K+S Aktiengesellschaft

Ladies and gentlemen, welcome to the Kplus S second quarter 2024 earnings call. We hope you had a chance to review our posted slides as well as our Q2 documents available on our 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 two of the presentation. Then a note on data privacy. Please note that the team session will be recorded, webcasted and be available as a replay on our homepage afterwards. People asking a question in the team 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 would like to turn over to Dr. Lohr for the opening remarks.

Thank you, Julia. Welcome to our Q2 earnings discussion. We had a robust quarter in line with expectations. We were again able to benefit from a strong European and specialty business, and therefore agriculture sales volumes increased to 1.84 million tonnes. Industry Plus also performed very well. In total, Q2 EBITDA reached 128 million euros, up from 24 million last year. Free cash flow of the first half amounted to 87 million euros. For the full year 2024, we confirm the midpoint of our previous EBTA guidance. The visibility we have gained with the China and India contracts and the current time of the year allows us to narrow the range to 530 to 620 million euros. The remaining range results from the different scenarios for sales volumes and for regional or product mix. We also continue to expect full year free cash flow to at least break even despite the planned elevated capex. Ladies and gentlemen, just to give you a sense of the phasing of figures for the rest of the year. Please remember that Q3 is our maintenance quarter. Last year Q3 contributed only 10% to full year EBITDA. However, free cash flow in Q3 2024 should be positive due to working capital movements. Back to Julia.

Thank you. 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 questions to us 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 us to the first question of Aron Ceccarelli from Berenberg.

Hello, good morning. Thanks for taking my question. My first one is about Q3 volumes. I would like to get an idea of how much volume you already committed at this stage and if you could give us a sense of the pricing around that. Thank you.

Thank you for that question. Good portions of Q3 is already committed. I think the most important message is that we are very sure that we can sell everything that we produce and maybe even more for the rest of the year. So we might even decrease our inventories a little bit further. It's all a matter of logistics whether we hit the 7.7 million or fall back to the 7.4 million. You know that there might be a strike in Canada and we might see other hiccups. So the demand is very strong. And pricing, we expect the price to continue for the rest of the year, more or less, on the current level.

My second question is around potential downtrading. With corn and soybean prices, which have come down both significantly, how would you think about potential downtrends

I don't think that the use of the kind of product is very intensively driven by pricing. because our specialties give additional values to the farmers. For example, SOP, they need to use SOP for chloride sensitive products and they would not skip it for potential cheaper MOP price. But you mentioned the lower crop prices. Yes, they came down. But with the low input prices, they are still making money with their business. And from the big macronutrients, potash is the cheapest. So we think that there is still a positive balance for the farmer to use our products. Thank you. You're welcome.

Thank you. The next question comes from Christian Feitz from Kepler-Chevreul.

Yes, thanks for taking my questions.

Yeah, first of all, good morning and thanks for the question. As everything over 2 million tons is secondary mining volumes, we should see 300,000 tons of secondary mining volumes by the end of 2025. Okay, perfect. Thank you. It's a matter of how long the strike will last. In the past, strikes were quite short in Canada due to the tremendous importance of the rail in this country. and the political impact on the parties. But this time it looks like the parties are really having a harder time than in the past. So we are prepared for, let's say, two weeks. We of course have used the time in between to decrease the volumes in our warehouses. But if it lasts longer, it will have an impact on the production in Canada. But of course, not only for us, for all producers. And here, our strategy pays off that we have production footprint in two continents. So even higher capacities in Germany than in Canada.

Okay, perfect. And if I may, I'll be done for good. I won't raise my hand anymore, I promise.

You might.

Yeah, because I saw there's little, very few hands raised. So can you please update us in advance for your tail tile expansions? And when would you expect to have all Googles in place?

So we are talking about HATOV now for the second phase. I think we are in line with our approval processes and we don't expect an approval, final approval for this year, but early 2025. But there's no reason for any concerns. We are totally in line.

And what about Neuhof?

There is no requirement now to expand a Neuhof mine. We have still enough capacity to... Or do you talk about coverage? Okay. That is still an ongoing issue. And we have a very noisy Bürgerinitiative, so a local initiative. But we have seen that in other places, we will find a way to come together. But that has no impact on our running business. If it takes longer, then it takes longer until we have covered the pile. But it's no risk for our running business. Okay, thanks very much. Thank you.

Thank you, Christian. The next question comes from Konstantin Wichert from Baader.

costs.

The reduction of the cost is mainly driven by the lower gas price we saw in the first half, and the main cost reduction is realized in the first half. We see some additional reductions in the second half, but the main cost reduction we already realized. And with regard to the cost per ton, that mainly depends on the volume, higher volumes in the first quarter, some lower volumes in the second quarter. And that's more a calculation, but that's no big impact. All right. So I guess about, let's say, maybe 70% of 200 may already be first and the remaining smaller share in the second half. Is that possible? Yeah, that's okay.

Sorry, now I can't hear you anymore.

So unfortunately, it seems the microphone from the phone is used, not from the AirPods. But anyway, so I've seen that you published or reported the trade volume separately right now. So maybe can you give us an indication how much is that for the Puglia? And if I'm correct, Your updated guidance right now excludes the trade volume but has included it in the first quarter guidance. So what should we assume then as an underlying volume growth in your volume guidance upgrade that you had right now?

First of all, the trade volume is almost entirely due to a new acquisition that we have done last year, an entity called Fertiva. We are a trader in South Africa that fits perfectly to our Africa strategy. We have been active in Uganda, in Kenya, and now in South Africa with own activities. And this entity is not only trading our potash, but also nitrogen and phosphate. And for the full year, we can expect 350,000 tons trade goods. But as this is not a role model for the group, we don't want to step into the trades good business. Only in this entity and only in South Africa, we decided not to put it into our volume guidance. And we are talking for the full year about roughly 350,000 tons. And when we guide 7.4 to 7.7 million tons sales volume, it's excluding these trade goods.

Okay, but in the first quarter, I think, at least you didn't mention that you excluded, but did you exclude it from the sales guidance from the first quarter already as well?

Yes. Thank you. You're welcome.

The next question comes from Andreas Heine from Stiefel.

I'd like also to get back to the costs. So, you have increased the sales volume, but the cost savings of 100 million will stick to you. So, I mean, the incremental volume is very little cost, or how can you explain? So, did you find additional ways to reduce cost?

The main impact, as I already mentioned, is the lower hedge basis of the gas price. We see on the other hand that the consumption of gas was higher due to higher volumes that we produced. But there are no special effects. Another position where we reduce the cost is the major maintenance we see every three years in Canada. That happened in the last year, but these costs are not or doesn't affect the P&L of this year. But we didn't face any additional main cost reductions.

But it means basically that with the increased volume, you have lower unit costs as the absolute cost guidance hasn't changed. Is that a fair assumption?

Yeah, that's a fair assumption. The higher volumes will reduce the cost position pattern.

Thanks, that was the first. And second, just to refer and understand the range of the volume you have, it is not dependent on how you think about the market. It is only technical, so how much you can get out of Canada. Is that the only variable or is there some uncertainties around the German production as well?

No, it's not a production driven range. It's all totally demand driven and logistical driven. And as we are not expecting that the demand is is lowering from one day to the other. There is no signal for that. It remains only to see whether we can get all the volumes over the logistical system and again, Impact Canada Now we have a very hot summer that might also have some logistical impacts, but we are not seeing any production obstacles and we are not seeing a weakening in demand.

Very clear. Thanks. The last question I have is on prices. You already highlighted you do not expect major PVSVs to set a standard in the second half. Looking on the prices in Europe, they are still quite Could you outline why these higher premium for European prices and SOP prices should stay for the second half and maybe also going into 2025?

The European prices came down a bit, but they are still higher than in the rest of the world. That is of course a function of supply and demand. We are still not seeing any Belarus volumes in Europe and only little Uracali volumes in Europe whilst they are back with their full capacity in the rest of the world. And that is one reason for the European strong pricing and we expect to see a comparable situation in 2025 as well. And SOP has not even lost significant pricing. So we see a strong demand in SOP and we see again or still some competitors weakening with their capacities. And that's a perfect environment for us to use the situation and get these high prices.

So let's say if you see some softening in overseas prices, then you would still, in MOP I mean, then you would still say, well, the European price should stay where it is, so a little bit decoupling from softer trends in other places, and the same would then be true for the different supply-demand balance in S&P. Is that fair?

That's a fair assumption, yeah. Thank you, Ms. Aina.

Thanks, Andreas. The next question comes from Chetan Odeshi from JP Morgan.

Hi, can you hear me? Yes. I have a couple of questions. I think the first question I have is when I look at your H1 numbers, I think what is clearly visible is you benefited from the good mix of European volumes. As we look into 2025, assuming the prices don't change from where we are, is it fair to say your numbers or your earnings on a life-for-life basis should be down? Because that benefit of Q1 and possibly Q2 in terms of mix and maybe still the lagging effect of last year's pricing, your numbers probably doesn't repeat.

Now I have to be careful not to give you already guidance for 2025. I think that's a little bit too early. But I'm not seeing any reason why the situation as it is should change significantly in 2025. There will be still sanctions against Belarus. Uralkali will have problems to enter the European market, so the environment will be still positive for us. So the European prices should be still very favorable. And the same is true for the specialty business and the specialty pricing. Of course, it depends on the total pricing in the world, but we will have a positive gain from our regional mix and our product mix. Understood.

And maybe just the second question is a bit more philosophical and strategic in the sense I mean, if I look at the potash depan this year, clearly we've gone back to the pre-war levels. In fact, it's probably even slightly higher. Maybe the supply from Belarus and Russia has gone back to the historical levels, maybe even more. We know BSD is going to start up their new site in Canada at some point in 26, 27. I think the point here I'm trying to get to is if I look at your row C guidance for this year, even with good mix, good price in Europe, you are still talking about low single digit row C, which is clearly well below your WAC. Is there a reason for K plus S to probably consider alternatives? I mean, to a standalone strategy because Maybe the market structure might not allow you to generate that decent ROCE above WAC over time, over the cycle. This is just an open sort of question. It's not meant to be right or wrong. I'm just trying to assess how are you guys thinking about that strategically?

First of all, we see the future and also the near future obviously more optimistic as you do. So I don't think that BHP will be a big issue. I don't see the volumes in 26, by the way. Ramping up from 727 until the 30s, the market will grow further. And our business delivers high returns, but a high volatility as well. So that's why our targets are a five years range. And in a five-year average, we are able to cover cost of capital. It's a capital-intensive business, but it delivers more than 20% EBITDA in this average, and it covers its cost of capital. And it's an oligopoly with limited demand. competition, it's difficult to enter the market. Remember when BHP started back in 2008, they're still not in the market. So, strategically there's no reason to think about something entirely different. What we have to do is, and that's core of our strategy, to optimize our core business as much as possible and we are working on that ongoing. You're welcome. Thank you for your questions.

Thank you very much. The next question comes from Lisa Denner from Morgan Stanley.

Hi, thank you for taking my two questions. I have one follow-up a little bit from Chetan's question, but maybe on a higher level. I mean, can you just share how you expect demand to evolve in the second half of this year and perhaps into 2025?

where that i mean the strength of the man could come from that's my first question um yeah we we have seen a long period of shyness from our customers first of all um due to the um due to the long-lasting contract situation in China and India. Now in China and India, we have seen the new contracts and we are now seeing a strong demand in Southeast Asia. So in total, it's easy. We are expecting 74 to 77 million tons. You know what we have done in the first half. So a second half with strong demand as well. And as the farmers still have the opportunity to make good money with their doing, I mentioned already the input factors are still cheap, especially potash. We should see a comparable volume in 2025. The only matter is what will the prices do and it's too early to elaborate on the pricing in 2025.

Sorry, just double checking, you expect 2025 MMP volumes to be similar to 2024, is that correct?

Now, I usually talk about our total portfolio. That's why I mentioned 74 to 77 million euros. But if you deduct the 5 million tons specialty markets, then we are in line, I think, with the expectations of our competitors. And that is a very strong volume. And we should see that in 2025 as well.

Okay, thank you. Very helpful. And then my second question is, can you give us an update on the different cost elements for this year, given you previously commented the expected cost budgeting to remain flat versus your previous guidance? And particularly, can you give us a bit of an update on how we should model wages in the second half, given the step up in your costs in the second quarter? Thank you.

With regard to the cost, as we already mentioned, the cost decrease is mainly driven by the gas prices. So we expect for the total year a lower cost level compared to a prior year of around about 100 million. The gas consumption will be lower and also the external supplies and service costs. With regard to the wages, we already see a slight increase, mainly driven by the general increase of the salaries by the collective bargaining agreement. With regard to the other costs, we expect that they will stay on nearly the same level, with some decrease, some increase, but mainly on the same level.

Thank you very much. Thank you. The next question comes from Tristan Lamotte from Deutsche Bank.

Hi, just one question, please. I was wondering if you could please clarify on the capital fund next year. Can you break that down into two main topics? Anything else? And when those projects will run into, or in other words, at what point we will reduce back down to maintenance levels, which I think you've said are around 350 million euros at present. I'm just thinking about how that translates to free cash flow in the next few years. Thanks.

Sorry, we have a very bad line. I just have to ask my team if they understood what you asked.

Yes, I think I got the question that you were asking. What about the CapEx in the next year? How will it divert into the different projects, Vera 2060 and Bethune?

Is that the question? And when will... It's the phasing of the capex and when you reduce the maintenance level.

Okay, okay, okay. So the main driver for the, I would call it inflated capex until 2027 is VERA 2060. And that is a very, very... profitable project and comes with a lot of very positive ESG impacts. I think that was not the question, what is the purpose of VERA 2060, but we need to make clear that KplusS is a completely different company after we have finished that project. The German assets always laid on the share price and we get rid of all the problems that we have faced in the past. So that's why we said we will take that hit with the next three years higher capex because it's very valuable to KplusS. That was a long story before I come to the numbers, but I think it's important. It comes with a capex volume between 550 and 600 million in the next three years. And the main portion of the additional volume, additional to 400, which is a normal capex number to the group, the main portion comes from VERA 2060. And after that, we should narrow back to 400 million. But you have to take into account, have in mind that the ramp up in Bethune, which also consumes some additional capex, but a number below 100 million euros, will continue even after 2027. Thank you. Okay, thank you.

So Chetan Udeshi from JP Morgan has still his hand raised, but I don't know if it's another question or just keeping the hand up. Maybe you give me a short feedback, Chetan.

Sorry, I've already done it, so I'm putting my hand up.

Sorry. No problem at all. Because that was the last hand I was seeing that was raised. If there are any further questions, raise your hand. Otherwise, I would give the last word to Dr. Lohr.

Yeah, like always, I would like to thank you for your time. We know that this quarter was in line with your expectations, but still you had some very interesting questions and we are looking very forward to seeing you on roadshows and on other occasions. Thank you and all the best to you.