K+S Aktiengesellschaft

Ladies and gentlemen, good morning and welcome to our Q2 video conference. We are delighted about the great interest. This is already the second time we hold this event via Microsoft Teams, so we look forward to work with you in this format. I would like to welcome our chairman of the executive board, Dr. Burkhard Lohr. Dr. Lohr will present the highlights of our second quarter 2021 and give an outlook for the current year. I would also like to welcome Torsten Böckers, CFO of KplusS, who will be available for Q&A together with Burkhard Lohr. Before we start, a few technical notes. This conference is webcasted live and the replay of the webcast will be available on our website afterwards. After the presentation of Dr. Lohr, you will have, of course, the opportunity to ask questions. Listeners of the webcast will have the opportunity to submit questions in writing, which will be read to the audience and answered at the end of the Microsoft Teams Q&A session. Please note that we will consider which questions have already been answered when treating that written questions. If you would like to ask a question via Microsoft Teams, please use the hand signal and write your name and the name of your research house in the Microsoft Teams chat function. We will then call you individually and you can address your question to us live. And please switch on your camera then. With that, we'll get started and I will hand over to our CEO, Dr. Burkhard Lohr.

Thank you, Dirk. Ladies and gentlemen, welcome to our Q2 call. Before we start with the results, I would like to highlight some achievements of the last quarter. And therefore, please move to slide number three. With the successful closing of the sale of the North and South American salt businesses on April 30th, we received net proceeds of around 2.6 billion euros and realized a book gain of 742 million euros. With the proceeds, we reduced our gross financial debt. In May, we already paid back our drawn credit facility, maturing promissory notes, commercial papers and some credit facilities with a total amount of over 1 billion euros. Additionally, we offered a buyback program for three of our four bonds. We targeted a buyback volume of 450 million euros and achieved a good 100 million euros more, making a total of 560 million. Finally, the KfW facility had been terminated, which had never been drawn. In total, we achieved a reduction of gross financial debt of around 1.7 billion euros within two months after closing the Americas transaction. Therefore, we could significantly improve our balance sheet and made it much more robust. The leverage improved to a sound net financial debt to EBITDA ratio of 2.0 by the end of the second quarter, compared with 12.3 at the end of last year. And the equity ratio furthermore improved significantly to 48% coming from 27. And now please turn to slide four. In addition to operational topics, KplusS has also taken social responsibility. Until the end of July, our employees and family members at the German sites received more than 3.5 thousand vaccine doses against COVID-19. This is our contribution to the German vaccination campaign. And now please turn to our Q2 results on slide five. Looking at the results of the continuing operations, we achieved higher revenues and a significantly higher EBITDA year on year. The higher MOP prices since the beginning of this year are rolling into our P&L step by step. In agriculture, the average selling price was moderately higher versus the level of last year's Q2 and also compared to Q1 this year. In total, the increase was higher than we expected before. We saw a strong demand in the agriculture customer segment and together with higher product availability, this led to additional sales volumes of more than 100,000 tons. In the industry plus customer segment, we saw a normalized demand for chemical and industrial applications after the lockdowns from last year's Q2. Together with a good early fill season for the icing, we increased sales volumes by nearly 300,000 tons. Combined with strict cost discipline and positive effects from currency hedging, able to more than compensate higher prices for freights and energy. So EBITDA has more than doubled versus prior year to 112 million euros. Following our impairment on potash assets last year, we will see value fluctuations on these assets quarter by quarter. Because of higher potash prices with a positive effect and higher capital costs absorbing parts of this, we increased the value of our potash assets by another 147 million euros in Q2. Adjusted free cash flow was impacted by higher interest payments due to our bond buyback program. We also had further cash outs for the SG&A restructuring project. Accordingly, it amounted to minus 68 million euros, including the positive cash flow from the Americas operations until April, it reached minus 24 million. Please turn to slide 6 for a closer look at the agriculture markets. Since summer 2020, there have been significantly rising prices for the main crop commodities. Falling stock-to-use ratios, mainly on the corn and soya bean, have triggered this price development. In the last weeks, we saw some smaller declines from the peak prices, but overall, these price levels are multi-year highs. With higher agriculture prices, farmers' income and their prospects have improved significantly. Along with strong demand, farmers switched from a cost-minimized to a volume-optimized mindset with still very good affordability, despite higher input costs. As a result, we see a very good potash demand in all regions. The tight supply situation is a limiting factor of worldwide volume growth. Now please turn to slide 7. Especially in June and July, prices in Brazil and the US rose sharply. And Europe as well as Southeast Asia followed this price trend. Based on an already strong demand, concerns on supply from Belaruskali due to sanctions and the shutdowns at Easterhazy K1 and K2 further boosted price increases. We expect the sales volumes worldwide on the record level of last year of about 76 million tons, including 5 million tons of specialty. Further volume growth will be limited to the tight supply situation. The average selling price for our agriculture customers increased significantly year on year. Please turn to slide 8 for the industry plus customer segment. We started into 2021 with a strong performance of our de-icing salt business. Due to the favorable winter weather, the customer inventories were quite low. This had a positive impact on the early fields business in Q2 with higher volumes compared to last year. Just to remind you, last year's Q2 was hit by the first lockdowns due to COVID-19. In this year's Q2, we saw a strong recovery of the economy and our products for chemical and industrial applications benefited with higher sales volumes of around 200,000 tons year on year. Now please move on to slide nine and let's talk about our outlook for the current year. I'm sure you have recognized our ad hoc announcement from last Tuesday with the strongly increased guidance on EBITDA. I've already described the positive market environment for fertilizers. We are therefore optimistic to achieve strongly higher average prices for our agriculture year on year. we continue to expect sales volumes in the agriculture customer segment to rise to more than 7.5 million tons. After the good winter, we expect still more than 2.6 million tons of de-icing salt sales volumes for the year as a whole. The notable savings of the SG&A restructuring cannot fully compensate for the overall rising costs, especially for freight and energy. Overall, we expect EBITDA from continuing operations to increase to a range of 700 to 800 million euros, which is 200 million more than in our last guidance. This continues to include the one-off gain of around 200 million euros generated at the closing of the Rex joint venture, backed this closing in this year, but now in Q4. Our adjusted group earnings from continuing and discontinued operations are meanwhile expected as significantly more than 1 billion euros. But we also expect three digit million amount from continuing operations. Our adjusted free cash flow, including the cash in from the sale of operations until a unit, sorry, will be significantly above 2 billion euros. Our free cash flow without these proceeds for 2021 is still be expected negative, but now on the level of the prior year. Last but not least, I would like to inform you that Julia Bock will take over as Head of Investor Relations. You all know Julia for quite a while. She has more than 10 years of experience in our IR department and 15 years at KplusS. On behalf of the entire board, I wish her great success in her new role. She succeeds Dirk Neumann, who will take over as Head of Corporate Development at KplusS. The board thanks Dirk for all his efforts and wishes him great success in his new role as well. Ladies and gentlemen, this concludes my presentation and we are now happy to take your questions as usual, one by one please. Operator, please open the line for the Q&A session.

Thank you very much, Dr. Lohr. Ladies and gentlemen, you now have the opportunity to ask questions to our board members. If you would like to ask question via Microsoft Teams, please use the hand signal and write your name and the name of your research house in the chat function of Microsoft Teams. We will then call you individually and you can ask your question live. And to remember you, please switch on your camera. One more request, as usual, we would like to answer your questions one by one. So if you have multiple questions, please ask one question at a time, and we will answer it first. After that, you will have the opportunity to ask further questions. This brings us to our first question from Lisa Deneuve.

Hi, good morning, guys. Can you hear me? Just checking.

Could be a little bit louder. Good morning.

Can you hear me now?

Yes, yes.

Okay, great guys. So I have two questions. I will ask them one by one. So first one is, can you please outline your free cash or guidance for this year? I'm particularly interested in how we square this 200 million EBITDA upgrade with a sort of mild upgrade to the guidance. And I wonder what factors have changed in there because the CapEx guidance is unchanged. So I'm just trying to understand how the drop through works. Thank you very much.

Yeah, Lisa, it's going to be a little bit longer answer, but I think it's important to consider the following items leading to this cash flow guidance. First of all, I want to say we expect more than 2 billion cash flow, but I know what you mean. You mean the continued operations. And when we think back in March it was, I gave you the guidance that the cash flow will be somewhere between minus 350 and minus 400 million. And we raised the EBITDA since then by 300 million. And the same drops down to the EBITDA. What we also shouldn't forget is the EBITDA increase is back and loaded. So the capexes, so the big payouts are ahead of us. And then we do not have the same timing when it comes to P&L income and cash realization. And what we also shouldn't forget is we have a couple of one-offs in the cash flow. This has nothing to do with the bridge from last guidance to this guidance, because this didn't change. But you need to consider the one-offs like the REX transaction, where we expect a 200 million income on the P&L, but only approximately a 90 million cash inflow after closing, plus We have this year the SG&A payout, so the cash costs for the program we have started and executed last year. We have bought back bonds. We have also the finalization of a tax audit. And all of this sums up to more than 100 million of one-offs that are not recurring. I hope this answers a little bit the question how we come to the cash flow guidance and why we don't see a positive number yet.

The phasing definitely helps. The second question is then, we noted across the sphere, I mean, comments from Mosaic, Israel Chemicals and so forth, that quite some volumes have been sold forward. And I'm just trying to understand, have you also sold volumes forward? Can you give some guidance on how much you have sold forward? And how should we think about sequential price increase for you in terms of average selling prices versus what we're seeing in the markets? Thank you very much.

Thank you for that question. First of all, we are very happy with the current price development. I gave in my speech the reasons why we see that and we believe that this is a sustainable development, a development which should carry into 2022. Yes, there have been some forward deals. We did some as well for the first quarter of 2022. but only a small volume, 100, 150,000 tons around that. And that was early this year. So on from today's perspective on a low price, low price level, but again, a small number and only Q1 22.

Thank you very much.

Thank you.

Then we come to the next one to Christian Fights, please.

Good morning, everyone. Hope everyone can hear me. I was just wondering about the, let's say, your own potash price evolution. I take it, obviously, that you are bound to longer-term contracts. Can you remind us of your contract structure for a typical large customer, such as a NPK mixer? And when would you see more pronounced price increases coming through for your potash portfolio? That's it from my side.

Yeah, thank you, Mr. Feitz, for your question. Usually we have a delay between three and four months between contracting and having the effects in our P&L. And as Torsten earlier said, the delay between the contracting and the cash-in is even longer. And so the first quarter has not shown any significant price effects. We have seen the first effects in Q2. But we should expect a significant development for Q3 and especially for Q4. And this nice price development in Q4 will lead to free cash flow impacts, positive, of course, in 2022 and not in this year anymore. That's why we could not take it into account for our free cash flow guidance.

Okay, great. Perfect. Thank you. Second and final question. Just packing on your operations, everything is running smoothly in Bethune and in Europe.

It's a fair question because it has not been the case all the time. But yes, we are very happy with the development on all our sites. And yeah, that is one reason why we could increase our sales volumes because we have the product available. And it's the perfect timing because now with high prices, we are able to deliver the markets with the volumes and It looks pretty good.

Excellent. Good to hear. Thank you very much.

Thank you.

The next question is from Mubasha from Citi.

Hi, I hope you can hear me. Just coming back to the free cash flow bridge, if we look out to 2022, we've already noted some of the one-offs that we've talked about in 2021, but if you look out to next year, Are there any significant one-offs we should be aware of or should we see many of these kind of negatives that we're seeing in 2021 unwind and therefore the free cash flow being significantly positive compared to where we are now? That's the first question, please.

Thanks for the question. Not going too much into detail on the 22 guidance today, but I mentioned the one-offs. We have the cash payout for the SG&A program. This is not recurring. The bond buyback we did this year is not recurring and we wouldn't expect the other one-off I mentioned, the settlement or the agreement, the payment from the tax audit either again. So there is about a hundred million just from this one-offs which will not be recurring. And the effect of the bond buyback is of course that we save interest costs next year and together with the bonds we are paying back In this year, it's only one bond outstanding in the amount of 500 million in December. So we would save another 30, 35 million at least in interest cost.

But there's no significant one-offs that you're already aware of that could impact in 2022?

That was the important part of the question that we are aware of, no. Okay. Okay.

Okay, perfect. And just the second concern, just a bit more kind of at the market level, there's been some news flow around the sanctions and stuff, and then there's kind of just trying to get your feel for how you think the market's developing. You talked about the stocks to use ratios are quite low, but going into 2022, you talked about, or you already talked about the volume-optimized mindset that the farmer has. Do you see that continuing or do you see into 2022 as you go in that the market loosening a little bit and then the potash prices coming back from the peak levels that we're seeing at the moment?

Yeah, I said earlier that I expect to see that development running into 2022. So this is not only a short-term effect and luckily we are not seeing a development as we have saw it back in 28, 29. Prices have found a a plateau on a high level, which is very good. And on this level, it's still affordable for farmers to buy our products. There is not too much in additional volumes running into the markets. If there would be some, it would be absorbed. So to sum it up, we can expect that we will have some good quarters in 2022 as well. That doesn't mean that it will end in 2022, but I think it would not be serious to try to predict the development in the market for more than, let's say, three, four quarters.

For example. Thank you.

Thank you very much.

Okay, now we have a question from our webcast system from Andreas Heine from Stifel.

How is the agriculture volume commitment you already have for Q3 and Q4?

on the well-known market price values and this as known has picked up significantly in Q3 and in Q4. Q3 is completely signed and we have started contracting good parts of the October and this is normal course of the business. So November and December is still open, but .

Thank you.

Then another question from Alexander Jones from Bank of America. Can you please give us a sense of the updated freight and energy cost for this year and how much will be offset by restructuring savings?

We expect for this year, but this is baked in our guidance of course, an additional 30 to 40 million negative effect both from energy and from freight. Okay, so it's it's well in total in total we say we want to save 60 million in steady state and We are in the good run-up this year. So it's maybe a little bit less like like 50 million for 2021

Okay, then we have one question of Torsten Philipp, who asks, what plans do you have regarding the 2021 dividend?

Okay. Yeah, this is too early to give a precise answer on that. But one thing is obvious due to our impairment impacts. We see movements in our net profit, which in the past was a base for dividend strategy. And we are thinking about a change. But how this looks precisely is too early because we have to discuss that with the supervisory board and then we come up with a proposal.

Then we have a question of Markus Meyer from Baader. How much do you expect the net working capital outflow in H2 2021 on current potash prices?

Markus, when I look at H1, we had a positive change in working capital of 30 million. I would expect for the second half a negative swing of minus 100 approximately, so that we end up at about minus 80, minus 90 approximately.

Then we have a question from from UBS. Are you able to give an update on roughly how long you see the delay from spot pricing to realized price for your potash sales?

Yeah, I think I've answered that earlier, but why not one more time? So the difference between contract And the P&L effect is three, rather four months. And depends on the region, the difference between the contract and the cash in is six months, even partially even more, especially when we sell into Brazil. And this is currently the hotspot with very high prices.

What is the proportional exposure to India, China this year versus normal?

Yeah, we are not selling anything into India. For two reasons. First of all, the price is not at all a market price currently. And India has the highest freight costs from our destinations. And that's why we have decided not to ship it to India. Some specialties, but these are more or less small amounts. And the second destination? China. In China. China, here we have decreased volumes as well. But this is, of course, for Bethune a very important destination that we cannot strip it down to zero entirely. But I would say it's up to 200,000 tons less than in normal years for the same reasons, pricing and freight costs.

Roughly what kind of SOP premium are you seeing in Europe this year?

Yeah, maybe we shouldn't talk about the premium because this is always a question of high volatility of MOP and SOP. But what we are seeing is as usual and as we saw this in the past, a delayed development. So we've seen MOP prices being very, very strong and it started with a small price increase of SOP, but now we are seeing it will not take the same heights, but we will see a significant SOP price development with a delay as usual.

Okay, then we have another question in the teams from Mubasher from the city.

Oh, I already asked my question. I don't have any further questions.

Okay, then I still see a hand raised from Christian Feitz. Is the question still there?

So, on your, let's say, shipment plans out of Bethune, Can you update us on the development of the U.S. market? I remember you were around 100,000 tons last year. You were planning to increase this. What would be your envisaged level for 2022? Thank you.

Yeah, we indicated that we would increase the volumes compared to 2020 in this year on the level of 250,000 tons and this looks pretty good. We will be able to ship 250,000 tons into the US market. And the target is 500,000 tons, but that will not be achievable next year, but most probably in 2023. And that should be a healthy level for the run rate, if you wish, for Bethune volumes into the U.S. market.

And is that going to be with your own logistical network, or are you using a partner?

No, that is all K plus S logistics and network and sales. All right. Thank you. Thank you.

Then we have a question from Adrian from Berenberg. Can you explain pricing developments in industry plus division, excluding the icing?

Yeah, if we strip out the icing, we always have a very stable business in our industry plus segment. The only significant impact that we have seen last year, and if you compare this year against last year, this has to be mentioned, we had a As you all know, we had a lockdown in Q2 2020 and so we had a negative impact on chemical volumes, on pharmaceutical volumes, some other applications were hit volume-wise and price-wise and now we have seen a recovery. We added roughly 200,000 tons compared last year due to that reasons and the price recovery was not that strong, but sustainable.

Another question from Andreas Heine from Stifel. Where will your potash inventories be by the year end compared to last year?

Good question. In a year like this, you should try to sell as much as possible. But as we believe this is a sustainable development and we will see a good price environment in 2022 as well, we rather will not change our inventory volume. So it should look pretty much like at the end of 2020.

And one question from Rikin Patel from Exxon BNP. Given your comments on demand and with leverage coming down, what considerations do you give to increasing capacity at Bethune beyond the first phase nameplate?

I think a good indication for Bethune is that we have achieved the two million tons. And we always said that for the rest, which is more or less increasing the secondary mining volume, so the rest up to 2.86 million tons, it's more or less linear development over a couple of years. So you should not expect more than 100,000 tons yearly, annually as additional volumes from Bethune, which of course does not impact the market at all. But it's baked in a growth story for K plus S, if you wish.

Currently, we have no further questions. So if no hand is raising, I would give back to you for the closing remarks.

Thank you very much. That was a short one, but no surprise because we have disclosed figures already in our talk before. I thank you very much for your attention and we look forward to meet you in person the next time and wish you all the best until then. Thank you very much and bye bye.