Earnings Call: Q1 2019

May 14, 2019

Welcome to the K And Best Conference Call regarding the publication of the quarterly report, q 1 19, hosted by Doctor Boyhard Law, 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 0 on your telephone keypad, and you will be connected to an operator. Please note on page 2 of the presentation, you will find the disclaimer. I'm now handing the call over to Doctor Von Pablo to begin today's conference. Thank you. Thank you, operator. Ladies and gentlemen, welcome to our Q1 conference call. Let's start right away on Slide 3 with our highlights for that quarter. Our first message is, ladies and gentlemen, we have delivered EBITDA and cash flow clearly about last year's achievements. The soon production increased further and our German mines operated much better as well. Strong potash pricing and wintry weather in the U. S. And Canada also helped us. As a result, the EBITDA of our operating units, Europe Plus, and Americas increased by 14% to 12%. The adjusted net profit is up almost 30% and the free cash flow of 1,000,000 is up even 63% compared to last year. In fact, this has been the strongest quarterly cash flow As a result, we started deleveraging our company. Now please turn to Slide 4 to have a closer look at this topic. Ladies and gentlemen, we are on the right track, reducing our indebtedness, and we confirm our target to half net debt and net financial debt to EBITDA by the end of 2020. As said before, 2018 was negatively affected by error outage days. Just for that, the financial debt to EBITDA would already have been at 3.9x percent of Q1. Please have a look at Slide 5. It is a development in our different customer segments. This is the first time ladies and gentlemen that we are talking about our customer segments with analysts and investors. Let's take a one step back. Why have we changed the old reporting? The 2 big potash and salt segments blocked a lot of potential. Apart from lost synergies, we were 2 production oriented and at the same time, not customer oriented enough. We did not put enough focus on business like industry or consumers For example, if you know that our industry business generated the highest margin across K Plus in 2018, With our new reporting structure, we started to manage the company with the new metrics organization. Let's begin with Agriculture. Mainly due to better pricing revenues and EBITDA increased notably. Our new mine in Canada made sure the progress to soon EBITDA was clearly positive in the quarter under review and up against last year. Our industry consumer segment, customer segment is comprised of our former potash and salt products. In combination, this is a 10,000,000 tonne division, which is generating sound and relatively stable margins. Sales and EBITDA are fairly equally spread over the quarter. In Q1 twenty nineteen, we reached last year's revenues, although availability of products was lower due to the closure of our Zip Hotel mine. Earnings prices for electrolysis customers improved, whereas freight costs are still weighing on profitability. Both revenues and margins increase our consumer business. A more favorable pricing environment and tailwind from ethics has helped us to recover profitability which was somewhat under pressure due to increased freight rates. In Europe, we are further developing the new salt brands Our Al Doro Foods trucks are already driving across the country. Last but not least, the community, the IT business, benefited from the severe economic and winter conditions in the U. S. And Canada. Volumes were even better than last year, and as a result, prices rose. Now we are looking positive into the next tender season starting in summer. 1st part indications are promising. Now please turn to the next slide to talk about of 1000000 to 1000000. Also confirm production levels expected cost per ton of our product production and target sales volumes. After positive development and good winter businesses in Q1, we feel confident with our EBITDA range. Please remember, this assumes that we will not face drought related outage days and the months to come. At the moment production is running smoothly, thus ground ponds are roughly 18% filled, and we've already started with of saline wastewater for offset disposal. In summer, we additionally expect a permit for a temporary underground storage of 400,000 cubic meters. Good news by obtaining this permit, we would be able to handle a summer like last year without outages. Let's sum up what we've achieved so far on Slide 10. We are happy with our Q1 achievements. Our operating performance improved both in Peru as well as in the bottom line. Our wastewater management improves and makes us more robust. The first quarter also showed that we are on track to reach our main target becoming free cash flow positive in 2019. All in all, we can confirm our 2019 guidance given in March and the targets we have set so far for the year, for year end 2020. Finally, we see further improvement due to our newly refaced organization. This will help us generate significant synergies of more than €150,000,000, and we can now manage our company much better customer centric. This will set the foundation for our growth options after 2020. Ladies and gentlemen, we are now Thank you. Session. Question, and you will be advised when your line is unmuted. The first question comes from the line of Thomas Swoboda from Societe Generale. Please go ahead. Yes. Good morning, Joe. I have three questions, please. Firstly, on free cash flow and inventories, obviously, it looks like you have you have sold down a quite significant chunk of your inventories in Q1. My question is, how should we expect working capital to develop, especially in the second second half of the year when you expect to ramp up your production volumes in the soon even more. Yeah, Thomas. I would answer it that way, with Latin working capital, we increase, of course, But when you compare it to Nas, in general, the ramp up is not as steep as in 2018. So we would see across the year, a positive working capital effect on the cash flow. My second question is on logistics costs. You have guided for 1,000,000 this year. I'm just wondering if this includes using the the additional, the additional 400 two cubic meters of storage, temporary storage facility or or should we expect a higher number in case we should we should really we we should really get it varied by summer like last year. Yeah. Thank you for that question. 1st of all, if you could verify that this is a logistic cost for our cold water for our transportation from the garage to other mines, mostly in lower tax money. And we said that 40,000,000 was, the number that we had last year, and that would be the worst case for this year as well because we cannot do more for for logistical reasons. We're not expecting the $40,000,000 in the mid range. That would be more or less a one trigger to to bring the EBITDA a little bit down. Currently, we are quite optimistic that we would not need the 40,000,000 entirely, but of course, nobody knows how the weather, continues from from now on. But the additional, storage facilities with what we have, underground in summer, which, gives us another $100,000,000 cubic meter does not really affect the water that we have to transport. That is more or less linked to a real weather condition because we cannot store, heap waters only production waters underground. Therefore, we have to continue transporting, waters, even if we have traditional storage facilities. So, to sum it up, it could be up to 1,000,000 and But with this additional tax facilities, we will most probably do not have all these days. Perfect. My last question is on pricing and especially regarding Brazil. I mean, we have this, this trade talks between the U. S. And China becoming hot again, and we have the African swine fever in in China on top. There is there was also a slow start to the U. S. 30 that was due to North American fertilizing season. Do we need to fear that, that the competition, especially in Brazil and in Asia will heat up as You know, everybody will would try to to sell there, and that we will see some more price pressure during the year, especially compared to last year. Could you could you share your thoughts on on your current current competitive environment and your price development with us, please? Yeah. Absolutely. First of all, we are not seeing this yet. And, we believe that over the year and that is, what my colleagues have communicated as well. So the CEOs of the other producers, and we will at least have a stable demand over the year. And, there are no meaningful additional capacities coming into the market. So, yes, we have the issues that we have mentioned, but we have still a very bullish Brazilian market. We have a stable European market Asia started looking for the year, but, but now it's picking up. So all in all, we are not changing our view on the market and on the price development, which is at least stable demand compared to last year. And we expected a stable pricing compared to the end of 2018 for the full year. This is very helpful. Thank you. Thank you. The next question comes from the line of Chris Line from Bank of America. Please go ahead. Hi, thank you. Just one question. I'm just trying to obtain a like for like comparison. So for the volume, guidance that you gave for 2019, it's certainly different from what was given in last quarter due to the re segmentation. So is there any change to the production volumes, for potash versus your expectations at the last quarter's call on the same question for assault as well. So, that takes the total volume to total potash volumes, which is, of course, agriculture and industry now. And we have no change in the total volumes to, so we have the same base for our guidance that we had in March. Saying 7,700,000 to 7,900,000 tons and of production. And the swing factor here is as soon as we are still in the ramp up. So it could be 1.7 to 1.9. Got it. And no change in your expectation for yourself lines? Thank you. I'll hop back in the queue. Welcome. Bye bye. The next question comes from the line of Markus Mayer from Barbara Helvea. Please go ahead. Yes, good morning gentlemen. Two questions from my side on this new segment. You had a, an industry, you stated that you had a negative product mix effect, maybe some more words on this would be helpful on also the consumer segment, you had here earnings jump. Here's some some of us to understand this. Marcus, talk to me. Yeah, I think what the text, when when I wanna summarize, the custom segments, we have seen a good development in consumers, which was pricing related. The industry effect, the negative one is less related to a product mix. It's more here here you see, especially the the higher freight cost impact. It is, it is harder to pass on, this, to the customers as we also have here a longer lasting contracts. And it's in general, this is why the industry, business is going back in terms of increase in terms of revenues, but decreasing in terms of of profitability and margin. Your next question comes from the line of Neil Piler from Redmond. The topic of freight costs, I wonder if you could give us an indication of, in absolute quantity, what was comprised over the course of 2018 and specifically within the communities, customer segment. What the absolute number was and how you expect that to change within your budgeting for 2019, please? I mean, given that given that community is, of the only consisting of of the of the old souls that means when you look back into 2018, a third of the total cost was related to freight costs. And, this was already in 2018 elevated because we had the higher cost already, and this is what we also see going into the new year. Overall, for us, the water, when you look at the total good cost, is related to freight costs. But this is, of course, this is, of course, the total freight. Yeah. This is not related to this hot water. This hot water is, what are the numbers Yeah. I was just really I was I was asking about trade exclusives. In general. So what and and and year on year, if you can give us any indication how that number moved in during the first quarter at percentage terms or whatever? It is it is it is rather it's it's only marginally increased. So, in terms of costs or a portion of total costs, it's, a little bit more than the quarter. From those quarters. Okay. Thank you very much. Any next question comes from the line of Christian Faitz from Kepler. Please go ahead. Questions from my side. First of all, can you please elucidate on your competitive planning for Bethune for this year and also for the next few years going forward? And on that, will the Bethian volume still predominantly the earmarked for non North American markets? Alright. Okay. Now I got yeah, our guidance for this year is, 1.7 to 1,900,000 tons, which is already 3300 to 500 talents on more than that year. And so the same point is still 53 with, with the 2,900,000 tons, a full capacity, precisely 2,860,000 tons. So, the way into this, full capacity should be a more or less flat line. The only credit market we still have is how will the ramp up of the secondary mining continue? Because as you know, we have only started and this is a new technology for us. So there's a little bit of an unknown in that, and we're talking about and 900,000 tons of secondary mining volumes. So, we assume now a flat line, but it could differ a little bit is on that. And to my second question, can you please give us an assessment of the icing inventory levels at your customers, both in North America as well as in Europe. Thank you. So we have low levels, very low levels in the Midwest. We have seen that even as we were at our stories since we're completely empty, and we know that from from the competitors and from from the customer. The East Coast is more on a normal level, the same is true for Europe. And yes, we have a Canadian the Canadian summer, we are a little bit below, average in, in industries in in Canada as well. Check great. Thank you very much. The next question comes from the line of Patrick Heidi from UDS. Please go ahead. Good morning, and thanks for for taking my three questions. The first is just to follow-up on your total production guidance, for for for potash this year. You already mentioned Bethune plus 300 to 500,000 tons. Should I assume all the other indications you've given us with Q4 are still valid. So 500,000 tons from where excluding Neuhof, then minus 100,000 tons from the lower K2O content in Germany, etcetera. So all of that is still valid? All of that is still a 100% valid. And, we all we we have looked into a deeper in the last remaining which would call it issue in Neuhoff. We are on track here. We have started in the mining and other areas. And the second half of this year should be back to the original plan so that, we only have this negative impact of 100,000 funds. All the other issues that we have mentioned and explained precisely are still valid. Okay, thanks. And the second question is actually a follow-up on this and on what you've said on the secondary mining, in Bethune. We've talked about around 100,000 tons from secondary mining this year. That's still valid as well. I assume. Yeah. If, we said could need to be 200,000. So between 102,002,001,000 tons, The secondary mining and that is one reason for this variance that we have given you. And granted strategy is the biggest unknown for us, how it really ramps up. Okay, thanks. And the last question is on the specialties or specialty fertilizers. In the past, we talked about pricing being delayed here due to contract structures. Is is is pricing catching up now already, or will that just follow in Q2, Q3? Now we see the development that we have seen in the asked as well. If MOP runs pick up, you see, a timing gap between picking up of the SOP, for example, and now we have seen the continued nice development here. We have seen it, and we expect, to be in the future. For example, one reason while we had tips rather high average selling price in the first quarter because in Shivan, we always have deposited mix effect higher at, specialty portions. And with this price development that I've just elaborated on, we ended up So this nice number, but it should recover over the year, not due to, for the price effect, but to mix effect. Okay. I understand. Thank you very much. Welcome. Your next question comes from the line of Andreas Heine from Bank. Please go ahead. Actually I have 4 at very small ones. The first picture is a little bit how you do the cost allocation between the product business in agriculture and the industries. So if you see some fluctuation in the unit quarter by quarter, year by year. Is that exactly what we can take as costs in the industrial business for purchase for the 1st month? Yeah. I mean, we look pretty, in where do we sell the product to, and this is the way we allocate, the cost to the different treatments. And we are able to allocate, to 80 percent of the costs directly and, the rest, by looking at the sales volumes confirms that. So when you take when you take sales volumes, there's a good proxy for that. And the second one, the, FX rates in your guidance is still at 120. So we are are now at a more favorable rate. If you take the current rate we have and have your hedges in mind you have for this year, What would be the the impact on EBITDA? Yeah. I I can only repeat. One one could discuss should we change our assumption now? But, I mean, usually at this point in time, you don't even get, a more concrete guidance from us. So we stick to our guidance range, and we also exclude the assumption of the 120 in our, planning and in our forecasting for this year. We we we told you, that, there is a positive effect when we see an ongoing rate of 1.15. And if we do see this for the remainder of the year, there's a 30,000,000 benefits to our current assumption. For the remaining 3 quarters. For the remaining, yes, because first quarter is Mhmm. Mhmm. Then, on the average pricing seen in agriculture, Now with a mix effect, looking forward to the, coming 3 quarters, just very accretively, where's the mix then in this agricultural, segment, quarter wise, which is the strongest, which is if everything stays as it is. The first quarter is clearly the strongest. And I mentioned earlier that we have a lot of, specialty sales in the first quarter traditionally. And, then we, should see a price. Giving the same price environment, which you should see for KPLIS as lower, average selling prices in the quarters to come. And, that is not only the sales mix. It's also that we are expecting, as you know, a ramp up in of that too. We started nicely into the year, but there is more to come. And, that also hasn't been impacted on, everything in price of Tableau. Thanks. And the last one very briefly, did you elucidate a little bit more on the industrial segment trends. So the the the impact you've seen in the earnings, is that driven more by the volume, by the cost or what was, that's what we can, what can we expect from this trend, which is more strategically related in the coming quarters? It's driven me by price. And, I mean, we have a slightly lower volume than last year. So I would say that for the rest of the year, the volume development should be rather stable. We expect in general a growth of, let's say, 1 to 1 a half percent overall of this product in the It's it's like with your sole pigments, it's, you know, I think it's a broad range of products. So do you have some, segments that are growing quicker and some certainly also, are not growing at all. I would say if only you are the flat when you talk for the rest of the year, longer term, we see a marginal increase there. We see a beneficial pricing, but keep in mind, what we said earlier, Here is where the freight costs are are hitting us at least through this year. And so we are not yet able to pass on this to the customer. Thanks. Very helpful. Thank you very much for the answers. The next question comes from the line of Chetan Vishi from JPMorgan. Just had a question on the current trends that you see in the industry in the potash market because seems the prices have been sort of edging down at least 30 prices that we did over the last quarter or so. And you know, there have these reports about very strong sort of imports into Brazil, especially in the 1st 3 months of this year. So how do you see firstly the inventory situation in some of the key regions for KNS in terms of potash and Any comments on prices are sort of, you know, have seen some moderation in the last few months, specifically? Thank you. We have already indicated that we are expecting, prices to remain on the level of the end of last year. Said that depending on the year already and, obviously, we were correct with this assumption. Which is positive. You know that we had a, a price rally between, 16 18 And, it's, it's more sustainable if we remain on the plateau. And it looks pretty much that, the industry could achieve that to have, to keep the prices stable with some stronger areas like Brazil. And, he which we will see another very good year. So the inventories and you were asking for inventories down the lower level, a different situation in, in, in Asia, which is not that relevant for us because our volumes into Asia are growing due to that, but are not on on a very high level yet. I can see that slowly market are are kicking in. And, Europe is fine. Our home markets, we are on a healthy development. We have a lot of rain, which is huge. Now for farmers at seasons. So in all in all, we are quite happy with the development and the that's why we confirm one more time the demand globally and, stable prices. Thank you. Welcome. Comes from the line of Mark Gabriela from Bankhaus Lampe. Please go ahead. Good morning, everybody, and congratulations on the Perfect. Results for Q1, just one question, two questions from my side. First of all, on the DICSOL business, I mean, you mentioned that stocks levels are low in the U. S. Midwest we saw already a price increase year over year. Is it fair to assume that additional, 10% is possible with the new negotiations with the communities? That's my first question. Yeah. Thank you, Mr. Gabriel, for your congratulations. We like to keep it because, you know, that we had some more difficult quarters behind us. But coming back to your question, it's too early We have seen only a very few, bits, and we are talking about hundreds of bits But the probability that you, that you discussed with that number in the Midwest is realistic. But we also have the region in in the East Coast here. We might end up with a slightly lower price. But in total, we expect higher prices. And then it's important to see that the volumes fit in, in Q4. Okay. And then a second question I have on the segment, customers, there you mentioned the positive pricing effect, that margin development or that that uh-uh, jump in in the EBITDA despite the, stable volumes, is that a sustainable number going forward for the next quarters or, is that just one timer? It's it's really hard to say, Mark. I wouldn't consider it as a one timer, because, I mean, we are pretty successful. You're talking about consumers, right, you said? We have strong brands, but this there's tough competition I'll keep going on from white label products. So, we have to we have to fight for customers, we try to, get our, higher costs passed on there. We are, most of the time, successful, not always, So I wouldn't say that there's a a straight line going up further, but we should be able to see that level at least. So you're more targeting for a margin, goal in that, yeah, segment. Or Yeah. Of course. We're not looking at revenues. And, we have to see that we get higher costs, compensated. So margin is rather the right thing to address. Okay. Thanks. Bye. Thank you. Bye bye. The next question comes from the line of Markus Schmidt from ODDO. Please go ahead. Yes, good morning. Just one question. You renewed recently your Silicon Quest facility consisting of RCF and a new term loan. You highlighted the favorable conditions in the press release. Could you explain how the tariffs have been priced? I'm in I'm a little bit reluctant to talk about, conditions in a not public facility. So they are favorable, but I don't wanna give any details on the numbers. You will just be presented, going forward, in any of your, documents? I think I will also be in future if you'd like me to do I mean, it's a very repricing. That's what I can say. Yes. So it's linked to the Yuri Board, and we we pay a margin to this. So it will it will vary anyway. But, I think this is nothing new. It is it is it is favorable compared or taking into consideration our our rating and, yeah, that's all I wanna say. So is it lower than the previous one or or higher? Yeah. I mean, the the previous one was done a couple of years ago, where pricing in everywhere, the interest rate environment was a different one. But also our rating was a better one. So looking at this, it's, not as favorable as in the past. Thank you very much. The next question that comes again from the line from Redburn. Please go ahead. Good morning, again. Follow-up is on the injection permit, the palm water injection permit that you referred to in your opening comments. You said you're confident of receiving approval for that permit So, I'd like to ask if you can share any of the reasons for that confidence. And following on from that would, Yeah. May I answer first, please? The of course, you want to answer one by one. I do oh, is that the this still belongs to your first question or what you want? It still belongs to the first first question. Sorry. Sorry. So the question is, hypothetically, if you weren't to receive the approval, could you still reach your volume production, guidance is exactly just protecting you to, to the downside. And could you give us a picture of any other major climate renewals due over the next, 2 years, please? Yes. Thanks for the questions. First of all, I need to avoid listener spending We're not talking about the injection permit. We have an injection permit, which allows us to equivalent takes 1,500,000 cubic meters a year, that will run out by the end of 2021. And we are working on, on a succession project, which is the, storage of waters underground in the area, and not only temporary, but continuously. And that looks pretty good. We will, for my reading, have the permit in hand early enough to have no interruption. What we are elaborating on here today in this quarter is a temporary storage underground of 400,000 cubic meters. And why I'm optimistic because we regularly talk out to our authorities and this have defined conditions, and we are able to meet these conditions. And then we're only talking about timing but somewhat in summer, we will have this in hand. And then we are pretty sure not to have any production impacts and we will be able to meet our target of in total 7,700,000 to 7,900,000 tons. And that's so important because with the Vera, they're producing most of our specialties. Yeah, yeah, I think I think I understand, but I just wanna make sure that if, you know, if you don't receive this this permit, and there is a dry summer, then that then that's the threat volume. But if if it's a normal normal weather, environment or conditions, then the additional underwater storage wouldn't be required. Exactly. So if we don't get this, we have to take the same environment as last year. The good news is we could continue the ponds totally over the winter. But that was the case in 'eighteen as well. So if we don't get the approval, we have the same situation we did last year, but that's means, we would need another drought in Germany to to have outage place, but I'm that is only theory I'm very optimistic that you get this additional. I understand. I just wanted to understand the potential possibilities. Thank you. Thank you very much. The final question comes from the line of Thomas Saboda from Societe Generale. Please go ahead. Yes. Thank you for taking my follow-up. And it is regarding the resource tax increases in Canada. Could you just just remind us please what effect this increase in mining royalties that you have on your P and L in the short term and especially what do they mean regarding your targets, for 2030, please? That's what we consider as short term as you know. There's no immediate effect because as a new, kid on the block in Canada, you are tax exempt from some taxes who were there. And so for the next 8 years, this is not affecting us. In the long term, yes, we, also, do see an increase in the potash production tax. But this is hitting us beyond 2028. Yep. Perfect. Thank you. Thank you. We have no further questions coming through. So I will now hand back to Doctor Brookard Law for the conclusion of the call. Please go ahead. Thank you very much for joining us today on that call. And, we are quite happy with the outcome of the first quarter and reassured We are working hard to deliver the other three quarters and we're looking forward to see you on the road in London and Frankfurt. To be, to answer more questions. And thanks again, and have a nice day. Bye bye. Thank you. That will conclude today's conference. Thank you for your participation, and have a pleasant day.