K+S Aktiengesellschaft

gentlemen welcome to the analyst conference on full year 2022 we hope you had a chance to review our posted slides as well as the documents available on our website some technical notes please refer to our disclaimer on page 2 of the presentation then a note on data privacy The Teams session will be recorded, webcasted, and be available as replay on our homepage afterwards. People asking a question from the room or in the Teams session have to be aware that by speaking from the room or turning on their camera and microphone in Teams, 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. Welcome to our full year 2022 analyst conference. I would like to welcome my new colleague on the board of Executive Directors, Dr. Christian Meyer. Today is his first day as CFO at KplusS and Mr. Meyer already knows our company very well from a different perspective and he will introduce himself briefly after my opening remarks. We are both very much looking forward to working together. But first of all, take a look at our new image film. Don't worry, it's only one minute, but it's well worth watching. And please start the film.

There is a place where it all begins. A place giving the world an important raw material, helping us to feed the world. We offer you growth. We offer you opportunities. We enrich life for generations.

As a partner to industry and agriculture, we extract raw materials everyone needs, every day, reliably, and in the best quality. I saw that film quite often, but I still like it very much.

We succeeded in closing 2022 as guided in November. We achieved a record EBITDA of 2.4 billion euros and we generated free cash flow before special effects of 1.2 billion. We are also looking on 2023 very positively. We expect global potash sales to be driven by limited supply in 2023 as well and therefore we are expecting an EBITDA of 1.3 to 1.5 billion euros. The free cash flow is expected to reach a very high level again at 700 to 900 million euros. As announced yesterday, we want to return capital of about 2 euros per share, totaling just under 400 million euros to our shareholders. This is 40% of our free cash flow and a 9% return. We will use two instruments in equal parts to satisfy different shareholder interests, dividend and share buyback. In making this decision, we took the following into account. First, the various interests in our broadly diversified shareholder structure. Second, the financing of our profitable investments in VERA 2060 and the ramp up in Bethune. And third, In view of our volatility and the ongoing geopolitical uncertainties, we want to be very careful with our indebtedness in this phase. And now I would like to pass on to Dr. Meyer for his introduction and afterwards we will directly jump into Q&A. Thank you very much.

Thanks to you. Glück auf also from my side. I'm very happy to be able to present myself on my first business day for K&S to be part of the board. Some words to my person. I'm a proud father of three daughters and I'm part of a family with a lot of public auditors and finance experts and I grew up in the southwest of Hannover. close to three potash mines. One of it was or is still Sigmundshall and I'm very familiar with KNS, working for KNS as an auditor since more than 20 years. So I'm very have a deep dive already during this 20 years with the business of KNS. And I'm also familiar with nearly every site KNSS has in Germany. And also I had a visit during this time in Canada at the Bethune site. That was a very interesting and important site from KNSS. And yeah, I'm very happy to be part of the team and be able to join you.

Thanks. And so am I. I'm sure we will be a good team, the two of us, plus Frau Trölsch, who joined on the 15th of March. We are the new team, and I'm sure we will be successful. Yeah, and now we are happy to answer your questions.

Before we start with the Q&A, a few technical notes again. Questions in the room will be answered first. If you'd like to ask a question in Teams, please use your hand signal and write your name and the name of your research house in the Teams chat function. We will then call you individually and you can address your question to us live. Please switch on your camera and unmute yourself when asking a question and keep it off when only listening. Please note that if you are dialed in via phone, sometimes it is complicated to ask questions, but we will definitely try. 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. Yeah, questions from the room. All at the time. So, Markus, I think your hand was first.

Two questions and then I hand over to Andreas. Yeah, first one is basically, can you give us an update on the trading environment and how you have started? And the second question is, what are your assumptions for the upper and the lower end of your guidance range?

Yeah, okay. Yeah, the market is in an interesting position because there is not really an application season now, but we are very close to the application season. The last couple of weeks were quiet. That's why we saw pricing coming down a little bit, not really significantly, but a little bit. That's due to the quietness in the markets. And we are all convinced that the Indian contract, which we expect every day, will be the catalyst for more activity. Europe has already started to pick up. Here we expect a good season for the first application season. And again, we are sure that we will see more activity once the Indian contract is available. We believe the Chinese contract will take longer, but with the Indian contract you have good visibility what will be the outcome of the Chinese negotiations. And why are we so optimistic? Because all over the globe, The environment is very positive for farmers. They make good money with their business and that's why there's no reason not to use fertilizers the way they have done that in the past. Second, we are early in the year, but still we have decided to have a narrow range, only 200 million. And this is not only one indicator. We look into potential price developments. We look into potential volume developments. And volume is not only driven by logistics, which was an issue last year, but also in our potential to produce. We look into cost developments. And all that together leads to this range. I guess you hoped to be more precise on the second one. For the time being, this is your answer.

And I start with two questions, actually adding on what Marcus was asking, to understand a little bit the price environment. If you look on the demand in the second half, of course there was less supply, but there was also less demand, so there is a price sensitivity. And it seems that farmers, despite the good environment and good income, have not bought as much as they could have done. But we have seen in the second half, how do you see this progressing this year? We also see probably progressively Russian player Uralkali and Belarus coming back to the market with more volume at a season where there is less demand. That's my first question.

Yeah, it's a good one because last year it was a really complicated year, something that we have seen never before in this way because we had a very, very strong demand in the first half because availability was an issue. And as a result, the inventories went up. And with higher inventories and no planting season, there was this wait-and-see behavior mostly all over the globe. And that led to decreasing prices. And this process is not totally finished, but we have seen that around $500 there was an area where the prices became more strong. And in addition, we had seen very high nitrogen prices. which are in a way the leading fertilizer. And if you have no chance to have nitrogen to an appropriate price, you would skip You would skip the potash application. This, what I said to the nitrogen, was a European issue due to the rocketing energy prices or gas prices. This has already come down significantly as we know. The gas prices are lower than we have expected for 2023. That means nitrogen prices came down as well. So this issue is off the table for the farmers. And we believe that once we have the price indication from India, we will see a good year because you mentioned Belarus and Uralkali. Yes, in our forecast, we have modeled higher volumes from Russia and Belarus, but far away from what they have done before the war. So we still have a very good balance between supply and demand. That's our view on 2023.

Thanks. Then one shall return. Obviously, it's early as we have just decided on the dividend for 2022 to ask you about 2023. But if you have now free cash generation, again, pretty high, balance sheet already very strong. What does that mean going forward? We know about the ratio you want to pay out, but that was also defined at the time where you had not a net cash position. So can you elucidate a little bit more going forward how your shareholder return policy will be?

I will, but before that I would like to explain one more time what we proposed. We have discussed a potential buyback program earlier, many years before, because we knew that part of our shareholder base likes this instrument. But there was not enough potential. So if we have only a small volume to give back to the shareholders, it doesn't make sense to split it. And we have to split it because, as you know, we have a strong retail, small shareholder base, which is very keen on dividends. But this year was a year to really fulfill what we have planned already earlier. to offer both, and we believe, and we saw that in the share price reaction yesterday, that this is really attractive to the shareholder base because everybody is getting what they want. We have not decided yet what the future will look like in the sense of returns to shareholders. That's why I said we are working on a new strategy. dividend policy or shareholder contribution policy maybe I should say because we are not only talking about dividends in the future but the indication should be what we did this year looks attractive we are convinced that this is in the best interest of our shareholder base and if there is enough potential in the future we should see comparable offers. I can be more precise when we have the policy at hand and have discussed that with our supervisory board, but I hope that gives you some indication. And you talked about the net cash position. It's true. But we are still in a war environment. And today we see all of a sudden we are talking about a potential new financial crisis. I don't believe in that, but I think when you are working in a market which shows volatility all the time, you should be a little bit more cautious, and we also want to achieve investment-grade rating in this year. So I think taking all aspects into account, we have a real balanced offer for the shareholders, and that should be the case in the future as well.

Christian?

Thank you. A couple of questions. First of all, where are we in terms of the approvals for the spring depositing salt brine? And maybe also where are we on the plans for the tailing pile extension? That's the first question.

Yes. Springen is an undertaking which was never seen on the world something comparable like that that's why the advisors from the authorities are more careful than they would be with a normal undertaking and I have full understanding for that but we had some discussions just recently and I'm very optimistic that we will see an approval soon But besides that, you know that spring is important for safeguarding the production in the Werra Valley. But we have taken so many, so many, yeah, or created so many alternatives to handle the waters. that we will be able to fully produce even in a very dry year, which did not start really dry. But even if we have a full dry year, 2023 is not at risk. And by 2024, we should definitely have the approval at hand. Tailings pulse extensions are running totally as planned. No problem. So no reason to believe that there is an obstacle for the Vera or other plants. We also have an extension at Zielitz. It's running as planned.

Okay, thank you. Good to know. Then my second and last question for now is the secondary mining in Bethune. How much volume tonnage did you get from secondary mining in Bethune last year? And where's the current production run rate for Bethune?

We had production of 2.1 million tons in 2021. As you know, we now try to ramp up. We have set new intermediate targets. The next focus is 2.6 million tons. We have already finished the design for the next step, then 3.2 million tons. And the final step, 4 million tons, is well known, but that will take a couple of years, you know. We had a very successful achievement. We had a good, in our first rubble mine, we had a very good potash content, more than expected. And that could have a good upside or give us opportunity for a more successful ramp up than we thought. So we are quite happy about that. Does it cover every part that you asked? Roughly.

So, because in the past you talked about annual extensions of around 100,000 to 150,000 points, if I'm not mistaken, from secondary mining.

That is the case. Will not the case be this year? Because we will have, that was planned for years, we will have an extraordinary maintenance break of three weeks. So, we should remain on the volume that we've seen last year. But from then on, we should see 100,000, 150,000 pods increase per annum.

Okay, thanks. And that three weeks just on that would be when, in which quarter?

In Q3, if I'm not mistaken. Q3, I think. All right. Thank you. You're welcome.

Thank you. Oliver Schwarz, Warburg Research. Thank you for taking my questions as usual one by one. Firstly, I saw in the guidance for, let's say, for the midterm, that you aim to, over a five-year cycle in the potash market, you aim for earning your capital costs. That raises a couple of questions to me. Firstly, how high do you envisage your capital costs to be? And secondly, connected to that, why do you not aim for a premium of your costs of capital, but just to earn the costs of capital? That would be my first one and a half questions.

First of all, I should mention that this is a... an ambitious target for our industry. Look into our competitors. They are struggling in earning the capital costs year by year because we are so capital intense. Yes, we are generating a lot of cash. We had 40% EBTA margin. We have in 10 years averaged more than 20%, but earning the capital costs is really an ambitious undertaking. And our target is not to stop with earning the capital cost. That is a minimum target. Of course, we are aiming for more. And we take the current capital cost because there are so many aspects. Who would have expected that the debt cost would rise that much? We might see a different development next year. So we have taken the current capital cost, which are, after tax, exactly 8% currently.

Thank you for that. Secondly, could you help me with the guided EBITDA to guided free cash flow bridge here, especially when it comes to cash taxes? I saw that in 2022 P&L cash was $626 million. Cash taxes were only $440 million. What is to be expected for 2023 in that regard? And also connected to that, again, a one-and-a-half question, you may argue, What are your assumptions regarding working capital movements in 2023?

So if you look at the tax rate in the free cash flow, this year it is good to assume the 30% again. Last year was a special year. So if you basically deduct from the EBITDA, the depreciation interest is not meaningful anymore in the cash side, and then apply 30%, you come to the right ballpark. That's number one. And if you then do the calculation and deduct our capex as guided of mid-triple digit million amount, 550 to 600 million euro, if you deduct this one and want to come out at our guidance, you see a nice low triple digit working capital release, which is basically the reversal of last year's capital drain that we had.

Okay, so is that mainly because of, let's say, lower energy prices or are other factors driving that release?

That is mainly because of lower prices. It is, on the other hand, counteracted by still higher-priced inventories. So you still see an inflation there. So it is not the full reversal of last year's effect, but at least low triple-digit million number.

Okay, and my... Last and very quick one. In regard to European NPK producers and demand from their plants, some of them idled some plants in 2022. Obviously, natural gas prices have come down to more reasonable levels by now, but are still at elevated levels. levels nevertheless. What do you see in regards to demand from, let's say, producers or customers from the NPK producer industry, especially in Europe, please?

They are coming back. So I'm not now talking about the blenders in general. We are seeing stronger demand than especially in the second half and last year from this industry. And SOP, for example, has a stronger demand than we've seen last year. That is due to the fact that their economics are back with the lower gas prices. Thank you very much. Thank you.

Then we have one question from Laurent Vernion from the credit side. So it's a credit analyst. Please unmute yourself if possible and switch on your camera.

Hi, good morning. I was wondering, do you have any plan of coming to the market for newborns this year for refinancing or CapEx purposes? Or would you rather wait for CapEx to achieve an investment rating first? Thank you.

Thank you for your question. There are no plans to be in the market for newborns. The opposite is rather the case. We are further paying back debt without refinancing them. That is the view from today's perspective. But as I said, we are in difficult times. It might change, but that is from our strong balance sheet view currently the most sensible way to act.

Thank you for your answer. Thank you.

So currently there are no further hand signals. Now there is one. First of all, Christian.

I just want to come back to the order pattern slash value chain this season as it has surprisingly started slowly. Can you confirm that the inventories at the retailers and at the farmers are relatively empty and the producers such as you are sitting on inventory. So the point would be if the season gets started, it should get started rather robust and you would expect a kind of snapback in demand and with that pricing. Is that what your sales people are seeing?

Yes, it's the case. No region and no customer is sitting on high inventories. But we have all continued to produce, so we have enough inventories to serve the demand that we expect to pick up. But that brings me to one point. We are already in the middle of March. We should not expect too high volume in Q1. So that will shift more or less in the next quarters.

Okay, the next question comes from Michael Schaefer from Oddo.

Yeah, thanks for taking my question. I'm actually here from AutoBHF. One is left, basically. So I wonder whether you can shed some more light maybe on your cost base heading into next year. I mean, you've flicked a low triple-digit amount for 2023. I think in the past you talked about $200 million uptick and a combination of energy costs and logistics. and materials costs. Given that your hatching currently is pointing towards lower energy costs in 2024, maybe logistics, we see some relief at least when it comes to freight rates overseas. So I wonder whether basically we have seen the peak maybe of your cost base in 2023 or how should we think about the evolution going forward into 2024?

Yes, we have seen the peak in 2023. So all aspects, all cost items, energy costs, we all are surprised where we are. It's still winter and we are talking about spot prices below 5 cents per kilowatt hours. That will help us because we have, as you know, we have something hatched for 2024 to very favorable conditions. And obviously we can hedge the rest of our requirements in 2024 to very favorable costs. So there's a chance to see lower energy costs. The same is true with freight. Some freight items will remain to be high. Let's talk trucks. That's an issue worldwide. Truck drivers are not available. The costs will be higher. Rail might be higher, but everything related to vessels will fall. We are now seeing already container costs being close to what we've seen before the war. So there should be a release as well, and some materials should come down as well. What we already know precisely is a 2% increase in wages in 2024 compared to 2023. But if you compare the bits and pieces, you need to take into account that there are some one-time payments in 2023. So we have without this one-time payments roughly 4% increase compared to 2022. And again, 2% increase compared in 2024 compared to 2023. So I'm very happy that we have this bargain agreement already. As you know, in other industries, we have seen strikes and we could avoid this. Not with too much offering a too good offer, but there's always a logic from both parties in K plus to avoid strikes and I'm very happy about it. The last strike was in 1929.

Maybe a second one is on your specialties business. I mean you touched the point already with the NPK question. So I wonder how should we think about SOP pricing going forward and also in other specialties you're providing. Is there any kind of Price pressure or contagion effects coming from the MOP market weighing on that or is this a kind of reestablished premium? Is this something which you would deem sustainable?

Yeah, I said earlier we have seen a very crazy year 2022 and when it comes to specialties and especially SOP, we have a crazy year 23 because I couldn't even tell you what the price for SOP is currently. We have a range between 600 and 950 euros in Europe. So we need to wait for a new price, which we always have arranged, but not such a big range. So I cannot answer, will we see a significant premium? Or is the premium smaller than before the war? I expect that in a year from now we will have a comparable situation than in the past that we are talking about, a 150 to 200 euros premium SOP over MOP. But currently it's crazy.

Thank you very much. You're welcome.

Oliver Schwarz from Warburg.

Perhaps a more, let's say, philosophical question about the importance of the Chinese annual contract due to the fact that the war and the consequential impact on Russia and Belarusian producers shifted market shares in the regions I guess currently China is getting a lot more of potash supply via rail from Russia because they can offer or have to offer highly attractive prices. Hence, let's say the remaining volumes China is to purchase from, let's say, Western producers, North American producers mainly, is likely to be lower. And this price has to be compared by the Chinese, obviously, to the potash from other sources. So is the Indian contract compared to the Chinese contract become, let's say, the lead price in the potash market going forward? Or is that assumption basically completely bonkers?

It's a good question. I wouldn't say that this will be the case in the future, but this year, definitely India is the lead. Because we know that the Chinese price will be at max the Indian price and minimum $10, $20 below that. But when we talk about the demand from Russia and Belarus, we know that the Chinese do not want to rely only on Russia and Belarus. So there's always availability for deliveries from Western companies, but luckily we have the flexibility to react. The last two years we have not shipped anything into India. We could reduce our Chinese volume significantly without losing volume because we have opportunities to ship the volumes into other destinations. That's due to our production network and due to our customer network. Thank you.

So right now we don't have further questions in Teams. But one more from the room. Markus Meyer, Baader Bank.

Two questions. One, again, on hedging. Can you update us on your currency hedging? What kind of levels have you hedged up and lower range? And then, technically, also update on your running efficiency program. Where are we in terms of savings?

2023, 100% hedged, basically, in our terms at least. And the best case is 108%. The worst case is 110%.

Yeah, and the last question is a tricky one because, Mr. Meyer, we have several efficiency programs. So we have started... Actually, it's an ongoing undertaking. We have started with our strategy back in 2017... 2030. Shaping 2030... to optimize our production network. And we have started, I'm not raising the names, several initial efficiency programs. And I come back to numbers later. And then with you, that's our current strategy. We were very ambitious in targeting, especially for the part, optimize the existing. Vera 2060 is part of it, but there is much more. So we have in total cost-saving programs of middle triple million euros amount and we are talking about time periods until 2030 but starting earlier with the higher volumes and we have a rolling controlling on that and The last one showed that we are in line to achieve that. Of course, that runs against, unfortunately, high inflation, but still, that delivers a significant contribution.

Sorry to come on again last time, I promise. When looking at your mid-term CAPEX requirements, given at least the current high inflation rate, What is to be expected in, let's say, 2024 and 2025 in that regard? Obviously, with inflation, you get lower things done for the same amount of money each and every sequential year. So does that impact your original plans in regards to the projects you have under your belts? Or is there, let's say, the willingness to shell out more CAPEX than originally envisaged? Thank you.

Yeah, when we earlier talked about the cost, the total higher cost for 2023 and an outlook for 2024, I also think that the inflation is peaking this year. And when we model a CapEx project, we always model contingencies and inflation in them already anyway, so that I believe we can. And the period you're talking about is a period with high ramp-up costs, Bethune, with Vera 2060. So I'm expecting CapEx to be on an comparable level than 2023 and here we have given you an indication with roughly 550 million euros. So the next year we will have capex on that level. Another reason for being not too aggressive with the payback to shareholders. Thank you. You're welcome.

We have one more question from Charlie Bentley from Jefferies. Partly it was asked, but maybe another highlight here. What is implied EBITDA based on spot price levels, please? So what price development are we assuming going from now in our guidance?

I was hoping that this question would not be. But let's try to be quite open here. We have assumed more or less the current price level in general over all regions and all over products. That differs of course from region to region. We expect once the market is really coming back or the demand is coming back that the South American prices, for example, will continue to increase. We might see some more flattening in Europe. And so you could talk about region and region, but in general, we expect pricing, again, of all regions in all our products to be on the current level. That is driving some price assumption for our guidance.

No further questions from teams?

It was already more than I expected because we have clear messages, we have good numbers so I never thought that we would have almost 40 minutes together but I'm very happy that we had the time together. And I would like to say thank you. Do you have to say some more technical details? Thank you to all of us for those who are in this room, for those who are online. And we will be on the road now. Hopefully we see many of you. And thank you for joining us. And good luck. Bye-bye.