K+S Aktiengesellschaft
Q4 2021 Earnings Call Transcript

Published: 10 Mar 2022

[Burkhard Lohr:]

Ladies and gentlemen, I would like to welcome you to our analyst conference and we appreciate your great interest and the opportunity to meet a few of you here in Frankfurt and the rest virtually. Before I come to our very favorable business development, allow me to start with the following. After the Supervisory Board and Mr. Boeckers had agreed to terminate his contract at the end of February Dr. Christian Meyer was appointed as the company's new CFO. He will join us in spring 2023. I know Dr. Meyer very well, as an auditor at Deloitte also for K+S. He is a proven financial expert with many years of experience and I look forward to working with him. For the time being, I will also assume the role as CFO. I would like to thank Thorsten Boeckers for the good cooperation over the past years. And now let's look into the business development during 2021 on slide number two. In one sentence, it was a very successful year for K+S. We successfully completed important measures during this period. With the sale of the operating unit Americas we have significantly reduced our debt as planned. The associated restructuring of our organization makes us leaner, more efficient and unburdens our cost base. Shortly before the end of 2021, we also successfully completed the merger of our waste management activities in the new joint venture REKS. This was also a key element of the strategic realignment of K+S. Last but not least, the proceedings with the FREP and passing were concluded, the final findings did not trigger any value adjustments in our financial statements. Now let's turn to slide three. In terms of operations, we once again achieved an excellent production performance at all our sites. We succeeded in meeting higher demand for our customers and increasing sales volumes. We also continue to master the challenge of the ongoing COVID-19 pandemic by taking measures at our sites. Please turn to slide four for a closer look at the very positive agriculture market development. Our own performance benefited from this over the course of the year, high demand accompanied by fully utilized supply, resulted in a significant increase in potash prices. In Brazil, prices have even tripled. Due to weather conditions, our de-icing salt business also developed very positively in both the first and the fourth quarter. And now let's take a closer look at slide number five. We translated our strong operating performance and favorable market conditions in higher earnings and cash flows. In the course of 2021, we raised our outlook 3 times and generated significantly higher EBITDA of around €970 million for the full year 2021 compared with around €270 million in 2020. This included the one-off gain of around €220 million from the REKS transaction. Our share price development from around €8 at the beginning of the year to more than €20 is just another proof that confidence in our company is returning. Looking at Q4, 2021, on slide six. We achieved the strongest quarter in our history with an EBITDA of €611 million. The biggest contributor was the higher polish price about €220 million were coming from the REKS transaction. Combined with strict cost discipline, we were able to more than compensate higher prices for freights, energy and raw materials. Adjusted free cash flow could be increased to €245 million after minus €100 million in Q4, 2020. Slide 7 shows that we achieved a major act of liberation in reducing the company's debt. With the sale of our North and South American Salt business completed in April 2021, we have massively reduced our net financial liabilities. The rating agency Standard & Poor's has already responded to this with the first improvement in our rating to B+, with a stable outlook and now we are aiming for an investment-grade rating. Please turn to Slide 8. Our new corporate strategy sets the guiding principles for the successful development of K+S. We are focusing on the core business with potash and magnesium products and are working intensively on further optimizing our existing business. The goals of our new corporate strategy are clearly defined. From 2023 onwards, the K+S Group in total as well as each of our plants, should generate a positive free cash flow even in the event of temporary low potash prices. Over a five-year circle --- cycle we aim to earn our cost of capital and target an EBITDA margin of more than 20%. With Slide number 9, I want to highlight that we are first of all focusing on optimizing our existing business in implementing our new strategy. The teams at our sites are already working very hard on many initiatives and projects. In Bethune, we want to increase production capacity to up to four million tonnes in the long term. At the same time, as at our commodity side in Zielitz, we are planning to implement specific measures to continuously improve our costs. At our specialty plants in Werra and Neuhof, the focus is on further optimizing the product portfolio. And Slide number 10 shows that we are also making further improvements in the areas of sales and marketing as well as in the supply chain. Projects have been launched here that will soon make a positive contribution to our operating earnings. Ladies and gentlemen please turn to Slide 11. Our focus on the environment nature and climate protection remains unchanged. Every business decision we make must be in line with our climate strategy and sustainability goals. Between 1990 and 2020, we already reduced our CO2 emissions by 80%. Looking ahead, we have set ourselves the goal of reducing CO2 emissions by another 10% by 2030. We can achieve this with our own efforts. It is also technically feasible to become completely climate neutral by 2050 or even a bit earlier. This however, requires the right framework conditions. Energy must be affordable and available where needed. We accomplished another major step towards improving water protection at the end of 2021. The injection of production water was finally terminated. Looking ahead, we assumed that the permit for the underground storage of these waters will be issued during the year. At the same time, we are well-prepared for our compliance with the lower target values set by the authorities for discharges into the Werra River by the end of 2027. In the disposal of solid residues, we will have completed the ongoing tailings pile expansions at several sites early 2023. Further major capital expenditures and required permits will then not be needed before the end of the decade. Moreover, the project to cover the large tailings piles at the Werra and in Neuhof have recently started. Ladies and gentlemen, this brings us to the outlook on slide 13. At this point, that's very important to me. I say clearly that is unbelievable for me to witness another war in Europe. I'm hoping for a quick end and maybe even over the next couple of days. The situation is confusing and dynamic. Our revenues in the affected regions are very low and we do not have any assets there. Of course, we are observing further developments closely, especially regarding energy supply and sanctions. And now please turn to slide 14. Overall, the general conditions on the agriculture markets remain positive. It is true that the prices of input materials including fertilizers have risen for farmers. Prices for their agriculture products however have also significantly improved or remained at a high level. Additionally, global inventories for key agriculture products are at historically low levels. As a result the yield prospects in agriculture continue to be attractive. They provide an incentive increase yield per hectare with balanced fertilization. Against this background, we expect overall demand for potash to be very strong. The recent conclusion of potash supply contracts in China and India at significantly higher prices is evidence of the attractive market environment. An increase in global potash supply is hardly possible because of the limited global capacities. Ladies and gentlemen please turn to slide 15. We expect EBITDA to range between €1.6 billion and €1.9 billion. This would more than double our operating earnings compared with the previous year and even more. It would be the best result in our company's history. Even in view of the war in Ukraine and the associated dynamics in sales prices as well as energy risks, K+S is sticking to this forecast. Therefore, we also expect our adjusted free cash flow to increase significantly between €600 million and €800 million based on a CapEx figure of €400 million.\ The range of the forecast results in particular from different scenarios, for selling prices, costs, logistic availability and weather conditions over the course of the second half of the year. In view of this possible development, there is a question of how we will use the expected additional liquidity. We would like to answer this on slide 16. The key measures we are looking at are the repayment of our bonds due in June, the purchase of further CO2 certificates for the years 2026 to 2030, the accelerated increase in production capacity at our Bethune plant in Canada, the further reduction in factoring payments of dividends and finally, further CapEx for optimizing our existing business. These measures have not yet been included, in the free cash flow forecast. And please turn to slide 17. It goes without saying that our shareholders should also benefit from the positive business development in 2021. The Board of Executive Directors and the Supervisory Board, therefore, intend to propose a dividend of €0.20 per share at the AGM on May 12. In accordance with our new dividend policy, the amount will be made or up, by a basic dividend of €0.15 and a premium of €0.05. The total dividend payout would therefore amount to around €38 million. Ladies and gentlemen, an exciting and at the same time good year 2021 lies behind us. We have made the company more efficient and profitable. Furthermore, we have strategically realigned K+S. The business prospects are all positive. Thank you for your attention and we are looking forward to your questions. And now, I hand over to Julia for some technical details. Julia, please?

[Operator:]

Please note, that the team session will be recorded Webcast and be available as replay on our homepage afterwards. People asking a question from the room or in the Teams session have to be aware that by turning on their camera and microphone they give content to saving and replaying video and audio sequences.

[A - Unidentified Company Representative:]

This brings us to our first question, Christian?

[Christian Faitz:]

Thank you very much. Christian Faitz, Kepler Cheuvreux. Two questions for me, one-by-one all circling around Bethune. . First of all, can you remind us on the volumes which are now being shipped into the U.S. which have been shipped in 2021? And what your plan is pertaining to the gearing up into 2022?

[Burkhard Lohr:]

Thank you, Mr. Faitz. Yes, the US is becoming a more and more important market for us, especially from Bethune or only from Bethune. And by the way I think it was never clearer than today that it was a strategic perfect move to build Bethune. We are so happy now to be in North America with at least one mine and the big mine, which will be growing over the years. And we have achieved 250,000 tonne sale in 2021 in the US and we should be able to 500 double the amount in the next three years. That's our target.

[Christian Faitz:]

Okay. Excellent. And then second on the Bethune accelerated ramp, you mentioned as part of making your funds work. What's the time frame for gearing up the production from the currently around about €2 million towards that €4 million? Is that significantly accelerated now? Because I have in mind, you were looking at around about 100,000 to 200,000 tonnes per year?

[Burkhard Lohr:]

Yes. The first number was the correct number. So our initial plan was to ramp up Bethune step by step. We are talking about increasing the secondary mining and then from time to time we have to enlarge our logistics. That takes time. And at the same time we want to not – we want to do it in a way that the CapEx is optimized. So 100,000 tonnes was the plan. This year we expect 2.1 million tonnes. But as our balance sheet has improved dramatically, the best investment is in speeding up doing this. But the opportunities are limited so we might invest a little bit more and we might do a little bit more than 100,000 tonnes. But 200,000 a year is already very optimistic.

[Christian Faitz:]

Thank you.

[Burkhard Lohr:]

Thank you.

[Thomas Swoboda:]

Thomas Swoboda Societe Generale. Two questions for me as well. Firstly, could you comment on your energy hedging? So how much have you hedged? And I would be especially interested what risk is there? Can this hedging be knocked out or is it – is it very safe? That's the first question.

[Burkhard Lohr:]

Okay. Thank you, Mr. Swoboda. Yes, I think we have a long history in hedging risks. And Mr. Bettenhausen is present here, so I'm happy that he's always doing this and looking very far in the future. So we have hedged not only CO2 and other things and currencies but also energy. And we are – we have 92% for 2022 already, so 8% missing, so that is a quite low number. And even for 2023 and 2024, we have 72% already. So – and these hedges are safe as long as gas is flowing. If gas would be stopped, gas shipments would be stopped entirely, that of course would be a force majeure event. That is not a scenario we are expecting, but what would happen if this would be expected, it would be this scenario? I think we and every industry company – industrial company and the German government has already worked on that. We should be safe until October. And with many measures taken there would be -- depends of course on how heavy the winter would be there is a potential risk of shutdowns of several weeks over the month of November and December. But that is the worst, worst case, and I'm not expecting this. And if I might -- a long answer, but I think things are of general interest, when we are talking about in -- the pipeline. Nord Stream 1 -- sorry. It could be shut down. It's only a quarter of what is coming from Russia. So there are three different pipelines, and they do not have even discussed to do anything with the other two. So if that would be stopped that would not be enough major -- would not be a major risk to us. Sorry, for the long answer but…

[Thomas Swoboda:]

No problem at all. This is of genuine interest. My second question is on salt. I saw a headline from your press conference this morning, you were asking about whether your Industry+ unit is on sale. I mean, it looks like you will be having plenty of cash at hand if everything goes as planned so is how serious should we be thinking about K+S being a pure potash player without salt?

[Burkhard Lohr:]

Yes. Yes, I'm excited about this headline, because I did not say anything else than what I said in November when we disclosed on the Capital Markets Day. Our new strategy, we said that salt is no longer core to us, which is normal after we have sold our U.S. business. And the remainder is 20% and the remainder is for €50 million, maybe €60 million, maybe €70 million EBITDA, so it's not even a risk mitigation for the customer segment potash any longer. And we also said, we are not actively looking for a buyer, but we would listen and we would have to listen if somebody would knock on our door and ask for -- talking about a potential transaction.

[Thomas Swoboda:]

Thank you.

[Julia Bock:]

So the first question from the Teams session comes from Andreas Heine from Stifel. Andreas, please turn on your camera and your microphone.

[Andreas Heine:]

Can you see me now? Hopefully.

[Burkhard Lohr:]

But we can hear you at least.

[Andreas Heine:]

At least. Sorry, my camera doesn't work. I have two questions and as you asks me, I will ask him in a row. The first is on net financial debt. Obviously, with this year's earnings being very strong and next year probably not too bad, you basically have no debt anymore. Usually one would say that is kind of over finance. But with the volatility in the potash business and your experience you had in several years, I would like to know what is -- what you would, let's say, have mid-term as financial position on your balance sheet, which you would keep as a limit before you think about shareholder return?

[Burkhard Lohr:]

Yes. Thank you for that question. So our target is an investment-grade rating and we should be there by the end of the year. Of course, it's not our decision, it's Standard & Poor's, but these numbers they should act that way. And I also gave you an idea what we will -- what we are going to do with cash, which exceeds the limits that we need to have for an investment-grade rating. So we have bonds to pay back. We are going to invest in this in ramp-up in Bethune that is core, because it is the most efficient growth story for K+S amongst all. We have some other ideas to increase our profitability on other sites to optimize the existing business especially at Werra. We are thinking about in the long run or mid-term to have the Werra site with less liquid and dry residues and less CO2 emission. That would be a huge step and that requires some CapEx as well. And, of course, we will have an eye on dividends. And maybe if this world -- if this war is at its end and we have an idea how the new world will look like maybe there are even some opportunities for some M&A activities. So that is in a way our agenda for using free cash.

[Andreas Heine:]

May I continue on the last point, you had the question about the M&A. What would that be? In the potash business there are probably no assets around. Would that be building up a new leg or what is what you would think about in that case?

[Burkhard Lohr:]

Yeah. So following our current strategy that would more or less be in some specialty segments. But as I said, I think we have to reevaluate opportunities and we are going to do that in a couple of weeks, so that we might come up with completely different ideas. So times like this are very risky, but also deliver opportunities and you have to be quick and you have to have a good eye on things.

[Andreas Heine:]

Thanks. Then the second question is what we ran through with Ukraine and Russia with what -- quite a number of Western participants not being willing to buy in the future from Belarus and Russia might change then the business environment for K+S in the potash business by having two competitors in these regions. How do you think the trade flow will change with how people thinking these days in buying or not buying from Belarus…?

[Burkhard Lohr:]

Yeah. That's another tricky question. First of all, I would rather prefer have an end of this story and have competitors from Belarus and Russia being active in all markets as in the past than having this crazy war. But I'm not trying to shy away from your question. First of all, Belarus is already not able anymore to ship anything into the Western world. And since last week the sixth MOP 60 is on the central list as well so they are hit in Europe. They are not able to enter the market anyway because they cannot use their harbor so -- and they have already declared force majeure. They obviously reduced production that will be missing as capacity volume in the market. Uralkali is not on the list, but the owner as I learned this morning the owner of Uralkali is on the sanction list. That will have an effect. We learned that some big shipping lines are not entering Russian markets anymore. So making a long story short, that will have a major impact on our markets. We should expect an undersupply in the short term. In the mid-term, it could be that the Eastern European companies are focusing more on Asia and the Western European and US or North American suppliers are focusing on the rest of the world. But that is only guessing, because I said the situation is so dynamic, but that is what I would expect from today's perspective.

[Andreas Heine:]

May I add to this. Lohr has said that they are -- that they have stopped getting any volume from Belarus with end of February. That is quite a high-volume customer. Have you seen more volume from this one? And is what you see in this application season in Europe already affecting the regional split of your own deliveries in 2021?

[Burkhard Lohr:]

Yeah. I'm not expecting any shipments from Belarus to anybody, as I said earlier. Of course, we have to evaluate the situation and have to adjust our destinations as we have done last year already. Yeah. I think I should live it with this.

[Andreas Heine:]

Thanks.

[Burkhard Lohr:]

Thank you, Mr. Andreas.

[Julia Bock:]

Thank you, Andreas. The next question is coming from Joel Jackson from BMO. Please turn on your camera and your microphone.

[Joel Jackson:]

Hi. Can you see me? Hear me?

[Burkhard Lohr:]

Yes, we can hear you. And we see you also.

[Joel Jackson:]

Great. It's both right. Good afternoon.

[Burkhard Lohr:]

Good afternoon.

[Joel Jackson:]

I have a few questions, of course I'll ask them one by one. Burkhard, when you talk about gas being 92% hedged for 2022 and 72% hedged for next year, can you give us a sense of what average gas price that is for this year or next year?

[Burkhard Lohr:]

In the hedge?

[Joel Jackson:]

In the hedge.

[Burkhard Lohr:]

40, €40. So we had a very -- the early parts were very cheap then we had a more expensive part. But the blended it should be €40.

[Joel Jackson:]

For both years?

[Burkhard Lohr:]

No for 2022. It's cheaper for 2023 because we have only 72% and we did that earlier than the last tranche in 2022. So it's slightly below €40 for 2023. By the way we have 72% for 2024 as well. But if you take €40 for all years, you are fine.

[Joel Jackson:]

Okay. So what will be -- if you think of all the different buckets of costs gas, currency, logistics obviously prices are insanely high right now very strong. What is the cost drag per tonne on MOP and SOP and the other products in 2022?

[Burkhard Lohr:]

The cost per tonne for energy?

[Joel Jackson:]

The drag. No, no, that -- what is the negative impact on costs in 2022 from all the different buckets of costs including energy?

[Burkhard Lohr:]

Okay. Not per tonne in total?

[Joel Jackson:]

Well per tonne. I think per tonne.

[Burkhard Lohr:]

I take the total number, because I have that by heart then you have to do the math yourself. So it's – in total it's roughly €200 million, and it's – the bigger part stems from energy, but another very huge part from freight as well €200 million.

[Joel Jackson:]

If we think about prolonged issues with Belorussian and Russian supply, and maybe the market for granular being tighter, what is the current granular capacity for K+S in Germany and Bethune? And would you look at using some of your windfall free cash here to upgrade your granular capacity?

[Burkhard Lohr:]

Yeah. The capacity for granular is roughly 40% of our MLP volume, and we have only limited opportunities to increase that. But I'm not seeing, the granular market more tight than the standard market, so I think, I see the tightness of all products.

[Joel Jackson:]

Well, what if we get into a world where China and India end-up buying in some countries standardized buy more potash from Russia and Belarus because of politics? And do you see – and we got a shift of trade and granular becomes a bigger part of the non-Belorussian Russian sales. Do you see what I'm saying?

[Burkhard Lohr:]

Okay, okay. But that is nothing, we should see this year. If we talk about next year, or maybe 2024, of course, there are opportunities to increase granulation capacity. Not – we will all not be able to increase capacities in this time significantly, but we can adjust from standard to granular in one or two years.

[Joel Jackson:]

But you're not looking at that yet?

[Burkhard Lohr:]

We are looking at everything, but still the situation is too dynamic to take any decisions on that.

[Joel Jackson:]

And then my last question following up on that is, and I forget the name, but I believe a number of years ago, I think you have some reserves in Germany that you could restart or – and you haven't mentioned that for years for obvious reasons, because part of it – it wasn't strong enough to do that, and you were focused on Bethune and other things. But what – how long would you have to see prolonged Russian Belorussian issues before K+S might look at going back and bringing back some other capacity in Germany?

[Burkhard Lohr:]

You're talking about sorry for the difficult German name. And we have also some opportunities in our existing mines, but we are talking about projects of at least 5 maybe 10 years so that would not help in the current situation.

[Joel Jackson:]

5, 10 years not two years. Okay. Thanks a lot, Burkhard.

[Burkhard Lohr:]

Yeah. Yeah. Thank you, Joel.

[Julia Bock:]

The next question comes from Michael Schaefer from ODDO. Please turn on your camera, which is already done, I think and your microphone.

[Michael Schaefer:]

Indeed unmuted. Yeah. Good afternoon, gentlemen and obviously, Julia. Thanks for taking my two questions. The first one is on your outlook statement Mr. Lohr. I recall, a couple of weeks ago, obviously, when your first time presented the outlook you stated that probably that, there are some – obviously, some easing on the pricing side assumed for the second half to make basically the average or even the low end there of the -- that you presented. With all what we are just discussing or what we've heard about the past couple of days, so -- so the question is, you today confirmed the outlook range. So, what's needed from your perspective and looking into today's situation to make it to the upper end essentially? This would be the first question.

[Burkhard Lohr:]

Yes, you're right. That was our expectation because, we were already on a high level, pricing level without the current situation and we thought for planning purposes being more cautious in saying that in the second half, the prices would rather decrease than staying on that level. That is not our reading any longer. But at the same time, the cost risks are increasing, so that we believe, it's still what we should see. From today's perspective and I said it's dynamic, we should -- we will see -- still see the EBITDA being in this range, especially because in the second half, we've no real visibility on what the impact on availability and then on cost development will be. So it will level out the fact that we are not expecting the prices to decrease. On the other hand, that is a good opportunity for a good 2023 as well and on the other hand, taking into account inflation risk and availability risks.

[Michael Schaefer:]

A quick follow-up on the new visibility topic. So can you just shed some more light on your order book basically in the first half?

[Burkhard Lohr:]

Yes. And you know that, order book is not a big issue for us, as we are talking about spot pricing in most regions of the world. And we have not really negotiated with China and India with -- on the new contract, but we are more or less booked until April, partially May already. That said, it is becoming less important because, with this situation, everybody will settle the whole production which is available this year for sure.

[Michael Schaefer:]

Okay. Thanks. And the second question goes to your use of cash or the freedom, you've gained here. I would like to come back on the Bethune acceleration and then also you mentioned on the slide that you may further moderate that the factoring which you are using. So, taking both together, so what's the kind of additional, let's say capital allocation, we should think about the two topics here?

[Burkhard Lohr:]

The easier part is the factoring. At the end of the year, we had still a volume of €120 million. If we draw that back, it's a €100 million impact on the free cash flow. And yes, Bethune will be maybe €50 million this year, could be more in the coming years. But with the effect that we -- quicker ramp up Bethune and you know that we do not only have the utilization advantage, we're also talking about a very efficient expansion, because the secondary mining is a very cheap primary cost production. And that is again under all options that we have to use cash, this is the most efficient one.

[Michael Schaefer:]

And this would be then on top of the €100 million I have in my head for Bethune annually.

[Burkhard Lohr:]

Exactly.

[Michael Schaefer:]

Okay. Thank you very much.

[Burkhard Lohr:]

You’re welcome.

[Unidentified Company Representative:]

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

[Alexander Jones:]

Great. Thanks very much for taking my questions. Two, if I may. I'll start with the first one. Just circling back to your comments on use of cash and M&A. Is there a reason that the specialty fertilizer space looks less attractive to you now, or is that just a comment on how much uncertainty there is in the world and you're not sure? And are you able to give any hints about which areas might look more attractive at sort of the current situation holds, your comments on other opportunities being available?

[Burkhard Lohr:]

It is still a focus area for us, but we are not seeing that we are going to invest this year maybe not even next year. You have to look for opportunities. And as I said earlier, we have to make up our minds how the potash world is looking like in a couple of months from now and there might be other interesting opportunities than doing bigger investments into specialties for the time being.

[Alexander Jones:]

Understood. And then just to follow up on the market outlook. I guess, the price is telling us that we need some level of demand disruption. Could you give us any color on what level or how much if any demand disruption you're seeing across the markets that you're selling into at current price levels?

[Burkhard Lohr:]

Yes. That's not the same in all areas. We are expecting a decrease in demand in Europe, but that is less due to higher potash prices. It's more a question of availability of nitrogen. And if you are not able to use nitrogen, it doesn't make sense to use potash. But that is only a European issue and that will not impact us, because we at the same time have to compensate the missing supply from Eastern Europe and we have opportunities out of Europe as well. And I'm not seeing this development in Asia or South America or other regions.

[Alexander Jones:]

Thanks.

[Burkhard Lohr:]

Thank you.

[Unidentified Company Representative:]

The next question comes from Adrien Tamagno from Berenberg.

[Adrien Tamagno:]

Hello. Can you see me, hear me?

[Burkhard Lohr:]

Yes.

[Adrien Tamagno:]

Yes. Hello.

[Burkhard Lohr:]

Hello.

[Adrien Tamagno:]

Hi. Two questions, please. First is, I mean, given the current situation did you receive some inquiries from large customers about securing a large amount of volumes for a certain amount of time? And would you be happy to do that?

[Burkhard Lohr:]

Customers are very active nowadays and talk to us to compensate here and there, so it's -- that's another part that I mentioned with dynamic. Of course, I wouldn't like to raise names, but currently see the many opportunities are raising for us.

[Adrien Tamagno:]

Okay. Understood. And is it too early to say or you would start to expect to risk a bit more the long-term production outlook out of Belarus and Russia given the sanctions? Like, if their production growth is restricted because their supply chain is becoming more difficult to source, yes, do you see that coming, or is it already safe?

[Burkhard Lohr:]

I'm not sure, if I fully understand your question. Can you please repeat it?

[Adrien Tamagno:]

Yes. Basically, I'm saying that do you expect the long-term production outlook production growth out of Russia and Belarus being risked because of the current situation?

[Burkhard Lohr:]

Okay, now I got it. And of course, it depends on how long you're looking into things, but I'm sure even if the war situation is over and I hope this will be the case soon, it will take two to three years before we see a normal behavior anymore, so there should be a tightness in the market for quite a while. And the same is true for agriculture products. We shouldn't forget that Russia, Belorussia and especially Ukraine is good for one-third of the worldwide production of some very important agriculture products. Before that comes back to normal and the pipeline is filled again, we are talking about another two to three years. So pricing in the agriculture segment will be high for quite a while and this will be a challenge for the world to ensure to feed everybody on this planet. That is what concerns me the most. And I am wondering sometimes, why we discuss energy issues less or more, more than the food security.

[Unidentified Company Representative:]

Next question is coming from Mubasher Chaudhry from Citi.

[Mubasher Chaudhry:]

Hi. Thank you for taking my questions. Two please. Can you provide some thoughts around where you see the first quarter heading please? I know you've given the full year outlook, but if you could just provide some thoughts on the first quarter also please?

[Burkhard Lohr:]

I hope for your understanding that I have -- we have closed 2021 now. We have a guidance for 2022, but we're not guiding single quarters. I would only qualitative say, we expect a very good Q1.

[Mubasher Chaudhry:]

Sure. And then coming back to your comments around the order book and being sold out to -- almost through May. Is it fair to say that, you're booking in volumes today for June July at today's prices and therefore, you've got a bit of clarity in where second and third quarter should be heading? I just want to see if that kind of four to five months lag is the right way of thinking about the today's spot pricing being baked into the P&L?

[Burkhard Lohr:]

Yes. So I think it's well known that the current pricing is taking for example, Brazil, we always like to talk about Brazil because it's a kind of reference that we are talking about more or less $900 in Brazil currently. And what we are signing now, will be -- we are in March already will be shipped in June July so running into our P&L in the second quarter and partially even in the third quarter. What is happening in the next couple of weeks, again, I have to repeat myself things are so dynamic that we cannot rule out anything. The only thing that I would rule out, is that the prices are decreasing.

[Mubasher Chaudhry:]

Understood. . So you've got -- so okay just to confirm that you remain positive on the pricing developments into the third quarter? And because it comes back to the original point around investments, the earnings power is kind of far outpacing your thoughts around CapEx investments. I know you've talked about a few things there, but it still leaves you with a reasonable balance sheet part to do things. So I'm just trying to understand your limitations around capacity functions for yourself? And are you seeing any other sort of supply side response from the rest of the world?

[Burkhard Lohr:]

Yes, you're correct. Our target is to be investment-grade rated. It's not to have spare cash on our accounts. So if you take that there is real firepower. And that's why we're evaluating in scenario analyses, which we are doing soon what our opportunities are raising for us. And then we might take some reactions on that. But it's – that is still very early. And therefore a clearer picture than we have – we all have today has to be developed about what could the world – it will not be the same anymore but how could the world look like in the future? And what does it mean for our markets and what does it mean for K+S. That's a task we have to do now.

[Mubasher Chaudhry:]

Understood. Thank you very much.

[Burkhard Lohr:]

Thank you.

[Operator:]

Next question is coming from Markus Mayer from Baader.

[Markus Mayer:]

Hey, good afternoon. I have three questions if I may. I also will ask one by one. The first one is on the purchase of the CO2 certificates for 2026 and 2030. Can you give us a magnitude of what this would mean in terms of spending given the – taking the current CO2 price into account?

[Burkhard Lohr:]

Yes. Thank you, Mr. Mayer. First of all, we have already started buying because we saw a window of opportunity that the prices came down. But we have not expected but most probably it's due to the discussion that energy plans might run longer. So if we would invest at the current price, the full amount, we are talking about €300 million. We are most probably will invest close to €100 million this year and then we might pause because even this whole system might be questioned, if the situation is escalating. So – but we are very happy that we have already such a long duration order that we have secured already our production until now 2027 with what we have done in Q1. I think that is much more than other companies have done and the first part was very cheap from today's perspective.

[Markus Mayer:]

Thank you. Okay. Second question would be on your US full hedging. An update there would be helpful, if you can tell us what would be the magnitude if the dollar would go down or up by $0.01?

[Burkhard Lohr:]

Now it's Julia's time.

[Julia Bock:]

Yes. We always said that €0.05 are bringing us €40 million.

[Markus Mayer:]

That's the case. And then the normally hedge in the brand-wide, yeah. Is this still the basis for this year or for the next years?

[Julia Bock:]

Yes.

[Markus Mayer:]

Basically yeah, okay. And what are the brands, what are the levels?

[Julia Bock:]

I'm looking to Mr. Bettenhausen. We have to give it to you later Markus.

[Markus Mayer:]

Okay. Okay. Good. And then the last question is on CapEx again is that -- potentially will invest €50 million more for Bethune this year. Can you give us an overall CapEx guidance for this year and in particular as of the mid-term CapEx guidance of €350 million? Is this still in case and what you said or should you add some more into the €350 million as well?

[Burkhard Lohr:]

The number that you have mentioned is still valid. I would like to call it a base number. But if we -- now as we have more opportunities to use cash if we see that it makes sense to invest €50 million or even €100 million in Bethune for a couple of years and this -- and the returns are just fine that -- we rather would do it. But for the time being the €350 million is the right base number.

[Markus Mayer:]

Okay. Thank you so much.

[Julia Bock:]

I now also have the answer for the other two. So the worst case and the best case are, for 2022 worst case is €190 million and best case €160 million.

[Markus Mayer:]

Okay. Thank you.

[Julia Bock:]

The next question is coming from a telephone number, so I don't know the name. So please state your name and ask your question. Okay. Then, we have one more question from Oliver Schwarz from Warburg.

[Oliver Schwarz:]

So hopefully this works. Did it?

[Burkhard Lohr:]

Yeah. It does, yes. Hello Mr. Schwarz.

[Oliver Schwarz:]

Good afternoon, lady and gentlemen. A couple of questions from side, as usual one by one. Can you please elaborate a just on your dividend policy? I heard that you are wanting to invest in CO2 certificates, we talked a lot about M&A. But can you shed some light on what you think might be a prudent dividend if your outlook for 2022 is basically correct?

[Burkhard Lohr:]

I know that you will not be happy with that answer now, but I have no chance to do more than that. It will be higher than this year. But it would not be very clever to raise numbers without having any discussions with the Supervisory Board before that.

[Oliver Schwarz:]

Agreed, okay. Can you give us some information about the duration of your gas contracts please? You said you locked in prices for the next three years to the extent of 72% and then to 2023-2024. I guess they're mainly due to long-running contracts with the respective supplier. Can you give us an indication how long those contracts run on average?

[Burkhard Lohr:]

Yeah. By the way, these numbers are raised only for Europe. We have other contract in Canada, but I think we have developed or follow money towards the development of the gas price in Canada. It has not moved much, so I think it was fair to have a lower hedge number. But let's stick to Europe. And we have contracts which run even longer than 2024. If I remember correctly, we are talking about 30% still -- or still for 2025 but I think that's it. We are not having meaningful contracts running more than the next three, four years.

[Oliver Schwarz:]

Okay. And -- that's maybe a timing key question but you said you're willing to invest €100 million in CO2 certificates that will run 2026 to 2030. But in the same sentence, you said you -- the whole system might be questioned due to the current situation and how it develops. Is it prudent to invest €100 million if you are not sure that the system as such will be in place in 2026 to 2030?

[Burkhard Lohr:]

Thank you very much for that question. I should rather have said it might be paused. I don't think that it will be skipped entirely, but there might be a pause and therefore it was very prudent to invest €100 million because we used a window of opportunity. And we should -- but what we should not do is to invest in the entire certificates that we need until 2030 for that reason. Yes, again, I think it was a very clever move to do what we did.

[Oliver Schwarz:]

Okay. We talked a lot about gas. Can you quickly update us on your electricity bill and how that is going to progress?

[Burkhard Lohr:]

[Julia Bock:]

You mean the electricity bill in total?

[Oliver Schwarz:]

Yes.

[Julia Bock:]

Yes. So, we had electricity costs in 2021 when you look into our annual report of €236 million. And we said that in 2022, we will see an inflation here of €100 million on top of that. So--

[Oliver Schwarz:]

I thought that was -- Julia was that electricity, or was that the energy bill we are talking about?

[Julia Bock:]

That was the energy bill but electricity is part of that. So, I mean electricity is produced basically by the cogeneration plants with gas.

[Oliver Schwarz:]

Okay. So, you're not getting electricity from let's say outside utility companies on top of that?

[Julia Bock:]

No. It's -- if you look at the split it's 98% gas and 2% other energy sources, but no.

[Oliver Schwarz:]

Okay. And maybe lastly, I don't want to stretch your patience for too long. Mr. Lohr when asked about the upper end of the guidance, you related to that there might be cost risks in the second half of this year. Given that the energy bill is not very variable based on your hedging where is that cost risks you might see, or where is that coming from basically?

[Burkhard Lohr:]

I said cost and availability risk. And the second one might be the bigger one. Availability of energy, availability of supply chain deliveries so that in such a situation you cannot completely rule out that for example truck is not available, train is not available et cetera. So -- and you have to take that into account. The pure cost risk is manageable, but the second one is difficult to calculate.

[Oliver Schwarz:]

But if I get you correctly the availability you're citing is only in relation to logistics. Did I get that right, or do you factor in also some risk for -- that maybe Russian gas won't be available in let's say in the second half of this year?

[Burkhard Lohr:]

You cannot give this scenario or a probability of zero -- if you get what I mean.

[Oliver Schwarz:]

I just want to connect the dots here. When we're talking the lower end of the guidance is there -- is that based on, let's say, restricted on no availability of Russian gas in the second half? Is that also only with a probability risk of let's say I don't know somewhere between 1% and 99% in the calculation?

[Burkhard Lohr:]

Yes I think the following will answer that question. If we should be forced to shut down for a couple of weeks due to Russian gas not being available we would still be in the range. Rather at the lower end but still be in the range.

[Oliver Schwarz:]

Okay. Thank you for that. I'll get back into line. Thank you.

[Burkhard Lohr:]

Thank you very much.

[Unidentified Analyst:]

Sorry to come back on Bethune. But just can you give us a picture or idea of how Chinese demand for your Bethune volumes is at present? I just want to get my head around Chinese buying behavior when they see obviously the Russian Belorussian volumes being trended. Are they still interested in investing on volumes?

[Burkhard Lohr:]

As we speak our sales forces are negotiating with them. Price is fixed volumes is under negotiation now and we believe that they are very interested to have non-Europe Eastern European sources as well.

[Unidentified Analyst:]

Thank you.

[Burkhard Lohr:]

You’re welcome.

[Unidentified Company Representative:]

There's no question in Teams and no from here so I hand back to Dr. Lohr for the closing remarks.

[Burkhard Lohr:]

Thank you very much again to be -- to have time for K+S in these very strange times. It was good to have you here in Frankfurt or in the different lines. Thank you very much for being interested. I think it was obvious that K+S is looking ahead positively although times are difficult. And I'm looking very forward to see you hopefully all very healthy and in good condition soon again. Thanks. Bye-bye.