| 2012/02/10 | 09:31:37 | + 15 min |
| Price: 39.89 EUR | -1.04 % |
Management Report
Business Environment
Macroeconomic environment
As forecast in our Financial Report 2009, the recovery of the global economy has continued moderately; the development in the industrial nations has been slow, while the developing countries have seen dynamic growth. Against this backdrop, the Deka Bank forecasts that the increase in the global gross domestic product (GDP) over the year as a whole will be 4.0 %.
In comparison to the United States, economic development in the eurozone has slowed down in recent months. There were influences of a lower level of investment, a reduction in monetary stimuli, and a curbing of production due to strong inventory drawdowns. Private consumption, however, remained at a constant level, and the situation on the employment market stabilised or improved. GDP growth is expected to be 0.8 % in the eurozone.
In the United States, the upturn, which was mainly buoyed by national economic programmes, continued. Gross domestic product is anticipated to grow by 3.4 % during the year as a whole.
In the emerging market countries, the economic recovery was significantly more dynamic than in the industrialised nations. While some important Asian countries already implemented recovery programmes to a significantly lesser extent, Brazil continued to profit from comprehensive government economic stimuli and from private consumption.
The European Central Bank (ECB) and the Federal Reserve Bank (FED) pursued their expansive monetary policies. As a result of the not yet sustainable stabilisation of the economy, the Kiel Institute for the World Economy assumes that the main refinancing rate will not be raised until mid-2011.
Development of Prices for Agricultural Products and Crude Oil
Index: 31 December 2009, in %
The raw materials markets performed unevenly during the first quarter. This was characterised by a 3 % hike in the oil price to just under US$ 83 at the end of the first quarter, while the prices of agricultural raw materials, such as wheat, soybeans and corn, generally tended to be lower; however, the price of palm oil rose steadily.
The US dollar got stronger against the euro during the first quarter of 2010 and, on 31 March 2010, stood at 1.35 USD/EUR against 1.43 USD/EUR at the end of 2009. This trend is, to a large degree, attributable to the tense debt situation of some European countries, in particular Greece. In addition to the USD/EUR relationship, also a relative comparison of the euro and the currencies of our competitors (Canadian dollar, Rubel) each in relation to the US dollar is of importance for us. A strong US dollar has a positive impact on the earnings capacity of most of the world’s potash producers in their respective local currencies; this is due to the fact that the major part of the global potash production lies outside the US dollar zone whereas almost all sales, with the exception of the European market, are invoiced in US dollar.
The following graph shows that, in the fertilizer business, we profited from the strength of the US dollar against the euro during the first quarter, while the dollar grew weaker against the currencies of important competitors.
Development of EUR/USD versus CAD/USD and RUB/USD
Index: 31 December 2009, in %
Impact on K+S
The changes in the macroeconomic environment impacted on the course of business for K+S:
- In comparison to the same quarter a year ago, for the Potash and Magnesium Products business segment an average of 1.39 USD/EUR including hedging costs due to the strength of the US dollar described on page 4 meant the exchange rate was significantly more favourable than it had been in the previous year. If the US dollar weakens again during the course of the year, the options used by us will hedge a worst case of about 1.43 USD/EUR including costs for 2010 as a whole.
- Our production costs are affected by energy costs to a not inconsiderable extent, in particular for gas. As a result of the energy purchase clauses agreed with our suppliers, changes in energy prices will only be reflected in our costs with a delay of six to nine months. Against this backdrop, during the first quarter we were still profiting from the lower level of energy prices prevailing in the middle of last year.
Industry-specific framework and conditions
Fertilizer business sector
The first quarter of 2010 was characterised by a significant revival in demand for fertilizers. Trade sector demand in the northern hemisphere, particularly in the case of potash fertilizers and complex fertilizers, rose again considerably in preparation for the spring season, following last year's purchasing restraint; the positive demand for straight nitrogen fertilizers, that has persisted since the middle of 2009, continued. The contracts concluded by some potash suppliers with Chinese and Indian customers at the end of last year and the beginning of this year supported confidence in the stability of prices that has again been achieved and therefore supported demand. As far as nitrogen fertilizers are concerned, prices rose significantly against the backdrop of higher input costs. The majority of potash producers were back at almost fully utilising their production capacities, and the European production facilities for nitrogen fertilizers were also running at full capacity again. However, primarily in the northern hemisphere, logistical problems, partly due to extreme wintry weather conditions, restricted the flow of goods to some extent.
Salt business sector
In the Western European de-icing salt market, the exceptionally long winter in the first quarter resulted in very high demand, which could not be completely met even with maximum utilisation of all the available local production capacities. Against this backdrop, there were more imports from the Mediterranean region (mainly Morocco, Tunisia, Egypt) and from Eastern Europe (mainly Poland, Romania, Ukraine), and additionally both food grade salt and industrial salt were used as de-icing agents. While the winter in the United States passed relatively normally during the first quarter, Canada experienced a very mild winter overall. The North American price level for de-icing salt was lower than during the same period of the previous year, which had benefited from supply bottlenecks. Furthermore, reluctance on the part of North American consumers due to the recession resulted in lower consumption of water softening products, whereas demand for salt for chemical use slightly improved.
Group structure and business operations
For a comprehensive overview of our group structure and business operations, please see the relevant passages on pages 58 et seqq. of the Financial Report 2009. In the first quarter there were no changes in the Group structure and business operations described there.
Corporate strategy and enterprise management
For a comprehensive overview of our corporate strategy and enterprise management, please see the relevant passages on pages 71 et seqq. of the Financial Report 2009. In the first quarter there were no changes in the corporate strategy and enterprise management described there.
Products and services
For a comprehensive overview of our Business Segments’ products and services, please see the relevant passages on pages 59 et seqq. of the Financial Report 2009.
Research and development
Research costs for the quarter under review totalled € 3.7 million and were practically on the level for the same quarter in the previous year (Q1/09: € 4.0 million). Increased efforts to further optimise production processes for reducing solid and liquid production residue in potash production again accounted for the major part of the research costs. As of 31 March 2010, there was a total of 78 employees in research and development. Compared to the previous year, the number thus increased by ten employees, primarily as a result of consolidation effects.
For a comprehensive description of the research and development activities, please see the relevant passages in our Financial Report 2009 on pages 80 et seqq. and pages 142 et seq.
Employees
Number of employees increased by 23 % due to the acquisition of Morton Salt
As of 31 March 2010, the K+S Group employed a total of 15,164 people. Compared with 31 March 2009 (12,334 employees), the number increased by 2,830 employees or 23 %. The increase is attributable exclusively to the acquisition of Morton Salt; adjusted for this consolidation-related effect, the number of employees in the K+S Group would have declined by 83 employees particularly as a result of personnel reductions in the Potash and Magnesium Products and the Nitrogen Fertilizers business segments. At the end of the first quarter, the number of trainees was 519 and thus slightly higher than that of the previous year (31 March 2009: 516).
The situation was similar in terms of averages: In the quarter under review, an average of 15,188 people were employed by K+S – 2,837 employees or 23 % more than in the first quarter of 2009 primarily due to the inclusion of Morton Salt.
Employees by region
in %; previous year’s figures in italics
Personnel expenses
First quarter personnel expenses totalled € 251.4 million and were thus up € 64.5 million or 34 % on the same period in the previous year (Q1/09: € 186.9 million). The increase is particularly attributable to the consolidation of Morton Salt; this accounts for about € 50 million. Additionally, there were effects from higher personnel costs as a consequence of production in the Potash and Magnesium Products business segment increasing again and of higher accruals for performance-related remuneration.
K+S on the capital market
Course of the K+S share price in the first quarter
- At the beginning of the first quarter, the K+S share was quoted at about € 40. Supported by positive comments by analysts regarding the prospects of the fertilizer business in 2010, the contract concluded with China and the price stabilisation anticipated against the background of this, the share recovered significantly until the middle of January.
- Following a brief phase of weakness at the end of January, the share rose until the beginning of March, hitting a high of € 47.18. In addition to the favourable market environment, the cold weather conditions in Europe and thus the prospects of a good result in our Salt business segment also contributed to this.
- Following publication of the figures for the financial year 2009 on 11 March, which were in line with expectations, the K+S share price initially moved sideways.
- In the last week of March, the share came under some pressure in the wake of falling prices for agricultural products and closed on 31 March at € 44.93. It was thus 12.4 % above the closing price of 2009, while the DAX only put on 3.3 % during the same period, the STOXX 3.8 % and the MSCI World 2.7 %.
Performance of the K+S Share in relation to DAX, DJ STOXX 600 and MSCI World
Index: 31 December 2009, in %
As a result of the improving market environment, the shares of fertilizer and salt producers worldwide mostly developed positively during the first months of the year. The K+S share, up 12.4 %, performed best in the first quarter in comparison to our fertilizer competitors. Only the stock of the North American salt producer Compass Minerals managed to perform even slightly better during this period.
Performance of the K+S Share in relation to peers
Index: 31 December 2009, in %
In the last (30 April 2010) of the research surveys that we carry out regularly, ten banks gave us a “buy/accumulate” recommendation, seven a “hold/neutral”, and seven a “reduce/sell” recommendation. The average target price was just under € 46.
Shareholder structure
There were no significant changes in our shareholder structure in the first quarter of 2010. According to notifications in accordance with § 21 of the German Securities Trading Act (WpHG), the Bank of N.T. Butterfield and Son Limited, Bermuda, continues to own about 15 % of the shares via MCC Holding Public Limited Company and its attributable subsidiaries. MCC manages the industrial shareholdings of Andrey Melnichenko on a fiduciary basis. BASF SE continues to hold about 10 % of our shares. In addition, BlackRock Inc. announced that it had exceeded the 3 % reporting threshold. Under the free float definition applied by Deutsche Börse AG, the free float unchangedly amounts to just under 75 %.
The K+S Bond
In spite of better economic data, the bond market continues not to appear to be assuming an end to the historic low-interest phase. Against this backdrop, unchanged low risk premiums for corporate bonds contributed to the K+S bond being quoted at 107.663 % on 31 March 2010, which corresponds to an increase of 2.357 percentage points since the end of 2009. This means that the return as at the balance sheet date was 3.13 % p.a.
