Corporate strategy and strategic direction of the business units

Growth strategy

In 2015, a recession in the economies of important emerging market countries, low soft commodities prices and an increasingly competitive market environment in the Potash and Magnesium Products business unit presented the K+S Group with major challenges. Our strong position in Europe, our specialty products in the Potash and Magnesium Products business unit and the growth-oriented salt business as well as the consistent implementation of our programme to increase efficiency and reduce costs, ‘Fit for the Future’ allowed us to hold our ground well. The two-pillar strategy we adopted has paid off. We will continue to pursue this strategy consistently over the next few years.

We want to continue to grow in both pillars - programmes like ‘Potash 2.0’ and ‘Salt 2020’ will help with this. As investment in the future, the new potash production in Canada (Legacy Project) will make a considerable contribution of the growth of the K+S Group. The sustainable growth of enterprise value in the form of a premium on the cost of capital before taxes of at least 15% is central to our financial objectives. Firstly, we have also set an ambitious mid-term target with regard to Group EBITDA. In spite of the current challenges, the mid-term and long-term growth trends remain intact. Based on these assumptions, a Group-EBITDA of € 1.6 billion by 2020 (2015: € 1.1 billion) continues to be our target.

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 strategy makes it possible to achieve higher margins in the Potash and Magnesium Products and Salt business units and enables us to be more resilient to market fluctuations.

Increasing efficiency and exploiting synergies

With regard to the competitiveness of the Potash and Magnesium Products and Salt business units, the cost position is a key success factor. Our focus here is the consistent pursuit of cost-cutting and flexibilisation initiatives throughout all process chains. For this reason, in 2013 we launched the ‘Fit for the Future’ programme, which is intended to make a lasting contribution towards improving our cost and organisational structures. Our aim is to make total cost savings of € 500 million between 2014 and 2016 compared with budgets for this period. The measures already implemented achieved just under two-thirds of the savings by the end of the year under review.

The broadly comparable mining methods make the realisation of further synergies between the Potash and Magnesium Products and Salt business units possible regarding the exchange of technical, geological and logistics know-how as well as economies of scale in the procurement of machines and auxiliary materials. A project was launched in 2015 to make joint recourse to existing resources also on the sales and distribution side in selected regions and enable a market presence across the business units (cross-selling).

Expansion of the 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 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.

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.

In addition to organic growth, we also strive to achieve growth via acquisitions and cooperation in the established business units.

 

Strategy Potash and Magnesium Products

 

The future 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. Expanding the market position in important overseas regions and tapping into new attractive sales areas in future growth regions will therefore be pursued.

Our Legacy Project in the Canadian province of Saskatchewan will make a key contribution to this. We expect commissioning in the summer of this year. Subsequent to this, annual production capacity is due to be gradually expanded to 2.86 million tonnes in 2023. More than 300 permanent jobs for potash production will be created on completion of the construction phase. The Legacy Project will supplement the existing German production network of K+S with an important North American site.

Moreover, the Potash and Magnesium Products business unit is pursuing a further increase in the share of ‘specialty products’ in the portfolio. To increase the value contribution and to become more independent from the standard potash (MOP) market, high-margin product segments are being expanded further and profitable niche areas occupied.

The optimisation of production structures is extremely significant for us. We want to make the best possible use of the resources available to us. K+S has also agreed on key points with the Hessian Ministry for the Environment for a Four-Phase Plan for the permanent disposal of saline wastewater in the Werra potash district, which includes a commitment period until 2075.

As an addition to the Group-wide ‘Fit for the Future’ project, the ‘Potash 2.0’ project was launched in the Potash and Magnesium Products business unit. To boost competitiveness, the programme aims to further develop business processes and introduce a new structural and procedural organisation along with cost savings. The project outcomes are currently being implemented.

Strategy Salt

 

The future strategic fields of action arising for the Salt business unit.

The Salt business unit particularly aims to achieve further growth in selected regions and product segments. Business and plant processes are being optimised at our European subsidiary esco and organisational structures adapted in order to be able to respond more flexibly to changing market conditions. As part of its growth strategy, esco is increasing production capacities for rock salt in the German rock salt 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.

In North America, an important strategic objective is the consolidation of business in salt products, which are not attributable to the de-icing salt business, in order to arrange the overall portfolio in a more robust manner in the face of fluctuations in the weather. The consistent implementation of our premium brand strategy in the US and Canadian consumer business supports this aim as well as distinct alignment towards service and quality. A further focus lies in the achievement of ambitious effectiveness and efficiency targets through consolidation and improved use of our North American production and distribution network. In 2015, for example, the standardised optimisation of all goods streams in the network as well as the re-tendering procedure for the entire North American transport business contributed to a significant reduction in transport costs accompanied by a simultaneous increase in service quality. For 2016 and beyond we are planning a further significant increase in profitability, inter alia by gradually consolidating our production and distribution sites. The implementation of the ‘SCORE‘ initiative aims at increases in efficiency and greater product availability by optimising plant processes across all production sites. In addition to the measures referred to above, we also pursue the target of optimum use of the supply potential of the global K+S production network, particularly in the de-icing salt and salt for chemical use business.

In Latin America, the introduction of the retail food grade salt brands ‘Lobos’ and ‘Biosal’ in Peru, which began in 2014, continued consistently in 2015. Sales volumes were continually increased during the course of the year with active support from advertising campaigns. The further expansion of this business as well as optimisation of the logistics chain are the focus for the next few years in order to secure further growth potential in this region.

In addition, the Salt business unit aims to advance its expansion into Asia. As well as increasing deliveries of salt for chemical industry applications and establishing Morton Salt in selected regions and segments. On-site personnel should allow not only the achievement of the strategic goal of increasing sales volumes and strengthening customer loyalty in the product and customer segments already served, but also the tapping of new segments.

Our ‘Salt 2020’ strategy, which combines the initiatives previously mentioned, is thus gaining further momentum. We are well on the way to our target of increasing the operating earnings (EBIT I) of the Salt business unit based on an average winter to over € 250 million (EBITDA: € 400 million) by 2020. We exceeded this figure in 2015 on account of the good winter in North America. An example of further growth is the technically innovative application of high-purity salts from our deposits in North Chile for the copper mining industry. ‘Copper leaching’ is the chemical process for extracting the copper ore from the mined raw ore, which involves the use of salt. Following the completion of pilot projects, which provided impressive substantiation of the potential, other copper mines are identified as customers for 2016 and 2017. K+S aims to develop its leading role in this segment as a copper mining partner.

Strategy for dealing with sustainability issues

As an international resources company, we think and act long term. For us, sustainable development means future viability. We seek to attain sustainable economic success while considering the social and ecological aspects that are tied to our business model. We systematically identify and assess relevant issues and social trends early on in order to incorporate them into our management processes and derive measures. As sustainability management is more than the sum of individual issues, it is crucial to consider their interdependence. The identification and evaluation of issues therefore requires regular updating and reviewing in order to include additional components where appropriate. This helps us advance our existing business, seize new business opportunities and minimise risk. We know from experience that sustainable corporate governance is worth it.

Strategic group structure

As regards the shaping of the Group structure in terms of company law, in addition to the presentation of our business unit structure, the optimisation of Group financing and tax optimisation are the main focuses.

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 the financing sources and instruments as well as the maturity profile

   Cost optimisation through capital procurement on sustainably favourable terms

We extended our credit line of € 1 billion by one year until June 2020 during the reporting year as part of this objective. We also have a total of three bonds with a volume of € 1.5 billion outstanding. This liquidity supply, other liquidity and future cash flows enable us to secure financing for 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 investments, we pursue the goal of optimising the income earned from liquid funds at a balanced risk/opportunity ratio.

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