K+S AG

Thorsten Boeckers - CFO Burkhard Lohr - Chairman

Markus Mayer - Baader-Helvea Oliver Schwarz - Warburg Research Neil Tyler - Redburn Patrick Rafaisz - UBS Investment Bank Andreas Heine - MainFirst Bank AG Knud Hinkel - equinet Bank AG Thomas Swoboda - Societe Generale Christian Faitz - Kepler Cheuvreux Marc Gabriel - Bankhaus Lampe KG Michael Schäfer - Commerzbank AG

Yes, thank you, very much. Ladies and gentlemen, welcome to our Q1 conference call, and with me here, as usual, we have Thorsten Boeckers, our CFO; Jörg Bettenhausen, our Head of Corporate Finance and Accounting; and Lutz Grüten, our Head of Investor Relations.

And after a brief presentation, and this will be quite brief this time, we'll be happy to take your questions. Let me start with the highlights of the first quarter on Slide 3.

A most important message on that slide is that sales and EBITDA are up over last year's first quarter. Our revenues rose by 4% on the back of high production availability, mainly from Bethune, higher de-icing volumes, the absence of weather-related standstills at the Werra plant and of course, further increasing MOP market prices.

On the other hand, the late start into the European fertilizer season and the weaker U.S. dollar had a negative impact on sales.

From an earnings perspective, we made good progress as well. Our EBITDA increased from €211 million to €237 million.

This was mainly due to better earnings contributions from our new mine in Canada. However, we are still facing some challenges at our Werra plant after the turbulent time in 2016 and beginning of 2017.

Despite the fact that our Werra production is up year-on-year, we are still operating below the technical capacity with the negative effects on our profitability. On top, freight costs increased significantly.

However, in spite of the described headwinds, we have seen solid results. Our adjusted free cash flow improved, and our financial leverage was further reduced.

We remain optimistic for the upcoming quarters, and we confirm our outlook. Now let's have a look at our potash business on Slide 4.

From a market perspective, global demand is healthy. However, after a late start into the European season on the back of a cold and muddy March, we lost some volumes in Q1 and may not recover that in Q2.

Overall, market prices for MOP and potash specialties increased further. Nevertheless, compared to Q1 2017, our average selling price was burdened by FX effects and a shift in our product mix.

All in all, as you can see in the table below, our EBITDA margin rose remarkably compared to the former quarters. And furthermore, our cash unit cost came down significantly, mainly due to Bethune.

That means we are making very good progress to reach a level of below €200 per tonne on a full year basis. Let's move on to Slide 5 to talk about salt.

On this slide, I would like to focus on three things. First of all, we had a good winter in the U.S.

which was quite supportive for volumes in our de-icing business. However, these volumes were mainly generated in regions with low prices.

Nevertheless, tight inventories could be supportive within the upcoming tenders for the next winter season. Secondly, the average selling price in non-de-icing softened versus last year on the back of unfavorable FX rates and a higher share of lower-priced industrial salt products which however has nice profit contribution.

And finally and in line with our competitors, we are facing increasing freight costs mainly in the U.S. All in all, Q1 2018 was okay, but not perfect.

And now let's talk about our view on the full year 2018. You find this on Slide 6.

The most important message on that slide is that we confirm our full year guidance. We expect our EBITDA to be up significantly on last year's achievements.

Earnings momentum will be back-end loaded. In addition, the adjusted free cash flow should improve further and we are making good progress to deliver on our targets to becoming free cash flow positive in 2019.

This makes me very optimistic about the future of K+S. And with our Shaping 2030 strategy, we pave the way to further growth.

Let's move to Slide 7 and an update on our new strategy. The project to lift synergies of at least €150 million by the end of 2020 has started.

Moreover, after having presented a basic concept of our new organization internally, we are now working on a detailed concept. We will be happy to offer you more details on our Capital Markets Day.

You should have already received our invitation at the end of last week. Again, we know Bethune is not around the corner, however, we would be happy to host you for 24 hours at our Capital Markets Day on September 5.

Please note that we would need to see your feedback by no later than end of June. Now I thank you for your attention.

And as always, we are happy to take your questions.

Two questions on the Salt business, only small ones. The first one is on the DNA of salt, which was €19 million versus - over last quarter's €26 million or €30 million.

Is this a new run rate or was there any kind of one-off effect in the DNA number here? And the second one is on the industrial salt prices, which are down.

Maybe you can explain this effect a little bit more.

Morning, Markus, it's Thorsten here. Yes, the about €20 million per quarter on DNA for salt is what I would consider as a run rate for this year.

Okay.

Sorry, I didn't get the second question.

Industrial salt prices, so we always have an impact from the product mix. I think we have stressed a couple of times that we have a very nice new application, copper leaching, with a nice margin but with a low total price that is only one of many examples.

And here we have the main impact of the product mix in the industrial prices as well. And what we have seen in the de-icing business was also true for the industrial segment and the consumers.

The freight costs had a negative impact in the first quarter beside of course the mainly U.S.-based business. Our FX rates had a negative impact due to the weaker U.S.

dollar. And these three reasons in total were the - that is the reasons for the impact that we have seen on the industrial salt in the first quarter.

That gives me the opportunity to remind everybody [Operator Instructions]. Thank you.

I have three of them, we'll go through them once at a time. Firstly, main effects.

There seems to be - in your waterfall chart on Slide 6, there seems to be a positive effect on EBITDA from the closure of Sigmundshall, if I understand that correctly. Could you highlight or flesh that out for me what that positive effect on EBITDA might be and how that came to be?

Yes, if we compare the potential earnings in 2018 to the actuals in '17, you have to take into account that we had a significant impact from the provisions we had to build, together with the decision to close Sigmundshall. And that turns, of course, if you compare '17 to '18, to a positive effect.

But I should also like to mention that - and that was indicated earlier, that the running business in Sigmundshall delivers a negative impact on earnings and on cash flow, slightly but still negative, and that is the reason why we have taken the decision to close it by the end of this year.

May I have a follow-up on that? Would that be a positive - sorry, a negative effect on 2017's EBITDA or on the EBIT level, if you're talking about a negative contribution by Sigmundshall in 2017?

Both levels.

Next question would be on the - your assumptions regarding the potash price in 2018. If you're talking about a slight increase that you assume for the potash price, is that the headlight price or is that like in U.S.

dollars in the world market like in Brazil or so, or is that the compound price of K+S that you expect to realize in 2018 in euros?

Yes, first of all, I would very briefly elaborate on what we are seeing in the markets, and that is a nice development. Prices are increasing steadily.

We have seen that for quite a while, and there is no reason. And I think more and more market participants are seeing it this way to believe that this come - could come to an end.

Next important indicator, of course, are the contracts in China and India. They will show an increase, for sure.

Over what magnitude, we do not know now. What does it mean for us?

You have mentioned all the impacts. First of all, product mix with Bethune.

We produce MOP, which has an impact on our average blended selling price. We also have more volumes in the U.S.

dollar region so FX has an impact. But when we are talking about a slight increase of our average selling price, we mean our blended price overall in euros.

Very clear. And my last question would be on your free cash flow assumption for 2018 where you say it's - there will be a significant improvement, but it will be still negative.

At the financial year 2017 reporting stage, we saw that there was still slightly negative. So it seems that you might be expecting a more negative free cash flow than originally anticipated.

Would that be a fair takeaway?

Yes. First of all, I think we have made, over years, significant improvements, minus €1,700 and - €750 million in '16, minus €350 million in '17 and it will be a significant improvement again in '18.

And I've just confirmed with my speech that we see a positive free cash flow in 2019. However, I have also indicated that we have seen some headwinds in the first quarter, like FX, like the regional mix of our de-icing business.

The freight cost is a real issue, especially for the Salt business. We have seen the late spring season in the potash business, and we do not expect to recover all of that in the second quarter.

And we still have some issues at the Werra. So we have lost some cash flow potential in the first quarter, and that is the reason why we have taken this slight adjustment in our guidance concerning the free cash flow.

Two from me. The first one, sticking with the cash flow.

The - can you talk about the CapEx run rate for this year? The first quarter spend, both in terms of the number you disclosed on the front of the release and also the cash flow, was below the run rate I had been anticipating.

So I wonder if you could expand on that and obviously if there has been any changes to your CapEx outlook for this year? That's the first one, please.

Thank you. No, you know what - when you look at the phasing throughout the quarters over the last couple of years, this was always a little bit distorted by the Bethune investment.

And now that they have gone, at least from a project point of view and so we go to maintenance CapEx there, you see a different phasing, which means we see a ramp-up of the CapEx later in the year in H2, and Q1 is not a good run rate. We expect still a CapEx of about €600 million for 2018.

Second question is on the realized potash price that you achieved in the European business. And the sequential in year-on-year step-up surprised me, at least slightly.

You mentioned in your introductory comments the MOP contribution was a factor. Is there anything else within there that seasonally is making a difference or can we perhaps take the Q1 relative realized prices as a good guide for how the product mix is likely to remain over the rest of the year?

Yes I mean, we have also seen in Europe the increase in the MOP prices. And you know that we always have a time lag before we see those really materializing in our P&L.

But part of this was a part in Q1 already. Also, when we look at the specialties, they have not even been better than we expected but even increased a little bit over the last couple of weeks.

And so what Burkhard said earlier, from a market point of view, we have a pretty good support also in euros.

Three questions, please. The first is on the production issues.

You still have in Germany, from what I understand, a labor shortage and machinery uptime issues. Can you put a number on that, how much you think you've lost here in terms of volumes versus what you could have produced here and how long this will continue?

Okay, yes, please give me the opportunity very briefly to elaborate what's going to happen there, what's going on there. And you have to really take - try to imagine there's a size 4,500 people are working there.

At the end of 2015, we did not know whether we get a deep well injection permit or not. If not at all, that would have - could have meant closing the site.

And they feared for their jobs, and we got the deep well injection permit, which was limited to 750,000 cubic meters. So we had to start - we had an on and off in the Werra site, in Hattorf especially we had short work.

We did not know will the situation change. Now we have settled all environmental issues.

We are very proud on having that solved, but that of course, still has an effect on our employees. The motivation is not the way it should be.

We have open positions, we have in the maintenance area open positions, which leads to availability of material and machinery, which is below our expectation. And of course, this all had a significant earnings effect and we have cut budgets like the maintenance budgets.

Now we see that this, of course, had a negative effect as well. In a nutshell, we have elaborated on that in the March call and we are fully aware what to do and how to solve the problems.

But that is not to be solved in a quarter. And we have lost against our expectation, or against the potential of that size, more than 100,000 tonnes in the first quarter of this year.

This will not disappear again totally in Q2, but we hope that we will be able to solve it over the remainder of the year.

And then secondly, on Bethune, can you talk a bit - I realize you won't be disclosing production for Bethune separately, but can you talk a bit about where you see yourself versus plan for the full year?

Yes, we are very happy with the development of our site in Bethune, and we are still in ramp-up, and ramp-up means you cannot fully produce the theoretical capacity day by day because you find reasons that you have to adjust to one or the other thing. Not only we are in the ramp-up, our partners are in ramp-up as well, like CP is an important partner for us in the logistic chain.

But they have to get used to handle these volumes, these additional volumes. But we are, again, taking all that into account, compared to our expectations, we are very happy with the current status, and we have indicated that we would see a positive EBITDA contribution, breakeven in the course of this year from the Bethune side.

And the first quarter makes us very hopeful that we will be able to achieve that.

And then the last question would be on cash flow. Nice contribution from inventory reduction, I suppose that's also related to Bethune, the increase here year-on-year despite the late start to the season in Europe.

And - but can you talk a bit about the change in current provisions, what exactly is the delta here to prior year?

Patrick, this is rather related to last year because the one-off payment we had to the employees was booked as a provision there, and this is no longer the case this year. And this is the movement we see in the working capital.

That was €27 million. Is that correct?

This was €30 million-ish, yes.

I have also three questions, I'll ask them also 1 by 1. The first is in the waterfall chart you have presented for the EBITDA change in the first quarter.

The FX impact of €11 million, is that exclusively sold as you have good hunches in the potash business?

Yes, this is - I would say to the largest extent it's salt because on an earnings level, this is really only marginally coming from Kali.

Is that ongoing like this? So is that you are very nicely hedged throughout the year in potash so that FX is not an issue?

I tried to look into the crystal ball right now, but I mean, we have favorable hedges done over the last couple of years. So if we see an FX impact it's certainly coming from the Salt business and less from potash.

Okay, that was the first question. The second, my understanding is that with the increase in the Werra mine production that also the product mix improves more to the specialties.

Could you update it a little bit how you see that progressing or was that also held back by the production issues you had at the Werra?

Yes, you're right and I cannot - I'm not [indiscernible] this with clear numbers. But the Werra is the center for our specialty.

And inside the Werra, we have several mines, as you know. And Hattorf is the one which is affected the most.

It's the one where we had more than 200 days standstill in 2016, and Hattorf is the one with the SOP production. So the more we solve our issues, the more we will be able to produce and sell our high-priced specialties.

So I only can give you this qualitative indication.

That's fine, all really helpful. And then last on Bethune, you already indicated that you are still in a ramp-up phase where you are not at, let's say, nameplate capacity yet.

But I would assume that the increase from quarter-to-quarter is rather not steep so that you are already at the very high level and that progress earnings-wise having everything else flat, so the mix by regions and the potash price should be rather slow. So it's not that you have a tremendous increase from Q1 to Q4, you are already in a good level in Q1, which gradually improves.

Is that the right way to look at it?

Yes, the fact that you already see a significant positive impact on our average cost per tonne shows that there was a significant production already in the first quarter. And we are very happy to see that change, if you compare the €214 blended over the year 2017 euros per tonne, now we are at €190 roughly.

That is a nice development and shows the real potential of Bethune. And - but again, we are in the ramp-up.

Our expectation for Q1 was the lowest. But as you said, it's not a significant increase quarter-over-quarter for the remainder of the year.

I also got three questions. I would like to dig a little bit deeper into the potash price side.

First question would be that sequentially, comparing Q1 to Q4 last year, the average selling price in overseas is down to - from €276 to €269. Is that - is my assumption correct, that it's because of Bethune, because the mix is deteriorated a little bit?

When you - sequentially you said, right?

Yes, Q4 2017 versus...

Yes, I mean, that's one portion of it. And I mean, then you have also always a difference between the quarters in the product mix anyway because of the different seasons.

So it's partly Bethune and it's partly product mix because of demand of doing specialties and commodities product.

Second question, could you remind me once again why the realized potash price is below the current spot price we see in Brazil, for example? So that is above USD 300 per tonne.

You have prices overseas of, as already mentioned, around USD 270. So where comes the gap from?

Yes, thanks for that question. I think you will see that with all the players in the potash market that the prices that you see in the SMV and the prices that you see in the realized prices are differing because we differ between the gross and the net portion of the price.

There's always a significant portion in between. And that if you are talking about roughly $300 in Brazil, yes, $270, $280 is the net price for us.

Okay, and last question would be on the specialties. According to my calculations, sequentially, they are significantly up.

Could you give an explanation why is this so positive?

Yes, again, it's also a product mix question. And as I said earlier, I took the example of SOP, I think.

We have seen a better pricing in SOP than we have expected and it was also up over the last couple of weeks.

I will risk three questions as well, two on potash, one on salt. First one, on salt, in terms of the regions you serve with de-icing salt, could you just talk about the season and inventories in the most important regions, please?

Yes, first of all, it was very important to have a nice winter weather in the Midwest because we haven't seen a lot of winter weather for years in that area. And that led, of course, to high inventories and unfortunately to decreasing prices in the past historical bidding season.

That was - had a negative impact in the first quarter. But having this low inventory situation in the Midwest, we can be positive for the expectation of the next bidding season there, which will - is going to take place in late summer, and will then mostly have a positive impact on the first quarter of 2008 - '19.

A slight impact in the course of this year as well, but we know that the first quarter is - delivers higher volumes than the fourth quarter. The other U.S.

regions are comparable but not with that magnitude. The East Coast, we have seen nice winter weather as well, and the inventories are on a below average level.

Canada is running well anyway year by year. That is not such an issue.

But I think you were asking about U.S. regions.

Is that correct?

If you could comment on Europe as well, that would be helpful.

Yes. Europe, the winter weather was okay.

It was below 2017 but the level of winter weather was okay to have quite low inventories anyway as well. And as you know, the volatility in prices in Europe is not that significant as it is in the U.S.

business. So the precondition for the next season are not too bad.

Perfect. The second question, on potash, you did renegotiate a bigger contract in SOP recently.

The question is, in terms of the price increase, did we already see the full effect in Q1 in your numbers? Or will it be still a tailwind sequentially into Q2?

No, it's included in the Q1 because the contract has been concluded by the end of '17.

Perfect. And the last question on your involvement in the contract negotiations in potash historically, you haven't been participating.

Now with Bethune, are you actively negotiating with China and India? And if I may ask, do you expect to ship significant volumes from Bethune to those contract customers in the second half of the year?

I think we have to put this in a context. So from a market point of view, we are still a very small supplier to China.

And we have - we're certainly, thanks to Bethune, increasing our share significantly, but we still remain a small player, which means we are not at the negotiation table in the first couple of rounds. But of course, we negotiate also with our customers afterwards.

But certainly, use the price as a guideline.

Two questions, if I may. First of all, are your Bethune operations in any way affected by the general rail problems in Canada?

Yes, that is a really good question because it merits more than one perspective. First as I mentioned earlier that ramp-up is not only an issue that we have to deliver, it's an issue that our partners also have to deliver.

And so that gives you an indication that it was not always perfect in the past. And - but we believe that we have overcome the situation and that we are going more and more in the normal logistical, yes, approach.

And - but maybe you heard about a potential strike that was closed already at the end of April, beginning May. Now we expect to have an election of one union or two unions about a potential strike, which then could start at the end of May or beginning June.

And that, of course, would have an impact on all Canadian producers.

And then second question, we saw a rather steep sequential and year-on-year increase in interest rate payments in Q1. Can you give us any guidance of interest - of the interest line in your P&L going forward?

Yes, Christian. What you saw especially was that with the start of the Bethune mine, we no longer capitalize the interest costs.

And this was why the financial result increased significantly. And I think we have always guided and we stick to that, that the financial results will be a little bit more than minus €100 million this year.

Just one question left, that is on the salt price negotiations, especially in the U.S. What are your targets here?

We've seen prices year-on-year down, also impacted by the FX, but for the next round, what are your assumptions? Will we see here a double-digit price increase?

And could it even be up to 20% or is that too far away?

Thanks, Mr. Gabriel, for that question.

Unfortunately, I cannot confirm 10% or 20% or 30%. I also only can give you an indication or a qualitative indication.

I think the area where the prices were depressed the most that's the Midwest. And here, we had the strongest volumes in total in the first quarter 2018, at least the strongest increase compared to what we have seen in the quarter of '17.

And that is a strong indication for a nice development in terms of new salt prices. Will that be double-digit 20% or whatever?

It's easily too early because we have not seen a single indication so far. There is good reason to believe that we will have at least some tailwind in the East Coast as well.

And as I said earlier, Europe is quite stable anyway. But there is at least no negative pressure on the European prices when it comes to new bids.

I hope that at least gives you some indication.

Okay, and maybe one follow-up with regards to the CapEx. You mentioned that it's - it will be higher, that level.

But what are other specific things you have in mind for higher CapEx in the next quarters or is that mainly now maintenance CapEx? Or should we expect here also some higher cash outflow for investments?

I don't know.

Yes, the first was a little bit of a special quarter because there was no more production investment in this - in the sites, Bethune. So we are now more or less in the normal run rate CapEx.

So maintenance CapEx, et cetera, in Bethune. And at the same time, we have not started our now biggest project, which is here in Germany, our heap extension in Hattorf.

That is going to start in the second quarter and we've always indicated, at least for the next 2 to 3 years, we will have our base CapEx and additionally, roughly €100 million of investments in heap extensions. We have to extend Hattorf this year.

We have to do the same thing with Wintershall next year and one year later, Zielitz [ph] is on the list, that is by chance. But then we are done for many, many years.

And that is the reason why we see a little bit more higher CapEx in the next quarters.

The first would be on salt. You're guiding now for a moderate EBITDA growth in the full year '18 while delivering 11% decline in the first quarter.

So if I just take 5% basic EBITDA growth for the full year, this implies something at 9% growth in the remaining three quarters. I wonder what you have baked in into this kind of expectation for the remaining three quarters of the year.

What we - Michael, what you certainly will continue to see is that the freight cost issue from the first quarter will remain. On the other hand, I mean we also try to mitigate what we have seen in the first quarter a little bit.

We certainly try to pass on parts of the higher freight costs to the market, but we won't see that before the negotiations have finalized for the next season. So as early as Q3, probably.

And also, I mean, the freight cost also hit the de-icing side. And also, we are working on measures there in order to mitigate the impacts.

So this is a little bit what we're going to do. So we talk about pricing and of course, also on the cost side, we try to find ways where we can mitigate the impact from the higher freight costs as good as possible.

And this is what you will see over the next couple of quarters.

Okay, and this belongs to both de-icing and non-de-icing products, I assume?

Yes.

Okay, second question would be on potash. So just to get a better understanding on your outlook, basically.

So we have seen now two quarters in a row with something like €190 per tonne cash unit costs, and you indicated earlier in your speech basically that you're fine with below €200. So - and still guiding also an ASP to be up slightly year-over-year while delivering something like minus 4% in the first quarter.

So is it fair to assume, basically, that in the upcoming quarters, we may see a widening spread in the sense that basically cash unit costs may remain where they are where you're benefiting from basically higher MOP prices and higher SOP prices, industrial price, et cetera, rolling in through the quarters? Is this the way we should look at the P&M segment in the quarters to come?

Yes, we said we expect - the average cost per tonne below €200. We are well below that in the first quarter.

There's no reason to expect the prices - the costs to rocket. But again, we have seen freight costs, significant freight costs increase, especially in the Salt business.

And we should be cautious for all the costs development, which could affect the potash business. Of course, the main portion, energy, gas in Bethune, for example, is already secured with long-lasting delivery contracts.

But again, that is a little bit of cautiousness. That's why we will not be more precise than only indicating it will be below €200 per tonne, which is a very nice development.

Okay, but there's nothing kind of extra maintenance you have to do which you already see right now which is inflating costs basically in the quarters to come? In Bethune I mean.

No.

Yes, thank you very much, first of all, for your time and your questions. Granted we have seen some hiccups, some issues in the first quarter.

Believe us, we're working hard to get all this settled and - but we are still positive for the remainder of the year that we will again increase our profitability significantly against the previous year, as we did in '17 compared to '16. And I would also remind you, please give us feedback on your participation on the Capital Markets Day.

And in addition, if you would like to get a flavor of our tomorrow's AGM, we would be happy to invite you at least to look into the Internet and see us there. Thank you very much, and looking forward to hear you, see you.

We will be on the road pretty soon again, pretty soon, and all the best to you for the rest of the day.