K+S Aktiengesellschaft

Ladies and gentlemen, welcome to the KplusS first quarter 2023 earnings call. We hope you had a chance to review our posted slides as well as our Q1 documents available on the website. After some opening remarks by Dr. Lohr, we will directly jump into Q&A. Some technical notes. Please refer to our disclaimer on page 2 of the presentation. Then a note on data privacy as always. Please note that the Teams session will be recorded, webcasted and be available as a replay on our homepage afterwards. People asking a question in the Teams session have to be aware. that by turning on their camera and microphone, they give content 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. Good morning and welcome to our Q1 earnings session. After brief opening remarks, we will directly start in the Q&A session and all the three of us will answer. And you have not seen him so far. On my left side, Dr. Christian Meyer, our new CFO, will also be part of the answering team. We had a good start into 2023 with an EBITDA of 454 million euros and an EBITDA margin of 38% and a free cash flow of 130 million euros. To put the free cash flow into the right perspective, You have to look at our trade receivable volume. This was still unusually high and saw no release from the year-end level of 1.1 billion euros. This should happen during the next month. Some words about the potash market. The wait-and-see attitude of customers has lasted longer than expected. This was partially due to the lengthy Indian negotiations, which were finally done at the beginning of April. In the northern hemisphere, this meant that deliveries were not in time for spring application. We expect demand to pick up in the second half of this year, and this is base for our outlook. We also expect overseas MOP prices to moderately recover from today's level in the second half. This would translate into a full year average selling price for our product portfolio tangibly below the level we saw in Q1. And now we are happy to take all your questions.

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 the Microsoft 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.

Yes, thank you. Good morning, everybody. I have two questions, if I may. First question first. You suggest a higher price level for Brazil from here on. Given that we have seen rather volatile prices in the Northern Hemisphere so far, with the U.S. sequentially improving stronger, but Europe pretty much doing nothing, can you give us an assessment of current market conditions and also your view on where you would see Brazilian prices into H2? Thank you.

Yeah, thank you for that question. I think that is the key question for this call, because we really had a long way to a normalization in the markets after this outstanding year 2022. It was good, but also it was a reason for some, yeah, unnormal behavior in some markets and that differs. But coming to Brazil, We are not seeing any reason to not believe that Brazil should come to a normal distance to the Indian contract. We have no China contract so far, but we know India is 422. This is standard product. We are delivering granulated product into Brazil, and there's a premium for that. And there is a good reason to believe that in the second half of the year, prices in Brazil should be $30, $40 at least higher than in India. And that, by the way, is base for our expectations as well. So the regions have reacted differently so far. We saw a pickup in North America. We expect similar development in Brazil when I talk about the volumes now, when the planting season in Brazil is starting, and that means deliveries should pick up by the end of this month and in June. Europe is interesting to see that some farmers have now not applied or applied too short volumes of potash for three seasons. And that means that they are really taking harm to their soils. And we expect there must be a logical behavior in the future. So another reason to believe that the second half could be a good one in Europe as well. But again, we lose volumes due to that behavior in Europe. But at the same time, Europe is the area with the least deliveries out of Belarus and Russia.

Okay. Thank you, Dr. Law. Second question, and it's actually a rather provocative question. Another fertilizer company, OCI, which reported today, it looks like their major shareholders are not exactly happy with their own share price performance, also versus peers in other regions, listed regions, i.e. non-Europe. And they seem to be musing about a delisting of their shares, at least in Europe. Any Thoughts on that? Are you happy with your valuation versus your key peers?

Of course, I'm not happy with the valuation. And when I see the development of the last couple of days, we are facing another very strong year, 2023, with a free cash flow of 650 to 850. And this is not in the right perspective with the share price from my perspective, but we know that the share price is true for us and true for our peers, linked very much to the potash price development. So a very short-term view on that. We believe that with all our strategic initiatives, Vera 2060, ramp up Bethune. And there's a lot of good news to come out of Bethune that we can get another spin into it. And don't forget, we have the AGM tomorrow. And after the AGM, starting early next week, we will see a buyback program. And it remains to see what the reaction will be on that. But a delisting is nothing we are discussing currently, like OCI. Okay, thank you very much. Thank you.

Thank you, Christian. The next question is coming from Mubesha Chaudhry from Citi.

Hi, hopefully you can hear me. Just the one question, please. Can you talk about your take on why the Indian contract took so long to negotiate and when it did agree, it only agreed for six months. So any thoughts on why the Indians pushed for a six-month contract on that side of things? Thank you.

Yeah, as you know, first of all, thanks for that question. As you know, we are not at the negotiation table and that's why we can only guess. It took long. What we heard that there was an agreement and that was afterwards. Yeah. Yeah, not both parties stick to that agreement, so they had to come together again. Now we have the 422. I guess the reason for the six-month, but that is not the first time, by the way, that we have a six-month contract, is the expectation of whatever, volatility, and I don't know which party was the one who was... asking for a six-month contract only, I wouldn't read a bad news into that. I would rather see we have potential in six months to see a higher price. Thank you. Thank you very much.

The next question is coming from Andreas Heine from Stiefel. Andreas, are you there?

Yes. Yes, we can hear you, but we cannot see you.

My question is on the volume side. You reduced the outlook for the volume by 100kt. Is that due to production capabilities or is that a function of the lower demand in the first quarter and potentially second quarter in Europe?

That is 100% due to the lower volume in the first quarter. So we have not assumed to make that up in the following quarters. And we are only talking 100,000 tons.

Okay, so production capabilities are fine. It's nothing.

Production capabilities are fine and there's nothing on the horizon that could cause a significant issue. Even a hot summer or dry summer would not lead to any stand stills.

And the second question is more on the agro economics. When you fertilize less in spring, does it mean you have to do more in autumn or is that completely different so that for the next spring season you always have to come to the acre before you plant or can you what you missed in spring, do in autumn to prepare for the next season?

That's always a function of the quality of the soil. But we are now talking about, when I talk about Europe, partially three seasons in a row with not enough potash on the soil. And that definitely has to lead to a reaction in autumn.

And then lastly, we hear a lot from IFA and from all sources about the supply from Belarus and Russia. My feeling is that the recovery is underestimated. Otherwise, we would not see that the market is well supplied and that these two players undercut especially overseas prices from Western producers. How do you see this situation going into the second half?

I think we all agree that the gap to normal production and normal deliveries of the two companies in 2022 was roughly 15 million. And the expectation for this year is somewhat between 7 million and 10 million. Still meaningful. So what we see or what we saw in the first quarter and might see in the second quarter as well, because we said second half should be a strong one, is more or less still wait and see behavior due to the expectation prices might come down even more. Fortunately, The North American market has now seen a strong development and again we expect the same for all the other areas as well. India is also strong after the contract, so it's not all weak and it's not a flooding of the market of Belarus and Uralkali. And by the way, you know that Belarus is still sanctioned in Europe and Uralkali is not using its headroom. So Europe definitely is not impacted by too high deliveries from these two companies. Thanks. Welcome.

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

Great, thanks very much. My first question, just following up on the India contract, I think on the call last time you talked about that as a catalyst for demand and it'd be interesting to hear your sort of comments on how customers reacted to that and whether it was just too late in the season for them to then show any interest, whether it has led to even a minor pickup in buying interest in your conversations.

Yes, that is what I mentioned earlier. It was so late that buying and shipping into the running season in the northern hemisphere was not possible anymore. And that's why the entire market has lost quite a volume. And that's the reason for the whole story. And again, as this happened and it has negative impact on the farmers, on the soils, we expect a strong half, second half of 2023.

Great, thanks. And second question is on cost. You reduced it from a mid triple digit million inflation to low to mid triple digit. Can you talk about what's changed there and maybe give us some quantification in terms of the different buckets of energy personnel logistics materials?

Yeah, we have seen different developments. As you know, the gas price is for us the easiest to calculate because we have this 90% hedge. But the unhedged volume went down significantly. Now we are talking in the spot about 35 euros. This is extraordinary cheap compared to what we saw last year. We also saw some freight items coming down, especially containers. That was not only a high price issue, that was also a question of availability that has changed entirely. And some materials are also less expensive than we expected. And that's why we only see roughly 100 million inflation compared to last year.

This is price-related?

Only price-related, of course. Thank you.

The next question comes from Michael Schaefer from Oddo.

Yeah, thanks for taking my questions. The first one is also on your outlook into the second half. You referred to MOP overseas pricing improving in the second half. So I wonder whether you can shed some more light on your underlying assumptions on the specialties products, which has been still up, I think, pricing plus 9% over here in the first quarter and maybe also on the industrial side. So how should we think about lower MOP prices and filtering through all those specialties and industrial products throughout 2023?

Yeah, thank you. Thank you for the question. One part of the answer is already known. So we expect the Brazilian prices to come back to a normal distance to the Indian prices. On the other hand, we expect the European prices to come down a bit because they are still the highest prices in the markets. and we should see a comparable development to some of our specialties, especially SOP, which are still on a very high level. So that is the normalization we are talking about, and that is with a normal volume the base for our guidance. And talking about the upper end and the lower end, so if this happens quicker, And then we are at the upper end. And if we don't see that development that I just described, we step more or less on the current pricing, then we are closer to the lower end.

Thanks for this one. Then my second question is on your trade receivables collection. So this was hardly unchanged number. in the first quarter compared to Q4. So I wonder, how should we think about this money flowing into your cash flow statement throughout the year 23? So what's the quarter when we see the most of the collection kicking in here?

With regard to this question, that's based on the maturity mix of our accounts receivables. And we expect the most of them to be collected in the second quarter and some in the third quarter. But you will see a big effect in the next month. That's based on the maturity mix. Thanks, Tetsong. Thank you.

The next question, and that's, I think, a follow-up question comes from... Oh, no, we had that already. We continue with Thomas Swoboda. And I guess Andreas Heine is ready. Otherwise, just give me a signal via the chat.

Yes. Good morning, everybody. I have two questions, please. Good morning. They are rather... Good morning. They are rather hypothetical, still, I think, worthwhile asking. My first question is on the theoretical break-even price in the potash market. In the last downturn, I think the prices only bottomed out at roughly $250. I hear you that we are probably not going into this direction and we saw a lot of inflation since then. But theoretically, Where do you think the current break-even price for MOP lies today?

That's a tricky question, because then we are talking about a lot of moving parts. Because one thing is for sure, and this is what we are seeing currently, when the potash prices would move in such a direct, and I'm not expecting that at all, that is totally unlogical with the shortness in supply. even if we have a further shyness of the customer, this is not going to happen. But I don't want to shy away from your question. Even if we would see a development in this direction, then we would see also a significant decrease in costs. If we would take that into account and you know that we said we want to be free cash flow at least neutral on a price level which we had back in 2020, so then this is more or less the break-even point. Right. Now you're gone. I hope it's not due to my answer.

Okay. Thank you. Ah, yeah. You're back. I'm back. Yeah, it must be my line. Thank you for that. You implicitly answered my second question. So if I understand you correctly, your cash costs would be already at a level of this 250 or whatever that you could stay cash positive in case we should see market prices going to this direction.

Yes and as you know our cash position sorry cash cost position is a moving target as we ramp up Bethune and we are getting step by step towards better position, but you're correct. With the assumptions I just presented, we should be fine with such a price level. Again, what I'm not seeing for years.

Perfectly understood. Very helpful. Thank you. Thank you.

The next question comes from Markus Meyer from Baader.

Yeah. Good morning, Julian. Good morning, Dr. Lohr. Two questions from my side. First of all, there are new sold capacities from Eastern European companies' land. Is this a threat for you? I understood that this is only 400 KT, but nevertheless, might be also sold in your market. May I answer one by one?

Sure. We knew a long time ago that this is going to happen and we have prepared for that. And as you see currently the salt business is really booming in Europe although we did not have an extraordinary winter. So you see that is not a threat to us at all.

And where do you exactly expect to see the effects? Is this more in the icing part or also in the consumer part?

That's more in the chemical segment, but that is so big that additional 400,000 tons is not really a threat to us.

Okay. Thank you for this. And then the second question is, have you understood this correctly that there are changes with the plans of the coverage of the tiling facilities in Neuhof? Can you update us on this and also what is the potential capex effect from this?

First of all, we are happy that we have an agreement with all parties because having a publicly noticed fight is never good. Not everything you read was 100% correct. We only have agreed that we will look again into the best methodology to cover Neuhof, but we will have to cover Neuhof because it's an obligation for us. And that we try to be quicker than the originally assumed 100 years. And again, I'm happy that we have calmed down the situation. Now we will meet regularly at a round table together with authorities, together with the ministries, and we will find the best solution and we will have to cover it and Rex will cover it. And it has no impact so far on future CapEx. Okay. Thank you. Thank you.

So far, we don't have any further questions. So if you have any further questions, raise your hand. No further questions in the line.

Thank you very much. I think that was a very interesting Q&A session with very interesting questions. Again, I would like to use the opportunity to remember one more time that after the AGM we start the buyback program and you see an optimistic management team and I'm looking very forward to see you on the road or where else.