Grupa Azoty SA

WSE:ATT

Earnings Call Transcript 2020-Q3

[Operator]

[Audio Gap]

Azoty Pulawy at PLN 740 million with EBITDA standing at PLN 100 million and net profit PLN 20 million (sic) [ PLN 29 million ]. Grupa Azoty Police reported revenue at PLN 449 million (sic) [ PLN 549 million ] with EBITDA at PLN 360 million (sic) [ PLN 36 million ] and net result at PLN 17 million. And Grupa Azoty Kedzierzyn reported revenue at PLN 379 million, PLN 32 million in EBITDA and net result at PLN 9 million (sic) [ PLN 4 million ]. Compo Expert, PLN 340 million (sic) [ PLN 330 million ] in revenue, PLN 31 million in EBITDA and PLN 9 million in net profit. Grupa Azoty at PLN 380 million (sic) [ PLN 383 million ], EBITDA at PLN 38 million and at net profit negative at -- net profit was negative due to low revenue from sales combined with high exchange rate of euro versus PLN, which resulted in higher recognition of high credit facilities in our results.

Among major developments and highlights in the third quarter, we reported changes in the composition of the Management Board, Grupa Azoty Management Board. Mr. Wojciech Wardacki, President of the Management Board, was removed from office on October 2020. He was responsible for HR, legal department, compliance and security. This was taken over by Mr. Mariusz Grab, who was appointed as the current President of the Management Board.

Mr. Pawel Lapinski was also removed from office. He was responsible for finance, Investor Relations as well as analysis and production of the market share. These areas were taken over by myself.

The new President of the Management Board was appointed, Mr. Hinc, Mr. Tomasz Hinc. He will be -- he will take over the office with effect from the 1st of December of 2020. The other member of the Management Board was not announced yet. The selection is in progress.

The measures taken in response to the pandemic included the following development. Grupa Azoty started the construction of a temporary hospital in the former university hospital in [ Krakow ]. This hospital will accommodate 114 beds for COVID-19 patients. Other measures taken in response to pandemic were the donations of PLN 1 billion earmarked for combating the pandemic by hospitals and other services involved in the content -- in the combating of the pandemic. We also lent vehicles used to transport samples to the authorities. We also provided certain logistics facilities, and we have taken other measures in order to provide relief to the services combating this pandemic.

In terms of distinctions and awards, we were recognized for the third time for The Best Annual Report. And we also were recognized for our corporate government statement.

Moving on to the flagship projects of the group, that is Polimery Police project. On October 7, 2020, we entered into an intercreditor agreement. The creditors are listed on Slide #10, and we provided security to PKO acting as the guarantor.

On October 16 (sic) [ November 16 ], the Extraordinary General Meeting of Grupa Azoty Polyolefins decided to increase share capital of the company by PLN 332 million (sic) [ PLN 922 million ] and to issue new shares of the company. And according to the agreements, investment agreements signed, these shares were taken over by Hyundai, KIND and Grupa Lotos. As a result of the payments received and after registration of the increased capital, Grupa Azoty Polyolefins will hold 34.41% of shares; Grupa Azoty of Tarnów will hold 30.2% of shares; and Grupa Lotos will hold 17.3% of shares; Hyundai, 16%; KIND will take over 1.14% of shares. The percentage shareholding corresponds to the share of both share capital and also the share in voting rights of Grupa Azoty Polyolefins general meeting.

The Polimery Police project is discussed -- the progress of the project is discussed on the following slide. What's worth pointing out here is the fact that on October 9, the company signed an annex for the EPC contract performance, which includes both the increase of the fee by EUR 33 million and also an extension of the project time line by 3 additional months. This was due to the legal changes on the back of the pandemic, which affected the time line of the project. And what is important is the fact that the annex exhausts all stated claims of the contractor related to any COVID-19 events which could affect the contract performance by the -- by October 31, 2020. And the parties agreed that any COVID-19-related events which could occur by October 31 cannot be considered force majeure under the EPC contracts and under the binding -- COVID-binding laws.

The progress of the EPC contract performance, as you can see on Slide #11. 22 building permits have been issued in order to complete the Polimery Police project. Foundations for propane and ethylene tanks have been laid, and installation, welding of the external tank shells have been commenced. The pipe rack -- steel pipe rack installation was completed. And all the sub projects include the assembly of steel structures and underground pipelines, including the remaining sections of pipe racks, these works are in progress. The current progress is at 31%, and this is in line with...

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And as we've mentioned, annex #1 was signed. On YouTube, on our YouTube channel includes a feature of this project, where you can see the exact figures and also the progress of works for the Polimery Police project.

Moving on to the consolidated results of the Grupa Azoty Group. The effect of the pandemic on the chemical sector or segment. As you can see, there was no major effect in terms of demand in terms of fertilizers. However, we must point out that in the third quarter of each year is the harvest season. And the first half of this period is always all-time low.

In terms of demand for polyamides, we reported high prices of raw materials, and the demand was affected versus the demand reported last year. The demand for end users started to bounce back, especially in terms of our automotive clients.

In terms of the effect of natural gas, it had a short-term impact on our operations. I will develop on it later on, showing you certain figures in terms of the effects of natural gas prices.

In terms of melamine, despite certain signs of demand improvement, most market participants still remained concerned about the prospects of the market. In the third quarter, we saw relatively high demand from the furniture and flooring segment, especially in terms of DIY products as well as demand from the paint and garden products. At the end of the quarter, we saw rising demand from the European and Asian, South American clients, for melamine.

In terms of OXO alcohols, the demand for OXO products grew steadily. However, it still remained lower than normal for this time of the year.

In terms of titanium white, it did not have -- the COVID pandemic did not have any material effect on the sales volumes. And I do believe that my colleagues will dwell on it later on.

In terms of the results of the capital group in the third quarter, our bottom lines were higher than the assumptions for 2020. This was compounded -- this was -- offset by slightly lower profits.

Sales volumes to date were assumed at PLN 7.9 billion, PLN 7.79 billion was the actuals. The net profit to date was at PLN 263 million, going down by 37%. This was due to lower prices of raw materials, which affected the prices of our sales of products. Moving on, you can see the EBITDA figures going down by 17% year-on-year. However, we should point out that it's a very difficult market environment and also the performance of our competitors make us optimistic still, because this figure shows stability and diversification of our sources of revenues.

We received a number of questions on compensation received. I will discuss this issue later on in terms of both allocations and the figures or cofinancing and compensation received.

On Slide #16, you can see EBITDA bridge and the negative effect due to lower prices, going down by PLN 876 million, as you can see on the graph. This was offset largely to a decrease in feedstock prices going up by -- this positive effect was at PLN 549 million. And also, CO2 allowances had a positive effect of PLN 110 million year-on-year. In the third quarter, Grupa Azoty reported PLN 25 million. Under compensation received, under the act on compensation for energy-intensive sectors, Grupa Azoty received PLN 9 million; [indiscernible] PLN 2 million; [ condition ] PLN 4 million and [indiscernible] [ PLN 7 million ].

The compensations for 2019 were recognized under other revenue, other operating income and had an impact on the current costs, especially in terms of energy prices.

By segment, we can break it down with energy segment at 45%. Also, the financial support of 55 -- PLN 59 million has a positive impact on our results.

The next slide presents the assistance that we received under the Shield 4.0 Act. We received, as I said before, we received PLN 59 million, in general. And both the parent and some of the subsidiaries took steps to avail themselves of the financial [indiscernible] or mechanisms available under the act. And the total amount to date is 50 -- PLN 65 million received largely in the third quarter as the capital group applied for the assistance in July and received financial support in August, September and October under the Shield 4.0 Act.

The next slide presents energy feedstocks. We expect to see downward trends in terms of electricity prices. The companies of Grupa Azoty Group secured the necessary amounts of electricity under the contracts for multi-annual agreements. And all those reliefs are received as planned. And the same applies for coal, hard coal. And in terms of CO2 allowances, Grupa Azoty companies canceled their volume base rights and have secured CO2 allowances for the next year.

What affects our business and our operations the most are natural gas prices, and we have observed a significant oversupply and also lower gas prices. This affected an additional -- caused additional price pressures for us.

Our performance by segment is as follows. In the third quarter of 2020, we reported -- throughout all our operating segments, we reported lower consolidated revenue versus the previous corresponding period year-on-year. However, this is yet another quarter in which we saw a positive effect of diversification on our performance. Agro Fertilizers accounted for 46% or 61% (sic) [ 60% ] in general for the 9 months of the year. So slightly higher year-on-year, going up by 1 percentage point mainly due to the performance of Compo Expert at 14% in the Fertilizers segment. In terms of Plastics, the share went down slightly to 11% (sic) [ 10% ].

The next slide presents our performance by segment, starting with the Fertilizer segment, where the revenue stood at PLN 1.441 billion versus PLN 1.522 billion a year before. The EBITDA margin stood at 14%, staying flat versus the previous year. All in all, the Fertilizer segment accounted for nearly 14% of our EBITDA. This was slightly lower compared to the previous year. But we managed to maintain high margins, especially on the back of extremely low prices of natural gas and other feedstocks. And the fertilizer segment is the most resilient segment to the effect of the pandemic if we compared the performance of the segment year-on-year. Due to the competitive pressures, the shares of both compound fertilizers and nitrogen-based fertilizers, their share went down.

On the other hand, the share of specialist fertilizers went up. This was a result of our marketing strategy and lower exchange rates of PLN versus euro and U.S. dollars. Our volumes went up for nitrogen fertilizers and ammonia. They went down for compound fertilizers and went up again for specialty fertilizers in terms of the tonnage and the volume share.

The demand was expected to stay moderate going forward, downward trend. In October, we had a positive effect of the fertilizer season. However, the subsequent drop in demand was reported as producers, agricultural producers put on hold the purchases. And the demand is expected to remain low.

We'll also wait for the weather conditions. This is obviously important for the demand figures. And the same goes for the general economic data and the situation in this segment. ARiMR, the Agency for Restructuring and Modernization of Agriculture, laid out compensation of financing or grants. This should have a positive effect on the demand. And the estimates for crop production according to the Statistics Poland suggests that the figures should be 15% higher year-on-year.

However, in the context of the entire European Union, we have a less optimistic situation. We are expecting a downward trend of 5%. We are also expecting higher prices of crop products. This should partially offset the losses generated throughout the past 2 years in Poland due to drought conditions. The amount of grants and financing received by agricultural producers was record high at PLN 15.5 billion, going up by PLN 303 million year-on-year. This is due to the favorable exchange rate of PLN versus other currencies. 70% of grants have already been paid out in October 2020.

Based on press reports reported by or published by major players, we can expect that the prices of nitrogen-based fertilizers will stay flat or increase slightly. This obviously will be impacted by the pricing policy of our major competitors and also by the effect of the COVID-19 pandemic, which is difficult to estimate and foresee.

We will see certain limitations in terms of the urea applications in Poland on the back of currently introduced laws, under which, the so-called pure urea is forbidden to be applied. The urea will be modified accordingly in order to be applied. This was adopted -- this law was adopted in line with the green law in the European Union's policy as to reduce the emissions of greenhouse gases into the atmosphere. And obviously, Grupa Azoty has revised its own policies accordingly.

In terms of the Chemicals segment, the revenue reported for the third quarter was at PLN 612 million year-end, going up by 7%. EBITDA margin stay at going down to 0 by 6 percentage points. Very challenging market conditions that we have discussed affected our product prices, which went down year-on-year for all our product groups in the Chemicals segment, especially for OXO alcohols and melamine going down by 16% and 14%, correspondingly.

On the other hand, certain products, prices went up. It was due to rising demand after a very weak second quarter. As of July, we reported higher demand for products -- for those products, which at the beginning of the quarter were affected are the concerns of the effect of the pandemic. All in all, the third quarter saw higher demand for OXO alcohols.

In terms of alcohol, the highest demand was reported from the packaging segment, the clients and also for the paint and lacquers producers. In terms of plasticizers, the demand went up, especially from the demand from the automotive segment and also the producers of floor panels.

Melamine, on the other hand, has been affected. The melamine market has been affected throughout Europe. And the European prices, contract-based prices went down on average by 3.9% year -- quarter-on-quarter. And year-on-year, melamine prices went down by 10.3%.

Higher demand from the construction business or from the DIY business and also from the paint and the garden producers, the moment went up. However, we must still remember that the uncertainty due to the persisting pandemic are still there.

The demand, the supply of melamine went up, especially from producers from Trinidad and Tobago and Netherlands. Still the demand was weak. In Asia, prices moved up, and the production volumes remained low due to low demand and also due to unfavorable margins and shutdowns. The demand for melamine is affected by the spread of the pandemic, and the stocks are kept low.

In terms of NOXy, European suppliers of AdBlue reported that sales levels are comparable with the previous years. And the consumption of AdBlue in Europe for 2020 is expected to stand at 3.77 million liters, going down by 7.7% year-on-year.

In terms of the Plastics segment, the third quarter of the year did not see a positive rebound, unfortunately, with revenues from sales standing at PLN 245 million, going down by 28%. And the EBITDA margin went down by 5 percentage points, going down to minus 3%.

As a result, our performance in the 9 months of the year stood at PLN 837 million, going down by 27% (sic) [ 26% ], with EBITDA margin going down to minus 2%. The prices of specialty polyamide continued to fall in the quarter, going down by 20% year-on-year. And the situation of the segment remains extremely difficult, especially that the pandemic affected -- the effect of the pandemic was particularly severe on the industry's purchasing the segment's products. We expect the market to return to equilibrium after the pandemic.

And in terms of product categories, caprolactam went -- the volumes of caprolactam went down, whereas modified polyamide stayed rather flat. In terms of the demand, it continues to rise steadily yet slowly. We must remember that the bottom line was -- or the baseline demand was very low compared to pre-pandemic state and year-on-year.

The noticeable higher interest of September was due to the clients -- was due to demand from the clients from the automotive business, rebounding back from the low demand in the summer period. In the periods to come, the situation will still depend on the demand and supply and also on the prices of petrochemical feedstocks, which will continue to affect the prices of our products.

In the short term, the outlook is positive, however still cautious due to the spread of the pandemic and also certain regulations limiting the demand. And the consumers will remain cautious. against the backlog of the ever-changing situation. The situation is extremely dynamic. We can only expect to have certain expectations on a very short-term basis.

In terms of Grupa Azoty Group finances, you can see on next slide. The secured corporate financing is broken down into individual sources of our financing. In addition to presented -- the data presented on screen, the company also has -- as at September 30, 2020, the company also -- the group also had additional funds on its disposal.

In terms of our CapEx and investments, our CapEx projects are progressing as planned without an interruption as you can see on the next slide. One question was the difference, what is the difference between our CapEx outlays and our cash flow, consolidated cash flow. The different comes -- the difference comes from higher expenditures, which includes some advanced payments, which are not presented on the slide and the figures for CapEx.

Moving on to the next slide and to Grupa Azoty Pulawy Group. Consolidated revenue of Grupa Azoty Pulawy for the 9 months of the year stood at [ PLN 2.237 billion ], going down year-on-year. For the 9 months of 2019, going down by 13.9%. Consolidated revenue in the third quarter stood at PLN 740 million, going down by PLN 36 million or by 6% versus the third quarter of the previous year.

Consolidated revenue or consolidated net profit for the 9 months stood at PLN 168 million, going down by PLN 76 million versus the 9 months of 2019, going down by 31.1%. Whereas for the third quarter, consolidated net profit of Grupa Azoty Pulawy stood at PLN 28.8 million, going down versus the third quarter of the previous year by 42.2%.

EBITDA bridge and consolidated EBITDA of the Grupa Azoty Pulawy Group stood at PLN 387 million, going down versus the first 9 months of the previous year by 20%. The consolidated profits of Grupa Azoty went down by PLN 378 million versus previous year, declining by 13.9%, whereas the costs for the 9 months went down in terms of selling costs by [ PLN 269 million ], mainly on the back of lower benzene prices and also natural gas prices.

We reported higher sales in terms of overhead and general administrative expenses and also higher other costs, which included settlement of the compensations received for energy-intensive sectors for 2019 as well as write-downs on our assets. Yes, and also in terms of lower depreciation and amortization.

On the same slide, you can see both positive and negative effects of our main feedstocks, especially in terms of lower natural gas prices, compensation for energy-intensive industry, and I already mentioned is higher price electricity and also the effect of the enterprises. In terms of negative effects, obviously, we had a decline in revenue, minus PLN 379 million to date and also higher volumes, down by PLN 38 million.

The next slide presents a breakdown into segments. As at the end of the third quarter of the year, we changed our segment reporting. This had an impact on the presented figures. And the Chemicals segment was renamed or reclassified into Plastics segment. And some of the assets of the segment were also appropriated or allocated to the Agro segment in order to ensure comparability of data versus 2019. In terms of Agro segment, EBITDA went down by 14% on the back of lower prices of our products and also declining revenues combined with higher volumes.

Moving on to our investments. We present our strategic CapEx projects. At Grupa Azoty Pulawy, this obviously includes construction of our power units with a budget of PLN 1.2 billion, and the progress in terms of financing at 16%. The next project is the upgrade of the nitrogen -- or nitric acid production unit and also construction of new installations for the production of nitric acid. That's PLN 695 million with the involvement in financing of 49%. The production unit for granulated fertilizer based on ammonium nitrate. And last but not least, modernization of the steam [ boiler ] at PLN 93 million. All in all, the progress of our investments is as planned without any major effect of the COVID-19 pandemic.

The key events or the highlights of the third quarter of 2020 included a decline in production of melamine, caprolactam and also a decline in sales of sulfuric assets. On the other hand, we received funding from the employee -- for the guaranteed employee benefits fund in order to -- in order not to lose any jobs, and we do not plan to release any of our employees.

We are also delivering on our expansive investment plan. CapEx is at PLN 257.7 million, going up by PLN 146.6 million versus the second quarter of the year. We also signed cofinancing agreements under the operation program, intelligence development. And the projects included slow-release fertilizers, environmental-friendly slow-release fertilizers and also the new technology for the production of adipic acid through oxidation of cyclohexanone. This project's value is at PLN 1.7 million. And also, additional funding for [indiscernible] hospitals and engaged in the combating of COVID-19 pandemic. We are talking about the additional PLN 200 million out of the entire amount of PLN 1 billion earmarked by the group, in general, as a whole, to combat the effect of the pandemic.

I will now give the floor over to Mr. Mariusz Kadziolka, Vice President of the Management Board of Grupa Azoty Police, who will discuss the performance of Police.

[Mariusz Kadziolka, executive]

Thank you very much. And I would like to welcome all of you, all the shareholders and everybody who is watching and listening to us live.

The third quarter of 2020 at Grupa Azoty Police Group is when we reported higher figures year-on-year. Our consolidated EBITDA stood at PLN 36 million, going up by PLN 14 million. And our net profit of the entire capital group stood at PLN 17 million, going up year-on-year.

And the key developments that affected our higher performance were mainly lower prices of natural gas and also potassium chloride going down by 33%. In the third quarter of the year, we reported higher sales of nitrogen products. All in all, we had lower selling prices or lower prices of our feedstocks combined with higher sales volumes and price of nitrogen products.

Our EBITDA for 9 months of the year stood at a level that was comparable to the third quarter 2019 at PLN 135 million versus PLN 138 million year-on-year. In both -- in the second and the third quarter of the year, our EBITDA level was up year-on-year. Only -- the only decline was reported in the first quarter of the year.

The third quarter also saw higher results of our financing operations compared to the previous corresponding period in 2019. Our net profit was higher not only in the third quarter of the year, PLN 17 million versus PLN 7 million, but also for the 9 months of the year at [ PLN 37 million ] versus [ PLN 33 million ] in the previous year. Our structure of sales, as you can see, remains unchanged with 82% of our revenues generated by fertilizers and 15% by pigments.

Moving on to the next slide, where we present EBITDA bridge. In reference to the previous statement by my colleague, we reported EBITDA at PLN 36 million despite lower prices of all the products across our product slate. This was generated mainly by low prices of our feedstocks, especially natural gas and also potassium chloride and also higher volumes.

For the 9 months of the year, our EBITDA stood at PLN 135 million versus PLN 138 million last year. This was a slight decline for the 9 months of the year mainly due to lower prices of natural gas and also lower prices of all our product groups, higher volumes of nitrogen-based fertilizers and also lower sales of our titanium white products and also compound fertilizers as -- and also higher cost of CO2 emission allowances.

Moving on to the next slide, you can see the breakdown into segments, Fertilizers and Pigments. In terms of Fertilizers, the results we generated in the third quarter of the year was comparable in terms of revenue to the previous year at PLN 433 million (sic) [ PLN 443 million ] versus PLN 447 million last year. At the same time, EBITDA went up to PLN 27 million from PLN 7 million in the third quarter last year.

This was affected by 2 opposing trends, that is lower product prices than a year before. However, this was offset by higher volumes of sales of our nitrogen-based products.

Our performance for the 9 months of the year in the Fertilizers segment stood at PLN 92 million, going down from PLN 104 million. And the EBITDA margin stood at 6%, going down by 1 percentage point from -- versus last year.

The main drivers of this trend reported for the 9 months of the year is -- are mainly lower -- low product prices, offset by low prices of natural gas and also higher volumes of nitrogen-based fertilizers, as I said before. The key factors

[Technical Difficulty] We are sorry for the technical difficulties that we have just experienced. It's the beauty of remote interpreting sometimes.

Moving -- going back to Grupa Azoty Police and the distinctions that we received or award for the involvement of our combating against the pandemic. Some of our employees will also receive certain distinctions at the national level -- at the labor inspector.

Wrapping up the third quarter of the year. We have not reported any negative effect of the COVID-19 pandemic on the sales of our fertilizer products in terms of both our compound fertilizers and nitrogen-based product. And the Pigment segment reported higher sales volumes of titanium white versus the previous corresponding period of 2019.

We reported no absenteeism of our employees due to the pandemic, which would -- could interrupt our operations, and we also had no interruptions of our operations in general due to the pandemic.

Thank you very much for this presentation. Our time is almost up. We tried to answer all your questions during the presentation, all the questions that we received beforehand. I do encourage you to send any additional questions and queries that you might have in relation to what we have just presented. We will respond to those questions shortly and as soon as possible.

Thank you very much for your attention and [indiscernible] of our performance. And thank you for your participation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]