| Variance analysis in % | Q3/06 | 9M/06 | |
| Change in revenues | + 7.7 | + 6.0 | |
| - volume/structure | (1.2) | (0.2) | |
| - prices | + 4.5 | + 4.2 | |
| - exchange rates | (0.9) | + 0.4 | |
| - consolidation | + 5.3 | + 1.6 |
The economic development of the world economy continued to be robust in the third quarter too, although the pace of growth slowed down somewhat due to a cooling of the economy in the U.S.A. Growth in Asia remains high despite measures introduced by the Chinese government to cool the economy, and Europe is experiencing a strong economic upturn. While the prices for industrial raw materials have been stagnating since the middle of the year, the price for crude oil has meanwhile fallen to under US$ 60 per barrel after having reached a high of almost US$ 80, and is thus approximately on the same level as at the start of the year. During the third quarter, the US currency fluctuated in relation to the euro within a narrow range of USD/EUR 1.25 to 1.29 and was therefore well within the defined barriers of the options that we use to hedge the currency.
Fertilizers and plant care business sector: The strong growth in the global economy, which is mainly the result of the upturn in the emerging countries, is also affecting the success of the K+S Group. The price increase of US$ 25 per ton of potash fertilizer (MOP) for the Chinese market negotiated by our competitors at the end of July was a positive signal. The high volume outflow has stabilised the international volume and price structure for potash fertilizers and successfully counteracted the temporary price pressure that has occurred on a regional basis.
Revenues by business segment
Jan. - Sept. 2006
Salt business sector: The Western European salt market displayed stable development on the demand side. Fluctuations in consumption only had a moderate effect on the individual salt segments. In North America, the preparations for the coming de-icing salt winter business are underway; the current tenders had no significant effect on the market structure. The South American market for industrial salt and salt for chemical use is growing in accordance with population growth there and is additionally supported by the economic recovery of this economic area.
The SPL Group was fully consolidated for the first time as at 30 June 2006.
Revenues rise by just under 8 % in the third quarter
At € 670.1 million, third quarter revenues were up € 47.7 million or just under 8 % on the figure for the same period last year; the increase was caused by price factors in addition to the first-time consolidation of SPL. Given higher world market prices for potash fertilizers on a year-on-year basis, the Potash and Magnesium Products business segment was able to increase revenues substantially once again. Revenues for the remaining business segments further increased too, except for fertiva. Revenues for the first nine months rose mainly as a result of price factors, increasing by € 126.0 million to € 2,225.7 million. At 42 %, the Potash and Magnesium Products business segment accounted for the largest share of revenues.
Operating earnings rise by 34 % in the third quarter
Operating earnings EBIT I, which are adjusted for the noncash changes in the market value of the foreign currency options that we use to hedge the US dollar, rose by € 13.1 million or 34 % to € 51.7 million in the third quarter. Higher fertilizer prices, the positive effects of currency hedging, efficiency enhancements and strong early procurement of de-icing salt contributed to an improvement in all business segments. The sharp rise in energy and freight costs could be more than made up for overall. The EBIT I for the first nine months amounted to € 224.2 million and was thus € 22.1 million or 11 % up on the same period last year.
Revenues by region
Jan. - Sept. 2006
Market values of exchange rate hedging transactions clearly positive in the third quarter
Under IFRSs, changes in the market value of the double-barrier options that we use to hedge the US dollar exchange rate must be reported in the income statement. While foreign currency cash gains deriving from options already exercised are included in operating earnings EBIT I, we report noncash changes in market value of options that are still outstanding as reconciliation to EBIT II. Changes occurring in the market value of these options until they reach their maturity date are irrelevant for the operating success of K+S. By means of our active foreign currency management, we attain a hedge that is essentially retained until the exercise date.
In the third quarter of 2006, earnings after market value changes EBIT II rose by € 43.4 million to € 97.0 million. The market value levels on the reporting date depend on such factors as the USD/EUR spot rate, exchange rate volatility and option terms.
Financial result lower after SPL acquisition
At € (5.2) million, the third quarter financial result has decreased by € 3.1 million compared with the same quarter a year ago. While the other financial result remained stable to a great extent, the interest on borrowings to be paid in connection with the SPL acquisition led to a reduction in the balance of interest. The financial result for the first nine months developed analogously; a decrease of € 4.1 million to € (11.3) million was posted here. Not only the interest expenses for pension provisions (9M/2006: € (5.5) million) but also the interest expenses for other non-current provisions, essentially provisions for mining obligations (9M/2006: € (10.4) million) are disclosed in the financial result; both are noncash. Further information can be found in the Notes.
Adjusted earnings before and after taxes rise substantially in the third quarter
Given the limited economic meaningfulness as well as the significant range of fluctuation in the market values of our currency option transactions, we also report earnings before and after taxes adjusted for these effects. The adjusted earnings after taxes thus also take account of the impact of changes in market values on deferred taxes.
Third quarter adjusted earnings before taxes amounted to € 46.5 million, which represents an increase of € 10.0 million or 27 % compared with a year ago. Because of the claiming of tax loss carryforwards and other factors, deferred income taxes are reported on a hypothetical basis, i. e. in the form of noncash taxes, under IFRSs. Of total income taxes of € 31.7 million for the third quarter, more than one half was noncash. Further information on the income tax burden can be found in the Notes. Third quarter group earnings after taxes, adjusted for the effect of market value changes, amounted to € 31.5 million, an increase of € 7.7 million or 32 %. In the first nine months, adjusted group earnings rose by € 16.1 million or 13 % to € 141.7 million. Information on earnings per share can be found in the Notes.
Gross cash flow for the first nine months rises by 6 %
At € 251.9 million, gross cash flow in the first nine months, i.e. cash flow before changes in working capital, was up 6 % on the figure for the same period last year (9M/2005: € 237.5 million). The higher operating earnings could more than make up for increased income tax payments. Cash flow from operating activities amounted to € 200.7 million and thus displayed a decrease of € 56.7 million on the same period last year. The key factors in this regard were a greater reduction in operating liabilities and the increased utilisation of current provisions. As a result of the acquisition of SPL, cash flow used in investing activities in the first nine months was significantly higher than a year ago (€ (379.6) million).
As a result of the acquisition of SPL, free cash flow for the first nine months also fell significantly to € (178.9) million, compared with € 197.3 million a year ago. After adjustment for the acquisition payment it amounted to € 179.7 million (9M/2005: € 197.3 million). The borrowing connected with the SPL acquisition resulted, also after dividend payment, in a positive cash flow from financing activities of € 124.2 million; we have thus reported net indebtedness of € 648.7 million as at 30 September 2006.
Capital expenditure increased as expected by 18 %
Third quarter capital expenditure amounted to € 33.2 million and was up € 5.0 million or 18 % on the same period last year. Most of the capital expenditure was accounted for by the Potash and Magnesium Products business segment, with a particular focus on the replacement and expansion of underground and above-ground infrastructure and energy-related capital expenditure. € 0.7 million was accounted for by SPL, especially for expanding the capacity of the port. Capital expenditure for the first nine months amounted to € 79.0 million; the increase of € 13.3 million was mainly attributable to surpluses from the previous year.
Including the capital expenditure overhang, we expect the volume of capital expenditure for 2006 as a whole to amount to approximately € 150 million. The main focuses are capital expenditures related to maintenance and minor optimisation measures in order to secure capacity. We expect depreciation charges to amount to just under € 130 million.
Research and development costs were € 3.2 million (Q3/2005: € 3.5 million) for the third quarter, and at € 10.1 million for the first nine months they were also up slightly on the figure for the same period last year of € 9.9 million. We expect research and development expenditure of about € 13 million for 2006.
Headcount rises after SPL acquisition
As at 30 September 2006, a total of 11,843 people were employed by the K+S Group, of which 749 employees came from the salt producer SPL acquired mid-year. At the end of 2006, the headcount should be at the same level. There were 621 trainees as of 30 September 2006 – an increase of 33 trainees compared with a year ago.
Third quarter personnel expenses amounted to € 159.1 million and were thus 7 % up on the same period a year ago. The increase resulted primarily from the first-time consolidation of SPL and the increase in collective bargaining wage scales as of August 2006. For 2006 overall, we anticipate no more than a moderate percentage increase in personnel expenses despite the acquisition of SPL.
After the end of the reporting quarter, there were no significant changes in the economic conditions. When considering the industry environment it should be noted, that Russian potash producer Uralkali had to close its Berezniki I potash mine at the end of October due to an inflow of leach. Uralkali has reported that the loss of the mine will have the effect of reducing its output for 2007 by 1.2 million tons.
Outlook for 2006 slightly improved
The favourable overall economic conditions described at the start of this report should also continue to apply over the remaining weeks of 2006. A fall in gas prices should also have a positive impact on the energy bill of the K+S Group in the medium term.
On the agricultural markets, insufficient food production in relation to consumption should tend to lead to further decreases in warehouse inventories for agricultural products. The further price rises to be anticipated as a result of this may well force the use of mineral fertilizers. The trend for renewable raw materials is having additional favourable effects on the demand for fertilizers. Following the agreement arrived at with China and India during the price negotiations for potash fertilizers, the substantial reduction in warehouse inventories due to the high scale of deliveries should further stabilise the international price level. The salt business during the fourth quarter will depend largely on winter weather conditions. We are assuming average long-term sales values for both the European and the North American market.
Under these premises, the revenues of the K+S Group for 2006 should increase to between € 3.0 billion and € 3.1 billion (previous forecast: € 3.0 billion; previous year: € 2.8 billion); we expect the SPL contribution to revenues to be unchanged at a good € 100 million. In the case of the operating earnings EBIT I of the K+S Group, we expect to generate between € 275 million and € 285 million (previously: € 265 million to € 280 million; previous year: € 250.9 million), with SPL probably accounting for between € 12 million and € 15 million in the second half of 2006. The adjusted earnings after taxes should amount to between € 165 million and € 175 million (previously: € 160 million to € 170 million; previous year: € 161.3 million), which would correspond to adjusted earnings per share of approximately € 4.00 to € 4.25 per share (previously: € 3.90 to € 4.10 per share; previous year: € 3.81 per share).
We are also confident regarding 2007. The global revival in demand for potash fertilizers should have positive effects on the price level during a period of stagnating supply capacity. The sustained full utilisation of capacity in potash fertilizer production at K+S calls for increased expenditure. Nonetheless, in the coming year, the operating earnings of the K+S Group should – subject to normal sales of de-icing salt on a long-term basis – come close to the very high level of 2006.
The Board of Executive Directors, 7 November 2006Forward-looking statements
This report contains facts and forecasts that relate to the future development of the K+S Group and its companies. The forecasts are estimates that we have made on the basis of all the information available to us at this moment in time. Should the assumptions underlying these forecasts prove not to be correct, actual events may deviate from those expected.
| © K+S Aktiengesellschaft | |
| http://reports.k-plus-s.com > K+S Quarterly Reports - Archive > Q3 / 2006 > Management Report | |