Ladies and gentlemen, good morning and welcome to our Q2 video conference. We are delighted about the great interest. This is already the second time we hold this event via Microsoft Teams, so we look forward to work with you in this format. I would like to welcome our Chairman of the Executive Board, Dr. Burkhard Lohr. Dr. Lohr will present the highlights of our second quarter 2021 and give an outlook for the current year. I would also like to welcome Thorsten Boeckers, CFO of K+S, who will be available for Q&A together with Burkhard Lohr. Before we start, a few technical notes. This conference is webcasted live and the replay of the webcast will be available on our website afterwards. After the presentation of Dr. Lohr, you will have, of course, the opportunity to ask questions.
Listeners of the webcast will have the opportunity to submit questions in writing, which will be read to the audience and answered at the end of the Microsoft Teams Q&A session. Please note that we will consider which questions have already been answered when treating that written questions. If you would like to ask a question via Microsoft Teams, please use the hand signal and write your name and the name of your research house in the Microsoft Teams chat function. We will then call you individually and you can address your question to us live. Please switch on your camera then. With that, we'll get started and I will hand over to our CEO, Dr. Burkhard Lohr.
Thank you, Dirk. Ladies and gentlemen, welcome to our Q2 call. Before we start with the results, I would like to highlight some achievements of the last quarter and here, therefore, please move to slide three. With the successful closing of the sale of the North and South American salt businesses on April 30th, we received net proceeds of around EUR 2.6 billion and realized a book gain of EUR 742 million. With the proceeds, we reduce our gross financial debt. In May, we already paid back our drawn credit facility, maturing promissory notes, commercial papers, and some credit facilities with a total amount of over EUR 1 billion. Additionally, we offered a buyback program for three of our four bonds. We targeted a buyback volume of EUR 450 million and achieved a good EUR 100 million more, making a total of EUR 560 million.
Finally, the KfW facility had been terminated, which had never been drawn. In total, we achieved a reduction of gross financial debt of around EUR 1.7 billion within two months after closing the Americas transaction. We could significantly improve our balance sheet and made it much more robust. The leverage improved to a sound net financial debt to EBITDA ratio of 2.0 by the end of the second quarter, compared with 12.3 at the end of last year. The equity ratio furthermore improved significantly to 48% coming from 27. Now please turn to slide four. In addition to operational topics, K+S has also taken social responsibility. Until the end of July, our employees and family members at the German sites received more than 3,500 vaccine doses against COVID-19. This is our contribution to the German vaccination campaign.
Now please turn to our Q2 results on slide five. Looking at the results of the continuing operations, we achieved higher revenues and a significantly higher EBITDA year-on-year. The higher MOP prices since the beginning of this year are rolling into our P&L step by step. In agriculture, the average selling price was moderately higher versus the level of last year's Q2, and also compared to Q1 this year. In total, the increase was than we expected before. We saw a strong demand in the agriculture customer segment, and together with higher product availability, this led to additional sales volumes of more than 100,000 tons. In the Industry Plus customer segment, we saw a normalized demand for chemical and industrial applications after the lockdowns from last year's Q2. Together with a good early fill season for de-icing, we increased sales volumes by nearly 300,000 tons.
Combined with strict cost discipline and positive effects from currency hedging, able to more than compensate higher prices for freights and energy. EBITDA has more than doubled versus prior year to EUR 112 million. Following our impairment on potash assets last year, we will see value fluctuations on these assets quarter by quarter. Because of higher potash prices with a positive effect and higher capital costs absorbing parts of this, we increased the value of our potash assets by another EUR 147 million in Q2. Adjusted free cash flow was impacted by higher interest payment due to our bond buyback program. We also had further cash outs for the SG&A restructuring project. Accordingly, it amounted to minus EUR 68 million, including the positive cash flow from the Americas operations until April, it reached minus EUR 24 million. Please turn to slide six for a closer look at the agriculture markets.
Since summer 2020, there are significantly rising prices for the main crop commodities. Falling stock to use ratios, mainly on the corn and soybean, have triggered this price development. In the last weeks, we saw some smaller declines from the peak prices, overall, these price levels multi-year highs. With higher agriculture prices, farmers' income and their prospects have improved significantly. Along with strong demand, farmers switch from a cost-minimized to a volume-optimized mindset, with still very good affordability despite higher input costs. As a result, we see a very good potash demand in all regions. The tight supply situation is a limiting factor on worldwide volume growth. Now please turn to slide seven. Especially in June and July, prices in Brazil and the U.S. rose sharply, Europe as well as Southeast Asia followed this price trend.
Based on an already strong demand, concerns on supply from Belaruskali due to sanctions and the shutdowns at Esterhazy K1 and K2 further boosted price increases. We expect the sales volumes worldwide on the record level of last year of about 76 million tons, including 5 million tons of specialties. Further volume growth will be limited to the tight supply situation. The average selling price for our agriculture customers increased significantly year- on- year. Please turn to slide eight for the IndustryPlus Customer segment. We started into 2021 with a strong performance of our de-icing salt business. Due to the favorable winter weather, the customer inventories were quite low. This had a positive impact on the early fills business in Q2, with higher volumes compared to last year. Just to remind you, last year's Q2 was hit by the first lockdowns due to COVID-19.
In this year's Q2, we saw a strong recovery of the economy, our product for chemical and industrial applications benefited with higher sales volumes of around 200,000 tons year-on-year. Please move on to slide nine. Let's talk about our outlook for the current year. I'm sure you have recognized our ad hoc announcement from last Tuesday with a strongly increased guidance on EBITDA. I've already described the positive market environment for fertilizers. We are therefore optimistic to achieve strongly higher average prices for our agriculture BU year-on-year. We continue to expect sales volumes in the agriculture customer segment to rise to more than 7.5 million tons. After the good winter, we expect still more than 2.6 million tons of de-icing salt sales volumes for the year as a whole.
The notable savings of the SG&A restructuring cannot fully compensate for the overall rising costs, especially for freight and energy. Overall, we expect EBITDA from continuing operations to increase to a range of EUR 700 million-EUR 800 million, which is EUR 200 million more than in our last guidance. This continues to include the one-off gain of around EUR 200 million generated at the closing of the REKS joint venture. We expect this closing in this year, but now in Q4. Our adjusted group earnings from continuing and discontinued operations are meanwhile expected at significantly more than EUR 1 billion. We also expect a three-digit million amount from continuing operations. Our adjusted free cash flow, including the cash in from the sale of a unit, will be significantly above EUR 2 billion.
Our free cash flow without these proceeds for 2021 is still be expected negative, but now on the level of the prior year. Last but not least, I would like to inform you that Julia Bock will take over as Head of Investor Relations. You all know Julia for quite a while. She has more than 10 years of experience in our IR department and 15 years at K+S. On behalf of the entire board, I wish her great success in her new role. She succeeds Dirk Neumann, who will take over as Head of Corporate Development at K+S. The board thanks Dirk for all his efforts and wishes him great success in his new role as well. Ladies and gentlemen, this concludes my presentation and we are now happy to take your questions as usual, one by one, please. Operator, please open the line for the Q&A session.
Thank you very much, Dr. Lohr. Ladies and gentlemen, you now have the opportunity to ask questions to our board members. If you would like to ask a question via Microsoft Teams, please use the hand signal and write your name and the name of your research house in the chat function of Microsoft Teams. We will then call you individually, and you can ask your question live. To remember you, please switch on your camera. One more request, as usual, we would like to answer your questions one by one. If you have multiple questions, please ask one question at a time, and we will answer it first. After that, you will have the opportunity to ask further questions. This brings us to our first question from Lisa de Nooij.
Hi, good morning, guys. Can you hear me? Just checking.
Could be a little bit louder. Good morning.
Can you hear me now?
Yes.
Okay, great, guys. I have two questions. I will ask them one by one. The first one is, can you please outline your free cash flow guidance for this year? I'm particularly interested how we square this EUR 200 million EBIT upgrade with the sort of mild upgrade to the guidance. I wonder what factors have changed in there, because the CapEx guidance is unchanged. I'm just trying to understand how the drop-through works. Thank you very much.
Yeah, Lisa, it's going to be a little bit longer answer, but I think it's important to consider the following items leading to this cash flow guidance. First of all, I want to say we expect more than EUR 2 billion cash flow, but I know what you mean. You mean the continued operations. When we think back in March, it was, I gave you the guidance that the cash flow will be somewhere between minus EUR 350 million and minus EUR 400 million. We raised the EBITDA since then by EUR 300 million. The same drops down to the EBITDA. What we also shouldn't forget is, the EBITDA increase is back-end loaded. The CapExes, so the big payouts are ahead of us. We do not have the same timing when it comes to P&L income and cash realization.
What we also shouldn't forget is we have a couple of one-offs in the cash flow. This has nothing to do with the bridge from last guidance to this guidance because this didn't change, but you need to consider the one-offs like the REKS transaction, where we expect EUR 200 million income on the P&L, but only approximately a EUR 90 million cash inflow after closing. We have this year the SG&A payout, so the cash costs for the program we have started and executed last year. We have bought back bonds. We have also the finalization of a tax audit. All of this sums up to more than EUR 100 million of one-offs that are not recurring. I hope this answers a little bit the question how we come to the cash flow guidance and why we don't see a positive number yet.
The phasing definitely helps. The second question is, we noted across the sphere, comments from Mosaic, Israel Chemicals and so forth, that quite some volumes have been sold forward. I'm just trying to understand, have you also sold volumes forward? Could you give some guidance on how much you have sold forward? How should we think about sequential price increase for you in terms of average selling prices versus what we're seeing in the markets? Thank you very much.
Thank you for that question. First of all, we are very happy with the current price development. I gave in my speech the reasons why we see that, and we believe that this is a sustainable development, a development which should carry into 2022. There have been some forward deals. We did some as well for the first quarter of 2022, but only a small volume, 100,000, 150,000 tons around that. That was early this year, so from today's perspective, on a low price level, but again, a small number. Only Q1 2022.
Thank you very much.
Thank you.
We come to the next one, to Christian Veit, please.
Good morning, everyone. Hope everyone can hear me. I was just wondering about, let's say, your own potash price evolution. I take it, obviously, that you are bound to longer-term contracts. Can you remind us of your contract structure for a typical large customer, such as an NPK mixer? When would you see more pronounced price increases coming through for your potash portfolio? That's it from my side.
Yeah. Thank you, Mr. Veits, for your question. Usually, we have a delay between three and four months between contracting and having the effect in our P&L. As Thorsten earlier said, the delay between the contracting and the cash in is even longer. So the first quarter has not shown any significant price effect. We have seen the first effects in Q2, but we should expect a significant development for Q3 and especially for Q4.
This nice price development in Q4 will lead to free cash flow impacts positive, of course, in 2022 and not in this year anymore. That's why we could not take it into account for our free cash flow guidance.
Okay, great. Perfect. Thank you. Second and final question. Just checking on your operations, everything is running smoothly in Bethune and in Europe?
It's a fair question because it has not been the case all the time. Yes, we are very happy with the development on all our sites. Yeah, that is one reason why we could increase our sales volumes because we have the product available and it's a perfect timing because now with high prices, we are able to deliver the markets with the volumes and it looks pretty good.
Okay, excellent. Good to hear. Thank you very much.
Thank you.
The next question is from Mubasher from Citi.
Hi, I hope you can hear me. Just coming back to the free cash flow bridge. If we look out to 2022, we've already noted some of the one-offs that we've talked about in 2021. If you look out to next year, are there any significant one-offs we should be aware of? Should we see many of these kind of negatives that we're seeing in 2021 unwind, and therefore the free cash flow being significantly positive compared to where we are now? That's the first question, please.
Yeah, thanks for the question. Not going too much into detail on the 2022 guidance today, I mentioned the one-offs we have, the cash payout for the SG&A program. This is not recurring. The bond buyback we did this year is not recurring. We wouldn't expect the other one-off I mentioned, the settlement or the agreement, the payment from the tax audit either again. There is about EUR 100 million just from this one-offs, which will not be recurring. The effect of the bond buyback is, of course, that we save interest costs next year. Together with the bonds we are paying back in this year, it's only one bond outstanding in the amount of EUR 500 million in December. We would save another EUR 30 million-EUR 35 million at least in interest cost.
There's no significant one-offs that you're already aware of that could impact in 2022?
That was the important part of the question. That we are aware of, no.
Okay. Perfect. Just the second question, just a bit more at the market level. There's been some news flow around the sanctions and stuff, and just trying to get your feel for how you think the market's developing. You talked about the stocks to use ratios are quite low, but going into 2022, you already talked about the volume optimized mindset that the farmer has. Do you see that continuing or do you see into 2022 as we go in that the market loosening a little bit and then the potash prices coming back from the peak levels that we're seeing at the moment?
Yeah, I said earlier that I expect to see that development running into 2022. This is not only a short-term effect, and luckily, we are not seeing a development as we have saw it back in 2008, 2009. Prices have found a plateau on a high level, which is very good. On this level, it's still affordable for farmers to buy our products. There is not too much in additional volumes running into the markets. If there would be some, it would be absorbed. To sum it up, we can expect that we will have some good quarters in 2022 as well. That doesn't mean that it will end in 2022, but I think it would not be serious to try to predict the development in the market for more than, let's say, three, four quarters.
That's helpful. Thank you.
Thank you very much.
Okay, now we have a question from our webcast system, from Andreas Heine from Stifel. How is the agriculture volume commitment you already have for Q3 and Q4?
Means I get on the well-known market price values, and this as known, has picked up significantly in Q3 and in Q4. Q3 is completely signed, and we have started contracting good parts of the October, and this is normal course of the business. November and December is still open.
Thank you. Another question from Alexander Jones from Bank of America. Can you please give us a sense of the updated freight and energy cost trends for this year, and how much will be offset by restructuring savings?
[Astrupp?]
Yeah. We expect for this year, but this is baked in our guidance, of course, an additional EUR 30 million-EUR 40 million negative effect both from energy and from freight.
The restructure of the holdings, what is the positive effect on that side?
In total, we say we want to save EUR 60 million in steady state. We are in the good run-up this year, so it's maybe a little bit less, like EUR 50 million for 2021.
Okay. We have one question of Thorsten Philipp, who asks: what plans do you have regarding the 2021 dividend?
Moritz.
Okay.
Yeah. This is too early to give a precise answer on that. One thing is obvious, due to our impairment impacts, we see movements in our net profit, which in the past was a base for the dividend strategy, and we are thinking about a change. How this looks precisely is too early, because we have to discuss that with the supervisory board, and then we come up with a proposal.
We have a question of Markus Mayer from Baader. How much do you expect the net working capital outflow in H2 2021 on current potash prices?
Markus, when I look at H1, we had a positive change in working capital of EUR 30 million. I would expect for the second half a negative swing of minus EUR 100 approximately, so that we end up at about minus EUR 80, minus EUR 90 approximately.
We have a question from UBS. Are you able to give an update on roughly how long you see the delay from spot pricing to realized price for your potash sales?
Yeah, I think I've answered that earlier, but why not one more time? The difference between contract and the P&L effect is three, rather four months, and depends on the region. The difference between the contract and the cash in is six months, partially even more, especially when we sell into Brazil, and this is currently the hotspot with our very high prices.
What is the proportional exposure to India, China this year versus normal?
Yeah. We are not selling anything into India for two reasons. First of all, the price is not at all a market price currently. India has the highest freight costs from our destinations, and that's why we have decided not to ship it to India. Some specialties, but these are more or less small amounts. The second destination?
China.
China. China, here we have decreased volumes as well. This is, of course, for Bethune, a very important destination that we cannot strip it down to zero entirely. I would say it's up to 200,000 tons less than in normal years for the same reasons, pricing and freight costs.
Roughly what kind of SOP premium are you seeing in Europe this year?
Yeah. Maybe we shouldn't talk about the premium, because this is always a question of high volatility of MOP and SOP. What we are seeing is, as usual and as we saw this in the past, a delayed development. We've seen MOP prices being very strong, and it started with a small price increase of SOP. Now we are seeing it will not take the same heights, but we will see a significant SOP price development with a delay as usual.
Okay, we have another question in the Teams from Mubasher from Citi.
Oh, I've already asked my question. I have no further questions. Thank you.
Okay, I still see a hand raised from Christian Veit. Is the question still there?
Hello.
Out of Bethune. Can you update us on the development of the U.S. market out of Bethune? I remember you were around 100,000 tons last year. You were planning to increase this. What would be your envisaged level for 2022? Thank you.
Yeah. We indicated that we would increase the volumes compared to 2020 in this year on a level of 250,000 tons, and this looks pretty good. We will be able to ship 250,000 tons into the U.S. market, and the target is 500,000 tons, but that will not be achievable next year, but most probably in 2023. That should be a healthy level for the run rate, if you wish, for Bethune volumes into the U.S. market.
Is that going to be with your own logistical network, or are you using a partner?
No.
Industries.
That is all K+S logistics.
Okay.
Network and sales.
All right. Thank you.
Thank you.
We have a question from Adrie n T amagno from Berenberg. Can you explain pricing developments in IndustryPlus division, excluding de-icing?
Yeah. If we strip out de-icing, we always have a very stable business in our IndustryPlus segment. The only significant impact that we were seeing last year, and if you compare this year against last year, this has to be mentioned. As you all know, we had a lockdown in Q2 2020, and so we had a negative impact on chemical volumes, on pharmaceutical volumes. Some other applications were hit.
Another question from Andreas Heine from Stifel. Where will your potash inventories be by the year-end compared to last year?
Good question. In a year like this, you should try to sell as much as possible. As we believe this is a sustainable development and we will see a good price environment in 2022 as well, we rather will not change our inventory volume. It should look pretty much like at the end of 2020.
To increasing capacity at Bethune beyond the first phase nameplate.
I think a good indication for Bethune is that we have achieved the 2 million tons. We always said that for the rest, which is more or less increasing the secondary mining volume, so the rest up to 2.86 million tons. It's a more or less linear development over a couple of years, so you should not expect more than 100,000 tons yearly, annually as additional volumes from Bethune, which of course does not impact the market at all. It's a baked-in growth story for K+S, if you wish.
Currently, we have no further questions, so if no hand is raising, I would give back to you for the closing remarks.
Thank you very much. That was a short one, but no surprise because we have disclosed figures already in our talk before. Thank you very much for your attention, and we look forward to meet you in person the next time and wish you all the best until then. Thank you very much and bye-bye.