Welcome to the K+S conference call regarding the publication of the financial report H1 2018, 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 a disclaimer. I am now handing the call over to Dr. Burkhard Lohr to begin. Please go ahead.
Thank you very much. Good morning, ladies and gentlemen, and welcome to today's Q2 conference call. During the next hour, we will not proceed as usual. After a very short overview of Q2, we will spend some time giving you the background on our guided EBITDA range for 2018, which we have already pre-released last week. After that, the team in Kassel will be happy to take your questions. Now let's start with a highlight on the second quarter on slide three. When we are talking about the second quarter 2018, the emphasis is that the market conditions remain supportive, and that is very important. Start with a highlight on the second quarter on slide three. When we are talking about the second quarter 2018, the emphasis is that the market conditions remain supportive, and that is very important.
On the back of higher volumes from Bethune, increasing product prices, and solid salt demand, our revenues and EBITDA rose compared to last year. Net profit is down, reflecting the Bethune-related depreciation and interest charges, which are now running through our P&L. EBITDA could have been even better, but topics to be discussed later also had a negative impact on profitability in Q2. However, we were able to increase our key financial figures compared to Q2 '17. Our adjusted free cash flow improved, and our financial leverage was down as a result of our very disciplined cash and cost management. For 2018, we now expect CapEx to be below EUR 600 million, and we are making good progress to deliver on our targets to becoming free cash flow positive in 2019. Now let's get started with our outlook on 2018 on slide four.
The already pre-released EBITDA range has not met market expectations. What happened? Some challenges are holding us back somewhat longer than expected. After discussing and assessing all findings over the course of last week, we came to the conclusion that we need to adjust our internal forecast for the year. While our former wording on the outlook for 2018, expecting that full year EBITDA should be up significantly, is still true, we also have to accept that the now guided range with an EBITDA midpoint of EUR 700 million is clearly below latest consensus. What are the findings we need to talk about? Please turn to slide five. First of all, let us talk about our new Bethune mine, which has come a long way, and I want to emphasize we are making very good progress.
From now on, we have to get this mine to a stable production and continuous improvement of quality. We are going to increase production capacity and commencing secondary mining very soon. However, Bethune is still in the ramp-up mode. What does that mean? Please turn to slide six. While K2O content is excellent, and that is very important, and our Canadian team is doing a great job, we still have to be aware that we are ramping up the first greenfield mine in Saskatchewan in 40 years. This also includes a learning process on production, processing, and shipping. Product quality and availability is the most important task for us to ensure that we satisfy our customers. The hardness of our granulated product was a challenge until Q2. However, it is now fixed. Regarding the caking, we know precisely what to do and are already making progress.
We expect top quality by the end of 2019 at the latest. However, there will be an impact on this year's Canadian production. When you are modeling our forecast, it might be helpful to indicate that we now expect our full year production in the range of 1.4 million-1.5 million tons, granular and standard. Already in 2019, we intend to start secondary mining with a volume of 100,000-200,000 tons, making us confident to reach a total production of about 1.7 million-1.9 million tons. Nevertheless, we confirm our former given targets to achieve a positive EBITDA contribution in 2018 already and to reach EBIT breakeven in 2019. Bethune remains an excellent investment. However, Germany remains challenging and some issues take longer to be resolved. Please turn to slide seven. Where do we stand at our German potash sites?
Shortage of staff, high illness rates, and a lack of motivation are still issues at the Werra which need to be managed. After changing the management team, vacancies have been partly filled and illness rate has already been halved. We are now in the process to qualify the new colleagues and to fill the remaining open headcounts till the end of 2018. This also includes moving experienced colleagues from Siegmundshall to our Werra site. Furthermore, machinery and equipment required extensive maintenance breaks, which led to downtimes in production. We have changed our maintenance schedules and started to replace outdated machinery. We expect 50% to be fixed by the end of this year, and the remainder by the end of 2019. The Werra site in Unterbreizbach is currently suffering from extraordinary low nutrient content as a result of crossing a field with lower quality.
This will be resolved by the end of 2019. Finally, our site in Neuhof has lost about 50,000 tons of production in the second quarter on the back of lower roof stability. We have implemented additional safety measures and expect production to start to improve in the third quarter of 2018. However, overall nutrient content in Germany is not improving. Please turn to slide eight. In Germany, we are operating mature potash mines and the overall K2O content is diminishing. Compared to 2017, the annualized impact in 2018 will be about 100,000 tons. However, this trend is not coming as a complete surprise, and we have talked about this several times. Together with our consultant, McKinsey, which is very experienced in this field, we are currently evaluating countermeasures.
This program, called Operational Excellence, has started with a site-by-site investigation, today we have already identified many opportunities to increase the efficiency across all sites. Current schedule implies an implementation starting in 2019, which should stabilize our current production in Germany on the back of a significantly increased efficiency, showing a compensation of the effect as of 2020. Further details will be released on our Capital Markets Day in September. To give you some more insight in our production, please turn to slide nine. In the past, when we talked about volumes, we were talking about the product sold to customers. Today, we want to give you a better feeling for our production base. In 2018, we expect a German production of about 6.4 million-6.5 million tons. Bethune is likely to add about 1.4 million-1.5 million tons of granular and standard products.
Next year, after the closure of Siegmundshall, with an annual production of about 600,000 tons, we schedule a German production of about 6.1 million-6.2 million tons. This number includes an improvement on the back of the above-discussed measures of about 300,000 tons to the German production. Bethune should add 1.7 million-1.9 million tons, including about 100,000-200,000 tons of low-cost secondary mining and supporting our target to reach break even on an EBIT level. All in all, our Operational Excellence program is in favor of compensating the declining nutrient content in Germany after 2020. Let's turn to slide 10 and the closure of Siegmundshall. Already at the end of last year, we provisioned the closure of Siegmundshall in the magnitude of EUR 40 million. However, since we have finalized the redundancy program and dismissals were announced, our productivity in Siegmundshall is far from normal business.
We therefore expect in 2018 a negative EBITDA contribution of Siegmundshall in the magnitude of EUR 20 million. Some of you seem to wonder about the expectations of our average selling price in the Potash and Magnesium Products for 2018. Please turn to slide 11. For our Potash and Magnesium Products, we expect this year's average selling price to be up slightly over 2017. While we agree on market expectations on the overall potash price development, we also have to take into consideration that our product and regional mix is reflecting the production start of Bethune. Compared to our specialties, MOP is lower priced and an increasing part of business with customers in China and Southeast Asia is also having an impact on our reported ASP. Finally, the weather is also having an impact on our current earnings. Please turn to slide 12.
This year's record summer in Germany is stretching our logistics, mainly at the Werra site. The good news is that so far, we have not been faced with any standstills related to the weather level, at the water level of the Werra. The KCF is fully up and running and reducing the salty wastewater by 20%. Furthermore, our additional measures we implemented last year are also quite supportive. The entire team is doing a great job. On the other hand, inland shipping capacities are short and freight rates are increasing. All in all, the extreme weather situation is causing additional logistics costs, which we expect to impact this year's profitability by about EUR 20 million. Finally, it is still too early to get a feeling for the impact on farmers' yield and the implications for our business. What is our appraisal of the current situation? Please turn to slide 13.
First of all, we are pretty sure that the problems now have been discovered and addressed. However, we have to admit that our challenges are holding us back somewhat longer than previously expected. Nevertheless, the entire management team has started working on the list, and the bottom-up findings of our Shaping 2030 program on efficiency and cost effects will be supportive in reaching our targets. What are the moving parts of our EBITDA guidance for 2018? Please turn to slide 14. This year's EBITDA will be burdened by the topics we have just discussed. However, it will also be supported by higher potash volumes and prices. Profits from Bethune are increasing, and EBITDA is scheduled to be positive in 2018. However, currencies, higher logistics costs, and the discussed production issues remain challenging.
As said earlier, in 2018, we do expect some costs related to our new Shaping 2030 strategy, which should turn into net savings already next year. For the full year 2018, we expect group EBITDA to significantly improve over last year's achievements in a range of EUR 660 million-EUR 740 million. Please note that this implies no outage days in 2018. As already mentioned, the adjusted free cash flow showed a strong development and should improve significantly year-over-year. Ladies and gentlemen, there are many balls in the air. Bethune is the first greenfield potash mine for 40 years, and the Sigmundshall closure, a mine that ran more than 100 years, is also weighing on the organization. Furthermore, the Shaping 2030 related reorganization is demanding and requesting the utmost of all our colleagues.
Please note that this is the first time ever that K+S is facing with such an intense cost-cutting and an efficiency program. Shaping 2030 will transform K+S into a new company, and rest assured that the target of becoming free cash flow positive in 2019 has the highest priority for the entire organization. As we will start road showing in Frankfurt and London tonight, there will be plenty of additional opportunities to intensify the discussion. Thank you for now. Operator, please open the line for the first question.
Thank you. Ladies and gentlemen, 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. You will be advised when to ask your question. Please stand by whilst we prepare the first question. The first question comes from the line of Markus Mayer calling from Baader Helvea. Please go ahead.
Good morning, gentlemen. I have three questions. I will ask it one by one. Kenneth, firstly, can you remind us what would be potential costs per outage day if now the drought or the summer remains as it is right now in Germany? That's my first question.
Thank you for the question. First of all, I would like to, again, mention that we have really improved the situation. If we would have had that summer two years ago, we would have had significant outage days already. We have really seen significant progress. In the past, we have given you a number of roughly EUR 1 million a day, but it would be slightly higher as the prices are higher than we had in 2016, for example, when we had this significant amount of outage days. The rough number, slightly more than EUR 1 million, is a good rule of thumb.
Okay. The second question on this is on this lower nutrient content at your German mines. With this new fact in mind, could you give us a new kind of cash breakeven point for your German mines?
First of all, that is not a new fact. I think we have talked several times about the situation that we have a set of old mines with a perfect deposit because we make all our specialties out of this and we have high margins with our products. That on the other hand, if we lose some production, that has a significant impact because in addition to that, we have high fixed costs. It's not really new, we also talked about the fact that year by year, the distance from the shaft to the face is getting longer and longer. It's something that one should have assumed in a way.
Okay.
The cash cost per ton is, of course, affected by that as well, but I cannot give you a precise number. Again, 100,000 tons in a year, based on a volume of 6.5 million tons, doesn't have such a significant effect. Most importantly is we see the opportunity with our Operational Excellence project, with a lot of measures, to stop this development from 2020 on. The production number that we give you for next year should be a base which is good for at least the next couple of years.
The third question is, with these quality issues in Bethune, but also in Germany, could you quantify the EBITDA impact so far, what do you expect for the full year, and how long do you also expect to remain this into 2019?
First of all, the quality issues are only a Canadian topic. We have no quality issues in Germany. Top quality that we produce. The only issue is that we are not producing currently the amount that we have expected at the beginning of the year. Talking about the quality in Bethune, we have taken a very important first step. We have developed a binder which gives our granular product the hardness which is expected by the customer. Tick in the box that is done. We are improving the caking situation month by month. I said the final step will be done at the end of next year with this cooling facility. This is already taken into account with the numbers that we have given you.
This year, 1.4 million to 1.5 million, and next year 1.7 million tons to 1.9 million tons, is reflecting the development of these quality issues. In Germany, the situation that we have described at the Werra and in Neuhof, it's also totally reflected in the numbers that we have given you for the production. In 2019, we will have solved the last of these mentioned issues.
I have a question on this. We should expect after 2019 that the ramp-up of Bethune is running as expected. Is this a fair assumption?
That is a fair assumption because
Okay
only that, what I described, is hindering us from being on the expected ramp-up the curve. Once we have overcome the situation, that is improving month by month and will be completely done by the end of next year, we are back on the ramp-up phase.
Perfect. Thank you very much.
You're welcome.
The next question comes from the line of Christian Faitz calling from Kepler. Please go ahead.
Yes, good morning, sirs. A couple of detailed questions.
Mr. Faitz?
Yes.
The line is not very good.
Okay
Speak up a little bit?
Do you hear me now?
A bit better, yeah.
Okay.
Better. Thank you.
A couple of questions, please. Can you please elucidate the roof stability issues you have faced in Neuhof, and what are your geologists saying about any future potential problems?
Can we do one by one, please?
Okay, sure.
Yeah?
Yes.
Thank you. We ran into geology. We knew that this would be a problem, but we did not expect that we would lose so much volume. The second quarter was affected with 50,000 tons. We now have adjusted our blasting and saving technology to diminish this effect. We are expecting to be back on normal production in Neuhof in the fourth quarter. So far, our geological forecasts are not showing any further areas like that. Again, of course, we are not foreseeing the whole area which is in front of us.
Okay.
Again, we have found solutions with adjusting the normal way of drilling and blasting and saving to come back to normal in Q4, starting in Q3 already.
Okay. Then a second question, there will be a third one. You mentioned the lack of motivation on slide seven that is plaguing your workforce at the Werra sites.
What have you done to resolve these issues other than moving workforce from Siegmundshall down to the Werra sites? Thank you.
Yeah. First of all, we have not moved people from Siegmundshall to the Werra yet, because we will produce until the end of this year. We are very happy that we could convince more than 100 colleagues to move in January from Siegmundshall to several other German mines. That will finally solve our open issue situation, and most importantly, they are qualified. There are not so many miners available in Germany anymore, but that will help a lot. We had a big motivation program. The first and most important step, I believe, is that they understand and believe that this site has a bright future. That maybe you remember the demonstration against the behavior of our authorities, which did not hand over our environmental approval in 2016. That was a very big event. They really asked themselves, do we have a future in this site?
I think we have done a lot of events, town halls, Q&As, to get this confidence back. A good indicator is always the illness rates. We know that it is a mix of different effects, and motivation is one effect which impacts the illness rate. We have halved this rate, and we have seen even further improvement in July. I am very confident that this will be history from next year on, definitely.
Okay. A last question, continuing with motivation. McKinsey. Why do you have to bring in McKinsey? Are there any steps in Operational Excellence in mining where they are any better versus your own in-house mining knowhow? I'm fully aware that consultants are often used as an excuse, but why not optimize the mature mines yourself?
Yeah, that is a very good and valid question. But it is not only the knowledge, it is the process as well. If you really want to undertake what we are doing now, we question everything we are doing, every single step we are doing in operation, and that we are doing on all our mines. We need to have somebody who is managing this. Also, we are not always talking about the big measures which deliver hundreds of millions. Sometimes it is small ideas, and somebody who has advised almost all mining companies worldwide brings a lot of good ideas and best practices into the company. Not only in identifying it, but in changing the processes, changing the steps in production and in mining. That is a big program ahead of us.
I think without experienced advisors, that would have been by far more difficult, maybe impossible, to do such a big move that we are doing currently.
Okay, thank you.
You're welcome.
The next question comes from the line of Thomas Swoboda, calling from Societe Generale. Please go ahead.
Yes, good morning, gentlemen. I have a couple as well. Starting with the potash unit costs. In Q1 you hit EUR 190 per ton, I think. Your target was below EUR 200 for 2018. I perfectly understand you have given that up for this year, given the unexpected headwinds. My question is: Is this target given up for the longer term, or is there any chance you can achieve this unit cost again? How about specifically in 2019, please?
Thomas, it's Koch here. Without giving now a 2019 and beyond guidance, I think the target for the cost per ton is especially given up for this year, for 2018, because we have lower volumes, we have extra costs in order to resolve that. Some of that will spill over into 2019. For the longer term, we certainly haven't given up our target of cost per ton going below EUR 200.
Right. Perfect. Just for the record, 2019, you probably will still be above?
Again, we don't want to guide on 2019 now. Let's first see the year 2018, then what will spill over into 2019 or not.
Right. A little bit more specifically on Sigmundshall. From previous discussions, I remember that you were commenting that Sigmundshall is rather break even or slightly negative EBITDA. We have this EUR 20 million of costs for obvious reasons, and we will lose the volumes from Sigmundshall from 2019 onward, if I remember correctly. How should we read the impact from Sigmundshall beyond 2018? Will you lose some EBITDA now, or how should we see that?
Yeah. First of all, we have already taken the decision to close Sigmundshall earlier as originally planned. Originally, we thought we would run that mine until 2020. We have seen a negative development due to the fact that we are the deepest operating mine worldwide, and efficiency went down quicker as assumed. We have taken the decision last year to have the last shift on the 31st of December. We have indicated, if I remember correctly, already in our Q1 call, that we are running into a situation that there is a slight negative impact on profitability and cash flow level. Once the mine is closed. We expect EUR 20 million EBITDA negative. Once the mine is closed, it is done because we have provisioned everything that we have to do after 2018, that is mostly closing the mine, flooding the mine, et cetera.
There is no running operational impact anymore from 2019 on.
Right. Perfect. Last question, I promise. Coming back to McKinsey. I can understand your motivation getting a consultant. If I look at your others line, it looks like you are having quite significant costs there as well. It is not just that we see the disappointment in potash, but the others line is more negative than we expected it to be. How big will be this burden from getting consultants in the company again? Should we be going for EUR 70 million negative for 2018 and perpetual, or is a run rate of EUR 50 million something you would like to go back to?
Yeah. First of all, I think I need to put that into perspective. That is not a reaction on the current situation. Part of our new strategy, Shaping 2030, is our synergy program. We have promised you to save more than EUR 150 million by the end of 2020. We have identified five different areas. One is SG&A. We are quite advanced here. Another one, and the biggest one, is Operational Excellence. We have started that early this year already. We have some others we want to deliberate on the Capital Markets Day. We are quite advanced here, and we have engaged an advisor for SG&A, and we are happy that we've done that. We have engaged an advisor for Operational Excellence as well. We are not talking the numbers you just mentioned. We are talking about, I think it's roughly EUR 10 million this year.
We will have a negative impact of cost this year, but we will have a positive impact of savings already next year. Again, that is not a reaction; that is part of our strategy.
Perfect.
Transition phase. Yeah.
Thank you very much. Understood.
You're welcome.
The next question comes from the line of Thomas Wrigglesworth calling from Citi. Please go ahead.
Good morning. First question. If I look at the second half run rate for Bethune versus the guidance of 1.7 million-1.9 million tons for 2019, based on my rough calculations, the run rate of the second half of Bethune to achieve the guidance for 2018 would actually have to be above the guidance for 2019. Is there some kind of maintenance schedule that is put in place for 2019, or is it just conservatism as to why the 2019 number looks so low relative to a reasonable estimate of the run rate from the exit of 2018?
I'm not 100% sure if I got your question, but we indicated for this year 1.4 million-1.5 million tons. We will add a number between 300,000-400,000 tons for next year in Bethune, taking into account that we still have not fully solved our caking issues. We will have by the end of next year. That has an impact, not in the possibility to produce, but in the supply chain. Taking means a delay in unloading, and that means that we cannot fully produce the volumes that we could produce. We will have overcome the situation by the end of 2019, that's why we are going back to the original ramp-up curve by 2020.
Okay. You're currently building significant inventories of unprocessed-
No, we're not building significant inventory. That is a small but very effective and clever additions to our mine. A grinder pump is something which reduces the volume of the crystals, and that is a very small additional facility. The cooling facility is the same. We're talking about small but clever additions.
If I double what your first half production is, that leaves me around 600,000 tons below the low end of your 2018 guidance. Of which you say 100,000 of that 600,000 is Huludao. 500,000 incremental tons look like they have to come from Bethune in the second half. If I assume that Bethune did, again, which would kind of imply that if Bethune's run rate currently was 500,000 tons, I get 1.5 million tons for 2018, right, as per your guidance. That would imply that the annualized run rate for 2019 is around 2 million tons, which is below the 2019 production rate. That's my rough maths.
It just looks like you're quite conservative on your 1.7 to 1.9, given that you're implying the second half of 2018 will be at around 2 million tons. Hence my question.
Yeah. I think a little bit of conservatism is advised in the current situation. Again, we are still in a ramp-up, and we might have the one or the other maintenance stop. The grinder pump and the cooling facility, they are not big facilities. We are not talking about big CapEx. We need to install them, and that has an effect as well.
Okay. Second question, if I may. Could you provide a little bit more detail around the improvements you are expecting in Germany that add the 300,000 tons in 2019? Thank you.
Yeah, that is the whole bunch of measures that I have mentioned. We will not have the impact in Neuhof, for example, that we have seen in the second quarter. We are talking about 50,000 tons here. We have lost in the Werra 100,000 tons in the first quarter, the same amount in the second quarter, and we are not expecting that to get down to zero impact in Q3 and Q4. Roughly, we lose 400,000, 450,000 tons this year. By solving our HR issues, I am 100% sure that this will be solved by the end of this year. Solving good part of our machinery issues at the Werra, and also having the K2O content not with the same impact in 2018 and having solved Neuhof, we are very confident to have 300,000 additional tons available compared to 2017.
Okay. Very clear. Thank you.
Thank you.
The next question comes from the line of Jatin Dadhania calling from JP Morgan. Please go ahead.
Yeah. Hi. Thanks for letting me ask a few questions. Maybe first, just a clarification. Can you give us what was the actual production from Bethune in first half this year? The second question related to that is, if I take your full year guidance, it still implies second half EBITDA to be up slightly versus first half. When I go back and look for the past, usually the second half EBITDA is down more than 20% versus first half. What is going to drive such a better seasonality for you in second half of this year versus first half, when historically it's been more of a reduction?
Yeah. Let's start with the first question. We have produced slightly more than 700,000 tons in the first half of this year in Bethune, both products, standard and granular. More important, we have shipped this to our customers, and now we have reached a quality which is fine for them. Again, we have to improve the situation to have a perfect supply chain up and running. Continue.
Yeah. With regard to what do we expect for the remainder of the year?
What you need to see is that Burkhard talked in the beginning, for example, about increasing MOP prices. This is not only MOP, this is also the specialty prices which are going up. The realization of these prices comes always in with a time lag. This is what we will see in our accounts more in the second half of the year than in the first half, especially more than in the second half of last year. When you look back into the last winter, we have seen a decent winter in most of our de-icing regions. We also expect higher volumes year-over-year and also better pricing in our salt business. This is, from my point of view, the most of these drivers.
Can I follow up one question on just the quality issue that you mentioned on Bethune? Given the quality issue, how are you selling it to your customers? In the sense, is there some sort of a price mechanism to sell the volumes, or are you doing something to improve the quality before you ship for customers to accept it at the market pricing? Maybe just the second question is, to some extent, it seems that there is some sort of execution issues here, because there is sometimes in the German mine, sometimes there is quality issues. Is there something you guys are doing about in terms of just maybe improving the operational execution within the company at different levels? Thank you.
Let's start with the second question. The Operational Excellence program, and we will give you a flavor of what we are doing, that the real big one comes to the perfect moment. Again, that was triggered by Shaping, but it is timeline perfect. We really make an efficiency program of all our sites to get a hand on these issues that we are reporting here. The first question. We are selling our Bethune volumes on market prices. Now as we have the perfect hardness of the granular product, we sell both products, granular and standard, on the current market price. From time to time, we recover some extraordinary handling costs, which might occur with the caking situation, but that's all.
Thank you.
Does that answer your question? Okay.
Perfect.
The next question comes from the line of Charlie Webb, calling from Morgan Stanley. Please go ahead.
Morning, gentlemen. Just a couple from me. First off, just on the volumes, you've guided to production volumes being fairly stable, I guess, 2018 and 2019. Sales volumes obviously below that for this year, guiding, I think, 7.4 million-7.8 million tons. How should we think about sales volumes in 2019? Do you still need to replenish your inventories and therefore something similar in terms of a proportion of sales volumes versus production volumes? That would be helpful. Maybe start there.
Thank you for that question. First of all, when we talk about the production volumes, you are right, we are more or less in 2019 on the same level that we are in 2018, it has another quality. We reduced the volumes from Sigmundshall, 600,000 tons. We indicated that we are losing money currently with that production. We increased the volumes from Bethune. Importantly, there is already some volumes from the secondary mining that we will incorporate this year with very nice low-cost production. Due to the current situation, we have to increase our inventory situation in the company. That is why we are expecting lower sales volume than production volumes in 2018. That is not market-driven. We know that the markets are bullish currently. Next year, the sales volume should be on the level of the production volume.
Okay, understood. Then just on SOP volumes, given the nutrient issues you guys are flagging around the nutrient content in the German mines, can you remind us what the SOP volumes were, or SOP and specialty volumes were in 2017? Now your expectations for 2018 and moving forward, given the lower nutrient content you are getting out of mines.
In 2017, our SOP volumes were about 700,000 tons. Also keeping in mind that we had in the first quarter, what was it? 20 outage dates? 25 outage dates, which also affected mainly Hattorf, which is mainly producing SOP. The nutrient content, this is why we are talking about nutrient, is not only affecting KCL, it is also affecting kieserite, and kieserite is what we need for the production of SOP. It will also slightly impact our SOP volumes. Of course, this also has a value effect because the price of SOP is, of course, significantly higher than that of MOP. We do not have a split right now of the 100,000 in MOP and in SOP.
Would it be fair to suggest that SOP volumes will be down year-on-year? Even adjusting for that 25 outage days or something similar?
To be cautious, I would say something on the level of 2017.
Okay. Moving forward with that nutrient problem or availability of the nutrients in those German sites, is that a kind of continued degradation process as in that ability to produce more specialty and SOP grades becomes increasingly difficult because of availability? Is that something we should, as a mix effect, continue to expect to see in 2019 and 2020, that kind of negative mix effect? Is it, once we've got through this year, that is the run rate going forward?
It should not have an impact on the mix. It only has an impact on the total volume. If we don't stop that development, and we are going to do that, but then we have to source more rock salt to get the same amount of product out of it and process more rock salt. That is the problem. It's related with higher costs or diminishing productions. We have a lot of ideas how to change things to stop this development. You should not expect that before 2020. It does not really impact our product mix.
Okay, understood. Just lastly, one last question. Can you remind us of Obviously, you've given Bethune production guidance for this year and next. I presume 2020, you'd expect to get to the 2 million tons you kind of originally targeted. Is there a new time frame to peak production? Also, what is peak production for Bethune? Has that changed at all, or is it still somewhere around, I think it was around 3 million tons. Maybe you can just update us with the latest.
Yeah. As I said earlier that we will be back on our original ramp upwards curve by 2020. The whole capacity is still 2.86 million tons, and we will achieve that by 2023 as originally planned.
Thank you very much.
You're welcome.
The next question comes from the line of Patrick Rafaisz calling from UBS. Please go ahead.
Thank you. Good morning, everyone. As the first question, can I please follow up on the last one we just heard, for the potash production bridge? That was a very helpful chart you provided for 2019. Thinking beyond 2019, can you confirm around 2 million tons or 2.1 or so just mentioned before? Can we also add in the lost nutrient content for the 2020 bridge for total potash production? Thanks.
Please don't force me to give you numbers for 2020, 2021, 2022, and 2023. I gave you one number for 2023, 2.86 million tons. As we will have overcome the last quality issue by the end of next year, I think the development from 2020 to 2023 will be quite linear. You can make up your calculation. I didn't get the second part of your question. Sorry for that.
That was just related to the nutrient content, which you specify as minus 0.1 million tons in the-
Yeah
2019 bridge. Should we add the 0.1 to 2020 here as well?
No, no, you should not add. We do not need to reduce the 2020 numbers by another 100,000. That is the target.
Okay. Understood. The second question is on the Operational Excellence countermeasures you talked about. We saw in the 2018 EBITDA forecast bridge the impact from one-offs. Should we model any material costs associated with these additional measures in the 2020 bridge? 2019, sorry.
Give us a chance to talk a little bit more intent and with more material about that on the Capital Markets Day. That is not so far away, it will be at the beginning of September. I think we have already indicated that we will see out of the whole synergy project, the positive net effect in 2019. The savings will be higher than the cost that we have to accept for achieving the savings.
Okay, good. The last question is on salt. Obviously seasonally not an important quarter. Can you give us an update how price negotiations went here so far? Can you quantify the logistics costs you're assuming for 2018? You did become a bit more cautious, right? Saying that EBITDA 2018 will be flat now versus 2017.
We are quite far in the bidding season. In Canada, we are already done. Only at the East Coast we have 50% of our bids done. In all the other areas, we are between 70% and 90%. We have quite a good indication where the price is tending to, and we are seeing a slight decrease at the East Coast, but in all other areas, including Europe, very nice increases of prices. That gives us hope for the next season, which, as you know, will have its biggest impact in the first quarter. With this price base and with the low inventories at our customers, besides here at East Coast, we are quite optimistic. Freight cost is still an issue. They rocketed in the first quarter. We have not seen a calming down of the situation in the second quarter.
We now expect that they stay on that level, and we have started, as we have indicated in the Q1 call, transferring these costs to our customers via higher prices. That is a process which has a significant delay, of course, between occurring of the cost and then agreeing and achieving the higher prices. That's why we see here a significant negative impact on the salt business. That, I believe, is not only a K+S issue. That is true for all our peers as well.
Thank you very much.
Thank you.
The next question comes from the line of Neil Tyler calling from Redburn. Please go ahead.
Yeah, good morning. Two from me, please, both relating to, I suppose, price mix effect. Apologies if I missed this in your earlier answers. With regards to the lower ore grade that you've encountered, could you help me understand or help us understand at what point that became apparent and how you at this point have confidence that that is not going to recur over the remainder of the year or over particularly 2019 and 2020? That's the first question. The second one relates to the
Maybe do one by one.
Okay.
That was not really a question related to our average selling price. Again, I understood that you were asking about the decreasing K2O content in our German mines.
Yes.
This is something that we have, of course, not talked about in every single call because that is an ongoing situation. If this comes together with all the other issues that have been mentioned earlier, then it, of course, has another relevance than in the past. That is something every mine in the world is facing. Where are the shafts? Of course, in the best area of the deposit. The more you move away from the shaft, the probability is high that you come into areas with lower K2O content, and that is the case at K+S as well in Germany. It's completely different in the solution mine. That's why we are not talking about such a situation in Bethune, for example. We have in the past not given you a number, but this time, we said that is a special situation.
We want to be more transparent than normal. That's why we have indicated we are seeing 100,000 tons. At the same time, we have started this Operational Excellence program, and we have not only identified opportunities to save significant costs in operations, but also to work against this development. That's why we believe we can stop that by the end of next year. Does that give you a flavor?
Yes, that does. Thank you. This has been happening in the past, but on this particular occasion, the incidence is just greater.
No, not greater. Together with all the others, it has a higher relevance.
I see. Okay. Thank you. Moving on to Bethune, in that case. I don't know if you'll be able to, but can you help us sort of break out perhaps in a EUR per ton quantity, the price mix effect of the product that you are selling out of Bethune, how that impacted the average selling price in the business?
We have tried to give you an indication for that on slide 11. That shows the change in our regional mix and in our mix between MOP and specialties. The step up, I would say between 2017 and 2018, I'm not able now and here to give you an exact EUR number per ton. Maybe therefore, we should come back to you to IR.
Okay. Thank you.
You're welcome.
The next question comes from the line of Andreas Heine, calling from MainFirst. Please go ahead.
Yes. Thank you for taking my question. I basically would like to ask two. Starting with the first one. Looking on your slide nine, where you give the breakup, what we can expect from the product production in Germany in 2019. I think the Siegmundshall mine, with minus 600,000 tons is all KCL, so not affecting the specialty. That should not change the mix. Looking on the increase in KCF is-
May I answer that directly?
Yep.
Makes it easier for me, thank you very much. No, that is both. That is MOP and specialties. A 50/50 split, roughly.
Coming to the KCF. It was said in former calls that the KCF plant, in the first place, solves the wastewater issue. It does not contribute to the earnings. It is fair to assume that these 100 kilotons from the KCF plant are basically neutral if it comes to the profitability from 2018 to 2019.
That is true. It is not neutral. We said, we have calculated the KCF the way that with the additional volumes we gain, we are able to cover the operational costs. It is a zero game, if you wish. We do good for the environment, and we save costs with having an opportunity to reduce the salty waters by 1.5 million cubic meters. On the other hand, we gain some additional product, and that ends up in a zero game. As we are ramping up the KCF this year, we have not the whole of quantity available that we are expecting in a completely up and running status, which will be the case next year with roughly 200,000 tons. The additional 100,000 tons is the ramp-up of this KCF, if you wish.
With only 100,000 tons this year, we have a slight negative impact, and next year it will be zero.
Understood.
The main achievement, if it comes to the bridge, is taking out the EUR 20 million of Siegmundshall is the improvement by 200 kilotons in the German mine. 100 you lose with lower K2O content, 300 you get with the additional improvement measures you will take from this year to next year. Is that the right reading? Effectively, a little bit from KCF, but other than that, it's 200 kilotons, with a decent profitability, what you should add in next year.
That's the right way to read it.
On top of that, you have potentially 400-500 kilotons more what you have to build up in inventory this year to be able to deliver in the high seasons in Q1 next year.
That is both in Germany and in Canada.
Both. Okay, thanks. The very last one on SOP. Having in mind what you said in Siegmundshall and having the lower K2O content in mind, what will be then the future SOP capacity you have, let's say midterm, so after 2020 when all these measures are in place? I have in mind that your capacity is 800 kilotons. You produced 700 last year, as much probably this year. What will be midterm your SOP capacity?
Yeah. Our target should be coming back to the 800,000 tons.
Okay. Despite Siegmundshall being off.
Siegmundshall-
Siegmundshall, Andreas, produced MOP and kieserite. The kieserite from Siegmundshall was not used for the SOP production. We sold it straight into the kieserite industry.
Thank you. SOP should stay at 800 kilotons then. Thank you very much. These were my questions.
Thank you.
The next question comes from the line of Philip Kuhle calling from DZ Bank. Please go ahead.
Yes. This is Philip Kuhle from DZ Bank. I have three questions, if I may. First one, you don't give a guidance for the cash unit cost bey ond 2018. For 2018, you forecast cash unit cost of EUR 205 to EUR 210 per ton. Midpoint would be EUR 207, which is EUR 7 below the 2017 level of EUR 214. With the increased contribution of Bethune, do the cash unit cost increase faster than we will see in the 2017-2018 period? That's my first one.
Yeah. First of all, the additional volumes from Bethune in 2018 compared to 2017 is higher than 2019 to 2018. There is an additional effect, positive effect with the secondary mining, which is very low cost production. It's difficult to precisely figure out what the impact from Bethune in 2019 is. Of course, we have an idea about that, but please give us the time until we guide the whole set of numbers for 2019. You should expect a positive development.
Okay. The second question is on Neuhof again. You said that you lost 50,000 tons in Q2 due to the roof stability problem. When you expect to resolve this problem in Q4, does that mean that you will lose a similar volume in Q3 as in Q2?
No, it should be less, that is all modeled into the numbers that we have given you for 2018. Q4 should not be affected anymore.
Okay. The last question, it's more a common question. What expectations do you have regarding the contract negotiations with Chinese and Indian potash fertilizer customers?
Yes.
Will K+S play a stronger role in these negotiations as a result of the start-up of Bethune?
Yeah, I think we are still a couple of years away from stronger role of K+S in that game. Maybe when we are fully ramped up in Beth une and again, even with the upper end of the production guidance for Bethune that we gave you, there is another million tons to come until 2023. The core of your question was, what is the outcome? I think it is well known that we are talking about a range of between $40 and $70 per ton. There was a short rumor that Chemtex had already agreed on 40. I did not believe that, and the next day they said that was not true. Obviously, part of this negotiation, that rumor. It is impossible to predict an outcome. It is very probable that it will be in that range, but no idea, will it be closer to 40 or closer to 70.
Okay. Thank you for clarification.
Somebody told me that this was the last question. I would like to thank you all for being on that call. I am aware that the situation is not that easy. I think, we hope that we help the situation with the higher transparency that we have given you. Is there another question still?
There was another one, just disappeared. Maybe two things are still on the line.
Okay. It's not the case. Sorry for that. This gentleman will have the opportunity later on to ask. It was an intense call, and I really enjoyed the question because it helps us to make the situation transparent. You see us here sitting and being still optimistic for the time to come, and we are looking forward to seeing you very soon in Frankfurt and in London. Thank you. Bye-bye.
Thank you. That will conclude today's conference. Thank you for your participation, and have a pleasant day.