Welcome to the K+S conference call regarding the publication of the financial report full year 2016, hosted by Dr. Burkhard Lohr, CFO. For the duration of the call, you'll be on listen only. However, at the end of the call, you'll have the opportunity to ask questions. If at any time you need assistance, please press star zero on your telephone keypad, and you'll be connected to an operator. I'm now handing the call over to Dr. Burkhard Lohr to begin. Please go ahead.
Yeah, thank you. Ladies and gentlemen, welcome to our conference call. I'm here joined by our Head of Finance and Accounting, Jörg Bettenhausen, and Thorsten Wölfel from Investor Relations. Let's turn directly to slide two. Our Legacy Project is heading towards its official opening. The rail connection to the Canadian Pacific spur line has been completed, and the first of our rail cars have been delivered. The new harbor facility in Port Moody, near Vancouver, is almost complete, and at the production site, construction is largely finished, except for the areas that were directly affected by the collapsed crystallizer last summer. Six well pads will initially be available to mine MOP. All of this gives us confidence that we will begin to produce potash in the second quarter of this year. We expect to have saleable product already in June.
Our goal to reach a capacity of 2 million tons by the end of 2017 is also expected to be met. As well, the budget remains on track with our projection of EUR 3.1 billion. Now please turn to slide number three. It was a great relief when we received the deep well injection permit at the end of 2016. This is an important step in securing long-term domestic production. In 2017, however, production may not run as smoothly as hoped due to the far-reaching restrictions of the permit, including a maximum limit for the daily injection volume. This will continue to impact, in particular, production at our Hattorf plant when the Werra River water levels are low. We saw this already happen during the first weeks of this new year. The standstills to date had a negative impact of about EUR 40 million.
Therefore, we continue to implement alternative measures for the disposal of wastewater. In addition to existing measures, for example, the mining field Springen or the old Bergmannssegen-Hugo mine, we now also have the ability to use old gas cavern for permanent storage near our salt plant in Bernburg. This increases our flexibility but is still not sufficient for full production in dry periods, and it comes along with higher costs. There is good progress, however, on one important element to reduce dependency on the weather. The new KCF facility, which is currently under construction, will reduce salt water residues by around 20% from 2018 onwards. This will help us to secure production to a large extent and make us much more independent from the water levels, and the KCF extracts further marketable product. Now please turn to slide four.
Our Salt 2020 strategy is full on track to achieve the target of a normalized EBIT level above EUR 250 million by the end of this decade. We normalize our annual salt business earnings to account for unusually strong de-icing volumes, as we saw in 2015, or unusually weak de-icing volumes, as we saw in 2016. This internal measure enables us to track the development of our business without the impact of uncontrollable factors. Our normalized earnings are developing steadily and positively as a result of the numerous earnings growth initiatives we have been implementing. Focusing on further efficiency measures, new market opportunities, like the copper leaching business in South America, and of course, the strength of our highly valued consumer brands will enable us to meet our goal. We firmly believe in the de-icing business and are confident that it will deliver attractive margins over the time.
As we continue to strengthen other segments of the business, the percentage of earnings coming from the more stable non-de-icing segments will increase to more than 50%. This will reduce volatility of earnings in the salt business further. Please move to slide number five. The cost discipline plays an important role in our company. Our Fit for the Future program, which we initiated in 2013, delivered very good results. Since then, we have saved about EUR 600 million and outperformed our expectations. The measures we have implemented will reveal their full effects in later years. This and further top-down targets should reduce costs across the company by another mid- to double-digit million amount by 2018. Let's have a look at the main drivers for the reported results on slide six. The sentiment in potash markets remains strong.
Demand is on the rise, as are prices for MOP from the lows seen in the third quarter. SOP and sulfate-based fertilizers like Kieserite increased again in Q4 last year. In the salt business, the non-deicing segment was again stable in terms of pricing and demand. The deicing business had a sound fourth quarter, especially in North America, but overall remained well below long-term averages. 2017 showed a good start in Europe, but North America, and thus the entire business unit, has remained behind its long-term average. Slide seven, please. Our salt business helped us to see profits in the fourth quarter after a loss on a group level in the third quarter. This was achieved despite a year-over-year decline in potash prices. In addition, the restricted deep well injection in combination with dry weather conditions led to another quarterly loss in the potash and magnesium products business.
On a full year basis, we finished 2016 with an EBIT I of EUR 229 million. The restricted permit resulted in a loss of around EUR 200 million, while ramp-up costs for the Legacy Project running through the P&L amounted to around EUR 90 million. The adjusted group net income declined accordingly, and we ended 2016 with EUR 131 million. I'm mentioning this because our dividend payout of 40%-50% is based on this result. We will propose a dividend per share of EUR 0.30 to the AGM in May. This represents a 44% payout ratio. Please turn to our guidance for 2017 on slide eight. On the positive side, we expect tailwind from potash prices and from higher volumes in both business units. We will continue with our initiatives to reduce costs across the group and execute our Salt 2020 strategy.
On the negative side, mainly the production start in Canada will burden our EBIT significantly more than the EUR 90 million seen in 2016. This is because D&A kicks in at amounts exceeding first profits from potash sales. Taking into consideration all of the above-mentioned items, the 2017 operating profit should increase tangibly compared to the depressed results in 2016. However, in the business unit Potash and Magnesium products, the forecast remains complex. The permit we have been granted, along with our additional measures, should give us some relief, but is not sufficient for full production during dry periods. This means, depending on the water levels of the Werra River, our Hattorf plant will continue to operate on an on and off basis. Extraordinarily dry periods could have a significant negative impact, once again, on our German production, which could impact profitability heavily.
Ladies and gentlemen, I would like to finish my presentation on a positive note. The road in 2017 remains bumpy, but we are looking into the future with optimism. The new KCF facility will help us to reduce the volume of saline wastewater by 20% from 2018 onwards. This means that we will reduce the risk of production standstill significantly. Our Legacy Project is expected to deliver a positive EBITDA in 2018. Our salt business continues on its path to consistently improve earnings. The group's CapEx will be about half of what we have seen in 2016. This will result in positive free cash flow from 2018 onwards, and we will make the first step towards deleveraging the K+S group. Last but not least, our midterm outlook on slide number nine.
Our Salt 2020 strategy is well on track to deliver an EBITDA of more than EUR 400 million by 2020. Our business unit, Potash, has developed a new vision and strategy that is based on nine action fields to shape the future of the business. The aim is to achieve an EBITDA contribution of EUR 1.2 billion from 2020 onwards. Legacy is, of course, one important component. We are aware that today's potash prices make the target very ambitious. However, we still believe the prevailing low price environment is not sustainable. Additionally, everybody within the K+S group is very committed to delivering the EUR 1.6 billion by 2020. Irrespective of the challenges we are facing right now, we want to keep this momentum. Ladies and gentlemen, thank you. Now we look forward to your questions.
Thank you. Ladies and gentlemen, if you'd 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. You will be advised when to ask your question. The first question is from Joel Jackson from BMO Capital Markets. Please go ahead.
Hi, good afternoon. My first question is looking at potash volumes in 2017. If your guidance for first saleable tons in June at Legacy occur, and you get to 2 million tons end of the year, how much production could we see out of Legacy this year? Then at Werra, or sorry, in Germany, if you get normal weather, how much incremental production in 2017 could we see, versus 2016? Thanks.
Thank you for the questions. I think we have indicated in the past that we are talking about roughly 700,000 tons from the Legacy side. I want everybody to take into account, we are talking about a $4 billion project ramping up. We will not be able to precisely predict now what the outcome will be. It does not mean that we will differ significantly from that, we always should look into ranges, maybe 600,000-700,000 tons is what we expect for this year production. We will take roughly 100,000 tons out of that to put it in our stockpiles, in our storage facilities. Germany, of course, that depends heavily to the situation that I have described earlier. Again, we are better prepared this year. We are having a better deep well injection permit, and we have our measures.
Maybe we try to answer the question coming from the potential risk of standstills in Hattorf. We have seen in the first quarter already 25 days, and that cost us roughly EUR 40 million EBIT. When we take into account from now on a normal weather conditions in this area for the rest of the year, sorry, we will most probably lose another 30 days. In total, that would mean roughly a lost production of 200,000 tons. Significantly lower than last year. Again, if we will see a drier summer or autumn, the outcome could differ from that.
Okay. That is very helpful. Just my last question would be on potash and magnesium costs. Costs, they went down a little bit sequentially in Q4, they stay high. How will potash magnesium costs ramp across the year? Can you give us some ideas of what to expect, maybe in the quarter Q1 and then for 2017 versus 2016? I know there is a lot of moving parts, Werra, Legacy, if you could help us out, that would be very helpful.
First of all, I am thankful for that question because if you look at the 2016 numbers, and I come back to 2017 later. If you look at the 2016 numbers, you have to take into account that there is, of course, a Legacy Project effect, and that there is a volume effect due to the Werra situation. If you adjust all that, you end up for the full year 2016 with a number precisely on what we have seen in 2015. All our measures have helped. Measures in terms of cost-cutting have helped us to compensate inflation and other developments. The precise number was EUR 216 per ton for 2016. Again, on the level of 2015.
At the end of your questions, I have to disappoint you because I think it would not be very helpful or not very good early this year, in a year where we will see all these moving parts, as you said, to give you a precise number for a quarter and the full year. Of course, it will have a significant impact from the Legacy Project ramp-up and of the fact how much production are we going to lose in the Werra area. So, please be a bit patient for receiving a precise number for 2017. We are not able to do it now.
Thank you.
Thank you, Joel. Thanks.
The next question is from Ben Isaacson from Scotiabank. Please go ahead, Ben.
Yeah. It's Oliver Rowe for Ben. Thanks for taking my question. Looking out, there's a few specialty projects in the pipeline in both SOP, and also some polyhalite projects. Do you view polyhalite as a competitor to your Kieserite? If not, what's insulating that from increased competition and demand switching?
Yeah, Ben, it's Thorsten. Morning.
When you talk to our salespeople and talk with them about polyhalite, they say, "Well, they're going to make fertilizers out of it, which are not in the markets today." Customers know, especially in Europe, the merits of our Korn-Kali products and around the globe of our potassium sulfate, so the SOP products. This is something a polyhalite product has to reach, first of all. Then, when you look at the nutrients included in the polyhalite products, we believe that the specific costs those products will have in the end are much higher than those of the specialties, which are right now in the markets already. Polyhalite has one big disadvantage, which is it contains plaster, which makes it very difficult or takes very long until the soils can absorb the polyhalite-based fertilizer. We are not convinced about the success of those products.
Thank you. I'll just follow on with one question on salt as well. Your de-icing volumes recovered a bit this year, they're still down from the earlier years as a result of the mild winters. Are you actually producing less, are your inventories growing? Further to that, where do you currently see industry-wide inventory levels at both producer and customer levels?
The season is not completely finished yet. You know that we have seen some snowfall in the U.S. at the East Coast. Of course, we react with our production on what we've seen in the winter weather. We have done that last year, especially in Europe. The production was lower as normal because the season 2015 to 2016 was by far weaker than the current season. Nevertheless, we will end up with higher inventories, this will be the case in the storing facilities of our clients and competitors as well. It's not in the same magnitude Europe and U.S., because the European weather in the first month of this year were not that bad. I would even say we were not far away from our long-term average, the U.S. business was by far weaker.
Again, we are still in the first half, precisely in the middle of March. We even had some weather in April, we will see the final outcome of that.
That's great. Thank you.
Welcome.
We have a question now from Christian Veith from Kepler Cheuvreux. Please go ahead, Christian.
Yes, thank you. Actually, a follow-up to the de-icing business. I'd like to get a better understanding of weather effects on your de-icing salt business. Can you please elucidate in brief if it's more important if there are intraday frost and thaw conditions, or is it much more relevant if there is precipitation coupled with frost days? Is there an easy rule of thumb we can work with? Then coming to potash, how has the European application season started so far this year? Comparing current weather conditions with a rather wet spring last year, demand should have come off to an excellent start in Europe. Is this an observation you would share? Thanks.
Thank you for the questions. The perfect weather for us is around zero, and days of a little bit of ice, and then at night and over the days, dry conditions that the trucks can deliver our product to the clients and the applications on the roads can take place. This would be the perfect condition for the de-icing business. We have seen this in January in Europe, and it was about two weeks in Europe, and these two weeks were good for very significant business. I said earlier, we might come out on average in the European business, although February and March so far was by far too mild. The European business. I'm now talking about potash. The European business starts very promising, strong demand, and your assumption is completely correct.
Thank you very much.
You're welcome.
We have a question from Stephanie Bothwell from Bank of America Merrill Lynch. Please go ahead.
Yes, thank you, and thanks for the opportunity to ask my questions. The first one was on your CapEx comments. I believe in your opening remarks, you said that in the medium term, CapEx should fall to around half of the levels of 2016. Just thinking more near term in terms of 2017, I think on the Q3 earnings call, you said you still had around EUR 200 million to spend on Legacy. Could you give us a bit more clarity in terms of what you expect the overall CapEx budget to be for 2017? If I look at consensus, it's currently factoring in around EUR 600 million. Can you confirm you're comfortable with that? The second question was on the EUR 40 million negative EBIT impact that you've had from the stoppages from the dry weather in the first part of the year.
I think you also said in your introductory remarks that an additional 30 days stoppages would be expected for the rest of the year. Is it fair to assume that negative EUR 80 million for the whole year would be reasonable if that indeed was the case? Thanks.
Thank you for the questions. CapEx. 2017 is in many ways a transition year. It is true for the CapEx number as well. We have a lower CapEx number than last year, but still higher than in an average year. We had some shifts from Legacy due to the incident. It was difficult to precisely predict what can we finish in 2016 and what is going to have to be done in 2017. The CapEx for Legacy will be higher than the EUR 200 million that you mentioned. This 2017 is the year of high CapEx in our KCF plant and some other environmental investments. The number will be higher than the EUR 600 million that you mentioned would be the guidance for the CapEx in 2017. EUR 40 million is the number for the impact that we had in the first quarter on the weather situation.
We can give you a rule of thumb. It's a bit more than EUR 1 million impact per production standstill day in Hattorf. You surely wonder why EUR 40 million on 25 days. Because we have additional costs for our measures that we use. It's roughly EUR 1 million per day, and we have 55 days in our forecast and some EUR 20 million-EUR 30 million for additional measures for the full year. You should have the impact based on a normalized weather situation for the rest of the year.
Okay. Thank you. Just to go back on the CapEx comment once again. If I take the EUR 1.2 billion in 2016 and a EUR 600 million medium term average, and I just go to the midpoint of around EUR 900 million, would you be comfortable with us assuming that for 2017? Does that seem reasonable?
That's by far closer than the EUR 600 million.
Okay. 900. Thank you very much.
You're welcome.
We have a question now from Neil Tyler from Redburn. Please go ahead.
Good afternoon. I'd like to come back to the Legacy Project, please, and a couple of questions there. Firstly, it feels like piecing together your guidance that the operating costs at Legacy, before depreciation, will be in the region of EUR 220 million or so next year. Do those calculations or does that result sound sensible to you based on the production schedule that you're planning?
Of course. Thank you.
Yeah. We have to be careful because this year 2017, I guess you were talking, you said next year, but you mean 2017, right?
Sorry. Yeah, 2017. Yeah.
Okay. We have a mix of still ongoing production and construction, sorry, construction of the site and start of the production.
Okay.
We shouldn't talk about OpEx, but we should talk about an EBIT impact.
Right.
That is going to be roughly EUR 150 million this year. Out of all the components I mentioned earlier, some OpEx during construction site, then kicking in D&A and other cost components, but we expect a negative impact of roughly EUR 150 million.
Okay. Thank you. Perhaps if I can ask another question sort of related to that, just to make sure that the assumptions I'm using are broadly accurate. How should we think about the realized price, or the best benchmark to use for the realized price for the Legacy Project, relative to other realized prices that you disclosed? I mean, should we just look at a Vancouver FOB price and work back from that? Is that a sensible way of looking at this?
The realized prices causes a mix of our deliveries. We will have a new entry in the U.S. market. Luckily, we have seen strong increase in the U.S. prices there. We are going to deliver via Vancouver into Asia, China and India. We are targeting to increase our footprint there. When we are able to deliver into these markets, we will see the new price indications due to the new contracts. Everybody's expecting higher prices. What the final outcome will be, it remains to be seen. There will be portions into Brazil. Important always to remember that 20%-30% of the production, that is not going to be this year, but 2018 and 2019 with strong volumes. We will have KCl 99, so industrial product with completely different prices. That will be the mix of the price impact of our Legacy side.
Okay. Thank you. Just one final housekeeping point. Just in terms of the reconciliation line at an EBIT level, can you give us some help on how to think about that for 2017 and beyond, please?
It should not be far away from what we have seen in 2015 and 2016. You have always a little bit of movements there, but when you see it was in 2015, minus EUR 16, now it was minus EUR 30. Somewhere in between for the next couple of years should be a valid assumption.
Thank you.
You're welcome.
We have a question now from Markus Mayer from Baader Helvea. Please go ahead, Markus.
Yeah. Good afternoon, gentlemen. Three questions. First one is on what you state in the presentation, additional measures beyond Fit for the Future. Can you give us a flavor on the impact for 2017-2018, also what are the costs for that measures? Secondly, on this outlook, can you also give us more flavor on what you expect for the overall potash market in terms of demand for 2017, and also the same question for the de-icing. In your presentation, you stated you expect higher de-icing volumes. Why is this the case? Lastly, maybe an update on the ForEx hedging strategy and the impact you expect for 2017.
Okay. This gives me the opportunity to ask one question by the other, I guess we have taken all these-
Sorry.
We want to keep the momentum with our cost discipline. We have delivered by far more than we have targeted with our Fit for the Future program. There are still ideas in the company to be more efficient and to save here and there. That is why we believe we will not only let it go, we are going to reduce our cost by a defined number. That is a mid-size double-digit million amount annually from starting in 2018.
The costs that we are going to have with these cost reductions are very low, or I would even say not meaningful. It is almost a net effect.
The de-icing question, it's a normal technique that we use. We take a 10-year average for our forecast. That's the best you have, best you can use to forecast your de-icing volumes. As 2016 was in total below a long-term average, you end up with an increase in de-icing volumes. Now you have to help me out with the question.
Yeah. Sorry. Basically, the same question on the potash market in terms of global demand outlook. You always give it for MOP and SOP together, whereas PotashCorp only looks at MOP. Maybe some more flavor on that would be helpful.
Yeah. Hi, Markus, it's Thorsten. We have seen 64 million tons in our world, i.e., including the specialty in 2016, and we expect a slight increase on that number. When you deduct the 4 million, you see that we are not far away from what the whole market is expecting there. You asked also about the pricing, I think, in potash, same as on the salt side.
Exactly.
You see a positive price effect because of the volume mix, because when we expect normal weather conditions for the rest of the year, Burkhard elaborated on our volume expectations earlier. This means also we can produce more specialties, and this means our ASP is not as depressed as it was last year. This is what we have factored into our guidance.
The last question on the hedging strategy or an update in general on hedging.
For now, we stick to our strategy, I think that is not your question, which technique do you use?
I'm quite more interested in that.
If the euro-dollar parity, or if the currency exchange rate is on 120, we're going to lose roughly EUR 20 million, always compared to 2016. If it should stay on 110, we gain EUR 36 million. If it would even see parity, then we gain roughly EUR 100 million. These are the current numbers.
Okay. Perfect.
Assuming this stays throughout the year, right?
Yeah. An average of the whole year.
Mm-hmm. Thank you.
Markus, are you done?
Yeah. Sorry. Yes, thanks so much. Yeah.
Thank you.
The next question is from Michael Schäfer from Commerzbank. Please go ahead.
Yeah. Thanks for taking my two questions. The first one is a clarification one. Dr. Lohr, you mentioned previously on the, let's say, average type of production you're expecting in Germany and primarily relating to 2017 with the working days, something like 55 working days off, basically in Hattorf. Have I got you right, basically, that you just said 200,000 tons lower production compared to base year. Looking in 2013, 2015 periods, these have been the years where we haven't seen any kind of negative impact from permitting, et cetera. You produce at group level something like 6.9 million tons, and/or sold 6.9 million tons of P&M products. Is this the right base we should deduct the 200,000 from? Or how should we read this?
Yeah, that's the right base. On that base, we've lost in 2016 roughly 800,000 tons. If we only lose these 55 days, we would lose 200,000 out of these roughly 6.9
Okay, thanks. Second one is on Legacy, obviously. You mentioned the EUR 93 million, it's probably in the annual report, and OpEx burden, EBIT burden in 2016. You guided back in 2016, something like EUR 110 million. It's a kind of carryover effect we should assume into 2017, also contributing to the EUR 150 million negative you are guiding to in full year 2017? Can you quantify this? What kind of extra costs you still account for in 2017, basically, which would otherwise happen in 2016?
The change of that number was also due to the impact to the incident that we had with our crystallizer, and that we had completely changed the plan how to continue with the project. Everything which comes additionally in 2017 is already incorporated in the number that I gave you earlier, the EUR 150 million that we expect negative EBIT impact for 2017.
Okay. Last but least, a quick one. On KCF, you mentioned construction is currently underway. Is there any kind of milestone we should look at? Any kind of headaches you have experienced in the meantime, which would dilute basically visibility for commission start in 2018?
No, not really. We are very well on track. We had a case of insolvency of one important supplier, but we have overcome that situation as well. There is good reason to believe that we will see the full effect in 2018.
Thank you very much.
You're welcome.
We have a question now from Patrick Rafaisz from UBS. Please go ahead, Patrick.
Patrick, good afternoon. Maybe two questions on Legacy. Of the volumes you plan to produce, has the destination for your target customers changed in any way over the last few months? Are you still mostly targeting Brazil at the first instance in 2017, and then expanding further into U.S. and other Asian markets by 2018 as you ramp up? That's the first question, please.
As you know, we have an agreement with Koch Fertilizer.
They're going to market up to 500,000 tons for us in the U.S. market. I wouldn't say that Brazilian is first and then the rest goes into the U.S. market. We want to materialize this contract and then in parallel go into the other markets.
You already plan to ship to the U.S. in the second half of this year?
Yes.
Okay.
Of course not the full 500,000, that will ramp up to the 500,000 that we have agreed with Koch.
Mm-hmm. Okay. Good. The other question, just on your visibility or your understanding of the quality of your resources at Legacy. You said you have six well pads. Do you already have a feeling of what kind of material is going to come out there? As I understand, it can be a very complicated process with a lot of surprises with production startups with these kind of projects.
Yeah. We are working on more than the six pads. The six pads are now completely available for us for starting the production. Of course, we have a very precise idea of the quality of the product, and we are very happy with the quality of the product. We are not waiting for the outcome out of the pads. We have a lot of geological research work to make sure what is the quality of the deposit and where to position our wells. We shouldn't have a surprise out of that.
Mm-hmm. Okay. Thank you very much.
Welcome.
We have a question now from Lisa De Vise from Liberum. Please go ahead, Lisa.
Good afternoon. A question actually on what you're seeing in the SOP market. Some consultants are revealing improved demand in the first quarter, and some competitors such as PotashCorp are cautiously optimistic for 2017. Could you provide a bit of comment of what you're seeing and expecting for SOPs here? Thank you.
Lisa, we have seen a good Q4, both pricing and demand-wise. We are seeing both in Europe, all around the globe actually, that the.
Demand and also the pricing will remain at the levels we are currently seeing. We are pretty optimistic about the SOP markets.
Okay, thank you. Just a quick second one. On the Fit for the Future program, you mentioned that you target additional double-digit cost savings by 2018. Could you provide some color on where you are seeing these further savings and efficiencies? Thank you.
The Fit project had the focus in the production, logistics, and administration. These are the same areas we are going to work on for the additional cost savings.
Okay, great. Thank you.
Welcome.
We have a question from Andreas Hein from MainFirst. Please go ahead.
Yeah, thank you. Thank you for taking my question. First, could you a little bit elaborate how you see the potash pricing environment in spring now in Europe, your most important area? I would like to understand why you would think that your unit costs under good conditions in 2018 will be with the cost savings in place and the KCF plant coming on stream. Lastly, it was very helpful that you have given us what your best guess is on the production level with this Hattorf issue. Would you also provide what, let's say, a worst-case scenario under very dry conditions could be? What is, let's say, the range we have to think of if the weather becomes nice and hot in the summer, which would obviously not be fun for you, but potentially for me, that would be helpful.
Yeah. I said earlier that we are quite happy with the volume development in Europe, and that goes along with a healthy price development as well. I think in almost all areas over the world, we see a recovery of prices, partially a bit quicker, partially slower, but no further development that could keep us awake at night. Europe is, from both perspectives, price and volume, very promising.
Let's skip the second question because I'm not quite sure if I got this correctly. I directly go to the third, then I would like to ask you to repeat the second question. For all the other participants, please, one question after the other. Worst case weather. This is almost impossible to answer. I only said every single day, and we are only talking about Hattorf because we believe with our additional measures, we are able to keep all the other two sites running. That was not the case in 2016. We had close-downs not only in Hattorf last year. This year, we expect it can only impact Hattorf. We expect an impact of roughly EUR 1 million. Now it's up to you to imagine how dry a year can be.
We are safe for the next couple of weeks, what's going to happen after that, I don't know. I'm sorry to not be able to give you a worst-case number.
Never mind.
On the other hand, why shouldn't we always see the downside? It could rain more, then we have some upside here.
Yeah. I was just looking on this both from upside and downside.
Yes. You asked about the KCF, but I'm sorry, I didn't get it completely.
Not completely. I would like to have a flavor what your unit cost will be if everything is solved in 2018. With the KCF plant in operation and no issue anymore with the water flow level of the Werra. Would that still be on this level of EUR 216 mentioned for 2015 and normalized 2016, or would it be different?
Andreas, I remember the first question from Joey was what could be your unit cost for 2017, and we said it's pretty tough to work that out. We're going to wait a little bit more until into the year before we answer this question that concrete.
Okay.
Thank you.
We have a question now from Andrew Benson from Citi. Please go ahead.
Yeah. Thanks very much. Funnily enough, most of the question's been answered. Can you just give us a bit of an update on what you think the financing costs and tax rates are going to be this year? Also you've made two acquisitions. Can you just give a little bit of detail on those and how they're going to fit in or what the financial contribution is likely to be this year? Thanks.
Financing costs. Do you mean the total amount of interest rates or?
Financial result
Financial result?
Yeah. The financial uses or hedging any pension costs as well as the financial charges.
Just to be sure that we're on the same side. Financial result was last year, so in 2016, minus EUR 52 million. This includes everything, interest income, interest costs, and costs on provisions, et cetera. I would assume that this goes up because we are no longer that much capitalizing the finance cost for Legacy. This should go up into the area of a little bit north of EUR 80 million.
Yeah. Did you mention the tax rate as well? Did I get that correct?
Yeah, that's right. Are there any tax breaks in Canada that can pull it down a bit or take it up?
The normalized tax rate for us is about 28%. We were a bit below in the last two years, that is what one should expect.
All right. The acquisitions?
Due to the fact that we have quite a debt burden already because of the biggest investment of the history of the company, Legacy, namely Legacy, there is nothing meaningful in the pipeline as additional acquisitions. Meaningful in terms of cash requirement.
All right. Okay.
Yeah.
We have a question now from Oliver Schwarz from Warburg. Please go ahead, Oliver.
Yeah, thank you. I'll cope with your demand and get through one by one. In regards to the measures, wastewater removal from the mines, are there additional measures to come, or are you satisfied with the measures in place?
Now we are working on additional measures. For example, currently, we are only allowed to bring our waters from the stockpiles into Bergmannssegen-Hugo. We hope that we will be able pretty soon to bring our production waters into that old mine as well. That would have a meaningful impact because there is a big volume available there. The next big one is Bischofferode, another old mine with a meaningful available volume. We hope to get a permit to dispose waters there in the second half of this year. These are the most important further steps in addition to what we have in hand already.
Would that affect Hattorf, or would that mostly affect the other parts of the Werra mine?
That could have a positive effect on Hattorf.
Okay. Just coming back to the calculation on the negative impact on impact in the first quarter, you gave the EUR 40 million you referred to. Just trying to do the math here, EUR 25 million for the standstill. Obviously around about EUR 15 million from the cost of additional measures. You said on the other hand, EUR 20 million to EUR 30 million for the measures for the full year. Why is that front-loaded?
I said slightly more than EUR 1 million.
Okay. All right. Could you give us an indication, should Legacy start up, let's say, first of July 2017, how much depreciation, because that's certainly something you can control very easily. What would be the level of depreciation for 2017 for Legacy?
Would be a number between EUR 10 million and EUR 15 million per month.
EUR per month. Okay, thank you very much. Lastly, I'm still a bit puzzled about the lack of movement in the provisions for mining provisions. When you look at the pension provisions, obviously depending on the interest rates, they tend to move all over the place, up and down, depending where the interest rates go. That's simply not the case in the provisions for mining. Assuming that we'll retain that silly low interest environment for another extended period of time, how would that affect the provisions for mining you have in your balance sheet?
We are affected by an adjustment of our discount rate on the mining provisions. We have reduced the discount rate from 3.5% to 3.3%, following the market and following our methodology, and that had an impact of additional mining provisions of roughly EUR 130 million. In total, we have increased our provisions due to interest rates developments by EUR 150 million, and that all drove our net debt number as well. We believe now we have achieved the end of that story, because there are more indications for rising rates than further decreasing rates. We have taken the whole hit already.
Okay. Understood. Lastly, just a housekeeping question. The royalties you're going to pay to the Canadian government for the production of Legacy, or better to say, for the sale of the product you produce at Legacy, would that be recorded or recognized as a production cost, or is that part of your tax payment?
Part of the EBIT.
Okay, thank you.
This was the last question, Oliver, right? Yes, it was. Okay. Sorry about that. No, everything fine. Just you ask one by another, everything is okay. Thank you very much.
We have a question now from Steffen Kipp from Commerzbank. Please go ahead.
Yes. Thank you. I'll also start with the first one. Talking about the CapEx assumptions for 2017, what do you expect for phasing? One might think that because the startup is planned for mid-year, that probably CapEx will be higher in H1 versus H2. What do you think the split will be, 60/40, 70/30? What is your assumptions for that?
Yeah. I went by far as I wanted in the beginning of this call. Now you have a very precise idea of the CapEx in 2017. That should be very linear. There is no reason for believing that we will see significantly more in the first half than in the second.
Okay, there's no remaining CapEx for Legacy that would have to be paid before startup.
There is remaining CapEx for Legacy, yes. We have heavy CapEx at the Werra area, it almost levels out.
Okay.
You can expect same amount in both halves. Also after the production start, the pure maintenance CapEx for Legacy kicks in, right? It's 50/50.
Okay, that makes sense. Thank you. Staying with Legacy, you talked about a minus EUR 150 million EBIT impact that you still expect in 2017 due to startup issues. Do you have an expectation of how much the operating cash impact from Legacy will be in 2017? I guess it's probably not going to be positive, but can you give an assumption of where that will be? Except for CapEx, just the operational cash from Legacy.
Yeah. As we said, EBITDA will not be positive.
Okay
2018. That means that we will have a still significant negative free cash flow in 2017, which is close to the number that we gave you for the EBIT impact.
Okay. That's minus EUR 150.
I would like to use the opportunity. I always say roughly.
Yeah
We are talking about a $4 billion project, which will be ramped up in the course of this year. Please allow us to be not as precise as with a site which has been running for decades. That is what we believe today.
All right. Very clear. Thank you. Pulling that all together, I guess, if I made the assumptions that there is a very good chance that net debt of the group at the end of 2017 will still be quite a bit higher than it is now. That would not be unreasonable now, would it?
That is not unreasonable. In 2018, we will reduce that portion significantly. It will still be a comparable number at the end of this year.
Not meaningfully more than it is now.
No, not more, but not meaningfully less than.
All right.
what we've seen at the end of 2016.
Very clear. Thank you very much.
Welcome.
We have a question from Brendan Green. Please go ahead, Brendan.
Hi. Yeah, just following on from what you said about CapEx. Could you just clarify, I think you said earlier that you expect positive free cash flow in 2018, which will then lead to de-leveraging?
Yes, that's correct. Positive free cash flow.
Okay.
Not only a very slight number.
Okay. Just to clarify what the individual before me asked, you think net debt could be slightly higher at the end of 2018 than it is currently?
No, I said it will not be significantly lower.
Okay.
We are not expecting. Sorry, are you talking about 2017 now or again 2018?
End of 2017.
2017. In 2017, it will be only slightly below the 2016 number.
Okay. Thank you.
You're welcome.
The final question we have coming through is from Stephanie Bothwell from Bank of America Merrill Lynch. Please go ahead.
Thank you. Just a couple of follow-up questions. You've committed to being at EBIT loss making level of around EUR 150 million in 2017. For 2018, you've committed to being EBITDA positive at Legacy. I was wondering if you could be committed to an EBIT break-even level for 2018. Is that reasonable? The second question is just on your net financial debt. Can you just confirm how much headroom you do have at this point of time on your existing facilities? Thanks.
Yeah. You should expect the positive EBIT in 2019, no break even on the EBIT level in 2018 for the Legacy side. With our financial debt, we still have significant headroom. We have our syndicated credit facility, which was drawn up to roughly EUR 300 million as of 31st of December 2016. The total amount is EUR 1 billion, so it's still quite a significant amount of headroom. That gives me the opportunity, even as you did not ask for that, I would like to give you the indication that there is one bond maturing next year. It has to be paid back. We believe that the current environment is perfect to early refinance this one. We might see a transaction not far away from today.
Okay. Very helpful. Thank you very much.
You're welcome.
At this point, I'll hand back to your host, Dr. Burkhard Lohr, for any concluding remarks. Thank you.
Yeah. Thank you very much for joining us today with many interesting and important questions. I think it was clear that 2016 was difficult. We believe 2017 will be better, but could still be bumpy because we still are dependent on the weather situation. We are very optimistic for the future. Legacy will kick in. We will finish our KCF plant. Salt 2020 is on track, good reasons to be positive. If you have further questions, please contact our investor relations department, and have a great day, and we are looking forward to see you soon again. Bye-bye.
Thank you. That will conclude today's conference. Thank you for your participation, and have a pleasant day.