K+S Aktiengesellschaft

Ladies and gentlemen, I would like to welcome you to our Q1 Teams Conference. And let me directly start with the development of our business on slide number three. After the sale of our Americas operating unit, we defined our new corporate strategy, which states, potash and magnesium products are our core business. The market environment for these products is very attractive. And I would like to point out that potash prices already strongly increased during 2021. In Brazil, prices had already more than tripled to $800 per tonne by the end of the year. Due to uncertainties of market participants regarding the geolot political situation and supply constraints, prices increased even further. And now please turn to slide four. We want to share a closer look at our key figures with you. Our EBITDA increased from 126 million euros to 524 million in the first quarter. The positive effects of higher prices, especially in the agriculture customer segment, more than compensated lower volumes and cost inflation, mainly from freights, energy and material. Even with a weather-related below-average de-icing salt business, we could slightly increase revenues in the Industry Plus customer segment. KplusS not only translated the strong operating performance and favorable market conditions in higher earnings, but also in significantly higher cash flows. the adjusted free cash flow increased from minus 15 million euros in the first quarter of 2021 to almost 300 million euros. Deducting the measures we have already implemented to utilize the additional liquidity, the adjusted free cash flow amounts to more than 100 million euros. And these measures were already mentioned in our conference call in March and included the reduction of factoring and the purchase of further CO2 certificates from 2026 onwards. These excellent results in the first quarter further reduced our leverage rate to 0.4 times. And this brings us to slide number five. Following the sale of the Americas operating unit, we took a major step towards significantly reducing our net financial liabilities. By the end of March, only 520 million euros remained, compared with 3.2 billion euros at the end of 2020. Our target is clear. We want to get back to an investment-grade rating. As you can see, our leverage ratio is clearly better than the required level. We take our homework seriously to also be prepared for times with lower potash prices. Now let's take a closer look to our outlook. Yield prospects in agriculture remain intact. They also provide an incentive to increase yields per hectare through balanced use of fertilizers. Not only the prices of various input materials such as fertilizers have risen for farmers, but also the prices of their agricultural products have improved significantly. For important crops such as soybeans and corn, expected margins are above the multi-year average. Furthermore, global inventories for key agricultural products are at historically low levels. Therefore, potash demand is high. The uncertainties about sanctions against Russia and Belarus, however, severely limit global potash supply. And slide seven shows that Russia and Belarus account for 32% of global potash production. While we can be quite sure that almost no material is leaving Belarus, it is not clear what volumes are exported from Russia. Apart from the short-term constraint on supply, it should be noted that most projects for capacity expansions are coming from Russia and Belarus. And these are likely to be at least delayed due to the current situation. That's because of financing has become challenging for producers and required materials or contractors originate from other European countries. At the same time, Russia and Ukraine are important suppliers of agricultural products. As large portions of these volumes are likely to disappear this year, maximizing yields through balanced fertilization by remaining farmers becomes even more crucial to the world's food supply. And therefore, market conditions remain positive. This brings me to our EPDA outlook on slide eight. At this point, I repeat that it is unbelievable for me to witness another war in Europe. I am still hoping for a quick end. The situation is confusing and dynamic. Our revenues in the affected regions are very low and we do not have any assets here. All figures I am presenting regarding outlook assume unrestricted production in the further course of the year, so no downtimes caused by potential disruptions in the gas supply. The current situation makes it impossible to reliably assess the security of energy supplies. In our ad hoc notification of April 13, we raised the expected EBITDA to 2.3 to 2.6 billion euros. Even our prior outlook of 1.6 to 1.9 billion would have been the best result in KplusS history. The strong increase in prices for our products in the agriculture customer segment more than compensate for cost increases in all areas, energy, logistics and material. Assuming capex of a good 400 million euros, this is expected to result in free cash flow of 1 to 1.2 billion euros before one-off effects. As indicated, we plan to use around 230 million euros of this for the repayment of our factoring program and the early purchase of CO2 certificates. Almost 200 million euros of this were already paid in the first quarter. Ladies and gentlemen, and now please turn to slide number nine. On the energy price side, we were very forward looking for our production sites and secured attractive terms even before the outbreak of war. We obviously depend on the reliable supply of natural gas like almost all industrial operations in Germany. The processing of the crude salt as well as the generation of heat and electricity at our production site is based almost entirely on natural gas. Only our winter site on the Werra plant is mainly supplied with energy by a waste-to-energy plant. A cutback in the supply of natural gas in Europe would lead to supply bottlenecks in the German industry, including for critical infrastructure. Our products are used as fertilizers for agriculture, as an intermediate for the chemical and pharmaceutical industry, and as food and animal feed. We therefore make a system-relevant contribution to society. If, however, our gas requirement cannot be covered, this will lead to production restrictions. Against the background of the Ukraine crisis, however, one thing becomes apparent. The strategic decision of KplusS to build the new potash plant in Bethune in Canada and therefore to diversify our production regionally is clearly confirmed. Bethune is not only an example for risk diversification, it also represents our most efficient and largest growth project. With slide number 10, I would like to go back to our corporate strategy. We have always made clear that the largest management focus is on optimizing the existing and announced what we will provide regular updates on projects. As such, I would like to further comment on the ramp up in Bethune on slide number 11. We do have strategies for all our sites. Considering the high free cash flow expected for this year, we have decided to increase the Bethune expenses budget for 2022 by 50 million euros. These additional expenses do not only target the short-term accelerated duration, but proactively also the longer-term ramp-up of the site. This requires primarily engineering, operations and IT services to raise the development status of the further expansion stages. In total, we aim to hire more than 70 additional people for the project this year. However, please do not expect the ramp-up to increase by more than 50,000 tons to 150,000 tons as of next year. On the next slide, I will comment on the other planned uses of the cash we will generate this year. Beside the ramp-up in Bethune, I already mentioned the repayment of factoring and the early purchase of CO2 certificates. In addition, we will propose to the Annual General Meeting to pay a dividend of 20 cents per share, which corresponds to a total of 38 million euros. A further step towards debt reduction will be taken in June, when the bond matures that we are not planning to refinance. The final bullet point on the slide is very important to us. At times when a war is raging in Europe and its impact cannot yet be assessed, it is important to keep the balance sheet robust with low debt levels to steer the company through uncertain times. Overall, K plus S had a very successful start into the year, and the market environment remains attractive. And this brings me to the end of my presentation. Thank you for your attention, and we are now looking forward to your questions, and I hand over to Julia for some technical details.

Yes, thank you, Dr. Lohr, and hello also from my side. Before we start with Q&A, a few technical notes. This conference is webcasted live and a replay of the webcast will be available on our website afterwards. If you would like to ask a question, please use the hand signal and write your name and the name of your research house in MS Teams chat function. We will then call you individually and you can address your question to us live. Please switch on your camera. One more request as usual. We would like to answer your question 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 the first question of Christian Veits. You are muted.

Good morning, Julia. Good morning, Burkhard. Two questions, if I may. So first question first. With NPK customers not being able to take volume in Q1 or sufficient volume due to nitrogen unavailability, has this changed in the meantime? And also, what do you make of the stories of farmers taking pothead holidays demand destruction on the pharma side due to high fertilizer prices, etc. Is this actually evidenced by your salespeople who talk to their customers on a regular basis, or is this just a myth and demand continues to be high because pharma affordability is clearly there?

Thank you, Christian, for that question. That's a very important one. First message is this year and most probably next year as well, supply will be the limiting factor and not demand. Yes, we have some impact from availability of nitrogen and some farmer are not using other fertilizers if not be able to produce to use nitrogen. Of course, the high price also has some impacts, but that is limited due to what I mentioned earlier, the high prospects of making good money for the farmers as well. And this is more or less only a European issue. We are seeing some weather-related issues in North America, but the rest of the world shows a very strong demand, and the gaps that we see due to the impacts I just mentioned are by far less than the lost supply. And that's, again, supply is limiting the demand this year and at least 2023 as well.

Okay, that's good to know. Thank you. Then, second question in your CFO function, use of cash. Many investors are increasingly asking, you know, you have your, obviously, you have your dividend policy in place with the optionality of paying out that kind of bonus element in there. But would you consider at some point also doing shareware banks or something else?

First of all, we are never ruling out anything. But when I talk about the dividend, yes, we are now in 2022 in a very positive environment, but the dividend is paid for the outcome of 2021. And the dividend we are going to pay, the 38 million, is already 42% of the free cash flow that we have earned last year. If, of course, this year will end in a way that we are seeing and forecasting, and I believe that we will see these numbers, then the dividend will look significantly different to the 2021 dividend. But we have not even discussed potential share buybacks, but everything is possible.

Okay. Thank you very much. Thank you.

The next question comes from Lisa Denef from Morgan Stanley.

Hi, thank you for taking my questions. I have two. The first one is you've got to do mid triple digit input inflation for 2022. Can you share a little bit more granularity on the energy logistics components and the mining materials inflation component of that? Just spitting it out if possible would be great. Thank you.

Yeah, thank you for that question. As I mentioned in my speech, we have three items which are heavily impacted by inflation or cost increases. This is first of all energy. Luckily, we have already secured 92% of our gas consumption of 2022 and also more than 70% of 2023 and 2024. But the not covered 8% has an impact on our cost base. And we are talking about more than 100 million higher costs than in 2021. And we are talking about another 100 million each on logistics and materials. All the other cost items are moving on a very normal level.

so much. And then coming back to the faster ramp-up of Bethune, I mean, you've announced a bit of a faster ramp-up, I think about 50,000 times quicker than initially set out. And as we're now starting to generate a lot of good free cash flow, and that may well be the case for the foreseeable future, would you consider non-organic opportunities to expand your potash or specialty potash footprint? Thank you.

Again, I would say we're not ruling out anything. For technical reasons, there is not much more in Bethune. So you know that we are talking about secondary mining and that we have to develop wells, etc. So speeding up by 50,000 tons a year is already something. But non-organical moves could be possible. But again, with all potential M&A transaction, what one should discuss, we also should be aware that we are in a very, very dynamic situation with the war in Europe. And I would rather keep the balance sheet and our financials robust. But we look into all opportunities.

Great. Thank you so much.

Welcome.

The next question comes from Kyle Korn from Citi.

Hi there. Can you hear me? Yes. And see you. Let's talk a bit about how the Russia-Ukraine-Belarus situation has altered trade flows. Are you seeing any changes in the demand weightings, your different deliveries to different regions? That's my first question.

Yeah, thank you. You mean the deliveries from Belarus and Russia into the rest of the world, right?

What's the demand that you're seeing to Brazil, say, or to different regions? Are they buying more or less as a result of Belarus?

First of all, Belarus is out of the non-Belarusian and non-Russian market at all. There is some Some ships, but not many, coming from Russia into the market. So we have a huge supply gap. And customers are buying whatever they can. And we know that June, July will be heavy season again in Brazil. So there is rather a shortness. And maybe that's the background of the question. We believe that current pricing... is quite stable. So we're not seeing significant price decreases in any regions.

Okay, thanks. And secondly, so the volumes in MonQ were a little disappointing, which may be down to some of the logistical issues that you've experienced. Can we expect them to return to some more of a normal rate for the second quarter? Are these issues going to persist?

Yeah, volumes are actually less than in the first quarter of last year, which, by the way, was a good quarter. So we are roughly 200,000 tons short. There are some reasons behind, but the main reasons are, you mentioned one, logistics. You heard about the CP strike. That is one reason. We had some hiccups with the Deutsche Bahn here in Germany as well. Nothing which had an impact on production but on moving the material. And we had some shipments that we have expected in Q1 slipped into Q2. And we stopped delivering for sanction reasons the deliveries into Eurochem. that had an impact in Q1 as well. But we still see the 7.7 million tons for the full year 2022. Okay, thank you. You're welcome.

The next question is coming from Andrew Stott from UBS.

Yeah, good morning. Can you hear me loud and clear? Yes. Yeah, morning, Burkhard. Morning, Julia. Thanks for taking the question. So I've got three apologies. The first one is, what's the worst case for production cuts in Germany?

You directly start with the most difficult one.

I didn't think it was easy, but can you give me an idea of what it looks like? I think you mentioned one of the mines would be relatively unaffected. So I just wondered what sort of capacity utilization you might see in that scenario.

First of all, Bethune is totally out of scope because gas is not an issue in Canada. And that's why I pointed out that the decision to go into Canada with a new production site was a very, very clever one. And in Germany, every site has its own story, I would like to say. So Wintershall is maybe the easiest one. That is one of the three sites in the Werra Valley. Here we have a waste-to-energy plant that can secure production at this Wintershall site. And then we would have to look in each single site And we would not lose full production if, for example, we would have only 20 or 30 percent less gas available. But it's very, very tricky what that would mean for us. And by the way, I should add that gas is only needed for energy and heat. So we don't need gas for our production process itself, like some chemical industries, for example, need gas for the production process. So we could substitute the gas. That would take time. The most probable way would be oil. And we are preparing this. And the time we would need for that differs from site to site as well. Some sites... still have some requirements that we needed because they were running on oil years ago and on some other sites it would take longer. But it's possible. Sorry for that long answer, but I think that was a very, very important question.

No, it's very useful. Thank you. Second question was on the salt business in Europe. If you go back to the CMD in November, you obviously flagged that that was a maybe long-term non-core, has there been any progress in your thinking on that asset?

I mentioned that with the new strategy that we have disclosed in November on the Capital Markets Day that SALT is not a core business anymore for many good reasons. But that does not mean that we are actively going to sell it. And we are quite happy with the development of that business. Although we had a weak winter, we have seen a slight increase in sales. So it's contributing to the bottom line, and that is positive. And there's no action currently.

Last question was on CO2 certificates. I think you said in the slides that you brought forward from, I think, your deficit expected from 2026. So how many years does that cover and at what carbon price?

Yeah, theoretically, we are now fine until the end of 2028, but we are also sure that we will find ways until then to reduce our CO2 footprint so that we might even be fine for the entire trading period. So until 2030. That's why we stopped acquiring further certificates.

Thanks a lot, Michael.

Thank you.

Thank you. The next question is coming from Adrian to Magno from Berenberg.

Hello. Hello. Hello. Good morning. Thank you for the presentation. Just one question on price realization. How should we think about specialties and the spread versus MOP for Q2? Is it going to turn meaningfully positive in Q2? Is the first one.

We have always seen that there is a premium between MOP and for example SOP. But with this very, very untypical price development on the MOP side, we are seeing of course a significantly lower premium. And we believe as long as the MOP prices are on that high level, the premium is not going to grow further. That is a mechanism that is only working in normal price environments.

Okay, thank you. And you say you want to have a crisis-proof balance sheet. So can you just provide some figures around that? Is it going to be less than one time leverage or net cash? How do you define this?

We see ourselves as an investment grade rated company, although the rating is not yet there. So I understand that Standard & Poor's cannot do more than two notches that they have just recently done. But that is a target we want to, even with further use of cash, want to be in this area of investment grade rated. And that would be, depends on which figure you take, including our provisions, it would be two or 2.5 times EBTA with a net debt number. Thank you. You're welcome.

The next question is coming from Alex Jones from Bank of America.

Great. Thanks very much for taking my questions. First one, just on the guidance. Could you give us some color on the price that you're assuming there? Are you assuming that potash prices are more or less flat through the rest of the year or any declines into the second half?

As I indicated in one of the earlier answers, we are not expecting prices to increase even more, but we are on historical high levels. But on the other hand, with this supply shortage, we are not seeing prices decreasing either. So the average price should climb quarter by quarter just due to the fact that the prices that we are seeing in Q1 were trades out of or sales out of Q4 last year. And the higher prices are rolling into our books now. But the current price environment should last for some further month on that level.

Great, that's very clear. And second question on FX. We've seen quite a marked move in the euro-dollar rate over the past couple of weeks. Could you give us some color reminders on how that impacts your numbers, both short-term, given the hedging you do, and then also as we go into 2023-2024 when that hedging rolls off? Yes, that's a perfect question for Julia.

Yes, thank you, Alex. So, Right now, with the current development of the US dollar, for sure we have positive effects in the revenues. But the hedging we did is kind of bringing negative effects in the EBITDA. That's normal in that space. And the best case basically for 2022 is around 1.16%. Yeah, but you should be aware that not all of the revenues are secured or are hedged because as our revenue figures are changing with all the estimates, we are kind of running behind with the figuring. So it's not 400% of the revenues, which is in today's case a good news.

Thank you.

No worries. The next question is coming from a telephone number, and I cannot see the name behind it, so I hope you just mention who you are. I guess it's Markus Meyer from Baader.

When you can hear us, we cannot hear you. Maybe you're muted.

There are actually no further questions. In the chat, someone is saying something. Okay. This is Jörg Heinicke. Do you consider yourself as a takeover target in light of the tightness in the market? And if you do think there would be massive political headwind in that case?

Difficult one. No stock listed company can be 100% sure not to be attacked from any side. But taking into account our current share price and taking into account the consolidation in the market, so a competitor would not be able to do that because there wouldn't be no approval at all in no parts of the world that I believe the probability is quite low.

I can see another question from Andrew Stott, but it might be the old risen hand. So maybe you give me a sign if you want to ask another question.

Yeah, I did want to follow up, actually. Yeah, thank you. It was on the Bethune extra costs, the 50 million. Is there some natural cost inflation in that number as well, or is that just purely the... extra production you're hoping to achieve?

That is purely and 100% extra measures that we take to get to 50,000 tons annually more.

And just to remind me, sorry, I should know this. Is it 150 to 200 or 100 to 150? 100 to 150.

Thank you. Welcome.

so one last chance for the telephone number which wants to rise a question it is 232 at the end no then we don't have any further quay ah there's another question from christian fights no he's taking that back i know okay he wants to do it hello all right yeah um

Sorry for the weird lighting, by the way. Our plans are broken in the office and lights. So on Bethune, can you remind us of your plans to ship volumes into the U.S. rather than into China and Brazil? How are we progressing there? Given that obviously also the U.S. market is quite attractive, never mind the 4 million tons of, sorry, 4 million acres. switch from corn to soy, but what are your plans there for this year in terms of shipping volumes into the U.S.?

Yeah, thank you. We are continuing to increase the volumes that we are going to ship into the U.S. We set the target as 500,000 tons, that we should be able to do that maybe in 23, maybe in 24, but we are on a good way. And it should be close to 300,000 tons what we are going to do this year. And China, we are talking about different products, standard and granular. But nevertheless, you mentioned China. Due to the netback situation, we are going to reduce the Chinese volumes again compared to last year. And we also started shipping volumes into Europe from Bethune. From the time being, we are... the last significant remaining EU producer and allocator of potash in this area. And that is our contribution to stabilize the agriculture situation here in Europe. Okay, thank you. Thank you.

We have one more question from Lisa Denev.

Hi, thank you so much for taking another question from me. On the back of your comment that you're shipping more volumes into Europe, are there any logistical challenges or limitations to doing that from your Bethune side, which may be due to your production or simply the fact that there's problems in the supply chain essentially?

Now, what we are doing here is bulk, and bulk is possible. It's, of course, also more expensive than it was years ago, but it's possible to get shipments of bulk products from Vancouver into Europe.

Okay, thank you.

You're welcome.

Then I received two questions from Markus Meyer by email because he could not unmute himself. So one question is on the change of interest rates and the impact on the discount rate for pension and environment provisions, so the positive effect we saw in the financial result.

Mm-hmm.

One by one. Right. Yeah. OK. So, yes, Marcus, we already had a positive effect in the financial result in Q1 coming out of that. Yeah. So it there is a positive one. And I guess if you will see further changes, this will also continue. And the other one is the financial effect of the bond repurchase. But we didn't have a bond repurchase in the first quarter, so it was all done in Q2 of last year. And the financial effect was, first of all, a negative cash outflow, but with now lower interest, which will, over time, level out.

Next in June.

And the next bond repurchase is in June, exactly. This is 200, yes. Okay, we don't have any further questions. So thanks a lot for the questions. I would like to hand back to Dr. Lohr for the closing remarks.

Yeah, not much left to say, but I would like to say thank you for taking the time to join this call and thank you for the good questions. I think we have really covered everything which is important for us. And we really hope that the world is more peaceful when we see us next time on that call. And after the corona was not even an issue in this call, So therefore, we are able to travel again and we will see some of you live during our roadshows. Thank you very much and all the best to you. Bye.