| 2012/05/22 | 17:13:38 | + 15 min |
| Price: 34.48 EUR | -0.05 % |
Management Report
Business Environment
Macroeconomic environment
The significant global economic recovery also continued in Q2/2010. The economic upturn was driven in particular by the emerging market countries China, India and Brazil. Many industrialised nations, however, were weighed down by debt crises.
Overall, a muted increase in economic activity was evident in the eurozone. This mainly resulted from the expiry of state economic support programmes such as the scrappage bonus as well as from a larger increase in imports than exports. In Germany, however, the economic recovery was stronger, so that the unemployment rate fell further.
In the USA too, the economic recovery continued, but strong private consumption faced a negative contribution from foreign trade and continued strains on the labour market.
In Asia and Latin America as well as in Central and Eastern Europe, the economy recovered very robustly. However, in the emerging market countries, the economy lost some of its momentum after some important Asian countries significantly reduced stimulus programmes.
In the second quarter, an expansionary monetary policy continued to be pursued in Europe and the USA.
Development of Prices for Agricultural Products and Crude Oil
Index: 31 December 2009, in %
The second quarter did not yet see a recovery in the prices of raw materials. Thus, at US$ 75 on 30 June 2010, the crude oil price was at about the same level as at the end of 2009. The situation with the price of palm oil was similar, which thus declined somewhat compared with its high at the end of April. The price trends for agricultural raw materials such as wheat, soy beans and corn moved more sideways in the second quarter. They remained below their price level at the end of 2009.
The strength of the US dollar compared with the euro was maintained in the second quarter of 2010. While the US dollar was still at 1.43 USD/EUR at the end of 2009, the exchange rate on 30 June 2010 was 1.22 USD/EUR. This trend was due in particular to the difficult debt situation of some eurozone countries, which was revealed in particular by the support measures that became necessary for Greece. In addition to the USD/EUR relationship, also a relative comparison of the euro and the currencies of our competitors (Canadian dollar, Russian rouble) 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 diagram shows that in the first half of the year, the K+S Group managed to profit from the strength of the US dollar against the euro in its fertilizer business. The advantage was significantly greater than that of competitors from Canada and Russia.
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 1.29 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 (Q2/09: 1.43 USD/EUR). If the US dollar rate weakens again during the course of the year, the options used by us will hedge a worst case of about 1.37 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 second quarter we were still profiting from the lower level of energy prices prevailing in the third quarter 2009.
Industry-specific framework and conditions
Fertilizer business sector
The second quarter of 2010 was also characterised by a normalisation of demand for fertilizers. The potash fertilizers ordered in the first quarter by the trade sector in the northern hemisphere were used by farmers for spring application at almost a normal level again. The positive demand trend for straight nitrogen fertilizers was also maintained in the second quarter, and there were positive trends for complex fertilizers as well. Following the conclusion of contracts by some potash suppliers 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, a global price level of between US$/t 350 and US$/t 400 was established for potassium chloride including freight. For most potash producers, capacity utilisation did not achieve the very high level of the first quarter, but was nonetheless pleasing. As far as nitrogen fertilizers are concerned, prices rose significantly in the second quarter against the backdrop of increasing input costs. The European production facilities for nitrogen fertilizers operated at a high utilisation rate.
Salt business sector
Despite low inventories of de-icing salt, there were delays in the second quarter in the early stocking-up of many customers in Western Europe. After the persistent wintry weather conditions and temporary supply bottlenecks, many customers initially looked to revise their stocking-up policy. The Western European price level for de-icing salt tended to firm up somewhat in the hitherto concluded agreements for the winter season 2010/11. In North America, however, high inventories due to a rather mild winter in many regions make the position of suppliers more difficult in the local tenders. Until now, this resulted in slight price declines in some cases. In Chile, the business with food grade salts normalised after the previously strong demand that resulted from the earthquake in the first quarter. Purchasing restraint of North American consumers due to the difficult economic environment continued to result in lower consumption of water softening salts. Overall, the market for industrial salt in North America, however, developed positively, while sales volumes in South America declined slightly. The demand for salt for chemical use improved significantly, most of all in Europe.
Group structure and business operations
On 9 June 2010, we announced that a sale of COMPO is being examined, since K+S Aktiengesellschaft, in line with its growth strategy, intends to focus its management and financial resources in particular on the areas of potash and magnesium products as well as salt. Furthermore, there were no changes in the Group structure or business activities in the second quarter. For a detailed description of the Group structure and business activities, please see the relevant passages in our Financial Report 2009 on page 58 et seqq.
Corporate strategy and enterprise management
There were no changes in the strategy of the Company or its enterprise management in the second quarter. For a detailed description of the corporate structure and enterprise management, please see the relevant passages in our Financial Report 2009 on page 71 et seqq.
Products and services
For a comprehensive overview of our Business Segments’ products and services, please see the relevant passages on page 59 et seqq. of the Financial Report 2009.
Research and development
Research costs for the quarter under review came to € 3.8 million and were almost on the level for the same quarter in the previous year (Q2/09: € 4.5 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 30 June 2010, there was a total of 77 R&D employees in the K+S Group. Compared with the previous year, the number thus increased mainly as a result of consolidation factors (30 June 2009: 68).
For a comprehensive description of the research and development activities, please see the relevant passages in our Financial Report 2009 on page 80 et seqq. and page 142 et seq.
Employees
Number of employees increased due to the acquisition of Morton Salt
As of 30 June 2010, the K+S Group employed a total of 15,102 people. Compared with 30 June 2009 (12,233 employees), the number thus increased by 2,869 employees or 23 %. The increase is exclusively attributable to the acquisition of Morton Salt. Adjusted for this consolidation-related effect, the number of employees of the K+S Group would have declined by 46 employees particularly as a result of personnel reductions in the Potash and Magnesium Products and the Nitrogen Fertilizers business segments. As a result of the internationalisation of the K+S Group which began in 2006, one third of the employees are now located outside Germany and more than one quarter outside Europe. The number of trainees at the end of the second quarter was 495 and thus again higher than the figure for the previous year (30 June 2009: 483).
Employees by Region
in %; previous year’s figures in italics
Personnel expenses
Second quarter personnel expenses totalled € 263.8 million and were thus up € 66.4 million or 34 % on the same period in the previous year (Q2/09: € 197.4 million). The increase is particularly attributable to the consolidation of Morton Salt; this accounts for about € 50 million. Additionally, there were effects from renewed higher utilisation of capacity in the Potash and Magnesium Products business segment and from higher accruals for performance-related remuneration in the light of positive earnings prospects.
K+S on the capital market
Course of the K+S share price in the second quarter
- Starting from a level of about € 44 at the beginning of the second quarter, the K+S share tended to move sideways initially until the end of April. After a price decline against the backdrop of a temporary weakness of the overall stock market, at the start of May, the K+S share price benefited from higher expectations of the capital market regarding sales volumes of potash and magnesium products and thus regarding the revenues and earnings figures of the first quarter.
- While the figures published on 11 May 2010 even managed to exceed analysts’ expectations, the cautious outlook of the K+S Group, however, prompted some analysts to reduce their estimates, which were primarily based on hitherto relatively optimistic assumptions regarding the price of potash. In a stock market environment that was weak overall, this resulted in a price decline to about € 36 by the end of May.
- At the start of June, the price increases announced by K+S for granulated potassium chloride of € 8 to € 305 per tonne and the announcement that it would examine the sale of COMPO within a year in order to focus more in future on the strategic development of the core potash and salt business segments, had a positive impact on the K+S share price.
- A weak environment on the equity markets and the hitherto continued declining price trend for agricultural raw materials then, however, pushed the price of the K+S share as at 30 June back down to € 37.88. The K+S share was thus 5.3 % below the closing price at the end of 2009, while the DAX remained unchanged during the same period, the DJ STOXX 600 lost 4 % and the MSCI World 11 %.
Performance of the K+S Share in relation to DAX, DJ STOXX 600 and MSCI World
Index: 31 December 2009; in %
The positive price development of the shares of international fertilizer and salt producers in the first quarter, which was attributable to an improving market environment, did not continue in the second quarter due to the price declines for agricultural raw materials until 30 June 2010. However, in this difficult market environment, the K+S share managed to maintain its position well and only lost about 5 %. The share price declines of important competitors tended, however, to be between 14 % and 35 % and were thus significantly higher. Only the share of the salt producer Compass has as yet performed better than the K+S share in the first half of the year, gaining about 5 %.
Performance of the K+S Share in relation to Peers
Index: 31 December 2009; calculation on the basis of local currencies; in %
In the last (4 August 2010) of the research surveys that we carry out regularly, thirteen banks gave us a “buy/accumulate” recommendation, seven a “hold/neutral”, and nine a “reduce/sell” recommendation. The average target price was at € 42.50.
Shareholder structure
At the end of the second quarter of 2010, our shareholder structure was as follows: On 17 May 2010, in accordance with Section 21 of the German Securities Trading Act (WpHG), the Bank of N.T. Butterfield and Son Limited, Bermuda, via MCC Holding Public Company Limited notified us that it had fallen below the threshold of 15.0 % and now held 14.989 % of the shares as at 14 May 2010. MCC manages the industrial shareholdings of Andrey Melnichenko on a fiduciary basis. BASF SE continues to hold about 10 % of our shares. In addition, the equity interest held by BlackRock Inc. continues to be above the 3 % reporting threshold. Under the free float definition applied by Deutsche Börse AG, the free float is unchanged and amounts to just under 75 %.
The K+S Bond
Continued low risk premiums for corporate bonds contributed to the K+S bond (cupon: 5.00 % p. a., maturity: September 2014) being quoted at 108.592 % on 30 June 2010. This corresponds to an increase of 3.317 percentage points since the end of 2009. This means that the return as at the balance sheet date was 2.810 % p.a.
