Grupa Azoty SA

WSE:ATT

Earnings Call Transcript 2021-Q3

[Operator]

Good morning. It's my pleasure to welcome you to the conference call devoted to the discussion of the Grupa Azoty Group of Companies in the third quarter of 2021. Today's speakers include Mr. Marek Wadowski, Vice President of the Management Board of Grupa Azoty S.A. who will discuss in firsthand about the segments result and consolidated results. He will be joined live by Mr. Jacek Janiszek, Vice President of Management Board of Grupa Azoty Pulawy; Mr. Michal Siewierski, Vice President of Management Board of Grupa Azoty Police S.A.; and Mr. Marek Czyz, Vice President of the Management Board of Grupa Azoty Polyolefins will all discuss the current state of affairs at Grupa Azoty. Also here Grzegorz Kuberski, Corporate Control and Department Director of Grupa Azoty S.A.

I'll now give the floor over to Mr. Marek Wadowski.

[Marek Wadowski, executive]

Good morning, ladies and gentlemen, we'd like to start with the current situation, with state of affairs versus summary of the events of the third quarter 2021. The main highlight of the quarter took place actually after the end of the quarter was the publication of the new Grupa Azoty strategy for 2021-2030 as we will look at what happened before in the third quarter mainly to see that we already launched certain measures in order to make our green -- our group more green. In order to invest more in the carbonization strategies and measures. All these measures are devoted to transformation of our group in order to put us in line with the ever-changing environment as well as more compliant with the environmental protection.

Moving on to the specific results generated by the group. Our financial results in the nine months of 2021 were quite solid despite the fact that in our macro environment, we saw a major rise in the feedstock prices, especially natural gas, which is one of the main feedstocks used in our production. It's worth mentioning that our comparable EBITDA excluding one-off events in the form of sectoral compensation received in the past year as well as anti-crisis shield funds. This comparable EBITDA was more than the previous year's EBITDA by 32%.

Looking at the quarter results, stand-alone results, we can also see the similar situation in the third quarter alone. Comparable EBITDA was up by 78%. And the result of the third quarter was under major pressure of rises -- increases in the natural gas prices. And those prices in natural -- those increases in natural gas include or concern the third quarter alone basically.

A couple of words about the market and about the reaction of Grupa Azoty to the market and the impact of the macro environment. To understand more what happens in the macro environment, we should discuss the effect on the pandemic -- of the pandemic on the macro environment because we compare our current situation to our previous year's results and market situation. We broke down the impact of the pandemic.

And in the first part, we'll discuss Agro Fertilizers and during 2020, in the pandemic year, we did not see any major impact of the pandemic on the demand in terms of fertilizers in the chemistry -- in the Chemicals segment, we saw a medium effect depending on the project, obviously. But all in all, this effect -- this impact of the pandemic was not a major impact. However, the pandemic stroke us or hit us, especially in the Plastics segment. And we saw a major slowdown last year in terms of demand in plastics.

Moving on to the current macroeconomic and market situation and its impact on Grupa Azoty Group. We present you here the 4 major parameters, which impact our situation and drive our results, especially in terms of natural gas prices, as you can see quite clearly throughout the 9 months of the year, the increase sped-up especially in the third quarter of the year, especially at the end of the quarter. We also saw a major increase in prices in CO2 emission allowances, which translates into an increase of electricity prices as well as a slight devaluation of PLN versus euro exchange rate. It's worth mentioning that at that point, currently, we still see a major increase in gas prices. It's continuing, and we expect that those high prices of natural gas will stay with us and remain on the market for quite some time will obviously depend on the temperature and on the use of gas, especially in the other segment sector and the economy. And we need to take into account of those prices will remain high for at least the winter period.

Moving on to a short summary of our situation in terms of revenue and expenses throughout 9 months of the year. Our feedstock prices of feedstock usage costs rose significantly, not only in terms of natural gas. You can see quite clearly here that prices of a lot of feedstocks went up quite significantly. And what we have now is that all our feedstocks and the prices went up to a lesser -- larger extent. And they have an impact on our situation. You can also see the structure of gas usage. And we use gas mainly in the Fertilizers segment and to a lesser extent, in the Chemicals segment and in the Plastics segment. This also applies to the price of gas and the increases in the price of gas and have a major effect, especially on the Fertilizers segment. At the same time, we saw an increase in revenue, mainly on the back of an increase of the costs and the prices of feedstocks, especially as we said before, natural gas, but also all the other products when prices went up. This was combined with high demand for those products.

In the third quarter alone, the situation is quite similar but we can see quite clearly that in terms of percentages in terms of the usage of feedstocks, this increase was larger, is more significant. And as I said before, the third quarter of 2021 was a pandemic stricken quarter. And obviously, depending on the segments, the increases in the prices of feedstocks had a major impact on our results in terms of revenues and expenses, especially after the end of 2020.

Moving on to the market. In terms of Agro Fertilizers segment, as I said before, we see a major increase in the prices of natural gas and other feedstocks. Likely in terms of the demand, in terms of the situation in crops, distribution is quite solid. However, it's worth pointing out that for obviously most and if not all of the producers of fertilizer, the situation is quite challenging. A lot of producers stopped the production or put it on hold because of the situation in the feedstock market, especially natural gas market. At the same time, imports are not very high, but it's quite simply it is very -- at a very low level. And we can expect that the months to come will not bring any changes, and they remain the same as in the third quarter of the year.

However, we must remember that despite the fact that there has been a major increase in the feedstocks -- feedstock prices and the fertilizers product prices, the wetter weather will be the determining factor and the timing will be a determining factor as well. And we must remember that the month of November is traditionally a period in which the demand for fertilizers is lower and we'll definitely look at market trends, but we do not expect the products of our fertilizers change significantly, mainly due to the trends in terms of the prices of natural gas.

In terms of compound fertilizers, the situation is quite similar. We can clearly see a significant increase in the prices of feedstocks and not only natural gas but other feedstocks as well. So for quite some time, the situation in the Fertilizers segment will remain as it is right now. It is worth pointing to a very high demand, which is due to a post-pandemic rebound in the economy, but also certain logistics constraints between Asia and Europe, which makes it difficult to have access to certain products and also an increase in freight prices and transport prices.

This all translates into a solid situation in terms of the chemicals market, especially in OXO alcohols. In our case because they have a major impact on our performance in the period, but not only OXO alcohols, we're also talking about plasticizers and titanium white here. We can see that the market is quite solid. We can see that situation is quite good, and we keep our fingers crossed, and we count on it that the situation remains as it is. As I said before, we obviously see a clearly high increase of all feedstocks here as well.

In Plastics, we see a solid demand as well. Logistics constraints, again, which have an impact on the market. And from our perspective, a major driver that is variable prices of phenol or benzene and the prospects for that particular segment, Plastics segment will definitely depend on what the producers will do in terms of the automotive segment, especially. And we keep our fingers crossed that this temporary slowdown will come to its end.

Moving on to our performance by segment. Throughout the 9 months of the year, 2021 year-to-date, it is worth focusing on the fact that the segments which contributed most to our solid EBITDA include Plastics and Chemicals, while the Fertilizers segment was under a lot of pressure in terms of natural gas prices. Another major driver did not only include -- was not only the increase in the prices alone, but it's dynamics, especially in the third quarter, which translated into a major change in the structure of our EBITDA performance, with the contribution of Fertilizers going down while the contribution of other segments went up. This all shows that diversification is very important and due to our diversified activities, we -- our performance was higher year-on-year.

In the third quarter alone, we see an intensification of all the phenomena and all the trends that I have discussed before, that is more or higher, better performance in Chemicals, in Plastics and lower results in terms of Fertilizers a major change in the EBITDA structure. In the third quarter, we see no Fertilizers contribution whatsoever almost, but we expect the situation to change in the fourth quarter of the year because as I said, the third quarter is impacted or has been impacted by a major increase in the prices -- in the price of feedstocks, but the prices of products will only have an impact on our performance in the fourth quarter of the year and in the first quarter of the next year. We can expect, however, that the high prices of natural gas will stay with us for quite some time, depending on the weather conditions, obviously.

Moving on to our major segment that is Agro Fertilizers, as I said before, we see a major increase in the costs of the segment. You can see that costs broken down in terms of technical cost of production in unit-based technical cost of production of fertilizers. This is a major element, especially in terms of the prices of gas was compensated, offset by increasing prices of products. However, as I said, the dynamics of those changes is such that we don't see that positive effect on the prices of products, which could offset the increase in the prices of natural gas in the third quarter yet, we will see that effect in the next quarter, in the fourth quarter of the year. In the third quarter, we can see quite clearly that the trend has intensified, sped-up, which was due to the dynamic I have mentioned before.

Moving on to the Chemicals segment. You can see that our performance went up quite considerably due to high demand for chemicals or the chemicals products, combined with the constraints in terms of logistics, which made us stronger in terms of the -- on the demand side. Obviously, the rising price of feedstocks were a challenge. However, the dynamic of those changes and increases were not that high -- as high as we saw in terms of natural gas for the Fertilizers. And the last -- third quarter of the year was quite solid for our Chemicals segment. You can see a strong demand, good performance. So we count on this trend to remain with us in this particular segment.

Moving on to the Plastics segment. On the one hand, we can see -- we actually see 2 drivers in this particular segment. On the one hand, we can see good, solid economic situation in the market and the demand and obviously, an increase in the price of feedstocks is significant. However, we must remember that also the volume of our sales went up, as you can see on this slide, in terms of polyamide, natural polyamide as well as modified polyamide. This had a positive effect on our performance overall.

In a nutshell, about our financial standing, our financial condition throughout the discussed period was quite solid. At the end of September 2021, our free funding of free financing sources were quite solid and mostly dedicated to our major investment, Polimery Police investments. In terms of the debt-to-EBITDA ratio, it was still solid as well. The maximum level is 3.5x. And our current level at the end of the third quarter was significantly lower.

A couple of words about our investments and CapEx project. Our major CapEx project is obviously the Polimery Police project, which will be discussed in more detail in a second. The second largest investment is the construction of the coal-fired power generation unit at Pulawy. This project's current level is at 50%. So we still had a couple of things to do in terms of that particular investment. And the upgrade of the existing nitric acid production unit as well as construction of new nitric acid production units and neutralization units and the stage of this particular project is at 60%.

We've gone through our CapEx figures and 9 months of the year were at -- were dependent to a major extent on the Polimery -- Police Polimeric project. Those CapEx figures went down in terms of this particular project, which was in line with the schedule -- with the project schedule. It is difficult to compare those finger suspending figures year-on-year or quarter-on-quarter because it all depends on the schedule of the project. As I said, this will be discussed in more detail later on.

In the 9 months of the year, year-to-date, in terms of capital expenditure, we see, on the one hand, a slight decrease in the investment -- in this particular investment and an increase in other investments. This, as I said, is related to the time lines and the promise of work on the construction side. So this is, I believe, is a good point to tell you a little bit more about this particular investment, our flagship investment at the moment, Polimery Police project.

And I'll now give the floor over to Mr. Marek Czyz to discuss some other group.

[Marek Czyz, executive]

Thank you very much for this introduction. Good morning, ladies and gentlemen. As far as Polimery Police is concerned, as my colleague said, the stage of completion is 60%. We are talking about the project work that has been completed already and also the supplies and deliveries, which will be completed in the several months to come. We're pretty close to that point, but also the very process the project process and the permits and the authorizations for the launch of this particular project.

Our budget is at $38 million in terms of CapEx. As my colleagues, as have mentioned, they should not be compared to previous quarters. They are currently at PLN 138 million. Year-to-date, Polimery Police CapEx is almost PLN 3 billion in terms of the key developments and the progress of construction installation work, let me discuss it in more detail. On this third slide, you can see pictures showing you 4 major subprojects for this particular investment PH unit. That is the hydrogenation of propane and offshore gas terminal project, which will make it available for us to receive gas from external and suppliers, the PP Logistics and PP Silos, we see 60 silos already on site as well as the PP unit.

So in terms of the progress of work on this project, those works are in full swing, so to speak, in terms of the installation of both underground and overground pipeline. So we are also installing the major equipment on the construction side. For instance, the module for continuous regeneration of -- for the offshore gas terminal, mainly propane and ethylene banks in terms of those works in the recent time, we completed the outer shell of the roofing and we are also finishing works or progressing with the insight of those times. In terms of the PAH of PP, we are installing reactors for polypropylene as well as extruder -- polypropylene extruder, which will make it possible to produce the granulate of this particular feedstock.

In terms of the major highlights, we are negotiating with the general contractor on the proposal to amend the EPC contract as we informed you in June and July, in the current report, our general contractor proposed certain amendments to the EPC contracts due to, first of all, the pandemic but also certain technical constraints. Irrespective of that fact, I'd like to stress that our cooperation and our partnership is smoothing -- is smooth and is progressing as planned, and the project is progressing as planned. You can see that progress on a daily basis.

The Management Board of Grupa Azoty Polyolefins in accordance with current report, we published our negotiation strategy, and we will sit down with our general contractor to negotiate the EPC contract in terms of the amendments due to the COVID situation and also some technical changes.

Other highlights on the construction site, includes the first authorization to use a certain part of this installation. That is the power network, 120 KV, our network and also other networks on the construction site.

[Marek Wadowski, executive]

Thank you very much for this presentation. A couple of words about the performance of our remaining companies. This is presented in summary in addition to those companies that present the performance on the stock exchange, both Grupa Azoty Kedzierzyn and Compo Expert generated quite solid results, especially in terms -- I'd like to point out that the situation across the group was quite solid and very stable in this period. You can see that in this slide -- on this slide, which presents the group company's results and financial highlights for the third quarter alone. I'll now move over to -- I'll now give the floor over to Mr. Jacek Janiszek from Grupa Azoty Pulawy. Pulawy generated quite a solid result. I'd like to emphasize that the situation of all our companies was quite good in this period. You can see that in this next slide. So moving over to Mr. Jacek Janiszek, Vice President of the Management Board of Grupa Azoty Pulawy.

[Jacek Janiszek, executive]

Ladies and gentlemen, in terms of our performance, it was determined by 4 major drivers, which was mainly driven by abnormally high gas prices. We are sorry for technical problems and interruptions. [Audio Gap]

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