Earnings Call: Q1 2018

May 14, 2018

Ladies and gentlemen, welcome to our Q1 conference call. And with me here, as usual, we have, our CFO, Jurgenhausen, our Head of Corporate Finance And Accounting, and Luke Graton, our Head of Investor Relations, And after a brief presentation, and this will be quite brief. This time, we'll be happy to take your questions. And let me start with the highlights of the first quarter on Slide 3. And most important message on that slide is that sales and EBITDA are up over by 4% on the back of high production availability mainly from Bethune, higher de icing volumes, the absence of weather related stem cells at the Werra plant and of course, further increasing MOP market prices. On the other hand, the late start into the European fertilizer season and the weaker US dollar had a negative impact on sales. From an earnings perspective, we made good progress as well. Our EBITDA increased from 1,000,000 to $237,000,000. This was mainly due to better earnings contributions from our new mine in Canada, However, we are still facing some challenges at our Varra plant. After the turbulent times in 2016, and beginning of 2017. Despite the fact that our Varra production is up year on year, we are still operating below the technical capacity with a negative effect on our profitability. On top, freight costs increased significantly. However, in spite of the described headwinds, we have seen solid results. Our adjusted free cash flow improved and our financial leverage was further reduced. We remain optimistic for the upcoming quarters and we confirm our outlook. And now let's have a look at our potash business on Slide 4. From a market perspective, global demand is healthy however, after a late start into the European season on the back of a coal and money march. We lost some volumes in Q1 and may not recover that in Q2. Overall, market prices for MLP and potash specialties increased further Nevertheless, compared to Q1 2017, our average selling price was burdened by FX effects, and a shift in our product mix. All in all, as you can see in the table below, our EBITDA margin rose remarkably compared to the former quarters. And furthermore, our cash unit costs came down significantly, mainly due to Bethune. That means we are making very good progress to reach a level of below EUR 200 per ton on a full year basis. Let's move on to Slide 5 to talk about thoughts. On this slide, I would like to focus on 3 things: First of all, we had a good winter in the U. S, which was quite supportive for volume in our de icing business. However, These volumes were mainly generated in regions with low prices. Nevertheless, tight inventories could be supportive within the upcoming tenders for the next winter season. Secondly, the average selling price in non de icing softens versus last year on the back of unfavorable FX rates and a higher share of lower priced industrial salt products. Which, however, has nice profit contribution. And finally, and in line with our competitors we are facing increasing freight costs, mainly in the U. S. All in all, Q1 2018 was okay, but not perfect. And now let's talk about our view on the full year 2018. We find this on Slide 6. The most important message on that slide is that we confirm our full year guidance. We expect our EBITDA to be up significantly on last year's achievements. Earnings momentum will be back end loaded. In addition, gears the adjusted free cash flow should improve further and we are making good progress to deliver on our target to becoming free cash flow positive in 2019. This makes me very optimistic about the future of KFS And with our shaping 2030 strategy, we paved the way to further growth. Let's move to Slide 7. And an update on our new strategy. 2020 has started. Moreover, after having presented a basic concept of our new organization internally, we are now working on a detailed concept. We will be happy to offer you more details on our Capital Markets Day. We should have already received our invitation at the end of last week. Again, we know Bethune is not around the corner. However, we would be happy to host you for 24 hours at our Capital Markets Day on September 5th, Please note that we would need to see your feedback by no later than endofJune. Now I thank you for your attention. And as always, we are happy to take your questions. Thank you. Session. You. Question. Operator, we can't hear anything. The first question is from the line of Markus Mayer. Marcus, please go ahead. Yes, good morning, gentlemen. Two questions on the salt business. Only small ones. The first one is on the D and A of salt, which was 19 versus, over the last quarter, 26 or 30. Is this a new run rate or was any kind of one off effect in the DNA, number here, and the second one is on the industrial salt prices. But you're down, maybe you can explain this effect a little bit more. Thank you. And yeah, the about $20,000,000 per quarter on D and A for sold is what I would consider as a run rate for this year. Okay. Sorry, I didn't get this. That's your salt prices. Here, we always had an impact from the product mix. I think we have stretched, couple of times that we have a very nice new application copper leaching with a nice margin but with a low total price That is only one of many examples. And here we have the main impact of the product mix in the industrial prices as well. And what we have seen in the de icing business was also true for the industrial segment and the consumers, the freight costs. Had a negative impact in the first quarter, besides, of course, the mainly U. S.-based business, our FX rate had a negative impact due to the weaker to a dollar. And these three reasons in total, were the that is the reason for the impact that we have seen on the industrial assault in the first quarter. That gives me the opportunity to remind everybody, please ask one question one after the other. So we have the chance to answer properly. And don't have to not risk to miss anything. Thank you, Marcus. The next question is from the line of Oliver Schwarz from Warburg. Please go ahead. Thank you for taking my questions. I have 3 of them. We will go through them once at a time. Firstly, main effect there seems to be in your waterfall chart on slide 6, there seems to be a positive effect on EBITDA from the closure of Sigma Salif. I understand that correctly. Could you highlight or slash that out for me what that positive effect on EBITDA might be and how that came to be? Thank you. Yeah, if we compare the potential, earnings in 2018 to the actuals in 2017, you have to take into account that we had a significant impact from the provisions we had to build together with the decision to closeigmundshall. And that's turned, of course, if you compare 2017 to 2018 to a positive effect. But I would also like to mention that, and that was indicated earlier that the running business in deep motel delivers the negative impact on earnings and on cash flow slightly, but still negative. And again, that is the reason why we have taken the decision closed by the end of this year. May I have a follow-up on that? Would that be a positive sorry, a negative effect on 2017 EBITDA or on the EBIT level, if you're talking about a negative contribution by segmental in 2017. Both levels. Okay. Thank you. Next question would be on the your assumptions regarding the potash price in 2018. If you're talking about a slight increase that you assume for the potash price. Is that the headline price or is that like in U. S. Dollars in the world market like in Brazil or so? Or is that the compound price of K plus S that you expect to realize in 2018 in euro? Yes. First of all, I would very briefly elaborate on what we are seeing in the market and that is a nice development. Prices are increasing steadily. We have seen that for quite a while. And there is no reason. And, I think more and more market participants are seeing it this way to believe that this could come through an end. The next important indicator, of course, are the contracts in China and India. They will show an increase for sure of what magnitude we do not know now. What does it mean for us? You have mentioned all the impact First of all product mix with Bethune, we produce MLP, which has an impact on our average blended selling price. We also have more, volumes in the U. S. Dollar region. So FX has an impact, but when we are talking about slight increase of our average selling price, we mean our blended price overall in euros. Very clear. Thank you. And my last question would be on your free cash flow assumption for 2018 where you say it's will there will be a significant improvement, but it will be still negative At the financial year 2017 reporting stage, we saw that there was still slightly negative. So it seems that you might be expecting a more negative free cash flow than originally anticipated, would that be a fair takeaway? No, first of all, I think we have made over a year significant improvements, minus 1,000,000 in 2016. Minus EUR 350,000,000 in 2017, and it will be a significant improvement again in 2018. And I've just confirmed with my speech that we see a positive free cash flow in 2019. However, I have also indicated that we have seen some headwinds in the first quarter, like FX like the regional mix of our de icing business, freight costs is a real issue, especially for the salt business. We have seen the late spring season, in the potash business, and we do not expect to recover all of that. In the second quarter. And we still have some issues at the Werra. So, we have lost some cash flow potential in the first quarter, and that is the reason why we have taken this, slight adjustment in our guidance. Concerning the free cash flow. Thank you, Oliver. The next question is from the line of Neil Tyler from Redburn. Please go ahead. Good morning. 2 from me. The first one, sticking with the cash flow, the can you talk about the CapEx run rate for this year, the first quarter spend, both in terms of number you disclosed on the front of the release and also the cash flow was below the run rate I had been anticipating. Wonder if you could, you could sort of expand on that. And I just know if there's been any changes to your CapEx outlook for this year. That's the first one, please. Hi, Neil. No, it's, you know, when you look at the phasing throughout the quarters over the last couple of years, this was always a little bit distorted by the And now that they have gone at least from a project point of view and so we go to maintenance CapEx there, you see a different phasing, which means we see a ramp up of the CapEx later in the year in H2. And Q1 is not a good run rate. We expect still a CapEx of about CHF 600,000,000 for 2018. Thank you very much. And second question is on the realized potash price that you achieved in the European business. And the sequential and year on year step up surprised me at least slightly. You mentioned in your introductory comments, the MO contribution was a factor. Is there anything else within there that seasonally is making a difference? Or can we we perhaps take the Q1 relative realized prices as a good guide for how the product mix is likely to remain over the rest of the year? Yes, I mean, we have also seen in Europe, the increase in the MOP prices. And you know that we always have a time lag before we see those really materializing in our P and L, but part of this was a part in Q1 already. Also, when we look at the specialties, they have not even been better than we expected, but even increased a little bit. Over the last couple of weeks. And so what Bhakar said earlier, from a market point of view, we have pretty good, pretty good support also in Europe. Okay. Thank you very much. Thank you, Neil. The next question is from the line of Patrick calling from UBS. Please go ahead. Hi, good morning. 3 questions, please. The first is on the production issues. Still have it in Germany from what I understand are labor shortage and machinery uptime and issues. Can you Can you put the number on that? How much you think your you've lost here in terms of volumes versus what you could have produced here and how long this will continue. Okay. Yes. Give me the opportunity very briefly to elaborate what's going to happen there, what's going on there. And you really have to take and try to imagine there's a size 4500 people are working there at the end of 2015, we did not know whether we get in a deep well injection permit or not. If not at all, that would have could have meant closing the sites and they've feared for their jobs. And we brought in the depot injection permits, which was limited to 750,000 cubic meters. So we had to start with an on and off and the vera size at the in hot top is definitely. We had short work. We did not now, will the situation change Now we have settled all environmental issues. We are very proud on having that solved, but that, of course, still has an effect on our employees. The motivation is not the way it should be, we have open positions. We have, in the maintenance area, open positions, which lead to, availability of material and machinery, which is below our expectation. And of course, this all had a significant earnings effect and we have cut budgeted budgets like the maintenance budget, Now we see that this, of course, had a negative effect as well. In a nutshell, we have elaborated on that in the March call. And we are fully aware what to do and how to solve the problems, but that is not to be solved in the quarter. And we have lost against our expectations or against the potential of that site more than 100,000 tons in the first quarter of this year. This will not disappear again totally in Q2, but We hope that we will be able to solve it over the remainder of the year. Okay. That's very clear. And then secondly, on Bethune, can you talk a bit I realize you won't be disclosing production for Bethune separately, but can you talk a bit about where you see yourself versus plan for the full year? Yes, we are very happy with the development of our sites in Bethune is we are still in ramp up and ramp up means you cannot fully produce the theoretical capacity day by day because you find reasons you have to adjust to one or the other thing, not only we are in the ramp up or partners are in ramp up as well, like CP is an important partner for us is a logistic chain that they have to get used to handle these volumes, these additional volumes But we are, again, taking all that into account compared to our expectations, we are very happy with the current status And we have indicated that we would see a positive EBITDA contribution breakeven in the course of here from the Bethune side in the first quarter makes us very hopeful that we will be able to achieve that. Okay. Thanks. And then the last question will be on cash flow. Nice contribution from inventory reduction. I post that's also related to Bethune, the increase here, year on year, despite the late start to the season in Europe. And but can you talk a bit about the change in current provisions? What exactly is the delta here to prior year? Patrick, this is rather related to last year because the, the one off payment we had to the employees was as a provision there and this is no longer the case this year. And this is the movement we see in the, in the working capital. That was 27,000,000. Is that correct? This was 30,000,000 ish, yes. Thank you, Patrick. The next question is from the line of Andreas calling from MainFirst. Yes, good morning. I have also three questions. I asked him also one by one. The first is in the waterfall chart you have presented for the EBITDA change, in, yeah, in the first quarter, the FX impact of 11,000,000 is exclusively sold as you have good handsets in the potash business? Yes, this is I would say to the largest end itself because on an on an earnings level, this is really only marginally coming from Kali. Is that ongoing like this? So is that we that you are very nicely hedged throughout the year in potash so that FX is not an issue? I tried to look into the first two ball right now, but, I mean, We have favorable hedges done over the last couple of years. So if we see an FX impact, it is certainly coming from this whole business and less from potash. Okay. That was the first question. The second, my understanding is that with the increase in the VERA mine production that also the product mix improves more to the specialties. Could you update it a little bit? How you see that progressing? Or was that also held back by the production issues you had at the Vram? Yes, you're right. And I cannot, underpin this with clear numbers, but the Vera is the decent of our specialties. And inside the Vera, we have several mines, as you know, and hotdog is the one which is affected the most. That's the one where we had more than 200 days, 10 still in, in 2016. And hotdog is the one with the SOP production. So the more we solve our issues the more we will be able to produce and sell our high priced specialties. So I only can give you this qualitative indication. No, it's fine. It's already helpful. And then last on 2, and you already indicated that you are still in the ramp up phase where you are not at, let's say, nameplate capacity, yes, but yet, but I would assume that the increase from quarter to quarter is rather, not steep so that you are already at a very high level and that the progress earnings wise, having everything else flat. So the mix by regions and the positive price should be rather slow. So it's not that you have a tremendous increase from Q1 to Q4. You are already in a good level in Q1, which gradually improves, is that the right way to look at it? Yes. The fact that you already see a significant positive impact on our average cost per ton, it shows that there was a significant production already in the first quarter. And we are very happy to see that change if you compare the 214 blended over the year 20 17 per tonne. Now we are at 1.90 roughly. That is a nice development and shows it real potential of Bethune. And but but again, we are in the ramp up. Our expectation for Q1 was the lowest But as you said, it's not a significant increase quarter over quarter for the remainder of the year. That were my questions. Thank you. You're welcome. Thank you, Andreas. The next question is from the line of Claude Hinkl from Equinix. Please go ahead. Hey, good morning, gentlemen. I also got 3 questions. I would like to take it a little bit deeper into the potash price side. First question would be, that sequentially comparing Q1 to Q4 last year, the average selling price in overseas is, is down to, from 200 $76,000,000 to $269,000,000. Is that, is my assumption correct? That is because of the tune, because the mix is, could you elaborate a little bit? When you'll sequentially use that, right? Yes. It's Q4 2017. Yes. Yes. I mean, Yeah, that's one portion of it. And, I mean, then you have also always a difference between the quarters in the product mix anyway because of the different seasons So it's partly the soon and it's partly product mix because of demand of doing specialties and commodities product. Okay. Thanks. 2nd question, Could you remind me once again why the realized potash price is below the current spot price we see in Brazil, for example. So that is about $300 per ton. You have prices overseas of, as already mentioned, around So what comes the gap from? Yes. Thanks for that question. I think you will see that with all the players in the potash market that the prices that you see in the FNB and the prices that you as the realized prices are differing because we differ between the gross and the net portion of the price. There's always a significant portion in between and that if you're talking about roughly $300 in, in Brazil, yeah, 270,000,000 dollars, $280,000,000 is a net price for us. Okay. And last question would be on specialization. According to my calculations, sequentially, they are significantly up. Could you give that explanation why is this so positive? Yes, again, it's also a product mix question. And as I said earlier, I took the example of E2P, I think, we have seen a better pricing and SOP than we have expected and it was also up over the last couple of weeks. Thank you, Mr. Henkel. The next question is from the line of Thomas calling from Societe Generale. Please go ahead. Yes. Good morning. I will risk free questions as well. 2 on potash, one on salt. First one on Salt. In terms of the regions you serve with de icing salt, could you just could you just talk about the season end inventories in the most important regions, please? Yes. First of all, it was very important to have a nice winter weather in the Midwest. Course, we haven't seen a lot of winter weather for years in that area. And that's let's course, to high inventories. And unfortunately, to decreasing prices in the historical bidding season that was had a negative impact in the first quarter. But having these a low inventory situation in the Midwest, we can be positive for the expectation of the next bidding season there, which will going to take place in late summer. And will then mostly have a positive impact on the first quarter of 2019, a slight impact in the course of this year as well, but we know that the first quarter delivers higher volumes than the fourth quarter. The other U. S. Reasons are comparable, but not with that magnitude of the East Coast. We have seen a nice winter weather as well, and the inventories are on a below average level. Canada is running well anyway year by year. That is not such an issue that I think you were asking about the U. S. Reasons. Is that correct? If you could comment on Europe as well, that would be helpful. Yeah. Europe, the winter weather was okay. It was below 2017, but the level of winter weather was okay to have quite low, inventories anyway as well. And as you know, the volatility in prices in Europe is not that significant as it is in the U. S. Business. So the precondition for the next seasons are not too bad. Perfect. The second question on potash, you did renegotiate a bigger contract in SOP recently. The question is in terms of the price increase, did we already see the full effect in Q1 in your numbers Or is it will it be still a tailwind sequentially into Q2? No, it's included in the Q1 because the contract, has been concluded by the end of 2017. Perfect. And the last question on your involvement in the contract negotiations in potash. Historically, you haven't been participating now with Bethune. Are you negatively negotiating with, with China and India. And and if I may may ask do you expect to ship significant volumes from Bethune to those contract customers in the second half of the year? I think we have to put this in a context. So from a market point of view, we are still a very small supplier to China. And we have we are certainly, thanks to Bethune increasing our share significantly, but we still remain a small player, which means we are not at the negotiation table in the 1st couple of rounds of course, we negotiate also with our customers afterwards, but certainly use the price as a guideline. You're welcome. Thank you Thomas. The next question is from the line of Christian calling from Kepler Cheuvreux. Please go ahead. Yes. Good morning, gentlemen. Two questions, if I may. First of all, are your Bethune operations in any way affected by the general rail partners in Canada? Yes, that is a really good question. Because we have married more than one perspective. First is I mentioned earlier that ramp up is not only an issue that we have to deliver. It an issue that our partners also have to deliver. And so that gives you an indication that it was not always perfect in the past. And but we believe that we have overcome the situation and that we are going more and more in the normal logistical approach. And but maybe you've heard about a potential strike that was closed already at the end of April beginning, May. Now we expect to have an election of 1 union or 2 unions about a potential strike, which then could start at the end of May or beginning June, and that of course would have an impact on all Canadian producers. Okay. Thank you very much. And then, second question, we saw a rather steep sequential and year on year increase in interest rate payments in Q1 Can you give us any guidance of interest, of the interest line and your P and L going forward? Yes, Christian, what you saw, especially was that with the start of the Bethune mine, we no longer capitalize the, the interest costs. And this was why the financial results increased significantly. And I think we have always guided and we stick to that the financial results will be a little bit more than minus 100,000,000 this year. Okay, very helpful. Thank you. Thank you, Christian. The next question is from the line of Mark Gabriel calling from Bankhaus Lamp. Please go ahead. Yes, good morning, everybody. Just one question left that is on the salt price negotiations. Especially in the U. S, what are your targets here? We've seen prices year on year down also impacted by the FX, but for the next round, what are your assumptions where we see here a double digit price increase And could it even be up to 20% or is that too far away? Yes, thanks, Mr. Garber for that question. Unfortunately, I cannot confirm 10 or 20 or 30%. I also only can give you an indication or a qualitative indication. I think the area where the prices were depressed the most at the Midwest And here we had the strongest volumes, in total in, in the first quarter. 2018, at least the strongest increase compared to what we have seen in the quarter of 2017. And that is a strong indication for a nice development in terms of new, new salt prices. Will that be double digit, 20% or whatever is easily too early because we have not seen a single single indication so far. There is good reason to believe that we will have at least some tailwinds in the East Coast as well. And as I said earlier, Europe is quite stable anyway, but there is at least no negative pressure on the European prices when it comes to new bids. I hope that at least gives you some indication. Okay. And maybe one follow-up with regards to the CapEx. You mentioned that it's it will be higher that level. But what are other specific things you have in mind for higher CapEx in the next quarters? Or is that mainly now maintenance CapEx? Or should we expect here also some higher cash outflow for, for, investments, I don't know. Yes. No. As a first quarter, it was a little bit a special quarter. There was no more production investment in this in the site that you So we are now more or less in the normal run rate CapEx or maintenance CapEx, etcetera, in Bethune. And at the same time, we have not started our now biggest project, which you see in Germany, our heap extension at all. That is going to start in the second quarter. And we've always indicated at least for the next 2 to 3 years, we will have our base CapEx and additionally roughly 1,000,000 of investment in heap extensions. We have to extend half of this year. We have to do the same thing with, Wintershall next year and 1 year later till it is on the list. That is by chance, but then we are done for many, many years. And that is, the reason why we see a little bit more the higher CapEx in the next Thank you, Mark. The next question is from the line of Michael Schafer calling from Commerce Bank. Please go ahead. Yes, thanks for taking my two questions. The first one would be on soles. You're guiding now for a moderate EBITDA growth. In the full year 'eighteen while delivering 11% decline in the first quarter. So if I just take 5% basically growth for the full year. This implies something a 9% growth in the remaining 3 quarters. I wonder what you have baked into this kind of expectation for What we, Michael, what you certainly, will continue to see is that the freight cost issue from the first quarter, will remain. On the other hand, I mean, we also try to mitigate what we have seen in the first quarter a little bit. We certainly try to pass on parts of the higher freight costs to the market. But we won't see that before the negotiations have finalized for the next season, so as early as Q3 probably. And also, I mean, the freight costs also hit the de icing site. And also, we are working on measures there in order to mitigate the impact So this is a little bit what we what we're going to do. So we talk about pricing and of course also on the cost side, we try to find ways where we can mitigate the impact from the higher freight costs as good as possible. And this is what you will see over the next couple of quarters. Okay. And just belongs to both de icing and non de icing products, I assume. Yes. Okay. 2nd question would be on potash. So just to get a better understanding on your outlook, basically. So we have seen now two quarters in a row with something like 1.90 euros per ton, cash unit costs and you indicated earlier in your speech, basically, that you're fine below 200. So and still guiding also an ASP to be up slightly year over year while delivering something like minus 4% in the first quarter. So is it fair to assume basically that in the upcoming quarters, we may see a widening spread in the sense that basically cash unit costs may remain where they are, where you're benefiting from basically a higher MOP prices in higher SOP prices, industry prices that are rolling in through the quarters. Is this the way we should look at the P and M segment in the quarters to come? Yes, we said we expect the average cost per ton below 1,000,000. We are well below that in the first quarter. There's no reason to, to expect the prices, the cost to rocket. But again, where we have seen, freight costs, significant freight costs increase and especially in the salt business. And we should be cautious for all the cost developments in which could affect the the potash business, of course, the main portion energy gas in the food, for example, is already insured with long lasting delivery contracts. But again, that is a little bit of cautiousness. That's why we will not be more precise and only indicating it will be below EUR 200 per tonne, which is a very nice development. Okay. But it has nothing kind of extra maintenance you have to do, which you already see right now, which is inflating costs basically in the course to come. I mean, No, okay. Thank you very much. Thank you, Michael. This was the last question for today. So I'll now hand back to Doctor. Burkhard Law for the conclusion of the call. Please go ahead. Yeah. Thank you very much, first of all, for your time. And and your questions. Granted we have seen some hiccups, some issues in the first quarter of deliveries. We are working hard to get all this settled. And, but we are still positive for the remainder of the year that we will again increase our profitability significantly against the previous year as we did in 2017 compared to 2016. And I would also remind you, please give us a feedback on your participation on the Capital Markets Day. And in addition, if you would like to get a flavor of our tomorrow's AGM, we would be happy to invite you at least to look into the internet and see us there. Thank you very much. And looking forward to hear you'll see you. We will be on the road pretty soon again pretty soon and all the best to you for the rest of the day.