K+S Aktiengesellschaft
Q1 2022 Earnings Call Transcript

Published: 11 May 2022

[Burkhard Lohr:]

Ladies and gentlemen, I would like to welcome you to our Q1 Teams conference. And let me directly start with the development of our business on Slide #3. After the sale of our Americas operating unit, we defined our new corporate strategy, which states potash and magnesium products are our core business. The market environment for these products is very attractive. And I would like to point out that potash prices already strongly increased during 2021. In Brazil, prices had already more than tripled to USD 800 per tonne by the end of the year. Due to uncertainties of market participants regarding the geopolitical situation and supply constraints, prices increase even further. And now please turn to Slide 4. We want to share a closer look at our key figures with you. Our EBITDA increased from €126 million to €524 million in the first quarter. The positive effects of higher prices, especially in the Agriculture customer segment, more than compensated lower volumes and cost inflation mainly from freight, energy and material. Even with the weather-related below average de-icing salt business, we could slightly increase revenues in the Industry+ customer segment. K+S not only translated the strong operating performance and favorable market conditions in higher earnings but also in significantly higher cash flows. The adjusted free cash flow increased from minus €15 million in the first quarter of 2021 to almost €300 million. Deducting the measures we have already implemented to utilize the additional liquidity, the adjusted free cash flow amounts to more than €100 million. And these measures were already mentioned in our conference call in March and included the reduction of factoring and the purchase of further CO2 certificates from 2026 onwards. These excellent results in the first quarter further reduced our leverage rate to 0.4x. And this brings us to Slide #5. Following the sale of the Americas operating unit, we took a major step towards significantly reducing our net financial liabilities. By the end of March, only €520 million remained compared with €3.2 billion at the end of 2020. Our target is clear

[A - Julia Bock:]

Yes. Thank you, Dr. Lohr, and hello also from my side. Before we start with Q&A, a few technical notes. This conference is webcasted live, and a replay of the webcast will be available on our website afterwards. [Operator Instructions] This brings us to the first question of Christian Faitz. You are muted.

[Christian Faitz:]

Okay. Now we unmuted, I hope. Julia, Burkhard, two questions, if I may. So first question first. With NPK customers not being able to take volume in Q1 or sufficient volume due to nitrogen unavailability, has this changed in the meantime? And also, what do you make of the stories of farmers taking holidays, demand destruction on the farmer side due to high fertilizer prices, et cetera? Is this actually evidenced by your salespeople who talk to their customers on a regular basis? Or is this just a myth and demand continues to be high because farmer affordability is clearly there?

[Burkhard Lohr:]

Yes. Thank you, Christian, for that question, and that's a very important one. First message is this year and most probably next year as well, supply will be the limiting factor and not demand. Yes, we have some impact from availability of nitrogen and some farmer are not using other fertilizers if not be able to use nitrogen. Of course, the high price also has some impact, but that is limited due to what I mentioned earlier, the high prospects of making good money for the farmers as well. And this is more or less only a European issue. We are seeing some weather-related issues in North America, but the rest of the world shows a very strong demand, and the gaps that we see due to the impacts I just mentioned are by far less than the lost supply. And that's, again, supply is limiting the demand this year and at least 2023 as well.

[Christian Faitz:]

Okay. That's good to know. Then second question in your CFO function, use of cash. Many investors are increasingly asking. You have your -- obviously, you have your dividend policy in place with the optionality of paying out that kind of bonus element in there. But would you consider at some point also doing share buybacks or something else?

[Burkhard Lohr:]

First of all, we are never ruling out anything. But when I talk about the dividend, yes, we are now, in 2022, in a very positive environment, but the dividend is paid for the outcome of 2021. And the dividend we are going to pay, the €38 million, is already 42% of the free cash flow that we have earned last year. If, of course, this year will end in a way that we are seeing and forecasting, and I believe that we will see these numbers, then the dividend will look significantly different to the 2021 dividend. But we have not even discussed potential share buybacks, but everything is possible.

[Julia Bock:]

The next question comes from Lisa De Neve from Morgan Stanley.

[Lisa De Neve:]

I have two. The first one is you've guided to mid-triple-digit input inflation for 2022. Can you share a little bit more granularity on the energy, logistics components and the mining materials inflation component of that. Just spitting it out, if possible, would be great.

[Burkhard Lohr:]

Yes, thank you for that question. As I mentioned in my speech, we have three items which are heavily impacted by inflation or cost increases. This is, first of all, energy. Luckily, we have already secured 92% of our gas consumption of 2022 and also more than 70% of 2023 and 2024, but they're not -- or not covered 8%. It has an impact on our cost base, and we are talking about more than €100 million higher costs than in 2021. And we are talking about another €100 million each on logistics and materials. All the other cost items are moving on a very normal level.

[Lisa De Neve:]

And then coming back to the faster ramp-up of Bethune. I mean you've announced a bit of a faster ramp up, I think, about 50,000 tonnes quicker than initially set out. And as you're now starting to generate a lot of good free cash flow, and that may well be the case for the foreseeable future, would you consider nonorganic opportunities to expand your potash or specialty potash footprint?

[Burkhard Lohr:]

Now here again, I would say we're not ruling out anything. For technical reasons, there is not much more in Bethune. So you know that we are talking about a secondary mining and that we have to develop wells, et cetera. So speeding up by 50,000 tonnes a year is already something, but nonorganical moves could be possible. But again, with all potential M&A transaction, what one should discuss, we also should be aware that we are in a very, very dynamic situation with a war in Europe, and I would rather keep the balance sheet and our financials robust. But we look into all opportunities.

[Julia Bock:]

The next question comes from [Kyle Kang] from Citi.

[Unidentified Analyst:]

Can you hear me?

[Burkhard Lohr:]

Yes, [Kyle]. And see you also.

[Unidentified Analyst:]

Just talk a bit about how the Russia, Ukraine and Belarus situation has altered trade flows. So are you seeing any changes in the demand weightings to your different -- deliveries to different regions? That's my first question.

[Burkhard Lohr:]

Yes. Thank you. You mean the deliveries from Belarus and Russia into the rest of the world, right?

[Unidentified Analyst:]

That you -- also demand that you're seeing to Brazil, say, or to different regions. Or are they buying more or less as a result of Belarus?

[Burkhard Lohr:]

Okay. Okay. Okay. Yes. First of all, Belarus is out of the non-Belarus and non-Russian market at all. There is some ships but not many coming from Russia into the market. So we have a huge supply gap and customers are buying whatever they can. And we know that June, July will be heavy season again in Brazil, so there is rather a shortness. And that's -- maybe that's the background of the question. We believe that current pricing is quite stable. So we are not seeing significant price decreases in any reasons -- regions.

[Unidentified Analyst:]

Okay. And secondly, so the volumes in 1Q were a little disappointing, which may be down to some of the logistical issues that you've experienced. Can we expect them to return to somewhat of a normal rate for the second quarter? Are these issues going to persist?

[Burkhard Lohr:]

Yes, volumes are actually less than in the first quarter of last year, which, by the way, was a good quarter. So we are a little -- roughly 200,000 tonnes short. There are some reasons behind, but the main reasons are, you mentioned one, logistics. You heard about the CP strike. That is one reason. We had some hiccups with the Deutsche Bahn here in Germany as well. Nothing which had an impact on production but on moving the material. And we had some shipments that we have expected in Q1 shipped -- slipped into Q2. And we stopped delivering for sanction reasons, the deliveries into EuroChem, that had an impact in Q1 as well. But we still see the 7.7 million tonnes for the full year 2022.

[Julia Bock:]

The next question is coming from Andrew Stott from UBS.

[Andrew Stott:]

Can you hear out clearly?

[Burkhard Lohr:]

Yes.

[Andrew Stott:]

So I've got three, apologies. The first one is, what's the worst case for production cuts in Germany?

[Burkhard Lohr:]

You directly start with the most difficult one.

[Andrew Stott:]

Yes. I do think it was easy. But can you give me an idea of what it looks like? I think you mentioned one of the mines would be relatively unaffected. So I just wondered what sort of capacity utilization you might see in that scenario.

[Burkhard Lohr:]

Yes. First of all, Bethune is totally out of scope because gas is not an issue in Canada. And that's why I pointed out that the decision to go into Canada with a new production site was a very, very clever one. And in Germany, every site has its own story, I would like to say. So Wintershall is maybe the easiest one. That is one of the three sites in the Werra Valley. Here, we have a waste-to-energy plant, and that can secure production at this winter side -- Wintershall site. And then we would have to look in each single site, and we would not lose full production if, for example, we would have only 20% or 30% less gas available. But it's very, very tricky, what that mean -- would mean for us. And, by the way, I should add that gas is only needed for energy and heat. So we don't need gas for our production process itself like some chemical industries, for example, needs gas for the production process. So we could substitute the gas. That would take time. The most probable way would be oil, and we are preparing this. And the time we would need for that differs from site to site as well. Some sites or all -- still have some requirements that we needed because they were running on oil years ago. And on some other sites, it would be -- it would take longer, but it's possible. Sorry for that long answer, but I think that was a very, very important question.

[Andrew Stott:]

No, it's very useful. Second question was on the salt business in Europe. If you go back to the CMD in November, you obviously flagged that, that was maybe long-term noncore. Is there -- has there been any progress in your thinking on that asset?

[Burkhard Lohr:]

Now I mentioned that with the new strategy that we have disclosed in November on the Capital Markets Day that salt is noncore any -- is not a core business anymore for many good reasons. But that does not mean that we are actively going to sell it. And we are quite happy with the development of that business. Although we had a weak winter, we have seen a slight increase in sales. So it's contributing to the bottom line, and that is positive. And there's no action currently.

[Andrew Stott:]

Last question was on CO2 certificates. I think you said in the slides that you bought forward from, I think, your deficit expected from 2026. So how many years does that cover? And at what carbon price?

[Burkhard Lohr:]

Yes. Theoretically, we are now fine until the end of 2028, but we are also sure that we will find ways until then to reduce our CO2 footprint so that we might even be fine for the entire trading period, so until 2030. That's why we stopped acquiring further certificates.

[Julia Bock:]

The next question is coming from Adrien Tamagno from Berenberg.

[Adrien Tamagno:]

Just one question on price realization. How should we think about specialties and the spread versus MOP for Q2? Is it going to turn meaningfully positive in Q2 is the first one.

[Burkhard Lohr:]

Yes, we have always seen that there is, yes, the premium between MOP and, for example, SOP. But with this very, very untypical price development on the MOP side, we are seeing, of course, a significantly lower premium. And we believe as long as the MOP prices are on that high level, the premium is not going to grow further. That is a mechanism that is only working in normal price environments.

[Adrien Tamagno:]

Okay. And you say you want to have a crisis-proof balance sheet. So can you just provide some figures around that? Is it going to be less than 1x leverage or net cash? Or how do you define this?

[Burkhard Lohr:]

Yes, we see ourselves as an investment-rated company, although the rating is not yet there. So I understand that Standard & Poor's cannot do more than two notches that they have just recently done. But that is a target we want to -- even with further use of cash, want to be in this area of investment grade rated. And that would be -- depends on which figure you take. Including our provisions, it would be 2 or 2.5x EBITDA with the net debt number.

[Julia Bock:]

The next question is coming from Alex Jones from Bank of America.

[Alex Jones:]

Great. First one just on the guidance. Could you give us some color on the price that you're assuming there? Are you assuming that potash prices are more or less flat through the rest of the year? Or any declines into the second half?

[Burkhard Lohr:]

Yes. As I indicated in one of the earlier answers, we are not expecting prices to increase even more, but we are on historical high levels. But on the other hand, with this supply shortage, we are not seeing prices decreasing either. So the average price should climb quarter-by-quarter just due to the fact that the prices that we are seeing in Q1, where trades are out of -- or sales out of Q4 last year and the higher prices are rolling into our books now. But the current price environment should last for some further months on that level.

[Alex Jones:]

Great. That's very clear. And second question on FX. We've seen quite a marked move in the euro-dollar rate over the past couple of weeks. Could you give us some color or remind us on how that impacts your numbers, both short term, given the hedging you do, and then also as we go into '23/'24 when that hedging rolls off?

[Burkhard Lohr:]

Yes. That's a perfect question for Julia.

[Julia Bock:]

Yes. Thank you, Alex. So right now with the current development of the U.S. dollar, for sure we have positive effects in the revenues. But the hedging we did is kind of bringing negative effects in the EBITDA. That's normal in that space. And the best case basically for 2022 is around $1.16, yes. But you should be aware that not all of the revenues are secured or are hedged because as our revenue figures are changing with all the estimates, we are kind of running behind with the securing. So it's not 400% of the revenues, which is, in today's case, a good news. The next question is coming from a telephone number. And I cannot see the name behind it, so I hope you just mention who you are. I guess it's Markus Mayer from Baader.

[Burkhard Lohr:]

When you can hear us, we cannot hear you. Maybe you are muted.

[Julia Bock:]

There are actually no further questions in the chat. Someone is saying something. Okay. This is [Joerg Heineke]. "Do you consider yourself as a takeover target in light of the tightness in the market? And if you do think there would be massive political headwind in that case."

[Burkhard Lohr:]

Difficult one. Yes. No stock-listed company can be 100% sure not to be attacked from any side. But we are taking into account our current share price and taking into account the, yes, the consolidation in the market. So a competitor would not be able to do that because there wouldn't be no approval at all in all parts of the world and that I believe the probability is quite low.

[Julia Bock:]

I can see another question from Andrew Stott, but it might be the old risen hand. So maybe you give me a sign if you want to ask another question.

[Andrew Stott:]

Yes, I did want to follow up, actually.

[Julia Bock:]

Okay.

[Andrew Stott:]

Yes. It was on the Bethune extra costs, the €50 million. Is there some natural cost inflation in that number as well? Or is that just purely the extra production you're hoping to achieve?

[Burkhard Lohr:]

That is purely and 100% extra measures that we take to get to 50,000 tonnes annually more.

[Andrew Stott:]

And just to remind me, sorry, I should know this, is it 150,000 to 200,000 or 100,000 to 150,000?

[Burkhard Lohr:]

100,000 to 150,000.

[Julia Bock:]

So one last chance for the telephone number which wants to raise a question. It is 232 at the end. No. Then we don't have any further -- oh, there's another question from Christian Faitz. No, he's taking that back. All right.

[Burkhard Lohr:]

No?

[Julia Bock:]

Okay. He wants to do it.

[Christian Faitz:]

All right. Yes. Sorry for the gaslighting, by the way. Our plants are broken in the office, and lights. So on Bethune, can you remind us of your plans to ship volumes into the U.S. rather than into China and Brazil? How are we progressing there given that, obviously, also the U.S. market is quite attractive, never mind the 4 million tonnes of -- sorry, 4 million-acre switch from corn to soy? But what are your plans there for this year in terms of shipping volumes into the U.S.?

[Burkhard Lohr:]

Yes. Thank you. We are continuing to increase the volumes that we are going to ship into the U.S. We said the target is 500,000 tonnes that -- we should be able to do that maybe in '23, maybe in '24, but we are on a good way. And it should be close to 300,000 tonnes, what we are going to do this year. And China, we are talking about different products, standard and granular. But nevertheless, you mentioned China. Due to the netback situation, we are going to reduce the Chinese volumes again compared to last year. And we also started shipping volumes into Europe for the -- from Bethune. For the time being, we are, yes, the last significant remaining EU producer and, yes, allocator of potash in this area, and that is our contribution to stabilize the agriculture situation here in Europe.

[Julia Bock:]

We have one more question from Lisa De Neve.

[Lisa De Neve:]

On the back of your comment that you're shipping more volumes into Europe, are there any logistical challenges or limitations to doing that from your Bethune side, which may be due to your production or simply the fact that there's problems in the supply chain essentially?

[Burkhard Lohr:]

Now what we are doing here is bulk, and bulk is possible. It's, of course, also more expensive than it was years ago, but it's possible to get shipments of bulk products from Vancouver into Europe.

[Julia Bock:]

And then I received two questions from Markus Mayer by email because he could not unmute himself. So one question is on the change of interest rates and the impact on the discount rate for pension and environment provisions. So the positive effect we saw in the financial result. One by one, right?

[Burkhard Lohr:]

[Indiscernible]

[Julia Bock:]

Yes. Okay. So yes, Markus, we already had a positive effect in the financial result in Q1 coming out of that, yes. So it -- there is a positive one. And I guess if you will see further changes, this will also continue. And the other one is the financial effect of the bond repurchase. But we didn't have a bond repurchase in the first quarter. So it was all done in Q2 of last year. And the financial effect was, first of all, a negative cash outflow but with now lower interest, which will, over time, level out.

[Burkhard Lohr:]

Next in June.

[Julia Bock:]

And the next bond repurchase is in June, exactly. This is €250 million -- €200 million, yes.

[Burkhard Lohr:]

No more?

[Julia Bock:]

No.

[Burkhard Lohr:]

Okay.

[Julia Bock:]

Okay. We don't have any further questions, so thanks a lot for the questions. I would like to hand back to Dr. Lohr for the closing remarks.

[Burkhard Lohr:]

Yes, not much left to say, but I would like to say thank you for taking the time to join this call, and thank you for the good questions. I think we have really covered everything which is important for us. And we really hope that the world is more peaceful when we see us next time on that call. And after the -- corona was not even an issue in this call. So therefore we are able to travel again, and we will see some of you live during our roadshows. Thank you very much and all the best to you. Bye.