Earnings Call: Q3 2019

Nov 14, 2019

Welcome to the K Plus S Conference Call regarding the Q3 2019 earnings release hosted by Doctor. Burkhart Loa, CEO. Please note on page 2 of the presentation, you'll find the disclaimer. I'm now handing the call over to Doctor. Boakatluwa to begin. Please go ahead. Thank you. Ladies and gentlemen, welcome to our Q3 conference call. Let's start right away on Slide 3 with the highlights of the 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 EUR81,000,000. Despite an extended maintenance break at our Bethune plant, higher sales from our Canadian sites compensated for missing volumes due to the Littmann's hull mine closure. The EBITDA of our operating unit euro plus 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 to more than EUR 200,000,000 after 9 months. And now please turn to Slide 4 to have a closer look at our customer segments. And 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 1000000 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 stalls and a positive currency effect helped us to more than compensate for higher costs. SQ3 is still seasonally low. Our de icing business in communities reported a negative EBITDA. Sales volume was below the strong figure of the previously year, mainly as a result of weaker early field, partially on the back of postponement into Q4. We will give you an indication for the next winter season later in this presentation. But now let's move to Slide 5 and have a closer look at the Polish market. After seeing good prices and volumes, in the first half of the year, the imports stop in China which has been in place since September is also causing restraints in other markets. Producers didn't decided to cut their production by more than 3,000,000 tons in total. Demand remained almost stable for MLP in Europe and the Peselties. Due to the higher shelf 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 17,000,000 tonnes compared to the record demand in 2018 by a good 71,000,000 Thomas. 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. Driving crop prices and production cuts in the industry are further positive indicators. But due to the continuing import stuff in China and high stock levels in Brazil, the market hasn't picked up yet. Please have a look at As mentioned earlier, the early fields 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 at this year. On the other hand, and we see orders increasing since the end of October after some postponement during Q3. On the prior 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. And now please turn to the next slide to talk about the full year guidance. Given the current situation on the potash by around 300,000 tons for this year. This corresponds to an EBITDA effect of about EUR 80,000,000. In addition, maintenance work, mainly a distillate 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 1,000,000. Therefore, we expect our EBITDA for 2019 to be at around 1,000,000 based on the 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 stem still due to the wastewater situation in the current year. Please turn to Slide 8. Ladies and gentlemen that 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 regard 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 sales this year. Our active working capital management has a positive effect on our free cash flow, and our synergy program already shows positive EBITDA contributions. We are making progress with the product quality in Bethune, and 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 and 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 9. BIak Neumann, previously head of corporates, controlling will take over as Head of Investor Relations. He has many years of experience at Casa S and knows our business and figures. On behalf of the entire board, I wish him great success in his new role, and now Dirk will give some words to the audience. Please. Yes, thank you. As said before, my name is Gerald Neumann. I'm for the year, forty eight years old, married to children. After my studies of economics in Gutting, I was working for different companies. And I joined K Plus as in 2003, And 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 to our 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. DX succeeds, Lutz Gooten, who left the company at his own request. The board thanks Mr. Ruden for his dedicated work over the past 3 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 and A session. And as usual, please, one question by the other, one by one. Thank session. The first question comes from the line of Diogo Silva from AppTior. 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. I mean, obviously, this fell very heavily on to Q4. Should we think about annualizing this for volume for next year? Should we think about spreading this reduction for next year? I'm, of course, assuming in a case where the market stays as it is now and doesn't improve. Yes, thank you for that question. First of all, maybe to explain a little bit deeper on what we have done and why we have done it. The market situation was described in my speech. We are not able to shift into China. We haven't been able to in 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. And of course, we use the time on the site, especially Bethune, and sealants for maintenance work, which was necessary. And we will be prepared for in terms of being able to produce high volumes in a period where the market turns. But more I cannot tell you about 2020. That is too early. Understood. And then my second question is I mean, congratulations on the it seems that this year, you will finally not have any wastewater issues or stoppages. But, 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? Yes, we have made a great progress in this matter, all the states, and we're talking about 7 different states, around the Bara. Have agreed on a solution, which is called the discharge in the old mine areas. So that means we will not build a pipeline. We will, keep well intact until the end of 2021. And then beginning in 2022, we will, bring the waters in the underground in the Dara area that means no transportation costs for these volumes. Of course, there has to be some preparation of work and with some approvals, but time is enough to get this done. And I mean, you mentioned no transportation costs, but I mean, should we think about this as both very immaterial in terms of extra costs and the extra CapEx? Or once you start doing this, how much will your costs increase by doing for doing that and how much your CapEx will increase? No, it's compared to the old situation that we work planning, even a decrease because the pipeline through the OVAVSA would have costs about 300,000,000 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. And also no additional CapEx? There is some additional CapEx, but this is by far lower than what we would have expanded into the over the visa pipeline. Industry. Thank you so much. Yes, you're welcome. The next question comes from the line of Chris Fights from Kepler. I have couple of questions. I'll start with the, best in question, has the cooling pump in September been successfully installed? Can you confirm that? We have a very short question. Yes, 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, but the whole package will be done by January, which is not a problem because now we are anyway in the cold season. It's important to be prepared when the weather is getting hotter again. And then we will definitely be done with the works around the PQP. And by the way, we are quite happy with the progress that we are seeing with in terms of quality of our product both products centered and granular in the 2. Okay. But as a follow-up to that question, that would also mean that Bethune will be out of production in January? No, no, that is, that doesn't require an extraordinary maintenance break, what we have to do now. That can be done in operation. Okay, excellent. And my second question is regarding Neuhof and price work. Can you, update us on the situation there, roofing in Neuhof and the mining through the lower quality seam and enterprise Thank you. Yes. The target enterprise bus that is, as developing expected, exactly as expected. We will have this area with the lower K2O content behind us by the end of this year. So we should see a positive effect next year. And similar situation in Neuhof we should be able to, to see higher volumes out of the molecules 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 $15,000,000 from 6 600 to 550, but there's going to be additional maintenance work with the production shutdown. So I'm just wondering, where is the cut to CapEx there coming from? And then overall, what is your flexibility in reducing CapEx? Yes, there's always some flexibility. When we're talking about such a big number, there are, bigger number of single projects behind that. And if we talk about the reduced CapEx volume, it's a mix out of a performance into 2020 and discipline, but the bigger portion is CapEx discipline. That is a reaction on the current market situation. And, the additional maintenance costs that we have due to the brakes not running into CapEx, mostly not running into CapEx. That is the maintenance, and it's shown in OpEx. Got it. And then are you able to guide for your expectation for work capital for the change in working capital and cash flow for Q4? Yes, Chris. We do not give a guidance on a quarterly basis, for this, but you know, we were saying 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 And this continued in third quarter despite it was in a relatively small quarter always overshadowed by other development but 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 a certain guidance with a certain number of that. And I would like to add that Torres and his team has done a great job. If you see what we have seen due to the market situation on the EBITDA level and we still expect to see a positive free cash flow. I think that, is a great result out of great measures that we are seeing. Understood. Thank you very much. The next question comes from the line of David Simmons from JP Morgan. Please go ahead. Yes, hi, Chetan here, actually from JP Morgan. Thanks for taking questions. I just had maybe 3, 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 3 months. That's number 1. Number 2, second question that was actually where we would like to do 1 by 1. So, yes, 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 MLP, 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 the European business and overseas business. And the average and a price decline, which obviously is the case, rolls into our numbers, with a delay. And due to the fact that we have cut MLP, we have even a higher average selling price because, the portion of specialties with the higher prices is higher. And 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 are seen in the fourth quarter of 2018. I'm sorry. We have lost that line. I will move on to the next question for now. Coming from Ashrafal Muhlman from GLG. I had a quick question on the China tracks. When do you think, it will settle? And what kind of price range are we talking? Do you expect 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. But looking into the stocks into China, they are still very high. So that's most probably not going to happen this year. So, around China New Year is potentially maybe an indicator, which is not too bad. Pricing depends, of course, heavily to the situation that we are facing in that by that time, But 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 etcetera. So, 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. The next question is coming from the line of Patrick Rafais from UBS. Please go ahead. First question, I have a 3 is on the Bethune volumes. I understand the site is up and running again after the extended maintenance shutdown in Q3. And with Brazil inventory is 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 have produced. Okay. And do you expect that to remain the smartphone. Yes. We have running agreements and, so that, as you know, we have already reduced significantly our do the market situation in Bethune. But what we are producing now is running into these two markets. Okay. Thanks. And the second question is on communities and the decline in EBITDA was prior year. You mentioned, of course, the softer refill, early fill business and your guide in for volumes for the full year remains unchanged, right, 12,500,000 to 13,000,000 tons. So does that mean you expect full recovery of the lost EBITDA. So we should see something like 1000000 to 1000000 reversal in Q4. Yes, one should not over estimate the split between the icing business in Q3 and Q4. The heavy heavy business is really December, January, February, and 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. So, and we have seen stronger business after October, as I said, so good portions of the lower volumes compared to Q3, 2018 could run into or will run into Q4. But of course, The final decision will be made by the weather condition in December and for next season in January, February. Yes. Okay. And the last question is a bit of a wider one. You mentioned in your opening remarks at the end, and the pressure on cost from environmental regulation. And how should we think about that if you try to size that? Or how do you account for that in your budgeting and planning? Well, what kind of costs do you see coming over the next 5 or 10 years? That is a period, which is by far too long because if you see what's going on all over the world with additional measures to safeguard to climate, it's difficult to predict what's going on in the next couple of years, but actually, it will affect everybody was doing industrial production. And one effect that we have seen already is that the CEO is to, emission rights for the first time will cost money in 2020. So far, it was for free. But this time, we are spending money and we will have additional cost for CO2. It's still on a level, which is doable, but one has to follow the development very closely. And of course, we are in directly and via, our organizations, DDI, etcetera, in touch with politics to to make sure that we will see a balanced situation between environment and the needs of the industry. The next question comes from the line of David Simmons from JP Morgan. Please go ahead. Sorry. I think we got cut off previously, but Did you get the answer on your first question? Didn't, it's okay. We'll catch up with that. No problem. Then I answer this again and then you go. Honestly, don't worry, we'll catch up with people 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 say that most global averages were down, if not significantly than at least slightly. I was just wondering whether there was some kind of regional mix effects that enabled you to increase that price or how that came about? And follow on from that, whether you expect what you expect to happen to ASP going forward? Can we cheat on, can we do the following? Because, we had just a small internal discussion here that we come back with this answer to you after the call. Yes, sure. No problem. The next question is coming from the line of Thomas Swaboda from Societe Generale. Yes. Good morning. I have three questions, please. Firstly, on the volumes, it Have you seen any pickup in volumes actually since the Indian settlement? Or is there just no change, no change yet? Frankly, not really. We have seen some recovery in Southeast Asia, but that did not drive our volumes So there is not yet the trigger in the market, which would change the things entirely. Understood. On specialties and the mix in Q3 in 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? Yes, that is purely a mathematical effect, if we If we cut another 200,000 tons MOP in Q4, then of course, this will have this effect in the average selling price. And as I said earlier, also we see, price declines with the delay in our numbers. Understood. And And 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 H1 or the run rate that you were guiding for in H2? Yes, 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 result, which is somewhere between 110 and 115. And it, will, yes, I don't want to go too much too far into the year, but this is certainly a number which we'll maintain until we have the debt level. Perfect. Thank you so much. Welcome. The next question is coming from the line of Michelle Shafer from from Commerzbank. Please go ahead. First one is, coming back to your, let's say, 1000000 plus 1000000, 1000000 EBITDA reduction we have seen since you announced the 1st round of curtailments end of September. I wonder whether you can break this up a bit into what kind of proportion should we expect ice 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, what's kind of linked to the missing volumes and linked to the, to really extra costs you are bearing, which may not recur into in 2020. This would be my first question. Yes. Of course, you're not expecting to get hard numbers on that, but the biggest portion, the biggest portion, of course, is not producing the volumes and not selling them. And as you know, that we are not only talking about the film, but also about Tealit. These are the 2 pure MOP sites. And of course, in Tealit, we have a high fixed cost portion. So the majority of the numbers are due to that. Only a small number is additional maintenance. Okay. And second one would be sticking to costs, looking into 2020. Can you update us on your, you mentioned that you are progressing well with synergies, what should we expect as a kind of additional cost reduction heading into 2020 from your shaping program? Michelle, 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, and we expect for next year, a positive net number It is also here. We don't want to talk too much about 2023 today. We do this plan in spring next year, but it will be a positive net number. And we the thing is we also see and we always said that, we see general cost inflation. When I look at the personal costs, when I look at material costs, now especially in 2019, the 3rd party costs, which are linked to maintenance. And this will both this will go into the next year. So the general cost inflation will be there and needs to be seen how much of this will be eaten up by the inflation. Okay. And last, not least, on de icing, in your, on your slides, presenting the outlook into the next winter season. Just a clarification question. You're referring basically to 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 costs inflation. Just clarifying, I thought that we have seen the bulk of rising logistics costs in the past, basically? And are you suggesting that there's no margin improvement from higher prices heading into 2019, 2020 season? Is this what are you saying? So can I ask Ian, you're referring to the guidance or to the Q3 number? No. On the you're giving on Slide 6, you're showing an outlook winter season 2019, 2020. And you're saying the the second bullet point is saying higher prices can compensate for logistics costs inflation. So I might I thought that we talked about rising logistics costs in the past winter. And well, 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 49 month where we have seen the start of the increasing logistics costs, not in the first quarter last year. And what you should also always also included here not just a pure price increase. We have, 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 cost And the main thing is when you look at the third quarter, it's a very we're talking about small numbers. So a small movement up in logistics costs, which is not explainable by significant price increases or other factors can have a big impact. So I wouldn't overestimate Okay, thanks guys. The next question comes from the line of Diego Silva from AppTior. Please go ahead. Hi, sorry, sorry, I just had one follow-up question and this is more of a confirmation. You, as you was mentioned before in the call, you had a big working capital inflow on the 9 months up to now. I know you don't give guidance for the remaining quarter, but I'm just wondering more, more broadly. Is this in flow something that you think it's it's something that's just seasonal and it could revert over the next quarters? Or are these genuine, like, working capital improvement 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 to reverse a lot The next question comes from the line of Gemma Permalu 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 just got one that's credit specific. Given your new EBITDA guidance for this year, just with just hoping that if you could provide an update on your leverage targets and just your general thoughts on debt issuance at some point, given your promissory notes that are due in 2019? Yes, we made progress in the 3rd quarter. And with a general positive free cash flow by theendoftheyear, 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 a no further progress by the end of the year when I look at the fourth quarter in isolation. And Can you repeat the second question, please? So the second question was really just on the promissory notes. That are June 2019. So it 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. So this will go on. 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 probably been guiding for 2020 2021 CapEx to be looked about even with 2019. Is that guidance still valid? We're not adjusting any guidance for 2020 2021 now. This will be all new in March. And just a follow-up on the previous question. I think she was referring to the Shoal Shine notes that were 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 knut Henkel from Pareto Securities. Please go ahead. Good morning, gentlemen. Thank you for taking my question. I have some problems to recall style, the volume guidance or the reduced volume guidance you're giving and the EBITDA in pack. If I take the average selling price and multiply it with 200 kilotons, then that's average selling price is probably too high because I understand that the cuts mainly refer to a pure MOP. So that's probably a little high, but nevertheless, if I do that exercise, I come up with revenues, which are around 1,000,000 or even below 50,000,000. So 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. And if you add that, you end up with these numbers. And, I mentioned it earlier, Chile is almost 100% fixed cost. We didn't have the chance to do, I don't know. Kut or by short work, etcetera, which would a little bit relax the situation. So almost 100% fixed cost. Thank you. We have no further questions coming through. So I will now hand back to Doctor. Burkhart Law for the conclusion of the call. Please go ahead. Thank you for joining us. The situation is currently difficult, but we are hopeful that the market will, react on on the actions which were taken, in the course of 2020. And we will see you soon on roadshows in other occasions by until then, thank you for joining and for listening to our call. Bye bye. Thank you. That will conclude today's conference. Thank you.