| 2012/05/22 | 17:09:48 | + 15 min |
| Price: 34.47 EUR | -0.07 % |
Forecast Report
Future business environment
Future macroeconomic situation
| Percentage change in Gross Domestic Product (real in %) |
|||
|---|---|---|---|
| Year | Germany | EU-27 | World |
| 2010e | + 1.4 | + 0.8 | + 4.0 |
| 2009 | (5.0) | (4.2) | (1.1) |
| 2008 | + 1.3 | + 1.2 | + 3.1 |
| 2007 | + 2.5 | + 3.1 | + 4.8 |
| Source: Deka Bank | |||
The following discussion about the future macroeconomic situation is essentially based on forecasts of the Kiel Institute for the World Economy (Kieler Diskussionsbeiträge: Weltkonjunktur im Frühjahr 2010, April 2010) as well as those of Deka Bank (Makro Research, Volkswirtschaft Prognosen, 1 April 2010).
Leading economic research institutes agree that the economic momentum in 2010 will probably be moderate in the industrialised countries. The Asian emerging market countries should, on the other hand, once again exhibit a higher speed of growth. The forecasts of Deka Bank for the global economy assume growth in the gross domestic product of 4.0 %.
The economic development of the eurozone should also improve in the coming quarters, but with less momentum. This forecast is based on the planned end of limited-term economic stimulus programmes, the debt crises of individual member countries and a continued low level of private consumption. For the financial year 2010 as a whole, Deka Bank expects a gross domestic product increase of 0.8 %.
Private consumption in the United States, to which approximately 70 % of the gross domestic product can be attributed, will be restricted in the longer term by the need for households to consolidate debt. Economic development in the USA is therefore also expected to be less dynamic, with an estimated growth rate of 3.4 %.
On the other hand, in the Asian emerging market countries the recovery should be more powerful than in the eurozone or in the USA. Exports have developed positively and are expected to increase further, assuming moderate growth in the industrialised countries.
As a result of the current low risk of inflation, it may be assumed that the central banks will continue to pursue an expansionist course. The Federal Reserve Bank will probably raise key interest rates earlier than the European Central Bank, since the US economy is developing more strongly. Our expectations regarding the USD/EUR exchange rate, which underlie our corporate planning, are about 1.36 USD/EUR for 2010, while we assume an oil price level of a good US$ 80 per barrel.
The previous effects on the course of business of the K+S Group described on page 4 et seq. also hold under the forecast macroeconomic conditions. In addition, the prosperity of the emerging market countries will also tend to increase further. This should also result in higher dietary expectations on the part of their populations. Moreover, the growth in the world’s population remains unchanged. As could already be observed during earlier periods of crisis, demand for agricultural products should therefore develop largely independently of economic conditions.
Future industry situation
Fertilizer Business Sector
The medium- to long-term trends described in the Financial Report 2009 on pages 146 et seqq., which positively influence demand for our products in the Fertilizers business sector, remain valid.
Against the backdrop of some potash suppliers having concluded agreements with Chinese and Indian customers at the end of last year and the beginning of this one, at US$/t 350 and US$/t 370 respectively for potassium chloride standard including freight, and the resulting increase in confidence in price stability, a stable price level of up to US$/t 385 for potassium chloride standard and US$/t 400 for granulated potassium chloride, both including freight, was also established on the other overseas markets. At the start of 2010, K+S announced the new price for Europe for granulated potassium chloride of €/t 285 including freight and simultaneously announced an increase of €/t 12 from March 2010.
In 2010, demand for fertilizers and in particular for potash fertilizers, should increase significantly due to the meanwhile lower stocks of single-nutrient fertilizers in the trade sector and due to the lower potash content of the soil following two very good harvests and the reduced application of fertilizers since autumn 2008. Since it has become clear in the meantime that the volumes demanded by the trade sector in Europe during the first quarter were also used by farmers, we are now expecting global potash sales volumes of 45 to 50 million tonnes for 2010 as a whole (previous forecast: about 45 million tonnes; 2009: 32 million tonnes).
Salt Business Sector
The future industry situation in the Salt business sector described in the Financial Report 2009 remains valid: While demand for food grade and industrial salt in Europe and North America should remain stable, the South American industrial and food grade salt market will probably develop constantly in line with the regional population trend. Demand from the chemical industry for salt for chemical use will remain depressed for the time being due to the global economic crisis both in Europe and South America; sales volumes, however, should increase moderately again in light of the emerging economy recovery. In the fourth quarter, the de-icing salt business will be influenced decisively by wintry weather conditions in Europe and North America. Both for the European and the North American markets, we are assuming a long-term average level of sales volumes.
Future research and development
In the future too, we will consistently pursue research and development goals defined in close consultation with marketing and production.
| € million | 2010e | 2009 |
|---|---|---|
| Research costs | 20.7 | 18.7 |
| Capital expenditure in development | 3.6 | 1.8 |
| Employees as of 31 December (number) | 76 | 78 |
As a result of the first-time inclusion of Morton Salt for the entire year, research expenditure in the current year, 2010, should be somewhat over € 20 million and thus slightly higher than in 2009. Our forecast for development-related capital expenditure is € 3.6 million. In 2010, the number of employees working in K+S Group research will probably remain at about the same level, while in 2011, the number will be increased in order to meet the coming challenges, particularly in relation to the environment. The focus of our R&D activities will again be on efforts to develop new and to optimise existing production processes for minimising solid and liquid production residue in potash production as well as on a research cooperation as to the effects of the optimal application of fertilizers on the efficiency of water use by the soil/plant system. Further main focuses will be the development of plant protection products in the COMPO consumer business in cooperation with company Syngenta, new developments in the sphere of stabilised fertilizers and partially coated fertilizers for application on green areas, as well as energy optimisations of brine works. At Morton Salt, research will focus on new exploration borehole drilling processes as well as on drainage and drying processes for evaporated salt products.
Future employees, future personnel expenses
For the current year, we are expecting the number of employees to remain about the same number employed at the end of 2009 (15,208). With the inclusion for the entire year of the employees of Morton Salt, the average number of employees should, however, increase significantly to about 15,160 in 2010 (2009: 13,044; employees of Morton Salt were included for the first time from 1 October 2009). Personnel expenses should also increase significantly in 2010 correspondingly.
Despite the economic crisis, K+S continues to regard vocational training an important investment in the future and will therefore make no fundamental changes to its training policy. For our German companies, our objective continues to be a trainee ratio of about 6 %.
Future earnings position
Significant increase in revenues expected
Following up the estimates in the Forecast Report of the Financial Report 2009 and against the backdrop of the demand and price trends emerging during the course of the first quarter of 2010, revenues of the K+S Group should rise significantly in financial year 2010 against the previous year. While we assume a tangible increase in revenues in the Potash and Magnesium Products business segment, we even expect significantly higher levels of revenues in the Nitrogen Fertilizers and Salt business segments. Alone as a result of the first-time inclusion of Morton Salt for a whole year, a consolidation effect of over € 500 million is anticipated. The revenue forecast assumes an average US dollar exchange rate of about
1.36 USD/EUR (2009: 1.39 USD/ EUR).
Costs expected to rise less than proportionally
As the effect of the consolidation of Morton Salt is very marked, the main items in our income statement will increase significantly in comparison to the previous year.
The following forecast of the expected development of costs is structured by cost type: The total costs of the K+S Group should rise significantly year on year. This is mainly due to the first-time inclusion of Morton Salt for the whole year. If this consolidation-related effect, which impacts all cost types, is eliminated from the analysis, the following picture emerges: As far as personnel expenses are concerned, in light of the expected higher utilisation of capacity and the entry into force of the second stage of the pay agreement concluded in 2009, we anticipate a moderate increase. In the course of projected higher sales volumes we anticipate a correspondingly significant increase in freight costs as well as material and energy costs, an increase which, however, is likely to be somewhat more moderate. We expect depreciation and amortisation charges – without the inclusion of Morton Salt, it should be noted – to rise slightly.
The increase in total costs is thus explained both by the first-time inclusion of Morton Salt for a whole year as well as the expected increase in sales volumes, with the consolidation effect being by far the main factor.
Operating earnings should increase significantly
For the financial year 2010, we are forecasting significantly higher operating earnings EBIT I in comparison to last year’s figure. This is connected to the already described consolidation effect in the Salt business segment, the incipient turnaround in earnings in the Nitrogen Fertilizers business segment, and the expected increase in earnings in the Potash and Magnesium Products business segment. On the basis of our US dollar estimate of 1.36 USD/EUR (average rate for 2009: 1.39 USD/EUR) should result in a slightly positive currency-related effect in comparison to last year.
Group earnings after taxes should also significantly exceed the figure for last year
The adjusted Group earnings after taxes should also be significantly higher in 2010 in line with the development of operating earnings. Our projection is based not only on the effects described for revenues and operating earnings, but also on the following circumstances expected from today's perspective:
- in spite of higher interest expenses, a somewhat better financial result, after this had been negatively impacted by special effects in the previous year;
- a domestic Group tax rate to be applied in accordance with IFRS of 27.9 % and an overall adjusted Group tax ratio derived from this of about 26 % (2009: 23.7 %).
Future dividend policy
We pursue a dividend policy that is in principle earnings-based. With this measure, a distribution level of between 40 % and 50 % of adjusted Group earnings forms the basis for the amount of future dividend recommendations to be determined by the Board of Executive Directors and the Supervisory Board. The significant increase in adjusted Group earnings after taxes expected for 2010 should also have a corresponding effect on the future dividend payment.
Expected financial position
Significant reduction of indebtedness expected
With a net indebtedness (including non-current provisions) of currently € 1,048.6 million, respectively a level of indebtedness of 44.1 %, and as a result of high operating and free cash flows expected this year, the K+S Group has a strong financial base. Both these factors mean that we are able to respond flexibly to investment and acquisition opportunities. In view of the expected earnings development and without taking into account possible acquisitions, share repurchase transactions or CTA allocations, the development of the level of our financial debt should be significantly regressive compared with the previous year; subject to these conditions, we will, in all likelihood, also in 2010 achieve our capital structure targets with an equity ratio of more than 40 % and a level of indebtedness of under 50 %.
Planned capital expenditure
As forecast in the Financial Report 2009, the level of capital expenditure for 2010 should be about € 260 million (2009: € 177.6 million). The increase is mainly attributable to the extensive package of measures on water protection as well as to the first-time inclusion of Morton Salt for the whole year.
In the Potash and Magnesium Products business segment, infrastructure measures for the faster utilisation of mine sites and energy projects at the Zielitz site as well as projects aimed at increasing raw material exploitation, process optimisation and reducing solid and liquid production residues will be the main focuses in 2010.
In the Nitrogen Fertilizers business segment, we will continue to invest in the construction of a third facility for coated fertilizers in Krefeld. In the Salt business segment, the modernisation of a shaft winding engine at the Borth site, the extension of the useful life of some of Empremar’s ships, the extension of sieving capacities at SPL, the refurbishment of a loading terminal on the Bahamas and the installation of a higher-performance crystallisation plant at the Grand Saline site in Texas numbered among the most important projects. Investments in replacement and ensuring production will probably account for about 70 % of the total volume of capital expenditure.
Capital Expenditure
in € million
Expected development of liquidity
For the current year, we are anticipating a positive development of liquidity; the projected development of earnings should also have an impact on the cash flow provided by operating activities. The latter will probably tangibly exceed outlays connected with capital expenditure, so that we can expect to generate a substantial positive free cash flow in 2010.
Guarantee of the Legal Representatives of K+S Aktiengesellschaft
To the best of our knowledge, and in accordance with the applicable accounting principles for interim reporting, the interim consolidated financial statements give a true and fair view of the asset, liabilities, financial position and profit or loss of the Group, and the interim Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities and risks associated with the expected development of the Group.
K+S Aktiengesellschaft
The Board of Executive Directors
This report contains facts and forecasts that relate to the future development of the K+S Group and its companies. The forecasts are estimates that we have made on the basis of all the information available to us at this moment in time. Should the assumptions underlying these forecasts prove not to be correct or should certain risks – such as those referred to in the Risk Report – materialise, actual developments and events may deviate from current expectations. The Company assumes no obligation to update the statements contained in the Management Report, save for the making of such disclosures as are required by the provisions of statute.
