K+S AG

Thank you. Good morning, ladies and gentlemen.

Welcome to our Q2 conference call. Let's start right away on slide 3 with the highlights of the quarter.

Our EBITDA showed a nice improvement again, up plus 14% in Q1. We accelerated the momentum and achieved an increase of 24% in the second quarter over last year.

The unchanged favorable pricing environment, but also higher sales volumes in agriculture supported this success. The EBITDA of our operating unit Europe+ increased by 29%, while our EBITDA in Americas came out below last year's results, mainly on the back of higher logistics and maintenance costs.

Even more important is in the current transformation phase of our strategy that we again improved our cash flow. Compared to last year, our free cash flow increased by 150 million to more than EUR100 million in Q2.

With this, we report the best second quarter of free cash flow since 2011. In the first half of 2019, we delivered cash in more than EUR330 million.

And now, please turn to slide 4 to have a closer look at our de-leveraging progress. At the end of June, and calculated on the last 12 months base, our financial leverage came out at 4.4 times compared to 5.3 times at the end of 2018.

Adjusted for last year's weather related outage days, this multiple would have only been at 3.7 times. With these excellent results, after the first half of 2019, we are well on track to achieving our de-leveraging targets.

Please have a look on slide 5 to see the development in the different customer segments. And let's start with agriculture.

Mainly due to better pricing and higher volumes, revenues and EBITDA increased significantly. The EBITDA contribution from the tune was clearly positive and up against last year.

However, the latest Chinese statement to temporarily suspend MLP imports makes us a bit more cautious on the outlook for short term demand. Our customer segment industry is generating sound and relative stable margin.

Sales and EBITDA are fairly equal spread over the quarters. While sales were up slightly, higher costs for freight and maintenance had a negative impact on the quarterly EBITDA.

Both revenues and profits increased in our consumer business. A more favorable pricing environment, especially for water softening products help us to compensate for slightly lower sales volumes.

No surprise that based on a seasonally low quarter, our de-icing business in communities reported a negative EBITDA. However, based on the first half of this year, profitability is comparable with last year's achievements due to a jumpstart at the beginning of the year.

The biddings for the upcoming winter season started promising, especially in the Midwest and Canada. And now let's move to slide 6 and have a closer look at the wastewater situation.

Ladies and gentlemen, I'm sure all of you remember the challenging weather conditions in 2018. Due to the drought in Germany, we had to stop production at our Werra plant, which burdened our full year EBITDA by almost EUR110 million.

But we made sure to be better prepared in the future. We boosted our basin capacities for sailing wastewater from 500,000 to 600,000 cubic meters.

We increased our logistics capacity, transporting [indiscernible] to old mines and at the beginning of August, we received approval for an additional temporary underground storage facility of up to 400,000 cubic meters on time and as promised. Thanks to that, we feel comfortable to state that even in case of an extended drought, there is now a high probability to have no weather related issues in 2019.

On slide 7, I would like to give you an update on the current situation in Bethune. As already released some weeks ago, we will enter into the next phase to improve the quality of our Bethune products.

After we have installed grinder pumps in July, we will prepare and install cooling, sieving and crushing equipment in September, which will be fully up and running in the fourth quarter. The longer maintenance period will have an impact on our full year production, which is now anticipated to be around 1.7 million tons.

The expected quality improvement should show up in 2019 and can be recognized by our customer in 2020. Now please turn to the next slide to talk about the full year guidance.

First of all, we are narrowing our 2019 EBITDA guidance from a range of EUR700 million to EUR850 million to now EUR730 million to EUR830 million euros. This means a significant increase compared to 2018 and a small increase of our formerly guided midpoint by EUR5 million.

To reflect current spot rates, we changed our euro dollar exchange rate assumption from 120 to 115. The positive effect from this would overcompensate the extended maintenance period in Bethune and our temporarily more cautious assessments due to the Chinese imports.

Furthermore, we increased our free cash flow expectation. We now expect an adjusted free cash flow of at least EUR100 million when reaching the midpoint of our EBITDA guidance.

Ladies and gentlemen, this concludes my presentation. And we are now happy to take your questions.

Operator, please open the line for the question-and-answer session.

Yeah, two questions. So, I’ll them in a row.

At first, I'd like to understand a little bit more the unit cost progression in the agriculture division. I was expecting these to come a little bit lower than the outcome was, maybe you can elucidate a little bit more on that.

What has happened in the second quarter, and an update on what we should expect on the full year base? The last thing I knew it was and it should be slightly above EUR200 per ton.

Maybe you can provide, give an update. And there's one more, but I’ll stop here with that one.

This is Thorsten. The guidance, so we said that we're going to see a number this year about 200.

Mid-term, we want to go below the 200. I wouldn't over evaluate the effects in the second quarter, what you see here is based on a stated volume number, we have produced more, so we have on a production base number, the number looks much better.

What we want to do in future is we don't have the number yet. But we want to give you a different number in future to really reflect what were production costs by ton not affected by freight, et cetera, et cetera, so we are working on that.

But I can confirm that the goal of below 200 still stands, but not for this year.

But nothing specific in the second quarter?

No.

Okay, good. Question is on cash flow, indeed, very pleasing outcome.

Looking into the cash flow statement in details and the progress was to client high degree on this receivables and other short term assets. That’s very good that the networking capital management did improve that much, about how sustainable is it?

If we then look into 2020, I got the feeling that there is obviously good progress in the operating performance. But most of the free cash increase is more on the networking capital side rather than driven by the earnings.

Yeah, I would say, I mean, earnings as well. So I mean, the EBITDA, I'm looking at the half year, year-over-year.

So what I can confirm is, there are no extraordinaries in this number. We had an earnings improvement, also Bethune contributed to this.

When you look at the receivables side, I mean, what we are now realizing are the cash flows from the good potash business in the fourth quarter ’18, the strong American salt business in the first quarter ’19, these numbers come in. And beside of that, yeah, a couple of things.

I mean, we look, we recall, we talk about more active working capital management, we look better at receivables right now. So there's a strong interaction between our finance department and our sales department to see how we can realize our receivables.

We have to look better into what is coming in the rest of the month. So we believe we have a more accurate forecast that while we dare to say, we want to realize [indiscernible].

On the payable side as well, we don't see that in the numbers that much. But there's a strong focus from procurement on managing price/cash discount, payment terms.

So we always told you we want to manage it more actively and better. We have now taken a step down, I wouldn't expect that we do such a step every year.

But we do of course, our utmost the best we can to keep this level.

So maybe repeating what you said in my words, see, what you see in the networking capital trend this year is more normal than what we have seen last year. So then, if we go to 2020, and then there should not be a big distortion from that time.

Yeah, that's a good summary.

I have one question, and then I'll go back in line. Can you share with us your production plans for Bethune in 2020 already, when basically all the measures should be in place which you are taking now?

Thank you.

Yeah, thank you for the question. Good morning.

First of all, we have to deliver 2019 and we feel quite fine with the 1.7 million tons. And we have achieved exactly half of that in the first half and we should do more in the second half.

But there's a maintenance break that we have elaborated on, that’s why we see the same volume in the second half of this year. We will see a higher volume in 2020.

But it's too early to give a precise number, because that is mostly driven now out of secondary mining. And here, we are still learning and have to look into the outcome of how it runs secondary mining, harvesting in this year.

And then by the end of the year, we will be able to give you a more precise outlook for next year. But again, of course, there will be a step up.

I actually do have three questions. I will take them one by one.

First question is on your cautiousness regarding China, I think this is understandable. My question is you cautious in 2019, isn't this a reason to be cautious on 2020 as well.

How do you think this will pan out, please?

I think this is a temporary situation. And I remember that some of my colleagues are already very optimistic for 2020.

You know that they are disclosing their numbers before us. That's why I heard them saying that.

And I’m in line with them the course we have seen that situation earlier. I think the last time it was four years ago, when we had two high volumes in in China for several reasons, then there was a stop of imports for two or three, at max four months.

And we expect to see the same this time. The market is prepared for that.

And it will have an impact on this year. That's why we are a bit more cautious for this year.

And it might have an impact on the new price, which is difficult to say what that means, that will have an impact on 2020. But I'm not, in total, I'm optimistic for 2020.

And even with this hiccup in China, we expect the worldwide demand on the level of last year and last year was a good year. So we shouldn't forget that we are discussing on a very high level.

If I may follow-up, are we talking of your expectation on the contract price to be down year-over-year in 2020? Is this the conclusion?

That would be the guessing and in the beginning of this year, people expected there might be pressure on the prize negotiations. Then in April, May, we have seen some positive tenders in this area.

So people thought the price could even go up. Now this import stuff is of course the negative circumstance for these negotiations.

But it could change and I'm not expecting to have a new contract tool in China. The situation is different in India.

Here, we should see a new contract in the next couple of weeks.

My second question is for the CFO probably, regarding your guidance on financial results, if I look at the run rate in H1 and what you guide for the full year, that would mean that financial expenses will worsen very significantly in H2. What is the driver for this please?

The guidance we have given is for -- and we, I mean, we always have here, like you guys have also seen in the second quarter, we have a positive contribution from the FX, which comes in -- has to do with in-house financing and we do see here benefits. So I wouldn't exclude frankly that this will also be seen in the second half of the year.

So maybe the 120 is a little bit too high. So that's why I took the time for me to answer was to realize that though I think we are a bit too negative on the guidance for the financial result.

The third question is on the statements you made Mr. Lohr, in the thoughts recently, if I understand correctly, you said the target to lower the sodium chloride level in the Werra River by 2021, which was agreed while ago is not feasible.

So my question is, what does it mean for K&S, especially production wise and financially, is cost to that attached to that, if you don't manage to lower the salt concentration is agreed?

No. That is embedded in a long story, but I try to keep it as short as possible here in this call.

As you know, the deepwell injection will end by the end of 2021. And by chance today, the environmental minister conference of Werra [indiscernible] had a meeting today and [indiscernible] and they will decide on what is the method after 2021 to discharge our production waters.

So far, we have discussed about the pipeline, but I don't expect that the pipeline will be the measure, which they decide on. By the way, we would have talked about 300 million of additional CapEx investment, the decision will most probably be in discharging the waters, and not temporarily as we do it now, but continuously in the underground or in the old mines in the Werra area, which means it's the best solution for the environment and it's the best solution economically, we don't have to transport the water, et cetera.

And we – I have clarified that we are fine and that we confirm the targets for 2008 when it comes to chloride content in the Werra. But I also open to the discussion we have to talk about how do we get there until 2028?

And that is everything I meant in this interview that I want to have an open discussion with a current target and are we able to meet them by 2022 already and yeah, not more, not less is part of this interview. And that does not necessarily and directly transfer in operating costs or whatever you would like to read out of this.

So my questions in order? First question is, if you had the quality that you aim to achieve, at Bethune today, how much higher would you think the realized price would be from Bethune?

Are we talking like 5 buck a ton or is it more like a 20 plus dollar a ton improvement from, as the quality rises?

The price is not the issue. We are achieving market prices with our Bethune product.

Of course, from time to time, we are compensating additional logistic costs to our customers. The problem is the production volume.

If we would have the targeted quality already, we might have up to 100,000 pounds more in 2019. And that's what we are aiming for.

Second question on the German assets, could you just refresh us on the roof stability at Neuhof, when you're expecting that to – if you could remind me when that's going to return to normal together with K2O, which I think was going through a low grade zone, a transition zone, if you can give us an update on when you expect those two assets to kind of return to normal levels of production.

Yeah. Let's start with [indiscernible] K2O content, we will still work in this area until the end of this year.

And then we can expect and we know that because we have done some geological research that we can then expect higher corrugated ore content again for 2020. And with Neuhof, we have a solution, we have temporarily given up this area where we had this roof stability problems and working in another areas where setup is done.

And by August, we are back to normal production, almost normal production. But we hope that we can go back maybe with the new technology in the old area because it has nice K2O content.

Thank you. I have three quick questions, please.

The first one is on agriculture where volumes were up, but specialty fertilizer volumes were down. Is that related to Sigmundshall or was there any other effect we should know about?

Yes. It's related to liquid.

Okay, good. That's easy.

And then on cash flow and your cash taxes, in the first half of the year and also Q2, lower than the P&L tax. Is that just a temporary issue as happens often?

And we should expect an increase in cash tax in the second half? Or is there a one-off that we should be aware about of?

Normally, second half cash taxes are higher than in the first half. But I would expect a cash tax number, which is well below last year, which was about 100 million because we had last year tax orders were replaced in the first half, the way to pay back taxes.

So I would expect a number lower than last year, but a ramp-up in the second half.

Okay, thanks. And the third one is on the commercial segment.

I understand the mix effect that impacted earnings. And you also mentioned higher maintenance and logistics costs.

Is that something you can quantify and is that something that will continue in the second half? Because you sounded quite upbeat about the pricing outlook into the upcoming season.

So you think we can still see higher EBITDA here versus last year? Or are these costs just too high and we will see a flat or slightly lower EBITDA for the year.

So let me talk about maintenance costs, they occur in Q2 and Q3. As you know, these are more or less a little bit weaker, seasonally weaker quarters.

So, they have an impact, but that is done then in Q4. And we expect in total an increase in EBITDA.

Three questions from my side as well. First of all, starting with communities, de-icing.

So, you mentioned that you have seen a rather promising negotiation period over the past couple of weeks. So I wonder whether you can quantify or help us a bit with what we should expect basically in terms of pricing, one of your competitors indicated something like 8% increase in de-icing, ASPs heading into the new season.

And maybe related to this one, your competitor also talked about extra logistics costs due to flooding in his Midwest area. So anything you are experiencing as well as a headwind from this one, this will be my first question.

When we talk about the outcome of the bidding processes, I think we need to talk about the different areas because the starting point is a completely different and let's start with the strongest area where we had two beautiful winters in a row in the Midwest and I’m now comparing season to season. We have really seen double digit price increases, which is very promising when the volumes come next season, we will be very happy about this.

Canada slightly up on the slower single digit number. We were positively surprised the US East Coast, the season was not that good.

But the prices are still stable. And even in Europe, the prices are slightly up.

So in total, it's a good starting point for the next season. And to the freight cost, that is true especially in North America after we had higher freight cost in last year already.

For different reasons this year, its system is a problem which we used heavily for our salt transportation. That has an impact as well, negative impact on us.

Can you quantify the level, what does this mean basically in terms of extra logistics costs you're facing?

We're talking for the full year, about a low double digit number and half of that is already in our numbers.

Okay. Second question would be on coming back to Bethune and what you've done there in terms of accelerating, taking extended 1 week maintenance, appeared on top of what you already planned.

So what does this do to your mix effect basically heading into 2020 also with the other measures you mentioned in the fourth quarter? So how should we think about granular mix, heading into 2020 in comparison to 2019 Bethune?

Oh, that's a good question and at the same time, this is difficult to answer because the mix is not only driven by production capabilities, and we believe we have from next year on all capabilities to a favorable mix. But also driven by market conditions.

For example, we have now, as we still can deliver into China, we have increased our standard volume in Bethune to deliver as much tenders into China as possible. And that will have an impact on the full year standards.

And the next year could look completely different. I would say too early to give you a number for the 2020 product mix.

Okay, so I’ll leave it there. The third question is a follow-up on your working capital outlook heading into the second half.

So last year, typically, you obviously you reported a networking capital drain in the second half. So last, we had something like 230 million outflows in the second half 18 due to the buildup of production and inventory ahead of the season in Northern Hemisphere.

So I wonder how should we think about that working capital flows in the second half 2019, given that you're still ramping up production. So any kind of indication what you have baked in there after a very strong contribution in the first half?

Yeah, I can only repeat that we do see, of course, an increase in working capital because of the winter season. So we're building up inventories for that.

We are building up inventories on the site, so we would expect an increase from both of that, on the other hand, we still are keen to optimize where we can. And I don't want to give you a very concrete number what we are expecting.

We also see a ramp up in the CapEx. So when we think about cash flow, don't forget that our CapEx is back end loaded.

And that's the best answer I can give you for now.

Good morning, gentlemen. Two questions from my side.

Firstly, again, coming back to this logistic costs. If you would strip out the flooding effect on the logistical cost, what you already see that the inflationary costs are coming down, so that was highlighted by the other companies for this?

That would be my first question.

It’s rather flat without this extraordinary effect.

And the second question is then on currencies, if we were to take the current ratio, so the run rate going into 2020, could you remind us what would be the positive effect on EBITDA from this currency effect next year?

So we are still in 2019, Markus. On the full year, we have now in our forecast based in 115, instead of 120, as we said.

And even if the dollar goes to 110, we wouldn't expect a significant contribution from that, because we know that most of our effects are hedged. And because of the higher FX rate last year, we hedged at higher rates.

So there is not another positive effect already to expect if the dollar goes to 110, for example.

So firstly, to come back to the specialties volumes in agriculture. You mentioned that Sigmundshall had an effect, but the Q2 volumes were down more than you might expect versus the Q1 volumes.

So just on that, were there any other smaller effects that were in that or was there maybe some inventory leftover from Sigmundshall to ship to sell in the first quarter?

Yeah. When you look into the single quarter’s many effects, first of all, for years, we have been sitting on very low inventory.

And, as Thorsten already indicated, we have produced more in the second quarter than we've sold, that is partially part of our strategy to slightly creep up our inventories. And of course, if a ship hits the harbor on the 30th of June, or on the 1st of July, that is not too much different for us in total, but it's different, of course, to view in Q2 and in Q3, and it happens with two ships, by the way, this quarter.

So, that definitely was not market driven.

Just on the plans post 2020 for the Werra River secondly, obviously, options are being discussed, can you get maybe a range of the potential CapEx and OpEx impacts from whatever the solution is, I mean, are you expecting an increase in OpEx versus the deepwell injection solution and will there be much CapEx associated with, if you did the basin fill for example.

First of all, we're talking about the time after 2021 for the first year with the new solution is 2022. And we start with a small solution, the volumes that we so far have injected, the same amount will run out of the KKF into the old mine.

Why this? Because the KKF have the magnesium chloride content that we need to avoid any sinking of the surface.

And so therefore, we do not have to spend a lot of CapEx. If we then later on, and then we're talking about the late ’20, increase the saline water that we want to discharge in the old mining areas at the Werra, there might occur some additional CapEx, but it's too early to get the numbers.

And then lastly for me, this might be one that you can't answer particularly specifically, but you mentioned that there may be some price impact in China by the delay of imports. So if you assume lower prices in China, less of a working capital tailwind last year, next year, I mean, potentially slightly higher CapEx next year, just given that you're below your guidance so far this year.

Do you think you can increase your free cash flow year-on-year in 2020? And are there, I mean, I'm not really expecting an answer, but are there bridge items that you -- that I've missed out, do you expect to boost free cash flow next year?

Yeah. First of all, we have not indicated that the CapEx goes up in 2020.

So we are expecting a level -- CapEx level on the level that we will see this year as well. Secondly, if there might be a lower price in China, that is only one of many indicators.

And don't forget, we will have higher volume available and especially volume of Bethune, from Bethune, secondary mining with very low cost base. And 2020 is the year where we want to deliver a big portion of our synergies, remember, that we had a target of 150 at least in 2021.

So that will be our good portion and a positive impact. So in total, without guiding 2020 now, there's a good reason to believe in a further positive free cash flow development.

Just to try to delve into the working capital one more. On your receivables outstanding, is there any target that you have for like a days receivable outstanding that you look to get to?

Frankly, neither on the DSO nor the DPO side, we look into hard targets, of course, we measure that internally. Let me answer it on the payable side, for example, if we would give procurement target to go down to DPO number of acts, we would ignore that the best lever to improve this number is to negotiate the best price.

Secondly, to go for cash discount. And then to think about how can we negotiate payment terms.

And so when we talk about working capital management, we are measuring those KPIs, but we have not identified a hard target. And yeah, that's the way we do it.

I just had two questions on salt, on customer inventories, especially in the US, are there any hard numbers that you're able to give and how they compare currently versus last year?

No, so far, we are not planning to give inventories by customer segments.

And then in the de-icing salt business, how much of your volumes are shipped versus ground transportation? Sorry, how much are shipped via the river versus ground transportation?

I'm sorry, I cannot give you the number by heart. But, we will make sure that investor relations is able to answer this question on the phone later on.

And if I could just follow up quickly on that. On the ground transportation, how have you seen costs throughout the year and what's the extra trajectory from Q2?

We'll dig into that and give you the answer later.

Yeah, maybe coming to the region Americas, trying to move the guidance, [indiscernible] but indication you’ve given on the price side looks a little better. As far as I know, the Americas basically reflect to a high degree the de-icing business in America, of course, there are other things as well, but they don’t move that match from one year to the other.

Could you elucidate and put in context the guidance for Americas for this year, with you said about the pricing is de-icing.

Yeah. Of course, there is a good reason to believe that with the higher prices, we have a nice contribution.

But you know that the biggest part of the season is the first quarter. So we only expect some weather in December.

So of course if we see weather in November, we take it, but that is not part of our forecast. So, the impact is higher in the first quarter 2020.

On the other hand, we have already elaborated on extraordinary costs rates, some maintenance and normal inflation. That's why we see the total outcome for the tier as guided.

Just quickly on Brazil, can you tell us what your salespeople are telling you about demand in the -- going into the season there?

Yes. Thanks for the question, because here we talk about the market, which runs from one record to the other.

We have seen so much improvement in demand from Brazil and we will see a year with higher demand again this year. In a way, it looks like they are winners of the tariff fight, which are ongoing between US and China.

And that's why everybody who's delivering into Brazil is very happy about the situation. What we also see is, of course, as you know, we are not present with standard product in the US, US was very weak due to the extraordinary weather situation.

And of course, some volumes, which usually run into the US markets were relocated into Brazil. That's why we've seen some pressure on pricing.

But that is, we're talking about $5, $10, nothing, which really frightens us about the demand, the underlying demand is strong and we're seeing that for the future as well.

Just following up on that last question, do you have any sense of your share in the Brazilian market versus some of the North American players, something you can tell? And the reason I ask is, you’ve obviously maintained your outlook for volumes for this year, for the full market, whereas nutrient decreased there out of volume?

So just curious on what the sort of difference you're seeing there is?

Yeah, we are growing with the market in Brazil, that means we are keeping our share. And so we wouldn't have been able to deliver from Germany more volumes into Brazil.

But as you know, with Bethune, Brazil is a key market for our granular product. And as we rent up, we grow with the market and keep our market share.

Yeah. It was more a question of whether you're even gaining share.

Currently not.

Yeah. Thank you, everybody for joining us today in the call.

We were very happy to report these good numbers, especially free cash flow and we told you last year already that ‘19 will be the year with the first positive free cash flow and with the new guidance, more than 100 million, we even will reduce in total our net financial debt slightly. And we will now be on the road and see the one or the other of you and we are happy to discuss further and thanks for your time and all the best.

Bye-bye.