K+S AG

Thank you. Ladies and gentlemen, welcome to our Q3 conference call.

Let's start right away on Slide 3 with the highlights of the quarter. We did not have any weather-related standstills at the Werra site this quarter and do not expect any for the rest of 2019 either.

This and positive price effects have been the main reason for the increase in our EBITDA from €36 million to €81 million. Despite an extended maintenance break at our Bethune plants, higher sales from our Canadian sites compensated for missing volumes due to the Sigmundshall mine closure.

The EBITDA of our operating unit Europe+ increased significantly, while our EBITDA in Americas came out below last year's results mainly on the back of higher logistics and maintenance costs but also due to weaker early sales in the de-icing business compared to the strong previous year. Year-on-year, our free cash flow increased by €264 million to more than €200 million after 9 months.

And now please turn to Slide 4 to have a closer look at our customer segment. And here, let's start with Agriculture.

Despite the weakness of the markets, the average price was still very good in Q3. Therefore, both currency and price effects had a positive impact on EBITDA.

In addition, more products were available due to the improved situation at the Werra site. In our customer segment Industry, price increases, higher volumes and a positive currency effect almost compensated for increased cost.

Therefore, EBITDA of €45 million remain on the level of last year. Both revenues and profit in our Consumer business improved.

The more favorable pricing environment, especially for table and specialty salt and a positive currency effect helped us to more than compensate for higher costs. As Q3 is still seasonally low, our de-icing business in Communities reported a negative EBITDA.

The sales volume was below the strong figure of the previous year mainly as a result of weaker early sales partially on the back of postponement into Q4. We will give you an indication for the next winter season later in this presentation, but now let's move to Slide 5 and have a closer look at the potash market.

After seeing good prices and volume in the first half of the year, the important stop in China, which has been in place in September, is also causing restraints in other market. Producers didn't -- decided to cut their production by more than 3 million tonnes in total.

Demand remained almost stable for MOP in Europe and specialties. Due to the higher share of SOP, the average selling price in our portfolio is even above the second quarter.

For 2019, we expect a slight decline in global potash demand to slightly below 70 million tonnes compared to the record demand in 2018 by a good 71 million tonnes. From a current perspective, forecasting the development in the potash market is still difficult.

The contract with India is already providing a first indication for the market and ensures product flows. Rising crop prices and production cut in the industry are further positive indicators.

But due to the continuing import stop in China and high stock levels in Brazil, the market hasn't picked up yet. Please have a look at Slide 6 to see the developments in our customer segment Communities.

As mentioned earlier, the early field business in the de-icing salt compares with a very strong prior year quarter. On the one hand, there are some higher inventories from the last winter season available at our customers at this year.

On the other hand, we see orders increasing since the end of October after some postponement during Q3. On the price side, we are satisfied with the bids for the upcoming winter season, especially in the Midwest, we are able to achieve significant price increases.

The development in Canada and Europe is also positive. On the U.S.

East Coast, we continue to see high competition. Overall, we see a positive price trend and should therefore compensate for cost inflation.

Now please turn to the next slide to talk about the full year guidance. Given the current situation on the potash market, we already announced in September that we reduced our MOP production by around 300,000 tonnes for this year.

This corresponds to an EBITDA effect of about €80 million. In addition, maintenance work mainly at the Zielitz site on the back of the current market situation will reduce production by a further 200,000 tonnes.

This will have an impact on earnings of about €50 million. Therefore, we expect our EBITDA for 2019 to be at around €650 million based on the normal winter in Q4.

This will still be an increase over 2018. We're confident to achieve a positive free cash flow in 2019, and I would like to say again at this point that we are not expecting any standstills due to the wastewater situation in the current year.

Please turn to Slide 8. Ladies and gentlemen, despite the current weak market situation, I would like to take the opportunity to point out how far we have progressed with the issues that we can influence ourselves.

We have successfully implemented the customer focus/new organization of the company, the operational situation with regard to personnel and machinery availability in Germany has improved significantly. The situation to the geological challenges in Neuhof is also on the right track.

We have improved our wastewater management by means of remote disposal and higher starts capacity on site so that we can rule out any weather-related standstills this year. Our active working capital management has a positive effect on our free cash flow.

And our synergy program already shows positive EBITDA contingencies. We are making progress with the product quality in Bethune, and our customers will realize the improvement in the first half of next year.

Against the factors we have in our hand, the potash market is challenging for us at the moment. And also regulatory requirements, especially with regards to climate protection could influence our cost position in the coming years.

Given the current political discussion, we have certainly not preferred to tell you that. Before concluding my presentation, I would like to introduce our new Head of Investor Relations.

Please turn to Slide 9. Dirk Neumann, previously Head of Corporate Controlling, will take over as Head of Investor Relations.

He has many years of experience at K+S and knows our business and figures. On behalf of the entire Board, I wish him great success in his new role, and now Dirk will give some words to the audience.

Please, Dirk.

Yes, thank you. As said before, my name is Dirk Neumann.

I'm 48 years old. Married, two children.

After my studies of Economics in Göttingen, I was working for different companies and I joined K+S in 2003. And in this time, I have several positions in the finance and controlling.

And the last position is Head of Controlling since 2015. And I'm happy working in future for Investor Relations.

I'm looking forward to my new role, and I'm looking forward to meeting you in person in the future.

Thank you, Dirk. Dirk succeeds Lutz Grüten, who left the company at his own request.

The Board thanks Mr. Grüten for his dedicated work over the past three years and wishes him all the best for his new professional duties.

Ladies and gentlemen, this concludes my presentation, and we are now happy to take your questions. Operator, please open the line for our Q&A session.

[Operator Instructions].

I have two questions. I'll ask them one by one, as you requested.

The first one is in terms of the volume reduction for this year, if you could just explain to us how should we think about next year? I mean, obviously, this fell very heavily on to Q4.

Should we think about annualizing this Q4 volume for next year? Should we think about spreading the reduction for next year?

I'm, of course, assuming in the case where the market stays as it is now and doesn't improve.

Yes. Thank you for that question.

First of all, maybe to explain a little bit deeper what we have done and why we have done it. The market situation was described in my speech, we are not able to ship into China.

We haven't been able to in September. Now we are seeing that due to the situation, more volumes go into Brazil.

Europe is okay, but we were forced to react, as all our competitors did. And of course, we use the time on the site, especially Bethune and Zielitz for maintenance work, which was necessary.

And we will be prepared for in terms of being able to produce high volumes in a period where the market turns. But more, I cannot tell you about 2020.

That is too early.

Understood. And then my second question is -- I mean, congratulations on -- it seems that this year, you are finally not have any wastewater issues or stoppages.

But just picking up on conversations we had before about the topic, you have obviously your permit for injection into the soil expiring in 2021. I know different solutions were being discussed, including a potential pipeline.

And I just wanted to know if there's any update in terms of what is likely to happen there and what's your plan once that permit expires.

Yes, we have made great progress in this matter. All the states, and we are talking about seven different states around the Werra, have agreed on a solution, which is called the discharge in the old mine area, so that means we will not build a pipeline.

We will deep well inject until the end of 2021. And then beginning 2022, we will bring the waters in the underground in the Werra area.

That means no transportation cost for these volumes. Of course, there has to be some preparational work and with some approvals, but time is enough to get this done.

And you mentioned no transportation cost, but I mean should we think about this as both immaterial in terms of extra cost and extra CapEx? Or once you start doing these, how much will your cost increase by doing -- for doing that?

And how much your CapEx will increase?

No. Compared to the old situation that we were planning, it will decrease because the pipeline [indiscernible] over Werra would have cost about €300 million.

I mean compared to today, not with the pipeline.

Compared today, I'm not seeing additional cost for the solution with the discharge in the Werra area.

And also no additional CapEx?

There is some additional CapEx, but this is by far lower than what we would have spent into the overall EBITDA pipeline.

Welcome, Dirk. I have a couple of questions.

I'll start. The [indiscernible] question, has the cooling pump in September been successfully installed?

Can you confirm that? [indiscernible] question.

We have -- yes, we have a package of measures, which we called PQP. We have successfully done the work in September that we wanted to do in September, but the whole package will be done by January, which is not a problem because now we are anyway in the cold season.

It's important to be prepared when the weather is getting hotter again, and then we will definitely be done with the works around the PQP. And by the way, we are quite happy with the progress that we have seen with -- in terms of quality of our product, both products, standard and granular, in the 2.

Okay. But as a follow-up to that question, that would also mean that you assemble the older production in January?

No. No.

That is -- that doesn't require an extraordinary maintenance break, what we have to do now. That can be done in operation.

Okay. Excellent.

And my second question is regarding Neuhof and the price back. And can you update us on the situation there, roofing in Neuhof and the mining for the lower quality [indiscernible] and the price back?

Yes, starting with [indiscernible] that is developing exactly as expected. We will have this area with the lower K2O content behind us by the end of this year, so we should see a positive effect next year.

And similar situation in Neuhof, we should be able to see higher volumes out of Neuhof next year as well.

My first question is just on the CapEx. The guidance is down €50 million from €600 million to €550 million.

But there's going to be additional maintenance work with the production shutdown. So I'm just wondering where is the cut to CapEx there coming from?

And then overall, what is your flexibility in reducing CapEx?

Yes, there's always some flexibility. When we are talking about such a big number, there are bigger number of single project behind that.

And if we talk about the used CapEx volume, the mix out of postponement into 2020 and discipline, but the bigger portion is CapEx discipline, that is a reaction on the current market situation. And the additional maintenance cost that we have into breaks is not running into CapEx, mostly not running into CapEx but it's in maintenance, and it's shown in OpEx.

Got it. And then are you able to guide for your expectation for working capital -- for the change in working capital and cash flow for Q4?

Yes. Chris, we do not give a guidance on the quarterly basis for this.

But you know, you heard us say already in the second quarter that we have a greater focus on improving our working capital. We are more actively managing both receivables and payables.

And this continued in the third quarter despite it was in a relatively small quarter overshadowed by other development, but we saw a positive development coming from working capital management. And we will see also in the fourth quarter, but it's tough to give a certain guidance with a certain number on that.

And I would like to add that Thorsten and his team have done a great job. If you see what we have seen due to the market situation on the EBITDA level, we still expect to see a positive free cash flow.

I think that it is a great result out of great measures that we have taken.

Actually Chetan here from JPMorgan. I just had maybe 3.

One is can you confirm if your Q4 or full year guidance for this year assumes any price declines given that we've seen some pricing moderation through last 3 months? That's number one.

Number two, second question was actually...

Wait, we would like to do one by one. Yes.

When you look into our average selling price, you have to take into account, which is always the case, that is because we have the mix out of MOP, which is now more in the focus when it comes to the current bad situation in the market and specialties and the mix out of European business and our Bethune business. And an average price decline, which obviously is the case, rolls into our numbers with a delay.

And due to the fact that we have cut MOP, we have even a higher average selling price because the portion of specialty to the higher price is higher. And therefore, we still expect that the average selling price for the full year, so that gives you guidance for Q4, should be around the level that we have seen in the fourth quarter of 2018.

Now we are ready for your next question.

I had a quick question on the China contract. When do you think it will settle?

And what kind of price range are we talking? Do you expect it to come lower than the India contract?

That's a difficult question. As you know, we are not negotiating directly with them because our stake in China still is not big enough to be the first to do that.

But looking into the stocks into China, they are still very high, so which is most probably not going to happen this year. So around China New Year, this is potentially may be an indicator, which is not too bad.

Pricing depends, of course, heavily to the situation that we are facing by that time, but at least the fact that all producers have cut production and we are seeing some positive development in Southeast Asia with crop prices rising and et cetera, so I'm not giving you a price now, but one could be not too negative on the outcome of the Chinese contract. But it's too early.

First question out of three is on the Bethune volumes. I understand that the site is up and running again after the extended maintenance shutdown in Q3, and with Brazil inventory very high; China, not in the market currently, where will these volumes move to?

Is it that Southeast Asia mainly?

We still ship into Southeast Asia and Brazil, the volumes that we have produced.

Okay. Yes.

Okay. Good.

And you expect that to remain [indiscernible]?

Yes, we are running agreement, so that -- you know we have already reduced significantly our volumes to the market situation in Bethune, but what we are producing now is running into these two markets.

Okay. And the second question is on Communities and the decline in EBITDA versus prior year.

You mentioned, of course, the softer refill business and your guidance for volumes for the full year remains unchanged, right, 12.5 million to 13 million tonnes. So does that mean you expect the full recovery of the lost EBITDA, so we should see something like €10 million to €15 million reversal in Q4?

Yes. One should not overestimate the split between the de-icing business in Q3 and Q4.

The heavy business is really December, January, February. And here, we are still hopeful that we can achieve our average volume.

By the way, we have seen some snow already in the U.S., so -- and we have seen stronger business after October, as I said, so good portion of the lower volumes compared to Q3 '18, which run into -- or will run into Q4. But of course, the final decision will be made by the weather condition in December and next season, January, February.

Yes. Okay.

And the last question is a bit of a [indiscernible] one. You mentioned in your opening remarks at the end the pressure on cost from environmental regulation.

How should we think about that if you try to size that? Or how do you account for that in your budgeting and planning?

What kind of costs do you see coming over the next 5 or 10 years?

That is a theory, which is by far too long because, if you see what's going on all over the world with additional measures to safeguard the climate, it's difficult to predict what's going on in the next couple of years. But actually, it will affect everybody who is doing industrial production.

And one effect that we have seen already is that the CO2 emission rights for the first time will cost money in 2020. So far, it was for free, but this time, we are spending money, and we will have additional cost for CO2.

It's still on a level which is doable but one has to follow the development very closely. And of course, we are in -- directly and via our organizations, PDI and [indiscernible], in touch in politics to make sure that we will see a balanced situation between environment and the need of the industry.

Sorry, I think we got cut off previously.

Did you get the answer on your first question or?

We didn't. But it's okay, we'll catch up with that.

No problem, then I answer this again and then you go ahead and...

No. Honestly, don't worry will catch up with you people later.

I think the second question, I hope we didn't miss this as well. Your MOP ASP was actually slightly up quarter-on-quarter in Q3 versus Q2, and I think it's fair to say that most global [indiscernible] were down, if not significantly, at least slightly.

So I'm just wondering whether there was some kind of regional mix effects that got you to increase that price or how that came about? And following on from that, whether you expect -- what you expect to happen to ASP going forward?

Chetan, can we do the following because we had just in small internal discussion here that we come back with this answer to you after the call?

Yes. Sure.

No problem.

I have three questions, please. Firstly, on the volumes, have you seen any pickup in volumes actually since the Indian settlement?

Or is there just no change yet?

Frankly, not really. And we have seen some recovery in Southeast Asia, but they did not drive our volumes, so there is not yet the trigger in the market which would change the things entirely.

Understood. On specialties and the mix in Q3 in fertilizers, you seem to be assuming that the positive mix effect will continue in Q4 given your average price guidance.

Is it something more substantial? Is it something that could continue into 2020?

Or is it just a temporary effect because of your product mix and the overall demand trends across the regions?

Yes, that is truly a mathematical effect. If we calculate another 200,000 tonnes MOP in Q4, then, of course, this will have this effect in the average selling price.

And as I said earlier also, we see the price declines with the delay in our numbers.

Understood. And lastly, probably for the CFO, the volatility in the financial result is quite high.

How should we think about the run rate also thinking about 2020? Is it rather the run rate we saw in H1 or the run rate you were guiding for in H2?

In terms of volatility, comes especially from the other financial results, and this is linked to the FX development. I would expect for this year, on a full year basis, financial results which is somewhere between 110 and 115.

And it will -- yes, I do want to go too much too far into the next years, but this is certainly a number, which we'll maintain and until we have this that level.

First one is coming back to your, let's say, €80 million plus €50 million, i.e, €130 million EBITDA reduction we have seen since you announced the first round of curtailments end of September, I wonder whether you can break this up a bit into what kind of proportion should we expect as linked to accelerated maintenance cost and maybe additional maintenance costs, as you otherwise wouldn't have had, just to give a bit of a flavor of what's kind of really link to the missing volumes and link to the really extra cost you are bearing, which may not recur in to 2020? This would be my first question.

Yes. Of course, you're not expecting to get hard numbers on that, but the biggest portion by far, the biggest portion, of course, is not producing the volumes and not selling them.

And as you know, that we are not only talking about Bethune but also about Zielitz, these are the two pure MOP sites. And of course, in Zielitz we have the high fixed cost portion, so the majority of the numbers are due to that.

Only a small number is additional maintenance.

Okay. Second one would be sticking to cost.

Looking in to 2020, can you update us on your -- you mentioned that you are progressing well with synergies. What should we expect as a kind of additional cost reduction heading into 2020 from your shaping program?

Michael, we will and we are making good progress, by the way, on the shaping on the synergies project in all of the different work streams, and we expect for the next year positive net number. It is also here, we don't want to talk too much about 2020 today.

We do this well in -- next year, but it will be a positive net number, and we -- the thing is we also see and we almost said that we see a general cost inflation, when I look at the personal cost, when I look at the material cost now especially in 2019 this third party cost, which are linked to maintenance, and this will both -- this will go into the next year, so the general cost inflation will be there, and needs to be seen how much this will be eaten up by the inflation.

Okay. And last but not least, on de-icing, on your slides presenting the outlook into the next winter season, just a clarification question.

You're referring basically to higher ASP or expecting on the back of the negotiations you have done, however, you're saying basically that those higher prices can compensate for logistics cost inflation. Just clarifying, I thought that we have seen the bulk of rising logistics cost in the past basically.

And are you suggesting that there's no margin improvement from higher prices heading into 2019/'20 season? Is that what you're saying?

So can I ask if you're referring to the guidance or to the Q3 number?

No. Your giving on Slide 6, you're showing an outlook winter season in 2019/ '20.

You're saying -- the second bullet point is saying higher prices can compensate for logistics cost inflation, so I thought that we talked about rising logistics costs in the past winter. And while this is done and we have seen some plateau of logistics cost, and hence, the improved pricing you have negotiated now is at least partly contributing to higher margins assuming volumes remain unchanged.

That's what I'm asking.

The statement doesn't refer only to Q3 isolated. It refers to the full 9 months where we have seen the start of the increasing logistics cost, not in the first quarter last year.

And what you should also or what's also included here is not just acute price increase. We have somewhat we call nonstandard sourcing cost where we need to ship between the sights sometimes sold in order to satisfy customer demand in some regions and this brings us also additional cost.

The main thing is when you look at the third quarter, it's a very -- we are talking about small numbers, so small movement up in logistics cost, which is not explainable by significant price increases or other factors can have a big impact. So I wouldn't overestimate that.

Sorry, I just had 1 follow-up question, and this is more of a confirmation. You -- as was mentioned before in the call, you had a big working capital inflow on the 9 months up to now.

I know you don't give guidance for the remaining quarter, but I'm just wondering more broadly, is this inflow something that you think -- it's something that's just seasonal and it could revert over the next quarters? Or are these genuine like working capital improvements that you've manage to achieve this year so you actually are not expecting them to reverse?

This is a general decline in working capital and we do not expect to reverse all of that.

I understand we have issue from all side this morning. I just got one that's credit specific.

Given your new EBITDA guidance for this year, just -- was just hoping that you could provide an update on your leverage target and just your general thoughts on debt issuance at some point, given your promissory notes that are due in 2019.

Yes. We make progress in the third quarter, and with a general positive free cash flow by the end of the year, which is operating minus investing means that we do see on a reduced EBITDA expectation a small increase in the debt number when you look at the net number.

We therefore expect no further progress by the end of the year when I look at the fourth quarter in isolation. And can you repeat the second question, please?

So the second question was really just on the promissory notes that are due in 2019, so I was just really hoping for some general update in terms of your thoughts on that issuance at some point or just general financing thoughts.

This is our commercial paper program, and so this is what we do on a rolling basis. As you know, this will go on, yes.

Just again on CapEx. You're probably been guiding for 2020 and 2021 CapEx.

We looked about even with 2019. Is our guidance still valid?

Not adjusting any guidance for 2020 and '21 now. This will be all new in March.

And just a follow-up on the previous question. I think she was referring to the Schuldschein notes that were -- that are due in 2019.

Has those been addressed and is there any other material maturities coming up in 2020 or 2021?

The next major maturities are coming up in '21.

I have some problems to reconcile the volume guidance or the reduced volume guidance you're giving and the EBITDA impact. If I take the average selling price and multiply it with 2.5 kilo tonnes, then that's average selling price is probably too high because I understand that the cuts mainly referred to a pure MOP, so that's probably a little high.

But nevertheless, if I do that exercise, I come up with revenues, which are around €50 million or even below €50 million. So my question basically, why is the EBITDA -- why is the EBITDA impact higher than -- or on par with the revenue impact?

As we said earlier, because we do at the same time maintenance work, which, of course, has a smaller impact than the lost volumes in the not sold volumes but still has an impact, and if you add that, you end up with these numbers. And I mentioned it earlier, Zielitz is almost 100% fixed cost.

We didn't have the chance to do -- I don't know, quicker by short work, et cetera, which would a little bit relax the situation, so almost 100% fixed costs.

Yes. Thank you for joining us.

The situation is currently difficult, but we are hopeful that the market will react on the actions, which we are taking in the course of 2020 and we will see you soon on roadshows and other occasions. But until then, thank you for joining and for listening to our call.

Bye-bye.