Earnings Call: Q3 2020

Nov 12, 2020

Welcome to the K Plus S Conference Call regarding the publication of the Quarterly Report Q3 20 hosted by Doctor. Burkhart Law, CEO. For the duration of the call, you will be on listen only However, at the Please note on page 2 of the presentation, you will find the disclaimer. I am now handing the call over to Doctor. Verkhart's Law to begin. Please go ahead. Thank you very much. Ladies and gentlemen, welcome to our Q3 call, and let's start right away with Slide 3. Despite difficult market conditions, which really was another decent quarter. Due to lower potash prices, in agriculture, we lost a good EUR 50,000,000 compared to the previous year. We were able to partially compensate this decline by showing strong operational performance of our plans to which Bethune in particular made a significant contribution. In addition, we had strong cost discipline and did our utmost to make optimal use of our logistics network. As in the first and second quarter, we had a COVID 19 related burn of around EUR 10,000,000, for employee protection measures and to ensure production. As already indicated in August, We were able to more or less compensate for these efficiency losses for the year as a whole with actions from our package of measures. We were therefore able to increase EBITDA from 1,000,000 last year to 1,000,000. On the back of the lower cash CapEx, free cash flow had also improved to a negative EUR 116,000,000, Of course, on a net profit basis, the noncash assets impairment resulted in a significant loss of almost EUR 2,000,000,000 in the quarter. Now I'll turn to Slide 4, please, to have a closer look at the agriculture customer segments. As expected, demand in agriculture was good in the Northern Hemisphere and Brazil in the reporting period. The tense situation in Southeast Asia has started to improve. This also takes off pressure from the European market. Prices for our fertilizer facilities remained largely stable. And we expect the price recovery continue in most overseas regions as producers are widely committed until at least the end of the year. Please turn to Slide 5 to have a closer look at the Communities customer segments. In total, the icing volumes in the second quarter were about 30% below the level of the previous year. Largely due to high stock levels of our customers at the beginning of the bidding fees. However, Since we have multiyear contracts with many customers and fixed prices, we only assume slight to moderate price decreases overall. Please turn to Slide 6. We have a closer look at the industry and consumer customer segments. Some sub segments, such as food sold, hotels and restaurants, or chemical source for the automotive industry, are affected by the corona pandemic. Other subsegment have benefited to describe one off effect from our package of measures, a significant improvement in operational performance, high cost discipline and an optimal use of our logistics network also contributed to the positive earnings development. Revenues we lost in food sold in the B2B area were more than compensated for by the demand in the consumer customer segments. We continue to see a strong demand for state at home products. For example, table salt, water softening and pool salt. This shows the robustness of the business has been proven during corona pandemic. And now please move to our outlook on Slide 7. For 2020, we continue to expect EBITDA of around EUR 418 1,000,000. Including one time restructuring expenses of up to 1,000,000. We continue to expect free cash flow around the breakeven point with this EBITDA guidance. Due to the impairment, EBIT and group earnings after tax will be strongly negative in 2020. We adjusted our long term assumption of potash prices as well as higher cost of capital. Based on the current project price level, we continue to expect sustainably rising prices in the short and medium term. The assumption for long term price development is now lower than previously assumed. Overall, this result in a one off asset impairment in the Europe plus operating unit of around EUR 2,000,000,000. However, this measure does not lead to an outflow of liquidity and does not change the indebtedness. With this matter, we have cleaned the balance sheet and thus have more room to realign the company. Please turn to Slide 9. Ladies and gentlemen, as you can see from our October report, we have reached an important milestone. The timing for the sale of our Americas Operating Unit to Stone Canyon Industry Holdings, mark Dimitry and affiliates at US3.2 billion dollars. As the currency risk is now fully hedged, we expect net proceeds of around 1,000,000,000 The closing is expected in summer next year. On Slide 10, I would like to briefly outlined how we are setting CapEx up for the future. 1st of all, I would like to state that our business model is intact, which has been always approved during the corona pandemic. There are no substitutes for production. Other minerals in our portfolio. They are essential for feeding the world population. The megatrends such as rising population and less agricultural lands per capita are still valid and clearly speak for an increasing demand for fertilizer. The sale of the operating unit Americas is an important milestone to delever the company. We are currently developing our new vision and strategy. The following targets will be part of it, One important goal is that our plan in Germany and Canada will generate sustainable cash in the future, even with a low potash prices and green winter. We will reach this with an optimized production footprint and an optimized product portfolio. Due to our improved financial situation, We will also have sufficient headroom to grow in specialties. Ladies and gentlemen, This concludes my presentation, and we are ready to take your questions. 1 at a time, please. Operator, please open the line for our Q and A session. Thank you. You. The first question comes from the line of Christian Faitz from Kepler Cheuvreux. Please go ahead. Yes. Thank you. Good morning, everybody. Good morning, Doctor. LoRa. So one question at a time. I got I have 2 overall First question, on the impairment, you are flagging lower to long term potash price assumptions. If I remember correctly, best even was planned with a long term potash price of around $4.30 per ton. If that used to be a long term price assumption, where is it now? And moreover which assets are mostly affected by your impairment? I assume it's Bethune. So, can you share with us Bethune's book value? Thank you. Yes, good morning, Mr. Faitz. Thanks for your question. And our original assumption when we put together the business plan for Bethune was a price, a long term price of USD 4.70. That was back in 2011. And, in the long term projection of of potash prices, it's important to stress again. We believe we have good reason for optimism in the mid and long term, mid and short term, but the prices at the long end have had to be adjusted if we see if we look at what the prices have done in the last 2 to 3 years And that was a major trigger. And of course, don't forget the WIC. We will not be the only one to be forced to assume a higher leg, and there was another trigger to do this now. And, it affects both Bethune and Germany. Of course, Bethune is a newer investment with higher assets. So roughly 2 thirds are on Bethune and 1 third on the German assets. Okay. Can you, would you mind sharing with us your new potashquhar's assumption in the long run? That would be a long time potash price forecast. And please accept that we are not willing to share that with you, but it was a significant reduction. From the 4 70? Okay. Thank you. Then my second question, agriculture, your pricing in Europe is substantially weaker compared to a sequential improvement in overseas pricing over the past 2 quarters. Can you please elucidate the reasons behind this? Is it just FX related or have your specialties lost some of their pricing power? Thank you. No, it's more or less a timing effect. You know, that Europe is less volatile, but it reacts, of course, on what's going on in overseas. And this comes with a time lag and that's what we are seeing now. And all the other effects are have less than an effect on our European price, but that gives me the opportunity to elaborate on what we are seeing currently in the market. And there are a lot of good news. China local prices were up by US25 dollars We have seen a significant increase in the USA. You could claim you only have a small portion in the U. S. Business, but that takes pressure from other areas. Crop prices like maize, corn and soya are up in the gains from a good man's doing And we see more tenders in the Southeast Asia area. So good bunch of good news and that should lead to higher prices, overseas and with a time lag in Europe. Okay. Thank you very much. Your next question comes from the line of On the restructuring cost cutting measures, Can you give us a flavor how much of the Q3 result came from cost cutting measures? And how much, of the savings are also sustainable, I guess, also there are several temporary cost saving measures included in Q3 result? Yes, the major portion of the effects will run into Q4. We only had a small, yeah, a single digit amount affecting the cost base from the restructuring measures. But again, the provision building for the rest will be done in Q4. But therefore, we will gain no gains this year, but we will gain not the full $60,000,000, but the biggest portion of the EUR 60,000,000 already in 2021. Okay, understood. Thank you. My second question is again on the impairment. If I could remember correctly, in 2016 in several conference calls, but also road shows There was always a question on the impairment. And at this time, it was set as long as the price stays above the USD 200 per ton level. There is no impairment risk. As we assume, the business plan is a long term business plan and therefore, the risk for the next years is basically around 0. And now we have this 2,000,000,000 impairment or was it twothree are coming from Versum? So I'm still struggling on the timing And also I'm still struggling, on this, what you said, the risk premium increase at Divic, maybe you can shed more light on this. Yes, there was Margaret Stossman. I think with the pricing, we have to see it's a long term price roll, yes. And as Booker stated, we expect an increase of the pricing, but at a, yeah, let's say, a slower pace than we originally anticipated also in the long run. And the long run plays, of course, a major role in this calculation. The second is, over the last years, we also experienced higher environmental CapEx, which affects our free cash flows we have to see for the next years, negatively and higher costs for environment like energy costs in Germany. And when we look at the WACC, this changed as well, we, I would say on twofold here, it's it's a higher market risk premium on the equity side we have to apply. And also the yields, we see this with our own point to use, but also the set of the peers, we see an increase so that we could not longer hold our previous assumptions. So it's a it's a used spreadsheet, which, with many changes. Okay, understood. And if I might steal another question, can you update us, when the year you announced this new strategy and also this plan to change care classes? And also to cut costs and use efficiency measures to drive earnings. You also said that potentially the management incentivization is previously was linked return on invested capital, mainly should be also linked to the share price on the earnings performance. Can you update us here? What are the current management links to the incentivization or the kind of triggers for incentivization? Yes, that was in that question. Think I've heard many questions, not only one. So the update, on our vision and strategy latest to the next JVM, but you should not expect all new many aspects out of shaping 2030 are still valid. But of course, with such a big cut, We sell a good portion of our business. We have to adjust our vision and our strategy. And that's what's going to happen now. And it's not only cost cutting what we are looking in. It's a way to set up our business more intelligently and we will create some additional ideas. When it comes to the management compensation, yet, we now have a big portion of, of share price development in the variable payment. And of course, the performance of the running year And in the long run, we also have sustainability targets in our compensation. Okay. Return of West capital is still included or is it not any part of the incentivization? No, that's not part anymore. The next question comes from the line of Chris Ryan from Bank of America. Hi. Yes. Good morning. Thank you for taking my question. So with the proceeds from the Americas sale, will you look to simply repay the Shoal Chine loans or will you look to refinance their Shoal Chine loans? Our commitment is to pay down our debt instruments, which means we would also pay back official chandones. Got it. And do you have a gross debt target following the Americas sale? Not a target that we laid out yet. This is certainly part of the strategy review. But again, our goal is to pay down our upcoming maturities with the proceeds. And so you can do the math a little bit on your own, how much of the gross debt will be paid back? Got it. Thank you. And just one quick one. Are you able to get the amount of the factored receivables that are outstanding as of September? The amount, yes. So, it is a good $100,000,000. Got it. Thank you. That's all my questions. The next question comes from the line of Lisa Deneff from Morgan Stanley So the first one, I was actually going to ask more about the sector of receivables, but maybe a broader question on net working capital. Can you share how we should think about net working capital in 2021 given this year you were helped by your factored receivables. And also, I presume you're going to build some inventories as you're ramping up soon as we're probably going to have a decent spring next year. So there was one special effect in 2020 in the first half of the year where we had a negative working or test wise, the negative development of the working capital. This was because we ended 2019 with low and we needed to refill our stocks and inventories in 2020. And given that we keep a strong production, We go with good inventory level into the year 2021. So I and most of the measures we have taken to improve our working capital we will keep, but I wouldn't expect to come a lot on top here so that we go with a rather Yes, a neutral working capital development throughout the year 2021. Okay. Thank you. And then just maybe now closer to K Plus as being, let's say, a close to potash pure play. Can you share a bit of detail as to how you plan to be free cash flow positive across all German mines And specifically, what type of measures, I mean, can you undertake to structurally lower the cash costs in some of these mines? Yes. This is not an impossible undertaking that is the first answer on that. We are already even on the current potash prices, cash positive on some German mines. The one who is suffering the most is maybe not a surprise. It's a vera. Here, we have very nice earnings, but we have a significant, environmental CapEx. Which is in a way, in a peak situation this year and next year due to several measures, heat extension, etcetera. So, the answer on that, Bethune, of course, is only a matter of ramp up. So the focus will be, VERA and ramping up soon. And here in the Werra is to find more intelligent answers on the environmental side. To also look into our, our product portfolio and not only on the cash backs, but also on the direct indirect costs, that's the production of some specialties bring. And, of course, cost cutting will be something which will never end in mining company. But these measures more or less will bring us, and I want to stress even on a low potash price, that is a task to, at least break even free cash flow of free cash flow wise. Okay. Thank you. And then just a final one. I mean, you mentioned during the presentation that you will look to grow on the specialty side. Can you just give a bit of details on how you plan to do that? This is also a bit too early. Let's give us the next couple of months to, to build a complete new vision and strategy, and that will then answer your questions. But again, it's not all new. What we have seen is the strategy to grow in specialties, we have already claimed with our, with shaping 2030 back in 2017. And the last years have proven that this is a good idea because here, the prices are stable and not as volatile as the MOP prices. Okay. Thank you very much guys. You're welcome. Thanks. The next question comes from the line of Mark Schmidt from Prisma Investment. Please go ahead. Marcus, your line is unmuted. Please go ahead. Questions. So the first question is about your asset sale in North America. And if you could tell how certain are you that used car deliveries will approve the transaction, if not, if you have negotiated a breakage fee with the purchase? And then I have a second question. Yes. Of course, the antitrust authority measures is the main, step we have to take between signing and closing. That's correct, but allow me not to elaborate further on that. And what was the second part? And yes, we have a break fee in the contract, but here, I also wouldn't like to give you more information about that. Okay. And assuming, so the positive, of it, so every single workout as expected could Could you detail more how you will use the asset for CSM? I think you want to receive a crossover rating and therefore you probably need to start tender process for your outstanding bonds also because I don't think you will incur a negative carry for a couple of years on an elevated cash position, you when you pay back the Schuldschein loan. So maybe you could explain you're deleveraging strategy more and you just could also entail a special dividend or for bolt on M and A in specialty for instance? So maybe you could elaborate a little bit more about that. Hey, Schmidt. Great question. I think it's a little bit too early because we expect the closing in summer. And our commitment is clearly to pay down our gross debt. That's what I stated earlier already. We need to see where our bond yield stands at this point in time when we receive the money and then we will develop, I mean, a strategy accordingly. But It's totally right. And this is all in consideration what you mentioned, but it's a bit too early to lay out the strategy for now. Okay. And then just quickly one more if I may. Could you please explain what's the one off income was which helped you the this quarter that is the other net plus 1,000,000 in the bridge. I did not really understand what you did say and it was not really explained in the in the quarterly report as well. So maybe some words on this, please. Yes, it was a part of our package of measures and it was related to reshuffling of legal entities internally where we realized the book gain on this and this has us to compensate for negative COVID impacts and also for first of the first transaction costs related to the sale of the OE Americas. So transferring entities within your group and releasing the in results or whatever. Is that what you did? The next question comes from the line of Andreas Heine from Stifel. Please go ahead. 3 questions. If I may. I started the first one. Escrow, how, integrated is this whole business meanwhile in the business. The aim was to and that was the reason why you have changed the reporting to, max the sold and the potash business more with each other. Is it difficult to separate ASCO in the future, or is it not difficult? No, it's, thank you, Ms. Dine, for your questions. It's fully integrated. And, give you one example, where the bunch of ESCO people working in Hanover and most of them now are in cattle. And you might remember that we have merged the entities on the MENAC, as we call it, and that brings a lot of synergies. And we are not planning to separate that anymore. So it will be a small salt business in the future, but it will be a nice additional business for us. The second question is CapEx. It is in the outlook stated that it will increase significantly. Can you at this stage be more specific on the CapEx this year and next year? Yes, Andreas, when I look at the consensus numbers, we gathered, it's about $550,000,000. And I you'd find with this number for CapEx 2020. And also, fine, is the consensus for next year? We talk about guidance for next year. Next year. And then one thing is now maybe you can give an update on what the production status of the various mines is how is the progression in between and how stable is the currently solid production in the German mines? Yes. Thank you for that question because it gives me the opportunity to, to express my proudness We have really gained from our, operational excellence measures, which were a big part from from trading 2030. And the biggest portion of our synergies that we wanted to achieve and will achieve in from next year on. So operations in Germany are running perfectly. We are slightly ahead of our internal plan and that plan was already very ambitious. And that is one reason why we could compensate good portions from the negative price effects, out of our operational business. And that was a lot of measures that we have taken, all of them successful. And we are not at the end of this optimization. I'm seeing even more, possibilities to get more out of the German mines. And that is another trigger to achieve a neutral, at least neutral free cash flow with even a stressed potash price. The next question comes from the line of Thomas Swoboda from Societe Generale. Please go ahead. Yes. Good morning, everyone. I have two questions left, please. Firstly, follow-up on CapEx. I mean, I understand you don't want to give guidance already, but just thinking about the normalized level excluding Sort Americas and after you have completed the environmental legacy CapEx what is on your mind? How much will you need in the long term? In the long term Thomas, you are right. We expect a lower environmental CapEx, which is about 100,000,000, a good 100,000,000 these days, which a good portion of digital recurring still may year, but then we have the big tailings expansions, for example, behind us. So we will We and then taking away the Americas, we should be able to run the company on a CapEx between 350,000,000 dollars, $400,000,000 really talking long term. This is not the guidance for next year yet. A clarification on what you said in your prepared remarks, Mr. Law, I think one One of the things that you said is getting to breakeven or above breakeven for all locations is an optimized production So my question and my question is what does this include closing down of of locations or is it a pure optimization exercise of existing locations? At this point, I would not like to rule out anything, but it doesn't look very probable that we will close down something earlier, then, anyway, assumed, as you might know, the next one would be under vice up in the middle of the 30s. Because we are seeing potential, to really get the best out of the mines and all the German mines deliver nice specialty products with nice premiums. And we will find a way to do it most probably, to do it without closing something earlier. Very helpful. Thank you. Thank you. The next question comes from the line of Michael Shafer from Commerce Bank. Please go ahead. Yes, thanks for taking my two questions. On the, on the CapEx, I'm sorry for stressing this one. So given that you are confident and fine with the 1,000,000 for the group, basically, I wonder whether you can and to summarize very important, but it can shed some more light on what the very complex of our plants basically, what's the share of those plants so that we get a better on your road to free cash flow neutral. At least this would be my first question. And sorry, we are already very transparent, but we wouldn't like to split our CapEx and allocate it to the single mines. Okay, cool. So my second question is then on the de icing business in Europe, on the inventory situation. So we're heading into winter season now. I wonder whether you can shed some more light on the inventories you have on the producer level and what you see at your customer level in the channel compared to midterm average or long term averages? Yes, it's too much product in the system, of course, due to the weak winter, but we have taken that already in account with our guidance. So we are not expecting a huge business, even in a normal winter situation. But it remains to be seen, a lot of experts are expecting a harsh winter. We would be prepared with our inventories to deliver. But remains to be seen. The next question comes from the line of Alexander Jones from Bank of America. Please go ahead. Thank you. And thanks for taking my questions. 2, if I may, on the market outlook. The first would be, do you have a view on growth in global MOP demand next year considering, crop price developments, etcetera. What do you expect? Thank you. Yes. I think we will see a normal year of growth, which should be in the area between 2% 3% which is a long term projection and should be true for next year as well. And by the way, We are not expecting too many new, capacities to run into the market. So we should have a year with more growth than additional capacity, which is another factor which should help price development. Great. Thank you. And then on China specifically, just if you could give a bit more detail on what you're seeing there in terms of inventory levels at ports or inland? And how do you expect that to shape out in the contract next year? Yes, there's always a matter of transparency. We see still a lot of, product in the arborist, but we also see that the local prices, I mentioned that earlier, are going up significantly and are above the current tender that we have. So there must be, obviously, not too much volumes in the country as side, although there is still some volume at the harvest. So all in all, we are quite optimistic that this is a good, good starting point for further negotiations, with a new contract in China. Maybe we will again see contracts earlier in India because India is due to the monsoon also a very good business and product flow. Great. Thanks. That's all from me. Thank you. The next question comes from the line of Elena Sutton from UBS. Please go ahead. Hi there, good morning. Thanks for taking my question. We've talked quite a lot in terms of impairment about, longer term prices, but I'm also interested in what your guidance implies for pricing and cost per tonne in 4Q for potash, please? I know that you used the phrase I think modestly higher. So just trying to figure out what that means. Thank you. Yes. We, we have, of course, In the course of the year, adjusted our assumption due to potash price development, it's always difficult to be precise on a price I mentioned earlier, and another question that we have a time lag between what's going on overseas and in Europe. And, so we now are a little bit more cautious with the final average price for 2020, which is quarterly and we've not determined in Q4. But as you see, that is a marginal adjustment because we could stick to our to our full year guidance. And again, I'm I think that was obvious over the call. I'm optimistic that the rally or the positive potashbite development will not end in 2020 that there is much more to come next The next question comes from the line of Tom Wrigglesworth from Citi. Please go ahead. So my first question is on SOP. Are you still shipping the same amount of tonnage Asia this year, as you did last year, noting that the Chinese have obviously lowered their export tariff. I'm wondering if that's having a volume impact on where you're selling your tons? Tom, that's what's not really a major disruption in the market, either on a volume base or on a price base for the volumes we are shipping to our core markets there. So just by sorry to go back to, the first half, but could you just remind me what the factoring amount was in the reduction of receivables? Is that something you've disclosed? Yes, it was in the first 9 months a good $100,000,000 of receivables we have factored. Okay. And there's no more factoring left to do. Is that a fair assumption that was now complete? Well, first of all, we want to keep this level. And if there are further opportunities, we would, of course, use them. So we still have some capacity. Okay. And then just in terms of your thoughts on operational cost in agriculture for, for 2021. Are you able to share any insights there versus what you've achieved thus far? In 2020? I again have to repeat that we are happy to, to give you all the guidance for 2020. By March 2020 sorry, 2021, of course. So it's a bit you very much. Much appreciated. Okay. Thank you very much. The next question comes from the line of Chris Ryan from Bank of America. Please go ahead. Not sure if I missed it or not. What exactly is the amount of the 1 off non cash benefit in Q3? We said it compensates, our COVID effects, which is $40,000,000 and also some costs that are related to the all the Americas transaction. So about $40,000,000? On the next basis, yes. Got it. Thank you. The next question comes from the line of Lisa Deneuve from Morgan Stanley. Please go ahead. Hi, again, guys. Actually my question is very simple, similar to the last one. I do think I'm sorry, maybe I'm not very educated, but I still don't understand what the $40,000,000 release really means. So if you could just be so kind to share this all again with us, what's the positive benefit is and where it comes from? That would be very helpful. Thank you. It is due to the within our package of measures. There was also an internal reshuffling of legal entities and also a streamlining of legal entities related to this. And so we, I think to make it simple, we realized book games internally. The next question comes from the line of Stephanie Vincent from JP Morgan. Please go ahead. Hi, thank you so much for taking my questions. You've answered it pretty thoroughly on the use of proceeds for debt, but I wanted to go bit further and ask, would any leases move with the sale of the Americas and how much is associated with that operating unit as well as any mining provisions? And then my next question Please wait, we would like to answer one by one. Of course. Sure. I think that some of the leases and the mining provisions is somewhat in the area in the ballpark of 1000000. That's great. And then my next question is also related to that. So on the $2,500,000,000 of proceeds, could there be some change when you are looking at a new working capital position? Summer of next year? And what would that amount be? So you mean with regard to a change in the operating business, right? Because the, working capital movements from the salt business for the way. But let's I think we should work out the details once we solve the business really or did the transaction work closed. We will still keep the movements in the first half of the year So we will benefit also from a Q1 winter season, for example. So I think it's a bit too early to dig into the details here. But if you were referring to potential price adjustment due to working capital change in the U. S, you should really work with a $2,500,000,000 proceeds in euros. It's a very detailed number. There are currently no questions We have no further questions coming through. So I will now hand back to Doctor. Burkhard Law for the conclusion of the call. Please go ahead. Yes. Thank you very much for listening that was busy Q3. But I hope that you could chance, we are optimistic. And we are looking forward to see, at least, see why our teams or whatever with our road show activities. Thank you, and bye bye. Thank you. That will conclude today's conference. Thank you for your participation and have a pleasant day.