We anticipate that K+S' earnings will remain subject to potential large swings
because we consider potash prices and volumes will remain the largest profit
driver. These depend on various fluctuating factors, such as farmers' incomes
and buying behavior, harvests, weather conditions, crop prices, competition,
and the industry supply/demand balance. Worldwide demand for potash declined
at a record pace in 2009, well beyond our low-cycle assumptions. Following the
acquisition of Morton Salt in 2009, the proportion of EBITDA from the salt
division increased significantly to 33% by 2011, which should help smooth some
of the volatility in the fertilizer segment. Still, the salt industry is
highly seasonal and profits can significantly change from one year or season
We classify K+S' financial profile as "modest.." Our assessment takes into
account the likelihood that the company's credit metrics may fluctuate in pace
with cyclical EBITDA, as well as some capital intensity for maintenance,
material capital intensity for expansion (especially green-field potash
projects), and K+S' target shareholder distributions. The "modest" financial
risk profile also assumes that K+S can achieve funds from operations (FFO) to
debt of at least 45% and debt to EBITDA below 1.5x under our assumed mid-cycle
EBITDA of EUR900 million. We believe the company could achieve much better
metrics in top-of-the-cycle industry conditions.
S&P base-case operating scenario
Our profit outlook for K+S is favorable for 2012 and 2013, reflecting our view
of supportive industry conditions (supply/demand balance) in the fertilizer
industry leading to high prices. We also expect stable to slightly increasing
volumes, based on favorable end market demand and high crop prices.
As a result, we expect K+S to report revenues around EUR4 billion and EBITDA of
about EUR1.1 billion in 2012 (both flat versus 2011). While this translates into
a much higher margin than in 2011 (at around 28% against about 22%), this
reflects the sale (completed last July) of the lower-margin K+S Nitrogen
trading business. On a comparable basis, we assume the margin to be broadly
S&P base-case cash flow and capital-structure scenario
We anticipate that K+S will retain very strong credit metrics for the rating
in 2012 and 2013, especially thanks to supportive industry conditions.
In our base-case scenario, we anticipate that K+S will generate adjusted FFO
of about EUR0.9 billion in 2012, which comfortably covers the capital spending
of EUR0.7 billion we assume. This compares with adjusted FFO of EUR0.7 billion and
adjusted capital spending of EUR0.3 billion in 2011.
We forecast that K+S' adjusted FFO to adjusted debt will remain at more than
75% in 2012 (compared with 122% in 2011), which comfortably exceeds what we
consider commensurate with the current ratings, but also reflects very
favorable industry conditions.
The short-term rating is 'A-2'. We classify the company's liquidity as
"strong" under our criteria because we expect liquidity sources to exceed
needs by more than 1.5x over the next 12-24 months, among other factors.
In our base-case scenario, K+S has the following liquidity sources:
-- Reported cash and equivalents of EUR1 billion on eJune 30, 2012, of
which we view EUR70 million as tied to operations;
-- An unused EUR800 million committed credit line. This facility matures in
July 2015, which we view as positive. It is subject to financial covenants
(net debt to EBITDA) under which the company had meaningful headroom on Dec.
31, 2011, a situation we expect will continue in 2012; and
-- FFO of about EUR0.9 billion in 2012.
In our base-case scenario, K+S has the following liquidity needs:
-- Virtually nil short-term debt on eJune 30, 2012;
-- Capital spending of about EUR0.7 billion in 2012, increasing to about EUR1
billion in 2013. We factor in EUR400 million for K+S' core operations (excluding
recently acquired Canadian subsidiary Potash One). Such core capital spending
includes the Werra water protection project, with large total outlays of EUR360
million between 2011 and 2015. The project aims to improve the quality of
water of the Werra and Weser rivers in Germany. We also factor in material
capital spending tied to the development of a green-field potash mine in
Canada of Canadian dollar (CAD)2.9 billion (EUR2.2 billion) between 2011 and
2016, following the Potash One acquisition;
-- Dividends that we assume will remain in line with the company's
publicly announced distribution of 40%-50% of adjusted group earnings. We
estimate a distribution to shareholders of about EUR250 million in 2012; and
-- Moderate working capital outflows in the vicinity of EUR75 million per
The stable outlook reflects our view that continuously strong demand for
potash fertilizers, with no major industry capacity addition, should continue
to result in high fertilizer prices and enable K+S to maintain strong EBITDA
around EUR1.1 billion in 2012 and 2013. We expect the company's FFO to debt to
stay sustainably above 60% in 2012 and 2013, while we view 45% as
rating-commensurate under mid-cycle industry conditions. Free operating cash
flow should remain positive in 2012, while it could be slightly negative in
2013 due to higher capital spending.
We could lower the ratings if FFO to debt decreases to below 45% on a lasting
basis following a steep fall in potash prices, a large-scale debt-financed
acquisition, or substantial shareholder returns that are currently not
included in our base case.
The possibility of an upgrade in the near term is constrained by our view of
the company's only satisfactory business risk profile.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business and Financial Risks In The Commodity And
Specialty Chemical Industry, Nov. 20, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008