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 Q3 '20, hosted by Dr. Burkhard Lohr, CEO. [Operator Instructions] Please note, on Page 2 of the presentation, you will find the disclaimer.I am now handing the call over to Dr. Burkhard Lohr to begin. Please go ahead.
Thank you very much. Ladies and gentlemen, welcome to our Q3 call, and let's start right away with Slide #3. Despite difficult market conditions, Q3 was another decent quarter. Due to lower potash prices in agriculture, we lost a good EUR 50 million compared to the previous year. We were able to partially compensate this decline by showing the strong operational performance of our plants, to which Bethune, in particular, made a significant contribution. In addition, we had strong cost discipline and did our utmost to make optimal use of our logistics network. As in the first and second quarter, we had a COVID-19-related burden of around EUR 10 million for employee protection measures and to ensure production. As already indicated in August, we were able to more or less compensate for these efficiency losses for the year as a whole with actions from our package of measures. We were, therefore, able to increase EBITDA from EUR 88 million last year to EUR 96 million. On the back of a lower cash CapEx, free cash flow has also improved to a negative EUR 116 million. Of course, on a net profit basis, the noncash asset impairments resulted in a significant loss of almost EUR 2 billion in the quarter.Now turn to Slide 4, please, to have a closer look at the Agriculture customer segment. As expected, demand in agriculture was good in the Northern Hemisphere and Brazil in the reporting period. The tense situation in Southeast Asia has started to improve. This also takes off pressure from the European market. Prices for our fertilizer facilities remained largely stable, and we expect the price recovery to continue in most overseas regions, as producers are widely committed until at least the end of the year.Please turn to Slide 5 to have a closer look at the Communities customer segment. In total, de-icing volume in the second quarter were about 30% below the level of the previous year, largely due to high stock levels of our customers at the beginning of the bidding season. However, since we have multiyear contracts with many customers and fixed prices, we only assume slight to moderate price decreases overall.Please turn to Slide 6, we have a closer look at the Industry and Consumer customer segment. Some subsegments such as food stores, hotels and restaurants, our chemical stores for the automotive industry are affected by the corona pandemic. Other subsegments have benefited. The described one-off effect from our package of measures, a significant improvement in operational performance, high-cost discipline and the optimal use of our logistics network also contributed to the positive earnings development. Revenues we lost in food sol in the B2B area were more than compensated for by the demand in the Consumer customer segment. We continue to see a strong demand for stay-at-home products, for example, table salt, water softening and pool salt. This shows the robustness of the business has been proved during corona pandemic.And now please move to our outlook on Slide 7. For 2020, we continue to expect EBITDA of around EUR 480 million, including onetime restructuring expenses of up to EUR 40 million. We continue to expect free cash flow around the breakeven point with this EBITDA guidance. Due to the impairment, EBIT and group earnings after tax will be strongly negative in 2020.Please turn to Slide 8. We adjusted our long-term assumption of potash prices as well as higher cost of capital. Based on the current potash price level, we continue to expect sustainably rising prices in the short and medium-term. The assumptions for long-term price development is now lower than previously assumed. Overall, this resulted in a one-off asset impairment in the Europe trust operating unit of around EUR 2 billion. However, this measure does not lead to an outflow of liquidity and does not change the indebtedness. With this measure, we have cleaned the balance sheet and thus, have more room to realign the company.Please turn to Slide 9. Ladies and gentlemen, as you can see from our October report, we have reached an important milestone. The signing for the sale of our Americas operating unit to Stone Canyon Industries Holdings, Mark Demetree and affiliates at USD 3.2 billion. As the currency risk is now fully hedged, we expect net proceeds of around EUR 2.5 billion. The closing is expected in summer next year.On Slide 10, I would like to briefly outline how we are setting K+S up for future. First of all, I would like to state that our business model is intact, which has been all proved the corona pandemic. There are no substitutes for potassium at our minerals in our portfolio. They are essential for feeding the world's population. The mega trends, such as rising population and less arable land per capta are still valid and clearly speak for an increasing demand for fertilizers.The sale of the operating unit Americas is an important milestone to delever the company. We are currently developing our new vision and strategy. The following targets will be part of it: one important goal is that our plants in Germany and Canada will generate sustainable cash in the future, even with low potash prices and green winters. We will reach this with an optimized production footprint and an optimized product portfolio. Due to our improved financial situation, we will also have sufficient headroom to grow in specialties.Ladies and gentlemen, this concludes my presentation, and we are ready to take your questions, one at a time, please. Operator, please open the line for our Q&A session.
[Operator Instructions] The first question comes from the line of Christian Faitz from Kepler Cheuvreux.
So 1 question at a time, I got -- I have 2 overall. First question. On the impairment, you are flagging lower long-term potash price assumptions. If I remember correctly, Bethune was planned with a long-term potash price of around $430 per tonne. If that used to be your long-term price assumption, where is it now? And moreover, which assets are mostly affected by your impairment? I assume it's Bethune. So can you share with us Bethune's book value?
Yes. Thanks for your question. Our original assumption, when we put together the business plan for Bethune was a price -- a long-term price of USD 470. That was back in 2011. And in the long-term projection of potash prices, it's important to stress again, we believe we have good reason for optimism in the mid- and long-term -- mid- and short term. But the prices at the long end had to be adjusted. If we see -- if we look at what the prices have done over the last 2 to 3 years. And that was a major trigger. And, of course, don't forget the WACC. We will not be the only one to be forced to assume a higher WACC, and that was another trigger to do this now. And it affects both Bethune and Germany. Of course, Bethune is a newer investment with higher assets. So roughly 2/3 are on Bethune and 1/3 on the German assets.
Okay. And can you -- would you mind sharing with us your new potash price assumption in the long run?
That would be a long time potash price forecast, and please accept that we are not willing to share that with you. But it was a significant reduction.
From the $470? Okay. Then my second question, agriculture. Your pricing in Europe is sequentially weaker compared to a sequential improvement in overseas pricing over the past 2 quarters. Can you please elucidate the reasons behind this? Is it just FX related? Or have your specialties lost some of their pricing power?
Nice. It's more or less a timing effect. You know that Europe is less volatile, but it reacts, of course, on what's going on in overseas. And this comes with a time lag, and that's what we are seeing now and all the other effects are -- have less effect on higher European price, but that gives me the opportunity to elaborate on what we are seeing currently in the market. And there are a lot of good news. China local prices were up by USD 25. We have seen a significant increase in the U.S.A. You could claim, you only have a small portion in the U.S. business, but that takes pressure from other areas. Crop prices like mace, corn and soya are up. India gained from a good monsoon. And we see more tenders in the Southeast Asia area. So a good bunch of good news and that should lead to higher prices overseas and with a time lag in Europe.
The next question comes from the line of Markus Mayer from Baader-Helvea.
I have 2 questions as well. First one is on the restructuring, cost-cutting measures. Can you give us a flavor how much of the Q3 result came from cost-cutting measures? And how much of these savings are also sustainable, I guess, also there are several temporary cost-saving measures included in Q3 results.
The major portion of the effects will run into Q4. We only had a small -- it's a single-digit amount affecting the cost base from the restructuring measures. But again, the provision building for the rest will be done in Q4. But therefore, we will gain -- no gains this year. But we will gain not the full EUR 60 million, but the biggest portion of the EUR 60 million already in 2021.
Okay. Understood. My second question is again on the impairment. If I could remember correctly, in 2016 in several conference calls, but also road shows, there was always the question on the impairment. And at this time, it was set as long as the potash price stays above the USD 200 per tonne level, there is no impairment risk, is Bethune -- the business plan is a long-term business plan. And therefore, the risk the next year is basically around 0. And now we have this EUR 2 billion impairment, of which 2/3 are coming from Bethune. So I'm still struggling on the timing and also -- I'm also struggling on this, what is that the risk premium increase at the WACC. Maybe you can shed more light on this?
Yes. [ Thorsten Boeckers taking here ]. I think with the pricing, we have to see -- it's a long-term price role, yes. And as Burkhard stated, we expect an increase of the pricing. But at a -- yes, let's say, a slower pace than we originally anticipated, also in the long run and the long run plays, of course, a major role in this calculation.The second is, over the last years, we also experienced higher environmental CapEx, which affects our free cash flows. We have to see for the next years negatively and higher costs for environment like energy costs in Germany. And when we look at the WACC, this changed as well, we -- I would say on twofold here, it's a higher market risk premium on the equity side we have to apply. And also the yields, we see this with our own bond use, but also with that of the peers, we see an increase so that we could not longer hold our previous assumptions. So it's a huge spreadsheet, which -- with many changes.
Okay. Understood. And if I might steal another question. Can you update us, when you announced this new strategy and also this plan to change K+S and also to cut costs and use efficiency measures to drive earnings. You also said that potentially the management incentivizations previously was linked to return on invested capital mainly, should be also linked to the share price on the earnings performance. Can you update us here what are the current management links to the incentivization or the kind of triggers for the incentivization?
Yes. That was -- in that question, I think I heard many questions, not only one. So the update on our mission and strategy, latest to the next AGM, but you should not expect all new, many aspects out of Shaping 2030 are still valid. But of course, with such a big cut, we sell a good portion of our business. We have to adjust our vision and our strategy, and this is what's going to happen now. And it's not only cost cutting, what we are looking in, it's a way to set up our business more intelligently, and we will create some additional ideas.When it comes to the management compensation, yes, we now have a big portion of share price development in the variable payments. And of course, the performance of the running year. And in the long run, we also have sustainability targets in our compensation.
Okay. And return on invested capital is still included? Or is it not anymore part of the incentivization?
No, that's not part anymore.
The next question comes from the line of Chris Ryan from Bank of America.
So with the proceeds from the Americas sale, will you look to simply repay the short-time loans? Or will you look to refinance the short-time loans?
Our commitment is to pay down our debt instruments, which means we would also pay back the short-term loans.
Got it. And do you have a gross debt target following the Americas sale.
Not a target that we laid out yet. This is certainly part of the strategy review. But again, our goal is to pay down our upcoming maturities with the proceeds. And so you can do the math a little bit on your own how much of the gross debt will be paid back.
Got it. And just 1 quick one. Are you able to give the amount of the factored receivables that are outstanding as of September?
The amount -- yes, so it is a good EUR 100 million.
The next question comes from the line of Lisa De Neve from Morgan Stanley.
3, if I may. So the first one, I was actually going to ask more about the factor of receivables. But maybe a broader question on net working capital. Can you share how we should think about net working capital in 2021, given this year, you were helped by your factored receivables? And also, I presume you're going to build some inventories as you're ramping up Bethune, as we're probably going to have a decent spring next year?
So there was 1 special effect in 2020 in the first half of the year where we had a negative working -- or cash-wise, a negative development of the working capital. This was because we ended 2019 with low production, and we needed to refill our stocks and inventories in 2020. And given that we keep a strong production, we go with a good inventory level into the year 2021. So I -- and most of the measures we have taken to improve our working capital, we will keep, but I wouldn't expect to come a lot on top here, so that we go with a rather -- yes, a neutral working capital development throughout the year 2021.
Okay. And then [indiscernible] now closer to give us something, let's say, close to potash pure play. Can you share a bit of detail as to how you plan to be free cash flow positive across all German mines? And specifically, what type of measures, I mean, can you undertake to structurally lower the cash cost in some of these mines?
Yes. This is not impossible undertaking, that is the first answer on that. We are already, even on the current potash prices, cash positive on some German lines. The one who is suffering the most is maybe not a surprise, is Werra. Here we have very nice earnings, but we have significant environmental CapEx, which is in a way, in a peak situation this year and next year due to several measures, heat extension, et cetera. So the answer on that -- and Bethune, of course, is only a matter of ramp up. So the focus will be Werra and ramping up Bethune. And here in the Werra is to find more intelligent answers on the environmental side, to also look into our product portfolio and not only on the cash backs, but also on the direct and indirect costs that the production of some specialties bring. And of course, cost-cutting will be something which will never end in a mining company, but these measures more or less will bring us, and I want to stress even on a low potash price, that is the task to at least break even free cash flow-wise.
Okay. And then just the final one. I mean, you mentioned during the presentation that you will look to grow on the specialty side. Can you just give a bit of details on how you plan to do that?
That is also a bit too early. Let's give us the next couple of months to build a complete new vision and strategy, and that will then answer your questions. But again, it's not all new. What we have seen -- the strategy to grow in specialties, we have already claimed with our Shaping 2030 back in 2017. And the last years have proven that this is a good idea because here, the prices are stable and not as volatile as the MOP prices.
The next question comes from the line of Markus Schmitt from PRISMA Investment.
Yes. I'm sorry, I was on mute. So the first question is about your asset sale in North America. And if you could tell how certain are you that [ U.S. cut ] office will approve the transaction? If not, if you have negotiated a breakage fee with the purchase? And then I have a second question.
Yes. Of course, the antitrust authority measures is the main step we have to take between signing and closing. That's correct, but allow me not to elaborate further on that. And what was the second part? And yes, we have a breakup fee in the contract. But here, I also wouldn't like to give you more information about that.
Okay. And assuming sort of the positive of it, so everything will work out as expected. Could you detail more how you will use the asset proceeds? And I think you want to receive a crossover rating, and therefore, you probably need to start tender process for your outstanding bonds, also because I don't think you will incur a negative carry for a couple of years on an elevated cash flow position, even when you pay back the Schuldschein loan. So maybe you could explain your delevering strategy more and this is could also entail a special dividend or for bolt-on M&A in specialties for instance? So maybe you could elaborate a little bit more about that?
Schmitt, great question. I think it's a little bit too early because we expect the closing in summer. And our commitment is clearly to pay down on our gross debt. That's what I stated earlier already. We need to see where our bond yield stands at this point in time when we receive the money, and then we will develop a strategy accordingly. But it's totally right, and this is all in consideration what you mentioned, but it's a bit too early to lay out the strategy for now.
Okay. And then just quickly 1 more, if I may. Could you please explain what's the one-off income which helped you this quarter? That is the other net plus EUR 30 million in the bridge. I did not really understand what you did there and it was not really explained in the quarterly report as well. So maybe some words on this, please.
Yes. It was a part of our package of measures, and it was related to reshuffling of legal entities internally where we realize the book gain on this. And this helps us to compensate for negative COVID impacts and also for first of -- yes, first transaction costs related to the sale of the OU Americas.
So transferring entities within your group and releasing the hidden reserves or whatever, is that what you did?
Yes.
The next question comes from the line of Andreas Heine from Stifel.
3 questions, if I may. I start with the first one. esco, how integrated is the sold business, meanwhile, in the industrial business, the aim was to -- and that was the reason why you have changed the reporting to make the salt and the potash business more with each other. Is it difficult to separate esco in the future? Or is it not difficult?
No, it's -- thank you, Mr. Heine, for your questions. It's fully integrated. And just to give you 1 example where the bunch of esco people working in Hanover, and most of them now are in Kassel. And you might remember that we have merged the entities on the [indiscernible] as we call it. And that brings a lot of synergies and we are not planning to separate that anymore. So it will be a small salt business in the future, but it will be a nice additional business for us.
The second question is CapEx. It is in the outlook stated that it will increase significantly. Can you, at this stage, be more specific on the CapEx this year and next year?
Yes, Andreas, when I look at the consensus numbers, we gathered it's about EUR 550 million. And I would feel fine with this number for CapEx 2020.
And also fine the consensus for next year?
We talk about guidance for next year, next year.
Then 1 thing, maybe you can give an update on what the production status of the various mines? And how is the progression in Bethune? And how stable is the currently solid production in the German mines?
Yes, thank you for that question because it gives me the opportunity to express my proudness. We have really gained from our operational excellence measures, which were a big part from Shaping 2030. And the biggest portion of our synergies that we wanted to achieve and will achieve in -- from next year on. So operations in Germany are running perfectly. We are slightly ahead of our internal plan, and the plan was already very ambitious. And that is one reason why we could compensate good portions from the negative price effects out of our operational business. And that was a lot of measures that we have taken, all of them successful, and we are not at the end of this optimization. I'm seeing even more possibilities to get more out of the German mines, and that is another trigger to achieve neutral -- at least neutral free cash flow with even a stressed potash price.
The next question comes from the line of Thomas Swoboda from Societe Generale.
Yes. I have 2 questions left, please. Firstly, a follow-up on CapEx. I understand you don't want to give guidance already. But just thinking about the normalized level, excluding South Americas, and after you have completed the environmental legacy CapEx, what is on your mind? How much will you need in the long term?
In the long term, Thomas, you are right, we expect a lower environmental CapEx, which is about EUR 100 million -- a good EUR 100 million these days, which -- a good portion of this is recurring still next year, but then we have the big tailings pipe expansions, for example, behind us. So we will -- we -- and then taking away the Americas, we should be able to run the company on a CapEx between EUR 350 million, EUR 400 million, really talking long term. This is not the guidance for next year yet.
Understood. A clarification on what you said in your prepared remarks, Mr. Lohr. I think one of the things you said is getting to breakeven or above breakeven for all locations is an optimized production. So my question is, would -- does this include closing down of locations? Or is it a pure optimization exercise of existing locations?
At this point, I would not like to rule out anything, but it doesn't look very probable that we will close down something earlier than anyway assumed, as you might know, the next one would be Unterbreizbach in the middle of the 30s because we are seeing potential to really get the best out of the mines, and all the German mines deliver nice specialty products with nice premiums, and we will find a way to do it -- most probably to do it without closing something earlier.
The next question comes from the line of Michael Schäfer from Commerzbank.
I want to follow-up on the CapEx. And sorry for stressing this one. So given that you are confident and fine with the EUR 550 million for the group, basically, I wonder whether you can -- and since Werra is very important, whether you can shed some more light on what the Werra complex, Werra plants, basically what's the share of those plants, so that we get a better idea on your road to free cash flow neutral, at least? This would be my first question.
And sorry, we are already very transparent, but we wouldn't like to split our CapEx and allocate it to the single mines.
Okay. Cool. So my second question is then on the de-icing business in Europe on the inventory situation. So we're heading into winter season now. I wonder whether you can shed some more light on the inventories you have on the producer level and what you see at the customer level in the channel compared to midterm average, long-term averages?
Yes. There's too much product in the system, of course, due to the weak winter. But we have taken that already in account with our guidance. So we are not expecting a huge business even in a normal winter situation. But it remains to be seen. A lot of experts are expecting a harsh winter. We would be prepared with our inventories to deliver, but it remains to be seen.
The next question comes from the line of Alexander Jones from Bank of America.
2, if I may, on the market outlook. The first would be, do you have a view on growth in global MOP demand next year considering crop price developments, et cetera. What do you expect?
Yes. I think we will see a normal year of growth, which should be in the area between 2% and 3%, which is a long-term projection and should be true for next year as well. And by the way, we are not expecting too many new capacities to run into the market. So we should have a year with more growth than additional capacity, which is another factor which should help price development.
Great. And then on China specifically, just if you could give a bit more detail on what you're seeing there in terms of inventory levels at ports or in land? And how you expect that to shape out in the contract next year?
Yes. That's always a matter of transparency. We see still a lot of product in the harbors, but we also see that the local prices, I mentioned that earlier, are going up significantly, and are above the current tender that we have. So there must be, obviously, not too much volumes in the country side. Although there is still some volume at the harbor. So all in all, we are quite optimistic that this is a good starting point for further negotiations with a new contract in China, maybe we will again see contracts earlier in India because India has, due to the monsoon, also a very good business and product flow.
The next question comes from the line of [ Elena Sedan ] from UBS.
And we've talked quite a lot in terms of impairment about longer-term prices. But I'm also interested in what your guidance implies for pricing and cost per tonne in 4Q for potash price. I know that you've used the price, I think, modestly higher. So just trying to figure out what that means?
Yes, we have, of course, in the course of the year, adjusted our assumption due to potash price development. It's always difficult to be precise on a price. I mentioned earlier in another question that we have time lags between what's going on overseas and in Europe. And so we now are a little bit more cautious with the final average price for 2020, which will, of course, then be determined in Q4. But as you see, that is a marginal adjustment because we could stick to our full year guidance. And again, I think it was obvious over the call. I'm optimistic that the rally or the positive potash price development will not end in 2020, that there is much more to come next year.
The next question comes from the line of Tom Wrigglesworth from Citi.
So my first question is on SOP. Are you still shipping the same amount of tonnage to Asia this year as you did last year, noting that the Chinese have obviously lowered their export tariff? I'm wondering if that's having a volume impact on where you're selling your tonnes?
Tom, this was not really a major disruption in the market neither on a volume base nor on a price base for the volumes we are shipping to our core markets there.
Okay. So I just want to -- sorry to go back to the first half. But could you just remind me what the factoring amount was in the reduction of receivables? Is that something you've disclosed?
Yes. It was in the first 9 months a good EUR 100 million of receivables we have factored.
Okay. And there is no more factoring left to do. Is that a fair assumption? That is now complete?
Well, first of all, we want to keep this level. And if there are further opportunities, we would, of course, use them. So we still have some capacity.
Okay. And then just in terms of your thoughts on operational cost in agriculture for 2021, are you able to share any insights there versus what you've achieved thus far in 2020?
Yes. I again have to repeat that we are happy to give you all the guidance for 2020 by March in 2020 -- sorry, 2021, of course. So it's a bit too early.
The next question comes from the line of Chris Ryan from Bank of America.
I'm not sure if I missed it or not, what exactly is the amount of the one-off noncash benefit in Q3?
We said it compensates our COVID effects, which is EUR 40 million, and also some costs that are related to the OU Americas transaction.
So about EUR 40 million?
On a net basis, yes.
The next question comes from the line of Lisa De Neve from Morgan Stanley.
Actually, my question is very simple, similar to the last one. I think -- I'm sorry, maybe I'm just not very educated, but I still don't understand what the EUR 40 million release really means. So if you could just be so kind to share this all again with us, what the positive benefit is and where it comes from? That would be very helpful.
Yes, Lisa, it is due to the -- within our package of measures, there was also an internal reshuffling of legal entities and also a streamlining of legal entities related to this. And so we -- I think to make it simple, we realized book gains internally.
The next question comes from the line of Stephanie Vincent from JPMorgan.
You've answered it pretty thoroughly on the use of proceeds for debt. But I wanted to go a bit further and ask would any leases move with the sale of the Americas and how much is associated with that operating unit as well as any mining provisions? And then my next question...
Please wait, we would like to answer one by one.
Of course. Sure.
I think some of the leases in the mining provisions is somewhat in the area -- in the ballpark of EUR 200 million.
That's great. And then my next question is also related to that. So on the 2.5 billion of proceeds, could there be some change when you are looking at a new working capital position in the summer of next year? And what would that amount be?
So you mean with regard to a change in the operating business, right, because the working capital movements from the salt business fall away. But let's -- I think we should work out the details once we saw the business really or the transaction was closed, we will still keep the movements in the first half of the year. So we will benefit also from a Q1 winter season, for example. So I think it's a bit too early to dig into the details here.
But if you were referring to potential price adjustment due to working capital change in the U.S., you should really work with the EUR 2.5 billion proceeds in euros. That's a very fair number.
[Operator Instructions] 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.
Yes. Thank you very much for listening. That was a busy Q3, but I hope that you could sense we are optimistic and we are looking forward to see -- at least see via Teams or whatever with our roadshow activities. Thank you, and bye-bye.
Thank you. That will conclude today's conference. Thank you for your participation, and have a pleasant day.