| Variance analysis in % | Q1/07 |
| Change in revenues | + 10.4 |
| - volume/structure | (2.5) |
| - prices | + 3.4 |
| - exchange rates | (1.8) |
| - consolidation | + 11.3 |
Economic trends in the first quarter displayed the global economy in robust shape with output in the industrialised countries increasing again and world trade intensifying further. Growth in Asia remained on a high level and the economic upturn in the eurozone also continued. Prices for industrial raw materials rose again in the first quarter; at the end of March, crude oil cost just under US$ 70 and thus, in terms of quarterly averages, was on about the same level as a year ago. In relation to the euro, the US currency fluctuated within a narrow range of USD/EUR 1.28 to 1.33 during the first quarter.
Fertilizer and plant care business segment: Canadian and Belarusian/Russian producers have concluded higher prices and volume agreements for calendar year 2007 with Chinese customers already at the beginning of February. This early agreement - a further indicator of the sharp rise in global demand for potash fertilizers - led to announcements of partly significant price increases due to lower producer stocks as well as temporary logistical problems at North American suppliers.
Revenues by
business segment
Jan. - March 2007
(in %)
Salt business segment: In the first quarter, the Western European de-icing salt market was marked by the warmest winter in the history of weather records. The North American de-icing salt market too was influenced by mild weather at the beginning of the year. However, the late start of the winter in March had a positive effect. Business was stable in the remaining salt segments. The South American market for industrial salt and salt for chemical use grew in line with local population development and received additional support from strong economic upturn.
The SPL Group was fully consolidated as of 30 June 2006.
First quarter revenues rise by 10 %
At € 944.7 million, first quarter revenues were up € 89.2 million or 10 % on the same period last year; in addition to the first-time consolidation of SPL, the increase was essentially attributable to price effects in the fertilizer business, thus more than offsetting negative volume and currency effects. The Potash and Magnesium Products business area achieved pleasing revenue increases as a result of higher volume as well as higher prices on a year-on-year basis. The COMPO and fertiva business segments attained significant revenue increases. The revenue rise for the Salt business segment resulted from the first-time consolidation of SPL, which more than made up for the negative effect stemming from the unusually low sales of de-icing salt in Europe attributable to weather conditions.
At € 646.6 million, just under 70 % of group revenues were generated in Europe in the first quarter. The Potash and Magnesium Products business segment accounted with 39 % for the largest share.
Revenues by region
Jan. - March 2007
(in %)
Operating earnings reach € 103.3 million (- 9 %) despite earnings decreases in the European de-icing salt business
EBIT I is free of non-cash changes in the market value of the options that we use to hedge the US dollar and only include the foreign currency gains actually achieved as a result of exchange rate hedging for the period under review.
At € 103.3 million, EBIT I for the first quarter of 2007 was down € 9.8 million on the same period last year. Noticeable earnings increases in the Potash and Magnesium Products and COMPO business segments could not fully make up for the markedly lower earnings contribution of the Salt business segment resulting from the weak de-icing salt business in Europe. However, this already illustrates the positive earnings momentum of the Potash and Magnesium Products business segment.
Market values of hedging transactions slightly positive in the first quarter
Under IFRSs, changes in the market value of our double-barrier options used to hedge the US dollar exchange rate are reported in the income statement. While cash currency gains from options already exercised are included in operating earnings EBIT I, we report non-cash changes in the market value of options that are still outstanding by reconciliation to EBIT II. Changes in the market value of these options until they expire are irrelevant for the operating success of K+S. By means of active foreign currency management and, if necessary, the acceptance of additional premium payments to adjust barriers, we can ensure that a hedge is essentially maintained until the exercise date.
At € 106.3 million, EBIT II, earnings after changes in market value changes, for the first quarter of 2007 was down € 58.5 million on the same period last year due to the lower US dollar exchange rate. The market value levels on the reporting date depend on such factors as the USD/EUR spot rate, exchange rate volatility and the option term.
First quarter financial result weaker
At € (9.8) million, the financial result for the first quarter was, as expected, down € 3.9 million on the same period last year, with the key factor here being the higher interest expense resulting from the loan taken out to finance the SPL acquisition. Under IFRSs, in addition to the interest expense for pension provisions (Q1/2007: € (1.8) million), the financial result includes the interest expense for other long-term provisions (Q1/2007: € (3.7) million) mainly related to mining obligations; both are non-cash. Further details can be found in the Notes.
Adjusted earnings before and after taxes lower than a year ago
Given their limited economic meaningfulness as well as the considerable fluctuations to which the market values of our currency option transactions are subject, we report earnings before taxes as well as after taxes following adjustment for these effects. The latter will also take account of the impact of changes in market values on deferred taxes.
Adjusted earnings before taxes for the first quarter amounted to € 93.5 million representing a substantial decrease of € 13.7 million or 13 % compared with a year ago. Under IFRSs, deferred taxes, i. e. non-cash taxes, are reported on an imputed basis despite the use of tax loss carryforwards. Of the total of € 31.9 million (Q1/2006: € 55.1 million) in income taxes for the first quarter, € 4.6 million (Q1/2006: € 30.2 million) were non-cash. Further details of taxation can be found in the Notes. Group earnings after taxes and after adjustment for the effect of market value changes amounted to € 62.6 million in the first quarter and were down € 8.6 million or 12 % on the same period last year.
Adjusted earnings per share for the first quarter at € 1.52 (- 12 %)
The undiluted, adjusted earnings per share are the quotient for the adjusted group earnings after taxes and minority interests and the weighted average number of shares outstanding. As none of the conditions resulting in the dilution of earnings per share exist at K+S at the present time, undiluted earnings per share correspond to diluted earnings per share. In addition, earnings per share are based entirely on continued activities; no discontinued activities or changes in accounting treatment needed to be taken into account.
At € 1.52, adjusted earnings per share were down 12 % on the figure for the same period last year (€ 1.73) despite the relatively high decline in de-icing salt sales in Europe. They were computed on the basis of 41.21 million (2006: 41.20 million) non par value shares, being the average number of shares outstanding during the reporting period.
As of 31 March 2007, we temporarily held 60,000 of our shares in connection with an employee share ownership programme; thus, the total number of K+S Group shares outstanding at the end of March amounted to 41.19 million non par value shares.
First quarter cash flow from operating activities rises by € 7.5 million
At € 104.1 million, gross cash flow for the first quarter was down on the figure for the same period last year (Q1/2006: € 114.0 million). This resulted from the lower operating earnings as well as higher interest and income tax payments. By contrast, first quarter cash flow from operating activities amounted to € 39.2 million and thus improved by € 7.5 million or 24 % on the same period last year. This was due to a smaller increase in working capital despite a sharp rise in receivables. As a result of planned higher disbursements for property, plant and equipment, cash flow from investment activities in the first quarter amounted to € (24.2) million compared with € 7.8 million in the first quarter of 2006. It should be noted that the same period last year was positively affected by proceeds from the sale of securities totalling € 20.8 million.
As a result of higher investment-related disbursements and the absence of extraordinary effects from the sale of securities, free cash flow for the first quarter amounted to € 15.0 million compared with € 39.5 million for the same period last year. After taking into account the slightly positive cash flow from financing activities, we report net indebtedness of € 713.1 million for the period ending 31 March 2007 (Q1/2006: € 308.2 million). The increase is mainly due to the taking out of a loan in connection with the acquisition of SPL .
Capital expenditure rose by just under € 10 million as planned
First quarter capital expenditure amounted to € 25.2 million and was thus € 9.4 million higher than a year ago. The increase is mainly attributable to continued work on projects from the previous year that have not been completed yet. 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 infrastructure. Further major projects in the first quarter were the doubling of loading capacity at the SPL harbour already started in 2006 as well as the investment by fertiva in the construction of a new filter plant for ammonium sulphate.
Including the overhangs, we expect capital expenditure volume of about € 200 million for 2007 which already includes the acquisition of a further ship for SPL . Just under two thirds of this volume are expected to be spent for replacement and safeguarding production which should be financed in total by the expected depreciation amount of about € 130 million.
At € 4.0 million, first quarter research and development costs were up slightly on the same period last year. We expect costs of about € 16 million for 2007.
Number of employees increases following SPL takeover
As of 31 March 2007, the K+S Group employed a total of 11,956 people, of whom 856 are employees of the salt producer SPL acquired in the middle of last year. At the end of 2007, the number of employees should remain on about the same level. There were 496 trainees as of 31 March 2007 - a further increase of 22 compared with same period last year.
First quarter personnel expenses amounted to € 171.5 million, up just under 3 % on the same period last year. Despite the first-time consolidation of SPL and the collective agreement pay rise as of August 2006, personnel expenses only showed a moderate increase. For 2007 as a whole, we also expect only a slight rise in personnel expenses.
Following the close of the quarter under review, no significant changes have occurred in the economic environment or in the situation of our industry, nor were there any other events of material importance for the K+S Group that would require disclosure.
Compared with the information provided in the K+S Group Risk Report and published on 15 March 2007 on pages 107 et seqq. of the K+S Group Annual Report 2006, there have been no significant changes in the risks described, i. e. in respect of possible negative consequences and the respective likelihood of materialisation. That includes new risks and those risks that no longer exist. At the present time, there are no risks that would jeopardise continued existence.
In respect of the opportunities described on pages 129 et seqq. of the K+S Annual Report 2006 and published on 15 March 2007, there have been no significant changes. This also applies to new opportunities and those opportunities that no longer exist. There is no offsetting of opportunities and risks as well as positive and negative changes in them.
Outlook for 2007 raised significantly
The favourable economic conditions in Europe as well as in the global economy described at the beginning should continue to apply over the remaining months of 2007. Any greater depreciation of the US dollar could have a dampening effect.
The tendency for food production to be insufficient is resulting in declining stocks of agricultural products on agricultural markets. The resulting price increases that can be observed are encouraging the use of mineral fertilizers. In addition, the trend towards renewable raw materials is also impacting favourably on fertilizer demand. International price levels have risen significantly as a result of the related strong demand for potash fertilizers while producer stocks remain low at the same time. The salt business, particularly in the fourth quarter, will largely depend on winter weather conditions. In this respect, we base our assumptions on average sales figures for a good many years in the case of both the European and North American markets, which, however, cannot make up for the current shortfall in sales of de-icing salt.
Given the conditions that are expected, we anticipate a tangible rise in revenues this year, which will also be positively impacted by consolidation effects arising from the first-time inclusion of SPL for the entire year. The K+S Group’s operating earnings over the coming three quarters should not only offset the current shortfall but also more than make up for it to an appreciable extent. Our outlook is based on the following premises: strong global demand for potash fertilizers, a significant reserve in the double-digit million range for possible follow-up hedging connected with the further depreciation of the US dollar, energy costs on their current level as well as average de-icing salt business in Europe and North America in the fourth quarter.
Assurance from the legal representatives of K+S Aktiengesellschaft
We hereby confirm that, to the best of our knowledge and in keeping with the principles of due group interim reporting, the interim consolidated financial statements provide a true and fair view of the net assets, financial position and results of operations of the group, that the group management report presents the course of business, including the results of operations and the position of the group, in such a way as to provide a true and fair view and that the key opportunities and risks relating to the anticipated development of the group over the remainder of the financial year are described.
The Board of Executive Directors, 2 May 2007
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 at the present time.
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