Earnings Call: Q2 2020

Aug 13, 2020

Hello, and welcome to the KSS Conference Call regarding the publication of the Half Year Financial Report Half 1, 2020. Hosted by Doctor. Burke Hardlaw, CEO. For the duration of the call, you will be on listen only. However, at the end the call. Please note on Page of the presentation, you will also find the disclaimer. And I am now handing the call over to Doctor. Burkhart Law to begin. Please go ahead. Thank you. Ladies and gentlemen, welcome to our Q2 call. I would like to start by pointing out the highlights on Slide 3. Despite difficult market conditions, Q2 bought a solid quarter. Due to lower potash prices in agriculture, we lost around 1,000,000 compared to the previous year. But we were able to partially compensate this decline by a showing a strong operational performance of our plan, 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 quarter, where the COVID 19 related burden of around EUR 10,000,000 for the measures to protect all employees and to ensure production. Overall, our EBITDA reached 1000000 compared to 1000000 in the previous year. Free cash flow is at -40 3,000,000 after the strong figure last year and is impacted by higher CapEx. Please turn to Slide 4 to have a closer look at the agriculture customer segment. As expected, demand in agriculture was good in the northern hemisphere and in Brazil. In Southeast Asia, demand did not pick up as a result of the Corona pandemic and limited availability of workers. New contract in China and India have led to a restart of product flow and the expected bottoming out of MOP prices in Brazil followed by slightly rising prices. Prices are still increasing despite higher volumes being absorbed by the market. We expect that this price recovery in most overseas regions will also take pressure of the European markets. And price for our special fertilizer specialty remains largely stable. And now please turn to Slide 5 to have a closer look at the community's customer segments. In total, the I think saw sales volumes in the second quarter were almost 30 below the level of the previous year, largely due to high stock levels of our customers at the end of the winter season, many are in a strong negotiating position in the upcoming bidding season. However, Since we have a multi year contract with many customers and fixed prices, we only assume flights to moderate price decreases overall. In addition, we already signed contracts in some region with good prices in Q4 2019. And now please turn to Slide 6 to have a closer look at the industry and consumer customer segments. Some products such as food sold for hotels and restroom or chemical sold are effected by the Corona pandemic. Other, such as pharmaceutical business, have more than compensated for these effects so far. Our products for our chlorine production show a positive trend as well. A significant improvement in operational performance high cost discipline and an optimal use of our logistics network also contributed to the positive running development. What we lost in food sold in the B2B area was more than compensated for by the demand of the consumer customer segment. The more people cooked at home, the more table salt was bought in the supermarkets. Water and pool salts also saw a very strong demand in Q2 too. In these uncertain times, customers buy well known brands that they trust. On Slide 7 is our outlook for the year as a whole. For 2020, we continue to expect EBITDA of around 1,000,000. As in our last outlook, the figure does not take into account one time a restructuring expenses, which could we would see an EBITDA of 1,000,000 due to the high cost discipline and the optimized use of our logistics network. EBITDA of the Americas operating unit is now expected to be only slightly lower than in the previous year. Despite significantly lower volumes for the de icing salt business. We had assumed a moderate decline We also saw good operating performance in our Europe Plus operating unit, which would help also which would help us also in the second half of the year. Furthermore, we have some positive effects from our package of measures. These effects allow us to compensate for the slower recovery in potash prices opposing currency effects from a weaker U. S. Dollar and COVID 19 related efficiency losses. We continue to expect free cash flow around breakeven point With this EBITDA guidance, also because the biggest part of the restructuring expenses will not be cash effective in 2020. And now please turn to Slide 8. Ladies and gentlemen, at this point, I cannot tell you anything new about the sale process of our Americas operating unit. You may have heard more details about sales the detailed process in the news. But please note, we do not comment on market speculation. However, We still expect timing this year, and you should see that as positive news. On Slide 9, I would like to briefly outlook what is important for the new K blood errors. With the sale of the operating unit Americas, a restructuring of the administration is mandatory. The overall target is to have positive free cash flow contribution from every site, even in difficult market conditions. The Europe plus operating unit and the holding company will be formed into a leaner and smaller K plus s with a focus on fertilizers and specialties. The future organization enables a budget reduction for SG and A functions by EUR 60,000,000 from 2021. And the future KFS will work in a functional organization with an operational management team. The executive board will be supported by 15 direct reports. Without the Americas operating unit, there were 36. The future direct reports are named and the design of the functions is now defined. At the same time, negotiations with employee representatives started. The expected restructuring expenses could be up to 1,000,000. The reorganization should be completed by the beginning of 2021. I'm convinced that the realignment of KPLASF will result in a leaner and more performance oriented company, one that will have a solid financial date for future growth. And now please turn to Slide 10. Ladies and gentlemen, the situation would certainly be much better for us with higher potash prices for sure. We have to focus on everything that we can influence. And to this end, we are making really good progress. We have finally achieved our potash production target. Our German plans are unaffected by wastewater related shutdown. The nutrient content is good, and Bethune continues ramp up, thanks to improved product quality. We were also able to cut cost significantly by optimizing the use of our logistics network. The OU Americas transaction and the realignment of the new cable S are on track. Something I would like to add here, we have just reached an agreement with the KSW Bank for a syndicated credit line of 1,000,000 at market conditions. This will help us if there are any additional unforeseen burdens coming from the corona pandemic. Ladies and gentlemen, this concludes my presentation, and we are ready to take your questions and one at a time, please. Operator, please open the line for the Q And A session. Questions. Our first question comes in from the line of Christian Faitz calling from Kepler. Christian, please go ahead. Yes. Good morning, gentlemen. Good morning, especially Doctor. Law, glad to see and hear your back. Three questions, please. So one by one. First of all, how has the Brazilian application season started in potash, obviously? Yeah. That is still a little bit early, but volumes, hasn't been an issue in Brazil all over the year. As you know, pricing was the issue. But, after we have seen the bottoming out and we have seen first increases, we believe that this will not rocket, but it will slightly continue. And we are very optimistic in terms of volumes for the upcoming season. Okay, great. Thank you. So second question, I take it that the physical issues with the product quality out of Bethune are solved Can you confirm this and also elucidate this a bit? Thank you. Yes, everything that we have done to get to this point, was very helpful and successful. And, I would really say at this point, and that is confirmation that the product quality issues are history. We are now really on a in the normal production with high quality. You know that the nutrient content anyway is higher than normal. So we are very happy with it. And that was one reason to start shipping into the U. S. And again, this will not be on the plate anymore. And that is another reason why we have, increased production. So we have taken a big ramp up step this year. Can you name the volumes you are shifting to the U. S? Small volumes because you have to start with the logistics, etcetera, we're talking about so far 40,000 tons. But anyway, it's dark. And there was a quite promising start and the customers are happy. Okay, great. And third and final question, please. And you elucidate a bit the recent press reports about your discussions with the Turinian government about the payments for your salt price acquisition in older mines. I'm specifically referring to the article in the FR test from this Monday, which is a chest that you are declaring position as preventative measures against mine collapses rather than the position, which triggers payments by the Torrington government, I take it. Thank you. Well, that's a very complex issue. I hope I get this done, in this call. And as you know, we will have to stop the deep well injection by the end of next year. And, we will beginning from 2020. At 2 on, we will, deposit, the processed waters instead of a deep well injection into an old mine called Jlingen. This is in Teringya. And Teringya at the same time has a eternity cost because there is a leak, and they have to handle the water. That is a significant alternative because for this, for this small, small country stage. And when we flood screening, there will be, that this problem solved as well. So it's a win win situation. And, we have find an agreement how to deal with the costs. And, I cannot disclose the number, but, this will be, favorable for us to discharge the waters in the future and favorable for Tarenga as well. Does that answer your question? Kind of. Yeah. That's it for now. Thank you. Thanks. Okay. The next question comes in from the line of Alexander Jones calling from Bank of America. Alexander. Please go ahead. Good morning. Thanks very much for taking my questions. The first one would be on the overseas potash price you've managed to achieve this quarter compared to the Brazilian 1, you're actually up sequentially quarter on quarter. Was that timing in the quarter, or was there some kind of improvement in the sales allocation you've managed to do? So we just found out that we didn't get your question, sorry. Can you repeat it? Yes, sorry. It was about the overseas potash price for the quarter, you achieved your average selling price, was up sequentially compared to the first quarter whereas I guess Brazilian average prices were down. So was there factor behind that? No. We had a high volume in March in the first quarter. And there we've seen already the lowest price. And from April on, we have seen this slight recovery and that is flowing into our numbers. And that's the reason why the average selling price overseas in Q2 was $6 higher than in Q1. Okay, excellent. Thank you. And maybe one other question on CapEx guidance. Are you all happy with consensus net CapEx being around 1,000,000 or is there any room for that to come down in order to your free cash flow guidance? Alex, it's Parson. I can promise that we do our utmost in order to keep the cash within the company. But we have to stick to the guidance that the CapEx increased significantly over last year. And we still feel fine with the consensus forecast for CapEx, which, as you said, is around 5.50 This level is especially innovative compared to the normal level because of the this year happening environmental protection measures, which are especially hedging's bias expansion. Great. Thank you very much. Question comes in from the line of Michael Schafer calling from Commerce Bank. Two questions basically. First is on the logistics cost relief you experienced in the second quarter. I wonder whether you can shed some more light on what you have saved basically compared to maybe the situation you've seen in the first quarter? And what should we expect heading into the second quarter when stronger the icing volumes are kicking in again and may reverse the trends. So this would be my first question. Michel, it's indeed, I think 2 things. First of all, one project within our package of measures is dealing with optimizing our logistics networks. And This is in the Americas decays, but this is also the euro in europe case. And we're talking here about, review of sites and the product set up. We are talking about networks between the sites and 2 customers or 2 stockpiles and also ocean freight networks. The benefits this is the benefit we haven't from this, we haven't seen yet. So but where we have seen the benefit from was, I would call it a smarter ocean freight or also truck freight, network management, we reduced free capacity from low cost de icing freight contracts in order to ship higher volumes in consumer business way sample. And, it's hard to say how much of this we cannot use in the 1st quarter when higher de icing volumes kick in again, but we always have enough capacity and freight in order to make of that. So it's hard for me to give you a concrete number, but I would expect that we see this tailwind also in a little bit in the third quarter. Okay. 2nd question is on your cost saving measures. You, thankfully, indicated the 1000000, 1000000 cost decline, from 2021 onwards. I wondered, 1st of all, the first AAV question is, how should we think about the phasing of the 1,000,000 savings in 2021 again, the, presumably, million cash out, this would be my 2A question and 2B would be, do you think that this is sufficient to keep, basically the, let's say, remaining, are you non or your Americas business and basically a free cash flow breakeven or sorry, a to bring it back to free cash flow breakeven, given the current price situation on the potash side? Okay. 1st of all, the easier part. So the 40,000,000 will, of course, run into the earnings this year with a provision. We will have, most of this as a negative cash effect in 2021. Part in 2020, but most of it in 2021. Our target is to be done by the end of this year. But of course, some costs will still run into 2021, out of running contracts. So The dominating part of the $60,000,000 savings will be seen in 2021, the full part in 2022. Yeah. On the current price level, this $60,000,000 is helpful, but of course, not the whole measures we have to take to achieve a free cash flow, a balanced free cash flow situation. That's why our package of measures is by far more than only selling the all year Americas and only realigning our administration. We are looking into every site and we are looking into what has to be done to get this site even on the current price level, free cash flow positive some are there. In Bethune, it's obvious we just have to follow our end up path. But in some cases, especially when we are talking about high environmental costs. It's a little bit more tricky, but we are working on all aspects to get there. The next question comes in from the line of Markus Mayer from Baader Helvea. Please go ahead. Men. Two questions from my side as well. Firstly, could you update us on your U. S. Dollar hedging and also how should the U. S. Dollars in will you look like after the investments of the Americans business? That will be my first question. Yes, Marcus, the last question, we are not hedging the translation effects from the U. S. Business because we have revenue streams and costs in U. S. Dollar and it's just the translation effect into, calculating the euro balance sheet The second is from now on, I mean, the dollar weakened and Let's assume it goes down by another $0.10. This would have an adverse effect, which is just the double digit. Okay, double digit. And this is basically also then the effect of the Americas business be out or is it just the effect right now for the CapEx as it is right now? No, this is the main effects come from the or when we talk about 2020, the Americas will still be for the majority of the parts of it, right? And so No, no, that's clear. I just wanted to know how it's right now and would be if Americas would be already out if this is possible. There's no big difference, I would say then. Okay. Okay. Thank you. Then my second question would be on the demand situation of your consumer and industry business, which was pretty strong in the 2nd quarter. Is this also going into July as well or was there a sequential weakness? July, showed very good numbers as well. We expect that there will in the next quarter in total, still the, development, which is above normal, but maybe below what we've seen in the second quarter. Okay. Thank you so much. Question comes in from the line Yes. Good morning, everybody. I have, one question left, if I may. And it's regarding your new, competitor from from Russia, they seem to be producing decent volumes of this mine already. My question is, do you see them in any of your markets already, or is it impacted mostly for the internal consumption? And do you expect Eurochem to become active as a net seller of potash still this year eventually next year would be great. Could share your opinion? Thank you. Yes, you're welcome. First of all, Maybe you've read that there was the one or the other surprised about these volumes. We weren't, what we could read now is in line with our expectations for this year and for next year. Of course, they started to, use the MLP by themselves. So it was internal use. And the more they produce, the more they, they will, of course, shift into the market. Most probably not in our European home markets due to the small volumes and the logistical constraints. We will see them in the overseas markets. But take into account, we are we could expect another 2,000,000 tons demand next year. So it is running into a growing market. I'm not seeing this as a significant threat This is very helpful. The next question comes in from the line of Andreas Haynes calling from MainFirst. Please go ahead. Yes. Thank you for the opportunity asking a question. I would like to come on and basically follow on questions on what was asked before. On this U. S. Dollar hedging specifically on potash, could you outline how you do this in the future? So we'll probably deliver much more from be doomed to Latin America and the German mines more focused on Europe. Maybe you can outline a little bit, but your net with dollar exposure in the potash businesses and what for, let's say, 2021, it means if the U. S. Dollar stays on the current level. Andreas, I wouldn't see a significant increase of the net position because, yes, we are delivering into U. S. Dollar regions. We are using this U. S. Dollar in part for paying costs, also costs from European shipments, but also from Canadian shipments. So freight is paid in U. S. Dollars. Which reduces the gross position then. We are securing the U. S. Dollar against the euro. And we are also hedging the U. S. Dollar against the Canadian dollar in order to cover the costs there. And the net position from 2020 to 2021 will not change significantly. In the long term, when, the soon ramps up further, we will certainly see the higher increase or an increase of this net position in U. S. Dollar, but not in the short term. Okay. Thank you. Then, the second on, Alan, on Christian, on the question, not going into any detail of this contract gap, Turingia. But is the change from 2021 to 2022 not using these people injection anymore? Is that adding cost or is the benefit from Turinga paying something for you is equaling this change? Yes. It's a question from where you're coming from. You know that another alternative was certainly was discussed the pipeline to the OVAVSA instead of the Deepgram injection that would have been significantly higher cost for us. So we, in a way, had this in our CapEx plan, and we can take significant parts of that out. But of course, it's not for free. But the major portion will be paid by Tringa. So there's still a slight negative, but not too much from 2021 to 2022. No, we are, we are starting preparing things already. There will not be a step up in terms of costs related to that. In 2021 compared to 2022. Okay. Then, can you share with us what the market conditions are for these KFW, KPI loans? I don't know what the market conditions are or company banking right now? I think what I can say is They are in line with market for a company with a single B rating. But we are not laying out the detailed conditions, but that's why I'm understanding it. Then, could you remind me that's really the last question I'd like to ask what is now your sustainable production from Germany with the current product mix you have by having solved all the issues you had in recent years. So what is what we can expect from 2021 onwards as a production from the German mines? I think if you calculate, there's roughly 7,000,000 tons, I think that's a good number. These are all my questions. Thanks a lot. Thank you. The next question comes in from the line of Lisa Danaby. Calling from Morgan Stanley. I have three questions. And the first one is a bit on your average selling prices. So I mean, in terms of the outlook for average selling price, you reduced it from $2.39 to $2.31. I'm just trying to understand what you're expecting for the second half of the year, given obviously Brazil has been quite strong. Mean, India has been buying a lot of fertilizer, especially urea. So do you expect an uptick there from India? I know you're not shipping there, but it's a global commodity. And what are you seeing in terms China. That's my first question. Yes. The guidance, the 2 39 was a 3 month old. Meanwhile, we have seen that, yes, there's an increase in the prices, but it's slower than we had assumed, 3 months ago. That's why we have cut this assumption. But so we are still expecting an increase, but a little bit slower than, assumed 3 months ago. But I think it's worth mentioning that we have, that we can cover even with our EBITDA guidance, even with the effect. And by the way, it's not precisely $231,000,000 and slightly above $231,000,000, what we expect now. Okay, sure. That's very helpful. Thank you. And second question, and So very much, congratulations on continuing to like manage your cash costs incredibly well. I have a similar question if you take the sort of the cash cost per ton sort of in correlation to your free cash flow. I mean, obviously, you're ramping up between that's bringing down your cash costs, but overall market price are still unfortunately a little bit low on the M and P side. How should I think about free cash flow generation across your different German mines I mean, are they all currently at free cash or breakeven? And can you provide sort of any detail around that? No, I think I gave a flavor already with an earlier answer. If you look into our site, again, Bethune is in ramp up and it's only a matter of time until they will be able to be free cash flow even on current price levels. And so the situation is very different here on our German mines. Of course, the various side has the biggest burden with our environmental CapEx. And that's why they are the forest off to achieve, free cash flow. Breakeven on the current price level, but we are getting there. I'm sure. Okay. That's very helpful. Thank you. And then final one is a very short one. You had a small uptick in your mining provisions over the first half by $20,000,000. Is that just related to your environmental CapEx or environmental provisions. Is there anything specific in there or just anything you can point out? It's just the accumulation of interest. Okay. Thank you very much. The next question comes from the line of Patrick Pfizer calling from UBS. Patrick, please go ahead. Thank you, and good morning. 3 questions from me as well, please. So first is a follow-up on your U. S. Market access. You mentioned the £40,000 currently. What's your plan over the next 2 to 3 years for the U. S. Market? Let's build on Gockets. It will be a nice additional business, but maybe get close to 100,000 tons in the next in 2021, but not much more. Okay. Thanks. And then, also a follow-up on the cost savings in admin to 1,000,000. How should we think about that, from a modeling perspective, would that be partly in the recon line and partly in agriculture or or an all in recon? And how will you allocate those? That is mostly in the recon line. But our reporting will look different anyway, when we, when we have sold all your Americas because there will not be an OU Europe anymore. It's only it's then one entity But most probably, if we will have, of course, the segmentation, customer segment and it will be shown Okay, thanks. And the last question on your financial results in the second quarter, and this was better than expected versus previous quarters. Do you have the guidance for the financial results for the full year? That's a tough one, Patrick, because it depends, especially on the other financial results, and here is especially on the development of the U. S. Dollar to the euro or the canola to the euro and even the relation can dollar to the U. S. Dollar. And this is we saw a strong adverse effect in the first quarter when you compare second quarter over 1st quarter, we had a slight positive effect because the currencies didn't move much. This makes it difficult to forecast it. But on the levels we are forecasting and using also for our hedging, etcetera, etcetera, we I would say the total financial results should be somewhere in the range of minus 140 to 150. The next question comes in from the line of Mark Schmidt Please go ahead. Yes, thanks for taking the question. I have just one question regarding the probably 4% KFW loan. And that is for what could you actually use the loan? I understand that you cannot simply use these funds for refinancing, for example, the 2021 bond Of course, there is a left pocket, right pocket principle applicable, but what can you specifically fund as a facility and must this for instance, in terms of CapEx always be an environmental friendly or CO2 emission reducing investment. And what are potentially other restrictions or EMRts in terms of usage? Yes, Ashmit, I think the main restrictions that are well known is the one you mentioned already, it's indeed you cannot use these funds for refinancing of existing debt. And the second is you have to make use of the majority of the already existing credit facility before you can tap the KW loan. And what I'm always saying is it is for us to cushion, an additional cushion for financing the running business. Yeah. And we don't know in that business how we always communicated it. What happens in the market especially with regard to development of Corona. And if we, according to our guidance, we have given out we have sufficient liquidity to run the business. And this is how I look at the KW line. And, yeah, that's the information I can give you. Okay. But could you use it for me for financing working capital? Is that That will be it? Okay. Yes. That's the business related, yes. Okay. The final question in the queue comes from the line of Chatham Udeshi calling from JP Morgan. Please go ahead. Yes, hi. Thank you. Just one quick question, which is around this administrative cost savings plan that you announced this morning. My question essentially is both the sale of the planned sale of the Americas business, you might have some remnant costs within the organization. So is the intention of this cost savings to essentially address some of those remnant costs? Or are these net positive numbers, in terms of, contribution to the I'm not 100% sure if I got that question, but, the numbers we are communicating are all completely without all your Americas. So when we are saying we are taking 60,000,000 out coming from 200,000,000 to CHF140 1,000,000. This is the remaining K Plus as owned without any administrations from the OU Americas. Did they cover your question? No, typically most companies, when they sell one of the big businesses, they talk about rental costs, which are costs that for instance, some of the common services costs might have been assigned to America's unit, which unfortunately might not go with the business because it is still within stateless. So my question is will this EUR 60,000,000 primarily offset some of those costs which are not necessarily going with America? So they might be assigned to Americas at this point? Or are these actual next incremental savings on top? No, I got it. So, the Americas is very independent already. They have all services they need, in Chicago and in other locations in the Americas. We only had, if you wish, some strategical SG And A costs here to run the business and to integrate the business in the group. So there will not be much of those costs that you're focusing on close to 0 once, the deal is closed. Okay. Understood. We do have another question coming through from the line of Tom Wrigglesworth calling from Citi. Good morning, gentlemen. Thanks for the presentation. So my question is Could you just refresh us on your expected schedule of cash cost production for agriculture through the second half and the developments into 2021? Yes. So we were in the last call still a bit more conservative than we would be today I would say, we forecasted for 2020 in agriculture, right? Cost per tonne of about per tonne. And we saw a strong cost development in the first half despite Corona. We saw record production levels and this has, of course, both in Canada and Germany. And I would dare to be to say when I look at the consensus, which stands, I think, at 2.7 or so, I feel comfortable that we can reach this number. And for 2021, it's a little bit too early to give this guidance right now. Okay. Thanks very much, Tawson. Okay. There are no further questions coming through. So I'll now hand it back over to yourself, Doctor. Percocnoff for the conclusion of the call. First of all, thank you all for joining us today and for, this good questions. We are looking forward to see you soon, unfortunately, virtually, but as we learned, that works as well. Until then, stay healthy. And thank you. Bye bye. Thank you. That does conclude today's conference. Thank you for your participation and have a pleasant day.