K+S Group, Kassel, reported strongly negative adjusted group earnings after tax of €-1.8 billion for full-year 2020, largely attributable to a final impairment loss as of Dec.31, 2020, of €1.86 billion.

This impairment loss was confirmed with an unqualified audit opinion on March 9, and was around €140 million lower than previously expected (GM Nov. 6, 2020), mainly as a result of more specific assumptions for the individual calculation components in the course of preparing the financial statements, the company said.

The audit opinion is a first step in K+S resolving potential issues being investigated by the German Financial Reporting Enforcement Panel (see separate news story).

Full-year EBITDA fell 30 percent to €445 million, down from the prior year €640 million, including discontinued operations. Revenue declined 9 percent to €3.7 billion from €4.1 billion, coming in above analysts’ average estimate of €3.43 billion (range €2.34 billion to €3.87 billion), according to a Bloomberg consensus.

K+S cited a weaker-than-expected recovery in potash prices during 2020 following the relatively late and long-anticipated conclusion of contracts with Chinese customers. The mild winter in North America and Europe also negatively impacted sales volumes of de-icing salt, the company said.

In addition, the extensive prevention measures required as a consequence of the COVID-19 pandemic burdened earnings by about €40 million. The company also cited one-off expenses associated with the restructuring of its administration, as well as transaction costs for the sale of the America’s operating unit to the U.S.’ Stone Canyon Industries agreed last October(GM Oct. 9, 2020).

“Despite the difficult conditions, we are not satisfied with the EBITDA achieved in 2020,” said K+S Chairman Burkhard Lohr. “On the other hand, we made good progress with the measures we could take ourselves, [notably] the sales agreement for the Americas operating unit reached in October 2020 [for $3.2 billion].

Lohr added that with this sale, which is now expected to close by this summer “at the latest,” K+S will generate proceeds of about €2.5 billion, which will be exclusively used to reduce company debt.

K+S’ net debt-to-EBITDA ratio had deteriorated to 7.2x as of Dec.31, 2020, compared with 4.9x at the end of 2019.

Responding to an analyst’s question at a company earnings call on March 11, Lohr said K+S is “very happy” with how the regulatory approval process is proceeding for the sale of the Americas operating unit, and pointed to the fact that K+S is now expecting the closing of the deal by this summer at the latest, whereas previously the expectation was during the summer.

“So it could be before June,” said Lohr.

At the time of the company’s third-quarter earnings release back in November, Lohr had conceded that U.S. antitrust clearance of the deal was “the main step K+S has to take between signing and closing,” and also confirmed there is a break-up fee in the sales contract (GM Nov.13, 2020).

The associated restructuring of K+S’ administration was completed on schedule at the end of 2020, and in the future will save 30 percent of previous administration costs, equivalent to €60 million.

K+S said it also achieved more than €150 million in synergies last year as planned, and implemented further operational improvements at its production sites.

Due to higher production volumes, sales volumes in the Agriculture customer segment increased by 1 million mt to 7.3 million mt in 2020, while Bethune, Sask., produced almost 2 million mt of potash last year for the first time, with K+S highlighting the high product quality at the Canadian operation. The company reported the average cost per tonne last year was reduced to below €200/mt across all plants.

Despite strong sales volumes, revenues and EBITDA at the Europe+ operating unit were lower year-over-year, with revenue coming in 5 percent down and EBITDA 21 percent down. The company cited lower average selling prices for its potash and magnesium products.

Europe+ operating unit

In the Americas operating unit, the significantly weaker sales of de-icing salt due to the mild winter in particular resulted in lower revenues (-17 percent to €1.27 billion) and an 8 percent fall in EBITDA to €212 million. The former Americas operating unit has been reported as a discontinued operation since the 2020 financial statements due to its anticipated sale.

Due to the upcoming sale of the Americas operating unit, K+S has made organizational adjustments to its customer segments. Following the sale, the Communities and Consumers business is being reduced, and so the company is now combining these segments into the Industrial business segment to form the newly created Industry+ customer segment. The Agriculture customer segment remains unchanged, as the sale of the Americas unit has no impact on this business.

K+S said it will not pay a dividend for the 2020 financial year “due to the strongly negative adjusted group earnings after tax, the resulting balance sheet loss of K+S, an expected significantly negative free cash flow from operating business in 2021, and the planned utilization of the purchase price of the Americas operating unit to repay debt and strengthen the balance sheet”.

For FY2021, the company sees “very good” demand for potash fertilizers and “moderately higher” average prices for potash and magnesium fertilizers. It expects sales volumes in the Agriculture customer segment to be >7.5 million mt.

It also expects “above-average” demand for de-icing salt in Europe in the first quarter due to the winter weather conditions at the start of the year, with sales volumes in 2021 seen at >2.5 million mt (2020: 0.9 million mt).

As per the guidance released by the company on March 9, K+S expects an improvement in EBITDA from continuing operations in fiscal year 2021 to range between €440 million and €540 million (2020: €267 million) as a result of the more positive market outlook for potash and magnesium fertilizer prices, and the closing of the sale of the American sale business. The 2021 guidance includes a one-off gain of around €200 million on the closing of the REKS waste management joint venture.

K+S and Remex GmbH in mid-December announced they had agreed to bundle their respective waste management activities in a new joint venture, REKS GmbH & Co. KG, in which both companies are equal partners, each with 50 percent participation (GM Dec. 31, 2020).

However, the EBITDA guidance disappointed analysts at UBS and Commerzbank, Bloomberg reported. The report cited UBS analyst Andrew Stott saying K+S’ forecast of FY2021 EBITDA is about 20 percent below estimates when excluding the €200 million gain from the REKS joint venture.

Commerzbank analyst Michael Schaefer called the guidance “disappointing”, but said “[K+S] management burned their fingers several times, and the outlook may be rather conservative.”

K+S Group’s auditor Deloitte GmbH on March 9 issued an unqualified audit opinion on the group’s 2020 consolidated financial statements, according to a K+S disclosure.

The impairment loss on assets in the Europe+ operating unit now amounts to €1.86 billion in the consolidated financial statements as of Dec. 31, 2020, around €140 million lower than previously expected, according to the disclosure.

“On balance, the lower impairment was mainly the result of more specific assumptions for the individual calculation components in the course of preparing the financial statements. In addition, exchange rate effects occurred in the fourth quarter,” said K+S.

However, the unqualified audit opinion confirms that the impairment loss should not have been recognized earlier. K+S had made the special impairment for the third quarter (GM Nov. 6, 2020)

The audit opinion is a first step in K+S resolving potential issues being investigated by the German Financial Reporting Enforcement Panel.

K+S disclosed last month its financial statements as of Dec. 31, 2019, together with the related interim group management report and the abbreviated financial statements as of June 30, 2020, were to be examined at the request of the German Federal Financial Supervisory Authority (BaFin) (GM Feb. 19, p.35).

BaFin cited the reason for the probe – which is being undertaken by the German Audit Office for Accounting (DPR), a separate financial watchdog on its behalf – as assets reported in K+S’ consolidated financial statements as of December 31, 2019, and the abbreviated financial statements as of June 30, 2020 – in particular non-current assets – may be overstated. The examination relates to a K+S statement on Nov. 4, 2020, that it had adjusted its long-term assumptions for the potash business (GM Nov. 6 & Nov. 13, 2020).

K+S said in this week’s statement while the examination by the German Financial Reporting Enforcement Panel has not yet been completed, the company is “firmly convinced that the impairment was made by us properly and in compliance with all relevant accounting standards, and the probe will be able to invalidate the indications for the examination. The unqualified audit opinion supports our assessment.”