Grupa Azoty SA

WSE:ATT

Earnings Call Transcript 2024-Q2

[Joanna Barnas, executive]

Good morning, everyone. Welcome to the results conference for Grupa Azoty Group for the first 6 months of the year. And here we have Mr. Adam Leszkiewicz, the President of the Board of Grupa Azoty; Mr. Andrzej Skolmowski, Vice President; Mr. Andrzej Dawidowski, Vice President of Azoty Group and CEO of Grupa Azoty Police. And online, we have Mr. Hubert Kamola, Vice President of Grupa Azoty and COO of Azoty Pulawy, and he's with us live from Ukraine from Lviv. And we have Mr. Pawel Bielski, Vice President of Grupa Azoty and Mr. Miroslaw Ptasinski, CEO of Azoty Kedzierzyn.

After we finish the presentation, there will be a Q&A session. For those of you who watch us online, you can use our chat facility to submit your questions.

And now I'll give the floor to the President of Azoty Group, Mr. Adam Leszkiewicz.

[Adam Leszkiewicz, executive]

Good morning, everyone. It's a pleasure to see all of you at the next presentation of our results for the second quarter or the first half of the year. We are grateful for the first comments for our results published yesterday. And I've been thinking that all of us would like to have good news for you, but we do not live in Wonderland, and we don't have a magic wand. Whatever we can do anything, we act, especially in the area of costs and restructuring.

Part of our problems is fundamental and beyond our control, like growing import from external markets. And the group is not undergoing a seasonal dip. Now Azoty Group was devastated, was thrashed and needs to be improved in all of its areas. I've been frequently asked if things are getting better. They have been getting better, as you will see shortly, but the recovery process will take time. The results are still negative. The challenges remain. The situation of the group is still extremely hard. We are still trying to stabilize our liquidity, optimize our costs, and to improve performance in key businesses. We are continuing recovery processes, but our situation is still hard. We still need time and capital and partners and support and trust of all our stakeholders. We know that in the first quarter of the year, we could do hardly anything as we took the office in the end of March 2024. I'm talking about the Board of Directors.

The second quarter in our industry is a specific time, a lot of downtime, a lot of maintenance work. So production is lower and the consumption of fertilizers is lower in that time of the year as well. The results are what they are. We improved our EBITDA. We improved our net results, but we perfectly understand that we still have a lot of work to do.

With my great team of industry and finance professionals, we believe in the recovery process. We are here to share with you our assessment of the current situation, the trends and the efforts to restructuralize and transform Azoty Group, because these 2 processes are intrinsically combined. On the one hand, we restructure. But on the other, we think about the future ahead and the future sources of our operating results. We face a number of problems, debt in more than 10 international financial institutions, over PLN 10 billion. I can't think of any other Polish organization with such large debt. Negative operating results. We improved them by 80%, but we are still nearly PLN 180 million below 0. Our margins are increasingly lower. Just compare ammonia prices this year and the year before, nearly PLN 200 per ton less. Dependence on many other areas, purchasing power of our farmers with low wheat prices, that power is shrinking. Increasing imports of fertilizers. What has been imported to Poland in the first 6 months is more than in 2023 combined, Poland is becoming the greatest importer of fertilizers, nearly 1.6 million tons. We have a lot of economic downturn in many industries, such as construction and automotive. The consolidation process has stopped. We lack a lot of competence in the group. And some of our partners have severed the ties with us. So we are taking the great effort of saving the company, searching for a new business model. So I would like to thank our key stakeholders and partners, obviously, starting with our staff, because they do the hard work. They make the biggest contribution in each positive result, so whether sales or operations, and now they actually pay the price for the situation we are in. So I'm very thankful to our team for everything we achieved in the first half of the year.

And I would like to thank our analysts and the journalists and the media and everyone who has been supporting group in this challenging time. The recovery process requires multi-faceted approach, many different tools, many different partners. And to give you an example today, we signed a letter of intent with Orlen on analyzing strategic options in a number of strategic areas. Today, we're facing Poland's biggest restructuring effort. This is our priority. This is our key task. Right now, we are approaching the end of a certain stage, the first stage of diagnosing the problems and formulating certain plans for restructuring and transformation. Later this month, we will try to start implementing that plan, bearing in mind that from day 1 of our work, we have been restructuring certain areas and improving our cost performance. I'll give you the details in a moment. We realized that some things may be done better, more efficiently. We keep our ears open. We listen to your feedback. But please do remember that in this process, nothing is just for show. The staff, the Board have given up on part of their wages. We have lost an important partner with many different events. We all work on the stress. Yesterday, I attended the 30th anniversary of ZAKsan, which is one of our group companies. We had to terminate a contract with them. That was a difficult meeting.

On the one hand, we were celebrating their achievements and results, but on the other hand, we are in a situation in which cooperation is difficult. So we are looking for other ways to support that club, and this is just one of the consequences we're facing. And please remember that in the recovery process, we are still operating. We have finished personnel changes. We replaced 80% of management members in the group company and in our daughter companies. 50% of managers have been replaced. We are looking for the best competence for the best people for these challenging times. And this is not easy to be bold and courageous to work with us. We have been auditing different areas as well. We are holding people accountable. We are submitting motions to the prosecutor's office, because it is also our responsibility to find out why the company is in a situation like this.

We realize that banks are our most important partner today, banks and other financial institutions. We follow a very simple rule of perhaps our internal consistent restructuring, making the most of all our financial reserves and construction of a new business model. These are the basic conditions of long-term agreement with banks, and we fully understand this. Looking at the different aspects of cooperation with financing institutions, I am confident to say that in the previous years, the group has been actually privatized by taking so much debt from financial institutions. And we know that the recovery process and the process of finding an understanding with banks will take more than just a few weeks, and I need to make that clear. Last but not least, some comments about our development. We cannot limit ourselves to cost cutting. We have to think about the future for our 15,000 people and the entire environment. We are in the process of a strategic review of our business. We created a list of developmental CapEx project. Partnership is the key financial mechanism for these projects. So if we do these projects, we'll do them in partnerships. We are actively involved in new areas such as explosives. We are there already, and we want to grow that business. Logistics is becoming one of the key aspects of our recovery and development process. We have our ports. We have our terminal in Grzybów. We are selling more and more in new markets, such as Ukraine, where we will sell much more this year than the year before. And President Kamola is in Ukraine in association with our sales efforts in fertilizers in Ukraine. Scandinavia is becoming another interesting market. We are developing our compounds, so we're looking for new areas to grow. And now a few facts or maybe a few more details. First, let's take a look at our financial results. A quick introduction. We know that our results reflect market trends, so growing import, shrinking purchase power of farmers, all of these things happening in automotive and construction industries. So the results for the first year suffer from those trends. They also suffer from the fact that the previous Board of Directors did little to prepare the company for the fertilizer season and for the sales in the first quarter of 2024. So the results for 2024 will suffer because of the results from the first quarter, because the first quarter historically contributed a lot to the year's EBITDA, up to PLN 700 million. This did not happen this year. The recovery efforts go in a few directions. We have a list of actions based on a few pillars such as internal restructuring, searching for a long-term understanding and agreement with banks, searching for additional capital sources, improving our business performance, searching for synergy within the group, such as support services, improvement of working capital efficiency, and agreement with a contractor at Police and completing the investment as soon as possible. And in all these areas, we optimize costs, we improve business performance, new activity, synergies, shared services center. So we are doing some synergy in R&D. We want to achieve our goals in Polimery Police. End of July, we had a conditional commissioning, and now we manage a large part of the plant, and we need to have a clarity on what to do next. The starting point in the first quarter was very bad, nearly PLN 1.5 billion of negative EBITDA. Too many overinflated investments, nearly PLN 10 billion in 4 years. And this creates a lot of costs related to debt repayment. And these investments do not contribute to our results, whether it's Polimery or the combined heat and power plant in Pulawy. It's still in the construction stage. And we struggle with repaying that debt, and there were no recovery processes in the past and the first announcement on broken covenants in 2023 did not bring about recovery processes. And to make things worse, sponsoring agreements continue to be signed or sponsoring policies were amended to enable continuing that operation despite the circumstances. Lower motivation among the management after October 2023, poorer company image, poorer market relations, no actual management. So when we came, we didn't see any new ideas for the group, whether new businesses or new internal organization. There was no dialogue, and on top of that, negative market and regulatory environment.

So in the face of all that, we started improving our costs. We decreased CapEx. And we made recovery a priority for everyone across the group. We wanted to sensitize everyone to the need to recover. And that's why I am grateful to all trade unions with whom we agreed on suspending certain costly solutions, and we hope to achieve the same in Pulawy.

Then revision of sales plans, renegotiation of key agreements and active involvement in regulatory processes. Let me comment on that. We are actively present in the discussions on RED III directive in the forthcoming 2030. Polish presidency in the EU is forthcoming. We want to deliver our ideas on green hydrogen and green ammonium, because this is very important for energy-intensive industries. Legislation on hydrogen, amendments to storage legislation. This is one of our priorities. We keep working on that to make sure that the final legislation which is being discussed by the minister today is optimized.

So we have the results for the first 6 months. Mr. Skolmowski will discuss them in detail. Our revenues are at the level of PLN 6.7 million (sic) [ billion ], EBITDA minus PLN 179 million, and EBITDA margin minus PLN 2.7 million. EBITDA has improved by over PLN 800 million compared to the year before. The loss is also smaller by PLN 300 million compared to the first half of 2023. And importantly, last year, in the first half of 2023, there were some one-off events that improved the results. Azoty received PLN 234 million in aid to energy-intensive companies and also sold some CO2 emission rights for nearly PLN 300 million. In total, that's more than PLN 0.5 billion, which improved the result for 2023. We improved our EBITDA by 90% if we factor in those one-off events.

Now sales in the first half of the year, we improved our performance here by nearly 730,000. We increased our sales volumes in all production segments, which in this way or another is the follow-up of our recovery program. Our revenues are lower because prices were decreasing faster than the sales volume was growing. And that's why, except for plastics, everywhere our revenues are lower. Plastics include polyolefins revenues that come from the commissioning stage of PP.

Costs by type. We are still searching for a way to reduce these costs. So across the group, our fixed costs were reduced. We follow a regime of limiting our noncritical expenses, so the cost is at the level of over PLN 7 billion, down by 13% compared to the year before. But if we compare fixed costs alone, then the reduction is nearly PLN 70 million, because this year in the first 6 months we had some one-off events. We have more depreciation. We launched the operations at polyolefins, and we have the cost of advisers related to restructuring added to the results for the first half of the year.

These are the effects of our efforts in the first half. So we have better financial results and net results, better sales, and there are many things that we do not communicate formally, because these things we do on a daily basis, but we still managed to develop a long-term investment plan. That's our internal document, internal paper. We have implemented cost-cutting schemes, and we signed agreements with 4 financial institutions more in the pipeline. We are improving working capital efficiency. We have launched our business review, transformation process.

We have taken some decisions on nonperforming plants and divestments. We have 22 plants that we want to divest from or decommission. We also have 8 divestment processes related to our assets. So we're searching for investors for those. The first of those is nearly completed. Maybe, hopefully, we'll complete it later this month. And everything we do trying to obtain new capital, we're constantly active talking to our partners.

And last but not least, things related to improving our relations. This is a time access starting from March. In March, we prepared the preliminary financial model with some recovery options. We started a dialogue with our partners, the social part, the liquidity, stabilization, and then the list of developmental projects, and then a draft of a strategic model with a financial forecast looking ahead, and then completion of all the structural changes and personnel changes across the group, then launching the Group Council. Finally, strategic business review, and now cost reductions, business improvement, synergies. We have a dedicated team working for instance with support services such as maintenance, repairs, automation, et cetera, and the development of restructuring and transformation plan. Now cost cutting measures. We had costs at the level of nearly PLN 1 billion. We managed to cut it by PLN 300 million. Our fixed costs in the first 6 months were reduced by PLN 70 million. But quite importantly here, in our internal plants, we saved PLN 200 million, that's the money we could spend, but we didn't, we tried to save money wherever we can. We have some collective bargains in key third companies, but the same processes are taking place in smaller subsidiaries. The combined effect of suspending those collective bargains in those smaller companies is PLN 100 million. We reduced employment by 340 people, which annually gives us another PLN 30 million in savings. We no longer do sponsoring or donations. Today, we do not spend a single zloty on that, which is another PLN 40 million of savings. So we keep reducing advertising or hospitability expenses. We reduced our management staff by 25 people, which is roughly PLN 7 million per year. There are 20 people fewer in supervisory boards across the group.

Nearly all our supervisory boards have been reduced to the statutory minimum. We have launched also some merging processes. So in this way, we will be able to reduce the headcount in Supervisory Board even more. We also eliminated supervisory boards from limited liability companies where they are not obligatory. We also chose not to be members of those associations where we don't need to be. We optimized our CapEx plans with savings in the order of hundreds of millions zloties. I mentioned that we have 22 plants that we want to decommission. The repair cost in all those plants is PLN 40 million per year.

When it comes to managing our assets, we are looking at those plants that will be liquidated, which will limit taxes and insurance expenses. So we are doing this review to improve performance. We started some formal analysis regarding working time. We expect that -- we also do some benchmarking, and we believe that we can have 60% savings, and we will be doing very open and very constructive dialogue with the trade unions. And we are also working on a draft of a single collective bargain across the group.

Right now, each company has its own collective bargain. That's why negotiations are rather challenging. We also do a lot in logistics. We want to gain roughly PLN 7 million by optimizing that rolling stock performance and by improving shunting yard operations. We also do some divestments. We want to attract more capital for the company. There are 8 projects in this regard. We have made a list of hundreds of real properties that we want to divest. These are very different. But usually, they are near or within our plants. They are not good for residential developments, but they are quite attractive for industrial investors. We also have 3 hotels or resorts that are on sale right now. So please look it up on our website. [indiscernible], for instance, at the sea side, right in front of the beach. So yes, please do take a look at that. So that was cost performance. Now audits and accountability. We are analyzing the reasons behind the group's financial situation right now. And I think everyone deserves to know the truth about the staff who bears the brunt of the current situation and the general public. So we are analyzing what's going on in the group and in the companies. The first motions to the prosecution office have been sent already. You can see the details on the slide.

We've been also auditing the 3 key projects. Polimery Police, this is going to take time because these are rather large projects than the heat and power plant in Pulawy and the deal with Compo Expert. A few examples to illustrate what we have in mind. Sponsoring. We notified the prosecution office that there may have been some politically shaded efforts, even though the group policy prohibits this quite clearly.

Another fine example, Polish Chemical Consortium, which is a project company of Azoty. It is also a general contractor. And we have a lot of things we need to clarify such as buying spas, buying alcohol, or organizing training or conferences for people who do not work in the company. So that's just an example off the top of my head. There are many more like that. For instance, investments in which 100% of services were delivered by subcontractors, and we are now analyzing if such an approach had any positive advantages for the company. Another company, Grupa Azoty Energia, a company dedicated to PV projects. We want to wind up that company. But the cost, the expenses of that company and its involvement in projects and spending money on advisers and analysts for projects that were never materialized, the combined cost of that is over PLN 20 million. Liquidation of the company or winding up of company related to phosphorites in Senegal. Key investments, perhaps they are less known, but they're still very doubtful. All those investments are past the delivery date, like a nitrous acid plant in Pulawy. So we are taking a close look at that project as well.

So I mentioned those 3 key projects in the heat and power plant in Pulawy. We need to clarify the transition from gas to coal, we need to clarify some technical solutions, and we need to analyze the energy balance. Why do we actually need that new investment. Now Compo Expert, a lot of synergies were expected, but after the company was purchased, no synergies took place. Another issue is the price, how much we paid for that company, for Compo Expert.

With Polimery, we have a huge delay in commissioning the plant. We have a lot of concerns about project management and cooperation between the contractor and the license right holder. And we have some concerns about expanding the original scope of that project. So these are the most important things by way of introduction, before we move on to financial and sales performance. I found it's reasonable to present this to the media, to financial analysts, and to the general public. We should make it clear what processes we do, what are the outcomes, and what will be the tasks and challenges in the days and weeks to come, because the recovery process doesn't end today. We know that the group is a key player in the food chain in Poland. When Poland has its own fertilizer manufacturers, then we have some influence on prices and margins. And we also ensure safety, because importing fertilizers or nitrates to Poland is always risky. When we have them locally, that risk is eliminated. We believe that the group is strong enough it will survive, it will change for the better, and it will become a great asset for our shareholders, and we ask our shareholders for patience and trust. The group will become a business value for our partners who are now thinking about whether and how to cooperate with the group. I am very, very grateful to all our partners that we are currently talking to about joint projects, whether in polymers or fertilizers or in logistics, and development of our ports and railways near Siarkopol. And the group is and will be a huge social asset for our people, our staff, and our communities, and we hope that each consecutive quarter will deliver better results and create a better image and a better atmosphere around Grupa Azoty. So we are moving forward.

And now I'll give the floor to President Skolmowski to give us a brief overview of financial results.

[Andrzej Skolmowski, executive]

The consolidated sales revenues of Grupa Azoty is PLN 3.3 billion. Our EBITDA loss is minus PLN 128 million, and EBITDA margin is minus 3.8%. In the second quarter, we didn't revert the trend, the negative trends in macroeconomic situation in Europe and globally. However, there are some symptoms showing slow recovery in the markets where we're present, and we can see that there is a potential to finish the economic crisis. The prices of almost all production raw materials went down 10% according to TTF quotations. The unit cost of energy utilities such as electricity and coal were also significantly lower. Despite the positive impact of lower unit costs on Azoty Group's results, the EBITDA margins of key segments were still negative, unfortunately. In the first half of the year, the group delivered consolidated sales at the level of PLN 6.7 billion, EBITDA minus PLN 179 million, and EBITDA margin of 2.7% compared to EBITDA in 2023, which was minus PLN 1 billion, factoring in one-off events discussed by Mr. President. The improvement of our result is greater than PLN 1.3 billion. The market situation in the European chemical and fertilizer industry is reflected in our results for the first year. As we mentioned, those results suffer from the lack of adequate recovery efforts and adaptation efforts in 2023 and before. In the first half, Azoty Group received support from the government paid to energy-intensive industries and collected revenues by selling CO2 emission rights. The emission rights delivered PLN 278 million.

[Hubert Kamola, executive]

Good morning. Record inputs of fertilizers as discussed by Mr. President, which is related to the ETS scheme and gas prices. ETS only applies in EU, but EU producers compete globally, so beyond EU. Also from 2022 to 2024, the total value of imports from Russia and Belarus is PLN 21 billion, which is a follow-up of importing gas, which is covered by the European embargo. We have negative performance of indicators, which is somehow related to the financial performance of member states. In the first quarter of the year, gas prices were relatively stable, and they were lower than in the year before, which obviously is good news for Azoty. The conflict in the Middle East had a strong influence on logistics. When it comes to the cost of logistics, longer routes, higher freight prices, and the overall geopolitical situation, all these caused certain speculations regarding to oil prices, which has a bearing on the cost of petrochemical feedstocks and some effect on gas prices as well. From the perspective of conventional market drivers, such as supply and demand, in our opinion, the current prices are not reasonable. But when we take into account emotions related to risks, well, all this keeps the prices high. The current year started with prices of EUR 35 per megawatt hour, then down to EUR 23 in the end of February, and then gradual growth up to EUR 35 at the end of September. In the second quarter, prices were higher than in the first quarter, but lower than in the previous years. Gas demand in Europe in the first quarter of 2024 was roughly 170 billion cubic meters, 25% less than before the war in Ukraine, so 2017 and 2021. The key reasons for the lower gas consumption was milder weather, less gas consumption in the residential sectors, and REPowerEU project, which reduces consumption and promotes renewable energy such as solar and wind. The most important factor affecting the market was the weather. Mild winter, strong winds, renewable energy sources, all that, and the gas reserves were high at the end of winter. In June, gas storage facilities were filled up to 77% more than in the previous 5 years. In Poland, the filling rate in it is 96%. So storage facilities are full, which is much more than in the years before. So low demand, big supply. This should stabilize the situation in the gas market, and we expect certain price reductions.

When it comes to electricity, in the first half of the year, the average price went down by 24% or 20% compared to the first quarter of 2023. The key price drivers were CO2 emission rights, gas prices, coal prices, and renewable energy, mostly from wind. We also had less demand for electricity in the EU for reasons including lower production and shifting production outside the EU, which in its own is not good news, and then relatively slow economic growth.

When it comes to CO2 emission rights, there are a lot of economic cycles here, and we have certain production plants in our company. We had to adjust the volume of emission rights to our production plants. Our capital group such as Pulawy and Kedzierzyn sold their rights, and they repurchased a certain volume. So we tried to do that to improve our liquidity. By selling these rights, we improved our liquidity and this contributes to our results.

Currency exchange in the second quarter. Zloty was at the highest level over the last 2 years. And then in the beginning of the second quarter, the zloty lost a little bit of earlier gains. When it comes to revenues in the second quarter, we had revenues of PLN 3.4 billion, PLN 150 million less. The key segments in the second quarter compared to the year before had greater sales due to greater volumes, PLN 1.2 billion, but the prices were lower, PLN 0.7 billion.

As a group, we paid less for energy materials such as coal and electricity, minus PLN 175 million. Fossil fuels of fossil materials, PLN 169 million. We also paid less for that because the prices were lower. And then oil derivatives, the prices were higher here, and these include phenol propane, which we need in our polyolefins operations. Gas prices up by PLN 97 million, and that's mostly because of the greater consumption. In the first of 2024 compared to the year before, our sales revenues were PLN 634 million smaller. And this applied to all segments except for plastics, and our plastics include the polymers from Police, which is in the test commissioning stage, and the prices were decreasing higher than the volume was growing.

So in the first half, the gas prices were lower, and in total, coal and electricity, the expenses on these were PLN 0.5 billion lower. Oil derivatives, PLN 412 million up compared to the first quarter, and this includes phenol, propylene, and propane. In the first half of 2024, the share of gas in our cost was 29%, 7 PPs less than in 2023. In Agro, a quick comment here. In the second quarter, the prices of end products and raw materials continued to go down. This applies to all benchmarks of the Agro segment. Year-on-year, the prices were comparable to the year before, perhaps slightly lower. However, ammonium prices go up a little and this is mostly attributable to the market balance and some export difficulties in China and growing gas prices in Europe, especially TTF. The demand was clearly smaller compared to the previous years. We've been watching some shifts when it comes to the moods in purchasing plans of farmers. The Ministry of Agriculture says that in the second quarter, agricultural produce prices were slightly higher than in the quarter before, except for corn and wheat. In the first half of 2024, agricultural produce prices were lower by 18% to 34%, depending on the commodity.

Let's move to the next slide, the second quarter of 2024. The market situation was characterized by lower prices of compound fertilizers with the exception of sulfur. Low supply in Europe drove the prices -- kept the prices at previous levels, and the smallest fluctuations applied to DAP fertilizers, again, because the supply was limited. And as in previous years, the demand for compound fertilizers in Europe remains relatively low. The only exception was Ukraine. Ukraine keeps building alternative sources for -- alternative to those they used before the war. And obviously, this is an opportunity for us.

DAP markets spread remained well above the levels from the year before, and this is mostly attributable to lower material prices with constant prices of end product. And we've been observing a lot of imports of compound fertilizers to the EU, including Poland. In total volumes of urea imports, the volume imported from Belarus and Russia is 70% of total imports into Poland. In the first half of the year, that share grew considerably.

Grupa Azoty is doing a lot to counteract this. We do this as part of Fertilizers Europe. We are discussing with our colleagues. We are consulting with the EC in order to implement special tariffs at 30%. In parallel, we are investigating possible dumping practice, and Fertilizers Europe also plans to interact with the European Commission.

Quite importantly, we need to mention the export tax. Fertilizers exported from Russia are subject to 10% export tax and that money is used by the Russian government for whatever purpose. Poland is #1 importer of mineral fertilizers from Russia and Belarus. 30% of the volume entering EU enters Poland. In the first 6 months of the year, the total volume was over 600,000 tons. Poland is followed by France and Germany.

To wrap it up, when it comes to Agro and markets environment, higher gas prices, the cost sensitivity of the farming industry, so lower commodity prices mean lower demand on fertilizers. The import from Russia and Belarus is negative for EU producers and third-party sources such as North Africa, Far East or the U.S.A., all these suppliers lose to Russia and Belarus. And then the overall geopolitical context related to the war in Ukraine and in the Middle East. This disrupts trade and logistics and increases the risk of raw material supplies.

In the Chemicals segment, OXO alcohols, OXO prices in Europe went up by 16% in the second quarter, and the demand for plastifiers and OXO alcohols remains stable, and there are no reasons to believe that the demand for alcohols and plastifier will go up in the months to come, but the situation is at least stable. With melamine, we've been observing a lot of imports from Asia, China. There is a revision procedure going on, on minimum tariffs. We expect that in November or December, the European Commission will publish an amendment on those tariffs. So probably we'll switch from minimum prices to ad valorem or proportional tariffs, which we believe will be a better solution to ensure a level playing field in Europe.

With pigments, the second quarter of 2024, titanium whites, a small increase in demand. An important thing here is energy prices. If we have a cold winter, then the prices of coal and gas may surge, which will surely affect our production costs. The key users of pigments are coats and paintings industry, and this is closely related to the construction industry. If there is an improvement in construction, this will have a bearing on coats and paints.

So to wrap it up for the market environment for this segment, slight seasonal improvement of demand. Continued attacks on ships in the Red Sea, this calls for longer routes from Asia. And we expect an improvement in the markets, which depends on the future macroeconomic situation in the construction industry. For titanium white and melamine tariffs, imports from China will be very important.

[Andrzej Dawidowski, executive]

Now plastics. When it comes to plastics, here, demand is stable, but unfortunately lower than in previous years, and it reflects the involvement of European producers. Today, production is 20%, 25% lower. When it comes to prices, the upward trend that continued for a few quarters stopped in June. So prices kept growing up until June. There was more interest in the European market by Chinese manufacturers. But after June, the prices went down. Then the import of Asian or Chinese products has a very quick effect on the European market, especially when it comes to lower-scale manufacturers. So here, the prices are going down at the highest rate.

If you look at the margin spread between materials and end product, we're not yet at the level of 2022. The margin remains rather flat, so it prevents us from delivering positive results from plastics. If we compare Asia and Europe, prices in Europe were growing faster than in Asia. As a matter of consequence, there is more interest in Europe among Chinese manufacturers.

To conclude, market environment for plastics sales is determined by the health of the economy. And here end buyers are still not very active. The current situation is affecting sales prices and sales volumes. When it comes to production indicators, demand meets supply in Europe. But in the first quarter, we had sulfur shortages, which increased sulfur prices in the first quarter. In the second quarter, we expected the prices to continue. And for the next few years, negotiations are still in progress. Thank you.

[Andrzej Skolmowski, executive]

Thank you. Despite better results, the EBITDA of the group improved by PLN 479 million compared to the year before. So despite that, the results of the key segments are not satisfactory in the second quarter. Agro had a negative EBITDA, minus PLN 102 million; chemicals, PLN 93 million; plastics PLN 63 million. And we had a positive EBITDA in energy, PLN 29 million; and other PLN 49 million. In the second quarter, consolidated revenues from sales was PLN 4.4 billion, and it was lower than in the year before by PLN 147 million. Lower sales revenues in the second quarter compared to the year before was observed in auxiliary segments, energy and others. In the base period, we sold CO2 emission rights for PLN 568 million, which added to the group's result.

The key segments of the group in the second quarter of the year recorded more sales, mostly attributable to growing sales volume. Unfortunately, sales prices were going down. The results for the first half of the year, despite the improvements in key segments, when we compare the first half of this year to the year before, Azoty Group still had a negative EBITDA margin at the level of 2.7%, and negative EBITDA in Agro, minus PLN 74 million; chemicals, minus PLN 153 million; and plastics, minus PLN 97 million. We had positive EBITDA in energy and other, PLN 65 million and PLN 80 million, respectively.

In the first half of the year, the key drivers were growing volume and prices of materials and end products. Last year, the company also benefited from the governmental support scheme as mentioned before. In the Agro segment, in the second quarter compared to the year before, the key drivers of the results were growing production and sales volumes and lower prices of end products and materials. In the second quarter of 2024, the downward trend slowed down that would trend for agricultural produce, and uptake in the fertilizer business was limited because of the general macroeconomic situation.

In the Agro segment, gas prices were lower, and most of the other production materials were cheaper as well. However, the decrease in prices was insufficient to deliver positive EBITDA. The EBITDA margin in the second quarter of the year was at the level of minus 5.4%. EBITDA in absolute terms was improved by over PLN 400 million compared to the year before.

Chemicals. In the second quarter compared to the year before, we had a greater sales volume and lower prices of end products and materials. Negative drivers here were slow economic growth globally, high stocks among our clients, and import of cheaper product. As a result, most of our products struggled, and we had to cut down production. Let's take melamine. In Pulawy, in the second quarter, we only used 1 of 3 production lines. Positive drivers included lower prices of materials and logistic problems affecting imports across the Red Sea, which increased the time and the cost of imports to the EU. As a result, import from Asia slowed down. However, the prices of plastifiers and sulfur went up. The EBITDA margin in the second quarter in Chemicals was minus 9.4%. In absolute terms, EBITDA went up by PLN 179 million compared to the year before.

In Plastics, the second quarter compared to the year before saw greater sales volume and greater sales of phenol with the same prices of polyamide 6. Negative drivers included the economic crisis. PA6 supply chain is strongly connected to the economic growth, which is still very slow in Europe. And logistics problems in the Red Sea, new routes, this drove the demand for products from Europe. The actual demand was still low compared to historical data depending on end use. The EBITDA margin in the second quarter in Plastics was minus 6.6%, up by PLN 93 million compared to the year before. And here, the results also include the results of polyolefins company, which is in the commissioning stage.

In the beginning of 2024, Azoty Group repaid its long-term debts on time, in total EUR 10 million. But in accordance with a stabilizing agreement, as from February 2024, we suspended repayment of principal. This included loans from a consortium of banks and EIB. We have a revolving facility of PLN 1.5 million and a term loan of PLN 0.9 billion, and the repayment -- the maturity date is June 2025. We also have a multipurpose loan agreement with PKO BP. Here the limit is PLN 1 billion or its equivalent in the euro or the dollar, and this agreement is valid until September 2025. And we also have a cash pooling facility in the zloty, dollar, and euro, and that agreement is also valid until September 2025. And reverse factoring agreements, that's in total, PLN 2.3 billion, and factoring of receivables is PLN 700 million and EUR 50 million. These agreements serve to finance general corporate needs and ensure security of funding for group companies through an umbrella nature of allocation of limits and the actual intra-group redistribution. Total amount of free cash and available limit is PLN 3.3 billion. The company keeps paying its obligations on time arising under its agreements and waiver letters. And in this way, we ensure the security and liquidity of the group.

The Board recommended to cover the net loss using reserve capital of the mother company generated by the share issue premium. And this recommendation was adopted by the general meeting. When it comes to investments in the group in the second quarter, intangible and tangible assets involved PLN 366 million. The largest CapEx went to the Polimery project. Other projects include precipitation plant, ammonium nitrogen plant in Police, and modernization of the turbine set and its auxiliaries [ 13 UK 32 ]. In Kedzierzyn, we do reserve and peak demand boiler project.

And when it comes to the first half of the year, the total volume of CapEx was PLN 582 million. And as in the second quarter, most of that budget went to the Polimery Police project and the other projects I mentioned for the second quarter. And here the difference is attributable to certain reductions of our CapEx introduced because of the current situation.

Polimery Police project, together the company and the organization of the project focuses on improving and stabilizing production there. In cooperation with Hyundai, we signed a conditional agreement on temporary takeover of the PP plant and the transloading terminal, which is very important for us, because we produce modified products with greater margin. Up to the moment of signing that agreement, everything had to be agreed on with the general contractor, which caused certain limitations when it came to adapting manufacturing to market demand. The expected production volume annually is 173,000 tons, and this year, we produced 150,000 tons of PP. When it comes to the general contractor, we negotiated project closure. We negotiated annex #5, and this is ongoing in the meantime, and the general contractor has submitted some claims. When it comes to intra-group synergies, we launched cooperation with Kedzierzyn, where we deliver PP. When it comes to financial stabilization, the company signed an agreement with banks extending our stability until the end of September. Polimery Police project is actually completed. We still need to do some documentation work and some commissioning and then delivering the guaranteed performance on the other parts of the plant. And Annex #5, the one that is being negotiated, will be an umbrella document for all these projects. Today, the average production is over 700 tons per day of PP. So we have 66% of our on-target capacity. We are working on the market side as well. We sell everything that we produce. And the whole commercial organization is fighting to build a market model and a portfolio of clients. And so here we focus on end users.

In Tarnów, our key investment projects include the construction of precipitation neutralization plan, and ammonium nitrate plant. These are related to our energy and climate transformation. We want to make better use of chemical heat to reduce our heat demand and improve our cost performance in caprolactam and nitrate fertilizers production. The first project will reduce energy consumption by 500 gigajoules per year. We plan to complete this project in 2026. The other project neutralization plan will reduce consumption by over 250,000 gigajoules per year.

In Kedzierzyn, we do a new energy concept. And the key aspect here is an innovative approach to energy and constant strive for zero emissions. And the key assumption behind this project is the use of process heat from the ammonium plant. That heat will be used for generating electricity and other forms of energy. So far, we delivered 6 out of 7 projects with a total budget of PLN 325 million. Those 6 have been completed. The one that is still pending is reserve and peak demand boiler. It will be delivered in September this year. And Mr. Ptasinski, the President of the company, is here today with us. And more details will be presented later on today by other speakers.

When it comes to group results, in the second quarter of the year, as we frequently mentioned, we had some negative macroeconomic environment. The demand was low. But despite that, we managed to generate greater volumes in terms of sales. Because of the difficult situation, none of the leading companies delivered a net profit. However, quite importantly, we had positive EBITDA in 2 companies. That's as of the Kedzierzyn and Compo Expert. The first one had plus PLN 6 million and Compo Expert has an EBITDA of plus PLN 37 million. In the first half of the year, just like in the second quarter, the key companies did not deliver positive EBITDA except for those 2 companies I mentioned, that as of the Kedzierzyn, PLN 36 million plus, and Compo Expert, PLN 95 million.

[Hubert Kamola, executive]

Now a quick comment from Azoty Pulawy. Right. as in the whole capital group in Pulawy, we also have a new Board appointed in May and early June. We started the recovery process including structural optimization, significant reduction in the number of managers and directors. We are planning to sell some of our assets such as hotels or resorts that are not related to our core operations. We are looking at our small capital group, which is part of the Pulawy Group and not related to our operations. Sto-Zap, a company in the catering business, for instance, and then we want to improve working capital management. We want to increase payment terms with our suppliers. We want to better manage our stocks of finished products and materials. We want to improve return. We want to deliver new products such as higher nitrogen content in ammonium nitrate. New formulas for NRAS with more sulfur, less nitrogen and new biodegradable coatings, including biomaterials.

We also analyzed melamine production in order to optimize urea consumption in Pulawy. And urea is both an end product and a component of AdBlue, and it's also a material for other solutions used in the industry. Just like the whole group, we had to terminate sponsoring operations with local sports clubs. This was not a very pleasant moment. We were sorry that we had to quit sponsoring, and we hope to once again become a support of local sports when we recover.

Caprolactam plant has been launched in order to use semifinished products that we generate. This is a process that was stopped 18 months ago, unfortunately. And now we resumed it. We also stopped all not critical expenses. We are doing a business review. We are searching for business solutions, not only for caprolactam, but we are thinking about how to use at least part of that plant such as sulfuric acid production. There is a market for that in Poland and beyond. We have some homework to do. We need to do a review of sulfuric acid. In the group, in Kedzierzyn and Pulawy, we are producing that acid. So we can use some synergies here.

Quite importantly, at the level of the group in Pulawy, we're working closely with our clients when it comes to the sales of fertilizers and urea for technical purposes. We also signed some stabilizing agreements, just like the group. In Pulawy, we still do not have an agreement on suspending certain clauses from the collective bargain, and eventually, as the Board, we had to take the painful decision on submitting a formal statement on our intention to terminate the collective bargain. Now after nearly 2 months of negotiations, we still haven't reached an agreement. That's why we submitted that statement, and now we follow the procedure provided for. In the collective bargain, we have 4 different trade unions. Their approach is very, very different. And on top of that, we do some cost-cutting efforts. As recommended by the capital group, we also do some audits within Pulawy. One of those includes some unfair competition. Another to look at investments. One of those is related to sponsoring.

When it comes to consolidated revenues from sales in the second quarter, that was PLN 854 million, and the sales volume had a positive effect on our EBITDA, PLN 38 million. Negative effect was greater use of strategic materials compared to the same period last year, but it was related to greater production volume. This drove our costs up by PLN 85 million and gas PLN 113 million. The prices were lower, but the volume was greater by 94%.

Electricity. Here, the cost was PLN 33 million less. 31% is attributable to prices, 21% is attributable to volume. Coal. Up by PLN 5 million in here. Price was 29% higher and the volume was also greater by 55%. A positive effect on our EBITDA also came from the fact that last year, the company sold CO2 emission rights. We didn't have this in the second quarter of 2024. When it comes to the first 6 months, then consolidated revenues was PLN 1.7 billion, 26% less than the year before. Positive contributions to EBITDA included greater sales volume. That's PLN 239 million more, and lower prices of strategic materials compared to the year before.

And for natural gas, the costs were down by over PLN 400 million. The prices went down by 57%, and the volume went up by 33%. Electricity. Cost down by PLN 84 million. Here, we had lower prices and lower consumption. And then coal, total cost was 10% less -- PLN 10 million less, sorry, and the prices went down, but the consumption went slightly up.

Now the segments. In the second quarter, negative EBITDA in Agro, minus PLN 116 million; plastics, minus PLN 20 million, and that's the cost related to caprolactam plant that was at a standstill, but we did some circulation efforts. And then positive results in EBITDA, in energy and other sectors. In the second quarter, the revenues from Agro represented 96% of all revenues. Melamine, because of the market situation, intensive imports and excessively high costs of manufacturing, driven by energy and emissions. So on the 4th of July this year, based on the resolution of the Board, we stopped the production of melamine, and in the same period, we did not produce caprolactam. The entire first half of the year saw an EBITDA of minus PLN 119 million in Agro; minus PLN 37 million in Plastics; and positive EBITDA in Energy, PLN 17 million; and PLN 15 million in other products and services. For the first 6 months, the Agro delivered 93% of our revenues, and absolute number was PLN 1.6 billion, which is PLN 136 million less than the year before.

Production volume. In the second quarter, nitrate fertilizers up by 70%; urea, up by 19%. And a quick comment here. When it comes to compound fertilizers, they are included in the consolidated results of Pulawy that includes Gdansk, and in the first half of the year compared to the year before, nitrate fertilizers and urea went up and compound fertilizers went down by 17%. This was attributable to some downtime and repairs in Gdansk.

When it comes to investments, the most important here is the modernization and the construction of new neutralization plant for nitric acid. The plant is ready for commissioning in October this year. This is a very important plant in the context of 2 palletization plants for ammonium sulfate. We're also building a new power unit based on coal and Pulawy commissioning is underway. This is quite controversial because it uses coal. The decision to switch from gas to coal was taken in 2017. In 2019, the contract was signed. In 2023, the budget was increased to PLN 1.23 billion. So currently, this project is in the commissioning stage.

Here, we are auditing the decisions taken originally and during the investment process, and if necessary, some follow-up will follow. FGD in the context of BAT, here, we had a budget of PLN 76 billion, and that project is completed. In the first half of 2024, Azoty Pulawy Capital Group spent PLN 119 million on CapEx compared to PLN 69 million in the second quarter. And compared to the year before, our CapEx went down by roughly 31%.

[Andrzej Dawidowski, executive]

Thank you. As of the Police, when the new Board took over, Police concentrated on the recovery, and this was something that has been our priority in the first quarter. So we introduced a new cost management model across the capital group, and this included all areas in the mother company as well. As a result, the overheads and fixed cost level, we reduced our costs significantly. When it comes to the recovery plan, we also focused on remodeling our corporate structure. We introduced a new structure to reduce the head count among managers by roughly 50%. We also improved internal communication, decision-making, and we implemented a new model of selecting our lower or junior managerial staff to make the most of the existing assets within our organization to drive our key goals. So greater revenues and lower costs.

We've been working hard with trade unions to suspend collective bargaining. We had some constructive dialogue and respectful decisions. As a result, we managed to suspend certain provisions from the collective bargain. We are working hard to increase our sales volume. The strongest limiting factor is the technical condition of our plant in the recent period. Because of the polyolefin project, Police did not have enough CapEx budget. So the technical condition of our plant prevents us from delivering 100% of our capacity. Our repair processes are overdue, which reduces our production capacity.

Despite all that, despite the negative technical condition, we managed to increase our production volume. We worked day in, day out to improve our performance and the results are visible after 6 months of the year, both in absolute numbers and when we factor in those additional events that drove up the results for 2023. When it comes to stabilizing agreement with financing institutions, we signed an agreement like this in Police as well. And each day, we try to improve the financial situation of the company. So we want to extend payment terms with more suppliers. We want to reduce our stocks in Police. We want to reduce payment times from our clients. All this has a positive effect on our financial performance.

In cooperation with polyolefins, we focus on streamlining production. We are connected by the so-called hydrogen line. So hydrogen flows both ways depending on the need, and this has to be optimized to ensure efficiency.

When it comes to results, in the second quarter of 2024, the consolidated revenues was PLN 677 million. It was lower, mostly due to lower sales prices, and those lower sales prices were attributable to falling prices of key materials such as phosphorite rock and potassium chloride and some materials for titanium white. The only material whose price went up was sulfur. When it comes to electricity price, the prices went up by -- went down by 42%; for coal, 34% down. This had a positive effect on our results, but it was somehow reflected in our sales prices as well. If we look at normalized EBITDA, normalized meaning factoring in one-off events in 2023, Police improved its EBITDA by PLN 100 million, and you can see it clearly when you look at the division into business segments, because here we have better performance in business rather than in terms of governmental support.

Some additional elements that add to our results, that's greater sales volume, greater production volume, and we're working hard to improve the technical condition of our plant. The period since June, we've had some downtime for maintenance and repair. And we hope that in the future, all our plants will be working at full speed. In the first half, the EBITDA improvement is even greater, PLN 177 million year-on-year. In the first half of the year, revenues slightly lower, 12.2%, as I said, mostly attributable to lower prices of materials. The other aspects of our net result and EBIT went up.

May I continue. Now results by segment. If we look at segments, the greatest progress is observed in fertilizers in the second quarter. And from the perspective of transition to the positive side, well, pigments are already delivering positive EBITDA. Revenues, both in fertilizers and pigments, quite stable from the perspective of the second quarter of the year. The entire efforts to improve production parameters, to reduce material consumption aim to using cheaper materials. This has delivered the results you've just seen.

The first half of the year, again, better performance in both key segments, fertilizers and pigments. The pigments in the first quarter had a negative EBITDA of minus PLN 11 million, but compared to 2023, you can see massive improvement by PLN 31 million. So in fertilizers, again, much better performance both in terms of reducing production costs and material consumption. And here, we also had greater production volume, also because we have improved the relationships with our Polish clients. We cooperate more closely. We enjoy more trust in Azoty Group as a competitive and reliable supplier. Production volumes in the second quarter, significant growth in terms of compound fertilizers and titanium white, less urea for technical purposes, mostly due to production downtime. When it comes to compound fertilizers, the trend has continued for 2 quarters, quarter 1 and quarter 2 in titanium white. Here we hope for the effect of tariffs on Chinese products introduced in June, that's tariffs between 14% to 40%. As a result, our products and all European products become more competitive. And we can also see a trend among paint manufacturers who used to prefer Chinese manufacturers, but now they switched back to European manufacturers to secure at least part of the volume locally, which is essential in terms of production security. Also when you look at the route between Asia and Europe. So it's not only tariffs, it's also logistics.

Production volumes in the first half of the year, as I mentioned, in all segments, in all categories, we have increases, except for technical urea, which remains stable. Had it not been for our technical problems with our plants, the volume would have been higher. And if we look at all these product categories, we can say that Police is growing compared to 2023 in all possible ways.

Key projects in Police. There's the extension of our logistics hub. That's an ongoing project, but now drawing to an end. And we are analyzing all our investment projects, whether to continue or not. But given how we want to reach our clients and how we want to offer our products, we need to ensure availability, both in terms of pigments and fertilizers. So these 2 projects are essential. When it comes to pigments, we built new silos that will make it possible to cater for large corporate clients, catered with silo trucks. The plant was commissioned in -- the silos were commissioned in June, so now we can offer a greater volume and an additional delivery mode, which is a completely new growth segment for our pigment business. And also from the perspective of the tariffs on Chinese projects, this is a key priority for us.

CapEx, as I mentioned, we have limited production capacity in Police, which is why we need more CapEx. The savings in Police in previous years were not targeted reasonably. So savings were diverted -- sorry, savings resulted in quick tear and wear of our plant. And now we have to make up for that. So we need to do both repairs and investments. And the repair downtime, which used to be 3 to 4 weeks, now it's more than a month, which in a way reduces our product availability.

Thank you very much. And now moving on to Q&A. Do we have any questions from the floor.

[Michal Kozak, analyst]

Michal Kozak from Trigon. I have a few questions, if I may. The first one is about the letter of intent. Are you thinking about selling the entire package in Polimery Police or just a part of them. If you sell all of it, would you be able to give up on issuing their shares? And would it be enough to survive another few years? Or is the scale so large that it would be just one of the elements? And the agreement with Basel versus Orlen, how would you comment on that?

[Adam Leszkiewicz, executive]

Let me start with the last question. The last question should be asked to Orlen rather than us. When it comes to the issue of shares, we're not preparing a share issue. So it's not related to polymers in any way. When it comes to polymers alone, then we've been openly saying that we're looking for partners for this project. And from day 1, we've said that projects like this should be done in a partnership. It wasn't the case here. Azoty Group took the brunt of financing the project without an industry partner.

So we believe that we need to find a partner and all options were open, perhaps a capital partner who takes some shares, or maybe a partner for technical operations, or perhaps a partner who has the raw material, propane. So we're open to all options. Now for 2 months, we will analyze options with Orlen. We will be searching for synergies and possible cooperation, and we keep all doors open. Possibly, we can increase shares in the project over to an option where polymers are not part of Azoty Group. So all options are still on the table.

[Michal Kozak, analyst]

So 2 months, did I get it right?

[Adam Leszkiewicz, executive]

Yes, 2 months, that's working period we need to analyze the options.

[Michal Kozak, analyst]

Okay. Next question. How much money is still left to spend on the polymer project? We've just heard that Hyundai expects another EUR 115 million. The budget is PLN 6.7 billion. So is this all, EUR 115 million?

[Andrzej Dawidowski, executive]

Well, if you look at the current stage of negotiations with Hyundai, we can't give you any figure either way. As we communicated before, Annex #5 will be a turnkey solution of our situation with the contractor. So this is part of the process of solving the issue. And when we complete this, we will let you know what the reasonable scenario is.

[Michal Kozak, analyst]

What is the current debt of the PDH? And could you somehow plot it on the table where you represent debt, which is probably greater than the polymer CapEx. So what is the debt-to-equity in the project?

[Andrzej Skolmowski, executive]

Without elaborating on what has been published, our obligation on the project alone was PLN 3.2 billion and subordinated loans offered by cosponsors. Well, all that combined, that will be PLN 3.8 billion, and then subordinate loans to the original sponsors, that's PLN 1.3 billion. And if we consider the capital contribution by the group in Police, that's PLN 1.099 billion. And then the subordinate loans, PLN 1.3 billion. So our total involvement in that project is PLN 2.479 billion. So PLN 2.4 billion, and then the rest of the CapEx is debt, right?

[Michal Kozak, analyst]

Market-oriented question. With the current prices and the most optimistic scenario for the fourth quarter and the first quarter in fertilizers after the cost cutting, do you think fertilizer business can be positive with the current prices and the pathway towards the fourth quarter?

[Andrzej Skolmowski, executive]

You know very well then we avoid forecasting, but we have repeatedly said that this year will be challenging for us, which means that we are not expecting very positive results.

[Michal Kozak, analyst]

Okay. And last question from me. If we look at the cost curves of compound fertilizers and urea, Poland is in the far end of the league. So in the context of CBAM regulations, how much would you need to invest in order to keep the company alive in fertilizers in the long term? Or if you look at the current geopolitical situation, the differences in raw material prices are just too large, and we simply have to expect reductions in production capacities?

[Andrzej Skolmowski, executive]

Well, there are many different ways to meet those requirements. Hubert will give you more details. But we are analyzing many different options. And if you take the investment approach, then the cost of those investments are high. Especially when you consider our financial situation, we concentrate on more affordable variance, and these include logistic variant, meaning we will be buying green ammonium from outside. So this is what we are currently analyzing.

Hubert, would you like to comment on that?

[Hubert Kamola, executive]

Yes, obviously. Renewables and electrolyzers that's a costly solution. No one in Europe is doing that. Pilot projects have very small production capacities and these are pilot projects to build some experience. And most mineral fertilizer manufacturers in Europe analyze the logistical option whereby they would be importing blue or green ammonium. Azoty has a lot of logistical competence. In Police, we are virtually ready to increase external sources of ammonium and then distributing that ammonium all over the group. And we plan more projects that would improve our logistical capabilities in Police and Gdansk.

We're also speaking to our partners also from outside Poland about supplies of ammonia from Africa, Middle East, and the U.S. And the U.S. is now a challenger when it comes to blue ammonium manufacturing. There's a lot of support from the U.S. government as part of the Anti-Inflation Act. When it comes to the new regulations, it will take place. It will enter in 2026. It will ensure a level playing field in terms of costs and the green hydrogen obligation, 42% by 2030. As part of Fertilizers Europe, we talk about proposal to change these requirements. We are waiting for the new European Commission and high commissioners with whom we will talk.

We consider many different options, either postponing the requirement of reducing the requirement. We asked the commission why 42%? Why is it the threshold? But we were not giving an answer. We know that this was a certain target that originally was 50%, and then after some conversations with the industry, that was reduced to 42%, but it doesn't reflect any scientific argument. So we still have some room for negotiation about how to cascade that target down on to individual countries and individual industries. But obviously, Azoty is the largest hydrogen operator in Poland, and we will surely be affected by the new regulations. So that's why we are preparing for the new regulations. So we are not considering reducing our volumes only to meet those requirements.

[Michal Kozak, analyst]

I have a follow-up to the question about PDH. Are there any suspending conditions, for instance, that you can't sell your shares if the Korean shareholder objects to it? Is there a mechanism where another shareholder could stop you from selling your shares in the project?

[Andrzej Dawidowski, executive]

No. No, there isn't.

[Michal Kozak, analyst]

And one more. Because this is your first initiative to sell shares in your assets. And Compo Expert has delivered positive EBITDA. So you also consider selling Compo Expert or selling at least part of shares to a future partner?

[Andrzej Skolmowski, executive]

We will issue an announcement in due time after analysis.

[Michal Kozak, analyst]

A question to Hubert, who is in Ukraine. Well, selling fertilizers to Ukraine doesn't sound natural, because in the Black Sea area, the prices were at the bottom level historically. So what are the reasons -- the arguments for exporting fertilizers from Poland to Ukraine in the long term?

[Hubert Kamola, executive]

Well, the geographic premium in our portfolio and our logistics, our own wide-gauge terminal integrated with a railway line that goes directly into Ukraine. We also have well-developed distribution of our fertilizers yesterday and today in Ukraine. We have meetings with tens of partners in Ukraine. These include creators, plantations and traders. So these are serious partners with lots of capabilities. We also built some pro-financing solutions. There are quite a few institutions that secure payments in deals with Ukrainian partners. So we're working with a few institutions in Poland to do that.

Another major thing is the fundamental change that has taken place in Ukraine. So they no longer import fertilizers from Russia and Belarus. This has started in 2014 gradually. And 2 years ago, it changed overnight. So Ukraine is still building alternative solutions, alternative sources of fertilizers. It needs at least 5 million tons depending on type of fertilizing and available land, because war reduces the surface area. Ukraine has 5 fertilizer plants. 3 out of those 5 do not work normally, either because of war damage or because they are located in occupied territories. So they need external sources.

Shipment by sea suffers from high war risk and high cost of insurance and usually has to come from a greater distance. So a one-off deal is usually more expensive. We can deliver smaller quantities by rail through our own terminals and our own logistics operation through Siarkopol, which has a great logistics potential. In addition, we can offer return services to the Baltic sea in the context of exporting Ukrainian crops. So this is a comprehensive approach to the Ukrainian market, which is one of our major export markets with a lot of potential, and we want to use that potential.

[Michal Kozak, analyst]

Okay. And one last question. You said that you're not considering share issue. What about haircut on your debt?

[Andrzej Skolmowski, executive]

We talk rather intensively to financial institutions. As our CEO mentioned, we are working on our transformation plan. So we wouldn't like to speak about plant performance or plant results. We focus on our business. What we did over the last 10 weeks was focus on improving our business performance and defining our perspective and planning our positive EBITDA in the years to come. This is not the first question like this. And obviously, all parties in these negotiations are interested in this. But right now, we are agreeing on the business model. This has to be our focus. We need to understand the perspective of Grupa Azoty.

[Unknown Analyst]

[indiscernible], Noble Securities. Let me follow up on those questions. When would you expect signing the final agreements with banks and financing institutions? Will it be later this year or next year?

[Andrzej Skolmowski, executive]

Well, these talks from the perspective of financial institutions, these talks are rather formal. So proposals we agree on have to be then analyzed by their committees, and we cannot plan the timing of the whole process. But what we expect is as follows, that until the end of this year, we will agree the draft with the banks. And then we hope to sign those agreements until the end of the first quarter next year.

[Andrzej Dawidowski, executive]

Thank you. Do we still have any questions from the floor?

If not. Online questions. In the most part, they overlap with the information that we have already presented. Now, fertilizer markets. What is the Board's opinion on distributors stock? And is the process of reducing expensive stocks now completed? And border tax that will enter in 2026, will it be a game changer? Will it drive fertilizer prices up?

[Hubert Kamola, executive]

Let me take these 3 questions. Is it going to be a game changer? I don't think so, but it will surely have an important influence on ensuring a level playing field, which is not level now, and this is what we've been communicating wherever possible. When it comes to stock levels of distributors, it's much lower than last year, which is attributable to the fact that over the last 2 years, Polish and European distributors have suffered from the negative consequences of overstocking. So they are quite conservative in terms of keeping long positions, greater volumes for long-term periods.

And farmers actually follow the same policy. But we have seen such situations in the past, and they usually involve expectations as the spring time was approaching. And in the spring time, there was a rush on fertilizers. So producers usually communicate the need. They promote the diversification of purchases. So if a farmer or distributor wants to be reasonable about what they do, then we always recommend sharing the purchases into 2, 3, or perhaps 4 parts rather than postponing everything to the last minute, because then it causes a lot of negative emotions and some price fluctuations.

[Andrzej Dawidowski, executive]

Another question. What is the potential of selling noncore assets such as real property?

[Adam Leszkiewicz, executive]

To answer this question, if we exclude projects such as polymers or Compo, then the potential is between PLN 200 million and PLN 300 million in terms of real properties and perhaps some company assets.

[Andrzej Dawidowski, executive]

What mid-term EBITDA do you expect in PDH?

[Andrzej Skolmowski, executive]

We consistently avoid forecasts like this, especially if it's in the context of the 2 months effort of negotiations with our partner.

So this is where the Q&A session ends. Is it?

[Andrzej Dawidowski, executive]

Is there a chance for a positive EBITDA in the quarters to come?

[Andrzej Skolmowski, executive]

We answered that question already.

[Andrzej Dawidowski, executive]

The letter of intent on potential sales of assets to Orlen. Is it about this? Or is it about some other form of cooperation?

[Adam Leszkiewicz, executive]

In the letter of intent, we mentioned 3 areas that we will analyze. The first one is about polymers, and in this regard, we want to look at possible synergies and which solution could be beneficial for both parties. Also, we want to analyze possible cooperation in Plastics, that's PA and caprolactam. Orlen has 2 materials. We need benzene for Pulawy and phenol for Tarnów. So all this commercial cooperation is quite vivid, quite lively, and this is yet another natural area that we should intensify.

Another area is our port in Gdansk, in phosphoric Gdansk. This port is an asset in itself, but when we design all kinds of logistic solutions, terminals, storage facilities that can be placed there, because we have quite a lot of space there. So cooperation with players like Orlen can be quite promising and creative in all possible ways such as liquid chemistry, which could be a major portfolio of materials located there. So in those 3 areas, we will analyze possible cooperation without making any predefined expectations. And when you sit down and negotiate for 2 or 3 months, you need to remember that all options are on the table and should be discussed on a working basis, and this is what we're going to do now and some analysis will follow.

[Andrzej Skolmowski, executive]

And the last question about polymers, what do you think about huge cooperation with Hyundai, and when the project will become commercially alive, and when will the projects become integrated?

[Andrzej Dawidowski, executive]

Well, commercial operations started a few months ago. The company produces and sells products in Europe and beyond. When it comes to cooperation with the general contractor, that's Hyundai, we are now negotiating Annex #5, which will be a turnkey completion of the project. As of now, we do not think of any follow-up cooperation with the contractor in terms of other aspects related to Polimery Police project. Judging by the current situation, it's fair to say that our relations with the general contractor are fine, and we believe that the negotiations will end soon.

[Adam Leszkiewicz, executive]

Okay. Thank you very much. Now it's time for informal talks, and let me invite you to investors chat today with Mr. Andrzej Skolmowski. And the link to the chat facility is available in our social media and on our website. Thank you very much.