K&S AG
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K&S AG
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Welcome to the K+S conference call regarding the publication of the quarterly report for Q1 '19, hosted by Dr. Burkhard Lohr, CEO. [Operator Instructions] Please note, on Page 2 of the presentation, you will find the disclaimer.I'm now handing the call over to Dr. Burkhard Lohr to begin today's conference. Thank you.
Thank you, operator. Ladies and gentlemen, welcome to our Q1 conference call. Let's start right away on Slide 3 with our highlights of that quarter.My first message is, ladies and gentlemen, we have delivered. EBITDA and cash flow are clearly above last year's achievement. Bethune production increased further, and our German mines operated much better as well. Strong potash pricing and wintry weather in the U.S. and Canada also helped us. As a result, the EBITDA of our operating unit Europe+ and Americas increased by 14% and 12%.The adjusted net profit is up almost 30%, and the free cash flow of EUR 233 million is up even 63% compared to last year. In fact, this has been the strongest quarterly cash flow in 8 years. As a result, we started deleveraging our company. Now please turn to Slide 4 to have a closer look at this topic. Ladies and gentlemen, we are on the right track to reducing our indebtedness, and we confirm our target to half net debt and net financial debt to EBITDA by the end of 2020. As I said before, 2018 was negatively affected by Werra outage days. Adjusted for this, the financial debt to EBITDA would already have been at 3.9x by the end of Q1. Please have a look at Slide 5 to see the development in our different customer segments. This is the first time, ladies and gentlemen, that we are talking about our customer segments with analysts and investors. Let's take a one step back. Why have we changed the old reporting? Within the two biggest potash and salt segments, we lost a lot of potential. Apart from lost synergies, we were too production oriented, and at the same time, not customer oriented enough. We did not put enough focus on business like industry or consumers. For example, did you know that our industry business generated the highest margin across K+S in 2018? With our new reporting structure, we started to manage the company with the new metrics organization. Let's begin with agriculture. Mainly due to better pricing revenues, [indiscernible] EBITDA increased notably. Our new mine in Canada made further progress. Bethune EBITDA was clearly positive in the quarter on the review and up against last year. Our industry consumer segment, customer segment, is comprised of our former potash and salt products. In combination, this is a 10 million tonne division, which is generating sound and relatively stable margins. Sales and EBITDA are fairly equally spread over the quarters. In Q1 2019, we reached last year's revenues, although availability of product was lower, due to the closure of our [indiscernible] mine. In earnings, [indiscernible] customers improved, where [indiscernible] freight costs are still weighing on profitability. Both revenues and margins increased in our consumer business. A more favorable pricing environment and tailwind from [ FX ] has helped us to recover profitability, which was somewhat under pressure due to increased freight rates.In Europe, we are further developing the new salt brand, [indiscernible]. Our [indiscernible] trucks are already driving across the country. At [indiscernible], the community [indiscernible] from the severe and long-lasting winter conditions in the U.S. and Canada. Volumes were even better than last year, and as a result, prices rose. Now we are looking positive into the next [indiscernible] summer. First [indiscernible] indications are promising.And now, please turn to the next slide to talk about full-year guidance. First of all, we confirm our 2019 EBITDA guidance of EUR 700 to EUR 850 million. We also confirm production levels, expected [indiscernible] tonne of our potash production, and target sales volumes. After positive active development and good winter businesses in Q1, we feel confident with our EBITDA range. Please remember, this assumes that we will not face drought-related outage days in the months to come.At the moment, production is running smoothly. [Indiscernible] are roughly 18% filled, and we've already started with transportation of saline waste water for [indiscernible] disposal. In summer, we additionally expect a permit for a temporary underground storage of 400,000 cubic meters. The good news, by obtaining this permit, we will be able to handle a summer like last year without outages.Let's sum up what we've achieved so far on Slide 7. We are happy with our Q1 achievements. Our operating performance improved both Bethune as well as [indiscernible] mine. Our wastewater management improved and makes us more robust. The first quarter also shows that we are on track to reach our main target, becoming free cash flow positive in 2019. All in all, we can confirm our 2019 guidance given in March and the targets we have set so far for year-end 2020.Finally, we see further improvement, due to our newly reshaped organization. This will help us generate significant synergies of more than EUR 150 million, and we can now manage our company much better, customer-centric. This will set the foundation for our growth options after 2020.Ladies and gentlemen, we are now happy to take your questions.
[Operator Instructions] Your first question comes from the line of Thomas Swoboda from Societe Generale. Please go ahead.
I have three questions, please. Firstly, on free cash flow and inventories, obviously it sounds like you have slowed down quite a significant chunk of your inventories in Q1. My question is, how should we expect working capital to develop, especially in the second half of the year when you expect to ramp up your production volumes in Bethune even more?
Yes, Thomas, I would answer it that way, [indiscernible] working capital will increase of course. When you compare it to last year in general, the ramp-up is not as steep as in 2018, so we would see across the year a positive working capital effect on the cash flow.
Perfect, thank you. My second question is on the logistics costs. You have guided for EUR 40 millions this year. I'm just wondering if this includes using the additional 400 cubic meters of storage, temporary storage facility, or should we expect a higher number in case we should really get a very dry summer like last year.
Thank you for that question. First of all, I [indiscernible] logistic costs for our salt waters for our transportation from the [indiscernible] to other mines, mostly in Lower Saxony. And we said EUR 40 million was the number that we had last year, and that would be the worst case for this year as well because we cannot do more for logistical reasons. We are not expecting the EUR 40 million in the midrange. It would be more or less one trigger to bring the EBITDA a little bit down, and currently, we are quite optimistic that we would not need the EUR 40 million entirely. But of course, nobody knows how the weather continues from now on. But additional storage facilities with what we have underground in summer, which gives us another [indiscernible], that must really affect the water that we have to transport. That is more or less linked to real weather conditions, because we cannot store [indiscernible] waters, only production waters underground. Therefore, we have to continue transporting waters, even if we have these additional storage facilities.So to sum it up, it could be up to EUR 40 million impact, but with this additional storage facility, we will most probably not have outage days.
My last question is on pricing, and especially regarding Brazil. I mean, we have these trade talks between the U.S. and China becoming hot again, and we have the African swine fever in China on top. There was also a slow start into the U.S., the North American fertilizing season. Do we need to fear that competition, especially in Brazil and in Asia, will heat up as everybody will try to sell there and that we will see some more price pressure during the year, especially compared to last year? Could you share your thoughts on the current competitive environments and price development with us, please?
Yes, absolutely. First of all, we are not seeing this yet, and we believe that over the year, and that is what my colleagues have communicated as well, so they see also the other producers, that we will at least have a stable demand over the year. And there are no meaningful additional capacities coming into the market, so yes, we have the issues that you have mentioned, but we have still a very bullish Brazilian market. We have a stable European market. Asia started weak into the year, but now it's picking up. So, all in all, we are not changing our view on the market and on the price development, which is, say, at least stable demand compared to last year, and we expect stable pricing compared to the end of 2018 for the full year.
The next question comes from Chris Ryan from Bank of America. Please go ahead.
I'm just trying to obtain a like-for-like comparison. So for the volume guidance that you gave for 2019, it's subtly different from what was given in last quarter and [indiscernible]. So is there any change to the production volumes for potash versus your expectations at the last [indiscernible] call? And the same question for salt as well.
So let's take the total volume, total potash volumes, which is of course agriculture and industry now. We have no change in the total volumes. So we have the same base for our guidance as we had in March, the same 7.7 million to 7.9 million tonnes of production. And the [ changed ] factor here is Bethune, as we are still in the ramp-up, so it could be 1.7 to 1.9 million.
Got it. And no change in your expectation for the salt lines?
No.
The next question comes from the line of Markus Mayer from Baader-Helvea. Please go ahead.
One question from my side on these new segments. You had an industry stat that you had a negative [indiscernible] maybe some more work from this [indiscernible]. And also, on the consumer segment, you have here earnings jump, here some [indiscernible].
Markus, [indiscernible]. I think what affects -- what I want to summarize, the customer segments, we have seen a good development in consumers, which was pricing related. The industry effect, the negative one is less related to the product mix. It's more -- here you see especially the higher freight cost impact. It is harder to pass on this to the customers, as we also have here longer lasting contracts. In general, this is why the industry business is going back in terms of -- it's increasing in terms of revenues, but decreasing in terms of the profitability in the market.
The next question comes from the line of Neil Tyler from Redburn.
[indiscernible] the topic of freight costs, so I wondered if you could give us an indication of, in absolute quantity, what those comprised over the course of 2018, and specifically within the communities customer segment, what the absolute number was and how you expect that to change within your budgeting for 2019, please.
Given that community is, yeah, only consisting of the old salt, [indiscernible] when you look back at 2018, 1/3 of the total cost was related to freight costs. This was already in 2018 elevated because we had the higher costs already, and this is what we also see going into the new year. Overall, for us, the water, when you look at the total group cost, it's related to freight costs. This is of course the total freight, yeah? This is not related to the salt water. The salt water is what [indiscernible].
Yes, I was asking about freight exclusive of salt water. And year on year, if you can give us an indication how that number moved during the first quarter [indiscernible] terms or whatever.
It is rather -- it's only marginally increased, so in terms of costs or a portion of total costs, it's a little bit more than [ 1/4] in both quarters.
The next question comes from the line of Christian Faitz from Kepler. Please go ahead.
A couple of questions from my side. First of all, can you please elucidate on your [indiscernible] plan for Bethune for this year, and also for the next few years going forward? And, on that, will the Bethune volumes sort of predominantly be earmarked for North American markets?
[indiscernible], Mr. Faitz, one by one.
All right, thank you.
Okay, now I got it. Yes, our guidance for this year is 1.7 to 1.9 million tonnes, which is already 300,000 to 500,000 tonnes more than last year. And to [indiscernible] point is still 2023, with the 2.9 million tonnes, full capacity [indiscernible] 2.86 million tonnes. So the way to this full capacity should be a more or less flat line. The only question mark that we still have is how will the ramp-up of the secondary mining continue, because as you know, we have only started and this is a new technology for us, so there is a little bit of an unknown in that, and we're talking about 900,000 tonnes of secondary mining volume. So we assume now a flat line, but it could differ a little bit. We'll keep you updated on that.
Okay, great, and now to my second question. Can you please give us an assessment of de-icing inventory levels of your customers, both in North America as well as in Europe? Thank you.
So we have low levels, very low levels in the Midwest. We have seen that even [indiscernible] our storage [indiscernible] were completely empty, and we know that from the competitors and some customers. The East Coast is more or less on a normal level. The same is true for Europe. [Indiscernible] Canadian, this Canadian summer, we are a little bit below average in inventories in Canada as well.
The next question comes from the line of Patrick Rafaisz of UBS. Please go ahead.
Good morning, and thanks for taking my three questions. The first is just a follow-up on your production guidance for potash this year. You already mentioned Bethune plus 300,000 to 500,000 tonnes. Should I assume all the other indications you've given us with Q4 are still valid? So 500,000 tonnes from Werra, excluding Neuhof, and minus 100,000 tonnes from [indiscernible] in Germany, et cetera. So all of that's still valid?
All of that is still 100% valid, and we have looked in -- people in the last remaining, if you wish to call it, issue in Neuhof. We are on track here. We have started in the mining in other areas, and the second half of this year should be back to the original plan so that we only have this negative impact of 100,000 tonnes. And all the other issues that you have mentioned and explained precisely are still valid.
Okay, thanks, and the second question is actually a follow-up [indiscernible] and on what you've said on the secondary mining in Bethune. We've talked about around 100,000 tonnes from secondary mining this year. That's valid as well, I assume.
Yes, we said it could even be 200,000, so between 100,000 and 200,000 tonnes in secondary mining, and that is one reason for this variance that we have given you. And, granted, this is the biggest unknown for us, how it really ramps up.
Okay, thanks, and the last question is on the specialties, or specialty fertilizers. In the past, we talked about pricing being delayed here due to contract structures. Is pricing catching up now already, or will that just follow in Q2, Q3?
Now we see the development that we have seen in the past as well. If MOP [ trends] pick up, we see a time gap between picking up of the SOP for example, and now we have seen the continued nice development here.
And expect it to continue, you think, in the --
We have seen it, and we expect this to be in the [indiscernible]. For example, one reason why we had this rather high average selling price in the first quarter, because in Q1, we always have a positive mix effect, higher specialty portions, and with this price development that I have just elaborated on, we ended up with this nice number. But it should recover over the year, not due to total price effects, but to [ a mix of] factors.
The next question comes from the line of Andreas Heine from MainFirst. Please go ahead.
[indiscernible] various moments, the first which is a little bit how you do the cost allocation between the product business in agriculture and industry. So if you see some fluctuation in the unit cost quarter-by-quarter or year-by-year, is that then exactly what we can take as costs in the industrial business for potash? That's the first one.
Yes, I mean, we look really in where do we sell the product to, and this is where we allocate the costs to the different instruments. And we are able to allocate to 80% of the costs directly, and the rest we check by looking at the [indiscernible] volumes confirms that. So when you take [indiscernible] volumes, that is a proxy for that.
And the second one, the FX rates in your guidance [indiscernible], so we are now at the more favorable rate. If you take the current rate we have and have your hedges in mind you have for this year, what would be the impact on EBITDA?
Yes, I can only repeat what [indiscernible] should we change our assumption now. But, I mean, usually at this point in time, you don't even get more concrete guidance from us. So we stick to our guidance range, and we also stick to the assumption of the 120 in our planning and in our forecasting for this year. We told you that there is a positive effect when we see an ongoing rate of [ 115 ], and if we do see this for the remainder of the year, there's a 30 million benefit to our current assumption.
For the remaining three quarters?
For the remaining, yes, because first quarter is [indiscernible].
Then on the average price we've seen in agriculture, [indiscernible] always a mix effect. Looking forward to the coming three quarters, just very qualitatively, where is the mix then in this agricultural segment quarter-wise? Which is the strongest, which is the weakest, just if everything stays as it is?
The first quarter is clearly the strongest. I mentioned earlier that we had a lot of specialty sales in the first quarter traditionally. And then we should see the price -- [indiscernible] the same price environment, we should be [indiscernible] lower average selling prices in the quarters to come. And that is not only the sales mix; it's also that we are expecting, as you know, a ramp up of Bethune. We started nicely into the year, but there is more to come, and that also has an impact on the average selling price of [indiscernible].
Thanks, and the last one, very briefly, could you elaborate a little bit more on the industrial segment trends? So the impact I've seen in the earnings, is that driven more by the volume or by the costs, or what was that? What can we expect from the trend which is more [indiscernible] related in the coming quarters?
It's driven by price, and I mean, we have a slightly lower volume than last year, so I would say that for the rest of the year the volume development should be rather stable. We expect in general a growth of, let's say, 1% to 1.5% overall of this product in [indiscernible]. Like with the old salt segment, [indiscernible] broad range of products, so you have some segments that are growing quicker and some certainly also are not growing at all. I would say it [indiscernible] rather flat when you talk for the rest of the year. Longer term, we see a marginal increase there. We see a beneficial pricing, but keep in mind what we said earlier. Here is where the freight costs are hitting us, at least in this year, and we are not yet able to pass on this to the customers.
The next question come from the line of Chetan Udeshi from JPMorgan. Please go ahead.
I just had a question on the current trend that you see in the industry in the potash market, because it seems the prices have been sort of edging down. At least [indiscernible] prices have reached over the last quarter. So, and you know, there have been sort of reports about [indiscernible] sort of [indiscernible] into Brazil, especially in the first three months of this year. How do you foresee the inventory situation in some of the key regions for K+S in terms of potash, and any comment on [indiscernible] prices are sort of, you know, sort of have seen some moderation in the last few months, basically? Thank you.
We have already indicated that we are expecting prices to remain on the level of the end of last year. We said that since the beginning of the year already, and obviously, we were correct with this assumption, which is positive. You know that we had a price rally between '16 and '18, and it's more sustainable if we remain on this [indiscernible]. And it looks pretty much that the industry could achieve that to [indiscernible] with some stronger areas like Brazil, and here we will see another very good year. So the inventories, and you were asking for inventories, are on the lower level. A different situation in Asia, which is much less relevant for us because our volumes into Asia are growing due to Bethune but are not on a very high level yet. I can see that, slowly, markets are [ fitting in]. And Europe is fine. Our home markets, we are on the healthy development. We had a lot of rain, which is good now for farmers [indiscernible] seasons.So, all in all, we are happy with the development and the -- that's why we confirm one more time [indiscernible] demand globally and stable prices.
The next question comes from the line of Marc Gabriel from Bankhaus Lampe. Please go ahead.
Good morning, everybody, and congratulations on the perfect results for Q1. Just two questions from my set. First of all, on the de-icing salt business, you mentioned that stock levels are low in the U.S. Midwest. We saw already a price increase year over year. Is it fair to assume that additional 10% is possible with the new negotiations with the communities? That's my first question.
Thank you, Gabriel, for your congratulations. We like to take it because you know that we had some more difficult quarters behind us. But coming to your question, it's too early. We have seen only very few bids, and we're talking about hundreds of bids. But the probability that you discussed with the number in the Midwest is realistic. But we also have the region in the East Coast. Here, we might end up with a slightly lower price. But in total, we expect higher prices. And then it's important to see that the volumes kick in in Q4.
Okay, then second question I have on the segment customers, you mentioned the positive pricing effect. That margin development, or that jump in EBITDA, despite the stable volumes, is that a sustainable number going forward for the next quarters, or is that just a one-timer?
It's really hard to say, Marc. I wouldn't consider it as a one-timer because, I mean, we are pretty successful. You're talking about consumers, right? You said customers, consumers?
Yes.
We have strong brands, but there's tough competition [indiscernible] going on from white label products, so we have to fight for customers. We tried to get our higher costs passed on there. We are most of the time successful, not always. So I wouldn't say that there's a straight line going up further, but we should be able to achieve that level at least.
So you're more targeting for a margin goal in that segment?
Yes, of course. We're not talking yet revenues, and we have to see that we get higher costs compensated, so margin is rather the right thing to look at.
The next question comes from the line of Markus Schmitt from ODDO. Please go ahead.
You renewed recently your [indiscernible] credit facility consisting of [indiscernible] a new term loan. You highlighted favorable conditions in the press release. Could you explain how the loan [ is affecting] price?
I'm a little bit reluctant to talk about conditions in the not public facility, so they are favorable, but I don't want to give any details on the numbers.
Will this be presented going forward in any of your documents?
I think I will also be unfortunately reluctant to do so. I mean, this is [indiscernible] pricing, that's what I can say, yes? So it's linked to the [indiscernible]. We pay a margin to this, so it will vary anyway, but I think this is nothing new. And it is favorable compared, or taking into consideration our rating and -- yes, but that's all I want to say.
Well is it lower than the previous one, or higher? Can you disclose that?
The previous one was done a couple of years ago, where the interest rate environment was a different one, but also our rating was a better one. So looking at this, it's not as favorable as in the past.
The next question comes again from the line of Neil Tyler from Redburn. Please go ahead.
Follow-up is on the injection permit, the [indiscernible] water injection permit that you referred to in your opening comments. You [indiscernible] confident of receiving approval for that permit, so I'd like to ask if you can share any of the reasons for that confidence. And following on from that, would --
May I answer first, please, because we want to answer one by one? Or this still belongs to your first question, what you wanted to say.
Well it still belongs to the first question.
Okay, sorry.
It's all right. So the question is, hypothetically, if you weren't to receive the approval, could you still reach your volume production guidance [indiscernible] effectively protecting you through the down side? And could you give us a picture of any other major product [indiscernible] over the next two years, please?
Yes, thanks for the questions. First of all, [indiscernible] avoid misunderstandings. We are not talking about an injection permit. We have an injection permit which allows us to [ deep well] injection [ 0.5 million] cubic meters a year. That will run out by the end of 2021, and we are working on a succession for that, which there is the storage of waters underground in the [indiscernible] area, and not only temporary, but continuously. And that looks pretty good. We will, from my reading, have the permit in hand early enough to have no interruptions.What we are elaborating on here today in this quarter is a temporary storage underground of 400,000 cubic meters. And why I'm so optimistic, because we regularly talk to our authorities, and they have defined conditions, and we are able to meet these conditions, and then we are only talking about timing. But somewhat in summer, we will have this in hand, and then we are pretty sure not to have any production impacts and we will be able to meet our target of, in total, 7.7 to 7.9 million tonnes. And that's so important because [indiscernible] producing most of our specialties. Does that answer your question?
Yes, I think I understand, but I just want to make sure that if you don't receive this permit and there is a dry summer, then that's the threat to the volume. But if it's a normal weather environment or conditions, then the -- each additional underwater storage wouldn't be required.
Exactly. So if we don't get this, we have the same environment as last year. The good news is we could [indiscernible] totally over the winter, but that was the case in '18 as well. So if we don't get the approval, we have the same situation as last year. But that means we would need another drought in Germany to have outage days. But that is only theory. I'm very optimistic that we get this additional --
Yes, I understand. I just wanted to understand the potential probabilities. Thank you.
The final question comes from the line of Thomas Swoboda from Societe Generale. Please go ahead.
Thank you for taking my follow-up, and it is regarding the resource tax increases in Canada. Could you just remind us, please, what effect this increase in mining royalties do have on your P&L in the short term? And especially, what do they mean regarding your targets for 2030, please?
That's what we still consider as short term, as you know. There is no immediate effect because, as a new kid on the block in Canada, our [indiscernible] from some taxes over there, so for the next 80 years, this is not affecting us. In the long term, yes, we also do see an increase in the product production tax, but this is hitting us beyond 2028.
Thank you. We have no further questions coming through, so I will now hand back to Dr. Burkhard Lohr for the conclusion of the call. Please go ahead.
Thank you very much for joining us today on this call, and we are quite happy with the outcome of the first quarter. And be assured, we are working hard to deliver the other three quarters, and we're looking forward to see you on the road in London [indiscernible] to be -- to answer more questions. And thanks again, and have a nice day. Bye-bye.
Thank you. That will conclude today's conference. Thank you for your participation, and have a pleasant day.