K+S Aktiengesellschaft. Analyst Conference. on 14 November in Frankfurt am Main. Speech by Dr. Ralf Bethke,

Transcription

1 Experience growth. K+S Aktiengesellschaft Analyst Conference on in Frankfurt am Main Speech by Dr. Ralf Bethke, Chairman of the Board of Executive Directors The spoken word is binding 1

2 Welcome! K+S Group Welcome! Analyst Conference K+S Aktiengesellschaft Frankfurt am Main Experience growth. Ladies and Gentlemen, We are pleased to be able to welcome so many of you once again to our analyst conference. First, I would like to set out the business development of our areas of business in the first three quarters of the year as well as our expectations and objectives for the whole of Afterwards, Mr Steiner will present the key financial data of our interim report for the third quarter of Finally, we shall be pleased to answer any questions you may have. 2

3 Slide 1 - Clear Increase in Earnings as of 30 September 2005 K+S Group Clear Increase in Earnings as of 30 Sept million, IFRSs Change Revenues 2, , % Operating earnings (EBIT I) % Earnings after market value changes (EBIT II) % Earnings after taxes, adjusted * % Earnings per share, adjusted ( /share) * % * Adjusted for the effect of market value changes; 37.8% tax rate assumed. K+S Group 1 The K+S Group continued its path of growth during the first nine months of The overall positive demand on our markets, the strong increase in world market prices compared with the previous year, especially regarding potash and nitrogen fertilizers, and our consistent implementation of further, sustainable efficiency measures have led to a disproportionate increase in earnings. For the first nine months of the year the K+S Group s revenues rose by 192 million or 10 per cent against the same period of previous year, and reached 2.1 billion. The Potash and Magnesium Products and fertiva business segments made the strongest contribution to this growth. At 42 per cent, the Potash and Magnesium Products business segment accounted for the largest share of revenues. Revenues of 1.6 billion or almost 80 per cent of Group revenues were generated in Europe, where we increasingly 3

4 leverage the logistical advantages that we enjoy over our overseas competitors, in the fertilizer business in particular. Operating earnings (EBIT I), amounting to million, exceeded the previous year s level by 69.6 million or 53 per cent. With the exception of the Waste Management and Recycling as well as the Services and Trading business segments, all business segments were able to improve on their operating earnings. The Potash and Magnesium Products business segment achieved by far the greatest increase. Ladies and Gentlemen, In its reporting, K+S concentrates on operating earnings (EBIT I) because they provide a better indication of the operating earnings capacity of the K+S Group than the earnings after market value changes (EBIT II). The changeover in accounting to IFRSs in 2005 led to distortions in the computation of earnings. This particularly applies to the treatment of measures to hedge the U.S. dollar exchange rate. The same applies to earnings after taxes. Because of the limited economic meaningfulness of the accounting measurement of our currency hedging, K+S also reports adjusted earnings before and after taxes that take this effect into consideration. Mr Steiner will explain this to you later. At million, adjusted earnings after taxes for the first nine months of the year 2005 exceeded the previous year s level by 45.9 million or 57 per cent. At 2.96 per share, adjusted earnings per share as of 30 September 2005, were up 1.08 or 57 per cent on the level of a year ago. Just as for the same period last year, this is based on 42.5 million no-par value shares. 4

5 Ladies and Gentlemen, Let us now proceed to the individual business segments: Slide 2 - High Demand on Global Potash Market Potash and Magnesium Products Business Segment High Demand on Global Potash Market million tonnes Disproportionate rise in demand in recent years Clear increase of 4% in H1/2005 too High price increases Forecast 2005: 55 million t (+3%) 2001 '02 '03 ' (e) incl. potassium sulphate and potash grades with lower K 2 O content Sources: IFA, K+S Medium-term trend: 2% growth in demand p.a. and further price increases too K+S Group 2 Demand on the world potash market has increased by an above-average amount in the past few years. During the first half of 2005, too, demand rose by almost 4 per cent. In the third quarter, Asian markets, especially India and China, experienced strong growth again, whilst developments in remaining markets were somewhat weaker. Following the strong growth of recent years, consolidation has been apparent since July 2005, especially in Brazil. Regarding 2005 as a whole, we expect worldwide demand for potash to increase by about 3 per cent to about 55 million tons (previous year: 53.8 million tons). 5

6 Because of increased demand, the prices of potash fertilizers have risen clearly. We find it rather difficult to achieve additional larger price increases, because agriculture worldwide has to cope with high increases in costs. However, for individual regions especially Europe we see further price potential. Over the medium term, we continue to expect an average increase in demand of about 2 per cent per year as well as further price increases as long as the costs for energy and logistics continue to rise, above all in North America. We believe that the announced expansion of capacity on the global potash market will, at least in the medium term, not change the shortage prevailing substantially. Slide 3 - Potash and Magnesium Products Business Segment Trend in Business as of 30 September / Outlook 2005 Potash and Magnesium Products Business Segment Trend in Business as of 30 September 2005 million, IFRSs Price-related increase in revenues % % Higher sales of fertilizer specialities and industrial potash grades Sustained savings from efficiency enhancements Outlook 2005: Tangibly higher revenues Strong increase in earnings Revenues EBIT I K+S Group 3 6

7 Now to our business segment Potash and Magnesium Products. We achieved revenues of 880 million up to 30 September 2005, which represents an increase of some 14 per cent on the same period last year. The clear increases in the prices of speciality and standard fertilizers were the main reason for this. Volume decreases of the standard product potassium chloride were largely offset by greater sales of our specialities and industrial potash grades. Revenue increases were achieved both in Europe and overseas. Operating earnings (EBIT I) reached million, more than twice the level of 54.8 million a year ago. Apart from the positive trends in prices, also the sustainable savings resulting from efficiency enhancement measures had a noticeable effect of boosting earnings. For financial year 2005, we expect revenues to be considerably higher than for 2004 while sales should remain on the level of a year ago. The operating earnings of the Potash and Magnesium Products business segment will increase significantly. 7

8 Slide 4 - Long-term Strengthening of Earnings Capacity Potash and Magnesium Products Business Segment Long-term Strengthening of Earnings Capacity Sylvinite extraction started Working hours extended from September 2004 Continued implementation of efficiency enhancements Efficient logistics with cost advantages (incl. long-term, relatively attractive contracts; shipment by container) Attractive hedging of U.S. dollar until 2008 K+S Group 4 Ladies and Gentlemen, As many of you will know, since years we have worked continually in the Potash and Magnesium Products business segment on improving our structures and processes and have consequently implemented measures to boost our earnings potential on a permanent basis. Following the launch of the sylvinite extraction in the rich parts of the Werra deposits in October 2004, this year we will only partially realize the contribution to earnings we are seeking, because we have not yet achieved in full the additional output we are striving for. The reason for this is the still too low number of drilling sites in the underground crude salt mines, because of geologically difficult mining areas. However, we plan to achieve our original higher volume target as of

9 In the potash segment, we have introduced greater working hours flexibility since September 2004, which also provides employees with realistic opportunities of obtaining a greater share in profits. The cost savings originating from this amounted to some 13 million in 2005, a figure that should rise to 16 million by Furthermore, following the successful implementation of our 10-point programme, we are working continuously on further projects in order to become even more efficient. An example is the planned optimisation, together with E.ON, of our power supply on the Werra site by By building a new heating plant and using alternative fuels for heating purposes, the use of relatively expensive natural gas at this site can almost be replaced completely and cost-effective. Further measures apply to improvements in raw material yield and savings in the use of explosives. In the logistics sphere, we made increasing use of container shipments in 2005 too in order to counteract the increases in sea freight rates for bulk fertilizers; this applies mainly to shipments to Asian markets. Furthermore, we are securing cheaper freight costs by concluding long-term and relatively advantageous contracts. Last but not least, we have hedged the U.S. dollar exchange rate at an attractive level until Mr Steiner will have more to say about this later. 9

10 Slide 5 - Anti-dumping Rules Potash and Magnesium Products Business Segment Anti-dumping Rules Protection of European potash industry in the EU 15 assured since 10 years through anti-dumping rules Transitional arrangements approved for the EU 10 states until April 2006 Since the EU accorded Russia "market economy" status in 2004, Russian producers (Silvinit, Uralkali) have applied for a review of the rules Belarussian producer Belaruskali later also applied for a review Russian producers have offered the EU Commission "undertakings"; Release of the decision by the EU Commission is expected shortly K+S assumes that the new rules are adequate for ensuring fair competition in Europe K+S Group 5 Ladies and Gentlemen, At present, the European potash industry in the old EU 15 is being protected against unfair competition, especially from Russia and Belarus, by means of regulations against unfair competition that have been in force for over ten years. For the ten new member states, the European Commission in Brussels has adopted a transitional arrangement that will remain in force until April This largely secures the hitherto supply from Russia and Belarus to these new member states. Following the EU s granting of market economy status to Russia in 2004, the two Russian producers Silvinit and Uralkali have applied for a review of the current anti-dumping rules with reference to this change of status. Subsequently, the Belarussian producer Belaruskali also applied for a review. 10

11 The purpose of the applications was to remove all measures against unfair competition. We are of the opinion that this application will not be successful. In order to complete the initiated procedures as quickly as possible, the two Russian producers have offered the EU so-called undertakings. These consist in contractual commitments on the part of Russian producers to deliver potash to the EU only under compliance with specific conditions (e.g. price and/or volume restrictions). In our opinion, the EU will accept the undertakings for the EU 15 first of all and, once the current transitional arrangement for the EU 10 has expired, will extend them to the new member states as well. We expect a decision to be released soon. We assume that also in the future the new rules are appropriate for ensuring fair competition in the expanded Europe of the 25 states. Nevertheless, we shall monitor the behaviour of the Russian producers and the European importers very carefully. 11

12 Slide 6 - COMPO Business Segment Trend in Business as of 30 September / Outlook 2005 COMPO Business Segment Trend in Business as of 30 September 2005 million, IFRSs % % 24.2 Professional and industrial business developed well Volume and price increases Consumer business weaker due to weather and economic factors Launch of concrete measures to cut costs Outlook 2005: Slight increase in revenues Revenues EBIT I Operating earnings should again attain last year's level K+S Group 6 And now to the COMPO business segment: In the first nine months of 2005, COMPO achieved a 3 per cent rise in revenues, which reached 434 million. COMPO s operating earnings up to 30 September 2005, improved by 12 per cent on the same period last year and reached 24.2 million. The growth can be attributed mainly to good business in the professional and industrial segments. Following poor business in spring as a result of unfavourable weather conditions, especially in Southern Europe, both Q2 and Q3 saw pleasing increases in revenues on the previous year again. Thanks to good demand for slow-release fertilizers and successful early stocking-up, especially in 12

13 the case of ENTEC, our nitrogen-stabilised speciality fertilizer, we were able to attain increases in terms of both volume and prices. On the other hand, the consumer area of COMPO was affected by changeable weather during the gardening season and by a cross-sector consumer restraint in parts of Europe. This particularly applied to sales of potting soil and plant care products in France. To achieve a sustainable improvement in earnings, we have within COMPO launched a series of measures aimed at optimisation and cost reduction. The focus is on measures that promote consumer interest in Germany and France; for instance the standardisation of packaging, a concentration of the product portfolio and the streamlining of distribution. Furthermore, in COMPO too we have introduced greater working hours flexibility; as of this year, employees at all German COMPO sites are once again working a 40-hour week. All in all, in COMPO we expect a slight rise in revenues against Operating earnings should once again approximate the level of a year ago. The efficiency enhancements that have been initiated, entailing one-off expenses, will have a positive impact on earnings as of next year. 13

14 Slide 7 - Strategic Alliance with Syngenta COMPO Business Segment Strategic Alliance with Syngenta Launched in September 2005 Joint development of full range of plant protection agents for the lawn and garden area (consumer) Extension of cooperation to non-european markets being reviewed Growth in revenues of about million expected as of 2008 Attractive offer of new solutions for the consumer business K+S Group 7 Ladies and Gentlemen, At the end of September of this year, COMPO agreed on the launch of a strategic alliance with Syngenta, one of the world s leading manufacturers of plant protection products. The objective is the joint development of a full range of plant protection products and pesticides for the consumer lawn and garden market in Europe. Syngenta will supply COMPO with the appropriate active substances. The arrangement also envisages a possible expansion of this cooperation to markets outside Europe. 14

15 For COMPO, this cooperation with an innovative manufacturer of plant protection agents operating on a worldwide basis opens up even better opportunities for serving the changing requirements of customers in an optimal manner. In this way, we can make even more effective use of our European markets and trading relationships and address a broader clientele with an extended and very effective range of lawn and garden care products. The combination of Syngenta s innovative portfolio of plant protection products and COMPO s well-known brands is leading to a very attractive full range of products for the lawn and garden segment. Thanks to this alliance, we expect an increase in revenues of about 20 to 30 million as of 2008, with interesting contributions to earnings. Slide 8 - fertiva Business Segment Trend in Business as of 30 September / Outlook 2005 fertiva Business Segment Trend in Business as of 30 September 2005 million, IFRSs % % 13.2 Good demand for nitrogen fertilizers Very good early stocking-up business Attractive price levels Higher sales of complex fertilizers and ammonium sulphate Outlook 2005: 0 0 Clear increase expected in revenues and earnings Revenues EBIT I K+S Group 8 15

16 So far this year, the business of fertiva has been characterized by a generally good level of demand for nitrogen fertilizers. We were able to make up for the restraint of European customers that prevailed in the spring season by increasing our deliveries to important overseas markets. In the third quarter, as a result of rising energy prices, the European trading sector apparently also expected a rise in the prices of nitrogen fertilizers; this resulted in very good business regarding early stocking-up. fertiva s revenues for the first nine months of 2005 rose by 16 per cent to reach 429 million. Because of relatively meagre worldwide supply and the high costs of raw materials, especially for ammonia, international prices of nitrogen fertilizers reached a very high level. We were able to implement price increases, sometimes significant ones, for all product groups. Tangible increases in volume in the case of complex fertilizers and ammonium sulphate more than made up for the slight reductions in our deliveries of straight nitrogen fertilizers during the first nine months of the year. At 13.2 million, operating earnings were up on the same period last year by 6 million or 83 per cent. Higher revenue-related margins as well as increased sales were the contributing factors to this improvement. All in all, for 2005 we expect a clear increase in revenues and earnings compared with the

17 Slide 9 - Salt Business Segment Trend in Business as of 30 September / Outlook 2005 Salt Business Segment Trend in Business as of 30 September 2005 million, IFRSs % % 45.3 Western European salt market faces competition at high level Very good de-icing salt business Price increases largely offset volume-related decreases in other product segments Outlook 2005: Revenues and operating earnings should reach last year's levels assuming favourable winter business Revenues EBIT I K+S Group 9 The Western European salt market again saw competition on a high level of volume. With the exception of de-icing salt, only limited volume increases are possible. Lately, East European salt producers in particular have been exerting pressure on the West European salt market. The Salt business segment s revenues reached about 276 million at the end of September 2005, an increase of some 7 per cent on the previous year s level. The weather-related good salt business for winter road clearance services during the first six months and the good seasonal purchase business for the forthcoming winter were the contributing factors to this improvement. In the remaining product segments, we were able to largely offset volume-related falls in revenues by means of price increases. 17

18 Our operating earnings reached 45.3 million million or 9 per cent more than a year ago. The revenues and operating earnings for the whole of 2005 will depend on the winter business until the end of the year. If the weather is appropriate, last year s very good levels might again be reached. Slide 10 - Waste Management and Recycling Business Segment Trend in Business as of 30 September / Outlook 2005 Waste Management and Recycling Business Segment Trend in Business as of 30 September 2005 million, IFRSs % % 6.5 Decrease in underground disposal (no follow-up to last year's special projects) Underground re-utilisation sees volume-related increases Recycling business also up on last year 10 2 Outlook 2005: Slight decrease in revenues Limited decrease in operating earnings as expected Revenues EBIT I K+S Group 10 The waste management market in Germany continues to see fierce competition. However, there has been a major change: Since June 2005, untreated residential waste can no longer be deposited above ground. Despite this new legal position, waste management prices are still on a relatively low level. In the medium term, it can be expected that the increase, already evident, in filter dust and flue gas 18

19 cleaning residues from domestic waste incineration plants will stimulate the market for underground re-utilisation. In the case of Waste Management and Recycling, we achieved revenues of 41 million for the first nine months of the year. The decline of 8 per cent is essentially attributable to lower volume for underground disposal. So far, we have not been able to acquire follow-up projects to the major projects involving the clean-up of pre-existing environmental contamination that expired last year. On the other hand, in underground re-utilisation, we attained a volume-related increase in revenues of 13 per cent to reach 17.8 million. This reflects the first positive results of the abovementioned new legal regulation regarding residential waste. Recycling business was also up by 12 per cent on the same period last year as a result of volume factors. As expected, the operating earnings in the amount of 6.5 million, that we achieved up to 30 September 2005, were not quite on the level of a year ago ( 6.8 million). This reflected the reduced volume of underground waste disposal. For 2005, we expect a slight decrease in revenues on 2004, which benefited from special projects involving the clean-up of pre-existing environmental contamination. Analogous to the development in revenues, we assume that operating earnings will decrease to a very limited extent. 19

20 Slide 11 - Services and Trading Business Segment Trend in Business as of 30 September / Outlook 2005 Services and Trading Business Segment Trend in Business as of 30 September 2005 million, IFRSs % % 17.3 Increased revenues due to higher grainhandlingforthirdparties Operating earnings down on last year due to lower fertilizer handling as well as lower income from Catsan granulation Outlook 2005: 10 5 Revenues and operating earnings will not quite reach last year's very good figures Revenues EBIT I K+S Group 11 To judge this business segment, it is important to know that the revenues only cover third-party business. Earnings, however, include income from both internal and external services, thus resulting in the reporting of a relatively high EBIT margin. For the first nine months, the business segment posted revenues deriving from third-party business of about 40 million; the 4 per cent increase was attributable mainly to increased grain handling for third parties. However, operating earnings as of 30 September 2005 fell by 1.5 million to 17.3 million, attributable to reduced fertilizer handling by KTG in Hamburg and reduced income from CATSAN granulation. 20

21 For 2005 as a whole, revenues will be slightly down on the previous year; operating earnings should also be slightly below the relatively high levels achieved in Slide 12 - Training Ratio on a Very High Level Once Again K+S Group Training Ratio on a Very High Level Once Again Sept Sept. K+S Group total * of which trainees Training ratio 11, % 11, % * including temporary employees measured on full-time equivalent basis (FTE) K+S Group 12 Ladies and Gentlemen, And now to the people of the K+S Group. The Group employed a total of 11,051 persons as of 30 September This figure barely changed compared with 30 September 2004 (11,080 employees). The workforce has increased as a result of consolidation factors connected with the acquisition of French SCPA activities; without this structural effect the number of employees would have fallen by just under 2 per cent. At the end of the year, too, the headcount will be at the present level. 21

22 As of 30 September 2005, there were 588 trainees. Our training ratio of 5.3 per cent was on a comparably high level once again. Slide 13 - Lower Capital Expenditure According to Plan K+S Group Lower Capital Expenditure According to Plan million, IFRSs % 65.7 Frisia brine field expansion in Salt business segment as well as sylvinite project in Potash and Magnesium Products business segment already completed in Outlook 2005: Capital expenditure of between 125 and 130 million Sept Sept. K+S Group 13 And now to capital expenditure: Capital expenditure for the first nine months amounted to 65.7 million and was thus 19.4 million or 23 per cent down on the corresponding figure for the same period last year, as planned. This is attributable to already last year s successful completion of the brine field expansion in the Salt business segment as well as the completion of the sylvinite project in the Potash and Magnesium Products business segment. For 2005 as a whole, we expect the volume of capital expenditure to amount to between 125 and 130 million. It is planned that about three quarters of this 22

23 amount will be used for capital expenditure related to replacement and ensuring production. We also expect depreciation charges to amount to about 130 million. Slide 14 - Outlook for 2005 Raised K+S Group Outlook for 2005 Raised Revenues should reach just under 2.8 billion Operating earnings (EBIT I) of between 225 and 235 million expected Adjusted earnings after taxes should reach between 135 and 145 million Confident outlook for 2006: Continued good demand for potash fertilizers worldwide Implementation of further efficiency enhancements (Potash, COMPO) Expansion of market positions through acquisitions and cooperations K+S Group 14 Ladies and Gentlemen, What is our assessment of the development of the K+S Group for 2005 as a whole? Business should continue to develop positively over the remaining weeks of 2005 too, so that we have once again raised our earnings outlook for Revenues for 2005 as a whole should reach almost 2.8 billion. 23

24 We now expect operating earnings (EBIT I) to amount to between 225 and 235 million following approximately 162 million in 2004; assuming average sales of de-icing salt until the end of the year as well as a U.S. dollar exchange rate that will remain within a range of USD/EUR 1.15 to Subject to the conditions described above, adjusted earnings after taxes for 2005 should amount to between 135 and 145 million, corresponding to adjusted earnings per share of approximately 3.20 to 3.40 per share. The corresponding figures for 2004 were 98.4 million or 2.32 per share. We are also confident about 2006 provided that there will be no deterioration in the general economic environment in the coming year. Our outlook is based on such factors as continued good demand for potash fertilizers worldwide as well as further efficiency enhancements in the Potash and Magnesium Products and COMPO business segments. We are steadfastly pursuing our goal of bolstering the international competitive position of the K+S Group also through external growth. We are engaged very specifically with acquisition projects, participations and cooperation in our current business areas. Our financial strength provides us here with many options which we shall exploit carefully. 24

25 Slide 15 - K+S Share Price Gains Significantly K+S Aktiengesellschaft K+S Share Price Gains Significantly Index: 30 December 2004 = K+S MDAX DAX +32% +29% +18% 90 Jan. Apr. July Oct. Source: Bloomberg; as of 9 November 2005 K+S Group 15 Ladies and Gentlemen, The price of the K+S share has risen comparably brisk since the beginning of the year and reached a new all-time high of on 5 October This price level was used for profit-taking a development that has affected the entire market, especially the MDAX, in recent weeks. At its current price level of a little over 50, our share appears to have found a new base; it is still about 30 per cent above the corresponding level at the end of When one adds the paid dividends, the total return per share is even higher. In October, we commenced a share repurchase programme and, at the same time, we separated off pension provisions from the balance sheet. In this way, we are optimizing the capital structure of the K+S Group without reducing the room for manoeuvre required for our planned acquisition and cooperation objectives. We see concrete opportunities for continued healthy growth. Thank you for your attention. Mr Steiner will now comment on the financial key data. 25