K+S Aktiengesellschaft (OTCQX:KPLUY) Q2 2022 Earnings Conference Call August 11, 2022 4:00 AM ET
Company Participants
Julia Bock – Head of Investor Relations
Burkhard Lohr – Chief Executive Officer and Chief Financial Officer
Conference Call Participants
Lisa De Neve – Morgan Stanley
Michael Schaefer – ODDO
Alexander Jones – Bank of America
Christian Faitz – Kepler
Markus Mayer – Baader
Adrien Tamagno – Berenberg
Chetan Udeshi – J.P. Morgan
Geoff Haire – UBS
Rikin Patel – Exane
Oliver Schwarz – Warburg
Julia Bock
Ladies and gentlemen, welcome to the K+S Second Quarter 2022 Earnings Call. After some opening remarks by Dr. Lohr, CEO and CFO, we will direct the jump into Q&A. Some technical notes. Please refer to our disclaimer on Page 2 of the presentation available online. Then the note on data privacy. Please note that the Teams session will be recorded, webcasted, and be available as a reply on our homepage afterwards.
People asking a question in the Teams session have to be aware that by turning on their camera and microphone, they give consent to saving and replaying video and audio sequences.
Now, I’d like to turn over to Dr. Lohr for the opening remarks.
Burkhard Lohr
Thank you, Julia. Good morning, everybody, and welcome to our Q2 conference. And this time, I’m not going to render a speech, then we have more time for Q&A, but I would like to highlight three topics. First, our free cash flow. We had a very strong free cash flow development in Q1 and in Q2, but please take into account that we also had increased working capital.
Only in Q2, we had working capital of more than €400 million additionally. That is due to the high prices and the high receivables and that will translate into free cash flows in the months to come and we have seen already a very strong free cash flow in July. Second, we have incorporated in our guidance, a low triple digit million euro amount for the potential gas shortage in the course of this year.
And the third remark would be, agriculture business and fertilizer business still has a very strong environment and we believe this is not only the case for the rest of 2022. And now I’m looking very forward to your questions.
Question-and-Answer Session
A – Julia Bock
Thank you very much, Dr. Lohr. As this question will be one which a lot of participants have, I would like to ask it before we start with the live Q&A. How do you assess possible impacts of a lack of gas in the upcoming winter for your German operations and costs?
Burkhard Lohr
Yeah, that’s a very important topic. And I’ve mentioned the amount already. So, we have chosen a probable scenario. Of course, it’s not the only scenario, but we believe that this is very probable. And we have taken two items as of first of October. First of all, [€50 megawatt] [ph] hours additional gas costs due to the Section 26 of the Energy Security of Supply Act. And we have assumed that there will be a shortage of 25% over the whole Q4 and this leads to the amount that I’ve mentioned.
Julia Bock
Thank you for that. Ladies and gentlemen, you now have the opportunity to ask questions to us. [Operator Instructions] This brings me to our first question from Lisa De Neve from Morgan Stanley. Please unmute yourself, Lisa, and switch on your camera.
Lisa De Neve
Hi. Good morning. I hope you can hear and see me.
Julia Bock
Yes. Good morning.
Lisa De Neve
I have two questions. I’ll just ask them one by one. So, the first one is, you had very good second quarter results, and it was really nice to see that you sort of reconfirmed your EBITDA guidance of 2.3 billion to 2.6 billion for the full-year, could you just share what’s included in the lower-end and the higher-end of that guidance?
Burkhard Lohr
Yeah. Okay. You know that there are a lot of indicators who impact our earning, but the strongest impact could come from the gas situation in Germany. And when we talk about the lower-end, then we see a scenario which is by far more dramatic than the one we have chosen. And the same is true for the upper end if there is no gas shortage then we are going more towards the upper-end. Of course, pricing, etcetera, are also impacts, but we are already in August and so we are able to assess that quite well.
Lisa De Neve
Okay. Thank you. And then my second question, and then after that, I jump back into the queue, it is related to, sort of the low water levels in the Werra River, I’m aware you sort of carried out the number of initiatives to reduce your reliance on the Werra River, but would it just be possible to share how much storage capacity you have today and how much of that is used? So some details around that would be very helpful. Thank you.
Burkhard Lohr
Yes, the situation is really extraordinary. We have always looked into the year 2018, but 2022 so far is much drier than it was in 2018, but we have changed a lot in the setup of the Werra sites. You mentioned already the basins. We have roughly two-third filled of that, but we expect approval for another 400,000 cubic meters that gives us a lot of flexibility.
We have additional possibilities to store waters outside the Werra River. And we have also managed to find ways to optimize our production on the Werra side to reduce the water impact. And all-in-all, we believe that there will be – we will manage even this extraordinary situation without any standstills.
Lisa De Neve
Okay. Thank you very much. Just one follow-up. Your comments mostly related to the production, are there any, sort of other disruptions potentially on the logistical side that we have to take into account?
Burkhard Lohr
Yes. Logistics are very difficult. The whole European logistic system is under stress for many reasons. Gas – oil power stations are coming back into place and we have to move coal and the river flows are low. And we are seeing impacts, but these impacts are already incorporated in our guidance that we are going to sell 7.5 million tons of potash product.
Lisa De Neve
Thank you very much.
Burkhard Lohr
You’re welcome.
Julia Bock
Our next question comes from Michael Schaefer from ODDO. Please unmute yourself and switch on your camera.
Michael Schaefer
So thanks for taking my question, indeed. Michael Schaefer from ODDO BHF. I have two questions. On the first one, given what you’ve baked into your outlook in the fourth quarter at [indiscernible] are the first two to be that conservative on that end. So, I wonder on the gas savings measures or potential mitigation opportunities you have? I mean, you are consuming around [6 terawatt hours] [ph] in Germany on an annual basis. I wonder whether you can walk us through the short-term and maybe more the mid-term measures you can implement to reduce the overall gas consumption and hence the bill associated to that one. And also, linked to this, if you can elaborate on your KCF plant, which is consuming a lot of gas as well, whether you are in contact with the regulatory authorities, whether this can provide savings as well? So, this will be my first question.
Burkhard Lohr
Yes, thank you very much. Let’s start with the KCF plant, here we have no way to save any gas because we need that desperately to manage our water situation, especially in this dry summer, but we have a lot of opportunities to switch fuels. And sometimes with short notice, for example, in Neuhof, we have already oil tanks. We have oil tanks filled. Everything is ready to switch if necessary.
In some other areas, we are not that far that most probably will not be possible to implement before the next winter, but we’re going to do that anyway next year to be prepared for the following winter, which might be even more difficult than the current winter. To give you one more example, we have a long list of measures we have bought significant volumes of LPG, stored in one of our [caverns in Denmark] [ph], and we want to use that in [sealants] [ph].
Therefore, we have to implement some measures that will be finished early next year. And then we would be prepared in [indiscernible] for a shortage situation for the winter 2023 and 2024.
Michael Schaefer
Related to this one, can you quantify maybe with the kind of savings potential based on the 6 terawatt hours we as a starting base?
Burkhard Lohr
Yes, I wouldn’t call it a saving measure. It’s more or less to safeguard full production. The costs, for example, APG costs are – it’s available – it’s going to be available, but it’s not that much cheaper than natural gas currently. But losing production is the most costly thing that could happen to us. That’s why we prepare these measures.
Michael Schaefer
Okay. Thanks. My second question would be on your energy logistics additional costs, which you have, now I think raised at least verbally. So, I wonder when we entered the year, I think we talked about something like 240 million of extra costs coming from that end. Now, we have already reached this level after the first half. So, I wonder whether you can shed some more light on the moving parts when it comes to logistics costs? What was the kind of excessive costs you are facing right now? And to what extent do you expect this to normalize once logistics is normalizing?
Julia Bock
Yes, I would take that question Michael. So, we have written in our report that we see a higher triple digit million amount for all kinds of cost inflation. Yes. And that divides, for sure, into energy, logistics, and material. If you look at energy, you have the normal more than 100 million that we always mentioned right for the higher rate that we secured at [indiscernible]. And on top of that now comes basically the low triple digit million amount, which you could put into that box, which would bring you definitely to, yes, more than €200 million for that end.
Logistics would be also more than €100 million. This has not changed dramatically only with an availability [high] [ph] with all the dryness we discussed and material is also more than 100 million and that brings you to this higher triple-digit number in total.
Michael Schaefer
Okay. Thank you very much. Thanks.
Julia Bock
The next question comes from Alexander Jones from Bank of America.
Alexander Jones
Perfect. Thanks very much for taking my questions. My first one, please, on the extra gas costs you’re now assuming. So, I think you’ve assumed €50 a megawatt hour of Section 26 charge. Can you give us any idea of Section 24 was to be implemented and you had to pay higher costs on some of your contracted gas? What additional cost headwinds that could present for you this year?
Burkhard Lohr
Yes. Thank you for the question. With the decision of the German government to implement Section 26, they also decided not to implement Section 24. So they are, either you choose one or the other one. Economically, it’s for us a better choice of the German government because we have nice hedges and they stay in place. We only have to pay an extra levy.
Alexander Jones
Great, understood. And then the second question on the potash outlook, you mentioned in your opening remarks that you expect this to be strong, not just this year, but into next year. Can you give us a little more color on how you see both the supply side evolving and how much product out of Eastern Europe and also the demand side given quite substantial demand destruction we’ve seen here today? Thank you.
Burkhard Lohr
Yes. Why am I so positive here? First of all, there is not a high availability of agricultural products. We see the situation in Ukraine. There’s not much moving and shortage all over the world. And we see a shortage in demand. Of course, I have no insights in what Belarus and Uralkali and EuroChem are planning, but we see they are not in the markets. Uralkali might come back a little bit quicker, but Belaruskali with a capacity of 12 million tons out of a market of 70 million. It’s a meaningful player and they obviously have a problem far beyond 2022. And in addition, with slightly lower prices, so, profitability for farmers are increasing. This is a very good environment and that’s why I see no reason why 2023 should not be a good year as well.
Alexander Jones
Okay. Thank you.
Burkhard Lohr
Welcome.
Julia Bock
The next question comes from Christian Faitz from Kepler.
Christian Faitz
Yes, good morning, everyone. Couple of questions, if my may. I want to start with the first one. Can you shed some light on your energy costs in Canada, you flagged very well the European situation or German situation, how are your energy costs evolving in Canada at this point?
Julia Bock
Also in Canada, we are hedged to more than 50%, basically. Yes. So, the spot prices are as in Germany not hitting us short-term, yes, but for sure, if you put it into the long-term DCF model, you also have the spot prices available and the hedges we do for that rolling time, but also here we have the three years’ time frame applicable.
Christian Faitz
Okay, right. Thank you.
Burkhard Lohr
The spot prices are increasing in North America as well, but of course, not as much as what we are seeing in Europe.
Christian Faitz
No, sure. We see that. Great. Thank you. And second, demand destruction. I mean, first of all, I would like to ask you to [indiscernible] the aftermath of demand destruction in the potash market because I just don’t see it. Talking about demand in Brazil, how is the Brazilian season coming off in terms of heading into the application season. What are your sales people saying on the ground? Thank you.
Burkhard Lohr
That’s a very important question. The demand started a little bit later than normal due to inventories, which were available in the country and at the harbor, but as we speak, of course, I always get an update before this conferences, we see a noble and strong demand and we believe by the end of the year the inventories should be on a normal level again.
Christian Faitz
Okay, excellent. And then third and final question, you had relatively high hedging costs in Q2, if I’m not mistaken, can you elucidate that a bit? Thank you.
Julia Bock
Yes, I can do that. That was related to the ex-hedging basically and also here we have a rolling system. And as we basically secured 70% of the revenues at the beginning of the year, the open position which you have because it’s rolling is rather to what the end of the year. That’s why in the full-year, we will see a positive net effect out of revenues and the hedging costs, but at the beginning of the year, we basically had the negative hedges at around 113, 114, 116, yes, against the good spot rate.
Christian Faitz
Okay. Thank you very much.
Burkhard Lohr
Welcome. Thanks.
Julia Bock
The next question comes from Markus Mayer from Baader. Marcus, can you unmute yourself? And, yes.
Markus Mayer
Sorry. Two questions from my side. I will ask them one by one. The first one is on the free cash flow; you have just said that free cash flow generation in July was strong as well. Maybe you can quantify how strong it was and also how your view on the second half of the year’s in particular, what do you expect in terms of [network capital] [ph] development?
Burkhard Lohr
Yes. Thank you for that, Question. Why should I highlight that number? We had roughly €300 million free cash flow only in July. So, we are on a very, very good track to end up in the range between €1 billion and €1.2 billion. But always please take into account this is before the CO2 emission rights and before the end of the factoring programs.
Markus Mayer
Okay, understood. Thank you for this. And second question would be, you stated that there have been price related demand declines in Western Europe. Do you expect this trend to continue in the second half? And do you also see similar effects in other regions that you’re selling your [other products]?
Burkhard Lohr
No, we’re seeing that mainly in Europe, but that goes along with – especially in the first quarter this year, non-availability of nitrogen. And so, if you cannot apply nitrogen, doesn’t make sense to apply potash. And we believe that the situation is normalizing as well and we are not seeing this shyness in other regions. And by the way, we had less demand, but also no supply from Eastern Europe. So, it was a balanced situation for us.
Markus Mayer
Okay. Thank you so much. I will jump back on into the queue.
Burkhard Lohr
Thank you.
Julia Bock
Thank you. The next question comes from Adrien Tamagno from Berenberg.
Adrien Tamagno
Hello? Hi. Can you see me?
Burkhard Lohr
Yes. Good morning.
Adrien Tamagno
Hi, good morning. One question on the use of cash going forward, will you just basically stay on the balance sheet in the next couple of months until your credit rate rating is going to be reduced?
Burkhard Lohr
Good question. I think the credit rating will increase by itself. It’s only a matter of time, but we have clear ideas what to do with our cash. One thing is, was mentioned earlier, we do the utmost to increase the ramp up in Bethune. That is not much we can do due to the situation that we are solution miners over there, but we can spend some additional CapEx, which is very well spent.
Then we have a major change in our Werra sites. We are going to be more precise on that with our Q3 call because then we have approval by the supervisory board. We want to run that site with lower water residues with less – with no further tail heap expansions with lower gas consumption and lower CO2 emissions. And of course, that makes the Werra site significantly more competitive. This is a program over a couple of years, but consumes mid-sized triple million CapEx amount, which is well spent.
Then of course, when the year-ends as we expect, we are going to talk with the supervisory board about dividend or maybe share buyback or whatever to let the shareholders participate in this good year.
Adrien Tamagno
Yes. That’s understood. And just coming back to potash, Q2 has been sort of the first quarter with massive disruption from Belarus and can you share some color around, which geographies did you allocate more tons? And do you expect this to continue in the coming quarters?
Julia Bock
Yes. So, the allocation in the first quarters would rather – or especially in the second quarter was more Europe. You saw that because although we had the demand destruction in Western Europe, we had higher demand from Northern Europe and Eastern Europe, especially because competitors would not have been available on that side. And we saw higher volumes to Brazil and Southeast Asia for sure, right.
I think as with everyone, if you look into the China inventory figures, there were not much deliveries going to China because just the netbacks with this old contract were not attractive.
Adrien Tamagno
Okay. Thank you.
Burkhard Lohr
Thank you.
Julia Bock
The next question comes from Chetan Udeshi from J.P. Morgan.
Chetan Udeshi
Yeah. Hi. Good morning. I was just looking at the second quarter EBITDA bridge, and it’s clearly some provision that you have taken, firstly, 23 million something. Can you confirm that is more a one-off in nature? It’s not something we should expect. And then, you know, Julia, I don’t think you quantified the hedging laws, but what I’m trying to get to is, if I assume that provision is one-off, there is some hedging loss, let’s say, whatever that number is, clearly, it’s going to be more than 30 million. It seems the underlying EBITDA run rate in second quarter should have been more than €750 million. And based on all the things you are seeing at the moment with volume guidance, second half pricing being higher than Q2 modestly, why can’t we just do the [750×2] [ph] for second half before any impact from production and gas levy? I mean, is there anything else which is changing from your perspective in second half versus second quarter run rate?
Burkhard Lohr
Yes. You will always have some moving parts. The provision is a one-off, but you have to take into account that you always have some change in provisions. We are going to have the more dry part of the year in the third quarter, logistic situation will be even more stressed than in the first, especially first and second quarter. And if you take all that into account, plus the gas situation, you end up in quite in the middle of that range.
Chetan Udeshi
Okay. Thank you.
Julia Bock
The next question comes from Geoff Haire from UBS.
Geoff Haire
Good morning. Thank you for the opportunity to ask a question. I just wanted to ask, obviously, you’ve taken a stance that you expect to see gas curtailment in Germany. I think from memory, you’re the only company in the chemical industry that’s done that, but at the same time, obviously, potash is quite key to food production and also to healthcare. So, do you assume that you’re not going to get any prioritization from the German government on gas supplies?
Burkhard Lohr
We had discussions with [indiscernible], the network agency – Energy Network Agency. Yes, they know that we are system relevant, but there are so many system relevant companies out there. It’s almost impossible to prioritize. Yes, there is a chance that we are not going to be affected, but we wanted to give you flavor what that could mean if we are affected and now we have made that transparent, I think that is helpful.
If it doesn’t come, it’s on top. And why do other companies not disclose that? Maybe it’s easier for us. We don’t need the gas for the product itself, only as an energy source and we can quite easily assess what’s going to [indiscernible] our German sites.
Geoff Haire
Okay. Thank you.
Burkhard Lohr
You’re welcome. The next question comes from Rikin Patel from Exane.
Rikin Patel
Yes. Hi. Thanks for taking my questions. Just a follow-up on the gas guidance. So, when we think about the 25% cash shortage, does that necessarily correlate to a similar cuts in adoption? And when we think about 2023, I suppose when you think internally, are you also assuming that production is cut by a similar margin for the entirety of next year? That’d be helpful. Thanks.
Burkhard Lohr
Yes. When we cut theoretically, the 25%, we of course use all opportunities that we have already prepared to compensate energy via oil, there where it is possible and already prepared. So, the production impact is not that big to be frank. And when we look into 2023, first of all, we are not expecting production cut, gas supply cut for the full-year. We might talk about Q1 and might talk about Q4. Maybe even only one quarter. So, you cannot take multiply that by four. And we will have implemented more measures to compensate against the [shortage] [ph].
Rikin Patel
Thank you. And just another follow-up on pricing, in your specialty portfolio, is it safe to assume that some of your products outside of SOP are also following benchmark SOP prices up by the – by some of the magnitudes, [indiscernible] other names fairly stable?
Burkhard Lohr
As you know, the SOP price has not moved parallel to MOP that is due to the extraordinary high pricing. So, the premium is very small or almost fully consumed, but SOP prices are on high level. And the most other specialties are following the SOP trend rather than the MOP trend.
Rikin Patel
Okay. Thank you.
Burkhard Lohr
You’re welcome.
Julia Bock
Next question comes from Oliver Schwarz from Warburg.
Oliver Schwarz
So, finally. Thank you for taking my questions. I’ve got a couple of smaller ones. I will get them to you one by one. Firstly, can you please elaborate a bit about your FX hedging rate for 2023 from today’s perspective? That would be my first one.
Julia Bock
Can you put the other one? Because I have to… [Multiple Speakers]
Oliver Schwarz
Can you talk about the anticipated, let’s say, the progression of labor costs, especially in Germany, as the German mines are much more labor intensive than the [Canadian miners] [ph].
Burkhard Lohr
Yes. We always have a very good relationship to our unions and our work councils. Of course, they are expecting a higher increase than in the past, due to inflation, but that must not necessarily be in a percentage, but it could be a one-time payment. And we believe that in total roughly 4% etcetera could be feasible for next year.
Oliver Schwarz
Just to clarify, is it must not or need not?
Burkhard Lohr
Now, I don’t remember the full sentence.
Oliver Schwarz
You say it must not be progression, but it might be, let’s say, a one-time payment.
Burkhard Lohr
Yeah. Need not. Need not.
Oliver Schwarz
Okay. Okay. Got it.
Julia Bock
Okay. I have the answer for the other one. So, the hedging quota basically is again 70% and we are between 109 and a bit more than 110 here in the range of best case and worst case.
Oliver Schwarz
Okay. So, basically, if the dollar stays at parity, what would additional costs be from today’s perspective, simply from hedging at those rates?
Julia Bock
I would say, as it was in the second quarter, the case basically in that quarters where we have the hedging, it levels out right? So, you have the good positive effect in revenues and you have the same amount in minus in, yes, on the cost side, so that it levels out. Yes, and in quarters where you have the open position, then you have the chance to participate at that parity.
Oliver Schwarz
Got it. Thank you. Perhaps a quick one on China, there seems to be an outlet that is only used let’s say, when every other region is what – when the demand in every other region is completely satisfied, due to the much more unattractive price level, is that something you want to continue in the future because I can’t see any, let’s say, major ties between you and Chinese customers develop on that basis?
Burkhard Lohr
Yes, of course, we always try to optimize our netbacks, and reducing the Chinese volume is an optimization to the fact that you have mentioned already, but because of the product mix in Bethune, we of course have to supply some product into China. It was 1 million tons a year in the past. We are now rather talking about 6,000, maybe 500,000 tons. So that is a range in which we can move.
Oliver Schwarz
Thank you. That’s all from my side. Thank you for answering my questions.
Burkhard Lohr
Thank you very much.
Julia Bock
The next and last question which I’m seeing is coming from [Ying Wang] [ph] and I don’t know the research house because I don’t know the name. So, I’m…
Unidentified Analyst
Hi. Thank you for taking my question. This is [Ying] [ph] an from BlackRock. Just so quickly, can you just quickly comment on your expectations on the capital structure for upcoming maturities? Any plan of refinancing or buyback? Thank you.
Burkhard Lohr
Yes, we have already bought back everything which was possible and available. And now we are waiting for the maturity in 2024 – 2023, sorry, but we are not planning to refinancing this due to our strong cash flow. And I indicated already that the cash situation in 2023 should be quite comfortable as well.
Unidentified Analyst
Great. Thank you very much.
Burkhard Lohr
Thank you. Yes. That was the last question. Thank you very much for your participation. You know that Investor Relations is always available for you and I’m going to – we are going on the road next week and hopefully I will see the one or the other of you. Thank you for joining us. We are going to continue this setup without rendering a speech in the beginning. I hope you enjoyed it. All the best to you and bye-bye.
Julia Bock
Bye.
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