Jastrzebska Spolka Weglowa SA

WSE:JSW

Earnings Call Analysis

Earnings Call Transcript 2023-Q2

[Tomasz Cudny, executive]

Good morning, ladies and gentlemen. I'd like to welcome you. We have good results generated by the company. The company at this similar period, corresponding period, somebody can say that the results are softer. But if we go back to what was happening in the first half of 2022, you'll find the explanation. Well, the market contacts the uncertainty in terms of what was going to happen after the outbreak of war in Ukraine, certain logistics problems. In terms of the transport of coal from Australia because of Climate really did risk the products, our products prices sored. We took advantage of that opportunity. And you could see that reflected in the results we reported for 2022.

The price of coking coal -- coke we had 25% in terms of coking coal and 20 so odd percent in terms of coke, but prices were up that much. And we cannot say today that we have soft results. We have good results we're taking advantage of the situation on the market, thanks to the work done by the Commercial division, even though there has been a little bit of panting amongst the steel industry. We've been in the steel industry, we've been able to sell our flagship products, coking coal and coke.

Before we go on to the presentation of the results, what we're doing as a group. We're looking at the strategy. We're thinking about, of course, our sustainable development. All of this is feeding into our very strong position, even though we do see some turmoil on the marketplace. So we'll take a look at the results. So if we look at coal production, without breaking it down into coking coal and steam coal, our sales CEO. We'll talk about that. So it's down by 1.9%. So this is one day of mining. So in the course of one day of mining, so the directors of our mines and our people are seeing what's happening, and we're going to try to catch up to that as a difference of 1.9%. So for talking about production of 3.3 million tonnes. We have production of coke up by 10% at 853,000 tonnes compared to what we had previously. This shows that the buyers are interested in our products.

If you look at our costs, costs are up by some 16% as a result of a variety of factors. So this is true both in terms of the mining cash cost as well as the cash conversion cost for coke. So we have an increase to PLN 745 per tonne in terms of mining cash cost. This is the result of agreements signed with the social partner, the employment community. So basically, if the management team has agreed to do something we follow through. So this was an agreement signed in February with the representative trade unions. Basically later, this led to certain declarations being made by ourselves. So we have lower sales revenue compared to Q1 of this year. But if we were to reference the previous year were down by some 21%. But I already mentioned the circumstances in place at that time and so the sales revenue was down by 7.2%.

If we look at the average price, versus Q1 2023, we have a slight increase in terms of coal. So it's PLN 1,235 and the price of coke is up by nearly 7%. If you look at EBITDA on a quarter-on-quarter basis, it's down by 30%, coming in at PLN 1.37 billion. But what's the most important to us. This is the net financial result. It's in black. We have nearly PLN 800 million profit. So as a company, it's being managed in this way we can see what we've been able to achieve in the various members of our management team will walk you through their areas of responsibility.

So Edward Pazdziorko and Sebastian Bartos, Robert Ostrowski. So thank you ask for listening to me, and I'll turn over to one of my colleagues.

[Edward Pazdziorko, executive]

So my name is Edward Pazdziorko. So on this slide, I will talk about our operating results at JSW in terms of our core segments. So we have a coal production as well as our coke production. So in terms of coal production, we've extracted in our 4 mines, so we have a 3-section mine. We have the Pniówek Mine, and we have Budryk and then the Knurów-Szczyglowice 2 section mine. So in Q2, before I go into a discussion of the results of the figures, we should point out that we encountered certain factors that can be observed in March of this year and this transferred to Q2 and we see the effects. We had a force measure instance in Knurów-Szczyglowice mine. This is because there was a fire -- and this is something that wasn't foreseeable when we plan production for this year.

We've done an initial estimate. This is going to have an impact of 25,000 tonnes of annual production. So we had to close that longwall. So we had to seal it off. At present, this longwall is being reinstated and we're conducting mining operations. In Q2, we've had to do a little bit more preventive work in Borynia-Zofiówka engine. So as we very well know, we have a large presence of methane, and that means we have to do extensive propylitic or preventive efforts. So if you look at the mining and geological conditions, we have different geological dislocations. We have disruptions in production operations and that means that we have to engage in a number of other mining activities. This is all something that exerts an impact.

So if we look at Q2, our production was higher than 3.3 million tonnes of coal. And if we compare that on a Q-on-Q basis, production was down by slightly less than 2%. What can you see in terms of that production?

You see that we've reduced the amount of steam coal by 100,000. We also see higher quantities of coking coal up by some 38,000 tonnes. And if we compare that in terms of H1 of 2022 and H1 of 2023, we can see the production in the first half of this year was above 6.7 million tonnes. It was down by 6.5% over last year. And this was primarily related to the number of longwalls, active longwalls. And of course, this also has an impact on the quantity or percentage of steam coal in the overall volume or the coking coal. So in Q2, we had 23 active longwalls on average. So we are up by 13.8%. If you look at the number of longwalls in Q2 versus Q1. So we had certain longwalls that were just getting started up where we were just commissioning the production, starting the production.

If we look at the comparison of H1 and H2 -- sorry, H1 of each of 2022 and 2023, we had more longwalls and active longwalls in the first half of 2022 than the first half of 2023. If we look at the other work, we've been doing, which is corridor works. This tells us how much work was done by the various mines and the companies. So we did more than 18 kilometers precisely 18,032 running meters of corridor works. So this is preparatory work. So we have external companies working for us, and we're doing that with in-house resources. So we did fewer quarter works. This was down by 13.4% compared to Q1 of this year. So in some of the parcels, we had to do more preventive work because of methane risk, as I mentioned. And the same is true in terms of -- well, methane, we have the biggest methane risk here as JSW.

We also had some geological disruptions where we went, we had to use, for example, explosives as opposed to using a sheer longwall shear machine. And so basically, this was a result of our reconnaissance on the longwalls. So if we look at the percentage or the ratio of work done that was in excess of [5.4]. So we know that longwalls have a lifetime, so we have our own longwalls as well as longwalls run by external companies. And so if we make a comparison of the first half of this year, with the first half of last year, we can see that we've increased the amount of running meters of quarter works by 8.6%. So that's an additional 3 kilometers, so we did more in the first half of this year than we did last year. We also saw a major increase amongst external companies. So they did nearly 6 kilometers as external companies. And we did some 33 kilometers as with our in-house resources. So we have a 5.8% ratio in terms of the quantity of corridor work is being done.

So what was important here, and this is something that we continue to scrutinize actively in certain situations, we're creating a new pit for each longwall. In some cases, we try to use the same mining pits a second time around. So in 2023, we have basically 2 kilometers of mining pits that we want to use, again, instead of tunneling new mining pits because we can use them multiple times.

If we look at coke production in turn, coke production in our group was conducted in 3 coking plants, Przyjazn, Jadwiga and Radlin. The biggest production is in Przyjazn, then Radlin, followed by Jadwiga. So in Q2 of '23, as the CEO mentioned, we had production in excess of 853,000 tonnes. It was up over Q1 by 10.5%. If we look at our production capacity at Jadwiga, saw 90% capacity utilization and 94% in the other coking plants.

If we compare the first half of '23 to the first half of 2022, we can say production was in excess of 1.6 million tonnes, but it was down by 7.6% versus the previous year. We have 2 major topics in terms of blast furnace coke, 73% is basically blast furnace coke and then the rest is industrial coke. So here, I have presented to you coke production and coal production in our results in this area in the first half of the year. So thank you very much for your attention.

Now in terms of market environment, I'd like to ask Sebastian Bartos to tell us what happened in Q2 and the first half of the year as the head of the sales department.

[Sebastian Bartos, executive]

Good morning. As CEO mentioned at the get-go, we've completed 2022. We don't need to comment on it. It was an extraordinary year. And any type of ratios, analysis compared to 2022. We will always see downward movement compared to last year. So proportions are going to be out of whack because the year was not a ordinary year for many reasons. And we've given explanations of that multiple times. We have had great market conditions. We see stability now. And so following an extraordinary year, we can see many factors have stabilized. If we look at costs in commodity companies and so the market for a certain period of time, was able to accept higher costs, so it's not always possible to transpose those costs and drilling down to the details in the comparison of Q2 to Q1 of this year. So if we look at those 2 quarters, what's happened in the market environment as JSW in terms of the steel markets, the coking coal market and the coke market.

So if you look at the nature of ratios, first starting with steel production. It was up by 5.5% at the global level. But in the EU, it was more or less flat at 0.3%. So this is marginal growth. And if we look at the dry figures, indicators, this is what things look like, but we have to drill down and have to take a look at what's happening over the longer run. What that means for the global scale production market for companies like ours. And if you compare it to the previous year. So if you look I'm not talking about prices, but I'm thinking about the level of production, we can compare production levels between the first half of last year and first half of this year. So we had 459 million tonnes of steel production, which is down by 1% from last year.

So that means outside of Europe, the rest of the world has good market conditions. The trends are positive, continents and countries like Asia and India are clearly the driving force behind the steel industry, but the 33 million tonnes of steel produced in the EU in Q2, which is more or less the same level as in Q1, but we should be aware that in comparison with last year, if we look at the 66 million tonnes of steel produced in the EU, this is 11% lower than what we had last year. So you can see the disconnect between what's happening in the European Union in terms of steel production.

So it's a softer market than what we see across the globe. So if we look at steel prices on the European market, which is the natural market where we operate at JSW. So if you look at HRC, it's down by 2.7% to EUR 764 per tonne. And if we look at the rods, but the difference is roughly 10%. So it's fallen so major infrastructure projects, construction projects. If we look at the macroeconomic indicators, what's happening with interest rates, inflation, well, this has a clear impact on investment decisions by major global players. And that means that steel and to see a bigger decline than, for example, automotive business.

So the automotive industry is a leading industry in Europe. And even if we look at 2021 and 2020, when there were certain difficulties or perturbations in terms of the delivery of products. Well, this was a continuous process in terms of sales. And so continuity was insured, but we see the impact through steel prices. If we look at Q1 and Q2, we can see that things were relatively flat or stable.

If we look at coking coal spot prices in Q1 and Q2, we have a big decline, roughly $100 down. So from $344 to $243. So market is volatile. And if we look at semi-soft, we had a similar decline of roughly 31%. So the price has moved down from $268 to $182, so the proportions are more or less the same.

In the past, we've seen a disconnect during after the outbreak of war, there was a shortage, but now things have more or less stabilized. And that means the market has come down from that level, which had never been seen before, like $560 per tonne. That was the level we saw last year. And then we had 300-some-odd dollars or euro per tonne at the beginning of this year, January and February. So we can say that the market is stabilizing around $250, and this is a level much lower than last year, but this is still a satisfactory level for a producer like JSW. So then if we look at coke prices, we had stability on the European market. It was a decline of near 3%. So if you look at the Blast furnace coke prices around EU price, it's around $443 and then we have a big decline on the Chinese market, which is down by 21.5%, this shows how important diversification is to JSW.

So if you look at the Chinese coke and the price for coal at the same time, $242. You can see that the relationships are -- there's a disconnect between those prices. So you can look at the production costs and then, of course, the revenue. So of course, we'll have the bulk of the revenue in the coal segment because the coking segment has a reduced level of profitability. And when we look at spot markets and exports to this overseas markets that should improve things and we'll make good negotiations to keep costs under control. We're talking about this with our commercial partners in terms of oversupply.

If I remember, precisely. We generated profit of roughly PLN 1 billion in coke. We can say this year, we should probably generate our profit, not from Coke, but mostly from coking coal and so we have good relationships here. Another thing in terms of the decline of coal prices. This will be on the next slide, something to look at and discuss the price declines we see quarter-on-quarter. Doesn't reflect what we have agreed with our counterparties that are totally different those relations and agreements. So we have a LionSteel method.

So in Q2, we have prices from March, April and May incorporated. And so if we look at a 5-month horizon, we would see a totally different results in terms of the dry figures as opposed to what we see otherwise. So if we can go on to the next slide, I'll start with the slide at the bottom. In terms of what I mentioned about the flattening of prices, we don't have extremely high price levels with sharp declines. In the near term, we can see that we have a peak of around $300-and-some-odd -- that's more or less in the middle of this period. We're talking about the graph on the bottom left. So the highest prices were incorporated in JSW prices, and we can't see this decline in JSW prices. So we don't see that decline if we look at the quarterly average.

And coming back to the bar graphs where I should have started, let's say. So if you look at the values generated by JSW in these market conditions, we have an increase, and we have a much higher utilization of the situation in terms of international prices. So our coal grades are usually discounted to the top quality grades because of a variety of factors, including quality and the geographic brands. So the percentage of capacity utilization is linked to the fact that we had some production programs in 2022. We've had 2 catastrophes. We've had basically the force majeure. And so we had lower volumes from Knurów-Szczyglowice mines.

So we reached a consensus with our customers and so we were selling those quantities at 2022 prices. And so basically, this influenced our price levels, but in Q2. We had basically arrangements from this period, and this was done at the current spot price without those type of burdens. So utilizing this ratio plus what I also said in terms of the prices themselves, we were able to increase our prices as opposed to reducing our prices, which would have been the direct conclusion from making a comparison based on the publicized figures, published figures. Well, this is something that's quite beneficial to us. So if you look at our coal prices versus prices of last furnace coke in EU, -- so we're at 92%, and we commanded a price of $407 as opposed to $362 and so we see a disruption or a lot of volatility because there's a disconnect. And this is something that's been visible over the last 2 years.

Coke was the driver of revenue and profit, where it's now coking coal. Some of the volumes we've been able to catch up on in terms of our sales in Q2, and I'll talk about that in just a moment. And that means we were able to generate better prices and that has an impact on our revenue. And you can see that in coal because, of course, we could have used more of the coke in our own coking plants. So if we look at steam coal price, the price we commanded of PLN 725. This is roughly 101% of the price we had in PSCMI. So we're not the biggest player. We're basically a second-tier supplier when it comes to steam coal.

Why do we have such differences versus previous quarter. So there is a total lack or shortage of steam coal on the domestic market in 2022. And if you think about the mine catastrophes, the shortage of type 35 coal and the production capacity we had, we responded quickly because we were able to catch up by increasing production in the northern mines to sell more on the steam coal market in order to sell to the commercial power sector. And that means we had some ratios of even 117% versus what was happening on the domestic market. But in Q2, we can draw one conclusion. The company is discharging its responsibilities under contracts with power plants.

Here, we're talking about the results in Q2 as well as the year-to-date results in the first half of the year. So we haven't renegotiated the prices for steam coal with any of our partners, and that's why we have 101% ratio. And so I think this commentary is probably sufficient to understand what we're talking about. Now we have the sales of coal produced in the group. This depends on how much we produce, and it depends on our commercial contracts. And so we have sales of coal to external customers and to internal customers. Internal customers are integrated coking plants.

And so I would put them together because this tells us what's happened in the group. So if we look at the global results, our sales of coal to external customers are down by some 20%. This decline of 20% is generated primarily by steam coal. So this is a decline from 726,000 tonnes to 489,000 tonnes. This is a result of what's happened on the market. So we had a lot of electricity from renewable energy sources in the summer period. And so coal-fired plants were used to a lesser extent. And we have the oversupply of coal in Poland. And so this is a natural decline, so commercial power sectors buying less coal. So this is a decline of roughly 20% for steam coal.

But if we look at our flagship products, our core product, of coking coal, we can see a decline from 1,770 to 1,500. This is a result of the production volumes we actually achieved and this is something that's offset immediately by selling coal to our in-house customers to our own coking plants, where we have an increase of sales by roughly 10%. So we can say that some of those external sales were shifted to internal customers. So we weren't able to operate the Przyjazn plant at 100% because of an exposure that occurred there. Well, this topic has been solved and we can basically produce at 100% of our capacity.

If you look at the sales of coke, we've been able to sell them and use that for internal purposes. And so we've made arrangements internally earlier, and this is a way of offsetting. So you have to look at those 2 graphs together. So if you look at the revenues on sales of coal to external customers, it's down by roughly 18% comparing Q1 2023 to Q2 2023. And also if you look at the first half of these 2 years, 2022 and 2023, the decline is roughly 17%. This is a result of lower tonnages and the natural stabilization on the marketplace at lower price levels. So I don't think I have to quote or mention anything more of the values are known here. Then if we look at the average selling price of coal to external customers, looking at coking coal. And if we look at the gray graph, so we have a 1.1% increase in the average selling price, even the overall market trends were downwards and were down by a little less than 3% in steam coal. This is a result of the annual pricing arrangement, and we haven't seen any declines.

If we look at H1 of last year and H1 of this year, we can see that the decline is around 25% for coking coal, and we explained why that happened. And we have an increase in price for steam coal of roughly 141%. Well, steam coal, the base contracts that we had from 2021 had a lower price compared to the market prices, spot prices, and so we agreed on much higher prices. And so we have the increase and the consequences of what's happened on the power sector. And if you look at the sales of coke to external customers. In Q1 and Q2 of this year, we see an increase of 5.3% Q2 over Q1. And if we look year-on-year, year-to-date, so the compression of H1 of last year and this year, we see it dipped by 2.9%. The coke plants we're using 100% of the capacity, so it's a difference of 3%.

So this is not a major difference. So the value of sales was more or less the same, even though in Q4 of last year and Q1 of this year, one of the coking plants wasn't able to produce at full production capacity. So if you look at the average coke sales price, I've already mentioned this. It's up by nearly 7%. And if we look at a year-on-year basis, we have a natural decline of some 28%, and this is more or less consistent with what's happened in terms of market prices, but it's not entirely representative of what's happening in JSW.

Then we have the revenues on sales of coke and hydrocarbons to external customers. One thing that might require some commentary. If you look at the average price in terms of the sales of coke, that's a increase of 7% and the revenue of 9.7% increase. So on top of tonnages, there's another element that supports that. These are hydrocarbons. And we have very high prices for tar -- and this is something that's helped us achieve nearly 10% increase. Then we have the sales -- have the inventories of coal and coke. So we can see that the inventory coal produced in the JSW group is up by 36.9%. So we have 624,000 tonnes. Well Q1 ended with 456,000 tonnes. So that's the combined inventory.

So this is the minimum level of for operating purposes is even lower than the needed level for operating purposes. But the increase is primarily because steam coal wasn't picked up, and that's why we have more steam coal in inventory, we haven't seen that happening in the coking coal. And basically, we've been able to sell the coking coal pretty stably. Then the inventory of coke, taking advantage of market conditions in Q2, we've been able to reduce our inventories to around 148,000 tonnes. This is a critical level in terms of being able to deliver coal costs overseas.

So in subsequent months, we should increase the inventory to have a safer possession. And so that's more or less all I wanted to tell you about the market environment. Thank you very much. Now I'd like to ask our technical director to tell us about the investments of the JSW Group.

[Edward Pazdziorko, executive]

So ladies and gentlemen, let me tell you about the investments made by JSW Group. At first glance, you can see that the CapEx is growing, not Q-on-Q, not only Q-on-Q, but also H1-on-H1. So if we look at CapEx, net of consolidation eliminations in Q2, we can see that CapEx was up to PLN 1.03 billion, up by 9%. You can also see at all the segments, we saw increases. It was up by PLN 64 million in coking coal, so it's a little lower than some of the others, but we can see that we had higher CapEx, generally speaking.

If we make a comparison on a year-on-year basis. So if we compare what was the case at H1 2022 and at H1 2023, you can see that in all the segments, our CapEx was back up to nearly PLN 2 billion at PLN 1.975 billion. And so our CapEx was up by some 70%. The first is what we saw in the first half of 2022. And so this is building the future for the core segment. So we have investments of some PLN 1.65 billion. So our resource base is benefiting from these various segments -- are benefiting from this CapEx policy.

So you can see that we had an increase of more than PLN 800 million over the previous year. So if we look at the CapEx in JSW Group, on a cash basis, which takes in conversation, the purchase of PPE, intangible assets and lease-based payments. In Q2, they were down to PLN 985.1 million, so this was down by 5.6% compared to Q1 '23. But if you can make a comparison year-on-year, you can see that the expenditure is much higher than in H1 2022. So it's above PLN 2 billion. whereas in H1 2023. And so this was an increase in percentage terms by in excess of 56%.

Now if you look at the 2 major segments, I'd like to discuss. So CapEx expenditures in JSW in the coal segments in Q2 we had CapEx in excess of PLN 858 million. And this CapEx was up by more than 8%. And if we look at the subsegments, we can see that investment construction is more than PLN 19 million or the purchases of capital goods is up by 10% then we had CapEx for mining pits and preparing those longwalls. So this is up by some PLN 26 million. And then we also had lease-based CapEx up.

So if you look at a comparison between H1 '23 and H1 2022, we can see an increase in CapEx. For this year, we were up beyond PLN 1.6 billion. So this is nearly 83% increase. This year over last year. And across the board, these segments benefited so we made purchases of investment construction and we had mechanized shields, modernization, purchasing transport equipment as well as mining equipments. So this is up by PLN 191 million and so we had to -- we spent PLN 826 million to peer mining pits. And so we had more than PLN 108 million for the typical preparations of the longwall. And then we had other lease-based payments of more than PLN 79 million. So the future is being built in all of these mines. And so if we can think about the equipment present on the longwalls contributing to a value expansion here.

We're focused on having the highest possible percentage of coking coal. Another very important thing when it comes to coking coal and expenditures for coking coal. So also on an accrual basis, we saw increases. So this was up PLN 131 million. So it was up by more than 24%. So our CapEx was related to battery #4, the chosen coking plant and then we had other investment tests. So this is an increase of some PLN 26 million. And we spend a little less at the Radlin power generation units.

If we look at H1 2022 versus H1 2023, we had more than PLN 200 million spent more compared to the previous year and 19% elsewhere. So this is a difference of PLN 38 million. So higher CapEx and so we are spending more to build the power generation region at Radlin was more than PLN 23 million purchasing emission rights. We had more spend there, and then we're also modernizing the battery #4 at the Przyjazn coking plant. So to sum up, you can see that our investments are rising and this is part of the strategy that we put together that in upcoming months and years, we will grow and build the future of the company through these capital expenditures. So thank you very much for your attention.

Thank you very much. Now I'd like to ask the CFO to present the results of the group in Q2 and H1 of 2023.

[Robert Ostrowski, executive]

Good morning, ladies and gentlemen. I'll begin by making a presentation of the main financial categories for the group. On top of that, I'd like to make one caveat. I'd like for you to remember that we are in an inflationary environment, which has an impact on the pace of change on the cost side. And as Mr.Bartos mentioned that the market context and what was happening, the volatility of prices on coke and coking coal. So in the first half of 2023 was affected by what we discussed in 2022. And so when we think about the comparability of financial data in the first half of this year versus last year, we should have in mind this caveat as we make those comparisons. So if we look at the revenue generated in the first half of this year. This was some PLN 8.6 billion, which is down by 21%. But on a quarter-on-quarter basis, our revenue diminished by 7.2%, and we had sales revenue of PLN 4.139 billion. And so the CEO already mentioned the reasons for that. So as we look at the financial results, EBITDA, the net result, as I said previously, on an absolute basis, our EBITDA in the first half of the year, net of one-offs, just PLN 3.6 billion or PLN 3.3 billion including non-recurring events. This is a great result. Also, if we look at the net results, it's in excess of PLN 2 billion. This is amongst the best results we generated as a company.

So of course, there's a decline of 51% between H1 2022 and H1 2023. So the EBITDA in the first quarter of the year was down by 30% compared to what we had in Q1 of last year -- Q1 of this year. As we had a decline of some 38% if you look at the net result from Q1 '23 into Q2 '23, when it dropped down to PLN 786 million. Then if we look at net working capital, we have to make a caveat that we incorporate our closed-end fund in our liquid assets, even though in the financial statements is treated as an long-term asset. So our net working capital, having in mind the FIZ, which is the closed-end fund, so we had PLN 8.4 billion of net working capital, is up by 3.3% over Q1 to the end of -- of March of this year.

Now we can go on to an analysis of our sales revenue and what were the major factors contributing to the diminishment of our sales results by some PLN 319 million. And we can compare what happened or look at what happened from Q1 to Q2. So the biggest impact was of coking coal sales volume. And so this was down by [indiscernible] tonnes. This is a difference of 15.1% in tonnes.

The second factor, negative factor in Q2 was the impact of steam coal sales volume, and this was down by [ 211,000 ] tonnes. This is a difference of some 33%. And it's now the other factors basically made a positive contribution. The biggest one which is above PLN 96 million, this was the result of having a higher average sales price per coke, so this is a difference of a little bit less than 7%.

In Q2, another factor that contributed positively was the higher of coke sales volume. This was up by more than 5%, this is an additional 44,000 tons of coke that were sold more in Q2 of this year. Another factor that's quite important is the increase of the average coking coal sales price, which is up by 1.1% and so this makes a difference in terms of the results between Q1 and Q2. And generally speaking, our revenue was down by some PLN 329 million (sic) [PLN 319 million].

If we look then at our expenses having in mind the caveats that we and the entire economy are operating in a high inflationary environment. This means that our costs of operating as a group are also on the rise. In Q2 of this year versus Q1, we have 2 items that grew. One is employment salaries up by Q-on-Q. And then we have external services up. So the increase was around PLN 400 million. First is the PLN 4.1 billion in total. And so this is growth rate of roughly 11%.

So if we compare the first half of this year to the first half of last year, we see an increase of 26% and so our expenses by nature is some PLN 7.6 billion, and that's in the comparison of H1 of this year to H1 of last year. I would only add that if we look at Q2 versus Q1, we also saw some costs falling for electricity and for materials. And I'll talk more about that in a moment.

Now if we take a look at our bridge, we can talk about what factors drove the differences. So as I mentioned, employee benefits have the biggest increase. So employee benefits plus payroll-driven expenditures. So we see that salaries continue to grow of employees as agreed with the social partners at the beginning of the year.

So at JSW, according to our agreement signed in February this year after we make an assessment to the situation in the first half of the year, we made the decision jointly with this social party, we decided to pay out a one-time motivational bonus and for that reason, our costs were up by PLN 352 million. So, PLN 361 million, something that adjusted that was the incorporation of the provisions, and we had used actuarial basis to adjust that.

Then we have the cost of external services. And this is linked to renovation services and what needs to be done in terms of remedying mining damages. This is a result of the costs growing for how our external operators are functioning. And so the effect in total in Q2 was nearly PLN 77 million.

The third line item, which deserves to be mentioned. This is depreciation and amortization. This was up by PLN 26.4 million. As we discussed, we have a new element in our accounting policy that the costs of preparing mines and longwalls. So we would capitalize that. And then we would depreciate that over natural lifetime using as percentage our coal production. And so basically, this would be done on a proportional basis. So we have similarity in terms of the revenue and the expenses.

So PLN 25 million increase. This was a result of the settlements of capitalized costs and what's happening in the areas around the long items, longwalls. So this is what contributed to that difference. If we look at 2 other factors that reduce costs, we had energy consumption, the average price of energy purchased in the group fell by nearly PLN 170 per megawatt hour without incorporating of course, distribution costs. Having in mind our coal production, our demand for electricity was down by some 20-megawatt hours. And that's one of the things that contributed to this line item dropping to PLN 68 million.

Then the next thing is consumption of materials. And the difference here is some PLN 16 million. And this is linked to the lower quantity of coal extracted from the mine. And if we look at the mining cash cost, we can say to the greatest degree if on a unit basis, so zloty per tonne, well, we have a price of PLN 745. Well, basically, one of the major differences are salaries paid to employees. We talked about expenses by nature earlier.

Another factor, which led to an increase in this cost. This is the increase in cost of external services. So basically for renovation companies, and this has a certain impact of PLN 23.28 million. And then we have another factor that only has a roughly a 2% increase. We have fewer tonnes by [ 16,000 ]. Then we had a lower materials utilization as well as reduction in energy costs. And so basically, our costs were down in unit mining cash cost.

If we look at the unit cash conversion costs, we have more contributing factors. To be clear, we had prices moving up from PLN 290 per tonne to PLN 310 million (sic) [PLN 310]. And so the biggest impact is taxes and charges because we had CO2 emission rates, and that led to an increase per ton of nearly PLN 18. So then we have the haulage of coal from our mines to the plant. This is mostly a result of higher costs for renovation services. And this is nearly PLN 13 per tonne.

Then we have external service providers PLN [indiscernible] per tonne. Next thing is employee benefits, we have the inflationary pressure, which is present not only in JSW but also in JSW [ Coke ]. This led to a signing of an agreement for what would happen in 2023. And this also affects payroll charges linked to that. Another element which increased our cost base is admin expenses, so we have depreciation. This is because of having higher cost of actuarial provisions for this is PLN 2.5 per tonne, and we have an increase in the salary fund in the admin section which is approximately PLN [ 7 million ], things that reduce those unit costs post the utilization of the cash input. So we had lower costs of obtaining that input. And so this is down by PLN 2.7 gross per ton.

The next slide. It's worthwhile to look at volumes and the cash production costs, so it's cost is up by some PLN 94 per tonne. And then we had the decline in extraction of some PLN 12. And so that means that was the impact of volume. And this led to an MCC of PLN 745. If we look at the unit cash conversion costs for Coke, we had the expense impact of PLN 47.32 whereas there is the impact of volume, which was bringing back down by PLN 27.46 per tonne. And at the end of the day, we had a unit cash conversion cost of PLN 310 per tonne.

And we have the EBITDA drivers, so in Q2, we had PLN 1.6 billion in EBITDA, whereas at the end of Q1, we had PLN 1.9 billion. So volumes of coke and sales price basically increased the outcome, improved the results. And then we had a difference of costs by nature, that was some PLN 395 million. And then we had another negative impact of coal sales and volume and sales prices. That was PLN 496 million. Then we also have inventory, a difference of PLN 115 million. And then we have basically short-term mining pits, and we have a smaller difference. The cost of appreciation is more or less of PLN 26 million. Then EBITDA prior to one-offs is PLN 1.36 billion. And then we had non-recurring events of PLN 277 million. And here above all 100% of that, which is PLN 261 million. These are the estimated costs of the one-time bonus we paid out as JSW.

Then we have the operating segments approach for EBITDA. So our EBITDA was down by PLN 819 million versus Q1 EBITDA, so the change in coke segment brought up our EBITDA by PLN 117 million. Then we have the change of the other segment for EBITDA that is PLN 24 million. And then we have change in EBITDA of consolidation eliminations, so this is in terms of what happened with coke and coal and other factors. And then we have the standard consolidation eliminations, which made an impact of PLN 92 million in green. And then we had the one-offs and the EBITDA, so this brought us to a level of PLN 1.646 billion in terms of the EBITDA without non-recurring events.

Now we have net working capital, which is just a pure accounting framework. So we have assets and the closed-end investment fund. We treat that as an asset, and we're not adjusting that to apply it to our short-term assets, so we had basically, nearly PLN 29 billion in assets. And then we had fixed capital of nearly of PLN 21.5 billion. So if we adjust the value of our long-term assets, so our working capital there as a result is around PLN 14 billion.

And we also have -- this also includes, of course, the closed-end investment fund. And if we look at financial highlights for the whole group, having in mind our short-term payables. I won't discuss individual line items. We have exactly the same result. Well, the working capital held by the group represent PLN 314 million.

Here, we have some financial highlights, so we have a balance sheet approach. And then we have an adjustment to include both investment fund, closed-end investment fund. And this is in gray. So we can say that we have a very good ratio, we have a fixed capital to non-current assets ratio of 1.35, which is a very good ratio. And we have net debt on an accounting basis in orange, and then we have the inclusion of the fees, so this means that the situation of the company is quite safe in terms of leases and loan contracts, whereas the gray bar tells us how much money we've accumulated in our closed-end investment fund.

Maybe a few words about our cash flow. In Q2 at the end of March, we had cash of PLN 5.5 billion, and it fell to PLN 4.7 billion, and that's the result of the following: we had a profit before tax of PLN 978 million. We had depreciation of nearly PLN 408 million. And we had change in inventories, this is a negative difference of PLN 44.5 million. Then we have change in trade in other receivables, this is in the black of nearly PLN 22 million. Then we have a change in trade and other liabilities, it's up by nearly PLN 297 million.

Then we have other operating cash flows of PLN 1.4 billion and this is as a result of paying income tax of PLN 1.3 billion. That's actually incorporated there. Then we have PLN 840 million in investment cash flows. So we have roughly PLN 900 million there. And we have some other items that offset that. Then if we look at repayment of loans and borrowings, this is PLN 351 million. So this incorporates the repayment of a loan to PFR, a total of some PLN 89 million on quarter.

It also takes into account movement in the banking syndicate. And so we're talking about the loan from 2019, which was replaced by a new contract signed at the beginning of this year. And according to the contract, old financing was paid using the money from the new exposure. You see this in other financing cash flows and FX differences. You see the increase of money from the loan PLN [indiscernible] million, and then we have PLN 183 million from a long term from a loan. So we have the minus in terms of FX rates and then we have lease payments of PLN 58 million. So this was an outflow.

At the end, we'd like to present one additional piece of information to you because we had the shareholder meeting in June. It did not make a decision to pay out a dividend. And this was linked, of course, to the recommendation or was consistent with our recommendations to the shareholder meeting. We want to remind you of the reasoning for that. As you recall, in 2022, we had 2 contracts signed loan agreements with PFR because of the financial shield provided to big companies to fight the COVID-19 pandemic.

And under those 2 contracts, we obtained nearly PLN 1.2 billion as JSW Group. And the company was in a difficult situation with the risk of becoming illiquid. And let me remind you why we were applying for that money, not just because somebody was available, but because the company needed that money in order to remain liquid. And the second thing is the program regulations indicated clearly, there was a major obligation that was a ban on paying out dividends for making any other type of payouts to the beneficial owners or to the owners, shareholders.

And so the funds provided by PFR under the Covid Shield was part of permissible public aid. And that meant it was notified to the EU and so the management of the company, JSW as well as other beneficiaries of this public aid. Well there's an obligation to respect all of the clauses and contracts. Let me add, that in 2022, the company at the beginning, notified everybody of having obtained this financing. And we also looked at or mentioned, the limitations that were put in place, but nobody made an outcry as a result, but the management team couldn't have anticipated what was going to happen in 2022 in terms of generating record high profit levels. This was not something that was foreseeable.

So if we look at the financing agreements, the loans from PFR, we also have a description of violations or breaches. And unless agreed otherwise, with the lender, the borrower or the shareholder or the borrower, announced this, adopts a resolution on or distributes a dividend or payment, remuneration or some other amount or interest paid on undistributed dividends. Well, these are violations or defaults.

So having in mind what happened at the beginning of 2023, when we were looking at the resolution and then the motion to make that payout, we were basically motivated by those factors. Having in mind what's happening with the funding market and the interest rates. And having in mind the limitations when drawing down these loans, while the payment prior to the schedule to PFR would mean that we would have to use money coming from more expensive sources, so debt financing, external debt financing would have meant replacing the least expensive capital we had in the balance sheet with more expensive capital.

And this would have led to a financial loss, and we would have had to justify that, but we didn't see a justification for that. That's more or less it is on my side in terms of explaining this situation, which has generated some doubts amongst the shareholder community. We respond to questions that are posed to us in terms of the dividend and the law that took place or took effect on the fourth of September.

On our portal, we'll have some information questions and answers about these 2 elements. So thank you very much for your attention.

[Tomasz Cudny, executive]

Thank you very much, Mr. Ostrowski for the comments on the results and the results themselves, and so the different circumstances we find ourselves in. There's a large number of questions from shareholders, minority shareholders.

And so basically, we had to act and as did the shareholder meeting. And we have questions coming in from the shareholder community and we're going to try to respond to those questions. But some of the other questions, which we may receive later than today, well then our Investor Relations department in consultation with the management team and its opinions will provide responses.

So I'd ask you to go ahead and pose those questions.

[Unknown Executive]

The first question, which clients or countries have increased their purchase orders or reduced their purchases under contracts for coal and coke.

[Sebastian Bartos, executive]

Let me respond. This question is directed to me. And I think our presentation responded to that would be difficult for us to mention or list individual customers and talk about the statistical data for that. But a few things came to mind very clearly in this presentation, so the coke segment increased its production by more than 5%. We also increased the coal delivered to our own coke plants result by more than 10%. So we were selling coking coal to external customers, and that was up by some 10%. And there is another thing that could have been incorporated in this response. We have the natural situation on the steam coal market that we have seasonality and an oversupply of the steam coal market and this has contributed to lower volumes in this period in JSW. So these 4 areas show you where we have better sales or where we have sales being reduced. Thank you very much.

[Unknown Executive]

The next question is about steam coal where the prices according to ARP are oscillating around PLN 30 per gigajoule, whereas on the ARA coal prices, including transport, are below PLN 20 per gigajoule. So do we see pressure on the domestic market for the steam coal prices? Do you anticipate that the commercial power sector will want to renegotiate prices for the latter half? Does the pressure exist?

[Sebastian Bartos, executive]

Yes. We don't conceal that, and you can see that with quotations being around $100 and some dollars having in mind the quality that PGG offers or what we offer in terms of -- so we're talking about prices of around PLN 20, PLN 21 per gigajoule, so, these prices aren't different. And this is clear from the presentation 101%, with the fact that we're in line with the domestic market shows that we haven't renegotiated any prices for steam -- for coal. Well, this reflects year-to-date what happened in Q1 and Q2. Today, that's all we can really say. If we have new facts that will appear, then we'll discuss them at future presentations. So thank you very much.

[Unknown Executive]

Then we have another question about production. What does the management Board anticipate in terms of coal extraction in Q3 and Q4 this year? Would you confirm the official output forecast of 14 million tonnes this year?

[Edward Pazdziorko, executive]

So ladies and gentlemen, I'll respond to this question. When we prepared the operating plan for '23, we took into consideration that our production would grow quarter-on-quarter. We couldn't anticipate all the difficulties we encountered, but production in Q3 should be higher than in Q2 and Q1.

In terms of the results forecast for the end of the year, I would just want to mention out that in the current report, we pointed out that there was a force majeure event in terms of the event that took place on the Knurow section. And we believe that the impact of that fire on that longwall, well, this will cost us in terms of reduction of production by 250,000 tons and subsequent quarters, we should be more or less in line with what production levels we saw in Q1 and Q2.

[Unknown Executive]

The next thing, does the management team intend to pay the 15% solidarity tax to its employees?

[Tomasz Cudny, executive]

Well, the response to this question cannot be black and white because we have a collective dispute on that subject. And each party agree not to communicate certain information until that dispute according to the statutory regulations is solved. We're in the process of discussions. So on Monday or Tuesday, we have the next round of negotiations. So only after we complete those negotiations, we will be able to provide you with any information whatsoever. Thank you.

[Unknown Executive]

So what amount of corporate income tax wasn't paid for H1 '23 to be paid in 2024? And to what extent is the cash position the company overstated at the end of June?

[Robert Ostrowski, executive]

So we paid PLN 1.3 billion. So that was our tax liability. Well, basically, our tax position was PLN 220 million. So that's the level of the overstatement.

[Unknown Executive]

You're thinking about acquiring a coking coal mine from PGG and Tauron Wydobycie? And are you thinking about buying back Victoria coking plant? And are you thinking about diversifying vertically, the steel segment?

[Tomasz Cudny, executive]

So If we think Tauron Wydobycie and PGG, those mines are producing steam coal, not coking coal. We have the coking coal production in our group and we're trying to increase the production of our own coal, so coking coal. An increase as a percentage, we do not plan any acquisitions in terms of the steam coal market. If we're thinking about semi-soft, that's something that we have available in our own resources, within the group. The next thing, of course, we're observing the steel market. We're watching what's happening and no decisions have been made and we couldn't place any analysis. Thank you very much.

[Unknown Executive]

In terms of building an ecosystem for hydrogen business. Will this increase your forecasted CapEx? what sort of CapEx would you apportion to that?

[Tomasz Cudny, executive]

Well, the hydrogen market is a new direction of thinking, having in mind the power market. This is something that's being scrutinized. And we're not standing on the side. We're doing some research work. We're doing some other type of work. And this work is becoming more -- what we're focusing on the risks we've been able to define and so the research we've done, and we want to complete this research over a 2-year period. And so we'd like to have basically 0.5 hydrogen per hour. We have certain risks of being able to do that. There's a lot of work, analytical work to be done, scientific research that needs to be done in terms of extracting very clean hydrogen and the outcome of our production has to be very high.

The second thing, so if we move from scientific research into industrial activity, whether or not we'll be able to achieve financial benefits. We want to be able to extract much more hydrogen or generate much more hydrogen per hour. But the question is about CapEx today. And we'll be able to talk about CapEx on only on a hypothetical basis. But after we complete our research work, we're going to be able to know, which direction for what amount of money we're going to be able to and have to dedicate in order to generate a specific return. So thank you.

[Unknown Executive]

The next question is linked to costs. What is the percentage growth year-on-year of the various components of mining cash costs.

[Robert Ostrowski, executive]

We don't have a presentation of that information. But I think in our reporting package, there's a slide on the subject. I think it's in the attachments. So I'll show you that slide at this time. So I think it's the line or column -- if we look at first half of this year to the first half of last year -- what was happening between the two, first halves of the year.

So we have 51% of materials and energy, consumption in materials and energy and it was less than 14% for employee benefits, under 6% for taxes and charges, 37.7% in external services. These are increases with respect to the underlying absolute values. So each one of those line items has a different weight because we have a much bigger percentage of employees benefits as opposed to other line items.

[Unknown Executive]

The next question is about production. What is the opportunity that your production Zofiowka and Pniowek will revisit the levels from prior to the accidents next year? To what extent will production be lower?

[Edward Pazdziorko, executive]

Well, the events that transpired in 2022 Well, we need an assessment shortly thereafter that this will have an impact over the next 2 years, especially 2023 and 2024. But we have to look at what I presented in terms of CapEx for the coal segment.

We're doing CapEx, we're looking for new solutions. We want our production, our run rate to grow. This is something we're aspiring to achieve. If you're thinking about specifically Zofiowka, 2023, 2024. Well, these 2 years will still be affected by those events. But we'll reinstate one of those areas. So in 2024, we should be able to come back to breaking their pattern of production.

So Zofiowka, we're starting to achieve those levels that we had targeted in Pniowek. Well Pniowek was also affected by these events. So the commission is still at work, which is assessing that event. The work has not been completed. And so we'll have more detailed recommendations in terms of doing our mining work in the current conditions. This can't be done until that committee finalizes this work. So this is something we'll be able to -- a response, we'll be able to give only once the commission produces its recommendations.

So we have high CapEx in this segment. So we visited all of our production plants as the management team. We talked with the directors of the various mines and how they're putting forth their assumptions. And so the future is being built on the future of each one of those mines. Thank you.

[Unknown Executive]

Since we have a limited amount of time, I would just read one of the 2 final questions. Thinking here about the solidarity payment. So we have the President of Poland to side, this liability at PLN 1.6 billion. Does the company plan to take any efforts, so it's not to pay this tax? And what sort of solutions are being taken consideration?

[Robert Ostrowski, executive]

I can only make a general response to that question. We are a legal entity, which operates under the legal regime. And so we respect the law to its fullest extent. So if we want to undermine or challenge the corporate income tax, we have PLN 1.3 billion in tax. Well, so at least in theory, the company could try to challenge that law.

But we have EU regulations about windfall profits. This is something that's implemented, and this is applicable to JSW as well.

When we looked at the EU regulation, we took efforts to show that we have volatility risk. So in 2020, we lost our liquidity and then later, we have a period of prosperity, but we have to remember what happened in 2020. The fact that we were able to get money from the financial shields from PFR, that we had money set aside in our closed-end investment fund, that we also had some money from loans that had been signed with banks consortium in 2019. This enabled us to survive a very difficult period.

And the fact that on one hand, we're talking about a dividend that wasn't paid out. And then we have the solidarity tax which only pertains to JSW. What this doesn't really give the management board the ability to take effective measures to avoid making that payment because the Polish law on solidarity tax also talks about the sanctions for an entity that would attempt not to pay that, and there are certain sanctions aimed at the management board itself.

So those regulations mean today, there is no effective measure, which could lead to not paying that tax.

[Unknown Executive]

Do you have any information about why this solidarity contribution is supposed to pertain only to JSW?

[Robert Ostrowski, executive]

This is not a question to JSW because we didn't participate in the process of enacting the law. Thank you very much.

[Unknown Executive]

That's all the questions that the shareholders had.

[Tomasz Cudny, executive]

So thank you very much. So as we wrap up the conference, I'd like to thank all of the employees and entities working with the group who've contributed to generating such positive results. I'd like to thank all of those parties that participated in the preparation and delivery of today's conference.

I'd also like to address minority shareholders. I'd like to thank you for your interest in the operations of the company. And I'd like to remind you that the management team communicates with the capital markets, we respect the principle of having equal access to information, all of the questions that were posed to us. Well, we responded to all of those questions.

If somebody wants to check that, I would suggest that you take a look at our website. We have the tab for Investor Relations. We present the questions, the responses to those questions. Well, those are very specific topics. We won't address them during our -- during the conference and there's a question there about the dividends, we've responded to that question.

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