K+S Aktiengesellschaft

Welcome to the K plus S conference call regarding the publication of the quarterly report Q320 hosted by Dr. Burkhard Loh, CEO. For the duration of the call, you will be on listen only. However, at the end of the call, you will have the opportunity to ask questions. If at any time you need assistance, please press star zero on your telephone keypad and you will be connected to an operator. Please note, on page two of the presentation, you will find the disclaimer. I am now handing the call over to Dr. Burkhard Loh 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 number three. Decide difficult market conditions. Q3 was another season's quarter. Due to lower potash prices in agriculture, we lost a good 50 million euros compared to the previous year. We were able to partly compensate this decline by showing the strong operational performance of our clients, 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 10 million euros 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 88 million euros last year to 96 million. On the back of the lower cash capex, free cash flow has also improved to a negative €116 million. Of course, on a net profit basis, the non-cash asset impairment resulted in a significant loss of almost €2 billion in the quarter. Now turn to slide four, 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 tent situation in Southeast Asia has started to improve. This also takes off pressure from the European market. Prices for our fertilizer strategies remain 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 five to have a closer look at the community's customer segments. In total, the ising volume in the second quarter were about 30 percent below the level of the previous year. largely due to high stock levels of our customers at the beginning of the billing season. However, since we have multi-year contracts with many customers and fixed prices, we only assume slight to moderate price decreases overall. Please turn to slide six to have a closer look at the industry and consumer customer segments. Some subsegments, such as food sold for hotels and restaurants, or chemical source for the automotive industry are affected by the corona pandemic. Other sub-segments have benefited. The described one-off effect from our package of measures, a significant improvement in operational performance, high cost discipline, and an optimal use of our logistics network also contributed to the positive earnings development. Revenues we lost in food sales 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 soles, water softening, and pool soles. This shows the robustness of the business has improved during the corona pandemic. And now please move to our outlook on slide seven. For 2020, we continue to expect EBITDA of around 480 million euros, including one-time restructuring expenses of up to 40 million euros. We continue to expect free cash flow around the break-even 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 eight. We adjusted our long-term assumptions 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 assumption for long-term price development is now lower than previously assumed. Overall, this results in a one-off asset impairment in the Europe class operating unit of around 2 billion euros. 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 nine. 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 Industry Holdings marks inventory and affiliates at 3.2 billion US dollars. As the currency risk is now fully hedged, we expect net proceeds of around 2.5 billion euros. The closing is expected in summer next year. On slide 10, I would like to briefly outline how we are setting K++ up for the future. First of all, I would like to state that our business model is intact, which has been also proven during the corona pandemic. There are no substitutes for potash and other minerals in our portfolio. They are essential for feeding the world population. The megatrends such as rising population and less agricultural land per hectare are still valid and clearly speak for an increasing demand for fertilizers. The sale of the operating unit Americas is an important milestone to deliver 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 plant 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 specialty. 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.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you change your mind when you ask your question, please press star 2. If you would like to ask more than one question, please submit one question at a time. Once answered, we will move to your next question. You will be advised when to ask your question. The first question comes from the line of Christian Faith from Kepler Chevroo. Please go ahead.

Yes, thank you. Good morning, everybody. Good morning, Dr. Loa. So one question at a time. I have two overall. First question, on the impairment, you are flagging lowered long-term potash price assumptions. If I remember correctly, Bethune was planned with a long-term potash price of around $430 per ton. 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? Thank you.

Yeah, good morning, Mr. Hals. Thanks for your question. Our original assumption when we put together the business plan for Bethune was a price, a long-term price of 470 U.S. dollars. That was back in 2011. And in the long-term projection of Polish prices, it's important to stress again we believe we have good reason for optimism in the mid and short term, but the prices at the long end have had to be adjusted if we look at what the prices have done in the last two to three years. And that was a major trigger. And of course, don't forget the WEC. We will not be the only one to be forced to assume a higher WEC. 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 two-thirds are on Bethune and one-third on the German assets.

Okay. Would you mind sharing with us your new product price assumption in the long run?

That would be a long-time Scottish 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, thank you. Then my second question. Agriculture. Your pricing in Europe is sequentially weaker compared to a sequential improvement in overseas pricing over the past two quarters. Can you please elucidate the reasons behind this? Is it just FX-related, or have your specialties lost some of their pricing power? Thank you.

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 have less effect on our 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 25 US dollars. We have seen a significant increase in the USA. You could claim you only have a small portion in the US business, but that takes pressure from other areas. Crop prices like maize, corn, and soya are up. India gains from a good and we see more tenders in the Southeast Asia area. So a good bunch of good news and it should lead to higher prices overseas and with a time lag in Europe.

Okay. Thank you very much.

You're welcome.

The next question comes from the line of Marcus Meyer from Bardo Helvea. Please go ahead.

Good morning, gentlemen. I have two 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 the savings are also sustainable, I guess, or the 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 single-digit amount affecting the cost base from the restriction 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 60 million, but the biggest portion of the 60 million already in 2021.

Okay, understood. Thank you. My second question is, again, on the impairment. If I can 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 said as long as the potash price stays above the $200 per ton level, there is no impairment risk, as BISUM, the business plan, is a long-term business plan, and therefore the risk for the next years is basically around zero. And now we have this $2 billion impairment, of which two-thirds are coming from BISUM, So I'm still struggling on the timing, and also I'm still struggling on this, what you said, the risk premium increase at the VAC. Maybe you can shed more light on this.

Yeah, there was . I think with the pricing, we have to see, it's a long-term price show, yeah. And as Boca stated, we expect an increase of the pricing. but at, 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 WAC, this changed as well. I would say 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 yields, 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 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 plus S and also to cut costs and use efficiency measures to drive earnings? You also said that potentially the management incentivization previously was linked to return on investment capital mainly. should be also linked to the share price and 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?

Yeah, that was in that question. I think I've heard many questions, not only one. So the update on our vision and strategy latest to the next AGM, But you should not expect all new. Many aspects 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 that's 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 best capital is still included or is it not any more part of the incentivization?

No, that's not part anymore.

Okay. Thank you.

You're welcome.

The next question comes from the line of Chris Ryan from Bank of America. Please go ahead.

Hi. Yes. Good morning. Thank you for taking my question. With the proceeds from the America sale, will you look to simply repay those Shoal Shine loans, or will you look to refinance those Shoal Shine loans?

Our commitment is to pay down our debt instruments, which means we would also pay back the Shoal Shine 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. Thank you. And just one quick one. Are you able to get the amount of the factored receivables that are outstanding as of September?

The amount, yeah, so it is a good $100 million.

Got it. Thank you. That's all my questions.

The next question comes from the line of Lisa Deneuve from Morgan Stanley. Please go ahead.

Hi, everyone. Good morning. Three, if I may. So the first one, I was actually going to ask more about the sector of receivables. But maybe a broader question on networking capital. Can you share how we should think about networking 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 the soon, as we're probably going to have a decent spring next year. Thank you.

So there was one 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. 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 neutral working capital development throughout the year 2021.

Okay, thank you. And then in working now closer to being, let's say, close to potash pure plague, can you share a bit of details of 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 costs in some of these mines?

Thank you. This is not an impossible undertaking, that is the first answer on that. We are already, even on the current potash prices, cash positive on some German mines. The one who is suffering the most is maybe not a surprise, is the Wera. 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 VERA and ramping up Bethune. And here in the VERA is to find more intelligent solutions answers on the environmental side, to also look into our product portfolio, and not only on the cashbacks, 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 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, thank you. And then just a 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? Thanks.

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 question. But again, it's not all new. What we have seen is that 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.

Okay. Thank you very much, guys.

You're welcome. Thanks.

The next question comes from the line of Marcus Schmidt from Prisma Investment. Please go ahead. Marcus, your line is unmuted. Please go ahead.

Yes, I'm sorry. I was on mute. Good morning. Thanks for taking the question. So the first question is about your asset sale in North America, and if you could tell how certain HUSC will approve the transaction, if not, if you have negotiated a breakage fee with the purchaser. And then I have a second question.

Yeah, 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 break-up fee in the contract, but here I also would like to give you more information about that.

Okay. Assuming the positive of it, so everything will work out as expected, could you detail more how you will use the asset proceeds? I think you want to receive a crossover rating, and therefore you probably You 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 position, even when you pay back the shul shine loan. So maybe you could explain your deleveraging strategy more. And this could also entail a special dividend or for Baldwin M&A specialties for For instance, maybe you could elaborate a little bit more about that.

Herr Schmidt, 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 deals stand 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 one more, if I may. Could you please explain what the one-off income was which helped you this quarter? That is the other net plus $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.

Yeah, it was a part of our package of measures, and it was related to reshuffling of legal entities internally where we realized a book gain on this, and this helped us to compensate for negative COVID impacts and also for 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.

Okay. Good. Thank you very much.

The next question comes from the line of Andreas Heine from Spiegel. Please go ahead.

Three questions, if I may. I started the first one. Esko, how... integrated is the salt business meanwhile in the industrial business. The aim was to – and that was the reason why you have changed reporting to make the salt and the polish business more with each other. Is it difficult to separate ASCO in the future or is it not difficult?

No, it's – thank you, Mr. Allen, for your question. It's fully integrated. To give you one example, we had a bunch of PESCO people working in Hanover, and most of them now are in Qatar. And you might remember that we have merged the entities on the MINAC, as we call it, and that brings a lot of synergies. And we are not planning to separate it 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?

Yeah, Andreas, when I look at the consensus numbers we gathered, it's about 550 million, and I feel fine with this number for CapEx 2020.

And also fine with the consensus for next year?

We talk about guidance for next year. Next year.

Then one thing, maybe you can give an update on what the production status of the various mines is. How is the progression in between and how stable is the currently solid production in the German mines?

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 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. That is one reason why we could compensate good portions from the negative price effects out of our operational business. That was a lot of measures that we have taken, all of them successful. 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 a neutral, at least neutral, free cash flow with even a stressed cottage price.

That were my questions. Thanks. Thank you very much.

The next question comes from the line of Thomas Svoboda from Societe Generale. Please go ahead.

Yes. Good morning, everyone. I have two questions left, please. Firstly, 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 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 100 million, a good 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 – and then taking away the Americas, we should be able to run the company on a capex between 350, 400 million, really talking long-term. This is not the guidance for next year yet.

Understood. Okay. A clarification on what you said in your prepared remarks, Mr. Law. I think one of the things that you said is getting to break-even or above break-even for all locations is an optimized production. So my question is, 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 Unterbreisbach 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.

Very helpful. Thank you. Thank you.

The next question comes from the line of Michael Schaefer from Commerce Bank. Please go ahead.

Yeah, thanks for taking my two questions. I want to follow up on the CapEx. I'm sorry for stressing this one. So given that you are confident and fine with the 550 million for the group, basically, I wonder... Whether you can, and since vera is very important, whether you can shed some more light on what the vera complex, vera 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.

I'm 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 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 mid-term average or long-term averages.

Yeah, 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. Okay, so fingers crossed. Thank you.

The next question comes from the line of Alexander Jones from Bank of America. Please go ahead.

Great. Thank you, and thanks for taking my questions, too, 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? Thank you.

Yeah, 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.

Thank you. 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 port or inland and how you expect that to shape out in the contract next year. Thank you.

Yeah, 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. although there is still some volume at the harvest. 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 a contract early in India because India has, due to the monsoon, also very good business and product flow.

Great. Thanks. That's all from me. Thank you.

The next question comes from the line of Eleanor Seddon from UBS. Please go ahead.

Hi there. Good morning. Thanks for taking my question. 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 ton in 4Q for potash, please. I know that you used the phrase potash, I think modestly higher, so just trying to figure out what that means.

Thank you. Yeah. We have, of course, in the course of the year, adjusted our assumption due to the 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 that was obvious over the call. I'm optimistic. that the rally or the positive product price development will not end in 2020, that there is much more to come next year.

Okay, thank you.

Thanks.

The next question comes from the line of Tom at Wigglesworth from Citi. Please go ahead.

Thank you very much. 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 tons.

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, thank you. So just by, 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 nine months a good $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 costs in agriculture for 2021, are you able to share any insights there versus what you've achieved thus far in 2020?

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. Okay, sure. Thank you.

Thank you very much. Much appreciated.

Okay, thank you very much.

The next question comes from the line of Chris Ryan from Bank of America. Please go ahead.

Hi, yes, thank you for taking my follow-up. I'm not sure if I missed it or not. What exactly is the amount of the one-off non-cash benefit in Q3?

We said it compensates our COVID effects, which is $40 million, and also some costs that are related to all the Americas transactions.

So about $40 million? On a net basis, yes.

Got it. Thank you.

The next question comes from the line of Lisa Deneuve from Morgan Stanley. Please go ahead.

Hi again, guys. 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 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. Thank you.

Yeah, Lisa, I just 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.

Okay, thank you very much.

The next question comes from the line of Stephanie Vincent from JP Morgan. Please go ahead.

Hi. Thank you so much for taking my questions. 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 the sum of the leases and the mining provisions is somewhat in the area, in the ballpark of 200 million euros.

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 change? in the operating business because the working capital movements from the sole business fall away. I think we should work out the details once we saw the business really or the transaction was closed. 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 2.5 billion proceeds in euros. It's a very big number.

Okay. All right. Perfect. Thank you very much.

There are currently no questions in the queue, so as a reminder, please press star 1 if you would like to ask a question. We have no further questions coming through, so I will now hand back to Dr. Burkhard Loh for the conclusion of the call. Please go ahead.

Yeah, 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 a few wire 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.