Welcome to the K+S conference call regarding the publication of the half-yearly financial report H1 2017, hosted by Dr. Burkhard Lohr, CEO. For the duration of the call, you will be on listen only. 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. Ladies and gentlemen, welcome to our Q2 conference call. Since I have taken over my new responsibility, this time has been quite a busy one for many of us at K+S. My team and I have many ideas to give the company a new, fresh shape. The outcome of our new strategy will be published in autumn. We are looking forward to the upcoming months, working hand-in-hand with all our stakeholders, our employees, customers, societies, and of course, our investors. I am joined by my colleague and CFO, Thorsten Reuber, and our head of finance and accounting, Jörg Bettenhausen. Lutz Götte, our new head of investor relations, is not present today. His youngest daughter has her first day at school, and nothing is more important than family. Now, let us get started on page three.
I am very proud to announce that we have the first potash volumes from our new Bethune mine in our hands and even 2 weeks earlier than we expected. Many of our colleagues have been working very hard on this. The first trains have started to Vancouver. We do expect about 600,000 tons production in 2017, which is mainly back-end loaded. We will reach our capacity of 2 million tons annual run rate by the end of this year. Here we want to repeat, due to our low fixed cost basis at Bethune, we have the flexibility to adjust production for the very first time. That means we are not flooding the market with additional potash if it cannot be used.
Please also keep in mind that Bethune is partly replacing our depleting capacities, for instance, our Sigmundshall mine, which is to be closed by 2020 at the very latest. Now please turn to slide four, and let us have a look at the situation at our Werra plant. Last year, we were hit hard by low water levels and missing permits. This has turned positive in 2017. After 25 days of production outages, we did not have to put production on hold with regards to wastewater disposal in the second quarter, as we made good progress with our countermeasures and also the expansion of basin capacities helped a lot. Further production limitations in long periods of low water levels in the river Werra, as we have seen in the first quarter, cannot be ruled out for the rest of the year.
That means production cannot yet run at full capacity in 2017. This will change 2018. We are making good progress with our new KCF facility. The start is scheduled for early 2018, and we continue to expect a reduction of tailing wastewater by 1.5 million cubic meters on a full year basis. This will help us to secure production to a larger extent and will make us much more independent of water levels. Meanwhile, the expansion of tailings pile capacity at Hattorf remains challenging. We are working on a solution along with the regulator. At the same time, we are optimizing the capacity of the existing tailings pile. The important message is, we believe to solve the issue without further dam builds in Hattorf. Now, please turn to slide five to talk about the potash market. In the quarter under review, the MOP markets have been pretty strong.
For example, Brazilian market demand rose by 50% in the first half, year-over-year. The Chinese and Indian contract prices met market expectations and underpin the recent global price level of about $260 per ton in Brazil. However, this also means that there's still a notable gap to our price assumption of $330 per ton in Brazil made in 2015 for the year 2020. That's why our EBITDA target for 2020 of EUR 1.6 billion no longer looks realistic from today's point of view. We are nevertheless doing our utmost to close the gap with further measures. Moreover, with our strategic review, Shaping 2030, which will be released in autumn this year, we will also give you an update on our financial aspirations. Back to the market.
The demand for specialty products remained strong in the second quarter. We saw continued good demand for our SOP products and market prices remained healthy. Nevertheless, due to a somewhat less favorable regional mix, our average selling prices came down slightly quarter-on-quarter. For the remainder of the year, we expect our average selling price in potash and magnesium products to move up slightly on last year's achievements. On slide six, we give you an update on salt. Here we saw stable revenues year-over-year in the non-de-icing business. Also, the average selling price remained on last year's level. On the de-icing side, a better winter business in Europe was able to partially offset lower volumes and prices in the U.S. The biddings are done now by roughly 80% in North America and about 50% in Europe.
The trends we have already seen in Q2 can also be applied to the remainder of this year. What is the bottom line? Therefore please turn to slide seven. Whereas revenues stayed firm, we achieved an EBIT 1 of EUR 29 million, which is almost twice the figure of last year's Q2. Our potash business improved from the very depressed second quarter 2016, mainly due to higher product availability. In Q2, we built up some inventories on a generally low level. Unfortunately, we had to cope with some small hiccups. Production fell a bit short on our potential due to some logistical problems at our rail partner in Germany on the back of stormy weather. In addition, we had hot weather and high temperatures in Germany in June, resulting in a short suspension of production at our Werra plant.
Higher costs with respect to our countermeasures to maintain production, lower de-icing prices in the U.S., and planned higher ramp-up costs at Bethune affected our earnings negatively in the second quarter. Nevertheless, on a cash perspective, free cash flow improved significantly due to lower investments in Canada. Please turn to slide eight. With the start of Bethune and the start of depreciation from the 1st of July onwards, K+S has harmonized its useful life of similar assets globally and cross-business units. This has been the first adjustment for more than 10 years. We have been guided by tax accounts in the past, but now we use the actual life of our assets, which is in line with IFRS. This procedure has led to overly high D&A in the past. The impact in 2017 should be about a positive EUR 14 million.
The full year 2018 impact equals more than twice the 2017 value. As a remark, our new D&A policy is, compared to our peers, still on the more cautious side. Let's come to the outlook for 2017 on slide nine. All in all, we expect an EBIT 1 between EUR 260 million and EUR 360 million for the full year. This is in line with our previous wording, stating that we expect a tangible increase over last year's achievements. Our guidance is based on the assumption that the overall product availability in the potash and magnesium product business unit will be significantly up on last year. We expect normal weather and water conditions for the rest of the year, and again, the successful execution of our countermeasures to reduce the disposal of saline wastewater into the River Werra.
In total, we expect potash sales in the range of 6.8 million tons to 7.2 million tons. On top of the volume increase, we would not be surprised to see a slightly higher average selling price for potash and magnesium products compared to last year's levels. On the other hand, the start of our production in Canada will burden our EBIT by about an additional EUR 60 million compared to 2016. In salt, we expect a moderate increase in volume, but selling prices are soft as a result of the mild winter season at the beginning of this year. The upper and lower end of our guided EBIT 1 range are determined by the still ongoing ramp-up of Bethune, uncertainties about the weather conditions and the water levels at our Werra site. Furthermore, our guidance is based on normalized winter conditions and a 10-year average.
Currency effects and the potash price development remain uncertain. When talking about 2017, please keep in mind that the current year remains a transitional year for K+S, as we stated earlier. On page 10, we want to show you why we are that optimistic with respect to the upcoming years. My colleagues and I are working hard on giving K+S the perfect facelift. As I said earlier, in autumn, we are going to release the first details of our all-new strategy called Shaping 2030. We are very excited about the outcome, and there's so much more to come. In 2018, our new Bethune mine in Canada is ramping up quickly, and EBITDA contribution is turning positive. Our salt activities will be even more profitable than they are today, as we are going to merge some of our sites and logistical hubs, which will further reduce our costs.
In 2018, our new KCF facility will help us to reduce the volume of saline wastewater by 1.5 million cubic meters per year. This means that we will diminish the risk of production standstill significantly, another huge tailwind, and that K+S delivers additional specialty volumes. At the same time, our investments will come down significantly in 2018, and we expect our adjusted free cash flow to turn positive. 2018 will therefore be the year when we will start reducing our financial debt and strengthen our balance sheet again. Ladies and gentlemen, many good reasons to be positive. For the time being, thank you for listening. Now we are happy to take your questions.
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. Please be advised, if you would like to ask more than one question, please submit one at a time. Once answered, we will move to your next question. You will be advised when to ask your question. The first question comes from the line of Paul Walsh from Morgan Stanley. Please go ahead.
Hi there, guys. Thanks very much for taking my questions. I'll start with my first question. On the D&A charges, Dr. Lohr, for 2017, do I back out that the D&A charge for Bethune is about EUR 50 million for this year? Can you give some guidance on what the D&A charge for Bethune will be in 2018 and beyond? Thank you. That's my first question.
Thank you, Paul. We have guided in the past that we are expecting D&A monthly of EUR 10 million-EUR 50 million. That is still the case. That will be the case for this year and for 2018 and the time to come.
That's great. Second question, just on CapEx, EUR 900 million this year. Can I tempt you into giving a steer for 2018 as well, please?
Yeah. We always said that we expect in 2018 the CapEx to drop again. Currently we would expect about EUR 600 million for next year.
Okay. Thanks very much. A final question from me, if I may. The cash costs per ton, so sales minus EBITDA, in PMP fell to about EUR 205 a ton in the second quarter. Again, just on that front, I wondered if for the full year, you can give any steerage on what the cash costs per ton are going to be, because that's a clear step down in Q2 versus Q1. I know the reasons why, the additional wage costs, the days outages and the countermeasures and so on. Any steer for the year as a whole would be helpful. Thank you.
Yeah, Paul. Different way to look at it. We always strip out the EBIT contribution from Bethune because it's negative.
Yeah.
We also strip out the effect from the lower water levels in the Werra, you know that we expect for the remainder of the year still 30 days of production standstill.
Yeah.
Including all, we would expect to stay at about the level we came out in the second quarter. We are working hard internally on costs. We always said that our Fit for the Future program will also have ripple effects into 2017 and 2018.
Yeah.
We have on top of that, but not given it another name externally, installed further cost discipline measures which we are executing, and this is the reason why you can counter the higher costs from driving away the brine from the Werra to somewhere.
Okay. Thanks very much, guys.
Thank you. Bye-bye.
The next question comes from the line of Michael Schäfer from Commerzbank. Please go ahead.
Thanks for taking my two questions, basically. The first one is on the ASP. You reported a quarter-on-quarter decline in the second quarter, referring to some adverse regional sales mix and lagging phasing in effects. Nevertheless, you confirm basically that for the full year 2017, you would expect the ASP to be slightly up year-over-year. I wonder whether you can shed some light on the phasing we should expect over the third quarter and the fourth quarter, because basically what you said for the full year implies significant increase compared to what you have recorded in the second half 2016. This was my first question.
Thank you, Mr. Schäfer. First of all, one quarter is only a snapshot. Positive message and the most important is there is, again, a quite long-lasting positive trend in the prices. We have seen MOP prices rising, we have seen specialty stable, but we know that we are talking especially about SOP very high premium, and this continues to be the case. The snapshot always has an impact of the regional mix. I think it's well known that we have, especially in the SOP business, old contracts which from today's perspective have unfavorable conditions that is running off at the end of the year. We believe with the trend that we are seeing for the remainder of the year, this will compensate for what we have seen in the third quarter.
In total, we should see in our average selling price, a price which is slightly higher than the average selling price from last year.
Okay. Second one is on German operations, basically. You've managed to basically keep production up and running in a rather dry and low water level second quarter. Water flows have improved significantly now heading into the third quarter. I wonder whether you can shed some light on the visibility you have when it comes to production. If I get you right, basically, your outlook is still including some significant outage days. How likely is this? How conservative is this basically baked into your outlook statement? Thank you.
Yeah. Thank you. Another good question. First of all, we still have in our midpoint of the guidance for [1,755 days of production standstills] in Hattorf incorporated. 25 days occurred as a surprise we have to commit in the first quarter because usually the first quarter is not that dry as it was this year. We did not have any impacts in the second quarter, mostly due to our very intelligent water handling systems, bigger basin capacities, capabilities to bring waters to Bergmannssegen, to Springen, to other locations. At the end of the year, we should also be able to bring waters to Bischofferode, which is a big one again, that is not incorporated in our guidance because this opportunity might occur at the end of this year. Still, there is a dependence on weather.
If we will have a very dry period from now, it is not completely unrealistic that we need this additional 30 days. I would call this more conservative. The good news is from next year on, we are going to be more or less independent from the situation because we have, in addition to the KCF plant, the lower selling wastewater to handle. This is only a matter of the remainder of 2017.
Okay. Pretty clear. Thank you.
Thank you very much.
The next question comes from the line of Jeremy Redenius from Bernstein. Please go ahead.
Hi, it's Jeremy Redenius from Bernstein. I just want to have one question about the 2020 guidance. You've mentioned that EUR 330 a ton looks unrealistic now. What are you seeing that causes you to make that change at this point in time?
Thank you, Jeremy. First of all, you're correct. I said it's no longer realistic, but it's not impossible. It's not entirely in our hands. We see a positive trend of prices increasing, but we have seen an additional $11 in China, and there is up to 2020, only a little bit more than 2 years, because we would have to step into 2020 with a price of $330 to have a year's average on that base. We easily believe, from today's perspective, it is less realistic to believe that we will have 2 huge steps in prices until 2020. That's why we indicated into the market that this is no longer realistic. I believe in further price increases, but maybe not of that magnitude.
By the way, we all know that there is a guidance out for 2020 for our EBITDA, which already takes into account what we have disclosed today.
I guess then, do you expect the additional supply coming into the market to make those price increases difficult? Because I think you could argue on one hand that, you sound like you're willing to moderate the pace at which you increase new capacity and you're shutting down capacity. I would imagine your competitors would also be willing to moderate the rate of production to absorb new capacity as it comes to the market. Wouldn't you think that that might enable the market to still increase prices?
What I said earlier took already into account that there are additional volumes coming into the market. Without these next last additional capacities in the market, there might have not been a reason to say it's no longer realistic. Taking into account these additional volumes and the market behavior, and we want to participate in it's still fair to believe in rising prices, but not in rocketing prices. Maybe having a look a couple of years down the road, there are no additional capacities planned due to the pricing situation and the volatility of the last years. We are at the beginning of a very positive long cycle in this market. I think one should take that into account as well.
Great. Thank you very much for that.
Thank you.
The next question comes from the line of Christian Veith from Kepler Cheuvreux. Please go ahead.
Yes. Good morning, gentlemen. First of all, a follow-up question to Michael Schäfer's question. Your old rule of thumb, X, obviously the KCF plant, et cetera, used to be that you need 40 cubic meters per second through flow at the Werra River at a certain point. We've been below that quite a few times, and still you were able to fully produce. Could you give us a new rule of thumb of basically just to follow up what's happening in terms of cubic meters per second?
That would be my first question.
Thank you, Mr. Veith . It's not that easy because, as I said earlier, we have the basin capacity, and we can use these capacities for quite a while, for a couple of weeks, in periods where we are below these 40 cubic meters per second, which is still necessary to have normal operations without any additional measures. The second opportunity is, of course, to bring the waters into Bergmannsee, [Wuhlsee], et cetera. With empty basins, and basins are empty currently, we can secure for a couple of weeks full production, even in times when the water flow is below these 40 cubic meters. We have a bit of a visibility for the next couple of weeks, but that's it. We do not know what's going to happen after that.
That's why we follow this cautious approach, and leave the additional 30 standstill days in our forecast. Again, it is cautious. Again, that is only a matter of the remainder of this year. We come back to a more normal behavior and more manageable situation in 2018.
Okay, thanks. My second question, actually staying on wastewater disposal.
Could you please give us an update on the planning for the Oberweser pipeline, timing, costs, et cetera, if there is an update?
Yeah. First of all, I would like to put this into perspective. The master plan, which we have agreed with all states which are relevant for Werra and Weser, are foreseeing two alternatives to the deep well injection, which will end by 2021. First is to bring these waters in our old mines, to deposit this in our old mines. In the Werra Valley, there is a lot of capacity, and that will easily be good for the remainder of the sites until 2060. The plan is that we are going to have a solution for that in mid of 2018, and then discuss with the states and go for permission. We need that at the end of 2021 to continue after we have no deep well injection any longer.
If this is not possible for technical reasons, then the alternative would be this pipeline to the Oberweser. The works are in plan. We believe that it is possible to build this pipeline until the end of 2021. Challenging, but possible, and the cost would be EUR 250 million, which are in our forecast already and in our midterm planning. That is still valid. Potentially, as I said earlier, maybe we do not need this option. That will be known more or less in the mid of next year.
Okay. Great. Final question. We know that the icing salt inventories are high. I mean, as seen in your salt results over the past few quarters. Could you give us a guesstimate of how high they are in a historic context, and when would you expect pre-buying to kick in? Would that be in September as usual in Europe, or would that be at some point earlier in Q4? What's new with your salt asset in Australia? I think it's called Ashburton Salt. Thanks.
The inventories actually really are on a higher level than in the long-term average. I think, Thorsten, can you please have a look how much exactly this is, but I continue with the question. That had already an impact in the bidding season . I said earlier that we have 80% bids done in North America and 50% in Europe, and the outcome was that we have a strong decrease in prices in the Midwest, a slight decrease in prices in the U.S. East Coast. Canada is flat. Europe, after a very good January this year, we have prices seen even going up a bit. All these price trends, which will of course be relevant for the rest of the year, are incorporated in our forecast. We believe that this will, of course, be a normal winter in the fourth quarter.
That is always our assumption, because it is not possible to predict something else. As you might know, yes, the inventories are high, but two weeks of a good winter weather can change the picture entirely. Two years ago, remember, we did not have any material left in the middle of the winter in some areas in North America. That does not really concern us a lot. Australia, the potential new mine, to deliver the very interesting Asian markets is on time. We are still working, but that was planned. That takes a long time in Australia. On the environmental approvals, and if we have this in hand, we have to make a final decision on the investment, but we always indicated that there will not be a production before 2021.
Thank you very much.
Thorsten, do you have a number?
I mean, we are a bit reluctant to give out concrete numbers there for two reasons. First of all, the market is always a guesstimate. We know what will be happening in terms of inventory. So we would not give out the concrete numbers for competitive reasons, but I can tell you that you need to distinguish between the regions. North America, especially the U.S., is well above the long-term average. Europe is, thanks to the good quarter, well below the long-term average. This is where I would like to leave it for now.
Okay, thanks.
The next question comes from the line of Markus Mayer from Baader Helvea. Please go ahead.
Yeah. Good morning, gentlemen. Several questions from my side as well. I start first, one by one. On this new accounting, maybe can you shed some light what kind of assumptions have changed besides the lifetime, and also what was the base previously and what kind of assumption you now have? As far as I understood, this is only for the German mines. Am I correct? What else does this accounting have on the mining obligations? What kind of impact? Also, if theoretically the potash price would fall below the EUR 200 per ton level, would you have to reduce then the lifetime of the asset again? That's my first question.
That's your first question with four or five sub-questions.
Markus, let us know when we didn't cover everything. We used the production start-up of Bethune to review our asset lifetimes globally, actually. We have different categories and the main change happened in technical equipment of machinery. Here, we went from four to 25 years to eight to 14 years. When we compare this with our competitors, we are still not very aggressive there. I must admit I forgot the rest of the other questions.
Does it have an impact on the provisions?
No.
No.
No impact on provisions.
As to another question, do I understand this correctly? You only changed basically the equipment, the lifetime of the equipment, not of the end of lifetime of your mines. Correct?
Yes. Exactly correct.
Okay. Understood. Okay, forget all the other questions. Okay.
That was easy. Yeah.
Second question, given your new mine in Canada, can you update us on the forex sensitivity then, for next year, and also with the hedging, what does this mean? What kind of U.S. dollar, euro rate would mean what? That would be very helpful.
First of all, we are quite happy with the situation. As I said in my speech, first trains are on the way. At the end of this month, there will be an official opening of our facility in Vancouver. We are quite happy with the quality of our product. Ramp up is doing fine so far. Usually, you are facing big problems. We only have faced small problems so far. We are hopeful that this continues as optimal as the production phase Legacy went. Obviously, the ramp up goes as well. Although we have the nameplate capacity at the end of the year of 2 million tons in hand, we are not expecting a 2-million-ton production for next year because still ramp up, there will be more maintenance interruptions than in a normal, fully running situation.
A couple of hundred thousand will not be produced compared to the potential of 2 million tons. Everything's running so far fine. We know precisely where to sell our first product. It will be Asia, first of all, because now we are producing standard white, and we have not started granulating, and the granulated product will then go into South America. When it comes to currency hedging, our policy is to have, of course, the running year fully hedged and the following year up to 60%-70%. In 2018, we have a good chunk of our expected sales and of course, the Canadian dollar costs, which compared to the U.S. dollar sales, already in a safe haven, if you wish.
The sensitivity has not changed compared to the past?
The activity has not changed. Of course, there is now an additional currency to take into account, the CAD cost. The system is the same, the activity to have a rolling hedging system is unchanged.
Okay. My last question is on the increase of the logistic costs. So far already see this. If you have hedged or locked in the logistic costs for next year, maybe some light on that would be helpful.
Mostly the higher volumes were the driver of the additional logistics costs. There's only very small price effects, not worth mentioning. We are hedging currencies. We are hedging gas prices with real deliveries, we are not really hedging logistic costs. That's why we have to take the market conditions, which are still very favorable.
Okay, perfect. Thanks so much.
Thank you.
The next question comes from the line of Neil Tyler from Redburn. Please go ahead.
Hey, good morning. First question, hopefully a quick one. In respect of the combined wastewater costs this year, which I think including your guidance, amount to about EUR 100 million, of which EUR 40 million is the additional measures, and then sort of EUR 60 million or so the interruptions. Can you just clarify how you expect that to shape up in 2018? I know the EUR 60 million is falling away, but how much of the EUR 40 million? That's the first question, please.
Yeah. Neil, thank you very much for the question. The situation will be by far more relaxed in 2018 with the KCF. I cannot stress this often enough because that is really a burden in 2017. Was in last year and is a burden this year, but it's going away. It will most probably be not zero in next year because part of that is not sensory cost, it's transportation costs. We might be forced in dry periods last year, to still bring our waters into Bernburg or whatever is available next year. It will be a very small number, maybe double digits, but not more.
That's great. Thank you. Secondly, with regard to the Bethune EBIT contribution, year to date, I think is about negative EUR 50 million at the EBIT level. Can you help us with your expectation for the full year, latest update on that number, and if you're prepared to give anything for 2018, that would be great.
Yeah. EUR 50 million for the first half is correct. Now, with the 1st of July, the D&A kicks in. We always said in the past it might be EUR 150 million for the whole year, and I can confirm that maybe a little bit below that. From next year on, we are not really talking about a production site any longer. It's a running mine, and the only indication we are giving is the EBITDA contribution, and that should be positive in 2018. Big achievement, again, another factor which is not burden our bottom line any longer.
That's helpful. Thank you. Final question. With regards to the Sigmundshall mine closure, you said that will stop producing from 2020 at the latest. How should we think about the output from that mine in the next two years then, 2018 and 2019?
Yeah. As I said, the latest, we might not see an output in 2020. For sure there will be the full production in 2018 still, because then, if we would have decided to close it already, then the decision would have been made. Question mark about 2019 and 2020. It will, of course, have an impact on our volume-
No big impact on our bottom line because there is a reason why we're closing it, because we are in a depth of 1,500 meters. Efficiency is very low, and there is no significant negative impact on the bottom line.
More or less compensated by a change in the sort of cost per ton, effectively.
Yeah, exactly.
Thank you. That's everything. Thank you very much.
Thank you, Neil.
The next question comes from the line of Patrick Rafaisz from UBS. Please go ahead.
Thank you. Good morning. Three questions, please. The first, again on 2018. Based on the previous comments you just made on Bethune volumes, I assume the 1.7 to 1.8 million tons for 2018 still makes sense. You said in the past that excluding Bethune 2018 volumes should be rather flattish, i.e., not more than seven million tons. Is that still correct?
Yeah. Bethune, yes, 1.7 to 1.8 is a fair assumption, please take into account we are talking about the mine which is still in the ramp up. We should see clearer in the beginning of 2018, 1.7 to 1.8 is very probable. The remainder of the seven million for the rest is a fair assumption as well. That would then mean a small increase compared to this year because we lost production due to the Werra situation in 2017. We increased significantly from in the German mines, the output and of course in Canada. That's why I'm not tired saying how big the step will be next year.
Okay. Makes sense. Thank you. Maybe you could give us an update on the permit for the tailings pile. With Q1, you were hoping to get it within a few weeks. You haven't really given us a potential financial impact, but you were just highlighting it to take it into consideration. Can you update that? Would it be possible to give us some ranges or indication on potential impact here? Thank you.
Yeah, of course. I'm happy to do that. First of all, we did not say that we expect it in a couple of weeks. We said we would need it in a couple of weeks, to be sure to have no interruption in Hattorf in next year. The situation has changed a bit. We have optimized the lifetime of the existing tailings pile, we are fine for the next couple of weeks or maybe even months. Currently we are working very cooperative with the regulator on a solution for the new tailings pile, I believe that there will be a solution in the next couple of weeks, there will then be no standstill in Hattorf, without standstill, there will then be no negative impact.
Okay. Clear. Thank you.
Thank you.
The last question, you probably can't really answer it, but I was just thinking about your Shaping 2030 targets and the strategic review. Can you allow us a peep into what exactly is going on? It's a very long-term timeframe. Should we expect some financial targets as well later this year in autumn? Will it be more qualitative statements on strategy where you want to steer the company?
Without saying too much, I think we're talking about the year 2030. How do we believe will the company look like, and in what condition will it be like? What will the profit contribution look like in 2030? That is granted, that is very far away. To comment to that, to 2030, first of all, we are a mining company and we need such a period to really radically shape the company. Alone Bethune from the first idea to the first ton, there was eight years in between. Now we are talking about 13 years. But I know for the capital market, this period is too long. That's why we are going to describe the way to this 2030 as well.
There will be information about what we are going to do in the next couple of years and maybe even financial targets, which is in between today and 2030.
Okay. Thank you. Thank you very much.
Thank you for your questions.
The next question comes from the line of Thomas Swoboda from Societe Generale . Please go ahead.
Yes. Hello, gentlemen. I have two questions. Firstly, on your currency sensitivity. In the past, you were actually sharing with us the exchange rate levels you have locked in. I am sorry if I missed it, is it still possible for 2017, 2018? What do you have in your books, please?
We have locked in our total volume. All the expected US dollar sales are hedged, but as these are hedged from a cash flow perspective, and we have some cash US dollar costs still on our Bethune side, there is still a small remaining impact, with a weaker or a stronger US dollar. From today's perspective, there is only more or less a single-digit EUR million amount, which could go in the one or the other direction with a stronger or weaker US dollar for 2017.
Thomas, we have for this year, it's not much less, but even if the dollar goes to 120, we would see versus 2016, a low double-digit positive contribution from that. For 2018, we are not yet fully through. We are now hedged with our net position at about 60%. Let us do the rest first, and then we give you the best case and the worst case, because it will change when we are going up with our hedging rate, which should usually be above or around 80% in autumn for the next year.
One thing is for sure, without this instrument, we would have a huge impact currently due to the very weak U.S. dollar.
That's pretty clear, I think. It's fair enough. I will try a second question, and it's regarding the potash volumes in H2. If I remember correctly, in Q3, you ship increasingly to Brazil. Question 2A, if you want so. Do you see any negative impacts from the currency devaluation in Brazil and the political unrest? How are your shipments to Brazil going? 2B, for the second half, should the volumes be rather equally distributed over the two quarters or rather back-end loaded? Thank you.
Brazil was very strong in the first half. If I remember correctly, the volumes went up by 15%, compared to 2016. As they had such a strong demand in the first half, the situation should relax a little bit for the rest of the year, but that is the only reason, not the environmental, the political and currency impact that we are seeing. Brazil is very strong and we believe remains to be strong. We believe that we will again sell our entire production. The problem is the shortage of production due to the Werra situation and that we are of course still ramping up Bethune. The guidance is 6.8 million-7.2 million tons. That is a clear message how we see the second half of the year in terms of potash output.
That's fair enough. Thank you.
Thank you.
The next question comes from the line of Oliver Schwarz from Warburg Research. Please go ahead.
Yes. Thank you gentlemen for taking my questions. Just a quick clarification one. I heard you saying that the FX sensitivity rule of thumb has not changed. Is that correct? If so, why is that? You are about to ship more volumes on US dollar prices into the market than you did in the past. If I heard that right, why has the sensitivity not changed or is not about to change? Thank you.
I think Burkhard said the system, how we deal with this, is not going to change. We will, of course, have a higher exposure to the US dollar.
A rule of thumb, change in US dollar, let's say by $0.10, how that would unhedged affect you in your business model currently, that is not something that you want to provide at the moment?
I think unhedged is what you can calculate on your own. Hedged, as I said, we're currently expecting for the remainder of the year a higher dollar than we expected at the beginning of the year. We went with 110 into the new year. We now expect 115, and it may even go higher. The euro may go higher, but even if we go to 120, there will be no negative currency effect versus 2016.
Understood. Thank you. The question I wanted to ask is about the hedged flexibility you have in your production, given that Bethune is starting up. I heard you say that we might see the 1.7, 1.8 million tons next year, which would indicate, let's say, given that you're still ramping up the plant, a full production next year. I guess, any flexibility that you might want to have would kick in only by 2019. If that is the case, how would that affect your contracts, A, with Koch Industries that are taking on perhaps one third of the plant production in Bethune? How would that also impact your prices you are paying or let's say the contracts, better to say the contracts that you have struck with your gas suppliers. Are those pay or take contracts?
Are you flexible on the volumes for natural gas you're taking on as well, or is there something that would trigger a payment to your supplier if you're not taking on the agreed volumes? That would be our second question.
Yeah, you're right. Maybe the year of ramp up, 2018, is not the perfect year to not fully use the capacities. First of all, we want to ramp up the site entirely before we cut production if necessary to calm down markets. We are talking about 2019. I think it's obvious in mine, solution mine, which only has fixed costs of one-third. Biggest cost item is gas, has the possibility to bring such a contribution that was impossible in Germany. Very high fixed cost base and a combined production. If we had reduced MOP, we would have an impact on the specialties as well. That's why we were not able to do that in the past.
In the future, with Bethune, that is possible, starting in 2017 and our Contracts with Koch and our gas deliveries give us all the flexibility we need to play that game.
Very clear. Thank you. Another one on the KCF plant that's about to start up in 2018. I'm under the impression that you'll reduce your wastewater by generating more solid waste, basically, which then has to go to the mining tips. Is there anything we should be aware of? Essentially with the problem you're currently facing in Hattorf, is there probably something building up as well if your mining tips are basically growing faster than they had in the past in Germany due to the installation of the KCF plant?
The KCF plant has no significant impact on the lifetime of the tailings piles. That is very clear, that is only a reduction of wastewaters and there is a little bit more dry material that we put to the tailings piles, but that is so little that this does not impact the lifetime of the tailings piles.
Brilliant. Just a quick one, credit rating. Any indication that the outlook or the rating as such is about to change?
Yeah, Oliver, short question, maybe longer answer. We know that our debt is high, and we also know why. We had significant investments into Bethune. We had a weak financial performance last year and will be only tangibly better this year. We are far away from running out of cash. The funds are in our hand and our financial needs are sufficiently covered. Burkhard said this a couple of times now, we expect 2018 to improve significantly due to the KCF, due to Bethune, and also due to ongoing cost and CapEx discipline. S&P usually reviews our historical financial performance, and will certainly do this also after Q2. Yeah, frankly said, we cannot rule out further rating action. We are positive for the future here as well, as our leverage will start to decline quickly from next year.
Also our operating results should improve again.
Very clear. Thank you very much.
Thank you.
The next question comes from the line of Andrew Benson from Citi. Please go ahead.
Yes. Thanks very much. Just on the FX, if you can clarify, you're half covered for 2018. If we stay where we are, there will be some impact from currencies, and then the full impact, assuming the dollar stays weak in 2019. Just if you can clarify and potentially dimensionalize that. I know we've talked about the Bethune production and your potential to curtail. I was just wondering, is there much storage? Could you operate at full blast for a considerable period and perhaps build up volumes and just limit the sales into the market? Is there a lot of flexibility on the storage in Canada? Lastly, when you're talking about curtailing, is there any sense that you'll be, I don't know whether it's feasible or not, or possible, but could the Canadian assets join Canpotex?
Want you to take that?
Starting with the hedging question, same answer as earlier. Yes, they may be an effect when the U.S. dollar stays where it is or when it gets weaker. We have a rolling hedging system, which means we have also locked in already favorable rates. On the other hand, we now are locking in the rest. I'm not going to give you a number by now, but we will, of course, not have the same positive effect as this year.
Second question. Yes, we have significant storage capacities in Bethune and in Vancouver, 140,000 in Bethune and 160,000 in Vancouver. In total, 300,000. Currently, they are more or less empty. That means we have not only flexibility but the necessity to have a base fill. That's why we are expecting to produce 600,000 tons this year, but only sell up to 500,000 tons, maybe a little bit less, because we need this base fill. When we talked earlier about 1.7 million to 1.8 million output for 2018, there will be some stocking up, has to be deducted from that number as well. Again, having these high capacities, that gives us a kind of flexibility as well. The Canpotex old question always comes up again. I think Canpotex itself understood that this does not make sense at all for us to join.
Only one reason would be Canpotex would be a competitor to us in Brazil because we continue to deliver from Germany into Brazil, and that is a situation you cannot handle. That is only one easy-to-understand reason for us not to join Canpotex. I think it's clearly and fully understood, and we go back to normalized, friendly behaviors amongst the producers.
All right. No, that's very clear. Thanks.
The next question comes from the line of Markus Schmitt from ODDO BHF Please go ahead.
Yeah, good morning. I have just a quick question. On your goodwill accounting, I saw in the second quarter that your goodwill came down by about EUR 40 million. Could you explain the reasons, please?
It's a currency effect.
Just currency. Okay, good. Thanks. Many thanks.
The next question comes from the line of Chetan Udasi from JP Morgan. Please go ahead.
Hi. Thanks. I have a few questions mainly around cash. If I look at your CapEx guidance for full year, it is still EUR 900 million. You did around EUR 400 million in first half, which implies about EUR 500 million in second half. As I understand, the bulk or the peak CapEx has already been spent on your Canadian mine. Why is the CapEx rising in second half?
Please wait. We have allowed once that somebody came up with all these questions, but that makes it difficult for us. We would like to answer one by one.
Okay. Sure.
Yeah.
Yeah. I think the answer is, we are still investing in Canada despite the production started, as we said a couple of times, we are in the ramp-up phase too. Also we are still investing in environmental protection, as you see in Germany, and namely here it is the KCF, right?
Would you say EUR 900 million is the right run rate level now, even with?
EUR 900 million is what we still expect for 2017. Yes.
Okay, fine. The second question I had is on cash generation of this business. Even with CapEx coming down in 2Q, EBITDA improving significantly year-on-year, free cash flow is still negative. What do you need the prices in the market to improve significantly from here to turn the corner on cash? How do you see the cash generation of the profile of the company now that the Canadian mine is probably in a ramp-up phase and will start contributing from second half and in 2018?
Yeah, for this year we are still expecting a negative free cash flow. This is what we also said in the past and has not changed. From next year on, we expect on a group level to be free cash positive again. Here are the same effects, as we earlier mentioned with regard for debt, for example. Bethune will deliver a positive EBITDA. The cash drain will go down from EUR 900 million to EUR 600 million-ish. In Germany, you remember that we have production standstill being incorporated in our expectations still, and this will ease the situation significantly next year with the KCF being then in operation.
Do you have a level that if the prices stay at this level, assuming once your plant ramps up in Canada to full capacity, what is the underlying cash generation profile of this business? Not for 2018.
That is less a function of a required price.
Yeah.
That is a function of that we finally are getting rid of the extraordinary burdens, like EUR 100 million in the Werra and EUR 150 million in ramp-up Bethune and others. That will be the case in 2018. Even on today's prices, we should be able to deliver a positive free cash flow.
Understood. Thank you.
Provide new mid and long-term targets in autumn. Question is not on when you now expect to achieve this level, so a new time frame, but rather if you think that this is still the right balance sheet structure leverage for the group, strategically.
You know that 1.5 is very strict.
Yep.
It's by far stricter than what would be required to be back in the investment grade area. Please give us the opportunity to answer that question together with the strategy.
Okay. Thanks.
Okay. Thank you.
We will now take the last question from the line of Joel Jackson from BMO Capital Markets. Please go ahead.
Joel? That is an easy question.
We will now take the last question from the line of Joel Jackson from BMO Capital Markets. Please go ahead.
Yes. Back. Goodbye.
Okay. Thank you.
Hi, do you hear me?
Here. We can hear you.
Now we hear you, yeah.
Sorry about that. Sorry. You gave a little bit of color on first sales activity at Bethune. I don't know how much color you can share now, but how meaningful will Bethune be for sales into the fall season in North America? Alternatively, looking into next year, could we expect K+S to have larger shares of the Indian and the Chinese annual contract processes?
Not sure if we got the question right here, Joel, the line is bad. If I understood it right, you mean how much impact we would be on the U.S. market this year for Bethune?
For the fall season, right?
Yes. Next year, what we expect to do in China, et cetera, right?
China and India, will you be a bigger player in the annual contract processes?
Thank you for confirmation because the line is really bad. This year we are not going to sell significant volumes into the U.S. market. As I said earlier, we are producing Standard White, and that is more or less an Asian product, and we will ship the trade volumes into Asia. I am not talking about zero in the U.S. market, but very small amounts. We ramp that up partially in the next couple of years. It is known that we have a contract with Koch, who exclusively is selling our product into the U.S. market up to 500,000 tons. Most probably the whole volume is not going to happen in 2018 already.
With the higher volume in hand, we continue to increase our volumes into Asia, mainly China and India, where we are a very small player currently. We believe the market has the capacity, and we have very promising contacts over there. We also look into South America with the volumes. That will be the split. Asia, something between zero and 500,000 tons in the U.S. market and some volumes into South America.
Thank you very much.
Thank you.
Thank you. This was the last question. I will now hand back to Dr. Burkhard Lohr for the conclusion of the call. Please go ahead.
Thank you very much for joining this call. We are fully aware that 2017 is the transitional year that we have indicated the beginning of this year as well. I think it's more important to look in the future. We gave many reasons for being very optimistic in 2018, and there's nothing which is dependent on circumstances which are improbable. All that is going to happen and no further negative impact from the Werra situation. Legacy is going to deliver positive EBITDA. We believe prices are going to increase further, and that should be the look on K+S. A promising development together with a new strategy. Thank you again for joining us today. We are looking very forward to talk to you or see you soon again. Bye-bye.
Thank you. That will conclude today's conference. Thank you for your participation and have a pleasant day.