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Edited Transcript of SDF.DE earnings conference call or presentation 16-Mar-17 12:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 K&S AG Earnings Call

Kassel Mar 16, 2017 (Thomson StreetEvents) -- Edited Transcript of K&S AG earnings conference call or presentation Thursday, March 16, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Burkhard Lohr

K+S AG - CFO

* Thorsten Boeckers

K+S AG - Head of IR

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Conference Call Participants

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* Joel Jackson

BMO Capital Markets - Analyst

* Oliver Rowe

Scotiabank - Analyst

* Christian Faitz

Kepler Cheuvreux - Analyst

* Stephanie Boswell

BofA Merrill Lynch - Analyst

* Neil Tyler

Redburn - Analyst

* Markus Mayer

Baader Helvea Equity Research - Analyst

* Michael Schaefer

Commerzbank - Analyst

* Patrick Rafaisz

UBS - Analyst

* Lisa De Neve

Liberum Capital - Analyst

* Andreas Heine

MainFirst Bank AG - Analyst

* Andrew Benson

Citi - Analyst

* Oliver Schwarz

Warburg Research GmbH - Analyst

* Stephan Kippe

Commerzbank - Analyst

* Brendan Green

- Analyst

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Presentation

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Operator [1]

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Welcome to the K+S conference call, regarding the publication of the financial report full-year 2016, hosted by Dr. Burkhard Lohr, CFO. (Operator Instructions).

I'm now handing the call over to Dr. Burkhard Lohr to begin. Please go ahead.

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Burkhard Lohr, K+S AG - CFO [2]

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Thank you. Ladies and gentlemen, welcome to our conference call. I am here joined by our Head of Finance and Accounting, Jorg Bettenhausen; and Thorsten Boeckers, from Investor Relations.

Let's turn directly to slide 2. Our Legacy project is heading towards its official opening. The rail connection to the Canadian Pacific spur line has been completed and the first of our [A cart] has been delivered.

The new harbor facility in Port Moody, near Vancouver, is almost complete; and at the production site construction is largely finished, except for the areas that were directly affected by the collapsed crystallizer last summer. Six well heads will initially be available to mine MOP.

All of this gives us confidence that we will begin to produce potash in the second quarter of this year. We expect to have saleable product already in June. Our goal, to reach a capacity of 2 million tons by the end of 2017, is also expected to be met. As well, the budget remains on track, with our projection of EUR3.1 billion.

Now, please turn to slide number 3. It was a great relief when we received the deep-well injection permit at the end of 2016. This is an important step in securing long-term domestic production.

In 2017, however, production may not run as smoothly as hoped, due to the fact far-reaching restrictions of the permit, including a maximum limit for the daily injection volume. This will continue to impact, in particular, production at our Hattorf plant when the Werra river water levels are low.

We saw this already happen during the first weeks of this new year. The standstills, to date, had a negative impact of about EUR40 million. Therefore, we continue to implement alternative measures for the disposal of waste water.

In addition to existing measures, for example, the mining field Springen, or the old Bergmannssegen-Hugo mine, we now also have the ability to use both gas cavern for permanent storage near our salt plant in Bernburg. This increases our flexibility, but is still not sufficient for full production in dry periods, and it comes along with higher costs.

There is good progress, however, on one important element to reduce dependency on the weather.

The new KCF facility, which is currently under construction, will reduce salt water residues by around 20% from 2018, onwards. This will help us to secure production to a large extent, and make us much more independent from the water levels, and the KCF extracts further marketable products.

Now, please turn to slide 4. Our Salt 2020 strategy is full on track to achieve the target of a normalized EBIT level above EUR250 million by the end of this decade.

We normalize our annual salt business earnings to account for unusually strong de-icing volumes, as we saw in 2015, or unusually weak de-icing volumes, as we saw in 2016. This internal measure enables us to track the development of our business, without the impact of uncontrollable factors.

Our normalized earnings are developing steadily, and positively, as a result of the numerous earnings growth initiatives we have been implementing.

Focusing on further efficiency measures, new market opportunities, like the copper leaching business in South America, and, of course, the strength of our highly valued consumer brands will enable us to meet our goal.

We firmly believe in the de-icing business, and are confident that it will deliver attractive margins over the time. However, as we continue to strengthen other segments of the business, the percentage of earnings coming from the more stable non-de-icing segment will increase to more than 50%. This will reduce volatility of earnings in the salt business further.

Please move to slide number 5. The cost discipline plays an important role in our Company. Our Fit for the Future program, which we initiated in 2013, delivered very good results. Since then, we have saved about EUR600 million and outperformed our expectations.

The measures we have implemented will reveal their full effects in later years. This, and further top-down targets, should reduce cost across the Company by another mid double-digit million amount by 2018.

Now let's have a look at the main drivers for the reported results, on slide 6. The sentiment in potash markets remains strong. Demand is on the rise, as are prices for MOP, from the lows seen in the third quarter. Also, SOP in sulfur-based fertilizers, like kieserite, increased again in Q4 last year.

In the salt business, the non-de-icing segment was again stable in terms of pricing and demand.

The de-icing business has a sound fourth quarter, especially in North America, but overall remained well below long-term averages. 2017 showed a good start in Europe, but North America entire business unit has remained behind its long-term average.

Slide 7, please. Our salt business helped us to see profits in the fourth quarter, after a loss, on a Group level, in the third quarter. This was achieved despite a year-over-year decline in potash prices. In addition, the restricted deep-well injection, in combination with dry weather conditions, led to another quarterly loss in the potash and magnesium products business.

On a full-year basis, we finished 2016 with an EBIT 1 of EUR229 million.

The restricted permit resulted in a loss of around EUR200 million, while ramp-up costs for the Legacy project, running through the P&L, amounted to around EUR90 million.

The adjusted Group net income declined accordingly, and we ended 2016 with EUR131 million. I'm mentioning this because our dividend payout of 40% to 50% is based on this result.

We will propose a dividend per share of EUR0.30 to the AGM, in May; this represents a 44% payout ratio.

Please turn to our guidance for 2017, on slide 8. On the positive side, we expect tailwind from potash prices and from higher volumes in both business units. We will continue with our initiatives to reduce costs across the Group and execute our Salt 2020 strategy.

On the negative side, mainly, the production start in Canada will burden our EBIT significantly more than the EUR90 million seen in 2016. This is because D&A kicks in at amounts exceeding first profits from potash sales.

Taking into consideration all of the above-mentioned items, the 2017 operating profit should increase tangibly compared to the depressed result in 2016.

However, in the business unit potash and magnesium products the forecast remains complex. The permit we have been granted, along with our additional measures, should give us some relief, but is not sufficient for full production during dry periods. This means, depending on the water levels of the Werra river, our Hattorf plant will continue to operate on an on-and-off basis.

Extraordinarily dry periods could have a significant negative impact, once again, on our German production, which could impact profitability heavily.

Ladies and gentlemen, I would like to finish my presentation on a positive note. The road in 2017 remains bumpy, but we are looking into the future with optimism.

The new KCF facility will help us to reduce the volume of saline waste water by 20% from 2018, onwards. This means that we will reduce the risk of production standstill significantly.

Our Legacy project is expected to deliver a positive EBITDA in 2018.

Our salt business continues on its path to consistently improve earnings.

The Group's CapEx will be about half of what we have seen in 2016. This will result in positive free cash flow from 2018, onwards.

And we will make the first step towards deleveraging the K+S Group.

Last, but not least, our mid-term outlook, on slide number 9. Our Salt 2020 strategy is well on track to deliver an EBITDA of more than EUR400 million by 2020.

Our business unit potash has developed a new vision and strategy that is based on nine action fields, to shape the future of the business. The aim is to achieve an EBITDA contribution of EUR1.2 billion from 2020, onwards. Legacy is, of course, one important component.

We are aware that today's potash prices make the target very ambitious. However, we still believe the prevailing low price environment is not sustainable.

Additionally, everybody within the K+S Group is very committed to delivering the EUR1.6 billion by 2020, irrespective of the challenges we are facing right now. We want to keep this momentum.

Ladies and gentlemen, thank you. And now, we look forward to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Joel Jackson, BMO Capital Markets.

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Joel Jackson, BMO Capital Markets - Analyst [2]

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My first question is looking at potash volumes in 2017. If your guidance for first saleable tons in June at Legacy occur and you get to 2 million tons at end of the year, how much production could we see out of Legacy this year?

And then, at Werra -- or, sorry, in Germany, if you get normal weather how much incremental production in 2017 could we see versus 2016? Thanks.

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Burkhard Lohr, K+S AG - CFO [3]

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Thank you for the questions. Yes, I think we have indicated in the past that we are talking about roughly 700,000 tons from the Legacy side. But I want everybody to take into account, we are talking about a $4 billion project ramping up, so we will not be able to precisely predict now what the outcome will be.

Doesn't mean that we will defer significantly from that. But it -- we always should look into ranges, maybe 600,000 to 700,000 tons is what we expect for this year production; and we will take roughly 100,000 tons out of that to put it in our stockpiles -- in our storage facilities.

Germany, yes, of course, that depends heavily to the situation that I have described earlier. But, again, we are better prepared this year. We are having a better deep-well injection permit, and we have our measures. So maybe we try to answer the question coming from the potential risk of standstills in Hattorf. We have seen, in the first quarter already, 25 days, and that cost us roughly EUR40 million EBIT.

When we take into account from now on normal weather conditions in this area for the rest of the day -- of the year, sorry, we will, most probably, lose another 30 days. And, in total, that would mean roughly a lost production of 200,000 tons. So, significantly lower than last year. But, again, if we will see a dryer summer or autumn the outcome could differ from that.

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Joel Jackson, BMO Capital Markets - Analyst [4]

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Okay, that's very helpful. And just my last question would be on potash and magnesium costs. Costs, they went down a little bit sequentially in Q4, but they stay high. How will potash and magnesium costs ramp across the year? Can you give us an idea of what to expect maybe in quarter -- Q1, and then for 2017 versus 2016? I know there's a lot of moving parts, where Legacy, but if you could help us out that would be very helpful.

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Burkhard Lohr, K+S AG - CFO [5]

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Yes. First all, I'm thankful for that question, because if you look at the 2016 numbers, and I come back to 2017 later, you have to take account that there is, of course, the Legacy effect, and that there is a volume effect, due to the Werra situation. If you adjust all that, you end up for the full-year 2016 with a number precisely on what we've seen in 2015.

So all our measures have helped. Measures in terms of cost cutting have helped us compensate inflation in other developments. The precise number was EUR216 per ton for 2016; again, on the level of 2015.

At the end of your questions I have to disappoint you, because I think it would not be very helpful, or not very good, early this year, in a year where we will see all these moving parts, as you said, to give you a precise number for quarter and the full year. Of course, it will have a significant impact from the Legacy ramp up, and of the fact how much production are we going to lose in the Werra area.

So please be a bit patient for receiving a precise number for 2017; we are not able to do it now.

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Joel Jackson, BMO Capital Markets - Analyst [6]

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Thank you.

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Operator [7]

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[Ben Isaacson], Scotiabank.

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Oliver Rowe, Scotiabank - Analyst [8]

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Oliver Rowe in for Ben. Thanks for taking my question. Looking at there's a few specialty projects in the pipeline in both SOP, and also some polyhalite projects, do you view as polyhalite as competitor to kieserite? And, if not, what's insulating that from increased competition and demand switching?

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Thorsten Boeckers, K+S AG - Head of IR [9]

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[Ben], it's Thorsten here. When you talk to our sales people, and talk with them about polyhalite, they say, well, they've got to make out fertilizers out of it which are not in the markets today. So customers know, especially here in Europe, the merits of our Korn-Kali products, and around the globe of our potassium sulfate, so the SOP products. And this is something the polyhalite product has to reach, first of all.

And then, when you look at the nutrients included in the polyhalite products, we believe that the specific costs those products will have in the end are much higher than those of the specialties which are right now in the markets already.

And polyhalite has one big disadvantage, which is it contains plaster, which makes it very difficult or it takes very long until the soils can absorb the polyhalite-based fertilizer. So we are not convinced about the success of those products.

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Oliver Rowe, Scotiabank - Analyst [10]

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Thank you. I'll just follow on with one question on salt, as well. Your de-icing volumes recovered a bit this year, but they're still down from the earlier years, as a result of the mind winters. Are you actually producing less, or are your inventories growing?

And then, further to that, where do you currently see industry-wide inventory levels at both producer and customer levels?

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Burkhard Lohr, K+S AG - CFO [11]

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The season is not completely finished yet. You know that we have seen some snowfall in the US at the East Coast, but, of course, we react with our production on what we've seen in the winter weather. We have done that last year, especially in Europe.

The projection was lower as normal because the season 2015 to 2016 was by far weaker than the current season, but, nevertheless, we will end up with higher inventories. And our -- this will be the case in the storing facilities of our client and competitors, as well.

So it's not in the same magnitude Europe and US, because the European weather, in the first month of this year, were not that bad. I would even say we were not far away from our average, long-term average. But the US business was by far weaker.

But, again, we are still in the first half -- precisely, in the middle of March. We even had some weather in April, and then we will see the final outcome of that.

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Oliver Rowe, Scotiabank - Analyst [12]

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That's great. Thank you.

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Operator [13]

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Christian Faitz, Kepler Cheuvreux.

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Christian Faitz, Kepler Cheuvreux - Analyst [14]

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Actually, a follow up to the de-icing business. I'd like to get a better understanding of -- better effects on your de-icing salt business.

Can you please elucidate, in brief, if it's more important if there are [infra-day] frost-and-thaw conditions? Or is it much more relevant if there is precipitation covered with frost days? Is there an easy rule of thumb we can work with?

And then, coming to potash, how has the European application season started so far this year? Comparing kind weather conditions with a rather wet spring last year demand should have come up from excellent start in Europe. Is this an observation you would share? Thanks.

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Burkhard Lohr, K+S AG - CFO [15]

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The perfect weather for us is around zero and days of a little bit of ice and then -- at night, and over the days dry conditions that the trucks can deliver our product to the client and the applications on the road can take place. This would be the perfect condition for the de-icing business.

And we have seen this in January in Europe. And this -- it was about two weeks in Europe. And these two weeks were good for very significant business. And I said earlier we might come out on average in the European business, although February and March so far was, by far, too mild.

Yes, and the European business, potash, I'm now talking about potash, started very promising, strong demand, and your assumption is completely correct.

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Christian Faitz, Kepler Cheuvreux - Analyst [16]

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Thank you very much.

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Operator [17]

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Stephanie Boswell, Bank of America Merrill Lynch.

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Stephanie Boswell, BofA Merrill Lynch - Analyst [18]

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Thanks for the opportunity to ask my questions; the first one was on your CapEx comments. I believe, in your opening remarks you said that in the medium term CapEx should fall to around half of the level of 2016. But just thinking more near term, in terms of 2017, I think on the Q3 earnings call you said you still had around EUR200 million to spend on Legacy.

Could you give us a bit more clarity in terms of what you expect the overall CapEx budget to be for 2017? If I look at consensus, it's currently factoring in around EUR600 million; can you confirm you're comfortable with that?

And the second question was on the EUR40 million negative EBIT impact that you've had from the stoppages from the dry weather in the first part of the year.

I think you also said, in your introductory remarks, that you hadn't -- that an additional 30 days stoppages would be expected for the rest of the year. Is it fair to assume that negative EUR80 million for the whole year would be reasonable, if that, indeed, was the case? Thanks.

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Burkhard Lohr, K+S AG - CFO [19]

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CapEx, yes, 2017 is, in many ways, a transition year; it is true for the CapEx number, as well.

We have lower CapEx number than last year, but still higher than in an average year. We had some shifts from Legacy, due to the incident. It was difficult to precisely predict what can we finish in 2016, and what is going to have to be done in 2017, so the CapEx for Legacy will be higher than the EUR200 million that you mentioned.

And this 2017 is the year of high CapEx in our KCF plant, and some other environmental investments. So the number will be higher than the EUR600 million that you mentioned would be the guidance for the CapEx in 2017.

EUR40 million is the number for the impact that we had in the first quarter on the Werra situation. We can give you a rule of thumb. It's a bit more than EUR1 million impact per production standstill day in Hattorf. Then, you surely wonder why it's EUR40 million on 25 days; because we have additional costs for our measures that we use.

So it's the roughly EUR1 million per day, and we have 55 days in our forecast, and some EUR20 million, EUR30 million for additional measures all over the -- for the full year. Then you should have the impact, based on a normalized weather situation for the rest of the year.

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Stephanie Boswell, BofA Merrill Lynch - Analyst [20]

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Okay. Thank you. Just to go back on the CapEx comment, once again, if I take the EUR1.2 billion in 2016, and a EUR600 million medium-term average and I just go to the midpoint of around EUR900 million, would you be comfortable with us assuming that for 2017? Does that seem reasonable?

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Burkhard Lohr, K+S AG - CFO [21]

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That's, by far, closer than the EUR600 million.

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Stephanie Boswell, BofA Merrill Lynch - Analyst [22]

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Okay. So, EUR900 million? Thank you very much.

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Operator [23]

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Neil Tyler, Redburn.

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Neil Tyler, Redburn - Analyst [24]

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I'd like to come back to the Legacy project, please, and a couple of questions there. Firstly, it feels like, piecing together your guidance, that the operating costs at Legacy before depreciation will be in the region of EUR220 million, or so, next year. Is that -- do those calculations or does that result sound sensible to you, based on the production schedule that you're planning?

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Burkhard Lohr, K+S AG - CFO [25]

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Yes, we have to be careful because this year, 2017, I guess you were talking -- you said next year, but you mean 2017, right?

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Neil Tyler, Redburn - Analyst [26]

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Sorry, yes, 2017.

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Burkhard Lohr, K+S AG - CFO [27]

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Because we have a mix of still ongoing production and -- construction, sorry, construction of the site, and start of the production. So we shouldn't talk about OpEx, but we should talk about an EBIT impact, and that is going to be roughly EUR150 million this year.

Out of all the components I mentioned earlier, some OpEx during construction side, then kicking in D&A and other cost components, but we expect a negative impact of roughly EUR150 million.

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Neil Tyler, Redburn - Analyst [28]

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Okay. Thank you. Perhaps, if I could ask another question related to that, just to make sure that the assumptions I am using are broadly accurate.

How should we think about the realized price, or the best benchmark to use for the realized price, for the Legacy project, relative to other realized prices that you disclose? Should we just look at the Vancouver FOB price and work back from that? Is that a sensible way of looking at this?

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Burkhard Lohr, K+S AG - CFO [29]

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The realized price, of course, is a mix of our deliveries. We will be a new entry in -- have a new entry in the US market. Luckily, we have seen a strong increase in the US prices there. We are going to deliver, via Vancouver, into Asia, China, and India. We are targeting to increase our footprint there.

When we are able to deliver into these markets we will see the new price indications, due to the new contracts. Everybody is expecting higher prices. What the final outcome will be, it remains to be seen. And there will be portions into Brazil.

And important always to remember that 20% to 30% of the production that is not going to be this year, but 2018 and 2019, with strong volumes, we will have KCL-99, so industrial product, with completely different prices. And that will be the mix of the price impact of our Legacy side.

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Neil Tyler, Redburn - Analyst [30]

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Thank you. Just one final housekeeping point, just in terms of the reconciliation line at an EBIT level, can you give us some help on how to think about that for 2017, and beyond, please?

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Thorsten Boeckers, K+S AG - Head of IR [31]

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It should not be far away from what we have seen since in 2015 and 2016. You have always a little bit of movement there but when you see it was in 2015 minus 16, now it was minus 30, so somewhere in between for the next couple of years should be a valid assumption.

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Neil Tyler, Redburn - Analyst [32]

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Thank you.

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Operator [33]

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Markus Mayer, Baader Helvea.

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Markus Mayer, Baader Helvea Equity Research - Analyst [34]

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Three questions, as well. First one is on the -- what you state in your presentation, additional measures beyond Fit for the Future. Can you give us a flavor on the impact for 2017 and 2018 also what are the costs for that measures?

Secondly, on this outlook, can you also give us more flavor on what you expect for the overall potash market in terms of demand for 2017? And also, the same question for de-icing. In your presentation you stated you expect higher de-icing volumes, why is this the case?

And then lastly, maybe an update on the ForEx hedging strategy and the impact you expect for 2017.

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Burkhard Lohr, K+S AG - CFO [35]

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This gives me the opportunity to ask one question by the other, but I guess we have taken all these.

We want to keep the momentum with our cost discipline, and we have delivered, by far, more than we have targeted with our Fit for the Future program.

There are still ideas in the Company to be more efficient and to save here and there. That is why we believe we will not only let it go, we are going to reduce our cost by a defined number; that is a mid-sized double-digit million amount annually from 2018, starting in 2018.

And the costs that we are going to have with these cost reductions are very, very low; or I would even say not meaningful, so it -- this is almost a net effect.

The de-icing question, it's a normal technique that we use where we take a 10-year average for our forecast. That's the best we have, best you can deduce to forecast the de-icing volumes. And as 2016 was in total below long-term average, you end up with an increase in de-icing volumes.

And now, you have to help me out with the questions.

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Markus Mayer, Baader Helvea Equity Research - Analyst [36]

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Yes, that question was basically the same question on the potash market in terms of low demand outlook. So you always give it for [MOP and] (technical difficulty), the potash [crop] only looks at MOP, maybe, some more flavor on that would be helpful.

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Thorsten Boeckers, K+S AG - Head of IR [37]

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Yes, (technical difficulty). We have seen 64 million tons in our world, i.e., including the specialties, in 2016, and we expect a slight increase on that number. When you deduct the 4 million, you see that we are not far away from what the whole market is expecting there.

You asked also about the pricing, I think, in potash spend, as on the [call side]. You see a positive price effect because of the volume mix. Because when we expect normal weather conditions for the rest of the year, Burkhard elaborated on our volume expectations earlier, this means also we can produce more specialties; and this means our ASP is not as depressed as it was last year. And this is what we have factored into our guidance.

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Markus Mayer, Baader Helvea Equity Research - Analyst [38]

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And then, the last question on the hedging strategy, or an update in general on hedging?

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Burkhard Lohr, K+S AG - CFO [39]

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That is that we stick to our strategy. But I think that is not your question, what is -- which technique do you use? I guess you want to know (multiple speakers).

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Markus Mayer, Baader Helvea Equity Research - Analyst [40]

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Of course, I'm always interested in that.

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Burkhard Lohr, K+S AG - CFO [41]

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If the euro/dollar parity -- if the currency exchange rate is on 120, we are going to lose roughly EUR20 million, always compared to 2016. EBIT should stay on 110, we gain EUR36 million; and if it would even see parity then we gain roughly EUR100 million.

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Markus Mayer, Baader Helvea Equity Research - Analyst [42]

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Thank you very much.

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Operator [43]

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Michael Schaefer, Commerzbank.

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Michael Schaefer, Commerzbank - Analyst [44]

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The first question is a clarification one. Dr. Lohr, you mentioned previously on the, let's say, average type of production you're expecting in Germany, and primarily relating to 2017, with the working days, something like 55 working days off, basically, in Hattorf. Have I got you right, basically, that you said 200,000 tons lower production compared to base year?

Looking in 2013-2015 period, these have been the years where we haven't seen any kind of negative impact from permitting, etc., so you produce, at Group level, something like 6.9 million tons, [rent] or sold 6.9 million tons of P&M products. Is this the right base we should deduct the 200,000 from? Or how should we read this?

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Burkhard Lohr, K+S AG - CFO [45]

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Yes, that's the right base. On that base, we have lost in 2016 roughly 800,000 tons. And if we only lose these 55 days, we would lose 200,000 tons out of this roughly 6.9 million tons.

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Michael Schaefer, Commerzbank - Analyst [46]

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Thanks. Second one is on Legacy. You mentioned [EUR93 million] probably in the annual report, and OpEx burden and EBIT burden in 2016. You guided, back in 2016, something like EUR110 million.

Is there carry-over effect we should assume into 2017 also contributing to the EUR150 million negative you are guiding to in the full-year 2017? So if you could quantify this: what kind of extra costs you still account for in 2017, basically, which would otherwise have happened in 2016.

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Burkhard Lohr, K+S AG - CFO [47]

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The change of that number was also due to the impact -- to the incident that we had with our crystallizer and that we had to completely change the plan how to continue with the project. But everything which comes additionally in 2017 is already incorporated in the number that I gave you earlier; the EUR150 million that we expect negative EBIT impact for 2017.

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Michael Schaefer, Commerzbank - Analyst [48]

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Okay. And last, but not least, a quick one. On KCF, you mentioned construction is currently underway. Is there any kind of milestone we should look at, any kind of headaches you have experienced in the meantime, which would dilute, basically, visibility for committing start in 2018?

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Burkhard Lohr, K+S AG - CFO [49]

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No, not really. We are very well on track. We had a case of insolvency of one important supplier, but we have overcome that situation as well. There is good reason to believe that we will see the full effect in 2018.

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Michael Schaefer, Commerzbank - Analyst [50]

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Thank you very much.

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Operator [51]

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Patrick Rafaisz, UBS.

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Patrick Rafaisz, UBS - Analyst [52]

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Maybe, two questions on Legacy. Of the volumes you plan to produce, has the destination for your targeted customers changed in any way over the last few months? Are you still mostly targeting Brazil as the first instance in 2017, and then expanding further into the US and other Asian markets by 2018, as you ramp up? That's the first question, please.

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Burkhard Lohr, K+S AG - CFO [53]

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As you know, we have an agreement with [Coke] fertilizers that they are going to market up to 500,000 tons for us in the US market. I wouldn't say that Brazilian is first and then the rest goes into the US market. We want to materialize this contract and then, in parallel, go into the other markets.

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Patrick Rafaisz, UBS - Analyst [54]

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So you already plan to ship to the US in the second half of this year?

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Burkhard Lohr, K+S AG - CFO [55]

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Yes.

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Patrick Rafaisz, UBS - Analyst [56]

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Okay.

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Burkhard Lohr, K+S AG - CFO [57]

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Of course, not the full 500,000 tons, but that will ramp up to the 500,000 tons that we have agreed with Coke.

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Patrick Rafaisz, UBS - Analyst [58]

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Okay, good. And then, the other question just on your visibility or your understanding of the quality of your resources at Legacy. You said you have six well pads, do you already have a feeling of what kind of material is going to come out there? Because, as I understand, it can be a very complicated process with a lot of surprises with production startups with these kinds of projects.

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Burkhard Lohr, K+S AG - CFO [59]

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No, we are working on more than on the six pads. The six pads are now completely available for us for starting the production. And, of course, we have a very precise idea of the quality of the product, and we are very happy with the quality of the product.

And we are not waiting for the outcome out of the pads. We have a lot of geological research work to make sure what is the quality of the deposit and where to position our wells, so we are very -- we shouldn't have a surprise out of that.

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Patrick Rafaisz, UBS - Analyst [60]

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Okay. Thank you very much.

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Operator [61]

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Lisa De Neve, Liberum.

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Lisa De Neve, Liberum Capital - Analyst [62]

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A question, actually, on what you are seeing in the SOP market. Some consultants are revealing improved demand in the first quarter, and some competitors, such as Tessendelo, are cautiously optimistic for 2017. Could you provide a bit of comment on what you're seeing and expecting for SOP this year? Thank you.

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Thorsten Boeckers, K+S AG - Head of IR [63]

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Lisa, we have seen a good Q4, pricing and demand-wise, and we are seeing both in Europe and -- all around the globe, actually, that the demand, and also the pricing, will remain at the levels we are currently seeing. So we are pretty optimistic about the SOP markets.

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Lisa De Neve, Liberum Capital - Analyst [64]

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Okay, thank you. And just a quick second one. On the Fit for the Future program you mentioned that you target additional double-digit cost savings by 2018, could you provide some color on where you are seeing these further savings and efficiencies? Thank you.

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Burkhard Lohr, K+S AG - CFO [65]

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The Fit project was -- had the focus in the production, logistic, and administration. And these are the same areas where we are going to work on for the additional cost savings.

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Lisa De Neve, Liberum Capital - Analyst [66]

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Okay. Great. Thank you.

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Operator [67]

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Andreas Heine, MainFirst.

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Andreas Heine, MainFirst Bank AG - Analyst [68]

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Thank you for taking my question. The first, could you a little bit elaborate how you see the potash pricing environment in spring now in Europe, your most important area?

And then, I would like to understand why you would think that your unit costs, under good conditions in 2018, will be with the cost savings in place and the KCF plan coming on stream.

And then lastly, it was very helpful that you have given us what your best guess is on the production level with this Hattorf issue. Would you also provide what, let's say, a worst-case scenario under very dry conditions could be? What is the range we have to think of if the weather becomes nice and hot in the summer, which would obviously not be fun for you, but potentially for me? That would be helpful.

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Burkhard Lohr, K+S AG - CFO [69]

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Yes, I said earlier that we are quite happy with the volume development in Europe, and that goes along with a healthy price development as well.

I think in almost all areas over the world we see a recovery of prices, partially, a bit quicker, partially slow, but no further development that could keep us awake at night. And Europe is, from both perspectives, price and volume, very promising.

Let's skip the second question, because I was -- I'm not quite sure if I got this correctly. I directly go to the third, and then I would like to ask you to repeat the second question. And for all the other participants, please, one question after the other.

Yes, worst-case weather, this is almost impossible to answer. I only said every single day, and we are only talking about Hattorf, because we believe, with our additional measures, we are able to keep all the other two sides running. That was not the case in 2016. We had close downs, not only in Hattorf last year. This year, we expect it can only impact Hattorf.

So we expect an impact of roughly EUR1 million; and now it's up to you to mention how dry a year can be. We are safe for the next couple of weeks, but what's going to happen after that, I don't know. I'm sorry to not be able to give you a worst-case number.

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Andreas Heine, MainFirst Bank AG - Analyst [70]

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Never (multiple speakers).

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Burkhard Lohr, K+S AG - CFO [71]

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But on the other hand, why shouldn't we always see the downside? It could rain more and then we are not -- then we have some upside here.

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Andreas Heine, MainFirst Bank AG - Analyst [72]

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Yes, I was just looking on these both upside and downside. Yes, and repeating the question, it was (multiple speakers).

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Burkhard Lohr, K+S AG - CFO [73]

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Yes, you asked about the KCF, but, I'm sorry, I didn't get it completely.

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Andreas Heine, MainFirst Bank AG - Analyst [74]

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(inaudible) is just I would like to have a flavor what your unit costs will be if everything is solved in 2018. So with the KCF plant in operation and no issue any more with this water flow low level of the Werra, would that still be on this level of [EUR216 million] mentioned for 2015 and normalized 2016? Or would it be different?

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Thorsten Boeckers, K+S AG - Head of IR [75]

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Andreas, I remember the first question from Joel was what could be your unit costs for 2017? And we said pretty tough to work that out. So we going to wait a little bit more, until -- into the year, before we answer this question that concretely.

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Andreas Heine, MainFirst Bank AG - Analyst [76]

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Okay.

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Operator [77]

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Andrew Benson, Citi.

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Andrew Benson, Citi - Analyst [78]

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Can you just give us a bit of an update on what you think financing costs and tax rates are going to be this year?

And also, you've made a -- two acquisitions. Can you just give a little bit of detail on those, and how they're going to fit, and what their financial contribution is likely to be this year? Thanks.

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Burkhard Lohr, K+S AG - CFO [79]

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Financing costs, do you mean the total amount of interest rates? Or is -- financial result?

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Andrew Benson, Citi - Analyst [80]

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Yes, the financial -- your hedging, any pension costs, as well as the financial charges?

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Thorsten Boeckers, K+S AG - Head of IR [81]

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It was -- just to be that -- to be sure that we are on the same side, financial result was last year, so in 2016, minus EUR52 million; and this includes everything, interest income, interest cost, and cost on provisions, etc. And I would assume that this goes up, because we are no longer that much capitalizing the finance costs for Legacy, so this should go up into the area of a little bit north of EUR80 million.

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Burkhard Lohr, K+S AG - CFO [82]

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Did you mention the tax rate, as well? Did I get that correct?

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Andrew Benson, Citi - Analyst [83]

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Yes, that's right. Is there any tax breaks in Canada that can pull it down a bit, or take it up, or (multiple speakers).

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Burkhard Lohr, K+S AG - CFO [84]

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The normalized tax rate for us is about 28%. We were a bit below in the last two years, but that is what one should expect.

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Andrew Benson, Citi - Analyst [85]

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Okay. And then, the acquisitions?

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Thorsten Boeckers, K+S AG - Head of IR [86]

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There is -- due to the fact that we are -- we have a quite a debt burden already because of the biggest investment of the history of the Company, Legacy, namely Legacy, there is nothing meaningful in the pipeline, additional acquisitions; meaningful in terms of cash requirement.

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Andrew Benson, Citi - Analyst [87]

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All right. Okay.

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Operator [88]

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Oliver Schwarz, Warburg.

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Oliver Schwarz, Warburg Research GmbH - Analyst [89]

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I cope with your demand and go one by one. In regards to the measures, wastewater removal from the mines, are there additional measures to come, or are you satisfied with the measures in place?

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Burkhard Lohr, K+S AG - CFO [90]

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No, we are working on additional measures. For example, currently, we are only allowed to bring our waters from the stockpiles into Bergmannssegen-Hugo. We hope that we will be able, pretty soon, to bring our production waters into that old mine as well. That would have a meaningful impact, because there is a big volume available there.

And next big one is [Bischavaroder], another old mine with a meaningful available volume. We hope to get a permit to dispose waters there in the second half of this year.

These are the most important further steps, in addition to what we have in hand already.

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Oliver Schwarz, Warburg Research GmbH - Analyst [91]

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Would that affect Hattorf? Or would that mostly affect the other parts of the Werra mine?

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Burkhard Lohr, K+S AG - CFO [92]

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That could have a positive effect on Hattorf.

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Oliver Schwarz, Warburg Research GmbH - Analyst [93]

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Okay. And just coming back to the calculation on the negative impact, on impact in the first quarter you gave, the EUR40 million you referred to, just trying to do the math here.

25% for -- sorry, EUR25 million for the standstill, but there are obviously around about [EUR15 million] from the cost of additional measures. But you said, on the other hand, EUR20 million to EUR30 million for the measures for the full year. Why is that frontloaded?

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Burkhard Lohr, K+S AG - CFO [94]

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Because I said slightly more than EUR1 million.

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Oliver Schwarz, Warburg Research GmbH - Analyst [95]

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Okay. All right. Could you give us an indication, should Legacy start up, let's say, July 1, 2017, how much depreciation, because that's certainly something you can control very easily. What would be the level of depreciation for 2017 for Legacy?

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Burkhard Lohr, K+S AG - CFO [96]

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Would be a number between EUR10 million and EUR15 million per month.

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Oliver Schwarz, Warburg Research GmbH - Analyst [97]

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Okay. Thank you very much. Lastly, I'm still a bit puzzled about the lack of movement in the provisions for mining provisions.

When you look at the pension provisions, obviously, depending on the interest rates, they tend to move all over the place; up and down, depending where the interest rates go. That's simply not the case in the [year], in the provisions for mining.

Assuming that we'll retain that silly low interest rate environment for another extended period of time, how would that affect the provisions for mining you have in your balance sheet?

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Burkhard Lohr, K+S AG - CFO [98]

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Yes, we are affected by adjustment of our discount rate on the mining provisions. We have reduced the discount rate from 3.5% to 3.3%, following the market, and following our methodology, and that had an impact of additional mining provisions of roughly EUR130 million.

In total, we have increased our provisions, due to interest rate development, by EUR150 million; and that all drove our net debt number, as well. But we believe now we have achieved the end of that story, because there are more indications for rising rates than further decreasing rates. But we have taken the whole hit already.

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Oliver Schwarz, Warburg Research GmbH - Analyst [99]

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Okay, understood. Lastly, just a housekeeping question, the royalties you're going to pay to the Canadian Government for the production of Legacy, or better to say for the sale of the product you produce at Legacy, would that be recorded, or recognized, as a production cost? Or is that part of your tax payment?

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Thorsten Boeckers, K+S AG - Head of IR [100]

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Part of the EBIT.

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Oliver Schwarz, Warburg Research GmbH - Analyst [101]

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Okay. Thank you.

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Thorsten Boeckers, K+S AG - Head of IR [102]

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But this was the last question, Oliver, right?

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Oliver Schwarz, Warburg Research GmbH - Analyst [103]

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Yes it was. Sorry about that.

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Burkhard Lohr, K+S AG - CFO [104]

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No, no everything is fine. You asked one by another; everything is okay. Thank you very much.

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Operator [105]

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Stephan Kippe, Commerzbank.

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Stephan Kippe, Commerzbank - Analyst [106]

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I'll also start with the first one. Talking about the CapEx assumptions for 2017, what do you expect for phasing? One might think that because the startup is planned for mid-year that probably CapEx will be higher in H1 versus H2. What do you think the split will be: 60-40, 70-30? What is your assumptions for that?

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Burkhard Lohr, K+S AG - CFO [107]

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I went by far, far as I wanted at the beginning of this call. Now you have a very precise idea of the CapEx in 2017. That should be very linear. There is no reason for believing that we will see significantly more in the first half than in the second.

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Stephan Kippe, Commerzbank - Analyst [108]

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Okay. So there is no remaining CapEx for Legacy that would have to be paid before start up?

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Burkhard Lohr, K+S AG - CFO [109]

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There is remaining CapEx for Legacy, yes, but then we have heavy CapEx at the Werra area so it almost levels out. You can expect same amount in both halves.

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Thorsten Boeckers, K+S AG - Head of IR [110]

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Because also, after the production start, the pure maintenance CapEx for Legacy kicks in. So it's 50-50.

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Stephan Kippe, Commerzbank - Analyst [111]

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Okay, that makes sense. Thank you. Staying with Legacy, you talked about a minus EUR150 million EBIT impact that you still expect in 2017, due to start-up issues.

Do you have an expectation of how much the operating cash impact from Legacy will be in 2017? I guess, it's probably not going [to be] positive, but can you give an assumption of where that will be? Except for CapEx, just the operational cash from Legacy.

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Burkhard Lohr, K+S AG - CFO [112]

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Yes, as we said, EBITDA will not be positive before 2018. That means that we will have a still significant negative free cash flow in 2017, which is close to the number that we gave you for the EBIT impact.

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Stephan Kippe, Commerzbank - Analyst [113]

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Okay. So that's minus --

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Burkhard Lohr, K+S AG - CFO [114]

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But I would like to use the opportunity, I always say roughly because -- and we are talking about a EUR4 billion project, which will be ramped up in the course of this year. Please allow us to be not as precise as with the site which has been running for decades. But that is what we believe today.

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Stephan Kippe, Commerzbank - Analyst [115]

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All right. Very clear. Thank you. And pulling that altogether, if I made the assumptions that there is a very good chance that net debt of the Group, at the end of 2017, will still be quite a bit higher than it is now that would not be unreasonable now, would it?

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Burkhard Lohr, K+S AG - CFO [116]

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That is not unreasonable. In 2018, we will reduce that portion significantly, but it will still be on a high -- it will still be a comparable number at the end of this year.

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Stephan Kippe, Commerzbank - Analyst [117]

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So not meaningfully more than it is now?

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Burkhard Lohr, K+S AG - CFO [118]

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No, not more; but not meaningfully less than what we have seen at the end of 2016.

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Stephan Kippe, Commerzbank - Analyst [119]

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Very clear. Thank you very much.

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Operator [120]

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Brendan Green.

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Brendan Green, - Analyst [121]

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Just following on from what you said about CapEx, could you just clarify, I think you said earlier that you expect positive free cash flow in 2018, which will then lead to deleveraging.

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Burkhard Lohr, K+S AG - CFO [122]

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Yes, that's correct. Positive free cash flow. Not only a very slight number.

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Brendan Green, - Analyst [123]

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Okay. And just to clarify what the individual before me asked, you think net debt will be -- or could be slightly higher at the end of 2018 than it is currently?

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Burkhard Lohr, K+S AG - CFO [124]

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No, I said it will not be significantly lower. But we are not expecting -- sorry, are you talking about 2017 now, or, again, 2018?

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Brendan Green, - Analyst [125]

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End of 2017.

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Burkhard Lohr, K+S AG - CFO [126]

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2017. In 2017, it will be only slightly below the 2016 number.

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Brendan Green, - Analyst [127]

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Okay. Thank you.

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Operator [128]

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Stephanie Boswell, Bank of America Merrill Lynch.

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Stephanie Boswell, BofA Merrill Lynch - Analyst [129]

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Just a couple of follow-up questions. You've committed to being at EBIT loss-making level of around EUR150 million in 2017. For 2018, you're committed to being EBITDA positive, like you say. I was wondering if you could be committed to an EBIT breakeven level for 2018. Is that reasonable?

And the second question is just on your net financial debt. Can you just confirm how much headroom you do have at this point of time in your existing facilities? Thanks.

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Burkhard Lohr, K+S AG - CFO [130]

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Yes, you should expect a positive EBIT in 2019, no breakeven on an EBIT level in 2018, from the Legacy side.

And with our financial debt, we still have significant headroom. We have our syndicated credit facility, which was drawn up to roughly EUR300 million as of December 31, 2016. The total amount is EUR1 billion. So it's still quite a significant amount of headroom.

But that gives me the opportunity, you did not ask for it, but I would like to give you the indication that there is one bond maturing next year. It has to be paid back. And we believe that the current environment is perfect to early refinance this bond, so we might see a transaction not far away from today.

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Stephanie Boswell, BofA Merrill Lynch - Analyst [131]

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Okay. Very helpful. Thank you very much.

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Operator [132]

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At this point, I'll hand back to your host, Dr. Burkhard Lohr, for any concluding remarks. Thank you.

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Burkhard Lohr, K+S AG - CFO [133]

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Thank you very much for joining us today, when many interesting and important questions.

I think it was clear that 2016 was difficult. We believe 2017 will be better, but could still be bumpy, because we still are dependent on the weather situation. But we are very optimistic for the future. Legacy will kick in; we will finish our KCF plant; Salt 2020 is on track, so good reasons to be positive.

And if you have further questions, please contact our investor relations department.

And have a great day. And we are looking forward to see you soon, again. Bye-bye.

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Operator [134]

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Thank you. That will conclude today's conference. Thank you for your participation. And have a pleasant day.