K+S Aktiengesellschaft

Ladies and gentlemen, welcome to our Q2 call. I would like to start by pointing out the highlights on slide three. Despite difficult market conditions, Q2 was a solid quarter. Due to lower potash prices in agriculture, we lost around 80 million euros compared to the previous year. But we were able to partially compensate this decline by showing a strong operational performance of our plan. 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 quarter, we had a COVID-19 related burden of around 10 million euros for the measures to protect all employees and to ensure production. Overall, our EBITDA reached 88 million euros compared to 130 million in the previous year. Pre-cash flow is at minus 43 million euros after the strong figure last year and is impacted by higher capex. Please turn to slide four to have a closer look at the agriculture customer segment. As expected, demand in agriculture was good in the northern hemisphere and in Brazil. In Southeast Asia, demand did not pick up as a result of the corona pandemic and limited availability of workers. New contracts in China and India have led to a restart of product flow and the expected bottoming out of MOP prices in Brazil, followed by slightly rising prices. Prices are still increasing despite higher volumes being absorbed by the market. We expect that this price recovery in most overseas regions will also take pressure off the European market. And price for our special fertilizer specialties remains largely stable. And now please turn to slide five to have a closer look at the community's customer segment. In total, the icing salt sales volumes in the second quarter were almost 30% below the level of the previous year. Largely due to high stock levels of our customers at the end of the winter season, many are in a strong negotiating position in the upcoming bidding season. However, since we have a multi-year contract with many customers and fixed prices, we only assume slight to moderate price decreases overall. In addition, we already signed contracts in some regions with good prices in Q4 2019. And now please turn to slide six to have a closer look at the industry and consumer customer segments. Some products, such as food salts for hotels and restaurants, or chemical salts, are affected by the corona pandemic. Others, such as pharmaceutical business, have more than compensated for these effects so far. Our products for chlorine production show a positive trend as well. A significant improvement in operational performance, high cost discipline, and an optimal use of our logistics network also contributed to the positive burning development. What we lost in food sales in the B2B area was more than compensated for by the demand of the consumer customer segment. The more people cooked at home, the more table sales were bought in the supermarkets. Water and pool sales also saw a very strong demand in Q2. In these uncertain times, customers buy well-known brands that they trust. On slide seven is our outlook for the year as a whole. For 2020, we continue to expect EBITDA of around 520 million euros. As in our last outlook, the figure does not take into account one-time restructuring expenses, which could result in up to 40 million euros. Including this one-off effect, we would see an EBITDA of €480 million. Due to the high cost discipline and the optimized use of our logistics network, EBITDA of the Americas operating unit is now expected to be only slightly lower than in the previous year, despite significantly lower volumes for the de-icing salt business. We have assumed a moderate decline, We also saw good operating performance in our Europe Plus operating unit, which would help us also in the second half of the year. Furthermore, we have some positive effects from our package of measures. These effects allow us to compensate for the slower recovery in POTUS prices, opposing currency effects from a weaker US dollar, and COVID-19 related deficiency losses. We continue to expect free cash flow around break-even point with this EBITDA guidance, also because the biggest part of the restructuring expenses will not be cash effective in 2020. And I'll please turn to slide eight. Ladies and gentlemen, at this point, I cannot tell you anything new about the sales process of our America's operating unit. You may have heard more details about this sales process in the news, but please note we do not comment on market speculation. However, we still expect signing this year, and you should see that as positive news. On slide nine, I would like to briefly outlook what is important for the new K-plus S. With the sale of the operating unit Americas, a restructuring of the administration is mandatory. The overall target is to have positive free cash flow contribution from every side, even in difficult market conditions. The Europe Plus operating unit and the holding company will be formed into a leaner and smaller K plus S with a focus on fertilizers and specialties. The future organization enables the budget reduction for SG&A functions by €60 million from 2021. In the future, KplusS will work in a functional organization with an operational management team. The executive board will be supported by 15 direct reports. Without the Americas operating unit, there were 36. The future direct reports are named, and the design of the functions is now defined. At the same time, negotiations with employee representatives started. The expected restructuring expenses could be up to 40 million euros. The reorganization should be completed by the beginning of 2021. I'm convinced. that the realignment of K plus F will result in a leaner and more performance-oriented company, one that will have a solid financial base for future growth. And now please turn to slide 10. Ladies and gentlemen, the situation would certainly be much better for us with higher potash prices for sure. We have to focus on everything that we can influence, and to this end, we are making really good progress. We have finally achieved our potash production targets. Our German plants are unaffected by wastewater-related shutdowns, the nutrient content is good, and the food continues ramp up thanks to improved product quality. We were also able to cut costs significantly by optimizing the use of our logistics network. The OU Americas transaction and the realignment of the new K++ are on track. Something I would like to add here, we have just reached an agreement with the KFW Bank for a syndicated credit line of 350 million euros at market conditions. This will help us if there are any additional unforeseen burdens coming from the Corona pandemic. Ladies and gentlemen, this concludes my presentation, and we are ready to take your questions, and one at a time, please. Operator, please open the line for the Q&A session.

Thank you. Thank you. If you would like to ask a question on today's call, please press star 1 on your telephone keypad. If you change your mind and wish to withdraw your question, please press star 2. As a reminder, if you would like to ask more than one question, please submit one question at a time. Once answered, we will then move to your next question, and you will be advised when to ask your question. Our first question comes in from the line of Christian Phipes, calling from Kepler. Christian, please go ahead.

Yes, good morning, gentlemen. Good morning, especially Dr. Law. Glad to see and hear you're back. Three questions, please, so one by one. First of all, how has the Brazilian application season started in Pradesh, obviously?

Yeah, that is still a little bit early, but volumes haven't been an issue in Brazil all over the year. As you know, pricing was an issue. But after we have seen the bottoming out and we have seen first increases, we believe that this will not rocket, but it will slightly continue. And we are very optimistic in terms of volumes for the upcoming season.

Okay, great. Thank you. So, second question. I take it that the physical issues with the product quality out of Bethune are solved. Can you confirm this and also elucidate this a bit? Thank you.

Yeah, everything that we have done to get to this point was very helpful and successful. And I would really say at this point, and that is confirmation, the product quality issues are history. We are now really on a normal production with high quality. We know that the nutrient content anyway is higher than normal, so we are very happy with it. And that was one reason to start shipping into the U.S. And again, this will not be on the plate anymore. And that is another reason why we have increased production, so we have taken a big rent up step this year.

Can you name the volumes you are shipping to the U.S.?

Small volumes, because you have to start with the logistics, et cetera. They're talking about so far 40,000 tons. But anyway, it's a start. And it was a quite promising start, and the customers are happy.

Okay, great. Third and final question, please. And you elucidate a bit the recent press reports about your discussions with the Turingian government about the payments for your soil prime deposition in older mines. I'm specifically referring to the article in the FRT from this Monday, which suggests that you are declaring the deposition as preventative measures against mine collapses rather than deposition, which triggers payments by the Turingian government, I take it.

Thank you. That's a very complex issue. I hope I get this done in this call. As you know, we will have to stop the deep well injection by the end of next year. And we will, beginning from 2022 on, we will deposit the process waters instead of deep well injection into an old mine called Springen. This is in Thuringia. And Turin at the same time has eternity cost because there is a leak and they have to handle the water. That is a significant eternity cost for this small country state. And when we flood Springen, there will be this problem solved as well. So it's a win-win situation. We have signed an agreement how to deal with the cost, and I cannot disclose the number, but this will be favorable for us to discharge the waters in the future and favorable for Turingia as well. Does that answer your question? Kind of, yes.

That's it for now. Thank you. Thanks.

Okay.

The next question comes in from the line of Alexander Jones calling from Bank of America. Alexander, please go ahead.

Good morning. Thanks very much for taking my questions. The first one would be on the overseas potash price that you've managed to achieve this quarter, you know, compared to the Brazilian one, you're actually up sequentially quarter on quarter. Was that timing in the quarter or was there some kind of improvement in the sales allocation you've managed to do?

So we just found out that we didn't get your question. Sorry. Can you repeat it?

Yeah, sorry. It was about the overseas potash price for the quarter that you achieved. Your average selling price was up sequentially compared to the first quarter, whereas I guess Brazilian average prices were down. So was there a factor behind that?

No. We had high volumes in March in the first quarter. And there we've seen already the lowest price. And from April on, we have seen this slight recovery, and that is flowing into our numbers. And that's the reason why the average selling price overseas in Q2 was $6 higher than in Q1.

Okay. Excellent. Thank you. And maybe one other question on CapEx guidance. all happy with consensus net capex being around 550, or is there any room for that to come down in order to free cash flow guidance?

Alex, it's Thorsten. I can promise we do our utmost in order to keep the cash within the company, but we have to stick to the guidance that the capex increases significantly over the last year. and we still feel fine with the consensus forecast for CAPEX, which, as you said, is around 550. This level is especially elevated compared to the normal level because of the, this year, happening environmental protection measures, which are especially Teddy's Pius extensions.

Great. Thank you very much.

The next question comes in from the line of Michael Schaffer, calling from Commerce Bank. Michael, please go ahead.

Yeah, good morning. Thanks for taking my two questions, basically. First is on the logistics cost relief you experienced in the second quarter. I wonder whether you can shed some more light on what you have saved basically compared to maybe the situation you've seen in the first quarter and what should we expect heading into the second quarter when stronger the icing volumes are kicking in again and may reverse the trends. So this would be my first question.

Michael, it's indeed, I think two things. First of all, one project, within our package of measures is dealing with optimizing our logistics networks. And this is in the Americas the case, but this is also in Europe the case. And we're talking here about review of sites and the product setup. We're talking about networks between the sites and two customers or two stockpiles, and also ocean freight networks. The benefit from this we haven't seen yet. So But where we have seen a benefit from was I would call it a smarter ocean freight or also truck freight network management. We used free capacity from low-cost de-icing freight contracts in order to ship higher volumes in consumer business, for example. And it's it's hard to say how much of this we cannot use in the third quarter um when higher the icing volumes kick in again but we always have enough capacity and freight in order to make use of that so it's hard for me to give you a concrete number but i would expect that we see this tailwind also in a little bit in the third quarter so okay

The second question is on your cost saving measures. You thankfully basically indicated the 60 million, six zero cost decline from 2021 onwards. I wonder, first of all, the first A question is, how should we think about the phasing of the $6 million savings in 2021 against presumably $40 million cash out? This would be my 2A question, and 2B would be, do you think that this is sufficient to keep basically the, let's say, remaining, i.e., non-EU-America's business and basically to bring it back to free cash flow break even given the current price situation on the potash side. Thank you. Okay.

First of all, the easier part, the 40 million will of course run into the earnings this year with the provision. We will have most of this as a negative cash effect in 2021, part in 2020, but most of it in 2021. Our target is to be done by the end of this year, but of course, some costs will still run into 2021 out of running contracts. the dominating part of the 60 million savings will be seen in 2021, the full part in 2022. Yeah, on the current price level, this 60 million is helpful, but of course not the whole measures we have to take to achieve a free cash flow, a balanced free cash flow situation. That's why our package of measures is by far more than only selling the OU Americas and only realigning our administration. We are looking into every site, and we are looking into what has to be done to get this site, even on the current price level, free cash flow positive. Some are there. In Bethune, it's obvious we just have to follow our embassies path, but in some cases, especially when we are talking about high environmental costs, it's a little bit more tricky, but we are working on all aspects to get there. Okay. Thank you very much.

You're welcome. The next question comes in from the line of Marcus Mayer, calling from Bada, Halvia. Please go ahead.

Yeah, good morning, gentlemen. Two questions from my side as well. Firstly, could you update us on your U.S. dollar hedging and also how should the U.S. dollar sensitivity look like after the vestment of your American business? That would be my first question.

The last question, we are not hedging the translation effects from the U.S. business because we have revenue streams and costs in U.S. dollar and it's just the translation effect into calculating the Euro balance sheet. The second is from now on, I mean, the dollar weakened and Let's assume it goes down by another $0.10. This would have an adverse effect, which is just double-digit.

Okay, double-digit. And this is basically also then the effect if the America's business would be out, or is it just the effect right now for the capital as it is right now?

No, this is – the main effects come from the – when we talk about 2020, the Americas will still be for the majority of the parts of it, right?

No, no, that's clear. I just wanted to know how it's right now and how it would be if Americas would be already out, if this is possible. There's no big difference, I would say, then. Okay. Okay. Thank you. Then my second question would be on the demand situation of your consumer and industry business, which was pretty strong in the second quarter. Is this also going into July as well, or was there a sequential weakness?

July showed very good numbers as well. We expect that there will, in the next quarter in total, still be development which is above normal, but maybe below what we've seen in the second quarter.

Okay. Thank you so much.

The next question comes in from the line of Thomas Swoboda, calling from Societe Generale. Please go ahead.

Yes. Good morning, everybody. I have one question left, if I may. And it's regarding your new competitor from Russia. They seem to be producing decent volumes already. My question is, do you see them in any of your markets already? Or is it apparently mostly for the internal consumption? And do you expect Euroshim to become active as a net seller of potash till this year, eventually next year? Would be great if you could share your opinion. Thank you.

Yeah, you're welcome. First of all, maybe you've read that there was the one or the other surprise about these volumes. We weren't. What we could read now is in line with our expectations for this year and for next year. Of course, they started to use the MOP by themselves, so it was internal use. And the more they produce, the more they will, of course, ship into the market. Most probably not in our European home markets due to the small volumes and the logistical constraints. We will see them in the overseas markets. But take into account, we could expect another 2 million tons demand next year, so it is running into a growing market. I'm not seeing this as a significant fraction.

This is very helpful. Thank you.

Thank you.

The next question comes in from the line of Andreas Haynes, calling from Maine First. Please go ahead.

Yeah, thank you for the opportunity to ask me a question. I would like to come on basically with following questions on what was asked before. On the US dollar hedging, specifically on PODESH, could you outline how you do this in the future? So we'll probably deliver much more from PODESH be doomed to Latin America and the German mines more focused on Europe. Maybe you can outline a little bit what your net US dollar exposure in the potash business is and what for let's say 2021 it means if the US dollar stays on the current level.

Andreas, I wouldn't see a significant increase of the net position because yes, we are delivering into US dollar regions. We are using This U.S. dollar in part for paying costs, also costs from European shipments, but also from Canadian shipments. So freight is paid in U.S. dollars, which reduces the gross position then. We are securing the U.S. dollar against the euro, and we are also hedging the U.S. dollar against the Canadian dollar in order to cover the costs. And the net position from 20 to 21 will not change significantly. In the long term, when the soon ramps up further, we will certainly see the higher increase or an increase of this net position in U.S. dollar, but not in the short term.

Okay, thank you. Then the second on Christian's question. Not going into any detail of this contract yet because Turing, yeah, but Is the change from 2021 to 2022 not using these deeper injection anymore? Is that adding costs or is the benefit from Turingia paying something for you is equaling this change?

Yeah, it's a question from where you're coming from. You know that another alternative was discussed, the pipeline to the Oberweser, instead of the deep well injection. That would have been significantly higher cost for us. So we, in a way, had this in our CAPEX plan, and we can take significant part of that out. But of course, it's not for free, but the major portion will be paid by Thuringia.

So, there's still a slight negative, but not too much from 2021 to 2022.

Yeah, we are starting preparing things already. There will not be a step up in terms of costs related to that in 2021 compared to 2022.

Then can you share with us what the market conditions are for these KFW or KFP loans? I don't know what the market conditions are for a company like URL.

I think what I can say is they are in line with market for a company with a single B rating. But we are not laying out the detailed conditions. That's why I'm standing here.

Then could you remind me, that's really the last question I'd like to ask, what is now your sustainable production from Germany with the current product mix you have by having solved all the issues that you had in recent years. So what is what we can expect from 2021 onwards as a production from the German mines?

I think if you calculate the roughly 7 million tons, I think that's a good number. Perfect. These are all my questions.

Thanks a lot. Thank you.

The next question comes in from the line of Lisa Denneby calling from Morgan Stanley. Please go ahead.

Good morning, everyone. I have three questions. And the first one is a bit on your average selling prices. So, I mean, in terms of the outlook for average selling price, you've reduced it from 239 to 231. I'm just trying to understand what you're expecting for the second half of the year, given obviously Brazil has been quite strong. I mean, India has been buying a lot of fertilizer, especially urea. So, do you expect an uptick there from India? I know you're not shipping there, but it's a global commodity there. And what are you seeing in terms of China? That's my first question.

Yeah, the guidance, the 239 was three months old. Meanwhile, we have seen that, yes, there is an increase in the prices, but it's slower than we have assumed three months ago. That's why we have cut this assumption. So we are still expecting but a little bit slower than assumed three months ago. But I think it's worth mentioning that we have, that we can cover even with our EBTA guidance, even this effect. And by the way, it's not precisely 231, it's slightly above 231, what we expect now.

Okay, sure. That's very helpful. Thank you. And second question. So very much congratulations on continuing to, like, manage your cash costs incredibly well. I have a little question if you take the sort of the cash costs sort of in correlation to your free cash flow. I mean, obviously, you're ramping up the scene that's bringing down your cash costs. But overall, market prices are still, unfortunately, a little bit low on the MFP side. How should I think about free cash flow generation across your different German mines I mean, are they all currently at free cash or risk even? And can you provide sort of any detail around that? Thank you.

Yeah, I think I gave a flavor already with an earlier answer. If you look into our site, again, Bethune is in rent up, and it's only a matter of time until they will be able to be free cash flow even on current price levels. And the situation is very different here on our German mines. Of course, the Behrer side has the biggest burden with our environmental capex, and that's why they are the farthest off to achieve free cash flow break even on the current price level. But we are getting there, I'm sure.

Okay, that's very helpful. Thank you. And then the final one is a very short one. You had a small uptick in your mining provisions over the first half, about $20 million. Is that just related to your environmental capex or environmental provisions? Is there anything specific in there or just anything you can point out?

It's just the accumulation of interest.

Okay. Okay, thank you very much.

The next question comes in from the line with Patrick of FISA calling from UBS. Patrick, please go ahead.

Thank you, and good morning. Three questions for me as well, please. The first is a follow-up on your U.S. market access. You mentioned the 40,000 pounds currently. What's your plan over the next two to three years for the U.S. markets?

It will not rocket. It will be a nice additional business, but maybe get close to 100,000 tons in 2021, but not much more.

Okay, thanks. And then also follow up on the cost savings in admin, the $60 million How should we think about that from a modeling perspective? Will that be partly in the recon line and partly in agriculture or all in recon? How will you allocate those?

That is mostly in the recon line. But our reporting will look different anyway when we have sold all your Americas because there will not be an OU Europe anymore. It's only one entity, but most probably we will have, of course, the segmentation customer segment, and it will be shown in a way in the recon line.

Okay, thanks. And the last question on your financial results in the second quarter. This was better than expected versus previous quarters. Do you have the guidance for the financial results for the full year?

That's a tough one, Patrick, because it depends. especially on the other financial results, and here especially on the development of the U.S. dollar to the euro or the can dollar to the euro, and even the relation can dollar to the U.S. dollar. And this is, we saw a strong adverse effect in the first quarter. When you compare second quarter over first quarter, we had a slight positive effect because the currencies didn't move much. This makes it difficult to forecast it, but on the levels we are forecasting and using also for our edging, et cetera, et cetera, I would say the total financial results should be somewhere in the range of minus 140 to 150.

Very helpful.

Thank you very much. The next question comes in from the line of Marcus Schmidt calling from Odo. Please go ahead.

Thanks for taking the question. I have just one question regarding the probably 4% KSW loan. That is, for what could you actually use the loan? I understand that you cannot simply use these funds for refinancing, for example, the 2021 bond. Of course, there is a left-pocket, right-pocket principle applicable, but what can you specifically fund with the facility? Must this For instance, in terms of capex, always be an environmental-friendly or CO2 emission-reducing investment, and what are potentially other restrictions or EMRs in terms of usage?

Yeah, Schmidt, I think the main restrictions that are well-known is the one you mentioned already. Indeed, you cannot use these funds for refinancing of existing debt. And the second is you have to make use of the majority of the already existing credit facility before you can tap the KSW loan. And what I'm always saying is it is for us a cushion, an additional cushion for financing the running business. And we don't know, and this is how we always communicate it, what happens in the markets, especially with regard to development of corona. And if we, according to our guidance we have given out, we have sufficient liquidity to run the business. And this is how I look at the KFW line. And, yes, that's the information I can give you.

Okay, but could you use it, for instance, for financing working capital? Is that forbidden?

Yes, that's business-related, yes. Okay, good.

Yes, thank you very much.

You're welcome.

Okay, the final question in the queue comes in from the line of Chatham Udashi, calling from J.P. Morgan. Please go ahead.

Yeah, hi, thank you. Just one quick question, which is around this administrative cost savings plan that you announced this morning. My question essentially is, you know, post the sale of... you know, the planned sale of the Americas business, you might have some remnant cost within the organization. So is the intention of this cost savings to essentially address some of those remnant costs or are these net positive numbers in terms of contribution to the earnings?

I'm not 100% sure if I got the question, but the numbers we are communicating are all completely without OU Americas. So when we are saying we're taking $60 million out, coming from $200 million to $140 million, this is the remaining K plus S without any administrations from the OU Americas. Did that cover your question?

Typically, most companies, when they sell one of the big businesses, you know, they talk about random costs, which are costs that, you know, for instance, some of the common services costs might have been assigned to America's unit, which unfortunately might not go with the business because, you know, it is still getting hit with that. So my question is, will this $60 million – primarily offset some of those costs which are not necessarily going with Americas, so they might be assigned to Americas at this point, or are these actual net incremental savings on top?

No, I got it. So the Americas is very independent already. They have all services they need in Chicago and in other locations in the Americas. We only had, if you wish, some strategical SG&A costs here to run the business and to integrate the business in the group. So, there will not be much of those costs that you're focusing on close to zero once the deal is closed.

Okay. Understood. Thank you.

You're welcome.

We do have another question coming through from the line of Tom Wigglesworth calling from Citi. Tom, please go ahead.

Good morning, gentlemen. Thanks for the presentation. So my question is, could you just refresh us on your expected schedule of cash cost production for agriculture through the second half and the development into 2021? Thank you.

Yeah, Tom, we were in the last call still a bit more conservative than we would be today, I would say. We forecasted for 2020 in agriculture, right? It costs per ton of about 210 euros per ton. And we saw a strong cost development in the first half despite corona. We saw record production levels and this has, of course, both in Canada and in Germany. And I would dare to say when I look at the consensus, which stands, I think, at 27 or so, I feel comfortable that we can reach this number. And for 2021, it's a little bit too early to give this guidance right now.

Okay. Thanks very much, Tulsi.

You're welcome.

Okay, there are no further questions coming through, so I'll now hand it back over to yourself, Dr. Birkhoff, and also the conclusion of the call.

First of all, thank you all for joining us today and for these good questions. We are looking forward to see you soon, unfortunately virtually, but as we learned, that works as well. Until then, stay healthy, and thank you. Bye-bye.