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Revenues and earnings position
| Variance analysis in % | Q4/08 | 12M/08 |
| Change in revenues | + 6.9 | + 43.4 |
| - volume/structure | (59.1) | (18.8) |
| - prices | + 65.3 | + 64.5 |
| - exchange rates | + 0.7 | (2.4) |
| - consolidation | – | + 0.1 |
Revenues rise by 7 % in the fourth quarter
At € 955.5 million, fourth quarter revenues were up € 61.8 million or 7 % year on year; the increase is attributable to positive price effects that more than offset volume-related revenue decreases. While the Potash and Magnesium Products as well as Salt business segments achieved revenue gains, COMPO and fertiva were unable to attain the levels of a year ago.
For financial year 2008, we posted revenues of € 4,794.4 million, thus up 43.4 % year on year. The increase in revenues can be attributed, in particular, to positive price effects, which could more than make up for the moderate declines in revenues that resulted from currency factors as well as for the significant declines in revenues caused by volume factors in the fourth quarter. The Potash and Magnesium Products, fertiva and COMPO business segments increased their revenues mainly as a result of considerably higher fertilizer prices. In the Salt business segment, weak de-icing salt sales in the first quarter were more than compensated for by higher revenues in the salt for chemical use, industrial salt and food grade salt segments and also as a consequence of the onset of winter in the fourth quarter. Just under 70 % of Group revenues were generated in Europe; Potash and Magnesium Products, the largest business segment, accounted for 50 % of revenues.
Revenues by business segment
Jan. – Dec. 2008
(in %)
Fourth quarter operating earnings rise by € 254.2 million to € 287.8 million
The operating earnings classified as EBIT I are free of the effects of market value changes from hedging transactions and only include the hedging gains actually achieved during the period under review. The effects of the exercise, sale or expiry of the derivatives that still existed at the beginning of the year but are no longer in operation are not included in the operating earnings either.
In the fourth quarter of 2008, EBIT I rose € 254.2 million year on year to € 287.8 million; this was mainly attributable to earnings increases in the Potash and Magnesium Products business segment. In addition, a significantly negative foreign currency result weighed on the result for the same period last year. At € 1,342.7 million, operating earnings EBIT I were up 370 % on last year’s figure (2007: € 285.7 million). Except for the Salt and the Complementary business segments, all the remaining business segments were able to improve on the previous year materially. Far higher prices for standard and speciality fertilizers resulted in a situation, where it proved possible to considerably more than make up for higher production costs as well as negative currency effects.
Earnings after market value changes and derivatives no longer in operation (EBIT II)
Under IFRSs, changes in market value from hedging transactions have to be reported in the income statement. While the cash gains from derivatives already exercised are included in operating earnings EBIT I, we report non-cash changes in the market value of derivatives that are still outstanding by reconciliation to EBIT II. Following the reorganisation of our US dollar hedging system at the end of 2007/beginning of 2008, the double-barrier options that existed at the beginning of the financial year no longer served to secure core business operations so that the earnings effects arising from the exercise, sale or expiry of the options are also reported in full in EBIT II.
Earnings after market value changes and derivatives no longer in operation (EBIT II) reached € 286.0 million in the fourth quarter, compared with € (137.5) million a year ago. In the year under review EBIT II achieved € 1,192.3 million, having been € (106.9) million in the previous year. With € 150.4 million, EBIT II was much less adversely affected than in the previous year (€ 392.6 million). Most of the adverse impact on earnings resulted from the exercise, sale or expiry of the derivatives that still existed at the beginning of the year but were no longer in operation.
Revenues by Region
Jan. – Dec. 2008
(in %)
Moreover, a significantly stronger US dollar until the reporting date, tangibly lower freight charges, and lower energy costs led to lower market values for the hedging instruments used.
Fourth quarter financial result up significantly year-on-year
At € 29.1 million, the fourth quarter financial result was significantly better than a year ago (2007: € (11.2) million); for 2008 as a whole too, it could be improved significantly by € 42.4 million to € 6.8 million. The main reason for this was the increase in the discount factor for the interest relating to provisions for mining obligations, which resulted in non-cash interest income of € 26.6 million. In total, the interest income from provisions for mining obligations in the year under review amounted to € 20.0 million (2007: interest expenses of € 13.9 million). Non-cash interest expenses for pension provisions came to a total of € 2.3 million in 2008 (2007: € 4.0 million); due to the corridor method used, the increase in the discount rate for computing pension provisions had no impact on the net interest result. Further details can be found in the notes.
Adjusted earnings before and after taxes
Given the limited economic meaningfulness of unadjusted earnings before and after taxes, we additionally report earnings before and after taxes adjusted for the effects of changes in market value from hedging transactions as well as from derivatives no longer in operation. The adjusted earnings after taxes also eliminate the effects of the market value changes from hedging transactions and derivatives no longer in operation on deferred and/or cash taxes.
Adjusted earnings before taxes for the fourth quarter reached € 316.9 million, which represents an increase of € 294.5 million on the same period last year. In 2008 as a whole, adjusted earnings before taxes amount to € 1,349.5 million, improving by € 1,099.5 million, year on year.
Under IFRSs, deferred, that is, non-cash income taxes are reported. The fourth quarter
tax expense amounted to € 88.5 million, of which € 15.4 million comprised deferred taxes (income tax Q4/2007: € 51.5 million, of which € 37.8 million were deferred). Tax expense totalling € 327.7 million was incurred in 2008; of this amount, € 61.4 million was deferred, i. e. non-cash. Further information about the income tax burden can be found in the notes.
Adjusted Group earnings after taxes for the fourth quarter amounted to € 227.5 million compared with € 22.9 million a year ago. At € 979.3 million, adjusted Group earnings exceeded the previous year’s level by € 804.0 million. In addition to dramatically higher operating earnings, this was also due to the greatly improved financial result. The adjusted Group tax rate was thus 27.4 %, after having been 29.9 % in the previous year.
Adjusted earnings per share reach € 1.38 (Q4/2007: € 0.14 per share)
Undiluted, adjusted earnings per share are computed by dividing adjusted Group earnings after taxes and minority interests by the weighted average number of shares outstanding. As none of the conditions resulting in the dilution of earnings per share exist in the case of K+S at the present time, undiluted earnings per share correspond to diluted earnings per share. Neither abandoned business segments nor changes in accounting treatment had to be taken account of separately in the earnings per share.
For the quarter under review, adjusted earnings per share amounted to € 1.38 and were thus up € 1.24 on the same period last year (€ 0.14). They were computed on the basis of an average number of outstanding shares of 165.00 million no-par value shares; (previous year: 165.00 million no-par value shares; adjusted to the share split in the ratio 1:4 entered in the Commercial Register on 24 June 2008 and technically executed on 21 July 2008). For the year under review, adjusted earnings per share amounted to € 5.94 and were thus up 460 % on the previous year (€ 1.06).
As of 31 December 2008, we held 24 shares of our own. The total number of K+S Group shares outstanding at the end of December amounted to 165.00 million no-par value shares.
Financial position and Capital expenditure
Free cash flow reaches € 632.6 million
In the year under review, gross cash flow reached € 1,177.9 million and was thus considerably greater than it had been the previous year (2007: € 372.1 million). In spite of higher income tax payments, this was primarily the result of an EBIT I that had increased by € 1,057.0 million. As a result of the alterations made to the foreign currency hedging system at the end of 2007, far fewer premium payments were made for US dollar hedging in the financial year than in the previous year, so that the figures following adjustment for the change in these tied-up funds look like this (2008: € 41.9 million; 2007: €367.0 million): Despite the significant increase in inventories, receivables and other assets as a consequence of higher fertilizer prices in 2008, it proved possible to increase the cash flow from operating activities by € 585.9 million to € 844.6 million.
Expenditure on investment activities increased last year by a total of € 29.4 million to € 170.1 million; this is mainly due to a higher level of capital expenditure in the Potash and Magnesium Products business segment on measures intended to improve exploitation as well as in the Salt business segment on the expansion and extension of the useful life of our fleet of ships.
In 2008, we achieved free cash flow of € 632.6 million; this was thus far higher than the negative free cash flow of € (249.0) million of the previous year. After adjustment for acquisitions/divestitures and the tying up of capital caused by premium payments, it rose by € 559.2 million to € 674.5 million, after having been € 115.3 million in the previous year. Free cash flow is subject to significant seasonality during the course of the year. In general, both the first and last quarters are influenced by an increase in receivables, while high cash receipts are usually recorded in the second and third quarters. These factors result in cash generally reaching its highest point for the year at the end of the third quarter.
Cash flow from financing activities during the year under review essentially comprised the redemption of loans as well as the dividend payment for 2007 of € 82.5 million. Altogether, the cash flow from financing activities thus consisted of loan repayments of € 318.0 million after the taking out of loans worth € 81.7 million in the previous year. Cash and cash equivalents at year-end were thus € 160.6 million (2007: € (151.4) million).
Capital expenditure
(in € million)
Capital expenditure in the fourth quarter down year on year
At € 64.4 million, the volume of capital expenditure for the fourth quarter was, as anticipated, down € 11.0 million on the figure for the same quarter a year ago (Q4/2007: € 75.4 million). The Potash and Magnesium business segment accounted for the major part of the capital expenditure with a continued focus on replacing and expanding underground infrastructure, measures to increase capacity for industrial products at the Zielitz site and projects to further conserve energy. In 2008, we invested a total of € 197.5 million in property, plant and equipment and intangible assets, about 15 % more than in the previous year. Furthermore, in comparison to the forecast published in our financial report 2007, at the end of the year, there were capital expenditure overhangs of about € 40 million, which were mainly attributable to delays in granting of permission for the construction of the saline water pipeline from the Neuhof-Ellers site to the Werra site, already applied for in July 2007, and to limited resources at suppliers and the resultant extension of delivery times.
Measures relating to replacing and ensuring production accounted for about half of the capital expenditure. The depreciation charges totalling € 141.7 million were able to thus fund these measures completely and, furthermore, cover part of the investments in expansion and rationalisation projects.
For the next few years, we are assuming that capital expenditure related to replacement and ensuring production will remain at about the level of our depreciation. Furthermore, the anticipated level of earnings should result in a cash flow provided by operating activities, which leaves sufficient scope for profitable investments in expansion and rationalisation projects. For 2009 overall, we expect a volume of capital expenditure of about € 200 million once again.
Measures related to replacement and ensuring production capacity account for a good 60% of this figure and should be fully financed through the anticipated depreciation charges of about € 150 million. K+S has announced a comprehensive package of water protection measures for the Hesse and Thuringia potash district. The related capital expenditure connected with improving water quality will amount to € 360 million in total by 2015. Of that figure, € 90 million is expected to be invested in 2010. Thus, the volume of capital expenditure for 2010 should total about € 250 million. A good 80 % of this should be spent on replacement and ensuring production.
| € million | 2008 | 2007 |
| Research costs | 18.1 | 15.5 |
| Capitalized development investment | 2.8 | 2.7 |
| Employees as of 31 December (number) | 65 | 56 |
Research costs for the quarter under review totalled € 4.9 million and were thus, as anticipated, somewhat above the level of a year ago (Q4/2007: € 4.1 million). In 2008, research costs came to a € 18.1 million in total and were thus above previous year’s level (2007: € 15.5 million) as well. This increase can be attributed primarily to further increased efforts to develop new production processes for reducing solid and liquid production residue in potash production. The findings obtained from this intensified research work formed the basis for the comprehensive package of measures announced with respect to water protection.
In the future too, we want to consistently pursue research and development goals defined in close consultation with marketing and production. We therefore expect both research expenditure and the number of employees involved in research to continue to increase in the years 2009 and 2010, in order to meet the coming challenges, particularly in the area of the environment.
In 2009 and 2010, the research projects carried out will include the following:
• the reorientation and optimisation of extraction and production processes with regard to increasing efficiency as well as the minimisation of solid and liquid production residue. Within this framework, experiments on cooling or evaporating saline water, the further development of dry processing technologies and improvements in preliminary deposit explorations form important focal points;
• the development of plant protection products in collaboration with Syngenta;
• continued cooperation with the Dutch research institute “Wetsus” in, among other things, the use of renewable energies.
As of 31 December 2008, the K+S Group employed a total of 12,368 people. In comparison with 31 December 2007 (12,033 employees), the number has thus increased by 335 employees or 2.8 % and is therefore moderately higher than the number forecast for the end of 2008. This can mainly be attributed to the following developments:
• In the Potash and Magnesium Products business segment, the workforce required to maintain the quantity of crude salt mined was expanded. Additionally, the personnel requirements of the Potash and Magnesium Products business segment as well as of the central functions increased as the result of greater efforts to reduce the amount of solid and liquid production residue in potash production.
• At SPL, the number of employees increased as a result of the expansion of the shipping capacity of the logistics company Empremar and through the inclusion of the employees of a company consolidated for the first time at the end of 2007.
As at 31 December 2008, we employed a total of 615 trainees (previous year: 614 trainees), of which 610 were located at German sites. At 6 %, the proportion of trainees at the domestic companies was at the high level of the previous year.
Personnel expenses increase appreciably year-on-year
Fourth quarter personnel expenses amounted to € 191.6 million and were thus up 7 % on the figure for the same period last year. The increase is attributable to the pay settlements under collective bargaining agreements that came into effect in the Potash and Magnesium Products and Salt business segments as of 1 January 2008 and to the moderately higher number of employees. In 2008, the personnel expenses of the K+S Group were € 738.5 million and thus, as anticipated, moderately higher than in the previous year (2007: € 687.3 million Without the provision effects, pure personnel costs rose by 8 % compared with the previous year for the same reasons. Of personnel expenses, variable remuneration accounted for € 83.7 million or about 11 % last year (2007: € 66.1million or just under 10 %).
Anticipated personnel development, anticipated personnel expenses
For the coming year, we are once again expecting, on the basis of a further increase in the Potash and Magnesium Products business segment workforce, another slight increase in the number of employees within the Group in terms of the annual average. Against the background of the personnel measures at esco and COMPO, as described below, the number of employees of the K+S Group at the end of the year should, however, be on about the same level as in 2008. At the same time, for our domestic companies we continue to aim for a trainee ratio of about 6 %. As far as personnel expenses are concerned, we expect that the additional costs arising from the most recent collective agreement pay rise and the slight increase in the number of personnel will moderately exceed the savings resulting from short-time working. For 2010, we are anticipating a slightly smaller number of employees and a slight increase in personnel expenses.
• In August 2008, esco concluded an agreement with the Works Councils and IG BCE trades union as a securing of its German locations in the long term. Initially, a cost optimisation programme, as part of a best practice approach, will enhance the efficiency of esco's locations. In addition, from 1 November 2008, the weekly working hours under collective bargaining agreements was increased by an average of two hours per week. This will not involve direct wage-based compensation, but however, the opportunity of additional profit participation. Altogether, about 110 jobs across Europe will be affected by these measures. At the same time, it is intended that operations-related redundancies should be prevented wherever possible, by providing further employment within the Group too.
• As part of the restructuring of the business with nitrogenous fertilizers, which was made known on 8 July 2008, a corresponding reorganisation of COMPO was also announced. The efficiency improvements aimed for with these restructuring measures will involve a loss of jobs. At German sites, about 80 jobs are affected. Of that number, up to 20 employees can move to fertiva and its nitrogenous fertilizer business. In addition, we are seeking to do everything possible to avoid operations-related redundancies, partly by providing further employment elsewhere within the Group. A definite determination of the measures necessary for the entire COMPO group will be possible after the concepts for the foreign companies in Europe and overseas are presented, which will still occur in the first half of 2009.
