k+s aktiengesellschaft analyst conference on 14 · pdf filedemand on the world potash market...

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K+S Aktiengesellschaft

Analyst Conference

on 14 November 2005

in Frankfurt am Main

Speech by Dr. Ralf Bethke,

Chairman of the Board of Executive Directors

– The spoken word is binding –

Experience growth.

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Welcome!

Experience growth.Experience growth.

K+S GroupK+S Group

Welcome!

Analyst ConferenceK+S Aktiengesellschaft

14 November 2005Frankfurt am Main

Welcome!

Analyst ConferenceK+S Aktiengesellschaft

14 November 2005Frankfurt am Main

Ladies and Gentlemen,

We are pleased to be able to welcome so many of you once again to our analyst

conference.

First, I would like to set out the business development of our areas of business in

the first three quarters of the year as well as our expectations and objectives for

the whole of 2005. Afterwards, Mr Steiner will present the key financial data of

our interim report for the third quarter of 2005. Finally, we shall be pleased to

answer any questions you may have.

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Slide 1 - Clear Increase in Earnings as of 30 September 2005

K+S Group 114 November 2005

Clear Increase in Earnings as of 30 Sept. 2005K+S Group

Revenues

Operating earnings (EBIT I)

Earnings after market value changes (EBIT II)

Earnings after taxes, adjusted *

Earnings per share, adjusted (€/share) *

* Adjusted for the effect of market value changes; 37.8% tax rate assumed.

€ million, IFRSs

2,099.7

202.1

221.9

125.8

2.96

2005

1,907.9

132.5

145.3

79.9

1.88

2004

+ 10%

+ 53%

+ 53%

+ 57%

+ 57%

Change

The K+S Group continued its path of growth during the first nine months of 2005.

The overall positive demand on our markets, the strong increase in world market

prices compared with the previous year, especially regarding potash and nitrogen

fertilizers, and our consistent implementation of further, sustainable efficiency

measures have led to a disproportionate increase in earnings.

For the first nine months of the year the K+S Group’s revenues rose by € 192

million or 10 per cent against the same period of previous year, and reached €

2.1 billion. The Potash and Magnesium Products and fertiva business segments

made the strongest contribution to this growth.

At 42 per cent, the Potash and Magnesium Products business segment

accounted for the largest share of revenues. Revenues of € 1.6 billion or almost

80 per cent of Group revenues were generated in Europe, where we increasingly

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leverage the logistical advantages that we enjoy over our overseas competitors,

in the fertilizer business in particular.

Operating earnings (EBIT I), amounting to € 202.1 million, exceeded the

previous year’s level by € 69.6 million or 53 per cent. With the exception of the

Waste Management and Recycling as well as the Services and Trading business

segments, all business segments were able to improve on their operating

earnings. The Potash and Magnesium Products business segment achieved by

far the greatest increase.


In its reporting, K+S concentrates on operating earnings (EBIT I) because they

provide a better indication of the operating earnings capacity of the K+S Group

than the earnings after market value changes (EBIT II). The changeover in

accounting to IFRSs in 2005 led to distortions in the computation of earnings.

This particularly applies to the treatment of measures to hedge the U.S. dollar

exchange rate.

The same applies to earnings after taxes. Because of the limited economic

meaningfulness of the accounting measurement of our currency hedging, K+S

also reports adjusted earnings before and after taxes that take this effect into

consideration. Mr Steiner will explain this to you later.

At € 125.8 million, adjusted earnings after taxes for the first nine months of the

year 2005 exceeded the previous year’s level by € 45.9 million or 57 per cent.

At € 2.96 per share, adjusted earnings per share as of 30 September 2005,

were up € 1.08 or 57 per cent on the level of a year ago. Just as for the same

period last year, this is based on 42.5 million no-par value shares.

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Let us now proceed to the individual business segments:

Slide 2 - High Demand on Global Potash Market


incl. potassium sulphate and potash grades with lower K2O contentSources: IFA, K+S

Potash and Magnesium Products Business SegmentHigh Demand on Global Potash Market

55.053.848.6

45.443.5

2001 '02 '03 '04 2005

Disproportionate rise indemand in recent years

Clear increase of 4%in H1/2005 too

High price increases

Forecast 2005: 55 million t (+3%)

Medium-term trend:2% growth in demand p.a.and further price increases too

million tonnes

(e)

Demand on the world potash market has increased by an above-average amount

in the past few years. During the first half of 2005, too, demand rose by almost 4

per cent. In the third quarter, Asian markets, especially India and China,

experienced strong growth again, whilst developments in remaining markets

were somewhat weaker. Following the strong growth of recent years,

consolidation has been apparent since July 2005, especially in Brazil.

Regarding 2005 as a whole, we expect worldwide demand for potash to increase

by about 3 per cent to about 55 million tons (previous year: 53.8 million tons).

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Because of increased demand, the prices of potash fertilizers have risen clearly.

We find it rather difficult to achieve additional larger price increases, because

agriculture worldwide has to cope with high increases in costs. However, for

individual regions – especially Europe – we see further price potential.

Over the medium term, we continue to expect an average increase in demand of

about 2 per cent per year as well as further price increases as long as the costs

for energy and logistics continue to rise, above all in North America.

We believe that the announced expansion of capacity on the global potash

market will, at least in the medium term, not change the shortage prevailing

substantially.

Slide 3 - Potash and Magnesium Products Business Segment Trend in Business as of 30 September / Outlook 2005


Trend in Business as of 30 September 2005€ million, IFRSs

Potash and Magnesium Products Business Segment

772880

0

200

400

600

800

1.000

2004 2005

114.8

54.8

0

25

50

75

100

125

2004 2005

Revenues EBIT I

+14% +110%

Price-related increase in revenues

Higher sales of fertilizerspecialities and industrialpotash grades

Sustained savings fromefficiency enhancements

Outlook 2005:Tangibly higher revenues

Strong increase in earnings

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Now to our business segment Potash and Magnesium Products . We achieved

revenues of € 880 million up to 30 September 2005, which represents an

increase of some 14 per cent on the same period last year. The clear increases

in the prices of speciality and standard fertilizers were the main reason for this.

Volume decreases of the standard product potassium chloride were largely offset

by greater sales of our specialities and industrial potash grades. Revenue

increases were achieved both in Europe and overseas.

Operating earnings (EBIT I) reached € 114.8 million, more than twice the level of

€ 54.8 million a year ago. Apart from the positive trends in prices, also the

sustainable savings resulting from efficiency enhancement measures had a

noticeable effect of boosting earnings.

For financial year 2005, we expect revenues to be considerably higher than for

2004 while sales should remain on the level of a year ago. The operating

earnings of the Potash and Magnesium Products business segment will increase

significantly.

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Slide 4 - Long-term Strengthening of Earnings Capacity


Long-term Strengthening of Earnings Capacity

Sylvinite extraction started

Working hours extended from September 2004

Continued implementation of efficiency enhancements

Efficient logistics with cost advantages

(incl. long-term, relatively attractive contracts; shipment by container)

Attractive hedging of U.S. dollar until 2008

Potash and Magnesium Products Business Segment


As many of you will know, since years we have worked continually in the Potash

and Magnesium Products business segment on improving our structures and

processes and have consequently implemented measures to boost our earnings

potential on a permanent basis.

Following the launch of the sylvinite extraction in the rich parts of the Werra

deposits in October 2004, this year we will only partially realize the contribution to

earnings we are seeking, because we have not yet achieved in full the additional

output we are striving for. The reason for this is the still too low number of drilling

sites in the underground crude salt mines, because of geologically difficult mining

areas. However, we plan to achieve our original higher volume target as of 2006.

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In the potash segment, we have introduced greater working hours flexibility since

September 2004, which also provides employees with realistic opportunities of

obtaining a greater share in profits. The cost savings originating from this

amounted to some € 13 million in 2005, a figure that should rise to € 16 million by

2007.

Furthermore, following the successful implementation of our 10-point

programme, we are working continuously on further projects in order to become

even more efficient. An example is the planned optimisation, together with E.ON,

of our power supply on the Werra site by 2008. By building a new heating plant

and using alternative fuels for heating purposes, the use of relatively expensive

natural gas at this site can almost be replaced completely and cost-effective.

Further measures apply to improvements in raw material yield and savings in the

use of explosives.

In the logistics sphere, we made increasing use of container shipments in 2005

too in order to counteract the increases in sea freight rates for bulk fertilizers; this

applies mainly to shipments to Asian markets. Furthermore, we are securing

cheaper freight costs by concluding long-term and relatively advantageous

contracts.

Last but not least, we have hedged the U.S. dollar exchange rate at an attractive

level until 2008. Mr Steiner will have more to say about this later.

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Slide 5 - Anti-dumping Rules


Protection of European potash industry in the EU 15 assured since 10 yearsthrough anti-dumping rules

Transitional arrangements approved for the EU 10 states until April 2006

Since the EU accorded Russia "market economy" status in 2004,Russian producers (Silvinit, Uralkali) have applied for a review of the rules

Belarussian producer Belaruskali later also applied for a review

Russian producers have offered the EU Commission "undertakings";Release of the decision by the EU Commission is expected shortly

K+S assumes that the new rules are adequate for ensuring fair competition in Europe

Potash and Magnesium Products Business SegmentAnti-dumping Rules


At present, the European potash industry in the old EU 15 is being protected

against unfair competition, especially from Russia and Belarus, by means of

regulations against unfair competition that have been in force for over ten years.

For the ten new member states, the European Commission in Brussels has

adopted a transitional arrangement that will remain in force until April 2006. This

largely secures the hitherto supply from Russia and Belarus to these new

member states.

Following the EU’s granting of “market economy“ status to Russia in 2004, the

two Russian producers Silvinit and Uralkali have applied for a review of the

current anti-dumping rules with reference to this change of status.

Subsequently, the Belarussian producer Belaruskali also applied for a review.

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The purpose of the applications was to remove all measures against unfair

competition.

We are of the opinion that this application will not be successful.

In order to complete the initiated procedures as quickly as possible, the two

Russian producers have offered the EU so-called “undertakings”. These consist

in contractual commitments on the part of Russian producers to deliver potash to

the EU only under compliance with specific conditions (e.g. price and/or volume

restrictions).

In our opinion, the EU will accept the undertakings for the EU 15 first of all and,

once the current transitional arrangement for the EU 10 has expired, will extend

them to the new member states as well. We expect a decision to be released

soon.

We assume that also in the future the new rules are appropriate for ensuring fair

competition in the expanded Europe of the 25 states. Nevertheless, we shall

monitor the behaviour of the Russian producers and the European importers very

carefully.

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Slide 6 - COMPO Business Segment Trend in Business as of 30 September / Outlook 2005



COMPO Business Segment

EBIT I

423 434

0

100

200

300

400

500

2004 2005

24.221.7

0

6

12

18

24

30

2004 2005

+3%+12%

Revenues

Professional and industrialbusiness developed well

Volume and price increases

Consumer business weakerdue to weather and economic factors

Launch of concrete measuresto cut costs

Outlook 2005:Slight increase in revenues

Operating earnings should againattain last year's level

And now to the COMPO business segment:

In the first nine months of 2005, COMPO achieved a 3 per cent rise in revenues,

which reached € 434 million.

COMPO’s operating earnings up to 30 September 2005, improved by 12 per cent

on the same period last year and reached € 24.2 million.

The growth can be attributed mainly to good business in the professional and

industrial segments. Following poor business in spring as a result of

unfavourable weather conditions, especially in Southern Europe, both Q2 and Q3

saw pleasing increases in revenues on the previous year again. Thanks to good

demand for slow-release fertilizers and successful early stocking-up, especially in

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the case of ENTEC®, our nitrogen-stabilised speciality fertilizer, we were able to

attain increases in terms of both volume and prices.

On the other hand, the consumer area of COMPO was affected by changeable

weather during the gardening season and by a cross-sector consumer restraint in

parts of Europe. This particularly applied to sales of potting soil and plant care

products in France.

To achieve a sustainable improvement in earnings, we have within COMPO

launched a series of measures aimed at optimisation and cost reduction. The

focus is on measures that promote consumer interest in Germany and France;

for instance the standardisation of packaging, a concentration of the product

portfolio and the streamlining of distribution. Furthermore, in COMPO too we

have introduced greater working hours flexibility; as of this year, employees at all

German COMPO sites are once again working a 40-hour week.

All in all, in COMPO we expect a slight rise in revenues against 2004. Operating

earnings should once again approximate the level of a year ago. The efficiency

enhancements that have been initiated, entailing one-off expenses, will have a

positive impact on earnings as of next year.

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Slide 7 - Strategic Alliance with Syngenta


Strategic Alliance with SyngentaCOMPO Business Segment

Launched in September 2005

Joint development of full range of plant protection agents for the lawn and garden area (consumer)

Extension of cooperation to non-Europeanmarkets being reviewed

Growth in revenues of about € 20 - 30 million expected as of 2008

Attractive offer of new solutions for the consumer business


At the end of September of this year, COMPO agreed on the launch of a

strategic alliance with Syngenta, one of the world’s leading manufacturers of

plant protection products. The objective is the joint development of a full range of

plant protection products and pesticides for the consumer lawn and garden

market in Europe. Syngenta will supply COMPO with the appropriate active

substances.

The arrangement also envisages a possible expansion of this cooperation to

markets outside Europe.

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For COMPO, this cooperation with an innovative manufacturer of plant protection

agents operating on a worldwide basis opens up even better opportunities for

serving the changing requirements of customers in an optimal manner. In this

way, we can make even more effective use of our European markets and trading

relationships and address a broader clientele with an extended and very effective

range of lawn and garden care products.

The combination of Syngenta’s innovative portfolio of plant protection products

and COMPO’s well-known brands is leading to a very attractive full range of

products for the lawn and garden segment. Thanks to this alliance, we expect an

increase in revenues of about € 20 to 30 million as of 2008, with interesting

contributions to earnings.

Slide 8 - fertiva Business Segment

Trend in Business as of 30 September / Outlook 2005



fertiva Business Segment

Revenues EBIT I

370

429

0

125

250

375

500

2004 2005

13.2

7.2

0

4

8

12

16

2004 2005

+16% +83%

Good demand fornitrogen fertilizers

Very good early stocking-upbusiness

Attractive price levels

Higher sales of complex fertilizers and ammonium sulphate

Outlook 2005:Clear increase expected in revenues and earnings

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So far this year, the business of fertiva has been characterized by a generally

good level of demand for nitrogen fertilizers. We were able to make up for the

restraint of European customers that prevailed in the spring season by increasing

our deliveries to important overseas markets. In the third quarter, as a result of

rising energy prices, the European trading sector apparently also expected a rise

in the prices of nitrogen fertilizers; this resulted in very good business regarding

early stocking-up.

fertiva’s revenues for the first nine months of 2005 rose by 16 per cent to reach €

429 million. Because of relatively meagre worldwide supply and the high costs of

raw materials, especially for ammonia, international prices of nitrogen fertilizers

reached a very high level. We were able to implement price increases,

sometimes significant ones, for all product groups. Tangible increases in volume

in the case of complex fertilizers and ammonium sulphate more than made up for

the slight reductions in our deliveries of straight nitrogen fertilizers during the first

nine months of the year.

At € 13.2 million, operating earnings were up on the same period last year by € 6

million or 83 per cent. Higher revenue-related margins as well as increased sales

were the contributing factors to this improvement.

All in all, for 2005 we expect a clear increase in revenues and earnings

compared with the 2004.

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Slide 9 - Salt Business Segment Trend in Business as of 30 September / Outlook 2005



Salt Business Segment

Revenues EBIT I

260276

0

80

160

240

320

2004 2005

45.341.7

0

14

28

42

56

2004 2005

+7%+9%

Western European salt marketfaces competition at high level

Very good de-icing salt business

Price increases largely offsetvolume-related decreasesin other product segments

Outlook 2005:

Revenues and operating earningsshould reach last year's levelsassuming favourable winter business

The Western European salt market again saw competition on a high level of

volume. With the exception of de-icing salt, only limited volume increases are

possible. Lately, East European salt producers in particular have been exerting

pressure on the West European salt market.

The Salt business segment’s revenues reached about € 276 million at the end of

September 2005, an increase of some 7 per cent on the previous year’s level.

The weather-related good salt business for winter road clearance services during

the first six months and the good seasonal purchase business for the forthcoming

winter were the contributing factors to this improvement.

In the remaining product segments, we were able to largely offset volume-related

falls in revenues by means of price increases.

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Our operating earnings reached € 45.3 million -- € 3.6 million or 9 per cent more

than a year ago.

The revenues and operating earnings for the whole of 2005 will depend on the

winter business until the end of the year. If the weather is appropriate, last year’s

very good levels might again be reached.

Slide 10 - Waste Management and Recycling Business Segment

Trend in Business as of 30 September / Outlook 2005



Waste Management and Recycling Business Segment

4541

0

10

20

30

40

50

2004 2005

6.56.8

0

2

4

6

8

10

2004 2005

-8%

-4%

EBIT IRevenues

Decrease in undergrounddisposal (no follow-upto last year's special projects)

Underground re-utilisationsees volume-related increases

Recycling business alsoup on last year

Outlook 2005:Slight decrease in revenues

Limited decrease in operatingearnings as expected

The waste management market in Germany continues to see fierce competition.

However, there has been a major change: Since June 2005, untreated residential

waste can no longer be deposited above ground. Despite this new legal position,

waste management prices are still on a relatively low level. In the medium term, it

can be expected that the increase, already evident, in filter dust and flue gas

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cleaning residues from domestic waste incineration plants will stimulate the

market for underground re-utilisation.

In the case of Waste Management and Recycling, we achieved revenues of € 41

million for the first nine months of the year. The decline of 8 per cent is

essentially attributable to lower volume for underground disposal. So far, we

have not been able to acquire follow-up projects to the major projects involving

the clean-up of pre-existing environmental contamination that expired last year.

On the other hand, in underground re-utilisation, we attained a volume-related

increase in revenues of 13 per cent to reach € 17.8 million. This reflects the first

positive results of the abovementioned new legal regulation regarding residential

waste. Recycling business was also up by 12 per cent on the same period last

year as a result of volume factors.

As expected, the operating earnings in the amount of € 6.5 million, that we

achieved up to 30 September 2005, were not quite on the level of a year ago (€

6.8 million). This reflected the reduced volume of underground waste disposal.

For 2005, we expect a slight decrease in revenues on 2004, which benefited

from special projects involving the clean-up of pre-existing environmental

contamination. Analogous to the development in revenues, we assume that

operating earnings will decrease to a very limited extent.

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Slide 11 - Services and Trading Business Segment Trend in Business as of 30 September / Outlook 2005



Services and Trading Business Segment

EBIT I

38 40

0

10

20

30

40

50

2004 2005

17.318.8

0

5

10

15

20

25

2004 2005

+4%-8%

Revenues

Increased revenues due to highergrain handling for third parties

Operating earnings down on last year due to lower fertilizer handlingas well as lower income fromCatsan® granulation

Outlook 2005:

Revenues and operating earningswill not quite reach last year's very good figures

To judge this business segment, it is important to know that the revenues only

cover third-party business.

Earnings, however, include income from both internal and external services, thus

resulting in the reporting of a relatively high EBIT margin.

For the first nine months, the business segment posted revenues deriving from

third-party business of about € 40 million; the 4 per cent increase was attributable

mainly to increased grain handling for third parties.

However, operating earnings as of 30 September 2005 fell by € 1.5 million to €

17.3 million, attributable to reduced fertilizer handling by KTG in Hamburg and

reduced income from CATSAN granulation.

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For 2005 as a whole, revenues will be slightly down on the previous year;

operating earnings should also be slightly below the relatively high levels

achieved in 2004.

Slide 12 - Training Ratio on a Very High Level Once Again


Training Ratio on a Very High Level Once AgainK+S Group

K+S Group total

of which traineesTraining ratio

*

200530 Sept.

11,051

5885.3%

200430 Sept.

11,080

5855.3%

* including temporary employees measured on full-time equivalent basis (FTE)


And now to the people of the K+S Group. The Group employed a total of 11,051

persons as of 30 September 2005. This figure barely changed compared with 30

September 2004 (11,080 employees).

The workforce has increased as a result of consolidation factors connected with

the acquisition of French SCPA activities; without this structural effect the

number of employees would have fallen by just under 2 per cent. At the end of

the year, too, the headcount will be at the present level.

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As of 30 September 2005, there were 588 trainees. Our training ratio of 5.3 per

cent was on a comparably high level once again.

Slide 13 - Lower Capital Expenditure According to Plan


85.1

65.7

Lower Capital Expenditure According to PlanK+S Group

Frisia brine field expansion inSalt business segment as well as sylvinite project in Potash and Magnesium Products businesssegment already completed in 2004.

Outlook 2005:

Capital expenditure of between € 125 and 130 million

€ million, IFRSs

200430 Sept.

200530 Sept.

-23%

And now to capital expenditure:

Capital expenditure for the first nine months amounted to € 65.7 million and was

thus € 19.4 million or 23 per cent down on the corresponding figure for the same

period last year, as planned. This is attributable to already last year’s successful

completion of the brine field expansion in the Salt business segment as well as

the completion of the sylvinite project in the Potash and Magnesium Products

business segment.

For 2005 as a whole, we expect the volume of capital expenditure to amount to

between € 125 and 130 million. It is planned that about three quarters of this

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amount will be used for capital expenditure related to replacement and ensuring

production.

We also expect depreciation charges to amount to about € 130 million.

Slide 14 - Outlook for 2005 Raised


Outlook for 2005 RaisedK+S Group

Revenues should reach just under € 2.8 billion

Operating earnings (EBIT I) of between € 225 and 235 million expected

Adjusted earnings after taxes should reach between € 135 and 145 million

Confident outlook for 2006:Continued good demand for potash fertilizers worldwideImplementation of further efficiency enhancements (Potash, COMPO)

Expansion of market positions through acquisitions and cooperations


What is our assessment of the development of the K+S Group for 2005 as a

whole?

Business should continue to develop positively over the remaining weeks of 2005

too, so that we have once again raised our earnings outlook for 2005.

Revenues for 2005 as a whole should reach almost € 2.8 billion.

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We now expect operating earnings (EBIT I) to amount to between € 225 and

235 million following approximately € 162 million in 2004; assuming average

sales of de-icing salt until the end of the year as well as a U.S. dollar exchange

rate that will remain within a range of USD/EUR 1.15 to 1.30.

Subject to the conditions described above, adjusted earnings after taxes for

2005 should amount to between € 135 and 145 million, corresponding to

adjusted earnings per share of approximately € 3.20 to 3.40 per share. The

corresponding figures for 2004 were € 98.4 million or € 2.32 per share.

We are also confident about 2006 provided that there will be no deterioration in

the general economic environment in the coming year.

Our outlook is based on such factors as continued good demand for potash

fertilizers worldwide as well as further efficiency enhancements in the Potash and

Magnesium Products and COMPO business segments.

We are steadfastly pursuing our goal of bolstering the international competitive

position of the K+S Group also through external growth. We are engaged very

specifically with acquisition projects, participations and cooperation in our current

business areas. Our financial strength provides us here with many options which

we shall exploit carefully.

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Slide 15 - K+S Share Price Gains Significantly


2005

K+S Aktiengesellschaft

Source: Bloomberg; as of 9 November 2005

Index: 30 December 2004 = 100

90

100

110

120

130

140

150

Jan. Apr.

DAX

K+S

MDAX

July Oct.

+29%

+32%

+18%

K+S Share Price Gains Significantly


The price of the K+S share has risen comparably brisk since the beginning of the

year and reached a new all-time high of € 59.10 on 5 October 2005. This price

level was used for profit-taking – a development that has affected the entire

market, especially the MDAX, in recent weeks. At its current price level of a little

over € 50, our share appears to have found a new base; it is still about 30 per

cent above the corresponding level at the end of 2004. When one adds the paid

dividends, the total return per share is even higher.

In October, we commenced a share repurchase programme and, at the same

time, we separated off pension provisions from the balance sheet. In this way, we

are optimizing the capital structure of the K+S Group without reducing the room

for manoeuvre required for our planned acquisition and cooperation objectives.

We see concrete opportunities for continued healthy growth. Thank you for your

attention. Mr Steiner will now comment on the financial key data.

k+s aktiengesellschaft analyst conference on 14 · pdf filedemand on the world potash market...

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