K+S Aktiengesellschaft (OTCQX:KPLUY) Q3 2022 Earnings Conference Call November 10, 2022 4:00 AM ET
Company Participants
Julia Bock – Investor Relations
Burkhard Lohr – Chief Executive Officer and Chief Financial Officer
Holger Riemensperger – Chief Operating Officer
Conference Call Participants
Christian Faitz – Kepler
Alexander Jones – Bank of America
Andreas Heine – Stifel
Oliver Schwarz – Warburg
Julia Bock
Ladies and gentlemen, welcome to the K+S Third Quarter 2021 Earnings Call. We hope you had a chance to review our posted slides as well as our Q3 documents available on our website. After some opening remarks by Dr. Lohr, we will directly jump into Q&A. Please note that today, the Q&A session on the quarter and the outlook should not take longer than 20 minutes to leave enough time for the presentation and questions on our Werra 2060 project afterwards.
Some technical notes. Please refer to our disclaimer on Page 2 of the presentation, then a note on data privacy. Please note that the team session will be recorded, webcasted and be available as a replay on our homepage afterwards. People asking a question in the team session have to be aware that by turning on their camera and microphone, they give content 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. A warm welcome from my side as well to our Q3 video call. And before we step into the Q&A, I would like to start with some opening remarks.
First, again, a good quarter, strong results and a record quarterly free cash flow of €580 million. Our sales volume was negatively impacted by logistical challenges. To give you one example, we had one vessel supposed to leave the harbor by the end of September. It slipped into the beginning of October. And we’ve lost in the quarter, but of course, not for the full year, 50,000 tons and roughly €30 million EBITDA. Second, now as we are close to the end of the year, we are more precise with our forecast. We are expecting an EBITDA of about €2.4 billion and a free cash flow of a good €1.2 billion. And this is the upper end of the former range. And even our unadjusted free cash flow will reach €1 billion, so you see a very good cash generation. And the final remark is we are seeing normalizing pricing, which is good because we will end up in a very healthy level of pricing with a stronger demand. And before that is achieved, we see the wait-and-see attitude of our customers. But with the new price level, which is again on a very healthy level, we should see a strong demand in the first half of 2023, because profitability in the ag markets is intact. And at the same time, we expect shortness in supply.
So that was the brief opening remarks session, and now we are happy to answer your questions.
Question-and-Answer Session
A – Julia Bock
[Operator Instructions] This brings us to our first question from Christian Faitz from Kepler.
Christian Faitz
Good morning. Sorry, can you hear me now?
Burkhard Lohr
Yes, good morning, Mr. Faitz.
Christian Faitz
Alright. Good morning. Couple of questions. So I’ll start with the first one. Thanks for the slide on the use of liquidity on Page 11, that kind of does also suggest that you could consider share buyback programs come March. Is that a correct interpretation?
Burkhard Lohr
We have always said that we are looking for the development of the debt capital markets. And if there is an opportunity, we might start the program again. So we have never ruled that out.
Christian Faitz
Okay, good to know. Thank you. Then second question, if I may and I have a third one then. You seem to have a rather high level of hedging losses in Q3, can you explain those?
Burkhard Lohr
Are you talking about the currency hedging or the gas hedging?
Christian Faitz
The currency hedging.
Julia Bock
Yes. So Christian, if you look at hedging, you first of all have to see, you do that to safeguard yourself, yes. We do that on the currency side and we do that on the gas side. The gas side, as you can see is much more important and the value of that contract has not to be reported in our IFRS. Otherwise you would see quite positive figures against that, yes. On the currency side, yes, it’s a different development, and it affected basically Q3 with €30 million. But I guess in the current development, you should put your eyes on the gas side rather to evaluate the things.
Christian Faitz
Okay, thank you. Then third and final question, Dr. Lohr, can you spend a few words on these – on this myth of potash holidays. I mean, I am aware that you are suggesting that in your release that there has been a certain buyer hesitancy to wait for lower prices. But have you actually or as you say has people actually observed that people skip potash with an NPK or would you expect such a thing for 2023?
Burkhard Lohr
Yes, good question. And the answer is yes, we have seen that in 2022. And as you know, this is not really possible in all areas of the world, mainly in North America and in Europe. And here, we have seen such development, a mix of several reasons for that. Of course, the high pricing, but also the nitrogen availability in Europe or nitrogen pricing in Europe and that was another trigger for doing a potash holiday. And as we know, we cannot do that multiple seasons in a row. So, that’s why we believe we will see less of that in 2023.
Christian Faitz
But I guess there is no way to qualify that, right?
Burkhard Lohr
That is almost impossible.
Christian Faitz
Okay, fair enough. Thank you very much.
Burkhard Lohr
Thank you.
Julia Bock
The next question is coming from Alexander Jones of Bank of America.
Alexander Jones
Great. Thanks very much for taking my questions. First one on potash demand, you mentioned sort of prices normalizing and customers in a wait-and-see attitude. Are you seeing any customers stepping in, given now the prices have fallen or at what level, if not, do you think customers are likely to step in and start taking more volume?
Burkhard Lohr
Yes. We believe we are not far away from the new price level. And for example, we’ve seen in Brazil, the inventory is going down 2 months in a row. And of course, customers are waiting for the new base, and then they step in at least immediately before the planting season. And that is, of course, different from area to area, but we expect December, January to see a stronger demand in Brazil, for example. And again, it’s a mix of lower prices. The signal there is a new floor and availability because the Eastern European situation has not really changed.
Alexander Jones
Great. Thanks. Just one more on Europe volumes, how are those logistics situation evolving? Do you expect that to ease at all in Q4 or into 2023 based on what you are hearing?
Burkhard Lohr
Yes. I think that some have underestimated the situation that we have seen here in Europe in summer with very low water in the rivers with multiple problems at the Deutsche Bahn and that, of course, all had an effect. That’s why we had sales volumes of only 1.6 million tons. And by the way, the production was higher, although we had our maintenance breaks in Q3. We have seen an easing of the situation in Q4. And of course, we are not expecting any comparable situation in the first half of ‘23. It remains to be seen what the summer looks like in ‘23, but that’s still quite while – quite farther away.
Alexander Jones
Great. Thank you.
Burkhard Lohr
Welcome.
Julia Bock
Are there any further questions on Q3 or the outlook? Yes. We have one more from [indiscernible] from Citi.
Unidentified Analyst
Thank you for the opportunity to ask questions. I guess, at this stage in the quarter, you have a pretty good idea of your order book. I wonder if you would be able to guide us on ASP for fourth quarter? That’s my first question.
Burkhard Lohr
Yes, the fourth quarter average selling price will be below the third quarter. So third quarter was the peak, if you wish and it was higher than in the second quarter. But with the prices coming down as they came down end of the second half, the time break between order and delivery is shorter. So, the Q3 – Q4 price will be below the third quarter prices.
Unidentified Analyst
Great. Thank you. And secondly, just is there any update on the Bethune ramp up? I know you guys wanted to accelerate that. Has that changed in any way? Have you maybe managed to accelerate any more or less?
Burkhard Lohr
We are working hard on that and you will later hear about our Werra 26 project deep dive. And in the course of 2023, we should also do a Bethune ramp up deep dive.
Unidentified Analyst
Okay. Thank you very much.
Burkhard Lohr
You are welcome.
Julia Bock
The next question comes from Andreas Heine from Stifel.
Andreas Heine
Yes. Only one, you were talking about normal – prices are normalizing. Can you share with us what you see as a normalized price level going forward and how you get to that conclusion, what normal in the future means?
Burkhard Lohr
Thank you, Mr. Heine. That’s a good question. So with normalizing, I am not talking about historical price levels, I am talking about price levels where affordability is spec for the farmers. And currently, we are trading slightly above $600 in Brazil. And we – as I said earlier, we believe that we are not far away from this situation I just described. So I hope that gives you an indication.
Andreas Heine
So you basically see the current level as kind of flow going forward. It is also the level of the Chinese and Indian contract by IRAD that some expect that the Chinese and Indian contract might go down from 590 to 450?
Burkhard Lohr
Yes, that is a wild expectation. But before – the first part of your question, we might even see rising prices in the first or second quarter next year because when demand comes back, the situation is changing. But that – it’s also speculation, like the speculation on China and India pricing, and there is a big range in what you mentioned is the lower end of the range.
Andreas Heine
Thanks. That was my question.
Burkhard Lohr
You are welcome. Thank you.
Julia Bock
I have one more written question from Naila from BlackRock. She’s on the debt side. I wanted to ask a question of what the company’s intention is with outstanding bonds. Now that your financial position has turned positive, Is the company intent on having any debt outstanding at all? And if so, what is the target for the gross debt? Are you still intent on achieving an investment-grade rating on your bonds?
Burkhard Lohr
Yes. I think the investment-grade rating to start with the second part the investment-grade rating is only a matter of time. With these numbers that we are showing, we are – we have a net cash position already by the net of – by the end of Q3. And we are also positive for the future. So again, it’s only a matter of time. And what we do with the bonds is financial engineering. It’s a matter of interest rates, on debt and on cash. And I also elaborated already on maybe on a potential buyback of parts of the outstanding bonds.
Julia Bock
And maybe that was the question by Christian. He was also, I think, referring to share buybacks at the beginning when he was asking.
Burkhard Lohr
Share buyback?
Julia Bock
Yes, that was also his question.
Burkhard Lohr
Okay. Then I got it differently, debt buyback. Yes, share buyback is something we are looking at. Of course, at the current – after such a good year, 2022, we have to let the shareholders participate and the options are higher dividend or share buyback or maybe a combination. But that is, of course, nothing which we can precisely answer today. As you know, we make a proposal to the Supervisory Board, and then we offer it to the AGM; that is going to happen in May, and we disclose the proposal in March.
Julia Bock
Okay. As far as I see no further questions on the quarter and the outlook, last chance. No. Then we directly jump into Werra 2060, and I now hand over to Dr. Lohr again.
Burkhard Lohr
Yes. Ladies and gentlemen, we are very excited about our project Werra 2060, and we are going to have a deep dive for that reason now because we have all the decisions made and the Supervisory Board has agreed as well to spend the money for that project. And this project is a real game changer for K+S. And it’s a situation that I really love. It’s a win-win situation because it’s positive for our economics, and it is positive for our ESG footprint. And that’s why my colleague, Holger Riemensperger, our COO, is going to provide you with the technical details now, and I’ll give you some input at the end about the valuation impact.
Okay. Holger, the floor is yours.
Holger Riemensperger
Thank you, Burkhard. About 1 year ago, we presented our new strategy. A key element of our new strategy is optimizing the existing business. This was or is to make K+S stormproof. Werra 2060, besides the ramp-up of Bethune, is one of our key projects. And today we present with pride details on this project. The Werra region is home to our three combined sites in Wintershall, Hattorf and Unterbreizbach. At Werra, we employ about 50% of our people, generating half of our German production output. The Werra can cover for approximately 40% of the Western European potash demand and therefore is key for the European potash supply chain resilience. The deposit of Werra has reached, including the new field Marbach of another 40 years of potash mining. The goal of the project is to become more cost competitive, improve margins and reduce environmental footprint at the same time. Therefore we choose a holistic approach from mine to field using latest mining technologies, increasing the average ore content, enabling us for underground backfilling and avoiding investments in tailing piles going forward.
The patented ESTA technology will allow us to change from wet to dry processes, halving our wastewater disposal, and the dry process technology also reduces the need for fossil energy, making us more resilient. And along the same lines, we can reduce and will reduce our CO2 emissions. The advanced proprietary technologies increased also the share of our specialties at the Werra site, making us less dependent from volatile commodity markets. All this, for the time being, only applies for the sites in Wintershall and Unterbreizbach as Hattorf will continue as is. This chart nicely shows you the value we create by lifetime expansion. And in total, we will extract approximately 10 million more potash specialties compared to current situation. The secondary mining technology combined with the dry backfill will allow us to use high ore content areas, and therefore, we need to extract less rock salt for the same output. As you can see in the graph, that nicely shows what we are talking about here is that the Unterbreizbach site, for instance, can run another 8 extra years.
Wrapping up on the technology part and to walk you and talk you through the holistic approach that we have used. First, we start with our proprietary ESTA dry process, which allows us to abstain from wet processes, reducing wastewater. Reducing wastewater or not using water in the process also means that you can avoid drying downstream processes, reducing the need for fossil energy. And again, as I said earlier, reducing CO2 emissions. The technology also provides dry solid residue instead of wet residue that you usually generate, which is suitable for underground backfilling. And so we can do the secondary mining, as I mentioned before, increasing the relative output through to higher yields from a higher ore content in the rock salt.
Combining all these together substantially improves our cost position and allows for higher proportion of potash magnesium specialties. The special potash magnesium fertilizer I’m referring to is our brand Korn-Kali, where we have high market share in all the regions where we serve. And today we can say that we are production limited and not able to meet the growing global demand. With this project, we will increase capacity of granule production as well, which improves field applicability and also provides the option of adding secondary nutrients, which would further add value to farmers. Due to the significantly reduced CO2 emissions and the overall reduction of the environmental footprint, one can call this green potash.
On my last slide, I want to show you the investment we need for this transformation. Some key points here. The total investment is about €600 million, while the incremental difference between the investment and the investment need going forward in an SE situation is only €300 million. So in other words, the extra €10 million potash specialties come at only €300 million investment. And at the same time, we reduced our OpEx 20%. So this provides us a return on investment of less than 10 years and the consideration starts now.
Back to you, Burkhard.
Burkhard Lohr
Thank you, Holger. Ladies and gentlemen, now you understand why we are so excited about the project. And when you look at the numbers, you get more – even more excited. This is the impact on valuation of that project on the Werra side and the impact on the free cash flow. So we are expecting an NPV increase due to Werra 2060 of more than €500 million. And the free cash – average free cash flow – annual free cash flow of more than €100 million starting in 2026.
I know that some thought that the Werra site has no value at all. And that is totally incorrect because of its high profitability, and we even increase that number. So with this increase of the NPV of more than €500 million, the total value is higher than €1.5 billion. And if you look at the value per share, you end up with almost €8. And for sure, this is not reflected in our current share price.
And finally, let’s have a look on the valuation of the entire K+S Group. And this is our sum of the parts valuation, part of that was already disclosed with our half year report. If you put all pieces together, you end up with the value of the company of more than €8 billion, and that is more than €42 per share, and I’m sure that you might discuss that and you have now the opportunity in the next Q&A session.
Julia Bock
The first question on this project is coming from Christian Faitz from Kepler.
Christian Faitz
Yes. Thank you. Just trying to find the buttons again. Just quickly, can you elucidate this 10 million additional specialties. Is this a net figure or a gross figure from also additional potash volumes, MOP volumes? And then second, the Marbach field, how much of that is new or how much of that is already in your existing mining area?
Holger Riemensperger
So, first of all, the – to the volume, the 10 million, so we are changing the portfolio, the production portfolio at the site, moving towards more Korn-Kali, which we consider specialty because this is not in the same fierce competition environment as MOP, as you mentioned. So, the 10 million are extra, on top volume side, what we do already today over the period from now to 2060. That’s one part. And the second part with regards to the Marbach. Marbach is an existing field that is part of what we have already in our consideration. It is well explored, and we pretty well know what we expect in the area. So, there is not a risk from that site or low risk, if you wish.
Christian Faitz
Okay. But at this point, you are not having any active mining in Marbach. Is that correct?
Holger Riemensperger
Not within that field, but we are opening the field basically, yes.
Christian Faitz
Okay. Thank you.
Burkhard Lohr
And maybe one additional information to your question, Mr. Faitz. The numbers I showed you was already incorporating the shaft Marbach.
Christian Faitz
Okay. Thank you
Julia Bock
The next question is coming from [indiscernible].
Unidentified Analyst
Yes. Hi. Thanks for taking my questions. I was just wondering with your new ESTA production method and you plan to use, I guess more electricity in the future. Do you think this will come from renewable energy? And are you planning to acquire any purchase agreements on that or is that from your existing infrastructure?
Holger Riemensperger
Yes. First to the ESTA, that is a unique process. But we are using the process as such since about 30 years. So, this is not complete new technology for us. But the way we use it and the way we process and going forward, that’s a new combination. And to the second question, we will use more electricity indeed. And yes, we hope that there will be enough renewable energy in Germany so that we can basically use that for the production. So, part of that, we will produce ourselves because we are investing as well, of course, but it’s never enough for a production like this.
Unidentified Analyst
So, what kind of renewable share have you included in your assumed reduction in CO2 emissions?
Holger Riemensperger
Actually for the full spend going forward, all the electricity will move towards renewable within our climate strategy as well.
Unidentified Analyst
Okay. Great. Thanks.
Julia Bock
The next question comes from Oliver Schwarz from Warburg. Oliver, are you there?
Oliver Schwarz
I am sorry. I had a technical problem here. Firstly, thank you for the presentation, very interesting. Question is, obviously, why now, why not earlier? Has there been technical breakthroughs that allowed you to come up with that project. Obviously prolonging lifetime of your German mines is not only crucial to K+S, but also obviously to the region. So, basically what has changed? Is it just that the funds are now available, that weren’t available before, or is that technical expertise has increased at K+S, or is it, let’s say, the assumptions for the prices of the products you can reap from those mines that allow you to alter your calculations and regarding to lifetime. That would be my first question.
Holger Riemensperger
Yes. Thank you for the answer of your question because it’s a mix of everything you just mentioned. But without joking, sometimes good ideas need the right timing and the time for Werra 2060 is now. So, this has a long history. We have been working on this and the previous projects for years. And it looks easy and obvious, but we have looked into 20 different setups of the site, potential setups of the site. And then we have optimized. Then we have, as you said, the Korn-Kali, the additional Korn-Kali volumes, we have to wait for the right time for the markets to be ready to take these new volumes. And of course funding was an issue, I think 2 years ago, you might remember the difficult situation. CapEx – additional CapEx program like that would have been impossible. So, all came together, and now it’s a perfect timing.
Oliver Schwarz
My second question would be on the projects you keep on evaluating, at least when looking at your annual reports, Siegfried-Giesen. When is the time right to a decision on that project?
Holger Riemensperger
There are still some legal claims ongoing. And before they are not finally decided, we cannot go for an investment decision. So, that might be still a couple of years away, the decision.
Oliver Schwarz
Okay. Got it. Thank you very much.
Holger Riemensperger
You’re welcome.
Julia Bock
The next question comes from Andreas Heine from Stifel.
Andreas Heine
Yes. Thanks for the opportunity to ask a question again. It is on the cash flow. I didn’t fully got the – your calculation on the cash flow from this project. You said €100 million, but this €100 million from this project, would get certainly to a higher net present value than €0.5 billion. Could you please repeat how you have come to this calculation?
Julia Bock
Yes. Andreas, thank you for that question. For sure, this is a very long-term DCF. Until 2060 was definitely varying advantages and disadvantages compared to the unchanged operation mode, yes. So, it is really only taking the full DCF line and building an average out of that, yes. And for sure, if that would be nicely distributed over the years, this would get you to a higher number. But some effects are definitely helping us towards the end of the project. And when you discount it at the WACC, this doesn’t give you that high number, yes.
Andreas Heine
So, this €100 million, that’s something we have in 2040, ‘50, but not before…
Julia Bock
No, not necessarily.
Holger Riemensperger
Starting in 2026.
Julia Bock
Yes.
Andreas Heine
2026, additional €100 million?
Holger Riemensperger
Yes. In average.
Julia Bock
On average, and that’s the important thing, exactly. So, you also see that the cash flow contributions, for example, on the higher volume, they are helping later. And that’s where they are not contributing that much. But for example, the personnel part is helping earlier in the DCF. And that’s why it’s bringing a greater NPV contribution. So, applying the average here is not the exact way to look at the DCF advantages.
Andreas Heine
Okay. Fair enough. Thanks.
Julia Bock
The next question is coming from Alexander Jones of Bank of America.
Alexander Jones
Thanks. Just to the first on, following up on that prior question on benefits. Can you split the sort of financial free cash flow benefits percentage-wise into volume versus sort of wastewater saving versus energy savings or any way to give us at least an idea on the relative magnitudes?
Julia Bock
Yes. That was the Slide #7 that Mr. Lohr showed you. We will give you the slides right after the call, yes. So, they will be available online right afterwards. But there, you have the exact distribution over the different areas. So, you have an NPV driver in the volume part of €100 million. You have basically €425 million, and that is quite evenly split over the three topics wastewater, CO2 emissions and saline process waters. You have here €425 million coming out of that. And you have the mid-term adjusted personnel requirements, which add another €275 million as a value contribution, and we also give you the free cash flow advantages on average in the years. As I have said, volume advantages later, personnel, for example, earlier. And with the ESG improvements, it’s a mixed picture. For example, if you can save on tailings piles expansions, that’s also quite in the near future, yes, and not only in 2060. But you will have that in the slides very detailed.
Alexander Jones
Great. Thank you. Then the second question, just on how we should think about your group CapEx profile. You provided gross and net figures in the slides. Should we add the gross figures to the 350-ish you were talking about a year at the CMD or should we instead take the net? Thank you.
Holger Riemensperger
Yes. Of course, Werra project and also the ramp-up Bethune and also the energy – the investments into the energy security will inflate the CapEx numbers for the next couple of years. So, this is in addition to the €350 million that we have given you as a normalized CapEx number.
Alexander Jones
Great. Thank you.
Julia Bock
So far, these were all our questions. Oliver and Andreas, your hand is just still raised. So if you want to say something un-mute yourself, otherwise, I am thinking that you are not – exactly, they are gone.
Holger Riemensperger
Okay.
Julia Bock
Yes. No further questions.
Burkhard Lohr
Yes. Okay. Thank you very much for your attention. And I am sure you will look into the Werra 2060 slides, and there will be some follow-up questions coming up, and we are always available for you to answer that. But again, this is a real game changer for K+S, and we are very proud to disclose that to you now. And we wish you all a good day. And we might see you soon on road shows or wherever. Thank you and bye-bye.
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