Corporate strategy and strategic direction of the business units
Our two-pillar strategy proved its worth once again in 2016. In an environment of low prices for potash containing products, winter business that was comparatively below average and in spite of significant production limitations at the Werra plant, we managed to achieve a respectable result on account of our strong position in Europe, our specialties products and the growth-oriented non de-icing salt business.
We want to continue to grow in both pillars and consequently set ourselves the ambitious goal in 2015 of achieving EBITDA of around € 1.6 billion (2016: € 0.5 billion) by 2020. Despite the current challenges, we have our sights firmly on this target. For this purpose, we have set ourselves an agenda which we have pursued consistently in 2016 with the acquisitions in China and Saudi-Arabia. The focuses are:
- successful commissioning of new potash production in Canada (Legacy Project)
- managing environmental challenges, particularly in Germany
- enhancing our portfolio of higher yielding products
- successful implementation of the ‘Salt 2020’ strategy
- keeping cost discipline above and beyond the ‘Fit for the Future’ programme
The sustainable growth of enterprise value in the form of a premium on the cost of capital before taxes of at least 15% continues to be central to our financial objectives. We want to achieve this mark again by 2020 at the latest.
Differentiation and sustainable margin growth through specialisation
K+S aims to expand market positions in its business units, in particular through marketing its diverse specialty products. The refinement of mined crude salt makes it possible to achieve higher margins and enables us to be more resilient to market fluctuations.
Strategic direction of the business units
With the Potash and Magnesium Products and Salt business units, K+S has two complementary areas, linked by synergies in many parts of the value chain, with attractive growth prospects at its disposal.
Strategy Potash and Magnesium Products
The strategic fields of action arising for the Potash and Magnesium Products business unit.
The Potash and Magnesium Products business unit is seeking to attain a balanced presence in the important agricultural regions of Europe, South America, North America and Asia to balance seasonal differences and reduce cyclical regional demand effects.
In 2016, the Potash and Magnesium Products business unit reviewed its market strategy with the focus on the expansion of customer-oriented specialties products. The newly acquired production site in Huludao (China) will make an important contribution in this respect. With this acquisition, the business unit’s product portfolio was complemented by synthetic magnesium sulphate (SMS). The Potash and Magnesium Products business unit is also consistently expanding its product range in the area of fertigation with a stake in SOP producer Al-Biariq (Saudi-Arabia). We see the use of fertilizer specialties in water efficient micro-irrigation systems as a future growth area.
The promotion of innovations also plays a crucial role in the new market strategy. The business unit is convinced that the agricultural industry will change, not least as a result of the increasing possibilities offered by digitalisation. The business unit sees this as an opportunity and has developed appropriate concepts and created structures with the goal to help shape the change.
Managing environmental challenges is very significant for us. We want to make the best possible use of the resources available to us and at the same time reduce the impact on nature to a minimum. K+S has made many efforts to improve the environmental conditions at the Werra and Weser rivers over the past few decades. We reduced saline wastewater by almost two thirds between 1997 and 2015. Between 2011 and 2015 alone we invested around € 400 million in modern technical facilities and processes as part of the package of measures for water protection. A further approximately € 180 million will be spent on the construction of a Kainite Crystallization and Flotation Facility (KCF), which is already underway, reducing the volume of saline wastewater again by about 20% from 2018 onwards.
A further central milestone will be the start of production of the Legacy Project in the Canadian province of Saskatchewan in the second quarter of 2017. Annual production capacity will be expanded gradually in subsequent years reaching 2.86 million tonnes in 2023. More than 400 permanent jobs will be created upon completion of the construction phase. The Legacy Project will supplement the existing production network of K+S with an important North American site.
As an addition to the Group-wide ‘Fit for the Future’ project, the ‘Potash 2.0’ project was completed successfully in the Potash and Magnesium Products business unit in 2016. To boost competitiveness, the programme aimed to further develop business processes and introduce a new structural and procedural organisation along with cost savings.
The Potash and Magnesium Products business unit is pursuing the target to achieve an EBITDA of at least € 1.2 billion in 2020.
The strategic fields of action arising for the Salt business unit.
The business unit Salt particularly strives to advance growth in selected regions and market segments.
At our European subsidiary esco, business and plant optimisation and organisational restructures will allow for more flexible responses to changing market conditions. As part of its growth strategy, esco is increasing production capacities for rock salt in German mines. Moreover, esco relies on growth in high-margin segments, such as pharmaceutical salts. These measures will ensure an increase in competitiveness in the long term.
An ongoing priority for our US subsidiary Morton Salt is the optimisation of the North American production and distribution network. The business unit continues to adhere to the achievement of its ambitious effectiveness and efficiency targets it has set itself in the context of the ‘Score‘ initiative. A recent example is the reconfiguration of our solar salt activities. As part of this initiative, Morton Salt will close the Newark plant in California in 2017 and increase capabilities at two other solar salt sites accordingly. This step towards more efficient use of available resources will offer advantageous positioning to support growth targets. The optimisation of the North American distribution network focuses on consolidating the warehouse footprint and streamlining the transportation management system. In 2016, Morton Salt launched its Masterbrand campaign ‘Walk her Walk’, with an emphasis on corporate social responsibility to strengthen brand position. Morton Salt will continue to drive innovation and premium positioning of the brand across various product and market segments.
In Chile and Peru, retail food grade salt brands ‘Lobos’ and ‘Biosal’ enjoyed continued success in 2016. Sales volumes increased consistently through 2016 with support from advertising campaigns. Further expansion of this business, as well as optimisation of the logistics chain will continue to be the focus for the next few years in order to secure growth potential in this region.
In addition to growth in current markets, the Salt business unit will promote expansion into Asia by increasing salt sales for chemical industry applications. With this in mind, the business unit managed to reach an important milestone in terms of expansion into Asia with the acquisition of the solar salt project ‘Ashburton Salt’ in Western Australia. When the necessary permits have been granted and the feasibility study has been completed successfully, K+S is expected to make a final investment decision in 2019 at the earliest. The business unit Salt also plans to increase the presence of the Morton Salt brand in selected consumer segments within China. Local personnel should facilitate not only the achievement of the strategic goal of increasing sales volumes and strengthening customer loyalty in existing markets, but also the tapping of new segments.
Our ‘Salt 2020’ strategy, to which the initiatives previously mentioned belong, is thus gaining further momentum. In spite of the overall mild winter in 2016, we are well on the way to our target of increasing the operating earnings (EBIT I) of the Salt business unit based on a normal winter to over € 250 million by 2020; this would correspond to an EBITDA of around € 400 million. Particularly with sales of salts that are not weather-related, such as consumer products, industrial salt and salt for chemical use as well as salt for food processing, we have been able to report significant growth in margins since the launch of our initiative ‘Salt 2020’ and for the first time, generate more than half of operating earnings here.
Expansion of a balanced regional portfolio
Worldwide, both potash and salt markets are characterised by seasonal and regional fluctuations in demand. K+S is aiming for a balanced regional portfolio, which should enable the offsetting of weather-related fluctuations and cushioning of cyclical market trends.
Setting of standards for quality, reliability and service
K+S’s goal is to be the ‘go-to’ partner for its customers in the market. Consistent customer orientation and high product quality are essential requirements in this respect. Individual advice to customers makes it possible to identify and offer needs-based solutions.
Increasing efficiency and exploiting synergies
With regard to the competitiveness of the Potash and Magnesium Products and Salt business units, costs are a key success factor. Our focus here is the consistent pursuit of cost-cutting and efficiency improvement initiatives throughout all process chains.
We see further potential regarding the realisation of synergies between the Potash and Magnesium Products and Salt business units in the exchange of technical, geological and logistics know-how as well as economies of scale in the procurement of machines and auxiliary materials. Moreover, we were able to record good progress in the financial year regarding a market presence across the business units in selected regions (cross-selling).
We know that sustainable corporate governance is a worthwhile pursuit. We systematically identify and assess relevant issues and social trends early on in order to incorporate them into our management processes and derive measures. This helps us to advance our existing business, seize new business opportunities and minimise risk.
Strategic financing measures
Essentially, we pursue the following goals with our financial measures:
- Ensuring solvency at all times
- Ensuring a balanced capital structure
- Limiting refinancing risks through diversification of financing sources and instruments as well as the maturity profile
- Cost optimisation through capital procurement on sustainably favourable terms
To achieve these objectives, we issued three bonds with a total volume of € 1.5 billion. We also placed ‘Schuldscheine’ (promissory notes) totalling € 700 million with different terms and fixed interest in the year under review. Moreover, we have a credit line of € 1 billion which runs until June 2020. This liquidity supply as well as future operating cash flows serve to finance general company purposes and the Legacy Project.
Liquidity is managed by the central treasury department. We strive for a constant liquidity reserve for the K+S GROUP of at least € 300 million. In the case of capital expenditure, we pursue the goal of optimising the income earned from liquid funds at a balanced risk/ opportunity ratio.