Lohr:]

Yeah. Maybe we shouldn't talk about the premium, because this is always a question of high volatility of MOP and SOP. But what we are seeing is as usual, and as we saw this in the past a delayed development. So we've seen as MOP prices being very, very strong and it started with a small price increase of SOP, but now we are seeing – it will not take the same heights, but we will see a significant SOP price development with a delay as usual.

[Operator:]

Okay. Then we have another question in the Teams from Mubasher from Citi.

[Mubasher Chaudhry:]

I have already asked my questions. I had no further questions.

[Operator:]

Okay. Then I still see a hand raised from Christian Faitz. Is the question still there?

[Christian Faitz:]

So on your let's say shipment plans out of Bethune, can you update us on the development of the US market out of Bethune? I remember you were around 100,000 tonnes last year, you were planning to increase this. What would be your envisage level for 2022? Thank you.

[Burkhard Lohr:]

Yeah. We indicated that we would increase the volumes compared to 2020 in this year on a level of 250,000 tonnes and this looks pretty good. We will be able to ship 250,000 tonnes into the US market. And the target is 500,000 tonnes but that will not be achievable next year, but most probably in 2023 and that should be a healthy level for the run rate if you wish for Bethune volumes into the US market.

[Christian Faitz:]

And is that going to be with your own logistical network, or are you using a partner?

[Thorsten Boeckers:]

No that is all K+S logistics network and sales.

[Christian Faitz:]

All right. Thank you.

[Thorsten Boeckers:]

Thank you.

[Operator:]

Then we have a question from Adrien Tamagno from Berenberg.

[Adrien Tamagno:]

Can you explain pricing developments in Industry+ division excluding de-icing?

[Burkhard Lohr:]

Yeah. If we strip out de-icing we always have a very stable business in our Industry+ segment. The only significant impact that we were seeing last year and if you compare this year against last year this has to be mentioned. We had as you all know we had a lock down in Q2 2020. And so we had a negative impact on chemical volumes, on pharmaceutical volumes, some other applications were hit volume wise and price wise and now we've seen a recovery. We added roughly 200,000 tonnes compared last year due to that reasons and the price recovery were -- was not that strong but sustainable.

[Operator:]

Another question from Andreas Heine from Stifel.

[Andreas Heine:]

Where will your potash inventories be by the year-end compared to last year?

[Burkhard Lohr:]

Yeah, good question. In a year like this you should try to sell as much as possible. But as we believe this is a sustainable development. And we will see a good price environment in 2022 as well; we rather will not change our inventory volume, so it should look pretty much like at the end of 2020.

[Operator:]

And one question from Rikin Patel from Exane BNP.

[Rikin Patel:]

Given your comments on demand and with leverage coming down, what can considerations, do you give to increasing capacity at Bethune beyond the first phase nameplate?

[Burkhard Lohr:]

Yeah, I think a good indication for Bethune is that we have achieved the two million tonnes. And we always said that for the rest, which is more or less increasing the secondary mining volume, so the rest up to 2.86 million tones, it's more or less linear development over a couple of years. So you should not expect more than 100,000 tonnes yearly, annually as additional volumes from Bethune, which of course does not impact the market at all. But it's baked in a growth story for K+S if you wish.

[Operator:]

Currently we have no further questions. So if no hand is raising, I would give back to you for the closing remarks.

[Burkhard Lohr:]

Yeah. Thank you very much. That was a short one, but no surprise because we have disclosed the figures already in our talk before. I thank you very much for your attention and we look forward to meet you in person the next and wish you all the best until. Thank you very much and bye-bye.