K+S Aktiengesellschaft

Ladies and gentlemen, welcome to the KplusS second quarter 2022 earnings call. After some opening remarks by Dr. Lohr, CEO and CFO, we will directly jump into Q&A. Some technical notes. Please refer to our disclaimer on page 2 of the presentation available online. Then a note on data privacy. Please note that the team session will be recorded, webcasted and be available as a reply on our homepage afterwards. People asking a question in a team session have to be aware that by turning on their camera and microphone, they give consent to saving and replaying video and audio sequences. Now, I'd like to turn over to Dr. Lohr for the opening remarks.

Thank you, Julia. Good morning, everybody, and welcome to our Q2 conference. And this time, I'm not going to render a speech. Then we have more time for Q&A. But I would like to highlight three topics. First, our free cash flow. with a very strong free cash flow development in Q1 and in Q2. But please take into account that we also had increased working capital. Only in Q2 we had working capital of more than 400 million euros additionally. That is due to the high prices and the high receivables, and that will translate into free cash flows in the month to come. And we have seen already a very strong free cash flow in July. Second, We have incorporated in our guidance a low triple-digit million euro amount for the potential gas shortage in the course of this year. And the third remark would be agriculture business and fertilizer business still has a very strong environment. And we believe this is not only the case for the rest of 2022. And now I'm looking very forward to your questions.

Thank you very much, Dr. Lohr. As this question will be one which a lot of participants have, I would like to ask it before we start with a live Q&A. How do you assess possible impacts of a lack of gas in the upcoming winter for your German operations and costs?

Yeah, that's a very important topic. And I've mentioned the amount already. So we have chosen a probable scenario. Of course, it's not the only scenario, but we believe that this is very probable. And we have taken two items as of 1st of October. First of all, 50 euros megawatt hours additional gas cost due to the Section 26 of the Energy Security of Supply Act. And we have assumed that there will be a shortage of 25% over the whole Q4. And this leads to the amount that I've mentioned.

Thank you for that. Ladies and gentlemen, you now have the opportunity to ask questions to us. 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 chat function of MS Teams. We will then call you individually and you ask the question live. 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 me to our first question from Lisa Denef from Morgan Stanley. Please unmute yourself, Lisa, and switch on your camera.

Hi, good morning. I hope you can hear and see me.

Yes, good morning.

I have a few questions, and I'll just ask them one by one. So the first one is, you had very good second quarter results, and it was really nice to see that you sort of reconfirmed your EBITDA guidance of 2.3 to 2.6 billion for the full year. Could you just share what's included in the lower end and the higher end of that guidance?

Okay, you know that there are a lot of indicators who impact our earning, but the strongest impact could come from the gas situation in Germany. And when we talk about the lower end, then we see a scenario which is by far more dramatic than the one we have chosen. And the same is true for the upper end. If there is no gas shortage, then we are going more towards the upper end. Of course, pricing, et cetera, are also impacts, but we are already in August, and so we are able to assess that quite well.

Okay, thank you. And then my second question, and then after that, I'll jump back into the queue. It is related to sort of the low water levels in the Werra River. I'm aware you sort of carried out a number of initiatives to reduce your reliance on the Werra River, but would it just be possible to share how much storage capacity you have today and how much of that is used? So some details around that would be very helpful. Thank you.

Yeah, the situation is really extraordinary. We have always looked into the year 2018, but 2022 so far is much drier than it was in 2018. But we have changed a lot in the setup of the VERA sites. You mentioned already the basins. We have roughly 2 third filled of that. We expect approval for another 400,000 cubic meters. That gives us a lot of flexibility. We have additional possibilities to store waters outside the Vera River. And we have also managed to find ways to optimize our production on the bearer side to reduce the water impact. And all in all, we believe that we will manage even this extraordinary situation without any stand stills.

OK, thank you. Thank you very much. Just one follow up. Your comments mostly related to the production. Are there any sort of other disruptions potentially on the logistical side that we have to take into account?

Yeah, logistics are very difficult. The whole European logistics system is under stress for many reasons. Oil power stations are coming back into place, and we have to move coal, and the river flows are low. And we are seeing impacts, but these impacts are already incorporated in our guidance that we are going to sell 7.5 million tons of potash products.

Thank you very much.

You're welcome.

Our next question comes from Michael Schaefer from Oddo. Please unmute yourself and switch on your camera.

So thanks for taking my question, indeed. Michael Schaefer from Oddo BHF here. I have two questions. On the first one, given what you've baked into your outlook in the fourth quarter. Admittedly, you're the first to be that conservative on that end. So I wonder on the gas savings measures or potential mitigation opportunities you have. I mean, you are consuming around six terawatt hours in Germany on an annual basis. I wonder whether you can walk us through the short-term and maybe more the mid-term measures you can implement to reduce the overall gas consumption and hence the bill associated to that one. And also linked to this, if you can elaborate on your KCF plant, which is consuming a lot of gas as well, whether you are in contact with the regulatory authorities, whether this can provide savings as well. So this would be my first question.

Yeah, thank you very much. Let's start with the KCF plant. Here we have no way to save any gas because we need that desperately to manage our water situation, especially in this dry summer. But we have a lot of opportunities to switch fuels. And sometimes with short notice, for example in Neuhof, we have already oil tanks, we have oil tanks filled, everything is ready to switch if necessary. In some other areas we are not that far, that most probably will not be possible to implement before the next winter. But we're going to do that anyway next year to be prepared for the following winter, which might be even more difficult than the current winter. To give you one more example, we have a long list of measures. We have bought significant volumes of LPG stored in one of our caverns in Bernburg, and we want to use that in Zielitz. Therefore, we have to implement some measures that will be finished early next year, and then we would be prepared in Zielitz for a shortage situation for the winter 23 and 24.

Related to this one, can you quantify maybe with the kind of savings potential based on the six terawatt hours as a starting base?

Yeah, I wouldn't call it a saving measure. It's more or less to safeguard full production. The costs, for example, LPG costs are, it's available, it's going to be available, but it's costly. It's not that much cheaper than natural gas currently. But losing production is the most costly thing that could happen to us. That's why we prepare these measures.

Okay, thanks. My second question would be on your energy logistics additional costs, which you have now I think raised at least verbally. So I wonder when we entered the year, I think we talked about something like 240 million of extra costs coming from that end. Now we have already reached this level after the first half. So I wonder whether you catch that some more light on the moving parts when it comes to logistics costs. What was the kind of excessive costs you are facing right now? And to what extent do you expect us to normalize once logistics is normalizing?

Yeah, I would take that question, Michael. So we have written in our report that we see a higher triple digit million amount for all kinds of cost inflation. Yeah. And that divides for sure into energy, logistics and material. If you look at energy, you have the normal more than 100 million that we always mentioned, right, for the higher rate that we secured at and the open 8%. Yeah. And on top of that now comes basically the low triple-digit million amount, which you could put into that box, which would bring you definitely to more than 200 million Euro for that end. Logistics would be also more than 100 million Euro. This has not changed dramatically, only with an availability eye, with all the dryness we discussed. And material is also more than 100 million. And that brings you to this higher triple digit number in total.

Okay. Thank you very much.

Thanks. The next question comes from Alexander Jones from Bank of America.

Perfect. Thanks very much for taking my questions. My first one, please, on the extra gas costs you're now assuming. So I think you've assumed 50 euros a megawatt hour section 26 charge. Can you give us any idea of section 24 was to be implemented and you had to pay higher costs on some of your contracted gas? What additional cost headwind that could present for you this year?

Thank you for the question. With the decision of the German government to implement Section 26, they also decided not to implement Section 24. So either you choose one or the other one. Economically, it's for us a better choice of the German government because we have nice hedges and they stay in place. We only have to pay an extra levy.

Great, understood. And then the second question on the potash outlook, you mentioned in your opening remarks that you expect this to be strong, not just this year, but into next year. Can you give us a little more color on how you see both the supply side evolving and how much product out of Eastern Europe and also the demand side, given quite substantial demand destruction we've seen year to date?

Yeah, why am I so positive here? First of all, there is not a high availability of agricultural products. We see the situation in Ukraine. There's not much moving and shortage all over the world. And we see a shortage in demand. Of course, I have no insights in what Belarus and Uralkali and Eurochem are planning, but we see they are not in the markets. Uralkali might come back a little bit quicker. But Belaruskali, with a capacity of 12 million tons, out of a market of 70 million, it's a meaningful player. And they obviously have a problem far, beyond 2022. And in addition, with slightly lower prices, so profitability for farmers are increasing. This is a very good environment. And that's why I see no reason why 2023 should not be a good year as well. Thank you. Welcome.

The next question comes from Christian Feitz from Kepler.

Yes, good morning, everyone. A couple of questions, if I may. I want to start with the first one. Can you shed some light on your energy costs in Canada? You reflect very well the European situation or German situation. How are your energy costs evolving in Canada at this point?

Also in Canada, we are hedged to more than 50%, basically. So the spot prices are, as in Germany, not hitting us short term. But for sure, if you put it into the long term DCF model, you also have the spot prices available and the hedges we do for that rolling time. But also here we have the three years time frame applicable.

The spot prices are increasing in North America as well, but of course not as much as what we are seeing in Europe. No, no, sure, we see that. Great, thank you.

And second, demand, demand destruction. I mean, first of all, I would like to ask you to do away with that myth of demand destruction in the potash market, because I just don't see it. Talking about demand in Brazil, How is the Brazilian season coming off in terms of heading into the application season? What are your salespeople saying on the ground? Thank you.

Yeah, that's a very important question. It's the demand started a little bit later than normal due to inventories which were available in the country and at the harbor. But as we speak, I always get an update before these conferences. We see normal and strong demand. And we believe by the end of the year, the inventories should be on a normal level again.

OK, excellent. And then third and final question. you had relatively high hedging costs in Q2, if I'm not mistaken. Can you elucidate that a bit? Thank you.

Yeah, I can do that. That was related to the FX hedging basically and also here we have a rolling system and as we basically secured 70% of the revenues at the beginning of the year, the open position which you have because it's rolling is rather towards the end of the year. That's why in the full year we will see a positive net effect out of revenues and the hedging costs but at the beginning of the year we basically had the negative hedges at around 113, 114, 116, yeah, against the good spot rate.

Thank you very much. You're welcome. Thanks.

The next question comes from Markus Meyer from Baader. Markus, can you unmute yourself and

Yeah, sorry.

Yeah, two questions from my side as well. I will ask them one by one. First one is on the free cash flow. You just said that free cash flow generation in July was strong as well. Maybe you can quantify how strong it was and also how your view on the second half of the years, in particular, what do you expect in terms of network capital development?

Yeah, thank you for that question. Why should I hide that number? We had roughly 300 million euros free cash flow only in July. So we are on a very, very good track to end up in the range between 1 billion and 1.2 billion. But always please take into account this is before the CO2 emission rights and before the end of the factoring programs.

OK, understood. Thank you for this. And second question would be, you stated that there have been price related demand declines in Western Europe. Do you expect this trend to continue in the second half? And do you also see similar effects in other regions you're selling your egg products?

Now we're seeing that mainly in Europe, but that goes along with, especially in the first quarter this year, non-availability of nitrogen. And so if you cannot apply nitrogen, it doesn't make sense to apply potash. And we believe that the situation is normalizing as well. And we are not seeing this shyness in other regions. And by the way, we had less demand, but also no supply from Eastern Europe. So it was a balanced situation for us.

Okay. Thank you so much. I will jump back into the queue.

Thank you.

Thank you. The next question comes from Adrian Timagno from Berenberg.

Hello. Hi. Can you see me? Yes.

Good morning.

Hi. Good morning. Yes. One question on the use of cash going forward. Will you just basically to stay on the balance sheet in the next couple of months until your credit rating is going to be reviewed?

Good question. No, I think the credit rating will increase by itself. It's only a matter of time. But we have clear ideas what to do with our cash. One thing was mentioned earlier. We do the utmost to increase the ramp up in Bethune. That is not much we can do due to the situation that we are solution miners over there. But we can spend some additional capex, which is very well spent. Then we have a major change in our vera sites. We are going to be more precise on that with our Q3 call, because then we have approval by the supervisory board. We want to run that site with lower water residues, with less with no further heap expansions, with lower gas consumption and lower CO2 emissions. And of course, that makes the Verisight significantly more competitive. This is a program over a couple of years, but consumes a mid-sized triple million capex amount, which is well spent. Then, of course, when the year ends, as we expect, we are going to talk with the supervisory board about dividend or maybe share buyback or whatever to let the shareholders participate in this good year.

Yeah, that's understood. And just coming back to Polish, Q2 has been sort of the first quarter with... massive disruption from Belarus. And can you share some color around which geographies did you allocate more tons? And do you expect this to continue in the coming quarters?

Yeah, so the allocation in the first quarters was rather, or especially in the second quarter, was more Europe. You saw that because although we had the demand destruction in Western Europe, we had higher demand from Northern Europe and Eastern Europe, especially because competitors would not have been available on that side. And we saw higher volumes to Brazil and Southeast Asia for sure, right? I think as with everyone, if you look into the China inventory figures, there were not much deliveries going to China because just the netbacks with this old contract were not attractive.

Okay, thank you. Thank you.

The next question comes from Chita Nudeshi from JP Morgan.

Hi, morning. I was just looking at the second quarter EBITDA bridge and there's clearly some provision that you have taken. Firstly, 23 million something. Can you confirm that it's more a one-off in nature? It's not something we should expect. And then, you know, Julia, I don't think you quantified the hedging loss, but what I'm trying to get to is if I assume that provision is one-off, there is some hedging loss, let's say whatever that number is, it's going to be more than 30 million. It seems the underlying EBITDA run rate in second quarter should have been more than 750 million euros. And based on all the things you are saying at the moment with volume guidance, second half pricing being higher than Q2 modestly, why can't we just do the 750 times two for second half before any impact from production and gas levy? I mean, is there anything else which is changing from your perspective in second half versus second quarter run rate?

Yeah, you will always have some moving parts. The provision is a one-off, but you have to take into account that you always have some change in provisions. We are going to have the more dry part of the year in the third quarter. Logistic situation will be even more... stressed than in the first, especially first and second quarter. And if you take all that into account, plus the guest situation, you end up in quite in the middle of that range.

Okay. Thank you.

The next question comes from Joff here from UBS.

Good morning. Thank you for the opportunity to ask a question. I just wanted to ask, obviously, you've taken a stance that you expect to see gas curtailment in Germany. I think from memory, you're the only company in the chemical industry that's done that. But at the same time, obviously, potash is quite key to food production and also to healthcare. So do you assume that you're not going to get any prioritization from the German government on gas supplies?

We had discussions with the Bundesnetzagentur, the network agency, energy network agency. Yes, they know that we are system relevant, but there are so many system relevant companies out there, it's almost impossible to prioritize. Yes, there is a chance that we are not going to be affected, but we wanted to give you a flavor what that could mean if we are affected. And now we have made that transparent. I think that is helpful. If it doesn't come, it's on top. And why do other companies not disclose that? Maybe it's easier for us. We don't need the gas for the product itself, only as an energy source. And we can quite easily assess what's going to happen on our German sites. Okay, thank you. You're welcome.

The next question comes from Rikin Patel from Exxon.

Yes, hi, thanks for taking my questions. Just a follow up on the gas guidance. So when we think about the 25% gas shortage, does that necessarily correlate to a similar cut in production? And when we think about 2023, I suppose when you think internally, are you also assuming that production is cut by a similar margin for the entirety of next year, that would be helpful. Thanks.

Yeah. When we cut theoretically the 25%, we, of course, use all opportunities that we have already prepared to compensate via energy, via oil, there where it is possible and already prepared. So the production impact is not that big, to be frank. And when we look into 2023, first of all, we are not expecting a production cut, a gas supply cut for the full year. We might talk about Q1 and might talk about Q4, maybe even only one quarter. So you cannot multiply that by four. And we will have implemented more measures to compensate against this shortness.

Thank you. And just another follow-up on pricing. In your specialty portfolio, is it safe to assume that some of your products outside of SOP are also following benchmark SOP prices up by a similar magnitude or have they remained fairly stable?

Yeah, as you know, the SOP price has not moved parallel to MOP. That is due to the extraordinary high pricing. So the premium is very small or almost fully consumed. But SOP prices are on high level. And the most other specialties are following the SOP trend rather than the MOP trend. OK, thank you. You're welcome.

Next question comes from Oliver Schwarz from Warburg.

So finally, thank you for taking my questions. I've got a couple of small ones. I will get them to you one by one. Firstly, can you please elaborate a bit about your FX hedging rate for 2023 from today's perspective? That would be my first one.

Can you put the other one? Because I have to.

And then she has time to Google the answer of the first one.

Can you talk about the anticipated, let's say, the progression of labor costs, especially in Germany, as the German mines are much more labor intensive than the Canadian one is?

Yeah, we always have a very good relationship to our unions and our work councils. Of course, they are expecting a higher increase than in the past due to inflation. But that must not necessarily be in a percentage, but it could be a one-time payment. And we believe that in total, roughly 4%, et cetera, could be feasible for next year.

Just to clarify, is it must not or need not? Now I don't remember the full sentence. You say it must not be a progression, but might be, let's say, a one-time payment. Need not. Need not. Okay, okay. Got it.

Okay, I have the answer for the other one. So the hedging quota basically is, again, 70%, and we are between 109 and a bit more than 110 here in the range of best case and worst case.

Okay, so basically if the dollar stays at parity, what would additional costs be from today's perspective, simply from hedging at those rates?

I would say as it was in the second quarter, the case basically in that quarters where we have the hedging, it levels out, right? So you have the good positive effect in revenues and you have the same amount in minus on the cost side so that it levels out. And in quarters where you have the open position, then you have the chance to participate at that parity.

Got it. Thank you. Perhaps a quick one on China. That seems to be an outlet that is only used, let's say, when the demand in every other region is completely satisfied due to the much more unattractive price level. Is that something you want to continue in the future? Because I can't see any, let's say, major ties between you and Chinese customers develop on that basis?

Yeah, of course, we always try to optimize our netbacks. And reducing the Chinese volume is an optimization due to the fact that you have mentioned already. But because of the product mix in Bethune, we, of course, have to supply some product into China. It was a million tons a year in the past. We are now rather talking about 600,000, maybe 500,000 tons. So that is a range in which we can move. Thank you.

That's all from my side. Thank you for answering my questions. Thank you very much.

The next and last question, which I'm seeing, is coming from Ying Wang. And I don't know the research house because I don't know the name.

Hi. Thank you for taking my question. This is Ying from BlackRock. Just quickly, can you just quickly comment on your expectations on the capital structure for the upcoming maturities, any plan of refinancing or buyback? Thank you.

Yeah, we have already bought back everything which was possible and available. And now we are waiting for the maturity in 2023. But we are not planning to refinancing this due to our strong cash flow. And I indicated already that the cash situation in 2023 should be quite comfortable as well.

Great, thank you very much.

Yeah, that was the last question. Thank you very much for your participation. You know that investor relations is always available for you, and I'm going to, or we are going on the road next week, and hopefully I will see one or the other of you. Thank you for joining us. We are going to continue this setup without rendering a speech in the beginning. I hope you enjoyed it. All the best to you, and bye-bye.

Bye.