Welcome to the K+S conference call regarding the publication of the quarterly report Q1 2019, 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 0 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'm now handing the call over to Dr. Burkhard Lohr 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 three with our highlights of that quarter. My first message is, ladies and gentlemen, we have delivered. EBITDA and cash flow are clearly above last year's achievement. Bethune 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 unit Europe+ and Americas increased by 14% and 12%. The adjusted net profit is up almost 30% and the free cash flow of EUR 233 million is up even 63% compared to last year. In fact, this has been the strongest quarterly cash flow in eight years. As a result, we started deleveraging our company. Now please turn to slide four to have a closer look at this topic.
Ladies and gentlemen, we are on the right track to reducing our indebtedness. We confirm our target to halve net debt and net financial debt to EBITDA by the end of 2020. As said before, 2018 was negatively affected by Werra outage days. Adjusted for that, net financial debt to EBITDA would already have been at 3.9 times by the end of Q1. Please have a look at slide five to see the 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? Within the two big potash and salt segments, we lost a lot of potential. Apart from lost synergies, we were too 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, did you know that our industry business generated the highest margin across K+S 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 further progress. Bethune EBITDA was clearly positive in the quarter under review and up against last year. Our industry customer segment is comprised of our former potash and salt products. In combination, this is a 10-million-ton division, which is generating sound and relatively stable margins. Sales and EBITDA are fairly equally spread over the quarters. In Q1 2019, we reached last year's revenues, although availability of product was lower due to the closure of our Siegmundshall mine.
In earnings, prices for electrolysis customers improved, whereas freight costs are still weighing on profitability. Both revenues and margins increased in our consumer business. A more favorable pricing environment and tailwind from FX 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 brand, SALDORO. Our SALDORO food trucks are already driving across the country. Last but not least, the community deicing business benefited from the severe and long-lasting winter conditions in the U.S. and Canada. Volumes were even better than last year, and as a result, prices rose. We are looking positive into the next tender season starting in summer. First price indications are promising. Please turn to the next slide to talk about full-year guidance. First of all, we confirm our 2019 EBITDA guidance of EUR 700 million to EUR 850 million.
We also confirm production levels, expected cost per ton of our potash production, and target sales volumes. After positive FX 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 in the months to come. For the moment, production is running smoothly, above ground ponds are roughly 18% filled, and we've already started the transportation of saline wastewater for off-site disposal. In summer, we additionally expect a permit for a temporary underground storage of 400,000 cubic meters. The 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 Pattensen as well as at the Werra mine.
Our wastewater management improved and makes us more robust. The first quarter also shows 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 year-end 2020. Finally, we see further improvements due to our newly reshaped organization. This will help us generate significant synergies of more than EUR 150 million, 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 happy to take your questions.
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 on to your next 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. I have three questions, please. Firstly, on free cash flow and in inventories, obviously, it looks like you have sold down quite a significant chunk of your inventories in Q1. My question is, how should we expect working capital to develop, especially in the second half of the year, when you expect to ramp up your production volumes in the June even more?
Yeah, Thomas, I would answer it that way. With that, working capital will increase, of course. When you compare it to last year in general, the ramp-up is not as steep as in 2018. We would see, across the year, a positive working capital effect on the cash flow.
Perfect. Thank you. My second question is on the logistics costs. You have guided for EUR 40 million this year. I'm just wondering if this includes using the additional 400 cubic meters of temporary storage facility, or should we expect a higher number in case we should really get a very dry summer like last year?
Yeah. Thank you for that question. First of all, I think we should clarify that it's the logistic cost for our salt waters, for our transportation from the Werra to other mines, mostly in Lower Saxony. We said EUR 40 million 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 logistical reasons. We are not expecting the EUR 40 million in the mid-range. That would be more or less one trigger to bring the EBITDA a little bit down. Currently, we are quite optimistic that we would not need the EUR 40 million entirely, of course, nobody knows how the weather continues from now on. The additional storage facilities, what we have underground in summer, which gives us another 400,000 cubic meter, does not really affect the water that we have to transport.
That is more or less linked to the real weather condition because we cannot store deep waters, only production waters underground. Therefore, we have to continue transporting waters even if we have these additional storage facilities. To sum it up, it could be up to EUR 40 million impact, but with these additional storage facilities, we will most probably not have outage days.
Perfect.
Okay.
My last question is on pricing, and especially regarding Brazil. We have these trade talks between the U.S. and China are becoming hot again, and we have the African swine fever in China on top. There was also a slow start to the North American fertilizing season. Do we need to fear that the competition, especially in Brazil and in Asia, will heat up as everybody will try to sell there, and that we will see some more price pressure during the year, especially compared to last year? Could you share your thoughts on the current competitive environment and the price development with us, please?
Yeah, absolutely. First of all, we are not seeing this yet. We believe that over the year, and that is what my colleagues have communicated as well, the CEOs of the other producers, that we will at least have a stable demand over the year. There are no meaningful additional capacities coming into the market. 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 weak into the year, but now is picking up. All in all, we are not changing our view on the market and on the price development, which is saying at least stable demand compared to last year. 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 Ryan from Bank of America. Please go ahead.
Hi, thank you. Just one question. I'm just trying to obtain a like-to-like comparison. For the volume guidance that you gave for 2019, it's slightly different from what was given in last quarter, emphasis on re-segmentation. Is there any change to the production volumes for potash, versus your expectations at the last quarter's call? And the same question for salt as well.
Let's take the total volume, the total potash volumes, which is, of course, agriculture and industry now. We have no change in the total volumes. We have the same base for our guidance that we had in March, saying 7.7 million to 7.9 million tons of production. The swing factor here is that soon, as we are still in the ramp-up, it could be 1.7 million to 1.9 million.
Got it. No change in your expectation for your salt volumes?
No.
Thank you. I'll hop back in the queue.
Welcome. Bye-bye.
The next question comes from the line of Markus Mayer from Baader Helvea. Please go ahead.
Yeah, good morning, gentlemen. Two questions from my side on this new segment. In industry, you stated that you had a negative product mix effect, maybe some more words on this would be helpful, and also on the consumer segment you had here earnings jump. Here some more words to understand this would be highly welcome as well.
Markus. I think when I want to summarize the customer 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. Here you see especially the higher freight cost impact. It is harder to pass on this to the customers, as we also have here longer-lasting contracts. In general, this is why the industry business is increasing in terms of revenues, but decreasing in terms of profitability and margin.
Okay, understood. Thank you.
The next question comes from the line of Neil Tyler from Redburn. Please proceed.
Yeah, good morning. The topic of freight costs. I wonder if you could give us an indication of, in absolute quantity, what those 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?
Given that community is only consisting of the old salt business, when you look back into 2018, a third of the total cost was related to freight cost. 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 total, when you look at the total group cost, is related to freight cost. This is of course the total freight. This is not related to the salt water. The salt water are the numbers what Marcel said earlier.
Yeah, I was asking about freight exclusive-
general salt water. Year on year, if you can give us an indication how that number moved during the first quarter in % terms or whatever.
It is only marginally increased. In terms of costs or portion of total costs, it's a little bit more than a quarter, in both quarters.
Okay. Thank you very much.
The next question comes from the line of Christian Veith from Kepler. Please go ahead.
Yes. Good morning, gentlemen. A couple of questions from my side. First of all, can you please elucidate on your capacity planning for Bethune for this year and also for the next few years going forward? On that, will the Bethune volume still predominantly be earmarked for non-North American markets? Second question.
Please say who, which side, one by one.
All right. For Bethune.
Okay, now I got it. Our guidance for this year is 1.7 million tons-1.9 million tons, which is already 300,000 tons-500,000 tons more than last year. The end point is still 2023, with the 2.9 million tons full capacity, precisely 2.86 million tons. The way to this full capacity should be more or less flat line. The only question mark that 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. There is a little bit of an unknown in that, and we are talking about 900,000 tons of secondary mining volumes. We assume now a flat line, but it could differ a little bit. We keep you updated on that.
Okay. To my second question, can you please give us an assessment of the icing inventory levels of your customers, both in North America as well as in Europe? Thank you.
We have low levels, very low levels in the Midwest. We have seen that even our storage units were completely empty, and we know that from the competitors and from the customer. The East Coast is more or less on a normal level. The same is true for Europe. As we had a good Canadian summer, we are a little bit below average in inventories in Canada as well.
Okay, great. Thank you very much.
The next question comes from the line of Patrick Laager from UBS. Please go ahead.
Good morning, thanks for taking my three questions. The first is just a follow-up on your total production guidance for potash this year. You already mentioned Bethune plus 300,000-500,000 tons. Should I assume all the other indications you've given us with Q4 are still valid? 500,000 tons from Werra, excluding Neuhof, then minus 100,000 tons from lower K2O content in Germany, et cetera. All of that is still valid?
All of that is still 100% valid. We have to look deeper in the last remaining, if you wish, we call it issue in Neuhof. We are on track here. We have started the mining in other areas, the second half of this year should be back to the original plan. So that we only have this negative impact of 100,000 tons. All the other issues that we have mentioned and explained precisely are still valid.
Okay, thanks. 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. We said it could even be 200,000, so between 100 and 200,000 tons secondary mining, that is one reason for this variance that we have given you. Granted, that is the biggest unknown for us, how it really ramps up.
Okay, thanks. 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 pricing catching up now already, or will that just follow in Q2, Q3?
Now we see the development that we have seen in the past as well. If MOP prices pick up, we see a time gap between the picking up of the SOP, for example, and we have seen a continuous nice development here.
Expected to continue the same in the second quarter?
We have seen it, and we expect this to be in the future. That is, for example, one reason why we had this rather high average selling price in the first quarter, because in Q1, we always have a positive mix effect, higher specialty portions. With this price development that I've just elaborated on, we ended up with this nice number. It should recover over the year, not due to total price effect, but to mix effects.
Okay, I understand. Thank you very much.
You're welcome.
The next question comes from the line of Andreas Heine from Bank Vontobel. Please go ahead.
Actually, I have four, but very small ones. The first, could you elaborate a little bit how you do the cost allocation between the potash business in agriculture and the industry? We see some fluctuation in the unit cost quarter by quarter, year by year. Is that then exactly what we can take as costs in the industrial business for potash? That's the first one.
Yeah. We looked really in where do we sell the product to. This is where we allocate the cost to the different segments. We are able to allocate up to 80% of the costs directly and the rest, and the check by looking at the sales volumes confirms that. When you take sales volume, that is a proxy for that.
Mm-hmm. The second one, the FX rates in your guidance is still at 120. We 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 impact on EBITDA?
Yeah, I can only repeat. One could discuss should we change our assumption now. Usually at this point in time, you don't even get a more concrete guidance from us. We stick to our guidance range. We also stick to the assumption of the 120 in our planning and in our forecasting for this year. We told you that there is a positive effect when we see an ongoing rate of 115. If we do see this for the remainder of the year, there's a EUR 30 million benefit to our current assumption.
For the remaining three quarters?
For the remaining, yes, because first quarter is-
On the average pricing seen in agriculture, there are always a mixed effect. Looking forward to the coming three quarters, just very qualitatively, where is the mix then in this agricultural segment quarter-wise? Which is the strongest, which is the weakest? Just if everything stays as it is.
The first quarter is clearly the strongest. I mentioned earlier that we have a lot of specialty sales in the first quarter, traditionally. We should see, keeping the same price environment, we should see for K+S, lower average selling prices in the quarters to come. That is not only the sales mix, it's also that we are expecting, as you know, a ramp-up in North Brazil. We started nicely into the year, but there is more to come, and that also has an impact on the average selling price of K+S.
Thanks. The last one, very briefly. Could you elaborate a little bit more on the industrial segment trends? The impact we have seen in the earnings, is that driven more by the volume or by the costs, or what can we expect from the trend, which is more strategically related in the coming quarters?
It's driven by price, we have a slightly lower volume than last year. 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%-1.5% overall of this product in there. It's like with the old salt segment. It's only, I think, a broad range of products. You have some segments that are growing quicker, and some certainly also are not growing at all. I would say it's volume rather flat. When you talk for the rest of the year, longer term, we see a marginal increase there. We see a beneficial pricing. Keep in mind what we said earlier, here is where the freight costs are hitting us, at least in this year, and we are not yet able to pass on this to the customer.
Thanks. Very helpful. Thank you very much for the answers.
Next question comes from the line of Chetan Udeshi from J.P. Morgan. Please go ahead.
Yeah. Hi. I just had a question on the current trends that you see in the industry, in the potash market, because it seems the prices have been edging down, at least the third-party prices that we get over the last quarter or so. There have been reports about very strong imports into Brazil, especially in the first three months of this year. How do you see firstly the inventory situation in some of the key regions for K+S in terms of potash? Any comment provided that these prices 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. We said that at the beginning of the year already, and obviously, we were correct with this assumption, which is positive. You know that we had a price rally between 2016 and 2018, and it's more sustainable if we remain on that plateau, and it looks pretty much that the industry can achieve that to keep the prices stable with some stronger areas like Brazil. Here we will see another very good year. The inventories, and you were asking for inventories, are on a lower level. A different situation in Asia, which is not that relevant for us because our volumes into Asia are growing due to battery, but are not on a very high level yet.
I can see that slowly markets are ticking in. Europe is fine. Our home markets, we are on a healthy development. We had a lot of rain, which is good now for farmers in that season. All in all, we are quite happy with the development and that's why we confirm one more time the demand globally and stable prices.
Thank you.
You're welcome.
The next question comes from the line of Marc Gabriel from Bankhaus Lampe. Please go ahead.
Good morning, everybody, and congratulations on the perfect results for Q1. Just two questions from my side. First of all, on the de-icing salt 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 take it because you know that we had some more difficult quarters behind us. Coming back to your question, I think it's too early. We have seen only a very few bids, and we're talking about hundreds of bids. The probability that you discussed with that number in the Midwest is realistic. We also have the region in the East Coast here, we might end up with a slightly lower price. In total, we expect higher prices. Then it's important to see that the volumes kick in in Q4.
Okay. Second question I have on the segment customers. There, you mentioned the positive pricing effect, that margin development or that jump in the EBITDA, despite the stable volumes. Is that a sustainable number going forward for the next quarters, or is that just a one-timer?
It's really hard to say, Marc. I wouldn't consider it as a one-timer, because we are pretty successful. You're talking about consumers, right? You said customers-
Yeah
consumers.
Yeah.
We have strong brands, there's tough competition also going on from white label products. 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. I wouldn't say that there's a straight line going up further, but we should be able to keep that level at least.
You are more targeting for a margin goal in that segment, or?
Yeah, of course. We're not looking at revenues. We have to see that we get higher costs compensated. Margin is rather the right indicator.
Okay, thanks. Bye.
Thank you. Bye-bye.
The next question comes from the line of Markus Schmitt from ODDO BHF. Please go ahead.
Yes, good morning. Just one question. You renewed recently your syndicate credit facility, consisting of RCF for a new term loan. You highlighted the favorable conditions in the press release. Could you explain how the new loan have been priced?
I'm a little bit reluctant to talk about conditions in a not public facility. They are favorable, but I don't want to give any details on the numbers.
Will this be presented, going forward in any of your documents?
I think I will also be in the future be reluctant to do so. I mean, it's a variable pricing, that's what I can say. Yeah, so it's linked to the Euribor, and we pay a margin to this, so it will vary anyway. I think this is nothing. It is favorable compared or taking into consideration our rating, and yeah, that's all I want to say.
Is it lower than the previous one or higher? Can you disclose that?
Yeah. The previous one was done a couple of years ago, where the interest rate environment was a different one. Also our rating was a better one. Looking at this, it's not as favorable as in the past.
Okay. Thank you very much.
The next question comes again from the line of Neil Tyler from Redburn. Please go ahead.
Good morning, again. Follow-up is on the injection permit, the brine water injection permit that you referred to in your opening comments. You mentioned you're confident of receiving approval for that permit. I'd like to ask if you can share any of the reasons for that confidence. Following on from that, would-
May I answer first, please? Because we want to answer one by one. Does this still belong to the first question, what you wanted?
It still belongs to the first question.
Okay. Sorry.
It's all right. The question is, hypothetically, if you weren't to receive the approval, could you still reach your volume production guidance? Is it effectively just protecting you to the downside? Could you give us a picture of any other major permit renewals due over the next two years, please?
Yeah. Thanks for the questions. First of all, I need to avoid misunderstandings. We're not talking about an injection permit. We have an injection permit, which allows us to deep well inject 1.5 million cubic meters a year. That will run out by the end of 2021, we are working on a succession project, which is the storage of waters underground in the Werra area, and not only temporary, but continuously. That looks pretty good. We will, from 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. Why I'm so optimistic, because we regularly talk to our authorities, and they have defined conditions, and we are able to meet these conditions. Then we are only talking about timing.
Somewhat in summer, we will have this in hand, then we are pretty sure not to have any production impacts, and we will be able to meet our targets of, in total, 7.7 million-7.9 million tons. That's so important because with Era, they're consuming most of our specialties.
I see.
Does that answer your question?
Yeah. I think I understand, I just want to make sure that if you don't receive this permit, there is a dry summer, that's the threat to the volume. If it's a normal weather environmental conditions, the additional underwater storage wouldn't be required.
Exactly. If we don't get this, we have the same environment as last year. The good news is we could empty the ponds totally over the winter. That was the case in 2018 as well. If we don't get the approval, we have the same situation as last year. That means we would need another drought in Germany to have outage days. That is only theory. I'm very optimistic that we get this additional.
Yeah, I understand. I just wanted to understand the potential possibilities.
Yeah.
Thank you.
Thank you very much.
The final question comes from the line of Thomas Swoboda from Societe Generale. Please go ahead.
Yes. Thank you for taking my follow-up. It is regarding the resource tax increases in Canada. Could you just remind us, please, what effect this increase in mining royalties do you have on your P&L in the short term, and especially, what do they mean regarding your targets for 2030, please?
That's what we still 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 over there. So for the next eight years, this is not affecting us. In the long term, yes, we also do see an increase in the potash production tax, this is hitting us beyond 2028.
Yeah. Perfect. Thank you.
Thank you. We have no further questions coming through, I will now hand back to Dr. Burkhard Lohr for the conclusion of the call. Please go ahead.
Yeah. Thank you very much for joining us today on that call. We are quite happy with the outcome of the first quarter, and be assured 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 answer more questions. 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.