Welcome to the K+S conference call regarding the Q3 2019 earnings release hosted by Dr. Burkhard Lohr, CEO. For the duration of the call, you will be on listen only. However, at the end of the call, you will have the opportunity to ask questions. If at any time you need assistance, please press star zero on your telephone keypad and you will be connected to an operator. Please note on page two of the presentation, you will find the disclaimer. I am now handing the call over to Dr. Burkhard Lohr to begin. Please go ahead.
Thank you. Ladies and gentlemen, welcome to our Q3 conference call. Let's start right away on slide three with the highlights of that quarter. We did not have any weather-related standstills at the Werra site this quarter and do not expect any for the rest of 2019 either. This and positive price effects have been the main reason for the increase in our EBITDA from 36 to 81 million EUR. Despite an extended maintenance break at our Bethune plant, higher sales from our Canadian sites compensated for missing volumes due to the Sigmundshall mine closure. The EBITDA of our operating unit Europe+ increased significantly, while our EBITDA in Americas came out below last year's results, mainly on the back of higher logistics and maintenance costs, but also due to weaker early fills in the de-icing business compared to the strong previous year.
Year-on-year, our free cash flow increased by EUR 264 million to more than EUR 200 million after nine months. Now please turn to slide four to have a closer look at our customer segments. Here let's start with agriculture. Despite the weakness of the market, the average price was still very good in Q3. Therefore, both currency and price effects had a positive impact on EBITDA. In addition, more products were available due to the improved situation at the Werra site. In our customer segment industry, price increases, higher volumes, and a positive currency effect almost compensated for increased costs. Therefore, EBITDA of EUR 45 million remains on the level of last year. Both revenues and profits in our consumer business improved. A more favorable pricing environment, especially for table and specialty salts, and a positive currency effect helped us to more than compensate for higher costs.
As Q3 is still seasonally low, our de-icing business in communities reported a negative EBITDA. The sales volume was below the strong figure of the previous year, mainly as a result of weaker early fills, partially on the back of postponement into Q4. We will give you an indication for the next winter season later in this presentation. Now let's move to slide five and have a closer look at the potash market. After seeing good prices and volumes in the first half of the year, the import stop in China, which has been in place since September, is also causing restraints in other markets. Producers decided to cut their production by more than 3 million tons in total. Demand remained almost stable for MOP in Europe and specialties. Due to the higher share of SOP, the average selling price in our portfolio is even above the second quarter.
For 2019, we expect a slight decline in global potash demand to slightly below 70 million tons compared to the record demand in 2018 by a good 71 million tons. From a current perspective, forecasting the development in the potash market is still difficult. The contract with India is already providing a first indication for the market and ensures product flows. Rising crop prices and production cuts in the industry are further positive indicators. Due to the continuing import stop in China and high stock levels in Brazil, the market hasn't picked up yet. Please have a look at slide six to see the development in our customer segment communities. As mentioned earlier, the early fills business in the de-icing salt compares with a very strong prior year quarter.
On the one hand, there are some higher inventories from the last winter season available at our customers as this year. On the other hand, we see orders increasing since the end of October after some postponements during Q3. On the price side, we are satisfied with the bids for the upcoming winter season. Especially in the Midwest, we are able to achieve significant price increases. The development in Canada and Europe is also positive. On the U.S. East Coast, we continue to see high competition. Overall, we see a positive price trend and should therefore compensate for cost inflation. Now please turn to the next slide to talk about the full year guidance. Given the current situation on the potash market, we already announced in September that we reduced our MOP production by around 300,000 tons for this year. This corresponds to an EBITDA effect of about EUR 80 million.
In addition, maintenance work, mainly at the Sigmundshall site on the back of the current market situation, will reduce production by a further 200,000 tons. This will have an impact on earnings of about EUR 50 million. Therefore, we expect our EBITDA for 2019 to be at around EUR 650 million, based on a normal winter in Q4. This would still be an increase over 2018. We are confident to achieve a positive free cash flow in 2019, and I would like to say again, at this point, that we are not expecting any standstills due to the wastewater situation in the current year. Please turn to slide eight. Ladies and gentlemen, despite the current weak market situation, I would like to take the opportunity to point out how far we have progressed with the issues that we can influence ourselves. We have successfully implemented the customer-focused new organization of the company.
The operational situation with regards to personnel and machinery availability in Germany has improved significantly. The situation to the geological challenges in Neuhof is also on the right track. We have improved our wastewater management by means of remote disposal and higher storage capacities on site so that we can rule out any weather-related standstills this year. Our active working capital management has a positive effect on our free cash flow. Our synergy program already shows positive EBITDA contributions. We are making progress with the product quality in Bethune. Our customers will realize the improvement in the first half of next year. Against the factors we have in our hands, the potash market is challenging for us at the moment. Also regulatory requirements, especially with regard to climate protection, will influence our cost position in the coming years.
Given the current political discussion, we are certainly not the first to tell you that. Before concluding my presentation, I would like to introduce our new Head of Investor Relations. Please turn to slide nine. Dirk Neumann, previously Head of Corporate Controlling, will take over as Head of Investor Relations. He has many years of experience at K+S and knows our business and figures. On behalf of the entire Board, I wish him great success in his new role. Now Dirk will give some words to the audience. Please, Dirk.
Yeah, thank you. As said before, my name is Dirk Neumann. I'm 48 years old, married with two children. After my study of economics in Göttingen, I was working for different companies, and I joined K+S in 2003. In this time, I had several positions in the finance and controlling, and the last position is head of controlling since 2015. I'm happy working in future for investor relations. I'm looking forward to my new role, and I'm looking forward to meet you in person in future.
Thank you, Dirk. Dirk succeeds Lutz Grüten, who left the company at his own request. The board thanks Mr. Grüten for his dedicated work over the past few years and wishes him all the best for his new professional duties. Ladies and gentlemen, this concludes my presentation, and we are now happy to take your questions. Operator, please open the line for our Q&A session, and as usual, please, one question by the other. One by one.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you change your mind and wish to withdraw your question, please press star two. If you would like to ask more than one question, please submit one question at a time. Once answered, we will move to your next question. You will be advised when to ask your question. The first question comes from the line of Diogo Silva from Aptior. Please go ahead.
Hi. Thanks so much for the call. I have two questions. I'll ask them one by one as you requested. The first one is, in terms of the volume reduction for this year, if you could just explain to us how should we think about next year? Obviously, this fell very heavily onto Q4. Should we think about annualizing this Q4 volume for next year? Should we think about spreading the reduction for next year? I'm, of course, assuming in a case where the market stays as it is now and doesn't improve.
Yeah, thank you for that question. First of all, maybe to explain a little bit deeper what we have done and why we have done it. The market situation was described in my speech. We are not able to ship into China. We haven't been able since September. Now we are seeing that due to the situation, more volumes go into Brazil. Europe is okay, but we were forced to react as all our competitors did. Of course, we use the time on the site, especially Bethune and Philippsthal for maintenance work, which was necessary. We will be prepared in terms of being able to produce high volumes in a period where the market turns. More I cannot tell you about 2020. That is too early.
Understood. My second question is, and congratulations on, it seems that this year you will finally not have any wastewater issues or stoppages. Just picking up on conversations we had before about the topic, you have obviously your permit for injection into the soil expiring in 2021. I know different solutions were being discussed, including a potential pipeline, and I just wanted to know if there's any update in terms of what is likely to happen there and what's your plan once that permit expires?
We have made great progress in this matter. All the states, and we're talking about seven different states around the Werra, have agreed on a solution which is called the discharge in the old mine areas. That means we will not build a pipeline. We will deep well inject until the end of 2021, then beginning in 2022, we will bring the waters in the underground in the Werra area. That means no transportation costs for these volumes. Of course, there has to be some preparational work and with some approvals, but time is enough to get this done.
You mentioned those transportation costs, but should we think about this as both very immaterial in terms of extra costs and the extra CapEx? Once you start doing this, how much will your cost increase for doing that, and how much your CapEx will increase?
No. Compared to the old situation that we were planning, even a decrease because the pipeline to the Oberweser would have cost around EUR 300 million.
Sorry, I mean compared to today, not with the pipeline.
Compared today, I'm not seeing additional costs with a solution with a discharge in the Werra area.
Also no additional CapEx?
There is some additional CapEx, but this is by far lower than what we would have spent into the Oberweser pipeline.
Understood. Thank you so much.
Yeah, you're welcome.
The next question comes from the line of Chris Faitz from Kepler. Please go ahead.
Yes. Good morning, gentlemen. Welcome, Dirk. I have a couple of questions. I'll start with the Bethune question. Has the cooling pump in September been successfully installed? Can you confirm that?
We have-
Very short question.
We have a package of measures which we call PQP. We have successfully done the work in September that we wanted to do in September. The whole package will be done by January, which is not a problem because now we are anyway in the cold season. It is important to be prepared when the weather is getting hotter again. We will definitely be done with the works around the PQP. By the way, we are quite happy with the progress that we are seeing in terms of quality of our products, both products, standard and granular, in Bethune.
Okay. As a follow-up to that question, that would also mean that Bethune will be out of production in January?
No, no. That doesn't require an extraordinary maintenance break, what we have to do now.
Okay.
That can be done in operation.
Okay, excellent. My second question is regarding Neuhof and Unterbreizbach. Can you update us on the situation there? Roofing in Neuhof, and the mining through the lower quality seam in Unterbreizbach. Thank you.
Yeah. Starting with Unterbreizbach, that is developing exactly as expected. We will have this area with a lower K2O content behind us by the end of this year. We should see a positive effect next year. A similar situation in Neuhof, we should be able to see higher volumes out of Neuhof next year as well.
Okay, great. Thank you, Burkhard.
You're welcome.
The next question comes from the line of Chris Ryan from Bank of America. Please go ahead.
Hi, good morning. Thank you for taking my questions. My first question is just on the CapEx. The guidance is down to EUR 15 million from EUR 600 million to EUR 550 million. There's going to be additional maintenance work with the production shutdown. I'm just wondering, where is the cut to CapEx there coming from? Overall, what is your flexibility in reducing CapEx?
Yeah, there's always some flexibility. When we're talking about such a big number, there are an even bigger number of single projects behind that. If we talk about the reduced CapEx volume, it's a mix out of postponement into 2020 and discipline, but the bigger portion is CapEx discipline. That is a reaction on the current market situation, and the additional maintenance cost that we have due to the breaks is not running into CapEx. Mostly not running into CapEx, that is in maintenance, and it's shown in OpEx.
Got it. Are you able to guide for your expectation for the change in working capital and cash flow for Q4?
Yeah, Chris, we do not give a guidance on a quarterly basis for this. You know we heard as same already in the second quarter that we have a greater focus on improving our working capital. We are more actively managing both receivables and payables. This continued in the third quarter, despite it was in a relatively small quarter, was overshadowed by other developments. We saw a positive development coming from working capital management, and we will see also in the fourth quarter, but it's tough to give a certain guidance with a certain number on that.
I would like to add that Thorsten and his team have done a great job. If you see what we have seen due to the market situation on the EBITDA level, we still expect to see a positive free cash flow. I think that is great result out of great measures that we are taking.
Understood. Thank you very much.
The next question comes from the line of David Simmons from JP Morgan. Please go ahead.
Yeah. Hi, Chetan here, actually from JP Morgan. Thanks for taking questions. I just had maybe three. One is, can you confirm if your Q4 or full year guidance for this year assumes any price declines given that we've seen some pricing moderation through last three months? That's number one. Number two, second question was actually.
Wait. We would like to do one by one.
Yeah.
Yeah. When you look into our average selling price, you have to take into account, which is always the case with us, because we have the mix out of MOP, which is now more in the focus when it comes to the current bad situation in the market, and specialties, and the mix out of European business and overseas business. An average price decline, which obviously is the case, rolls into our numbers with a delay. Due to the fact that we have cut MOP, we have even a higher average selling price because the portion of the specialties with a higher price is higher. Therefore, we still expect that the average selling price for the full year, so that gives you guidance for Q4, should be around the level that we have seen in the fourth quarter of 2018.
Now we are ready for your next question.
I'm sorry, we have lost that line.
Okay.
I will move on to the next question for now, coming from Ashraful Mumin from GLG. Please go ahead.
Hi there. I had a quick question on the China contract. When do you think it will settle, and what kind of price range are we talking? Do you expect it to come lower than the India contract?
That's a difficult question. As you know, we are not negotiating directly with them, because our stake in China still is not big enough to be the first to do that. Looking into the stocks into China, they are still very high, so that is most probably not going to happen this year. Around Chinese New Year is potentially maybe an indicator which is not too bad. Pricing depends, of course, heavily to the situation that we are facing by that time. At least the fact that all producers have cut production, and we are seeing some positive development in Southeast Asia with crop prices rising and et cetera. I'm not giving you a price now, but one could be not too negative on the outcome of the Chinese contract, but it's too early.
Okay. Thank you.
The next question is coming from the line of Patrick Rafaisz from UBS. Please go ahead.
Thank you, and good morning, everyone.
Good morning.
Good morning. First question out of three is on the Bethune volumes. I understand the site is up and running again after the extended maintenance shutdown in Q3, with Brazil inventories very high, China not in the market currently. Where will these volumes move to? Is that Southeast Asia mainly?
We still ship into Southeast Asia and Brazil, the volumes that we are producing.
Okay.
Yeah.
Yeah. Okay, good. You expect that to remain the market?
Yes, we have running agreements. We have already reduced significantly our volumes due to the market situation in Bethune. What we are producing now is running into these two markets.
Okay, thanks. The second question is on Americas, and the decline in EBITDA versus prior year. You mentioned, of course, the softer early fill business.
Your guidance for volumes for the full year remains unchanged, right? 12.5 million-13 million tons. Does that mean you expect a full recovery of the lost EBITDA? We should see something like EUR 10 million-EUR 15 million reversal in Q4?
Yeah. One should not overestimate the split between the de-icing business in Q3 and Q4. The heavy business is really December, January, February. Here we are still hopeful that we can achieve our average volumes. By the way, we have seen some snow already in the U.S., and we have seen stronger business after October, as I said. Good portions of the lower volumes compared to Q3 2018 will run into Q4. Of course, the final decision will be made by the weather condition in December and next season in January, February.
Yeah. Okay. The last question is a bit of a wider one. You mentioned in your opening remarks at the end, the pressure on costs from environmental regulation. How should we think about that if you try to size that? How do you account for that in your budgeting and planning? What kind of costs do you see coming over the next five or 10 years?
That is a period which is by far too long. If you see what's going on all over the world with additional measures to safeguard the climate, it's difficult to predict what's going on in the next couple of years. Actually, it will affect everybody who's doing industrial production. One effect that we are seeing already is that the CO2 emission rights for the first time will cost money in 2020. So far it was for free. This time we are spending money. We will have additional costs for CO2. It's still on a level which is doable. One has to follow the developments very closely. Of course, we are in directly and via our organizations, BDI et cetera, in touch with politics to make sure that we will see a balanced situation between environment and the needs of the industry.
Okay. Thank you very much for the answers.
Thank you.
The next question comes from the line of David Simmons from JP Morgan. Please go ahead.
Hey. Sorry, I think we got cut off previously.
Did you get the answer on your first question?
No, we didn't, but it's okay. We'll catch up.
No problem. I answer this again, and then you go ahead.
No, honestly, don't worry. We'll catch up with you later. I think the second question, I hope we didn't miss this as well. Your MOP ASP was actually slightly up quarter on quarter in Q3 versus Q2, and I think it's fair to say that most global averages were down, if not significantly, then at least slightly. I was just wondering whether there was some kind of regional mix effect that enabled you to increase that price or how that came about. Following on from that, what you expect to happen to ASP going forward.
Chetan, can we do the following? We had just a small internal discussion here that we come back with this answer to you after the call.
Yeah, sure. No problem.
Okay.
The next question is coming from the line of Thomas Swoboda from Société Générale. Please go ahead.
Yes. Good morning. I have three questions, please. Firstly, on the volumes, have you seen any pickup in volumes actually since the Indian settlement, or is there just no change yet?
Frankly, not really. We have seen some recovery in Southeast Asia, but that did not drive our volumes. There is not yet the trigger in the market which would change the things entirely.
Understood. On specialties and the mix in Q3 in fertilizers, you seem to be assuming that the positive mix effect will continue in Q4, given your average price guidance. Is it something more substantial? Is it something that could continue into 2020, or is it just a temporary effect because of your product mix and the overall demand trends across the regions?
Yeah, that is purely a mathematical effect. If we cut another 200,000 ton MOP in Q4, then of course this will have this effect in the average selling price. As I said earlier, also we see the price declines with a delay in our numbers.
Understood.
Lastly, probably for the CFO, the volatility in the financial result is quite high. How should we think about the run rate, also thinking about 2020? Is it rather the run rate we saw in H1 or the run rate you were guiding for in H2?
Yeah, Thomas, the volatility comes especially from the other financial results, and this is linked to the FX development. I would expect for this year, on a full year basis, financial results, which is somewhere between EUR 110 and EUR 115. I don't want to go too far into the next year, this is certainly a number which we'll maintain until we have the debt level.
Terrific. Thank you so much.
Welcome.
The next question is coming from the line of Michael Schaefer from Commerzbank. Please go ahead.
Yeah, thanks for taking my 3 questions. Good morning, gentlemen. The first one is, coming back to your, let's say, 80 plus 50, i.e., EUR 130 million EBITDA reduction we have seen since you announced the first round of curtailments end of September. I wonder whether you can break this up a bit into what kind of proportion should we expect is linked to accelerated maintenance costs and maybe additional maintenance costs, which you otherwise wouldn't have had. Just to get a bit of a flavor of what's kind of re-linked to the missing volumes and linked to the really extra costs you are bearing, which may not recur in 2020. This would be my first question.
Of course, you're not expecting to get hard numbers on that, but the biggest portion, by far biggest portion, of course, is not producing the volumes and not selling them. As you know, that we are not only talking about Bethune, but also about Philippsthal. These are the 2 pure MOP sites. Of course, in Philippsthal, we have a high fixed-cost portion. The majority of the numbers are due to that. Only a small number is additional maintenance.
Okay. Second one would be sticking to costs, looking into 2020. Can you update us on You mentioned that you're progressing well with synergies. What should we expect as a kind of additional cost reduction heading into 2020 from your Shaping Program?
Michael, we will, and we're making good progress, by the way, on the Shaping on the synergies project, in all of the different work streams. We expect for next year a positive net number. It is also here, we don't want to talk too much about 2020 per today. We do this then in spring next year. It will be a positive net number. The thing is, we also see, and we always said that, we see a general cost inflation. When I look at the personal costs, when I look at material costs now, especially in 2019, the third-party costs, which are linked to maintenance, and this will go into the next year. The general cost inflation will be there, and it needs to be seen how much of this will be eaten up by the inflation.
Okay. Last not least, on de-icing, on your slides presenting the outlook into the next winter season. Just a clarification question. You're referring basically to higher ASP you're expecting on the back of the negotiations you have done. However, you're saying basically that those higher prices can compensate for logistics cost inflation. Just clarifying, I thought that we have seen the bulk of rising logistics costs in the past, basically. Are you suggesting that there's no margin improvement from higher prices heading into 2019-'20 season? Is this what you're saying?
Can I ask again, you're referring to the guidance or to the Q3 number?
No, you're giving on slide six, you're showing an outlook winter season 2019-2020.
Yeah.
You're saying the second bullet point is saying higher prices can compensate for logistics cost inflation. I thought that we talked about rising logistics costs in the past winter, and this is done, and we have seen some plateau of logistics costs, and hence the improved pricing you have negotiated now is at least partly contributing to higher margins, assuming volumes remain unchanged.
This statement doesn't refer only to Q3 isolated. It refers to the full nine months where we have seen the start of the increasing logistics costs, not in the first quarter last year. What you should also, or what is also included here, it's not just a pure price increase. We have somewhat, we call non-standard sourcing costs, where we need to shift between the sites, sometimes solve in order to satisfy customer demands in some regions, and this brings us also additional costs. The main thing is, when you look at the third quarter, we're talking about small numbers. A small movement up in logistics costs, which is not explainable by significant price increases or other factors, can have a big impact. I wouldn't overestimate that.
Okay, thanks for this.
The next question comes from the line of Diogo Silva from Aptior. Please go ahead.
Hi. Sorry, I just had one follow-up question, and this is more of a confirmation. As it was mentioned before in the call, you had a big working capital inflow on the nine months up to now. I know you don't give guidance for the remaining quarter, but I'm just wondering more broadly, is this inflow something that you think it's something that's just seasonal, and it could revert over the next quarters? Are these genuine working capital improvements that you've managed to achieve this year, and so you actually are not expecting them to reverse?
This is a general decline in working capital, and we do not expect a reversal of that.
Thank you.
The next question comes from the line of Jemma Permalloo from JP Morgan. Please go ahead.
Hi, morning. Thank you for taking my question. I understand we have a few from our side this morning, but I just got one that's credit specific. Given your new EBITDA guidance for this year, was just hoping that if you could provide an update on your leverage target and just your general thoughts on debt issuance at some point, given your promissory notes that are due in 2019. Thank you.
We made progress in the third quarter, with a general positive free cash flow by the end of the year, which is operating minus investing, means that we do see on a reduced EBITDA expectation, a small increase in the debt number when you look at the net number. We therefore expect no further progress by the end of the year when I look at the fourth quarter in isolation. Can you repeat the second question, please?
The second question was really just on the promissory notes that are due in 2019. I was just really hoping for some general update in terms of your thoughts on debt issuance at some point, or just general financing thoughts.
This is our commercial paper program, and this is what we do on a rolling basis. This will go on, yeah.
Got it. Thank you.
The next question comes from the line of Chris Ryan from Bank of America. Please go ahead.
Hi, yes. Thank you for taking my follow-up. Just again on CapEx, you had priorly been guiding for 2020 and 2021 CapEx to be looked about even with 2019. Is that guidance still valid?
We're not adjusting any guidance for 2020 and 2021 now. This will be all new in March.
Just to follow up on the previous question. I think she was referring to the Schuldschein notes that are due in 2019. Have those been addressed, and is there any other material maturities coming up in 2020 or 2021?
The next major maturities are coming up in 2021.
Thank you.
The next question is coming from Knud Hinkel from Pareto Securities. Please go ahead.
Good morning, gentlemen. Thank you for taking my question. I have some problems to reconcile the volume guidance or the reduced volume guidance you're giving and the EBITDA impact. If I take the average selling price and multiply it with 200 kilotons, that's the average selling price is probably too high because I understand that the cuts mainly refer to pure MOP, that's probably a little high. Nevertheless, if I do that exercise, I come up with revenues which are around EUR 50 million, or even below EUR 50 million. My question is basically, why is the EBITDA impact higher than the or on par with the revenue impact? Thanks.
As we said earlier, because we do at the same time, maintenance work, which of course has a smaller impact than the lost volumes and the not sold volumes, but still has an impact. If you add that, you end up with these numbers.
Okay, thanks.
I mentioned it earlier, Zielitz is almost 100% fixed cost. We didn't have the chance to do, I don't know, Kurzarbeit short work, et cetera, which would a little bit relax the situation. Almost 100% fixed cost.
Thank you. We have no further questions coming through, so I will now hand back to Dr. Burkhard Lohr for the conclusion of the call. Please go ahead.
Yeah. Thank you for joining us. The situation is currently difficult, but we are hopeful that the market will react on the actions which were taken in the course of 2020. We will see you soon on roadshows in other locations. Until then, thank you for joining and for listening to our call. Bye-bye.
Thank you. That will conclude today's conference. Thank you for your participation and have a pleasant day.