2. ZERO HUNGER

Edited Transcript of SDF.DE earnings conference call or presentation 11-May-20 8:00am GMT – Yahoo Finance

Impact team
Written by Impact team

Edited Transcript of SDF.DE earnings conference call or presentation 11-May-20 8:00am GMT  Yahoo Finance

Q1 2020 K&S AG Earnings Call

Kassel May 11, 2020 (Thomson StreetEvents) — Edited Transcript of K&S AG earnings conference call or presentation Monday, May 11, 2020 at 8:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Thorsten Boeckers

K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors

================================================================================

Conference Call Participants

================================================================================

* Alexander Jones

BofA Merrill Lynch, Research Division – Analyst

* Christian Faitz

Kepler Cheuvreux, Research Division – Equity Analyst

* David Symonds

JP Morgan Chase & Co, Research Division – Analyst

* Knud Hinkel

Pareto Securities, Research Division – Analyst

* Lisa Hortense Maria De Neve

Morgan Stanley, Research Division – Equity Analyst

* Marc Gabriel

Bankhaus Lampe KG, Research Division – Research Analyst

* Markus Mayer

Baader-Helvea Equity Research – Lead Analyst of Chemicals

* Markus Schmitt

ODDO BHF Corporate & Markets, Research Division – Fixed Income Analyst

* Michael Schäfer

Commerzbank AG, Research Division – Equity Analyst of Chemicals

* Oliver Schwarz

Warburg Research GmbH – Chemical Analyst

* Patrick Rafaisz

UBS Investment Bank, Research Division – Director and Chemical Research Analyst

* Thomas Swoboda

Societe Generale Cross Asset Research – Research Analyst

================================================================================

Presentation

——————————————————————————–

Operator [1]

——————————————————————————–

Hello, and welcome to the K+ S conference call regarding the publication of the quarterly report Q1 ’20, hosted by Thorsten Boeckers, CFO. (Operator Instructions)

Please note on Page 2 of the presentation, you will find the disclaimer. I am now handing over the call to Thorsten Boeckers to begin. Please go ahead.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [2]

——————————————————————————–

Thank you, Judy. Good [afternoon] and good morning, everybody, and welcome to our Q1 conference call.

Before we go through the presentation, I would like to mention 2 things. First of all, Burkhard Lohr asked me to take over this call. He has tested positive for corona. In his case, the course of the disease is a mild one. However, he stays in quarantine this week.

Secondly, some background on our announcement from last Friday. So far, we have come through corona operationally well. In Q1, we had some smaller burdens, for example, because of efficiency losses due to health measures to ensure the safety of our employees or the delayed new contract with Chinese customers has an impact on the timing of recovery in potash prices. Also, we cannot rule out that access to liquidity remains difficult because of further uncertainty in the markets about the future economic development. As a precautionary measure, we have decided to adjust the dividend proposal to the minimum to maintain eligibility for a state-secured KfW loan.

Let me start our presentation on Page 3. The corona crisis is keeping all of us on edge. In some industries, sales have dropped overnight. It is different for us because we offer essential products. It is also part of our social responsibility to serve the needs of our customers in the fields of medicine, pharmaceuticals, food production, animal feed and agriculture in the best possible way and to ensure safe waste disposal. Particularly in these times, we are proving that we are a reliable supplier.

Slide 4, please. Every day, our employees are making great contributions with their personal commitment and flexibility by keeping our production and the whole supply chain up and running. We optimized the shifts at the production plants to ensure social distancing, either on the way into or out of the mine or in the changing rooms. We have expanded home office regulations for administrative stuff. Social distancing also applies in our offices.

On Slide 5, please. Corona will trigger an economic downturn. Based on our product portfolio, we analyzed that 77%, so a clear majority of our total sales, is not only slightly dependent on the general GDP development. This should provide us a certain resilience against what’s coming up.

On Slide 6, I would like to give you a brief update on our package of measures to reduce debt, and the biggest measure is certainly the sale of the OU Americas. In March, we informed you about that, that we now plan to fully divest the Americas operating unit. Despite the current corona crisis, the sales process is going according to plan and signing in 2020 remains our goal. We still see a lot of interest from potential buyers, including everything from family-run offices to private equity and strategic investors.

What is also a major part on our — of our package of measures is what you see on Slide 7. Because with the complete sale of the operating unit Americas, the restructuring of the rest and especially of SG&A functions has to be done. With only 1 remaining operating unit, all of the administrative functions have to be adapted to the new K+ S structure. We are doing this to reduce our costs and complexity and to focus on our core business. We will also ensure that all production sites are able to generate positive free cash flow even in difficult market conditions. Future-oriented solutions in the environmental sector that sustainably reduce our CapEx have also to contribute to this target. We will keep you posted throughout this process. I am convinced that the realignment of K+ S will result in a leaner and more efficient company.

Moving on to Slide 8. Our EBITDA reached EUR 201 million compared to EUR 270 million in the previous year. The main reasons were a very mild winter, which led to significantly lower sales in the Communities business and lower average selling prices in Agriculture. Good cost discipline and higher earnings contributions from Industry and Consumer segments were able to partially offset this. However, the coronavirus, as mentioned earlier, affected us, too. Compared to other industries, we are in the favorable situation that our products considered — are considered essential. And therefore, we only had small losses — we have no losses on the sales side, but the measures to protect the employees and to ensure production and shorter shutdowns at some smaller sites cost us around EUR 10 million in this first quarter.

On Slide 9, the customer segment Agriculture. The Chinese import stock for potash was still in place in the first quarter. As a result, prices in our overseas markets like Brazil continued to fall due to temporary product overhang and missing price orientation. In Europe, prices were almost stable. The good weather conditions in Europe helped us to return to normal sales levels after the production cost in last year — in the second half of last year. At the end of April, we finally saw the signing of the Chinese supply contract at USD 220 per tonne. We therefore assumed that MOP downward trend has bottomed, and we have already seen the first positive reaction in the Brazilian market.

On Slide 10, just briefly, because I mentioned it already, the mild winter has led to a significant drop in sales and earnings in all regions. In total, de-icing volumes in the first quarter were almost 50% below the high level of the previous year.

On Slide 10 (sic) [Slide 11], in the Industry segment, we offer products for a variety of applications. Some sectors such as chemical source or the supply of hotels and restaurants are affected by corona. Other segments such as the pharmaceutical business or the production of cellulose have so far more than compensated for the negative effects on our earnings. A significant improvement in operational performance also contributed to this, but we suffered a little with lower prices of our potash-based Industry product range. What we lost to foods sold in the B2B area was more than compensated by the demand in the customers — in the Consumer segment. The more people cook at home, the more table salt was bought in the supermarkets. In these uncertain times, customers buy well-known branded products that they trust, like Morton Salt and its Umbrella Girl.

And then finally, the outlook on Slide 12. We had a good start into 2020. However, mainly due to the late China contract and ripple effects on other markets, we see our EBITDA at about EUR 520 million now for 2020. We also see further optimization potential in working capital and will stay CapEx disciplined, so we still expect the free cash flow to be around the breakeven point. Because we have already received several questions regarding the impact of the dry weather and on our wastewater disposal, due to the additional local storage capacities installed last year, we can state that even if we have a dry summer like in 2018, we will not see — foresee any standstills.

This concludes my presentation. And Judy, we can now go into the Q&A session, please.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions) And the first question is coming from the line of Christian Faitz from Kepler.

——————————————————————————–

Christian Faitz, Kepler Cheuvreux, Research Division – Equity Analyst [2]

——————————————————————————–

Christian Faitz here from Kepler. First question and then I’ll have a second one. How much is your Industry segment actually impacted by the slowdown in chemical production because at least some of you salt clearly goes into the chlorine chain as well? Can you comment on that?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [3]

——————————————————————————–

Yes. Christian, that’s what I mentioned briefly in the speech. We saw that the chemicals business was affected already by the downturn in the chemicals industry. However, in the first quarter, we haven’t seen the full impact yet. So it was only — when I look at the revenue development, only marginally down, but we certainly expect a higher impact here in the coming quarters.

——————————————————————————–

Christian Faitz, Kepler Cheuvreux, Research Division – Equity Analyst [4]

——————————————————————————–

Okay. Fair enough. Then my second question is, can you comment on your aspiration to go for a KfW — sorry, KfW back to credit facility? And how would that improve your financial flexibility when it comes to refinancing your debt in 2021?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [5]

——————————————————————————–

Yes. I think, first of all, it is important to maintain liquidity for 2020 and what else is coming. It’s — as we said, it’s a precautionary measure. The first quarter was good, and we have some hope that we come through the year without bigger distortions of the operating business. But can we rule this out? No, we cannot because when you look at markets like Brazil, we may not have seen the negative effects from the corona crisis yet. And here, given that we have already first distortions by corona, and that’s the — what I just described is maybe coming in the next quarters. It is, for us, important to have access to liquidity sources. And I mean, we are noninvestment-grade rated, right? So some of the liquidity sources are closed for us. And here, KfW offers us help. And so it’s a precautionary measure, and I’m not — I’m less looking at refinancing next year. I mean the maturities next year are in May and in December. So we got some time. But this is more to keep the liquidity and keep the business running in case we will come into issues for the remainder of this year.

——————————————————————————–

Christian Faitz, Kepler Cheuvreux, Research Division – Equity Analyst [6]

——————————————————————————–

Okay. And then, just finally, all the best to Burkhard Lohr for his recovery.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [7]

——————————————————————————–

Thanks.

——————————————————————————–

Operator [8]

——————————————————————————–

And the next question is coming from the line of Markus Mayer from Baader-Helvea.

——————————————————————————–

Markus Mayer, Baader-Helvea Equity Research – Lead Analyst of Chemicals [9]

——————————————————————————–

Yes. Three questions, if I may, as well. Maybe the first one on the ag business. If I look on the Q1 MOP, volumes and also the revenue, the implied price would be around EUR 202 per tonne. Or if you take $1.10 U.S. dollar-euro exchange rate, EUR 222. This is substantially below the current market price no matter and what kind of market. Could you explain this, please?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [10]

——————————————————————————–

I’m not sure if I fully got your question, Markus. Can you repeat, please?

——————————————————————————–

Markus Mayer, Baader-Helvea Equity Research – Lead Analyst of Chemicals [11]

——————————————————————————–

If you take the revenues of calcium chloride divided by the volumes of calcium chloride, so this EUR 246 million revenues divided by 1.22 million tonne, then you come up with the average price of EUR 202 per tonne MOP or calcium chloride.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [12]

——————————————————————————–

Just MOP?

——————————————————————————–

Markus Mayer, Baader-Helvea Equity Research – Lead Analyst of Chemicals [13]

——————————————————————————–

Yes.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [14]

——————————————————————————–

Yes. So when I look at our average selling price for the total portfolio, we stand for the first quarter at EUR 239. And you know that our specialties, and we haven’t seen virtually no negative effect on specialties and not on the European business in the first quarter. We kept this price higher than, of course, the MOP price where we have especially seen the decline in the Brazilian market. So I think when I follow your calculation for MOP overseas, it is certainly — I mean, we’re showing this as well in the table. We are there at 2.5 So — and this is in line with what the trade journals are also reporting. But we are — yes, we saw a strong decline in prices. This was driven by MOP only and in overseas only. So that’s what I can confirm.

——————————————————————————–

Markus Mayer, Baader-Helvea Equity Research – Lead Analyst of Chemicals [15]

——————————————————————————–

But have you basically undercut then the prices, which are officially in the market? Or how — what is the explanation for this very low MOP price?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [16]

——————————————————————————–

No. I mean one reason is certainly that we saw a strong business in March, also with the start-up of the Brazilian season and March. So at the end of the quarter, the sales price was lower than at the beginning of the quarter. So — but we haven’t really undercut any prices, right? So we are in line with what competition is offering.

——————————————————————————–

Markus Mayer, Baader-Helvea Equity Research – Lead Analyst of Chemicals [17]

——————————————————————————–

Okay. And then my second question is on the Consumer segment. This significant volume drop. Can you explain this a little bit more? I thought out of my maybe blue-eyed thinking that Consumers are more at home and maybe would use more of your products, then why this sharp volume drop in the Consumer segment?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [18]

——————————————————————————–

Yes. It’s mixed. So when I look at the culinary business, so really the table sold are also water and pool, you’re absolutely right, people are at home. And the Germans bought toilet paper and the Americans bought salt. What was driving down the volumes was the BDI business. So we are also selling de-icing sold for consumers, which is reflected here and not in the communities business, obviously. And this led to a drop. So there, the revenues — yes, they almost — they are at 10% of what we have achieved last year. So the volume drop you see comes from the de-icing.

——————————————————————————–

Markus Mayer, Baader-Helvea Equity Research – Lead Analyst of Chemicals [19]

——————————————————————————–

Okay. Okay. Understood. Makes sense. And then last question. You said there was a first initial positive action in the Brazilian market. Have you meant this price-wise or volume-wise?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [20]

——————————————————————————–

No, volume is anywhere not an issue price-wise.

——————————————————————————–

Operator [21]

——————————————————————————–

And the next question is coming from the line of Alexander Jones from Bank of America.

——————————————————————————–

Alexander Jones, BofA Merrill Lynch, Research Division – Analyst [22]

——————————————————————————–

Two questions, if I may. The first is on your guidance for sales prices in agriculture this year. Could you just give us a bit of color around the potash price recovery trajectory you’re assuming in that, what potash price you’re assuming in Brazil, for instance, by the end of the year? That would be helpful.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [23]

——————————————————————————–

Yes. Alex. We do see from here for the rest of the year, a slight recovery of the market prices. And I mentioned earlier, when Markus asked about this, we saw already a first positive reaction in Brazil that prices are no longer on the downward trend there. And with continued good demand and with continued good — under normal circumstances, so I’m not referring to any possible corona effect, we would expect a slight recovery of the prices in the second half of the year.

——————————————————————————–

Alexander Jones, BofA Merrill Lynch, Research Division – Analyst [24]

——————————————————————————–

Okay. And then the second question is going back to the industrial volumes. Do you have a sense in April, for example, of — or into Q2 as a whole, the volume trajectory in terms of whether that’s now gone into a decline? Or yes, any run rate there would be helpful.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [25]

——————————————————————————–

Not yet, because the thing in industrial is we are serving here more than 10,000, almost 14,000 different industries with potash-containing product and with nonpotash-containing product. And it is a broad range from chemical, where I said earlier to Christian, we have seen here certainly a negative impact on the volumes. On the other hand, we have food and animal nutrition and pharmaceutical, which is offsetting volume decline here. So I would say we see a mixed picture. In general, we have not seen a significant drop yet.

——————————————————————————–

Operator [26]

——————————————————————————–

And the next question is coming from the line of David Symonds from JPMorgan.

——————————————————————————–

David Symonds, JP Morgan Chase & Co, Research Division – Analyst [27]

——————————————————————————–

First one, on volumes. I think it is surprisingly strong first quarter, given that Nutrien and MOSAIC saw volumes flat to down. So can you talk maybe about the new markets that you were able to enter with the higher Bethune quality? And was this the main driver of your higher volumes?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [28]

——————————————————————————–

David, first of all, we are happy that we have seen this volume development, of course, and Bethune is contributing here. So the Bethune quality, both when you look at the granulated product, but also the standard product, has improved significantly. And we — when we talk about new markets, I mean it is clear that we wanted to tap the U.S. market always, and this is what we still plan. The volume development, and this is something one should not forget when you compare our volume increase with that one of the competitors, it’s — last year in the first quarter, after the closure of our Sigmundshall mine in Germany and some issues in our production — on our production plants, we are stronger recovering because last year’s Q1 was affected by extraordinary negative effects in availability of product here. So this is certainly why our growth rate is larger. And what this sales volume show is certainly that there’s a strong demand for the products. And that’s what we are happy for, and for the first time, we can deliver.

——————————————————————————–

David Symonds, JP Morgan Chase & Co, Research Division – Analyst [29]

——————————————————————————–

That’s clear. And then secondly, are you still willing to access your revolver? Or is there a concern that you hit the leverage covenant whilst it’s drawn and that causes a cross-default? So in other words, is the EUR 800 million revolver, firstly, still undrawn today? And secondly, are you willing to access that? Or are you looking elsewhere for source of liquidity?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [30]

——————————————————————————–

It’s fully undrawn. And I mean, it’s — we have this RCF in order to use it, if necessary. And I think this answers the question.

——————————————————————————–

Operator [31]

——————————————————————————–

And the next question is coming from the line of Knud Hinkel from Pareto Securities.

Okay, it doesn’t look like Knud is unmuted. Knud, if you could hear us, please unmute your line so you could ask your question.

——————————————————————————–

Knud Hinkel, Pareto Securities, Research Division – Analyst [32]

——————————————————————————–

Okay. Can you hear me?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [33]

——————————————————————————–

Yes.

——————————————————————————–

Knud Hinkel, Pareto Securities, Research Division – Analyst [34]

——————————————————————————–

Can you hear me? Okay. Sorry, I was — actually, I was really muted. So my first question would be on cost per tonne in agriculture. It seems that is significantly lower compared to last year. Is that because of the mix effect because of more volumes from the June? That would be my first question.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [35]

——————————————————————————–

It’s indeed — the reason is that the first quarter saw a very good production level in Bethune and also in Germany. That’s what why — it’s part of my answer from the question before because we saw production without any major distortion here in Germany. And we also — and this one part here is certainly the better — the much better product quality in Bethune contributed also there to a higher production. And this is why we have seen a drop of the cost per tonne on this revenue over EBITDA basis from 205 to 188. So it’s the production level.

——————————————————————————–

Knud Hinkel, Pareto Securities, Research Division – Analyst [36]

——————————————————————————–

Okay. Second question, do you still disclose how much the tune contributes to the overall production level? And if yes, how much was it?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [37]

——————————————————————————–

So we are not breaking this down by quarter. But we said — I mean, we saw in last year a production there, which was burdened by the production cuts. So Bethune only produced 1.6 million tonnes, and we will, this year, certainly come closer to the 2 million level. But I don’t want to break this down by quarter.

——————————————————————————–

Knud Hinkel, Pareto Securities, Research Division – Analyst [38]

——————————————————————————–

Okay. Great. Then third question, you said in a statement from Friday that you now expect a slight earnings drop in the operating unit Americas for 2020. How does — or does that affect your price expectations for the intended disposal of the unit?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [39]

——————————————————————————–

It’s a good question, but we don’t expect that this will majorly distort this process. We see — as I said in my speech as well, we still see a very good interest from a broad variety of investors, potential investors. And I mean, you know it better than I do probably. The investors look at earnings quality and earnings stability. And here, the business has shown, even in this crisis, that it still can generate despite the drop in de-icing salt volumes, which are obviously only weather-related enough, and this can change again. We have seen a very stable contribution. You see the revenue drop. You see that the EBITDA only decreased marginally. So there’s a high cost discipline in the OU Americas, like in the rest of the group, but there’s also an ability to offset lower de-icing salt by, I mentioned it, consumer, by pharmaceutical products. So we don’t expect that this will have a negative impact on how investors look at this business.

——————————————————————————–

Knud Hinkel, Pareto Securities, Research Division – Analyst [40]

——————————————————————————–

Okay. And my fourth and last question would be on the dividend. You said — my question would be, why is there — could you remind me why there is a minimum dividend? So is that stated in your bylaws? Or what’s the reason for minimum dividend you have to pay?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [41]

——————————————————————————–

No. It’s — this is something which is stated in the German Acts and (inaudible) that there are very strict requirements for not paying a dividend at all. And there’s a minimum dividend mentioned of 4%, and this is what we mean with minimum dividend. So we apply for this — for precautionary reasons, and we are not in economically in that deep trouble that we could delete the dividend totally.

——————————————————————————–

Operator [42]

——————————————————————————–

And the next question is coming from the line of Patrick Rafaisz from UBS.

——————————————————————————–

Patrick Rafaisz, UBS Investment Bank, Research Division – Director and Chemical Research Analyst [43]

——————————————————————————–

Three questions, please. The first one, a follow-up on financing. If I go back to the release on Friday, you talked about exploring all options, including the KfW state loan. So if you wouldn’t be able to secure that loan, what kind of alternatives were you thinking about? And by what time would you want to have additional liquidity resources secured before you would have to resort to maybe a capital increase, for example? That’s the first question.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [44]

——————————————————————————–

Yes. Patrick, really, this is a precautionary measure, and we are talking to KfW like we are also talking to our banks. So it is not that we are in urgent need right now. I called it a precautionary measures because we don’t know what’s coming up over the next quarters. And for example, when and how will the commercial paper markets open up again or at what point in time would you also be able to place a bond or something similar. So it’s really — we want to have this liquidity just in case we need it. And we also said earlier that we have a fully undrawn RCF, which we would also use, if necessary. So this shows you that there’s no immediate lead right now. So I would quote the liquidity situation for now as sufficient, again, not knowing what comes. And this is how you should read the KfW loan, it’s an additional source for liquidity for us, which is now offered.

——————————————————————————–

Patrick Rafaisz, UBS Investment Bank, Research Division – Director and Chemical Research Analyst [45]

——————————————————————————–

And then a question on CapEx. You were talking about CapEx discipline earlier today, but the guidance, at least qualitatively, remains the same, right, in terms of wording significant increase. Is that significant increase a smaller significant increase than we had before? Or how should we think about that also into next year, maybe how much? I mean, I remember all the comments you made in previous calls around the minimum required CapEx, but is that something that’s moving down currently? Or are we still talking about the same orders of (inaudible)?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [46]

——————————————————————————–

You heard me saying that we can run the company at CapEx levels of about EUR 450 million to EUR 500 million. In this year and also partly in next year, we have some environmental projects running that we need to execute, look at the tailings piles expansions at the Werra and also in Zielitz. And we are — there are some more we have to invest in. So we cannot come down despite all discipline to this level in this year and in next year. On the other hand, I think the consensus is at around EUR 550 million, right? And from today’s point of view, my best guess is that this is a number I would put into the model if I would be you.

——————————————————————————–

Patrick Rafaisz, UBS Investment Bank, Research Division – Director and Chemical Research Analyst [47]

——————————————————————————–

Okay. That’s very helpful. And the last question is also on guidance on EBITDA. The EUR 520 million, that’s surprisingly a precise guidance given that we are still very early in the year. What drove that decision to go for such a precise guidance rather than the range as you had in the past?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [48]

——————————————————————————–

I can tell you it was a long discussion what should we do with the guidance. And having said that, we do not know how the next couple of quarters will develop because of the further corona impacts, which are possible. We also consider not to give a guidance at all. But we said, if we do see — and especially now after the contract conclusion in China, we have a certain expectation that pricing will bottom and that we do also see a slight increase of the price levels compared to the first quarter. That’s what I said earlier. And we said, if this is this the case, we can be reasonably safe with the consensus number of EUR 520 million, and we baked in this into our guidance. And I mean, we could have given you a range. On the other hand, you would have looked at the midpoint only. So we would also be at EUR 520 million. And this was in the end, where we said, okay, let’s give a concrete guidance at this point in time. Explicitly said, this is without any major corona impacts, right? Then we need to talk about this again if this happens.

——————————————————————————–

Operator [49]

——————————————————————————–

And the next question is coming from the line of Thomas Swoboda from Societe General.

——————————————————————————–

Thomas Swoboda, Societe Generale Cross Asset Research – Research Analyst [50]

——————————————————————————–

I have 2 questions, please. Firstly, on the inventory situation at the end of the application season. Obviously, there is some talk in many markets that there were some — there might have been some buying amid the spread of COVID-19. Do you have any insights on how the inventories at the end of the season are going to be? Are farmers applying or they buy? Or will there be an overhang?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [51]

——————————————————————————–

We saw strong demand, Thomas. And this is also confirmed by our salespeople, gives us confidence that the — that there’s no significant overhang despite the corona situation. Now with the China contracts, we do see a better utilization of the large suppliers as well, and this should also help to easen this situation.

——————————————————————————–

Thomas Swoboda, Societe Generale Cross Asset Research – Research Analyst [52]

——————————————————————————–

Fair enough. My second question is on the planned disposal of South Americas. In your prepared remarks, you say no impact from the COVID-19 situation. I’m wondering because most of the other companies have been saying that due diligence, for example, right now is barely possible and a lot of transactions are in a standby mode. So could you just explain to us, if possible, at what stage your process actually is and when do you expect to go into due diligence?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [53]

——————————————————————————–

I’m not going to give you a more precise time line, but what I can tell you is, and I really can confirm this, we are talking about a business with leading brands and with a high emotional customer loyalty. And this obviously means that there’s still a lot of interest. We haven’t seen any drop of parties dropping out, so we feel very happy. And I repeated it already that we expect the signing in 2020. But Thomas, please understand that I’m not going to give any more precise details of where we are in the process.

——————————————————————————–

Operator [54]

——————————————————————————–

And the next question is coming from the line of Markus Schmitt from ODDO.

——————————————————————————–

Markus Schmitt, ODDO BHF Corporate & Markets, Research Division – Fixed Income Analyst [55]

——————————————————————————–

Yes. So one is on the KfW loan. Do I understand it correctly that you have not applied yet for the loan? Or did you apply already? And if so, at what envisaged terms, such as amount, length and instrument will be super senior because I understand that these loans are granted on a super senior basis? And also, in what time frame do you think you will be able to collect funds?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [56]

——————————————————————————–

We said that we want to keep the chance and all options open. And I want to leave it there. And I’m not going to give today any volume or any further conditions out because — let us first do our job there, and then we will certainly provide you with more details on how successful we were.

——————————————————————————–

Markus Schmitt, ODDO BHF Corporate & Markets, Research Division – Fixed Income Analyst [57]

——————————————————————————–

Okay. And on the RCF, have you started talks with banks to waive or reset covenants? Or will this not be necessary with the new EBITDA guidance?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [58]

——————————————————————————–

No. I mean, I said earlier, we have sufficient liquidity with the instruments we have in place at this point in time, and I can only repeat what we also said earlier that we will make sure to meet our contractual agreements. And there are covenants in some debt instruments, which are obviously along with our company objectives. And so we will — we make our best to meet our contractual agreements with the banks.

——————————————————————————–

Operator [59]

——————————————————————————–

And the next question is coming from the line of [Stephanie Densig] from JPMorgan.

——————————————————————————–

Unidentified Analyst, [60]

——————————————————————————–

Just a couple of questions for me, not to belabor the points about covenants, but it would be very helpful to know if the covenants only get — come into place upon drawing or not. And if so, if you would talk about potentially the amount. I mean it just really — I know you say that you have access to this liquidity, but it just helps to know what absolute number. And then also…

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [61]

——————————————————————————–

Can we answer the — [Stephanie], can we answer the question one by one?

——————————————————————————–

Unidentified Analyst, [62]

——————————————————————————–

Sure.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [63]

——————————————————————————–

Yes. So I mean, when you look at our balance sheet, you see the cash on hand. And we have — when I say we have in some of our instruments the covenants, I think this is also — you can also find this out when you look into the prospectus of the bonds that there are no covenants included. So this leaves us mainly with our RCF. And the RCF has a volume of EUR 800 million and is, as I said earlier, fully undrawn.

——————————————————————————–

Unidentified Analyst, [64]

——————————————————————————–

Okay. But sometimes the leverage covenants only come into place when you draw over a certain amount. Are you willing to speak to that?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [65]

——————————————————————————–

No, the covenants are in place irrespective if the credit line is drawn or not.

——————————————————————————–

Unidentified Analyst, [66]

——————————————————————————–

Okay. Okay. That’s useful. And then just on my next question about your comments about this is precautionary for liquidity, and apologies if this has been asked in prior calls. But can you speak to your view and particularly sort of volatile working capital swings inter-quarter? What sort of top end of the range cash burn could you expect from working capital in a given month?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [67]

——————————————————————————–

Sorry, I was quiet because I needed to think about this briefly. We normally have the high cash inflow from working capital in the first half of the year, which normally leads to — or comes from the sales of de-icing salt where you get the money relatively quickly. We have to — when I look at the first quarter working capital, we have, on the one hand, our working capital measures, which contributed positively, but we also were missing the de-icing sales, which had a negative impact, obviously, on working capital. On the other hand, but this is not coming through in the first and probably not in the second quarter, are the sales from the agriculture business. Here, you have sometimes very long — with big customers in overseas markets, very long payment targets. And so I would say that we haven’t seen the full potential from working capital in the first quarter yet.

——————————————————————————–

Operator [68]

——————————————————————————–

And the next question is coming from the line of Lisa De Neve from Morgan Stanley.

——————————————————————————–

Lisa Hortense Maria De Neve, Morgan Stanley, Research Division – Equity Analyst [69]

——————————————————————————–

Two questions from my side. I’ll start with the first one. Could you please help us understand how you’re getting to free cash flow break-even guidance for the full year 2020? I just would like to understand, with an EBITDA guidance of EUR 520 million, CapEx of EUR 550 million, net interest expense of about north of EUR 100 million, I mean, what are the drivers to get to free cash flow breakeven? Or how big does your working capital inflow need to be for that? Sort of a little bit of granularity on that would be very helpful.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [70]

——————————————————————————–

Yes. Lisa, we — again, we do our utmost to keep the CapEx under control even despite the environmental investments we have to make. Secondly, you’re absolutely right, a lot of this comes from working capital. And I just described — we had pretty good sales in the first quarter, and we will see this money coming in, in Q2 and Q3. So this was not yet reflected in the first quarter. And the rest is indeed coming from working capital. We have — there was one measure already in the — this is not working capital, but we sold our administrative buildings in Kassel, so we also had a positive EUR 40 million coming from this in the first quarter. This was already mentioned in the annual report as well. And we are working on the working capital, and we believe that we can achieve, here, positive inflows. It’s a broad range of projects contributing slightly, but also some bigger measures. We could see another — on a full year basis, a low triple-digit million positive effect from working capital measures.

——————————————————————————–

Lisa Hortense Maria De Neve, Morgan Stanley, Research Division – Equity Analyst [71]

——————————————————————————–

Okay. That’s very helpful. The second, I would love to follow up on the cash cost per tonne. I mean congratulations on getting your cash cost per tonne down so much year-on-year. I would just like to understand a little bit the dynamics there, specifically on Germany. I know you don’t provide any specific numbers, but are you seeing any sort of tailwinds in your cost base, for example, from energy that are very helpful to the German cash cost? I mean, sort of any sort of movements that bring that cash cost down and sort of better understanding around that would also be very helpful.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [72]

——————————————————————————–

I would say it’s really the high production level, and Q1 was pretty high. It is seasonally, in the Agriculture business, one of the very strong quarters. So I wouldn’t apply the number you have seen now for the rest of the quarters, yes? So we still we still remain conservative there and do not change our full year guidance yet. We have seen — we haven’t seen any extraordinary positive effect from energy because most of our energy consumption is gas, and this is bought already. We — what you saw in this number is that now Bethune would be — the fact that we overcame the quality issues has contributed significantly to this. So we saw — in order to sum this up, we saw in both regions, in Bethune and also the German plants, an improvement in costs, and this is from my point of view, especially volume-related. And you saw, of course, a higher contribution — higher positive contribution to the cost per tonne from the Bethune mine.

——————————————————————————–

Lisa Hortense Maria De Neve, Morgan Stanley, Research Division – Equity Analyst [73]

——————————————————————————–

It’s very helpful. If I may just sneak in a last one. On your cost per gram, that is normally to be completed by the end of this year. Could you just provide us with an update on where you are in achieving these targets?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [74]

——————————————————————————–

Which program, sorry?

——————————————————————————–

Lisa Hortense Maria De Neve, Morgan Stanley, Research Division – Equity Analyst [75]

——————————————————————————–

Your cost program of cost savings of EUR 150 million by the end of 2020.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [76]

——————————————————————————–

Yes. We have — the project has started. And I think we said at the press conference in March already that we expect somewhere around autumn year the first results, we can announce. But when I look at what we see so far, we are making progress and we are very happy with this outcome.

——————————————————————————–

Lisa Hortense Maria De Neve, Morgan Stanley, Research Division – Equity Analyst [77]

——————————————————————————–

I hope that Burkhard gets better very soon.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [78]

——————————————————————————–

Thank you. I will pass it on.

——————————————————————————–

Operator [79]

——————————————————————————–

And the next question is coming from the line of Oliver Schwarz from Warburg.

——————————————————————————–

Oliver Schwarz, Warburg Research GmbH – Chemical Analyst [80]

——————————————————————————–

As usual, one by one. I’d like to come back to what you just discussed, the unit costs. When looking to your guidance, when given the year-on-year lower unit costs in the Agricultural segment, which seems to be mainly driven by volume, given your volume guidance here, I wouldn’t expect that to fluctuate in the rest of the year too much from where we are today. Given that Q2 and Q3 are weaker quarters, I would say they would go up in the next 6 months. But by Q4, they should come down again quite significantly. And as you are planning for average selling prices a bit higher than the first quarter of 2020, that would give you quite a bit of tailwind in regards to the EBITDA progression in the agricultural segment. And I would just like to connect that to the EUR 520 million you’re currently guiding upon. I guess my first question is how much corona effects basically are baked into the guidance? You mentioned EUR 10 million for the first quarter. So is that the run rate you are working upon for the next quarters? Or am I missing something here?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [81]

——————————————————————————–

No, Oliver, we haven’t — and EUR 10 million means for the group, right? So we saw also effects in the Americas. We haven’t baked into this guidance any significant expectation of corona effects because you don’t know really what is coming. We know that we are a little bit less efficient, but this is then more baked into the volume expectations we have.

You are absolutely right, and I hear what you’re saying, but I want to stay, at this point in time, on the conservative side with the cost per tonne guidance. We should also not forget that we talked — I talked briefly about the potentially dry summer again, which would then mean we have remote disposal to do from the Werra side, which would increase the costs because of transportation costs. It is simply too early to take or to change this number at this point in time.

——————————————————————————–

Oliver Schwarz, Warburg Research GmbH – Chemical Analyst [82]

——————————————————————————–

Fair enough. The second question is, I think, more concrete, it’s about how you handle the drop in volumes in de-icing salt in your European businesses because, I mean, around about — a cut of around about 50% in demand, that’s a huge number when it comes to volumes. How do you handle that in your mines? Are they on short-term labor for the time being or — because you can’t just go on producing flat out with demand collapsing by 50%, I guess. So something’s got to give. How do you manage that in your mines — in your salt mines in Europe?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [83]

——————————————————————————–

Yes. There’s no short time work. But what the salt mines in Germany have done already in the last years, I mean it’s not the first mild winter we saw in Europe, we have a lot of flexibility when it comes to the workforce. We have agreements in place with them that at times where there’s a high utilization, we can call them in. And at times where there’s a low utilization, they can stay at home. And it balances over the year. And this is what we are making use of right now. So there’s no short time work at this at this point in time necessary. It is all captured by the regular agreements we have made with the Works Council than with them.

——————————————————————————–

Oliver Schwarz, Warburg Research GmbH – Chemical Analyst [84]

——————————————————————————–

Yes. But wouldn’t it be, let’s say, favorable from your point of view to do just that because of all the corona thing going on? Short-term labor isn’t something that really stands out at the moment, I guess, and it would be really beneficial to your P&L.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [85]

——————————————————————————–

Believe me, believe me, the people — our people running the mines and also our HR guys are doing everything that is favorable for our employees, but also for the company. And this may be a measure or not, but at this point in time, it is not.

——————————————————————————–

Operator [86]

——————————————————————————–

And the next question is coming from the line of Michael Schäfer from Commerzbank.

——————————————————————————–

Michael Schäfer, Commerzbank AG, Research Division – Equity Analyst of Chemicals [87]

——————————————————————————–

Most of them have been answered already. But — so one by one. The first one is on the most recent news flow we have got in the German press release. There were some talks and reports on discussions you have with the Environmental Ministry here in the state of Hesse on sale and content post basically the exploration of the deep well injection permit 2022. So I wonder whether you can provide us an update there whether there’s any major risk from today’s point of view that you may significantly reduce, basically wastewater injection, into the Werra River from 2022 onwards basically? This would be the first question.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [88]

——————————————————————————–

Yes, this popped up in the news right now or in the last week, I think. But it is not really something new. It is for a while that we are saying that with the measures we are taking and we do what we can, we cannot achieve the very low limits from 2022. But this is something Burkhard and the team has also discussed with the politicians already. So our goal is, and this is the basis we are discussing, we will meet the target values for 2028, and we’ll no longer discharge processed water into the Werra dam. But we need to bridge the time until then. And with all the measures we are currently undertaking, I’m also sure that we will find an agreement with the politicians and with other interested parties. I mean, look at — this was a press release out a week or 2 ago. We were very successful in what we have agreed with the BUND in order to reduce the deep well injection volume significantly. So we are doing our utmost. And very important is we are in a good contact with politicians, and we are in good contact with communities and with NGOs. And we will overcome any issues there.

——————————————————————————–

Michael Schäfer, Commerzbank AG, Research Division – Equity Analyst of Chemicals [89]

——————————————————————————–

Okay. Is there — the second question is on today’s press in the German Frankfurter (inaudible) mine, there was an article on some disagreement when it comes to taxes. And so maybe you can elaborate on this one whether there’s any material risk coming from this end.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [90]

——————————————————————————–

This is from a very early tax audit, and I think we elaborated on this already in the annual report. And this was now picked up by the Frankfurter. It is — we have an office on Malta, and — but we have a very good substance there, which means we are not giving out licenses. We have financing activities there. We have a bunch of people there working in the offices. We have regular meetings in there. So we — in the discussions we have with tax authorities, we have made this point. And we have appealed against this decision for a while, and that’s currently not a lot happening. And this procedure is very at the beginning, so that an outcome is, of course, hard to predict. But we are — also, with the advisers we have there are pretty sure that it goes into our favor.

——————————————————————————–

Michael Schäfer, Commerzbank AG, Research Division – Equity Analyst of Chemicals [91]

——————————————————————————–

Okay. And then last, not least, is a housekeeping one. In the first quarter P&L, there’s another financial result, a major negative one of minus EUR 26 million. So I wonder whether it will be just a significantly negative number if you compare this with basically previous years. So maybe you can shed some light on this one. And how this is baked into what’s behind this, first? And second one, how this is baked into your full year net financial result outlook? I think it’s minus EUR 140 million, minus EUR 150 million. So is there any reversal expected in the quarters to come, so just as a housekeeping?

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [92]

——————————————————————————–

Yes. It’s — I mean, the number looks strange because it’s always the market-to-market valuation, for example, of lease contracts or in-house cash we have in U.S. dollar and the Canadian dollar, and especially the Canadian dollar moved a lot. So it depends a little bit on the development of the Canadian dollar, also of the U.S. dollar over the next couple of quarters. We have increased the expectation for a negative financial result, already now EUR 240 million, EUR 150 million. It was low before. So we have baked some of this into this, and so — but it’s hard to predict the currency developments and then hard to predict the exact outcome of the other financial results. But with EUR 140 million, EUR 150 million, I think we feel fine for now.

——————————————————————————–

Operator [93]

——————————————————————————–

And the last question is coming from the line of Marc Gabriel from Bankhaus Lampe.

——————————————————————————–

Marc Gabriel, Bankhaus Lampe KG, Research Division – Research Analyst [94]

——————————————————————————–

Get well soon for Burkhard as well from my side.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [95]

——————————————————————————–

Thank you.

——————————————————————————–

Marc Gabriel, Bankhaus Lampe KG, Research Division – Research Analyst [96]

——————————————————————————–

First of all, could you give us a split of the de-icing salt business between the U.S. and Europe in terms of volumes? That would be helpful.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [97]

——————————————————————————–

So the — you mean for the first quarter, right, not in general? The first quarter sales volumes in Europe were about 200,000 tonnes and the rest comes from the Americas. I mean the Americas have the advantage of having not only bigger market, but also a more stable market like Canada in there. And this is why this number was bigger there.

——————————————————————————–

Marc Gabriel, Bankhaus Lampe KG, Research Division – Research Analyst [98]

——————————————————————————–

The second question is on the U.S. volumes for the potash business. When are you going to deliver significant volumes on the contract, which you signed a few years ago with corn fertilizer? Or has that already started in a significant volume? Or could you share some volume figures here? That will be my second question here.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [99]

——————————————————————————–

No, Marc, they haven’t set any bigger volumes. We had some smaller deliveries, but this would not be visible in the market. And we have now the right service quality — sorry, product quality. And this is what we mean with — we use opportunity in other markets if they are there, and the U.S. is certainly one of this. But it’s too early to talk about any volume expectations for the next couple of weeks. So let us do the first shipments, and then we can quantify this better.

——————————————————————————–

Marc Gabriel, Bankhaus Lampe KG, Research Division – Research Analyst [100]

——————————————————————————–

Okay. And finally, the EBITDA performance of Americas, that was a big surprise in Q1 especially when you say in your report that the drop in de-icing salt business has been compensated by your earnings from Industry and Consumer customers. But when I compare the volumes in these 2 segments, we saw a total of plus 3% and some 3.7% in sales, while EBITDA was only up in both segments by 1.9%. And that does not really fit to a 50% drop in the Communities business. I mean I can understand that if you have lower deliveries that you have lower cost for trucks and for diesel, et cetera. But what was really the cost effect here, what helped to bring the EBITDA only down by 4%, 5%? That will be great.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [101]

——————————————————————————–

Yes. So first of all, the cost flexibility in the U.S. mines is higher than it is in Germany because of labor market conditions over there. And I can only send my kudos to my colleague, Mark Roberts, who has really trimmed this organization to an even bigger cost focus. We have done a lot also in SG&A. We have done also a lot in efficiency. We have really — and I mean, what you see when you look at the other — when you look at the Consumer segment, for example, you see the headline number, right? You shouldn’t forget that there’s also the European business, and — which had some counter effects, especially from thede-icing business. And this was also the case in the de-icing business in the U.S. But when you — I talked about this earlier, when you look at culinary, when you look at water and salt, when you look at all the specialty salts with a high margin contribution, this was really phenomenal and this is how we could cushion the strong decline in the revenues. There was no one-off effect if you are assuming that.

——————————————————————————–

Operator [102]

——————————————————————————–

And that was the last question for today. So I’ll now hand it back to Thorsten Boeckers to be — for the conclusion of the call.

——————————————————————————–

Thorsten Boeckers, K+S Aktiengesellschaft – CFO & Member of Board of Executive Directors [103]

——————————————————————————–

So thanks, everybody, and thank you for the regards also to Burkhard. I will certainly pass this on to him. And I’m proud that we had a pretty good quarter given the circumstances. I think the most important thing is that everybody stays now healthy and safe. And if there are further questions, please refer to our Investor Relations department. And I just want to say, for now, have a good day.

——————————————————————————–

Operator [104]

——————————————————————————–

Thank you. That will now conclude today’s conference. Thank you for your patience, and have a pleasant day.

Source: finance.yahoo.com

Leave a Comment