Moderator: Welcome to our online Q&A chat session with Andrzej Skolmowski, Vice President of the Grupa Azoty Management Board. Please ask questions concerning the Group’s performance in the third quarter of 2024.

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Andrzej Skolmowski: Hello and welcome to our chat. I will do my best to provide you with the most thorough answers to your questions. The subject of today’s chat is Grupa Azoty Group’s performance in the third quarter of 2024. You can ask your questions now.

Pablo67: What will be the maximum gross financial debt in the coming quarters?

Andrzej Skolmowski: The Grupa Azoty Group does not publish financial forecasts (including forecasts of maximum gross financial debt). In accordance with the Standstill Agreements signed by Grupa Azoty and Grupa Azoty POLYOLEFINS, as a rule the intention is to maintain financial debt within the facilities available under the financing agreements covered by these Standstill Agreements.

Majka: When will you reach a final agreement with the banks on the terms of further financing and eliminate the risk of contract termination?

Andrzej Skolmowski: The Group is successively extending the standstill agreements with the Financing Institutions providing its financing and is developing a turnaround plan that will serve as the foundation for the anticipated long-term restructuring agreement.

Guest: Group layoffs at PKP Cargo are stirring up a lot of emotions. Are any layoffs planned at Grupa Azoty Group companies?

Andrzej Skolmowski: Currently, only group layoffs are planned at GA Siarkopol.

Guest: Good morning, referring to the Azoty Business programme – is it realistically possible to, as you put it, “create a cost-effective group with a strong position in the European market for fertilizers, plastics, and OXO products,” when your products face tough competition from cheap imports? Is the plan based on the assumption that it will be possible to change the status quo and impose customs duties at the EU level? What if it doesn’t work out?

Andrzej Skolmowski: The programme consists of several stages and several levels of optimisation. Additionally, we are implementing a range of protective measures using the available solutions and tools. At the same time, we are counteracting the effects of past inaction and overspending. These are actions within our control. The results presented today indicate that the direction is good, and the first effects can already be seen.

Regarding the duties on fertilizer imports from Russia and Belarus, we are determined in our actions, and we are slowly seeing a shift in the perception of the risks linked to the sharp increase in the share of Russian and Belarusian fertilizers within the import structure. Public institutions are openly declaring the need to take action in this regard. The reliance of domestic agriculture on imported fertilizers will lead to higher prices for agricultural products and, consequently, an increase in the cost of living for society as a whole.

Guest: Hello. Will there be a single collective bargaining agreement proposed for all the companies? Regards.

Andrzej Skolmowski: Analysis and work is currently underway to develop a solution in this regard. This is one of the tasks of the Task Force which has been established with representatives from all the key companies.

Guest: What is the situation as regards the introduction of duties on fertilizers from Russia and Belarus?

Andrzej Skolmowski: We are constantly building awareness of what threats the Polish fertilizer industry is currently facing, and in this respect we are very active. According to the information we have, the Ministry of State Assets is in talks with the Ministry of Finance to implement tighter controls on the sources of fertilizer inflows into Poland.

Guest: Will the unsecured portion of contractual penalties be enforced in court?

Andrzej Skolmowski: At this stage, we are focusing on the programme to bring the project to completion. Both parties have expressed their willingness to conclude the project amicably. There is strong communication at the level of the Management Boards of Grupa Azoty Puławy and Polimex-Mostostal.

Guest: When do you expect to resolve the settlements issue with the general contractor for the Polimery Police project?

Andrzej Skolmowski: Grupa Azoty Polyolefins is in negotiations with the General Contractor regarding the final settlement of the project, including reaching an agreement on mutual claims. The negotiations are expected to be concluded by the end of this year or the beginning of the next year.

Pablo67: What is the amount of new reverse factoring liabilities assumed by the company in the third quarter?

Andrzej Skolmowski: The Grupa Azoty Group increased its liabilities under reverse factoring agreements by a total of PLN 58 million in the third quarter of 2024.

Patrycja Bernat: Hello. Will Grupa Azoty seek the imposition of duties on fertilizer imports from Russia and Belarus? If so, what steps will be taken to this end? And what does the company intend to do if the duties are not introduced? Regards.

Andrzej Skolmowski: Grupa Azoty expects the introduction of duties on fertilizer imports from Russia and Belarus as a tool to protect the Polish and European markets. We are taking a number of steps to support this issue, and we strongly believe that failure to impose the duties will have major implications for the entire fertilizer and agricultural industry in the European Union.

Guest: The future of Orlen’s Olefins project is currently being decided. In your opinion, does this project offer any potential for synergies and joint activities with Grupa Azoty?

Andrzej Skolmowski: We are facing our own challenges! ;-) We have signed a Letter of Intent with Orlen, with three areas of potential cooperation under analysis. One of the areas are polymers, with a particular focus on Grupa Azoty Polyolefins.

Guest: Did the company measure inventories at net realisable value in the third quarter? Is the company past the period of producing below cost for its product mix?

Andrzej Skolmowski: Yes, inventories were measured at net realisable value.

Changes in inventory write-down estimates for the third quarter are presented in Note 3.6 to Grupa Azoty Group’s interim consolidated financial statements.

Andrzej Skolmowski: Thank you for our meeting today and the questions asked. I also invite you to visit the Grupa Azoty Group website, where you can find various resources, including a transcript of today’s conference, along with a discussion of the Group’s results for the third quarter and the first nine months of 2024. A presentation is also accessible on our website, and I encourage you to review it at your convenience. You are welcome to our next chat next year!

moderator: On behalf of StockWatch.pl, I would like to thank you for an interesting discussion and invite you to our future chat sessions.

Moderator: Welcome to today’s investor chat with Andrzej Skolmowski, Vice President of the Grupa Azoty Management Board. We invite you to submit your questions regarding the Group’s performance in the second quarter of 2024.

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Andrzej Skolmowski: Good afternoon, everyone. It’s great to have you here on this warm day. I’ll do my best to answer your questions as comprehensively as possible. Today’s discussion will focus on Grupa Azoty’s results for Q2 and H1 of 2024, as well as the Group’s current standing. I look forward to your questions.

Michał Sopiel: Good afternoon. Could you please comment on the estimated level of necessary capital expenditure for the Group over the coming years, excluding the Polimery Police project and any potential divestments (such as Compo Expert)?

Andrzej Skolmowski: At the moment, the Grupa Azoty Group is carefully reviewing its long-term CAPEX plans. Given the challenging financial situation we are facing, we must adopt a highly selective approach, prioritising projects accordingly. Our goal is to plan CAPEX in a way that minimises the impact on the Group’s financial performance, while still allowing us to continue our core business activities. We are also considering decarbonization initiatives that will help the Group meet regulatory requirements.

Michał Sopiel: During today’s conference, you mentioned that the Group is preparing a collective bargaining agreement (ZUZP). Could you provide more details on how the Group's workforce optimisation efforts might affect overheads, particularly personnel costs? Is the Group considering implementing a voluntary redundancy programme or similar solutions?

Andrzej Skolmowski: A voluntary redundancy programme is indeed one of the options for optimising headcount; however, in the initial phase, it can also be quite costly. Standardising the ZUZP provisions (including optimising expensive benefits and introducing certain safeguards) would help protect the Company in case of any deterioration in financial liquidity.

Piotr: Good afternoon, what is the status of the Russian oligarch W. Kantor in the Company? Does he have access to information as a shareholder?

Andrzej Skolmowski: Viatcheslav Moshe Kantor has been placed on the UK sanctions list, the European Union sanctions list, and the Polish sanctions list, along with his subsidiaries—Norica Holding S.a.r.l. of Luxembourg, Opansa Enterprises Limited of Cyprus, and Rainbee Holdings Limited of Cyprus—through which he controls a 19.82% stake in Grupa Azoty S.A.

As a result of the sanctions, the assets related to financial resources (including shares) held by the aforementioned entities are subject to a freeze. This means preventing any movement, transfer, alteration, use, availability, or transaction involving these assets that would result in any change in their size, value, location, ownership, possession, nature, or purpose, or any other modification that would enable their use, including as part of a portfolio management. I want to emphasise that Viatcheslav Kantor does not have access to any information beyond what is officially published by Grupa Azoty.

Investor: Regarding the agreement with Orlen, is the company open to selling the entire polymers business, or only a minority stake? In your opinion, are there any synergies to be generated with Orlen’s olefins business?

Andrzej Skolmowski: We have agreed with Orlen to explore strategic options to decide on potential transactions, including those related to Grupa Azoty Polyolefins S.A. The scope and structure of any potential transactions will be determined by the working groups from both parties. Potential synergies were indeed one of the key reasons for identifying this area for detailed analysis by both sides. It’s time for talks between the Group’s Chemicals and Orlen’s Petrochemicals, and I believe they will be fruitful!

gosc102: Given that Poland is the leading fertilizer importer from Russia and Belarus, and Grupa Azoty is reporting an increase in production, where are the Group’s fertilizers being marketed?

Andrzej Skolmowski: It’s important to remember that Poland is not only a frontline country but also, geographically, a very attractive destination for imports from Russia and Belarus. Additionally, it is one of the largest consumers of fertilizers in the EU. Some volumes are likely being re-exported, but the upcoming application season and the need to replenish inventories provide opportunities to place the Group’s products in the market.

Bartek: Hello, how would you assess the risk that Grupa Azoty might need to conduct a share issue to improve its financial situation?

Andrzej Skolmowski: The situation we are in requires us to analyse every possible solution. Which one will be chosen? We haven’t made that decision yet.

Guest: Hello, what is the current risk that Grupa Azoty and its subsidiaries may face mass layoffs?

Andrzej Skolmowski: We are not working on any plans for mass layoffs. We will use other options, including those available under the agreement we have with the unions. In recent years, the Group companies haven’t offered the highest wages locally, which has led to relatively high employee turnover. This turnover naturally contributes to changes or reductions in salary costs. At the moment, the companies are not planning any mass layoffs.

Marek: To improve liquidity, the Group is selling emission allowances with a buyback agreement. Could you provide details on the buyback terms and potential price? Is this structured as an option?

Andrzej Skolmowski: In the report, we stated, and I quote: “In the reporting period, the Grupa Azoty Group executed a transaction to sell and repurchase 1,123,235 CO2 emission allowances. The transaction value of PLN 319,187 thousand was disclosed under other financial liabilities. As at 30 June 2024, the balance of liabilities reflecting the financing utilisation period and foreign exchange differences was PLN 324,200 thousand.”

In the first half of the year, Grupa Azoty sold excess EUAs at the highest possible market price. The allowances sold were those left after redeeming the carbon credits for 2023. Simultaneously, we entered into forward purchase agreements for EUAs to secure planned CO2 emissions for 2024. These contracts will mature in Q3 2025, ahead of the redemption deadline of 30 September 30 2025.

Wielki Tarnów: Is Grupa Azoty facing a scenario similar to PKP Cargo, specifically mass layoffs or the option of filing for restructuring?

Andrzej Skolmowski: We are not working on any plans for mass layoffs. We will explore other solutions, including those available under our agreement with the unions. In recent years, the Group companies have not offered the highest wages locally, which has led to relatively high employee turnover. This turnover has naturally helped in adjusting or reducing payroll costs. At this time, the companies do not foresee any mass layoffs.

inwestor2k: The banks have been quite lenient regarding debt ratio covenants. How are those discussions going? Are you sensing any impatience from the banks, or have they set any deadlines after which further leniency won’t be an option?

Andrzej Skolmowski: In compliance with the Standstill Agreement, as amended on 31 July, which expires on 11 October, we are currently working intensively on a long-term transition plan for the Group. The Waiver Letter, signed by the financing institutions on 9 September, regarding the covenants not met as at 30 June 2024, gives us the necessary time to complete this work and then engage in further negotiations with the creditors.

There is no leniency in these discussions. This issue affects a significant portion of the Polish chemical industry, so unfortunately, it’s neither a quick nor simple process. These talks have been ongoing for several months, and while fatigue – and occasionally impatience – may set in, we must reach an agreement.

Shareholder: The Chemicals segment significantly improved its results in Q2 2024, although operating losses persist. Could you provide more details on which products saw the greatest improvement? Do you think gross profit margin will remain positive in the coming quarters?

Andrzej Skolmowski: In Q2, the Chemicals segment generated an improvement of PLN 27 million compared to the previous quarter, mainly due to the performance of Pigments, OXO, and other inorganic chemicals. Looking ahead, we expect further improvements in the market, particularly for titanium white.

Michał: What synergies can the Company envision at Polimery Police after Orlen takes a controlling stake in PDH? Specifically regarding sales channels for propane, benzene, and phenol?

Andrzej Skolmowski: We see synergies with Orlen in many areas, including those you mentioned. We are already harnessing some through our existing partnership, as we are a client of Orlen’s. The Letter of Intent (LOI) allows us to explore further opportunities for collaboration.

Krystian Brymora: How come that sanctions have been imposed on gas, but not on fertilizers, which are entering the EU market via Poland?

Andrzej Skolmowski: Sanctions on natural gas without corresponding sanctions on fertilizers are ineffective because gas enters the EU in a processed form, primarily as fertilizers, especially nitrogen fertilizers, where gas is the key raw material. This is something we have strongly emphasised in our communication.

Investor: I’m looking at the segment report and see that G&A costs in the Agro segment have increased by 61% year-on-year. Could you comment on this in the light of the Company’s difficult situation? Was there any one-off event last year that affected this cost?

Andrzej Skolmowski: The increase in G&A costs in the Agro Segment is due to the method of allocating these costs within Grupa Azoty across reporting segments. Currently, the allocation key is based on the margin generated on variable costs by each segment. As a result of the significantly better year-on-year performance of the Agro Segment, a proportionally larger share of G&A costs was allocated to it.

Piotr: What is Grupa Azoty's stake in the Polimery Police project? Is it 52%, which is the sum of GA's 30.5% stake and that held through its ownership interest in Grupa Azoty ZCh Police (34.4% x 62.86% = 21.6%)?

Andrzej Skolmowski: Grupa Azoty's total equity interest in the Polimery Police project is 64.89%, consisting of Grupa Azoty's direct stake of 30.50% and Grupa Azoty ZCh Police's stake of 34.39%.

Question: The President of the Management Board of GA Puławy recently called for a 30% tariff on fertilizer imports from Russia and Belarus. Is there a realistic chance of pushing this proposal through at the EU level? Do other European producers support this initiative, and if so, how are they approaching it?

Andrzej Skolmowski: We are actively pursuing this initiative at the EU level in collaboration with other fertilizer producers. The market must understand that denying farmers access to locally produced fertilizers in the long term will lead to dependency on external supplies, which will result in higher prices due to reduced supply chain diversification for agricultural inputs.

We have seen examples in other countries where the closure of local production caused a significant increase in prices.

Michał: Is there a risk that the European Commission may not make any decisions to limit fertilizer imports from Russia and Belarus? The import problem mainly affects Poland, not the rest of Europe.

Andrzej Skolmowski: We agree that, in the current situation, Poland is the most exposed to imports from Russia and Belarus.

There is indeed a risk that the EU may not take action, which would unfortunately lead to further challenges for the fertilizer industry, not only in Poland but across Europe.

We’ve seen how Russia's dominance in the gas market spurred action, and its elimination from that market has triggered reactions in the fertilizer sector, which could eventually impact European agricultural markets.

Piotr: Does PDH’s debt amount to PLN 4.6 billion, i.e. the difference between the total project budget of PLN 7 billion and the equity amount of PLN 2.4 billion as mentioned during the call? That would imply a debt-to-equity ratio of 65%.

Andrzej Skolmowski: The current debt under utilised senior loans stands at PLN 3.5 billion, which includes the current balance on the investment facility, the working capital facility, and the VAT financing facility.

Guest: Hello. In Q1 2024, the Plastics segment reported a positive gross profit margin, but in Q2 2024, while revenue increased by almost 50% quarter-on-quarter, profitability was negative, which suggests that Polyolefins are now generating losses at the gross profit level. Can you confirm this?

Andrzej Skolmowski: The Plastics segment recorded an EBITDA result of PLN -41 million in Q2 2024, up PLN 15 million on the previous quarter. This improvement is primarily attributable to the sales of polymer plastics.

Guest: Do you plan to retire any units in Tarnów? If so, how many and when?

Andrzej Skolmowski: After a thorough review, Grupa Azoty has identified several units that, due to their technical condition and the low margins earned on their output, do not have promising prospects and incur costs even while off stream. These units will be gradually retired, starting this year.

Piotr: How much would Grupa Azoty's net debt decrease if the entire stake in the Polyolefins project was sold to Orlen for PLN 1?

Andrzej Skolmowski: According to the Group’s Financing Agreements, Grupa Azoty’s net debt is calculated excluding the external net debt of the standalone Polimery Police project. Therefore, selling the project to Orlen for PLN 1 would not reduce Grupa Azoty's net ‘bank debt’.

However, as at 30 June 2024, the external net debt of GA Polyolefins was PLN 3.788 billion, so selling the Polimery Police project for PLN 1 would remove this external debt from Grupa Azoty’s consolidated financial statement, thus reducing the Group’s total net ‘balance sheet’ debt by that amount.

Krystian Brymora: Grupa Azoty is a key purchaser of gas from Orlen. In 2023, Orlen’s gas segment earned over PLN 27 billion, while Grupa Azoty posted a loss of PLN 2 billion. How does Grupa Azoty’s management view the existing gas supply agreement, which is based on the TTF+ margin formula, considering Orlen’s much lower gas acquisition costs? How unfavourable is this agreement for the Group, and what actions is the management taking to change the situation, leveraging its position as a strategic client?

Andrzej Skolmowski: The details of the agreement are subject to commercial confidentiality. Gas is critical for us, so we are constantly addressing this issue, regardless of the profit levels achieved by our supplier. Our margin depends on it.

Politico: Does the recent notification to the prosecutor’s office regarding concerns around advertising and marketing agreements close the chapter on audits at Grupa Azoty? Are there other areas you are currently reviewing?

Andrzej Skolmowski: Various audits are still ongoing. The chapter is not closed.

Krystian Brymora: How large are the current fertilizer import s from Russia and Belarus? How does the management estimate their impact on Grupa Azoty’s current results? How have market shares changed, and what has the Company done to safeguard its position? How come that, 2.5 years after the outbreak of war in Ukraine, fertilizers have not been covered by sanction regimes? Could this change in the upcoming 2024/2025 fertilizer season?

Andrzej Skolmowski: According to Eurostat, total fertilizer imports from Russia and Belarus amounted to nearly 676,000 tons in 2023, and for the first half of 2024 alone, we have already reached 684,000 tons. This represents a significant increase. These two exporting countries benefit from a substantial cost advantage due to several factors, primarily lower gas costs and the absence of costs associated with emissions allowances. As a result, Grupa Azoty is forced to compete with the cheapest products on the market, often at levels that do not generate positive margins, as we strive to maintain our market presence.

In recent years, the Group’s market position has weakened, and we are now working hard to rebuild it.

Since taking responsibility for the Group, we have consistently emphasized the need for sanctions in all possible communications and discussions at both the national and European levels. However, Grupa Azoty cannot directly influence the decision-making process on sanctions; we can only submit our concerns to the relevant authorities.

We sincerely hope that our voice will eventually be heard, as we believe that the European Union’s food security and market competitiveness are safeguarded by securing volumes from other regions around the world. However, with the current escalation of activities by Russia and Belarus in the fertilizer market, these sources are being gradually displaced. We hope that the EU will soon implement the necessary measures to protect the European market from becoming dependent on fertilizer supplies from Russia and Belarus.

Andrzej Skolmowski: Thank you all for joining today’s chat and for your insightful and thoughtful questions. I encourage you to visit Grupa Azoty’s website, where you can find the recording of today’s call, including the discussion of our Q2 and H1 2024 results. We’ve also made a presentation available on the website, and I invite you to take a look at it. I look forward to seeing you at our next chat in November. Until next time!

Moderator: On behalf of the StockWatch.pl editorial team, I would also like to thank you for this engaging discussion, and we look forward to the next chat.

moderator: Welcome to our online Q&A chat session with Andrzej Skolmowski, Vice President of the Grupa Azoty Management Board. Please ask questions concerning the Group’s performance in the first quarter of 2024.

moderator: A quick reminder of the rules of our chat room: you first send your questions to the moderator. The questions selected by our Guest will be published together with the answers. You can see the order of questions at the bottom of the screen. The moderator has the right to reject questions which do not comply with the rules.

moderator: Information for journalists reporting our session: when citing today’s chat you are required to specify the source. If you have any questions or doubts, please contact: ##qxjgd#at#hidrzlpirw.ea##

moderator: You may ask your questions now. Our Guest will start answering them at 2:00 pm. If you can’t see the answers, please refresh the page. Participants are also encouraged to share the chat and comment on it on social media using the #chatStockWatch hashtag.

Andrzej Skolmowski: I have the pleasure to welcome you just before the long weekend. I will try to answer, as exhaustively as possible, any questions you may have regarding the current condition and performance delivered by the Grupa Azoty Group in the first quarter of 2024. You can ask your questions now.

moderator: Ladies and Gentlemen, the chat with Mr Andrzej Skolmowski will begin soon. We apologize for the delay and thank for your understanding.

Guest: How likely is the scenario of the sale of GAP and a DIVESTMENT process – ultimately leading to a reduction in the Group’s debt level – given the prevailing severe downturn in the polyolefins market?

Andrzej Skolmowski: I guess the question concerns our project company Grupa Azoty Polyolefins Police. At present, we’re looking at all the possible scenarios to restructure our debt. One of them involves strengthening the project company’s equity base with a divestment of some assets.

Andrzej: Doesn’t Grupa Azoty have a problem with the production of hydrogen from natural gas, the most expensive of all available methods? Why isn’t Grupa Azoty investing in green hydrogen like this company from Switzerland: https://www.wnp.pl/chemia/polski-sposob-na-zielony-amoniak-zasili-szwajcarskie-nawozy-historyczna-umowa,602262.html

Andrzej Skolmowski: Production of hydrogen from natural gas through steam reforming is now the cheapest method to obtain this feedstock for mineral fertilizers. Grupa Azoty has its own capacity based on this technology to obtain the so-called grey hydrogen for its ammonia production. In line with the current regulatory and market trends, this hydrogen production method should be decarbonised. For the time being, the price of green hydrogen is soaring and would significantly inflate the price of our final product, feeding directly into agricultural crop prices. Concrete steps on this front will be communicated later this year. First, however, we need to focus on stabilising our business.

Michał Kozak: To what extent was the Plastics segment’s EBITDA affected by the Polimery Police plant in 2023 and in Q1 2024?

Andrzej Skolmowski: The project’s negative impact on our consolidated EBITDA was PLN -276 million and PLN -42 million, respectively, in 2023 and in Q1 2024.

Guest from Puławy: How much truth is in the rumour circulating among GA Puławy’s employees that the workforce might be slashed by about 700 to 1,000 FTEs, with a possible pay cut by about 15%? Can you comment on that, denying or confirming the hearsay?

Andrzej Skolmowski: There are plenty of rumours and opinions circulating at the moment. What we’re dealing with is certainly a very difficult situation, one that is calling for tough decisions. Rumour also has it that we’ve already taken many such decisions, most of them we haven’t even heard of. What I can say is that we have promised open communication and we’ll keep our word on that.

I haven’t heard of the idea you are referring to. I will forward this question to President Hubert Kamola with a request to address this important issue as part of their internal communication at GA Puławy.

Guest: Does the Company believe it could buy back shares from the market?

Andrzej Skolmowski: We don’t have free funds for a buyback programme, so we remain focused on what’s achievable.

Guest: In what year does the Company expect to finally report anything above the break-even point?

Andrzej Skolmowski: Everything we’re doing now is aimed for the Group to generate net earnings. However, our current financial condition is posing a number of challenges. With the Standstill Agreement in place, we’ve gained leeway to continue working on a long-term restructuring plan, which is absolutely necessary to stabilise the Grupa Azoty Group’s financial position and then to undertake a recovery process within its individual business areas. This, in turn, will translate into improved cost efficiency and competitiveness of the Group’s product portfolio, to be reflected in its financial performance.

Edek: Why are staff bonuses being paid despite financial losses recorded in 2023 and 2024?

Andrzej Skolmowski: Such payments are being made under the companies’ collective bargaining agreements with trade unions. The management boards are acting on the basis of these agreements, to fulfil the obligations towards employees arising from their provisions.

Guest: I have a question regarding the planned equity consolidation between Grupa Azoty and ZEW Niedzica. Is it still on the agenda or have you abandoned the project? Thank you.

Andrzej Skolmowski: The project has not been abandoned by the Group. It may be carried on depending, among other factors, on the owner’s decision.

MarekInvest: Within what timeframe does the Company expect to generate profits? The recent losses have severely affected your equity position and it seems they cannot continue for much longer.

Andrzej Skolmowski: Grupa Azoty is currently working on a recovery plan to stabilise its financial condition and restore profitability within individual business areas, which will have a long-term effect on equity.

Guest: When will sales of the first types of POLYPROPYLENE COPOLYMERS be launched on the Polish market? As officially announced in mid-May, the output was to reach 100 thousand tonnes of PP, but only for HOMOPOLYMERS.

Andrzej Skolmowski: As planned, the Company’s product range is being steadily extended. The target portfolio comprises more than 30 polypropylene types marketed under the Gryfilen brand. This gradual rollout of new products has been methodically scheduled, with the launch of each new offering preceded with its thorough validation for both production and processing by customers. The Grupa Azoty Polyolefins portfolio of Gryfilen-branded products includes homopolymers as well as copolymers, in different varieties tailored to the needs of downstream processors. Homopolymers are already available in regular sales. Copolymers will be introduced gradually, over the coming months, based on the agreed production plan.

Michał: Why are non-controlling interests in Polimery Police, assuming the full consolidation method, at PLN 26 million, with Grupa Azoty’s interest above 60%, in the investment project worth PLN 7 billion?

Andrzej Skolmowski: As per the consolidated financial statements, the sole shareholders in Grupa Azoty Polyolefins S.A. are Grupa Azoty S.A. and Grupa Azoty ZA Police S.A. Equity interests of the other shareholders are presented as a financial liability arising from the obligation to purchase the shareholdings.

Hence, the non-controlling interests stand at 19.68%.

Paweł: Is Polimery Police consolidated using the full method? Has the Company consolidated PLN 6 billion of expenditures on the polymer project over the recent years?

Andrzej Skolmowski: Grupa Azoty Polyolefins S.A. is consolidated by Grupa Azoty S.A. with the full method, and expenditures on the Polimery Police Project are recognised in the financial statements after consolidation adjustments.

Piotr: Hello! What proportion of Q1 revenue and margin was derived from sales of polypropylene and propylene for the Plastics segment?

Andrzej Skolmowski: In the first quarter of 2024, Polimery Police generated a negative EBITDA of PLN -42 million on revenue of PLN 153 million.

Guest: Last quarter you sold 188 k CO2 allowances in a sale and repurchase transaction. Was the transaction executed for hedging, speculative or liquidity reasons?

Andrzej Skolmowski: The sale transaction was concluded to manage liquidity.

Siarkopol: What is the importance of Siarkopol to GA? Why such a sudden crisis at the company that has thrived for so many years? Why is GA unwilling to sell granulated sulfur to Morocco? Why invest PLN 20 million in locomotives when the plant is old? How to explain those decisions to rank-and-file workers? Why is the company’s policy so complicated? Who’s pulling the strings there? A simple man would run the company better without any politics involved.

Andrzej Skolmowski: We’re taking politics out of the business. Siarkopol has a new president, and the process of appointing new management board members is underway. The priority is to recruit well qualified managers and create teams capable of effectively responding to market challenges.

Grupa Azoty Siarkopol is a supplier of the key raw material for the manufacture of fertilizers and caprolactam. The most urgent task to be dealt with by its new management board will be to develop optimal solutions for the sulfur business. One of the options under consideration at the Group level involves strengthening the area of logistics services using Grupa Azoty Siarkopol’s infrastructure.

We are committed to developing Grupa Azoty Siarkopol in such directions that would allow the company to leverage its potential.

Guest: Hello. We already know the Grupa Azoty Group’s results for Q1 2024. In my opinion the performance is poor, because the first quarter has typically been a period with a net profit (except for the first quarter of last year). My question is: did each product segment record a loss, or did any of them make a profit, and is there a glimmer of hope for the segments that have been running at a loss, something to herald an upward trend in the coming quarters?

Andrzej Skolmowski: The first quarter should be the best one for AGRO, but we’re far from satisfied with its performance. In Q1 2024, the Grupa Azoty Group delivered consolidated EBITDA of PLN -50 million, to which AGRO, CHEMICALS and PLASTICS contributed, respectively, PLN 27 million, PLN -90 million and PLN -56 million. Q2 is a period of maintenance shutdowns, Q3 marks the entry into a new fertilizer season, so – obviously – the segment has no chance to recoup the Q1 losses in the following two quarters.

inwestor2k: Do you expect to receive any government support this year (such as subsidies for energy-intensive enterprises), and if so – when and in what amount?

Andrzej Skolmowski: Our plans for 2024 do not include any support for energy-intensive industries. However, if such regulations that we can take advantage of are enacted, we will certainly apply for the support.

inwestor2k: Please explain the 10% year-on-year increase in administrative expenses – given that the Company is supposedly in a tight spot and cost restructuring plans have been announced.

Andrzej Skolmowski: The year-on-year increase in administrative expenses by 10%, i.e. PLN 24 million, is mainly due to the production launch at Grupa Azoty Polyolefins, expenses incurred to handle the negotiations with banks, and costs of advisory services to develop a recovery plan for the Grupa Azoty Group.

Analyst: Will you try to renegotiate pricing terms in view of the falling coal prices?

Andrzej Skolmowski: We are in direct contact with our trading partners and are negotiating an adjustment to the coal prices. We’re also keeping track of the market prices of all energy commodities, including coal.

Guest: Despite financial constraints faced by the Group as a whole, are there any plans to invest in green energy (renewable energy sources) over the coming years? Are you planning to build an on-site green hydrogen facility or only source green hydrogen from external markets?

Andrzej Skolmowski: The Group’s decarbonisation process will be based on a number of solutions to achieve a carbon neutral footprint of the Group’s product range in the most cost-efficient and technically viable way.

Access to low-cost green energy is key, but other measures, such as green ammonia imports or development of a biomethane market in Poland, are also important and will be explored. We don’t say no to the idea of having our own green hydrogen capacity in Poland.

Marcin: With the launch of polymer production, will you start publishing price charts for the product in your reports ?

Andrzej Skolmowski: At the moment, the market environment section of our Directors’ Report contains an overview of the polypropylene market. We expect that the scope of this reporting will be expanded once the company moves into the commercialisation phase.

inwestor: PKP Cargo, having found itself in dire straits, has terminated its collective bargaining agreement and employment guarantees. Is a similar move also possible at Grupa Azoty?

Andrzej Skolmowski: At the Grupa Azoty Group, each company has a separate Collective Bargaining Agreement with Social Partners, and one of our objectives is to standardise them across the Group in view, for example, of the obligations arising for group entities under the EU pay equity and transparency directive. We consider social dialogue a key activity to be engaged in by the management boards of our Group companies, and any changes that may prove necessary will certainly be discussed with employee representatives.

Kamil: Looking at today’s macroeconomic landscape, has the prospect of share issuance become more remote or the other way round?

Andrzej Skolmowski: We take into account not only the prevailing macroeconomic conditions, but also our activities resulting from the need to stabilise the Group’s finances. In our discussions with the financial institutions, all options are on the table.

Kamil: Can you assure us that none of the Group’s major plants will be sold to a foreign investor? Or, on the contrary, would such sale be a way for the Group to overcome the present crisis.

Andrzej Skolmowski: Any ownership-related decisions will be communicated in accordance with the applicable law. However, our priority is to further integrate the Grupa Azoty Group, with the goal of enhancing its value for current and future shareholders, rather than disintegrate it.

Marcin: Hello. Faced with abounding rumours from various sources, employees are worried about their jobs. Are you planning any layoffs or plant closures?

Andrzej Skolmowski: We’re implementing a recovery programme aimed at stabilising the business, ramping up production rates and making sure our plants are in good condition. This is crucial to be able to talk about funding for our operations. A detailed analysis of the profitability of each plant is an element of our action plan.

Guest: Two of your projects – the Puławy CHP Plant and Polimery Police – are years behind schedule. What is the value of claims against the project contractors?

Andrzej Skolmowski: Pursuant to annex 3 to the EPC contract, the completion deadline for Polimery Police expired on 31 August 2023. According to the EPC contract, liquidated damages for delay in delivering the project are capped at 10% of the contract sum.

The contract for the turn-key ‘Construction of a Coal-Fired Power Generation Unit’ provides for liquidated damages payable to the Company in the event of, among other things: the Contractor’s delay in delivering key project milestones, failure to achieve guaranteed performance parameters by the unit, or the Company’s withdrawal from the contract for reasons attributable to the Contractor. The total amount of liquidated damages (on all those grounds) payable by the Contractor has been capped at 30% of the contract price.

Andrzej Skolmowski: Thank you for another investor chat session and for so many, so varied questions. I’ve done my best to answer them as fully and precisely as possible. It’s always my great pleasure to meet with you. I also invite you to visit the Grupa Azoty Group website, where you can find various resources, including a transcript of today’s conference, along with a discussion of the Group’s results for the first quarter of 2024. A presentation is also accessible on our website, and I encourage you to review it at your convenience. I invite you to join our next chat session. Have a nice long weekend!

moderator: On behalf of StockWatch.pl, I would like to thank you for an interesting discussion and invite you to our future chat sessions.

moderator: Welcome to our online Q&A chat session with Andrzej Skolmowski, Vice President of the Grupa Azoty Management Board. The meeting is devoted to discussing the company’s fourth-quarter and full-year financial performance for 2023.

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Andrzej Skolmowski: Welcome on this sunny day. I am ready to answer your questions about the Group’s results for 2023. A special welcome to those who are on vacation and have chosen to join us today. You can ask your questions now.

Author: Could you provide an update on the current status of the Puławy CHP Plant and the projected start of its operation? Is the company considering pursuing liquidated damages against the firms responsible for construction and commissioning for the delays in meeting the project’s completion deadline?

Andrzej Skolmowski: The construction of the power generating unit, the largest investment project currently pursued, is more than 99% complete. In August 2023, the unit entered its adjustment run phase, initiating optimisation processes, test runs, safety checks, and more. However, on 20 December 2023, Polimex-Mostostal, the general contractor, submitted a notice that it needed to extend the project’s completion timeline. The reason for extension of contract completion by the contractor is a boiler failure that occurred during the adjustment run, consisting in damage to the secondary steam superheater. As per the contractor’s revised schedule, the project is now anticipated to end in October 2024, which means an approximate two-year delay in the investment timeline. The company is presently analysing the progress of the project and has not dismissed the possibility of pursuing claims. We are also looking at how this investment will affect the profitability of our company.

Author: The current production of polypropylene is about 80% of the capacity. When will the company begin generating revenue from polypropylene sales? What is the margin looking like for this product category? It is around a few percent, or more in the range of 10 to 15 percent?

Andrzej Skolmowski: With the ongoing start-up phase of the PDH and PP units, where full production capacity remains unreached, with the current polypropylene prices, the company is able to generate a positive margin on sales. It has been selling polypropylene since January of this year in accordance with its sales strategy. By the end of April, it successfully marketed approximately 70,000 tonnes of polypropylene.

Accountant: Are financial problems, including the need to sign waivers or agreements, significantly affecting the timeline and budget of the Green Azoty transformation project?

Andrzej Skolmowski: The Stabilisation Agreements signed by Grupa Azoty haven’t notably impacted the timeline for the planned expenditure linked to the Green Azoty strategic initiative. Nevertheless, we are trimming down other capital outlays, which are currently undergoing meticulous scrutiny as part of the Group’s recovery plan.

Tomek: Is the current polymer production level of 800 tonnes per day a fixed benchmark or is it fluctuating? Maintaining an output of 800 tonnes per day would be quite good, wouldn’t it?

Andrzej Skolmowski: The plant presently maintains an average production rate exceeding 800 tonnes of polypropylene. The output will gradually go up as new grades are introduced into production.

Author: Will Grupa Azoty buy back Polyolefins shares from the Korean partners and Lotos?

Andrzej Skolmowski: We are currently conducting a thorough analysis of the project, reviewing documentation and confirming our negotiating position. Our primary focus is on our responsibilities, and then we may explore various options for implementation.

Piotr: Hello! Will this year see any increases in the prices of fertilizers manufactured by GA?

Andrzej Skolmowski: We are transitioning now into the final phase of farmers’ nitrogen and compound fertilizer applications in both domestic and European markets.

Sales in the upcoming months will be driven by farmers accumulating stocks for the next fall 2024/spring 2025 season. Fertilizer pricing will be depend on several factors, including the prices of raw materials used in production, such as gas, potassium chloride, phosphate rock, the prices of imported fertilizers, as well as the broader agricultural economic landscape (prices of essential agricultural commodities). We expect that the best prices will be seen during the summer months, coinciding with reduced demand for production inputs from farmers. A subsequent uptick in fertilizer prices should be seen during the fall and winter seasons.

Minority shareholder: How are members of the Supervisory Boards of Grupa Azoty Group subsidiaries selected? Why is it often the case that these boards lack representation from Grupa Azoty S.A., which would provide genuine ownership oversight, and instead include individuals with questionable qualifications?

Andrzej Skolmowski: The process and criteria for selecting members of supervisory boards within the Grupa Azoty Group, as well as the organisation and evaluation of the supervisory body’s work, are governed by the Principles of Ownership Exercise – Corporate Governance Policy at the Grupa Azoty Group. In compliance with these principles, the current management board would like to note the following:

Only persons with appropriate education, professional track records and personal experience should be appointed to the supervisory boards of the subsidiaries and they should be able to devote the necessary amount of time to properly perform their duties on the supervisory board. The composition of the supervisory board should be well-rounded and diverse in terms of gender, education, expertise, age and professional experience.

At the Grupa Azoty Group companies, candidates for supervisory board members must also meet the requirements of the Act on State Property Management.

One of the initial actions undertaken by the current management team was a comprehensive review of the supervisory boards. Following the review, changes have been made to the supervisory body at a number of companies, including GA ZAP, GA ZCh Police, GA ZAK, GA Siarkopol, GA Compo Expert, GA Koltar, and GA PKCH.

Tomek: What is the current economic situation in the fertilizer sector? Do you see an improvement against 2023? Is demand still weak due to imports and cheap grain?

Andrzej Skolmowski: We are witnessing the first signs of a positive shift in the grain market, and hope that these trends will persist. The prices in the first futures contracts for consumer wheat from the upcoming harvest are hovering at almost PLN 900/t at Polish ports, which we see as a promising development. We find ourselves nearing the season’s end, but it is evident that farmers have conscientiously tended to their crops, ensuring they receive the right nutrients. Simultaneously, we are seeing an inclination among farmers to delay purchases as much as possible, opting for smaller and more frequent purchases. Some farmers persisted in their endeavours to economise. What will be the effect of this? We will only see at the end of the year. However, it appears that farmers, despite the challenging market conditions and a volatile first quarter, are currently focusing on ensuring the efficiency of their efforts.

Michał Kozak: What potential negative impact might the plastics segment experience this year as a result of the start-up and defect repair processes at Polimery Police? At current margins, how much should the Polimery Police plant generate annually? Could it be above PLN 500 million?

Andrzej Skolmowski: The delay in the Polimery Police timeline may affect the polypropylene market in such a way that end users, especially in the Polish market, will be forced to import larger volumes of the product to meet their current production needs. It is difficult to estimate the full extent of the delay on the market.

Question: In March this year, you delivered an output in excess of 500,000 tonnes for the first time since July 2022. Is it fair to say that the market has stabilised?

Andrzej Skolmowski: As regards fertilizers, it is true that we significantly increased output in March. The surge in demand can be attributed, in part, to farmers’ eleventh-hour purchases in the domestic market, the extension of the application period, and the heightened sales activity in European markets.

tymek: What possibilities does Grupa Azoty currently have to diversify its gas supply and potentially reduce costs?

Andrzej Skolmowski: We have opportunities to diversify our gas supply all the time. However, what truly matters to Grupa Azoty is whether such diversification will lead to a reduction in gas costs. We are analysing the market.

Author: Is the company engaged in manufacturing for PGZ? What level of annual revenue could this collaboration potentially generate?

Andrzej Skolmowski: Last year, we entered into a development cooperation agreement with PGZ, outlining new avenues for technological advancement and production. Anticipated joint initiatives will encompass research and development in chemical production, ensuring component supplies for manufacturing operations, developing innovative materials, and designing materials for 3D printing.

Guest: What capex projects have been shut down as part of the restructuring process?

Andrzej Skolmowski: The capex plans of all the companies are currently undergoing meticulous review, and their final structure will soon be determined. The restructuring process must effectively align with both the technological requirements of the companies and the requirements set by the banks.

Michał Kozak: Is the current macroeconomic situation conducive to generating positive EBITDA in fertilizers, plastics and chemicals as of today? Please discuss each segment.

Andrzej Skolmowski: Achieving positive EBITDA is not solely contingent on market conditions, although demand remains subdued. It also depends on production costs, particularly those related to raw materials.

The macroeconomic environment impacts the most the industries served by the Plastics and Chemicals segments, and its impact on the industries served by the Fertilizers segment is the lowest. Currently, we haven’t observed any substantial change in indicators that could enhance the situation of consumers and consequently stimulate demand. However, early signs of improvement are beginning to emerge. We anticipate an improvement in demand, although forecasts remain notably cautious. In the Agro segment, demand is primarily driven by other factors, yet macroeconomic conditions still hold significance for the agricultural industry.

Michał Kozak: What is the likelihood that financial institutions will demand a bailout issue of Grupa Azoty or Police shares?

Andrzej Skolmowski: To date, no such demand has been made by the Financing Institutions. A comprehensive long-term financial model for the entire Group is currently under preparation. This model will serve as the basis for defining the optimal structure of the Group’s financing. The sale of some non-operating assets is also being considered as one option for raising financing.

Edi: During the conference, there was mention of consolidating the repair and design functions. How big will be the cost savings? How substantial will the workforce reduction be?

Andrzej Skolmowski:We are currently in the process of conducting a thorough analysis of this process. It will encompass several companies that are currently part of the Grupa Azoty Group. Preliminary estimates regarding savings from the consolidation of functions will be included in the restructuring plan. We aim for these planned measures not only to yield savings for the Group but also to enhance the quality and lead time of the services provided.

Marek: How do you plan to deal with the expensive gas? The cost of producing ammonia in Africa, the Middle East, or the US is roughly half of your cost, even when factoring in transportation costs.

Andrzej Skolmowski: The situation in the gas market is slowly stabilising and gas prices are falling. We are holding talks with our strategic supplier on a revised method of defining gas costs. We are exploring similar arrangements with potential suppliers of ammonia based on which we could carry out a part of our production.

Marcin: Why should it take as long as two years to stabilise the Group’s performance? What is the reason?

Andrzej Skolmowski: This is what experience from other recovery processes suggests. In the case of the Grupa Azoty Group, this is likely to be one of the largest processes of this type in Poland from a financial perspective.

We must also consider the market environment. 2023 was a period of relative stabilisation of the markets and recovery from the extreme events of 2022. While significant economic recovery is not yet evident, the outlook remains optimistic. Challenging macroeconomic conditions have led to a slump in demand, which currently stands at a stable albeit low level. The European industry remains weakened mainly by low demand as well as relatively high production costs. Supply in the European market continues to be aligned with market demand, and many producers are maintaining reduced production rates. Managing production costs and finding markets for products remain considerable challenges for the European industry, particularly in light of its diminishing competitiveness.

inwestor2k: What about the sale of Puławy to Orlen? Can we say that it is definitively off the table?

Andrzej Skolmowski: Causa finita. The project to sell Azoty Puławy Group to Orlen is definitively off the table.

Bartek: Compo Expert reports the largest excess of the value in use over the carrying amount despite these difficult conditions. Can the previous management boards be commended for this investment?

Andrzej Skolmowski: The Compo Expert Group operates in a different segment of fertilizer products compared to the Grupa Azoty Group companies in Poland. It sells speciality fertilizers offered in several advanced and diversified product subgroups, with distribution across numerous global markets. Unlike the Grupa Azoty Group, the Compo Expert Group does not rely on natural gas purchases and procures its primary intermediates and raw materials from global markets. As a result, it demonstrates greater resilience to adverse price fluctuations observed in the underlying markets of the Grupa Azoty Group in Poland.

Guest: What is the risk of terminating the stabilisation agreement with the financial institutions after 28 May 2024? Such move could significantly threaten the Group’s liquidity.

Andrzej Skolmowski: The Grupa Azoty Group is performing all the obligations provided for in the agreement, so we see no risk of termination after 28 May 2024.

Andrzej Skolmowski: Ladies and Gentlemen, thank you for today’s chat meeting and for the multitude of engaging questions. I endeavoured to provide comprehensive answers to the best of my ability. It is always a great pleasure to meet with you, and I would like to invite you to the next chat session with Grupa Azoty. I also invite you to visit the Grupa Azoty Group website, where you can find various resources, including a transcript of today’s conference, along with a discussion of our results for the fourth quarter of 2023 and the full year. A presentation is also accessible on our website, and I encourage you to explore it at your convenience.

moderator: On behalf of StockWatch.pl, I would like to thank you for an interesting discussion and invite you to our future chat sessions.

moderator: Welcome to our online Q&A chat session with Marek Wadowski, Vice President of the Grupa Azoty Management Board. You can ask questions concerning financial results delivered by Grupa Azoty for the three and nine months ended September 30th 2023.

moderator: A quick reminder of the rules of our chat room. First, you send your questions to the moderator. The questions selected by our Guest will be published together with the answers. You can see the order of your questions at the bottom of the screen. Please note that questions not adhering to our rules may be rejected by the moderator.

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moderator: You may ask your questions now. Our Guest will start answering them at 1:30 pm. If you can’t see the answers, please refresh the page. Participants are also encouraged to share this chat and leave their comments on social media using the #chatStockWatch hashtag.

Marek Wadowski: Welcome to our meeting dedicated to discussing the financial results delivered by the Grupa Azoty Group in the third quarter of 2023. You can ask your questions now.

Guest: Could we have more details about the contract with Trafigura PTE Ltd., as well as its effect and implications?

Marek Wadowski: On December 16th 2022, Grupa Azoty Polyolefins signed a contract for deliveries of propane over the period December 2022 – December 2024. Deliveries under the contract will cover more than 50% of the company’s demand for propane in 2023 and 2024, propane being the key raw material used in the production of propylene and polypropylene. On September 14th 2023, Grupa Azoty Polyolefins S.A. executed amendment 1 and amendment 2 to the contract. The amendments are to align the contract with the company’s current needs reflecting the progress made on the Polimery Police project, which is expected to take longer than expected. Under the amendments, the schedule of propane deliveries has been revised, additional deliveries have been contracted, and the contract term has been extended until December 12th 2025. The estimated value of the contract, including the amendments, totals USD 330 million.

Guest: Is the Group’s challenging financial condition likely to prompt a downscaling of capital expenditures in the coming years? If so, which projects may be halted or postponed?

Marek Wadowski: Our current financial condition is compelling us to reassess investment spending, which is reviewed across the mandatory, business maintenance and growth capex categories. We are contemplating a reduction in growth capex, although the ongoing projects and mandatory investments will be carried on. We are also in the process of reviewing our detailed investment plans in consultation with the respective business segments.

Guest: Why have production units at Zakłady Azotowe Puławy been shut down? Why has Zakłady Azotowe Puławy stopped selling its products? They are no longer available on the market.

Marek Wadowski: Production levels within each segment of the Group are determined by the prevailing market conditions and ability to sell the products. For the time being, caprolactam production at the Puławy plant has been halted. Except for the ammonia water production unit, the other caprolactam facilities have been shut down since the first quarter of this year. Given the product’s application, developments on the European plastics market are a major consideration in this case. Continued challenges within this segment are due to low demand for plastics and persistently high production costs. In the case of fertilizers and melamine, production volumes have been adjusted to market conditions. Both on the domestic and foreign markets, sales of the Group’s fertilizer products are based on cooperative arrangements with strategic partners and distributors (indirect distribution). The contracts are being performed in a timely manner.

Guest: What is the net debt to EBITDA ratio as at the end of the third quarter?

Marek Wadowski: The net debt/EBITDA ratio for 12 months (x) as at the end of the third quarter is -2.44x. In accordance with the financing agreements, the ratio is not tested as at the end of the third quarter. It should be noted, though, that Grupa Azoty has signed agreements with financing institutions whereby they agreed to waive certain covenants laid down in the agreements, including the net debt/EBITDA covenant.

Guest: What level of capex should be expected in 2024?

Marek Wadowski: The current situation calls for a reassessment of our investment spending, and the process is underway. Planned investments include projects aimed at aligning the Group’s business with the objectives of the European Green Deal, as well as a number of projects focused on optimising our production processes.

Tomasz Stępień: In your presentation, you mentioned the current capacity of the Polimery Police plant, which already appears to be quite substantial. Could you provide more details on the expected production volumes of propylene and polypropylene in 2023, the start of production at full capacity and the launch of polypropylene sales?

Marek Wadowski: The full production capacity of the Polimery Police plant is expected to be achieved in 2024. One distinctive aspect of projects involving the production of multiple polymer grades is that – for them to achieve maximum capacity – the production processes must first be optimised and the products must be placed on the market. Sales of our polypropylene product have already started, with full commercialisation planned for 2024.

Jędrzej Stachura, BiznesAlert.pl: Could you provide a rough estimate of when Solarfarm Brzezinka will become operational and its anticipated generation capacity? Is the Grupa Azoty Group planning more investment into renewables?

Marek Wadowski: The intended capacity of the Solarfarm PV power plant is 270-300 MWp, depending on the selected development option. Shares in Solarfarm are planned to be acquired in the third quarter of 2024. The Grupa Azoty Group is contemplating further investment into renewable energy projects now and in the future, both on the premises owned by the Group and through targeted acquisitions.

Tarkbo: Is the Group considering a potential CCS project involving underground injection of CO2 to avoid having to pay higher carbon charges? Will imports of ‘green’ ammonia, if any, lead to the closure of entire production lines at the Group’s plants and staff layoffs?

Marek Wadowski: The Grupa Azoty Group is contemplating CCS as one of possible pathway towards decarbonisation. We constantly monitor regulatory changes relevant to such projects, particularly with regard to onshore CO2 injection. We keep in touch with representatives of other energy-intensive industries, where the CCS technology plays a significant role for their sustained long-term operations in Europe. Importing green ammonia is another decarbonisation path we may consider. Green ammonia projects are mainly undertaken in regions with favourable environmental conditions (low-cost renewables) and attractive support measures. We are engaged in discussions on that matter with US companies, but we are not currently considering an option of importing green ammonia to completely replace the output of our own plants.

Tarkbo: Wasn’t it a mistake to insist on curtailing fertilizer production in the first six months of this year, when gas prices were at their lowest? Or banning the product transfer to third-party storage facilities? All the output from that period could now be sold at a profit.

Marek Wadowski: To begin with, our production volumes during that period were adjusted to market demand for current applications. Producing just to increase stocks would tie up cash. The currently prevailing prices of nitrogen fertilizers are notably lower than those in the first and second quarters of 2023, meaning that selling stocks produced during that period would now generate a loss. Furthermore, gas prices in the third quarter of 2023 were lower than those in the first half of the year.

Przemysław: Are you planning to hold more discussions with banks regarding a restructuring and modification of the financing terms? Wouldn’t it be a good idea to consider an issue of bonds / Eurobonds?

Marek Wadowski: The Grupa Azoty Group is in discussions with financial institutions over the terms of additional arrangements to keep in place the existing package of financing agreements. Importantly, the Grupa Azoty Group has cash and undrawn funds under financing agreements allowing it to maintain liquidity and service debt in accordance with the terms of the Waiver and Amendment Letters.

Michał: Why is the Company struggling to achieve profitability on fertilizers even though the gas market has stabilised? Could the first quarter of 2024 see a breakthrough?

Marek Wadowski: Demand for nitrogen fertilizers went up in the third quarter of this year, driven by rising prices in Europe and globally. An uptick in demand for nitrogen fertilizers was seen both on the domestic and export markets. A continued challenge in Poland has to do with large volumes of imported urea, whose prices reduce potential buyers’ willingness to purchase nitrate fertilizers, significantly affecting profit margins we were able to achieve on those products in the presented period, despite the relative stabilisation of gas prices. In addition, the emergency shutdown at the Kędzierzyn plant coupled with the scheduled maintenance shutdowns led to an erosion of profitability in the Agro Segment.

inwestor: Why haven’t the volumes of NPK fertilizers returned to former levels as they have in the case of nitrogen fertilizers?

Marek Wadowski: A decline in the consumption of compound fertilizers is much more pronounced than in the case of nitrogen fertilizers. For this reason, the volumes are taking longer to be restored and we expect to see an improvement next year. In addition, the prices of compound fertilizers in 2023 did not decline as steeply as those of nitrogen fertilizers, which has also led to a more substantial reduction in the volumes consumed by end users.

Paweł: Are nitrogen fertilizer prices in the fourth quarter likely to increase relative to the third quarter?

Marek Wadowski: The prices of nitrogen fertilizers are expected to continue on an upward trend in the fourth quarter of this year.

Brzoza: The Group incurred substantial losses in the third quarter, as opposed to exceptional earnings posted in 2021 and 2022. Why, unlike other chemical producers, didn’t the Group invest in acquiring smaller businesses? European companies have operations in the US and Asia, seeing an upswing in their EBITDAs. And a follow-up question. Agro has reported a PLN 1,116 million loss this year. It appears that the acquisition of Compo Export was more of a major misstep than a favourable deal. What are your plans for that company?

Marek Wadowski: After the record-breaking year 2022, Compo Expert’s performance in 2023 has been somewhat weaker. Following a challenging first half of the year, there was an improvement in the third quarter. We are noticing signs of recovering demand in its key sales markets and stabilising prices of the main raw materials. The Group’s global presence (in more than 100 markets) enables a diversification that helps to significantly mitigate business risks. The main objective behind our decision to acquire COMPO EXPERT was not to enter new sales markets, but to add high-margin speciality fertilizers to our product portfolio. As regards our trade partnership potential, we have been tapping on it since the beginning of 2019. One of the major achievements was in particular the launch of sales of Grupa Azoty’s compound fertilizers on the Greek and Balkan markets. We are intent on further developing this collaboration.

Guest: What is the share of compounds in your total sales of plastics?
Marek Wadowski: In the third quarter of this year, compounds represented 14 percent of plastics sales.

Marek: ...The Grupa Azoty Group is the undisputed leader of the Polish fertilizer market and a key player on the European market of fertilizers and chemicals. It is the European Union’s second largest manufacturer of nitrogen and compound fertilizers... Although this description may be slightly far-fetched today, there is no doubt that GA is a major player in the industry. It is difficult to determine when the project mentioned in the article will start earning profits as it is still in the commissioning phase, but it is crucial for the “operating part” of Police. The project was expected to yield profits, but apparently fell short of expectations. What about the operating part, that involving the production of fertilizers? Are you going to invest in the decades-old, failure-prone production lines that are costly to maintain, rendering production both expensive and uncompetitive? Investments and concrete measures need to be taken right now if we are to remain optimistic about the present and the future. Can we afford to let importers from we all know which countries freely enter our market? The volume of imports is staggering, far exceeding our own production levels. I know that your answer might be: we are short of funds, we have been incurring losses, etc. If you provide an answer like this, rather than charting a course towards swift and innovative solutions to improve our competitiveness, then, in my view, the fate of Grupa Azoty has been sealed. The solutions enabling substantial and tangible improvements already exist. And they are not that expensive. I believe you have this knowledge. I am looking forward to receiving some information on this subject tomorrow. Regards.

Marek Wadowski: We keep implementing numerous projects with the goal of developing our competitive advantages and consolidating our position as one of the leading groups in the European fertilizer and chemical industry. Specific projects designed to enhance our position in the fertilizer market are included in the Grupa Azoty Group’s Strategy until 2030. They primarily involve a shift towards sustainability, reflected both in our product portfolio and technologies, hence our emphasis on initiatives focusing on the energy transition. This allows us to raise our energy efficiency and offer products with the lowest possible carbon footprint to customers within each segment. Our financial condition does necessitate a review of investment plans, but the fertilizer segment remains a crucial component of our production capacities, and we are factoring this consideration into our decisions.

FinTwitter: Has the company concluded any discussions regarding polymer sales? When can we expect the signing of any binding contracts with buyers?

Marek Wadowski: Grupa Azoty Polyolefins is ready, both commercially and logistically, to launch full-scale sales. The Gryfilen brand has already been positioned on the European market. The company has built a broad portfolio of end customers and forged relationships with distributors. Sales of the finished product have already started.

inwestor GPW: Considering the Group’s dire financial results, does Green Azoty remain a viable project?

Marek Wadowski: Green Azoty is a key project of the announced Grupa Azoty Group’s Strategy until 2030. Its primary focus is on decarbonising energy generation and reducing CO2 emissions. The general direction set by Green Azoty remains unchanged and will be consistently pursued by the Group. Some initiatives under the project are currently in progress, and some have already been completed. Other initiatives are under review.

Jarek: Considering the reported losses, is there a need to recapitalise any of the Group companies, as was previously the case with Grupa Azoty Police?

Marek Wadowski: Generally speaking, there is currently no need to recapitalise any of the Group companies because of the reported losses.

akcjonariusz: Correct me if I’m wrong: you must extend a loan to Polimery Police so it can service its bank debt? Is the company going to seek any compensation from the contractor?

Marek Wadowski: Grupa Azoty and Grupa Azoty Zakłady Chemiczne Police have granted a joint and several support loan provision guarantee (for up to EUR 105 million) to cover a potential shortfall in financing of the Polimery Police project. The prolonged project completion time involves a risk that the support loan in the form of a subordinated loan will have to be disbursed. In accordance with the distribution mechanisms, the loan would be repaid with surplus cash from future operations of GA Polyolefins.

Guest: Is it true that your most recent wage payments were financed through a loan taken out for that purpose?

Marek Wadowski: Current liabilities (including payment of employee wages) are settled with cash and undrawn credit facilities available to the company. Grupa Azoty’s liquidity is at a safe level.

Marek Zych: Have you explored alternative sources of ammonia imports other than the United States? Is the decision to proceed with such import final? Are you considering imports from markets other than the US?

Marek Wadowski: The Grupa Azoty Group is exploring various options for ammonia supplies by sea, encompassing both the procurement process and development of the logistics infrastructure around the terminal in Police.Decisions in this regard will depend on the ammonia balance within the Group, the economic viability of such transactions relative to our own production, and any low-carbon ammonia projects.

Michał: Can banks mandate a bailout share issue at Grupa Azoty? What is the Company’s liquidity position? It is evident that the Polimery Police project is delayed, with a shortfall of PLN 1.6 billion in capital expenditure to meet the budget.

Marek Wadowski: Thanks to efficiency-enhancing measures, the Grupa Azoty Group’s liquidity position is safe. Time to complete the Polimery Police project has been extended due to a delay in the works carried out by the general contractor. For this reason, the percentage of its completion is higher that the percentage of the budget spent (as payments are made following the acceptance of individual project milestones).

Marek Wadowski: Ladies and Gentlemen, thank you for today’s meeting and your insightful questions. I also invite you to visit the Grupa Azoty Group website, where you can find various resources, including a transcript of today’s conference, along with a discussion of our Q3 2023 results and presentation.

moderator: On behalf of StockWatch.pl, I would like to thank you for an interesting discussion and invite you to our future chat sessions.

moderator: Welcome to our online Q&A chat session with Marek Wadowski, Vice President of the Grupa Azoty Management Board. You may ask questions concerning the financial results delivered by Grupa Azoty Group companies in the first half of 2023.

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Marek Wadowski: Welcome to our meeting dedicated to the results of the Grupa Azoty Group for the three and six months ended June 30th 2023. You can ask your questions now.

Marek: Has Polimery Police secured a sufficient supply of process steam to operate at full capacity? The President only mentioned propane during the conference.

Marek Wadowski: Regarding the supply of raw materials, including propane, the company has established relevant supply contracts and is fulfilling them as scheduled. We are flexible in adjusting the schedule to align with the progress of plant commissioning. As previously announced, the company has secured propane contracts for production purposes that extend through the end of 2025.

As for the process steam required for production, it is generated at the Polimery Police plant through waste heat recovery, ensuring self-sufficiency in this aspect. Also, we have the ability to generate additional steam using the steam boiler. Notably, the steam boiler maintains a minimum 50% reserve, serving as a backup energy source for the neighbouring fertilizer production facility of Grupa Azoty Zakłady Chemiczne Police, which is connected via a pipeline.

moczur: What does ‘a significant increase in demand in the third quarter’ mean, and can we expect it to translate into a net profit?

Marek Wadowski: As predicted, we have witnessed a substantial recovery in the Agro segment since the third quarter, which has had a favourable impact on our overall performance. August marks the third consecutive month of increased fertilizer production for the Grupa Azoty Group. Yet, the Plastics and Chemicals segments face persistent challenges. The extensive influx into Europe of non-EU products, made from cheaper raw materials and manufactured under more lenient regulations, predominantly from Asian countries, remains a hurdle for our Group.

Guest: Hello. Could you please provide an update on the current status of the discussions regarding the sale of Puławy?

Marek Wadowski: A due diligence process is currently underway. As a result, we are fulfilling the provisions outlined in the non-disclosure agreement signed earlier this June. Any new developments on this matter will be promptly communicated to the market, following the established practices and regulations applicable to companies listed on the Warsaw Stock Exchange.

Guest: Could you please provide an update on the current situation in the Chemicals and Plastics segments? To what extent have the negative trends reversed?

Marek Wadowski: The first half of 2023 has presented challenging market demand conditions for products in the Chemicals and Plastics segments. Reduced consumer demand, primarily stemming from unfavourable macroeconomic conditions, has led to a decrease in demand for these products. Persistent market challenges, extending from the pandemic to the energy crisis and Russia’s aggression against Ukraine, have had a significant impact on global markets, particularly in Europe. The process of rebuilding these markets requires a period of stabilisation followed by recovery. Current trends suggest we are still in a transitional period. While certain signs of recovery are emerging, such as in the automotive sector, we are starting this recovery from a very low base, which remains below the pre-pandemic levels.

Benia: Why did nitrogen fertilizer sales and production outperform compound fertilizers in August?

Marek Wadowski: The Grupa Azoty Group operates four leading production plants (three producing nitrogen fertilizers and one producing compound fertilizers). Additionally, there is Fosfory, based in Gdańsk, which produces compound fertilizers at a smaller volume. As a result, the Group has larger production capacities for nitrogen fertilizers and comparatively lower capacities for compound fertilizers.  The sales in August encompassed both the current production and purchases of fertilizers produced and delivered in the first half of 2023. The variation in fertilizer supply stems from the differences in production capacity, which is lower for compound fertilizers, thus explaining the disparities in sales between the two.  It’s worth highlighting that in August, there was a global increase in fertilizer prices, including nitrogen fertilizers produced by the Grupa Azoty Group. This prompted some farmers, particularly larger farms preparing for the spring of 2024, to expedite their fertilizer purchases and build up their fertilizer stock.

inwestor_2k: Hello. Grupa Azoty operates in an industry prone to cyclicality. The past two years have been an ordeal for shareholders, and as you pointed out, the second quarter marked a perfect storm. Are any signs of market improvement on the horizon?

Marek Wadowski: Over the past two years, we’ve experienced significant volatility in raw material prices, particularly in gas, which serves as the primary feedstock for the Grupa Azoty Group. However, since the beginning of this year, there has been a stabilization in gas prices in the market, which allows us to implement a consistent pricing strategy for our fertilizers. Additionally, there is an uptick in demand for nitrogen fertilizers. The Plastics and Chemicals segments continue to grapple with unfavourable macroeconomic conditions and strong competition from imported products, particularly those originating from Asian countries. But we are beginning to see first signs of a turnaround from the negative trends witnessed in the first half of 2023.

Guest: Is the Grupa Azoty Group planning to increase its fertilizer prices in the second half of the year? Is this even feasible given the competitive pressures from imported products?

Marek Wadowski: The Grupa Azoty Group determines its fertilizer prices through continuous market analysis.  Furthermore, as previously announced, as part of our efforts to stabilise the market, we are returning to the price path model employed in prior periods this season.

Guest: Hello. There have been discussions regarding a potential merger with ZEW Nidzica, but it seems that there has been a lack of recent updates. Is this still a current topic? Can you provide any insights into the matter?

Marek Wadowski: We are currently in the process of conducting analyses. If there are any reportable developments, we will promptly inform the market in accordance with standard stock exchange procedure.

Guest: What is the current status of the Russian oligarch’s shareholding? Is Mr Kantor contacting the company? Does he have access to sensitive information of the Grupa Azoty Group?

Marek Wadowski: On July 11th, 2023, the Minister of Development and Technology issued a decision to institute a temporary administration lasting six months for three companies associated with Mr Kantor. This was done to take over ownership of these companies’ shareholdings in Grupa Azoty of Tarnów. Radosław Leszek Kwaśnicki was appointed by the Minister of Development and Technology to oversee the temporary administration. As a result, the administrator has gained control, including voting rights, over the company’s shares. Mr Kantor is not in contact with the company and does not have access to any sensitive information.

Guest: Indeed, it wasn’t until August that you approached production levels comparable to the previous year, and last year was marked by plant operation interruptions, so there’s not much to celebrate here. Can you provide insight into when the management board anticipates a return to a more stable situation? Could you share the capacity utilisation rate for the second quarter?

Marek Wadowski: The stabilisation of market gas prices has enabled the Grupa Azoty Group to return to the fertilizer sales policies employed in previous years. We are witnessing a rise in demand for fertilizers, leading to increased production and higher capacity utilisation. With the additional government support for farmers (subsidies for grain, fertilizer, and fuel) amounting to approximately PLN 10bn, we anticipate this positive trend will persist as the year progresses.

Roten: Will the net debt/EBITDA covenant be breached at the end of September? What is the timeframe provided by the banks for rectifying the ratio?
Marek Wadowski: Under the waiver agreements signed on August 31st 2023, the institutions have agreed to waive certain provisions of the Grupa Azoty Group’s financing agreements, specifically the net debt/EBITDA ratio as calculated using the financial statements for the first half of 2023. The subsequent calculation of this ratio in compliance with the financing agreements will be based on the full-year financial statements for 2023.  In addition, the parties have agreed to negotiate in good faith to reach a mutually satisfactory solution that would enable the Group to continue its operations and fulfil its obligations under the financing agreements in accordance with their terms.

Guest: Is the company planning to seek contractual penalties for the delay on the Polimery project in Police? Does the company believe the issues encountered during the commissioning phase were unforeseeable?

Marek Wadowski: Given the scale of the project, it can be challenging to entirely mitigate the risk of technical issues, particularly during the commissioning phase. The contract includes provisions for contractual penalties in the event that the contractor does not meet the specified deadlines.

Gwidon: Considering the ongoing difficulties in the Plastics and Chemicals segments, is it safe to say you don’t expect a positive EBITDA for the third quarter?

Marek Wadowski: The improving situation in the fertilizer business has a positive impact on our results. However, the Grupa Azoty Group's other business segments are still navigating challenging conditions, including a globally low demand across various end-use industries (especially in construction), a declining trend in product prices, and persistent strong competition from Asian producers.

Guest: Does the contract with Orlen include any minimum gas offtake requirements or a take-or-pay clause?

Marek Wadowski: Our contracts do not contain a take-or-pay clause.

Guest: How is Compo Expert, your German operations, performing in the current conditions?

Marek Wadowski: After a record year in 2022, Compo Expert’s performance in 2023 has been somewhat weaker. Following a challenging first half of the year, there has been an improvement in the third quarter. We are noticing signs of heightened demand in key sales markets and a stabilization of prices for main raw materials.

Marek Wadowski: Ladies and gentlemen, thank you for today's meeting and your insightful questions. I invite you to visit our website, where you can find various resources, including a transcript of today’s results conference, along with a detailed discussion of our results and a results presentation.

moderator: On behalf of StockWatch.pl, I would like to thank you for an interesting discussion and invite you to our future chat sessions.

moderator: Welcome to our online Q&A chat session with Marek Wadowski, Vice President of the Grupa Azoty Management Board. The session will be devoted to discussing the results reported by Grupa Azoty Group companies in the first quarter of 2023.

moderator: A quick reminder of the rules of our chat room: you first send your questions to the moderator. The questions selected by our guest will be published together with the answers. You can see the order of questions at the bottom of the screen. The moderator has the right to reject questions which do not comply with the rules.

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Marek Wadowski: Hello and welcome to our chat. The purpose of today’s chat is to discuss the performance of Grupa Azoty Group companies in the first quarter of 2023. You can ask your questions now.

Maciej: Hello. “The government is working on a solution that will allow the Grupa Azoty Group to continue as a going concern,” said Jacek Sasin, Deputy Prime Minister and Minister of State Assets. What options are on the table?

Marek Wadowski: All significant events, should they occur, are reported by the Grupa Azoty Group in accordance with the regulations applicable to WSE-listed companies.

Renata: Will Azoty Puławy be gradually closed down? Its employees are being laid off and production has almost ground to a halt. Gas prices are at their pre-war levels.

Marek Wadowski: Jobs at Grupa Azoty PUŁAWY are not threatened. The company’s management board is not planning any layoffs.

Gwidon: Is it true that work is under way to sell Zakłady Azotowe Puławy to PKN Orlen?

Marek Wadowski: All significant events, should they occur, are reported by the Grupa Azoty Group in accordance with the regulations applicable to WSE-listed companies.

Andrzej Poteraj: Do you intend to produce green ammonia from surplus renewables or will you continue to produce hydrogen from expensive, imported natural gas?

Marek Wadowski: Production of green ammonia is extremely important for the future operation of the Grupa Azoty Group. We are now looking into the possibility of either producing or importing green ammonia.

It is too early to talk about surplus energy from renewables. However, we continue our efforts to increase the potential in this area, and we will keep you informed about specific steps we take.

Analyst: Hello. Why do you recognise the amount of subsidy for energy-intensive sectors on a one-off basis, rather than over the period for which it was granted? It sort of blurs the picture...

Marek Wadowski: The Grupa Azoty Group recognised the received compensation in accordance with International Accounting Standards which state that a government grant that becomes receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with no future related costs is recognised in profit or loss of the period in which it becomes receivable.

Tomek: Does the Grupa Azoty Group (given that it buys more expensive gas than manufacturers from other regions) plan to change its gas procurement model to, for instance, direct imports?

Marek Wadowski: The Grupa Azoty Group monitors the viability and profitability of direct imports on an ongoing basis. If there are better offers than our existing gas supply contract, we will certainly consider them.

Guest: Market prices of gas were falling, and the chart in your earnings presentation showed that the unit cost of gas purchased by the Grupa Azoty Group rose in the first quarter. Did that result from gas price hedging or your contract with PGNiG? How strong an impact did that have on your EBITDA?

Marek Wadowski: The costs of gas consumption were significantly affected by the reduced production scale, which we adapted to the current supply and demand dynamics on the market for products manufactured by the company.

Adam: How much propane and electricity is needed to manufacture one tonne of propylene using the PDH method?

Marek Wadowski: The consumption of individual raw materials per tonne of product depends on the quality of the raw material and will be consistent with the licence assumptions.

Dariusz Nawrot: Are there any talks underway on the acquisition of Grupa Azoty by PKN Orlen?

Marek Wadowski: All significant events, should they occur, are reported by the Grupa Azoty Group in accordance with the regulations applicable to WSE-listed companies.

Krzysiek S: When were the inventories covered by the write-down at Grupa Azoty Puławy produced? Why wasn’t this write-down included in the full-year report? Did fertilizer prices plunge in the first quarter?

Marek Wadowski: Inventory write-downs are recognised in accordance with Grupa Azoty Puławy’s accounting policy, once a quarter. The write-down may be recognised on inventories produced in the reporting quarter and in earlier periods.

Quarter on quarter, Grupa Azoty Puławy reported a decline in the prices of its key products, ranging from 2% to 25%, depending on product category. However, the revenue decline in the first three months of 2023 was mainly related to lower sales volumes.

shareholder: Hello, could you please give us an update on the merger between Grupa Azoty and Zespół Elektrowni Wodnych Niedzica S.A.? Are there any new developments?

Marek Wadowski:In September 2022, the Grupa Azoty Management Board announced that after the due diligence and valuation of the business of Zespół Elektrowni Wodnych Niedzica S.A. was completed, and considering the Grupa Azoty Group’s Strategy for 2021–2030, which includes the Group’s transition towards renewable energy sources, the Management Board decided to request the Polish State Treasury, as the sole shareholder in ZEW Niedzica, to initiate a process leading to potential acquisition of the company and its integration with the Grupa Azoty Group.

Grupa Azoty’s intentions remain unchanged. At present, the potential transaction and its optimal structure are being analysed.

MarzenaGPW: Hello. Why is Grupa Azoty Puławy the least affected by reduced fertilizer production? Do units of this company deliver the highest margins?

Marek Wadowski: Each company of the Grupa Azoty Group adapts its production levels to the current supply and demand situation.

Given that the companies’ product mix is different, it is difficult to compare reduction in their production volumes.

Michał Kozak: What is the risk of delayed launch of Polimery Police? In which quarter should results delivered by PDH materially contribute to Grupa Azoty Group’s results? What is behind the low capex spend (PLN 4.75 billion vs a budget of PLN 7.2 billion)?

Marek Wadowski: The Polimery Police project is progressing on schedule. The company plans to generate increasing cash flows in the second half of the year. Capital expenditure is being made as scheduled.

Guest: In the first quarter of 2023, gas consumption at the Grupa Azoty Group fell 34% y/y. However, gas purchase costs decreased by only 38% y/y although the average gas price on the EEX went down 44% y/y. This can be partly explained by gas transmission costs, which were not lower per unit of transmitted gas. But how much more did the Grupa Azoty Group pay for gas consumption alone in the first quarter of 2023 compared with the prices on the EEX?

Marek Wadowski: In addition to the market price from the German exchange, the cost of gas consumption also includes transmission and storage costs, the supplier’s margin and other fees (such as balancing fees). Movements in the EUR/PLN exchange rate also play an important part.

All these items significantly increased year on year.

Guest: Have you held any talks with the banks concerning non-compliance with the covenants yet?

Marek Wadowski: We are not holding any such talks with financial institutions. However, we do identify the risk of failure to maintain the net debt/EBITDA ratio within the range permitted by the financing agreements. This ratio will be tested at the end of June 2023.

Guest: What will the breach debt covenants result in? Would it just mean a higher interest rate, or would it also accelerate the debt?

Marek Wadowski: In the event of breach of the net debt to EBITDA ratio permitted by the financing agreements as at the next calculation date of June 30th 2023, the Grupa Azoty Group intends to work with all of the institutions that provide financing to the Group in order to determine the steps required to eliminate such breach.

Considering the Group’s long-standing, partnership-based cooperation with these financial institutions, we do not expect materialisation of the risk of declaring an event of default regarding the parameters specified in the financing agreements and accelerating the debt.

Michał Kozak: Is any segment likely to deliver negative EBITDA in the second quarter of 2023?

Marek Wadowski: The Grupa Azoty Group monitors its financial performance on an ongoing basis. In the second quarter of 2023, we continue to see the impact of the supply and demand dynamics on our results. We will publish estimated results for the first half of 2023 as soon as they are prepared. The issue of financial statements for the first six months of 2023 is scheduled for August 30th 2023.

Guest: How are gas price talks with Orlen going?

Marek Wadowski: We do not comment on negotiations held with our strategic natural gas supplier.

We will disclose the outcome of the negotiations in a stock market announcement.

Michał Kozak: Do I understand correctly that another PLN 2.45 billion is to be spent on Polimery Police in the consolidated financial statements between the second and fourth quarters of 2023, with the amount to be added to net debt?

Marek Wadowski: Grupa Azoty has already fully discharged its equity contribution commitment in respect of Polimery Police, with the remaining CAPEX to be funded with proceeds from Grupa Azoty Polyolefins’ credit facility provided on a project finance basis without recourse to Grupa Azoty. Accordingly, debt under the Polimery Police credit facility agreement (and any increase in the debt) is excluded from Grupa Azoty’s net debt as defined in its financing agreements.

Kamil: Is Grupa Azoty planning to produce green ammonia on its own? What is your current installed PV capacity and what is the capacity of your PV projects in the pipeline?

Marek Wadowski: We are analysing options to produce or import green ammonia. We will keep you informed on that.

Work is also under way on renewable energy projects. We have already announced our interest in the project to build the 270 MWp Brzezinka solar PV power plant. Smaller projects are being prepared at the sites of the Group companies.

Guest: Will the 2030 strategy revision planned for next year also cover financial targets?

Marek Wadowski: Grupa Azoty takes a comprehensive approach to its strategy, and this is also true for the planned revision of our strategic targets.

Chemik: Will your current results and operating cash burn rate lead to delays in key capital projects and the zero-carbon transition?

Marek Wadowski: In line with our stated strategy, Grupa Azoty plans to spend PLN 2.7bn on green and decarbonisation projects until 2030.

We are adjusting our investment plans to current market conditions. Execution of our flagship green transition project, Green Azoty, is a priority to us.

abcabc: Is it true that production has been shut down for as long as six months on some units? Are layoffs likely soon, or only after the elections?

Marek Wadowski: Grupa Azoty PUŁAWY regularly reports on its production volumes in current reports. Also, the company has published monthly updates on its production volumes since January 2023. In common with other European producers, the company is adjusting production to current market conditions. In addition, on May 17th 2023 Grupa Azoty Puławy announced that it partially resumed melamine production.

Jobs at Grupa Azoty PUŁAWY are not threatened. The company’s management board is not planning any layoffs.

Guest: Is the company or the government lobbying for reinstating ammonia and urea tariffs?

Marek Wadowski: The suspension of tariffs was an ad hoc measure taken by the EC in response to a request from the EU agricultural sector to lift all fertilizer duties, including anti-dumping duties. The EC’s decision was based on the reported risk of fertilizer shortages in the EU and high gas prices.

The position taken by the Polish government was one of the reasons why the duties were only temporarily suspended for six months and not for two years, as proposed in the Commission’s original draft. The temporary suspension may be extended only after the Commission has performed a relevant analysis and prepared a report on its findings.

Guest: Hello. Why did your bank debt rise from 2.2 billion to 3.8 billion at the end of the first quarter?

Marek Wadowski: The rise in bank debt in the first quarter of this year was partly due to negative EBITDA reported by the Group as well as changes in its working capital, including a decrease in trade payables in the period.

Guest: In which month of the year will production start at Polimery Police?

Marek Wadowski: Polypropylene production will start at the end of the second quarter and the beginning of the third quarter of 2023.

Antek: What’s your comment on the media reports suggesting Zakłady Azotowe Puławy may be taken over by Orlen? Are any such preparations actually taking place? When did they start? How many employees are scheduled for layoff in Puławy?

Marek Wadowski: All significant events, should they occur, are reported by the Grupa Azoty Group in accordance with the regulations applicable to WSE-listed companies.

Jobs at Grupa Azoty PUŁAWY are not threatened. The Management Board of GA PUŁAWY has no plans to make redundancies.

Mariusz: Since it was obvious that fertilizer prices were unacceptable to farmers at the time, wasn’t that a cue for management to cut production? The market knows and responds to demand. Given the soaring gas prices, wouldn’t it have been reasonable to cut production and explain to Mr Sasin he was wrong? He pressed for production to continue, and now no-one wants to take responsibility. 1.5 billion loss for the last six months. I don’t think the second quarter is going to be any better. What does the management board have to say about this?

Marek Wadowski: When deciding production volumes, Grupa Azoty takes into account the achievable price and logistics issues. The selling price of fertilizer covers variable production costs and part of fixed costs, but when production cuts are implemented (dictated by fertilizer demand) total costs cannot be covered. Although a loss is generated, inventory levels are reduced and cash is not tied up. Grupa Azoty also takes logistics into account when deciding on its production volumes. In order to ensure fertilizer availability and maximise sales volumes, fertilizers must be distributed to end users in advance. This approach helps maximise the bottom line.

Tomek: Do the first signs of a slight upturn mentioned in the presentation also apply to the agro segment and fertilizers? Is there a risk that European fertilizer producers being pushed out of the market by imports from countries with access to cheaper gas may prove a lasting phenomenon?

Marek Wadowski: We are seeing stronger demand for some product categories due to agrotechnical deadlines – but it’s below prior-year levels.

Michał Kozak: Is Grupa Azoty expecting more EU or government support, like the aid received in the first quarter of 2023, in the coming quarters or years?

Marek Wadowski: Grupa Azoty is exploring options to join assistance programmes supporting businesses in the face of the present energy market situation. We will apply for assistance when such opportunities materialise.

Guest: Are further fertilizer price reductions likely?

Marek Wadowski: Grupa Azoty is in the process of preparing an offer for the new fertilizer season. The offer will take into account the current market situation.

Guest: Soaring energy prices are cited as one of the reasons for poor performance. Meanwhile, basic DAM base contracts on the POLPX traded at prices that were just 2% higher year on year and 17% lower quarter on quarter. Was Grupa Azoty buying energy above market prices?

Marek Wadowski: The volumes traded on the POLPX are not sufficient to meet the needs of Grupa Azoty, so DAM purchases are used to fill the shortfall, and they do not determine the final price we pay for electricity.

Grupa Azoty Group companies buy electricity at market prices under futures contracts with major trading companies.

Guest: What’s your outlook for the second half of the year given that duty-free imports of fertilizers are still permitted and the spread on calcium ammonium nitrate in the second quarter is narrower compared with the first quarter?

Marek Wadowski: Preparing for the opening of a new season in the second half of the year, Grupa Azoty will take measures to stabilise the current market, including by using proven solutions regarding proposed price paths, taking into account current market conditions.

Marek Wadowski: Thank you very much for your questions and your participation in today’s meeting. It is always a great pleasure to meet with you, and I would like to invite you to the next chat session with Grupa Azoty.

moderator: On behalf of StockWatch.pl, I would like to thank you for an interesting discussion and invite you to our future chat sessions.

moderator: Welcome to our online Q&A chat session with Marek Wadowski, Vice President of the Grupa Azoty Management Board. We will discuss the most recent financial results, the current situation in the chemical and fertilizer markets, and the outlook for the coming quarters.

moderator: A quick reminder of the rules of our chat room: you first send your questions to the moderator. The questions selected by our guest will be published together with the answers. You can see the order of questions at the bottom of the screen. The moderator has the right to reject questions which do not comply with the rules.

moderator: Information for journalists reporting our session: when citing today’s chat you are required to specify the source. If you have any questions or doubts, please contact: ##qxjgd#at#hidrzlpirw.ea##

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Marek Wadowski: On behalf of Grupa Azoty, I would like to welcome you to this chat session. Today, we will discuss the fourth-quarter and full-year 2022 results of the Grupa Azoty Group companies. You can ask your questions now.

Tamara: Is the company feeling pressure from customers to extend payment terms given the challenging situation in the fertilizer market?

Marek Wadowski: No. We are not seeing any pressure to extend payment terms.

Tomek: I have a question about the Polimery Police project. Are the PP and PDH plants to be started up simultaneously? Is it possible the polypropylene (PP) plant will be started up before the PDH unit using propylene supplied by a third party?

Marek Wadowski: The PP plant will be test-run on propylene purchased from a third party. It will be tested and then shut down. For continuous operation, the plant will be brought onstream simultaneously with the PDH unit.

inwestor_2k: Good day. I have read somewhere that Puławy is going to build a rare earth extraction facility. Is this true? If so, please elaborate – what’s the completion date, which metals will be processed and who will provide the technology?

Marek Wadowski: Grupa Azoty Puławy is not directly involved in any project of this type. A third-party planning to conduct extraction operations is leasing land from Grupa Azoty Puławy. Under the contract in place, Grupa Azoty Puławy is also to supply utilities to the company.

ISBnews: What is Grupa Azoty’s capex for 2023? And what is the estimated expenditure to be incurred on Green Azoty projects this year?

Marek Wadowski: In line with our strategy, we completed our first capex projects in 2022. These included heat recovery from chemical processes – construction of a turbo generator set using steam from the Sulfuric Acid Department at Grupa Azoty SA, upgrade of the ammonia liquefaction unit, replacement of K-2 and K-3 ammonia gas compressors with electric compressors, and upgrade of the partial combustion unit at the Ammonia Department, which are elements of the New Energy Concept at Grupa Azoty ZAK SA, which envisages using process heat from chemical units to produce electricity and other energy carriers. We are also implementing R&D projects under Green Azoty that are contributing towards our strategic goals. According to estimates, Grupa Azoty will spend PLN 2.7bn on Green Azoty until 2030.

Tamara: Did other European producers halt urea and ammonia production in the first quarter? If so, which producers?

Marek Wadowski: Most European companies have curtailed ammonia and fertilizer production since natural gas prices started to rally in the second half of 2021.

Some of them implemented production cuts while others shut down production altogether. A common practice was to shut down ammonia production and continue the manufacture of other products.

Gas prices have dropped in the first quarter of 2023, but shutdowns and production cuts are still occurring due to soft demand.

Guest: Hello. Do you think the start-up date of the new Polimery Police plant might be threatened?

Marek Wadowski: Polimery Police is progressing in line with the approved commissioning schedule.

Michał Kozak: Hello. Does the Group have a uniform policy for managing market risks, including for natural gas that is vital to its operations, or does each company manage the risks separately? Is the mechanism in place working effectively?

Marek Wadowski: Grupa Azoty has adopted a uniform policy for managing the natural gas price risk, with the policy applying to key Grupa Azoty Group companies. In line with the policy, the Corporate Committee comprising members of the companies’ management boards, informed by market research reports and recommendations from the research team, makes decisions regarding the rationale, scale and periods of hedging against gas price fluctuations with futures/forward contracts at individual companies.

Guest: Gas prices surpassed EUR 200/MWh during the summer holidays, dropped to just over EUR 60/MWh in February, and continued to fall in March. Why has production been halted now? Is the cost of downtime lower than the loss on inventory you could sell at lower prices?

Marek Wadowski: The key reason for a temporary production halt is the current supply and demand dynamics in Europe. Production levels are adjusted to current market demand. The temporary suspension of production last year was due to the situation prevailing in the natural gas market, which determined the profitability of production at the time.

Guest: Is the amending annex to the factoring agreement an effect of funding shortages? Declining sales and falling prices should actually lower your working capital requirements.

Marek Wadowski: The amending annex to the reverse factoring agreement with CAIXA, raising the facility amount from PLN 800m to PLN 950m, seeks to secure further working capital funding sources, which is justified particularly given the unprecedented volatility of energy commodity prices that we have seen over the past two years, further exacerbated by Russia’s invasion of Ukraine.

It should be noted that 2022 saw periods of significant declines alternating with unexpected hikes in natural gas prices, with reverse factoring agreements used as a natural purchase financing instrument. 

Guest: Five years ago you were opening new plastics lines, insisting they were a good investment. Now the unit has been written down, which clearly shows it was not a good investment after all. Can you assure us the same will not happen with the polymers project?

Marek Wadowski: Business cycles in the plastics industry are closely correlated with the state of the economy. The write-downs on assets are a consequence of the current market situation. The macroeconomic indicators have markedly deteriorated in recent months, feeding through to consumer sentiment and the purchasing power of customers in end-use segments. This adverse trend is cascading up the plastics value chain and generating poor performance for all process participants. The current situation will change as the economy improves.

Also, our efforts to place Polimery Police’s products on the market have been going on for several years now. The selection of distribution channels and planned marketing and sales efforts will contribute to achieving sales targets.

Grupa Azoty Polyolefins SA plans to market its products all over Europe, but it will focus largely on the Polish market as well as on CEE markets, where the company has a significant competitive edge over its Western European competitors in terms of logistics.

Guest: Is the company currently producing any of its products at a loss?

Marek Wadowski: Grupa Azoty analyses the profitability of production for each product category and process unit to inform decisions on production volumes of finished products. We have reported this in reports published since the beginning of the year, after the end of each month.

Guest: When is Polimery planning to make its first deliveries to customers?

Marek Wadowski: The company delivered its first polypropylene as part of pre-marketing efforts in March 2023. Deliveries will be possible during the plant start-up in the middle of this year.

Elektryk: When could the construction and commercial operation of an MRR start? What are your estimates at this point?

Marek Wadowski: Working with Ultra Safe Nuclear Corporation and ZUT, we plan to develop a comprehensive research programme and a plan for the construction, operation and maintenance of a 30 MWt MMR in the next six months. This will surely blaze the trail for the rest of our industry, so we need to perform detailed testing, optimisation and integration of the MMR as a zero-emission energy source with an industrial facility, in this case our Police plant.

Our ambitious and responsible approach to diversifying our energy sources is the reason why we will seek to implement the project as soon as possible. We expect a preliminary schedule for the implementation of the MMR to be ready within the next six months.

Witka: What is the IRR assumed for the polymers project?

Marek Wadowski: The estimated IRR for Polimery Police is above the weighted average cost of capital. This means the project is an attractive investment, generating returns exceeding the minimum expected market return of a project with similar characteristics or risk profile.

Guest: If state aid is granted for 2022–2024, why do you want to recognise the proceeds on a one-off basis rather than over time? This will look like a one-off and will probably be treated as such by finance experts and analysts.

Marek Wadowski: The grants are compensation for costs that have already been incurred and were awarded as immediate financial support, with no link to corresponding future costs. Therefore, they are recognised in the month when they became due.

Guest: How can you say that inventory write-downs are non-cash? Will you keep them in stock forever, or are you counting on prices to rise?

Marek Wadowski: Inventories are measured as at the reporting date in accordance with IAS 2 Inventories.

As at the reporting date, write-downs are considered non-cash as they are estimates.

We aim to sell inventories on an ongoing basis and keep them at low levels that are necessary to ensure smooth logistics.

Guest: What is the current demand for polypropylene?

Marek Wadowski: There is a lot of market uncertainty caused by the current economic situation. The market is expecting an upturn in the macroeconomic landscape. A marked improvement in polypropylene demand was seen in early March compared to February 2023.

Polypropylene demand is currently below the expected averages for this period of the year, but we have seen an improvement driven by a seasonal spike in demand from the agricultural and construction sectors in Europe.

Demand from the packaging sector is slow, and demand from the durable goods sector is in decline due to a change in consumer preferences triggered by inflationary pressure.

Demand from the automotive sector is improving, also because semiconductor shortages are being resolved in Europe, with the adoption of electric vehicles to boost polypropylene demand from the automotive sector in the long term.

Demand in Europe may improve soon. Market demand is expected to improve in the long term as well. Market research conducted by independent research agencies shows the European polypropylene market will experience a gradual, steady growth.

DePe: For how long will caprolactam and melamine production be halted? What is the situation on the caprolactam and melamine markets in terms of demand?

Marek Wadowski:

Caprolactam:

The geopolitical and macroeconomic landscape, economic crisis, high inflation and unclear economic prospects are exerting adverse impacts on consumer sentiment and purchases, significantly dampening demand and prices across virtually all plastics conversion industries (automotive, construction, textiles, carpets, packaging).

The drop in demand and orders in the plastics value chain has translated into a significant reduction in caprolactam purchases by European polyamide producers, forcing caprolactam producers to cut production in Europe. Despite major production cuts, supply in Europe remains high relative to demand.

The plastics business in Europe is facing the challenge of cheaper polyamide imports from China.

Against this demand-supply backdrop and with production costs remaining high relative to prices, European producers along the caprolactam value chain are running at reduced capacities, or have shut down their production units altogether.

Melamine:

The current economic environment is affecting the conditions in the resins and melamine markets. We anticipate this trend to continue in 2023. However, we expect global melamine demand in 2023 to be slightly higher than in 2022.

Marek Wadowski: Thank you for joining us today. It is always a great pleasure to meet with you, and I would like to invite you to the next chat session with Grupa Azoty.

moderator: On behalf of StockWatch.pl, I would like to thank you for an interesting discussion and invite you to our future chat sessions.

moderator: Welcome to our online Q&A chat session with Marek Wadowski, Vice President of the Management Board of Grupa Azoty, responsible for financial management, accounting policy, plan implementation monitoring, planning, budgeting, management control, M&A, and investor relations. We are here to discuss the performance of the Grupa Azoty Group companies in the third quarter of 2022.

moderator: A quick reminder of the rules of our chat room: you first send your questions to the moderator. The questions selected by our guest will be published together with the answers. You can see the order of questions at the bottom of the screen. The moderator has the right to reject questions which do not comply with the rules.

moderator: Information for journalists reporting our session: when citing today’s chat you are required to specify the source. If you have any questions or doubts, please contact: ##qxjgd#at#hidrzlpirw.ea##

moderator: You may ask your questions now. Our guest will start answering them at 1:00 pm. If you can’t see the answers, please reload the page. Participants are also encouraged to share the chat and comment on it on social media using the #chatStockWatch hashtag.

Marek Wadowski: On behalf of Grupa Azoty, I want to welcome you to our chat. It gives us great pleasure to be able to talk to you again. You can ask your questions now.

Guest: If Grupa Azoty decides to pay dividends for 2022 while the sanctions imposed against Mr. Kantor continue, will his shares be excluded or will this prevent dividend distribution completely

Marek Wadowski: Grupa Azoty does not pay dividends to Mr. Kantor. It pays dividends to the shareholders, and Grupa Azoty minority shareholders include three entities related to Mr. Kantor (Norica Holding S.a.r.l., Opansa Enterprises Ltd. and Rainbee Holdings Ltd.), which have been subjected to sanctions imposed by Poland because of this relation. The sanctions include freezing of the rights attached to shares and other securities and of the right to receive dividends. As long as the sanctions remain in force, no dividends will be paid to those entities by Grupa Azoty. However, this will not prevent the payment of dividends to any shareholders that are not subject to such restrictions under the applicable laws.

Michał: In Q3 2022, there was an increase of PLN 1 billion in cash q/q, i.e. relative to Q2 2022. Net debt (including leases and other financial liabilities) rose by PLN 270 million q/q. What is the reason for the difference?

Marek Wadowski: In Q3, Grupa Azoty made greater use of reverse factoring arrangements (by deferring payments to selected suppliers). As a result, the total balance of reverse factoring liabilities grew by about PLN 973 million in Q3 (from PLN 368 million as at June 30th 2022 to PLN 1,341 million as at September 30th 2022).

This led to an increase of some PLN 1,018 million in cash (from PLN 867 million as at June 30th 2022 to PLN 1,885 million as at September 30th 2022).

Factoring liabilities are not included in net debt in accordance with the definition of the net debt to EBITDA ratio contained in the Group’s financing agreements.

inwestor_2k: Is there any chance for dividends to be distributed for 2023. Or perhaps no chance, given the capital expenditures of the Group?

Marek Wadowski: The Grupa Azoty dividend policy provides that the company should be able to pay dividends once the strategic capex programme (including projects driving climate transition of the Grupa Azoty Group) has been completed, at a level above 40 per cent of consolidated net profit.

The programme is being implemented and the projects will be carried out in the coming years. Appropriation of the company’s net profit for a financial year is in each case decided on by the General Meeting.

inwestor_2k: What is the demand for mineral fertilizers now? Are farmers buying them to stock up because of concerns about possible price hikes? Or, to the contrary, are they waiting for lower prices?

Marek Wadowski: In previous periods there was a trend to stock up on fertilizers, but now we are seeing lower demand. However, based on the schedule of agrotechnical procedures we expect a significant growth of purchase volumes in the near future.

Michał: Is the company earning positive margins on fertilizers, chemicals and plastics in the current margin environment?

Marek Wadowski: Grupa Azoty adjusts the volumes of output in each segment to its ability to cover the costs. After we temporarily stopped production in August this year, the changes in raw material prices that occurred in the second part of the quarter made it possible to gradually resume it in October.

After production was started again at the Group companies, Grupa Azoty offered new, significantly lower prices of nitrogen fertilizers, which are now among the lowest in the EU.

sasky: Hello! When does the company expect to fully resume melamine production?

Marek Wadowski: After the launch of production on melamine Line 3 we are operating at about one-third of our production capacity.

As regards operation of the other two lines, i.e. full resumption of production, we are monitoring the market and we are in communication with our customers on an ongoing basis, so we will be able to adapt very quickly and flexibly to market demand.

Michał: Does Grupa Azoty have an exposure to spot gas contracts or does it use mainly monthly contracts?

Marek Wadowski: Grupa Azoty can buy gas both at spot prices and under futures contracts.

Polish Press Agency: Are there any effects of the due diligence on Zespół Elektrowni Wodnych Niedzica, which Grupa Azoty wants to integrate with? When might this company be acquired? Are there any plans for further acquisitions of such power producers? What would be the timeline? 

Marek Wadowski: On September 12th 2022, after the due diligence and valuation of the business of Zespół Elektrowni Wodnych Niedzica (“ZEW Niedzica”) was completed, and considering the Grupa Azoty Group’s strategy for 2021–2030 which includes the Group’s transition towards renewable energy sources, the Management Board decided to request the Polish State Treasury, as the sole shareholder in ZEW Niedzica, to initiate a process leading to potential acquisition of the company and its integration with the Grupa Azoty Group.

Further steps in connection with the potential transaction and its optimal structure would be agreed on with the State Treasury, represented by the Minister of State Assets.

Information on any further activities in this process will be provided in accordance with the disclosure standards applicable to listed companies.

In line with the new Grupa Azoty Group’s strategy until 2030, we launched the ‘Green Azoty’ project, intended mainly to decarbonise and reduce emissions from the Group’s production units, implement R&D projects that are consistent with the European Green Deal and deploy new solutions in the area of environmentally friendly, zero carbon renewable energy sources, including solar photovoltaics and wind power.

The total capacity of new renewable energy sources is expected to reach no less than 380 MW by 2030.

The contemplated entry by the Group into the wind power and SMR segments may deliver additional several hundred MW from zero-carbon energy sources.

Guest: How much EBITDA will the Polimery Police project add to the Group's result in 2023?

Marek Wadowski: The Group does not publish any EBITDA forecasts for Polimery Police. The project's projected performance in the long term is at a level that ensures its effectiveness.

Polish Press Agency: When will the acquisition of shares in Solarfarm, the company building the Brzezinka solar PV farm, take place? Does Grupa Azoty plan any further acquisitions in this industry? When? What effects are they expected to have?

Marek Wadowski: On July 20th 2022, Grupa Azoty entered into an agreement to hold negotiations, on an exclusive basis, regarding the potential acquisition of 100% of the share capital of Solarfarm.

The parties expressed their interest in collaborating on a project to build Brzezinka solar PV power plant with a capacity of approximately 270 MWp, which is being developed by Solarfarm, comprising preparatory, construction and installation work, grid connection, commissioning and potential operation of the power plant.

If the transaction is closed, it will significantly contribute to achieving the goals outlined in the part of the Grupa Azoty Group’s strategy for 2021–2030 where it provides for securing own renewable energy sources.

Negotiations on the project are continuing. Information on any further steps taken in this process will be published in accordance with the disclosure standards applicable to listed companies.

Guest: What is the reason behind the almost ninefold increase in the amount of ‘Items that are or may be reclassified to profit or loss’ in the third quarter?

Marek Wadowski: In Q3 2022, the amount of ‘Items that are or will be reclassified to profit and loss’ in the consolidated statement of comprehensive income rose to PLN 105.4 million from PLN 12 million in the corresponding period last year, i.e. almost nine times. This is attributable to:

1. the effect of a change in the valuation of instruments hedging currency risk and interest rate risk related to loans contracted for the Polimery Police project, to the extent they are covered by hedge accounting; the value of the instruments rose significantly as a result of an increase in market interest rates;
2. a positive effect of translating the net asset value of Grupa Azoty Group’s foreign operations, including assets of the COMPO EXPERT Group and its subsidiaries, as well as Grupa Azoty ATT Polymers GmbH; the translation was made at a higher EUR exchange rate, i.e. 4.8698 PLN/EUR as at September 30th 2022 vs 4.6329 PLN/EUR as at September 30th 2021;
3. the effect of deferred tax on those items.

Guest: With fertilizer prices down to PLN 3,000-4,000 per tonne and current gas prices, is fertilizer production profitable?

Marek Wadowski: Given the prevailing market conditions, in particular the price of natural gas, the current price of fertilizers covers their production costs.

Guest: Why did Grupa Azoty perform so poorly in terms of the Q3 results against Yara, which also halted production to a significant extent? Did the company yield to the political pressure by lowering fertilizer prices?

Marek Wadowski: In Q3 2022, Grupa Azoty delivered EBITDA of PLN 267 million, down 11 percent on the corresponding period last year. At the same time, the EBITDA figure was at a level similar to the results posted in the third quarter of previous years, despite an unprecedented increase in raw material prices and temporary production limitations.

Grupa Azoty adjusts its output volumes to the market conditions to be able to cover the production costs. The fertilizer price reduction was made possible by a drop in the prices of raw materials, especially natural gas, which is the main feedstock in fertilizer production.

Michał: In Q3 2022, total net debt (including leases and other financial assets ) rose by PLN 270 million q/q, while cash grew by PLN 1 billion q/q. What is the reason for that? Please explain the changes in other financial liabilities: +PLN 1 billion q/q.

Marek Wadowski: The total increase in the Group's net debt in the third quarter of this year (including lease liabilities and other financial liabilities relating to factoring arrangements) was directly attributable to a higher balance of loans and borrowings of GA Polyolefins, the company implementing the Polimery Police project, which went up by about PLN 424 million in the third quarter (from PLN 1,652 million to PLN 2,076 million).

It should be pointed out that this debt has been incurred on a project finance basis with no recourse to the Group and therefore it is not included in net debt in accordance with the definition of the net debt to EBITDA ratio provided for in the Group's financing agreements.

Tomek: At what price per tonne does the cost of fertilizers begin to exceed the farmers’ buying capacity. How likely is it, in your opinion, that removal of the anti-inflation shield for fertilizers and a possible increase in gas prices in winter will cause that barrier to be exceeded, resulting in the necessity to stop production again?

Marek Wadowski: Demand for fertilizers in Poland is relatively constant, with sales continuing throughout the year. When production was resumed, Grupa Azoty offered fertilizers at prices that are among the lowest in the EU. Whether farmers make purchases depends on such factors as crop prices, which determine the profitability of agricultural production.

Guest: Does the company plan any acquisitions in the near future?

Marek Wadowski: We perceive acquisitions as one of the methods for developing and restructuring our business. If we have any information on acquisitions that requires publication, we will report it to the market in due course.

Guest: What are the upsides and downsides of the recently enacted fertilizer law for the Group?

Marek Wadowski: The purpose of the latest amendment to the Fertilizers and Fertilization Act was to implement the provisions of the EU Fertilizer Regulation 2019/1009 into the Polish law.

The EU regulations have been known since 2019, and came into effect on July 16th 2022.

Michał: You say that factoring liabilities are not included in net debt, but we see them in other financial liabilities, which are added to net debt. Is factoring shown in the cash flows/cash flow statement?

Marek Wadowski: Reverse factoring liabilities are recognised in the financial statements as ‘other financial liabilities’ from the date when the factor defers payment of amounts due from the Group to the supplier. However, in accordance with the definition contained in the financing agreements, they are not included in the net debt to EBITDA ratio.

The Group’s payment to the factor of reverse factoring liabilities, in respect of amounts which have been deferred by the factor and paid to the supplier, is recognised as cash flows from financing activities.

Michał: Will you be able to pass on the increase in the cost of coal and electricity onto product prices in 2023? Is it likely that you will limit production for a longer time than in Q3 2022?

Marek Wadowski: Currently, Grupa Azoty offers fertilizers at prices that are among the lowest in the EU. It should also be stressed that Grupa Azoty was among the last EU producers to scale down production.

Whether farmers make purchases depends on such factors as crop prices, which determine the profitability of agricultural production.

Fertilizer prices are driven to a significant extent by the level and volatility of the price of the main production feedstock, i.e. natural gas.

At this point, it is not possible to estimate the level of gas prices in 2023 as it is difficult to predict how the geopolitical situation will develop.

The company constantly monitors the price levels for all raw materials and commodities as well as the profitability of production processes, and makes business decisions on this basis.

Guest: Does the Group intend to buy PKN ORLEN’s equity interest in the Polimery Police project considering that PKN ORLEN already produces polypropylene and is a competitor to Grupa Azoty in this area?

Marek Wadowski: The terms of purchase of shares held by minority shareholders in the special purpose vehicle Grupa Azoty Polyolefins SA are governed by the Grupa Azoty Polyolefins SA shareholders' agreement of May 31st 2020, as reported by the company in Current Report No. 24/2020.

With regard to the disposal of Grupa Azoty Polyolefins SA shares subscribed for by Grupa Lotos (which was acquired by PKN ORLEN on August 1st 2022), the parties to the shareholders' agreement agreed that the lock-up period in which this shareholder is not allowed to dispose of the shares will continue until the debt under the debt financing agreement is repaid in full, but no longer than until December 15th 2035. In the shareholders’ agreement the parties also agreed on a procedure for the disposal of Grupa Azoty Polyolefins SA shares by the minority shareholders after expiry of the lock-up periods. In the case of Grupa Lotos this procedure includes in particular the purchase by Grupa Azoty Polyolefins SA of the shares subscribed for in 2020 in order to cancel them. For further details, please refer to Note 21 – Financial instruments in the condensed consolidated financial statements for the six months ended June 30th 2022.

Tomek: Is there any chance for the Agro segment to report a profit in the fourth quarter with the lower fertilizer prices offered after the production was resumed?

Marek Wadowski: The company constantly monitors the price levels for all raw materials and commodities as well as the profitability of production processes, and makes business decisions on this basis. A factor of key importance to the profitability of the Agro segment is the level and stability of prices of natural gas as the principal feedstock used in production.

If fertilizer prices and natural gas prices continue at the current levels, the segment may earn a profit in the fourth quarter.

Guest: Does the company see a rebound in demand for chemicals and plastics? Are the margins on those products better in Q4 than in Q3?

Marek Wadowski: The situation in the chemicals and plastics market is challenging, which is the outcome of significant differences between raw material prices for EU and non-EU producers. Demand depends largely on the global macroeconomic situation, and at present we cannot see any rebound in demand in those segments.

Guest: What is your opinion on yesterday's EC communication regarding stabilisation of the fertilizer market?

Marek Wadowski: The EC’s communication on ensuring the availability and affordability of fertilizers presented on Wednesday is a response to short-term problems in the market. With the war started by Russia, the problems with gas and fertilizers, Russia's use of the crisis to destabilise global markets for fertilizers and agricultural products, and the impact of the Green Deal on mineral fertilizer production, there is a need for an in-depth analysis of the future of the fertilizer sector in the European Union. The EC announced that a fertilizer market monitoring centre would be launched in 2023 to share data on fertilizer production, use, prices and trade, which would improve the availability of market information and market transparency. It is important that the European Commission recognises the problem and understands the need to support the sector in Europe.

Marek Wadowski: Thank you for your attendance and participation in today’s chat. I hope to see you again at Grupa Azoty chat sessions in the future.

moderator: On behalf of StockWatch.pl, I would like to thank you for an interesting discussion and invite you to our future chat sessions.

moderator: Welcome to our online Q&A chat session with Marek Wadowski, Vice President of the Management Board of Grupa Azoty, responsible for financial management, accounting policy, plan implementation monitoring, planning, budgeting, management control, M&A, and investor relations. Today we will discuss Grupa Azoty’s performance in the first half of 2022.

moderator: A quick reminder of the rules of our chat room: you first send your questions to the moderator. The questions selected by our guest will be published together with the answers. You can see the order of questions at the bottom of the screen. The moderator has the right to reject questions which do not comply with the rules.

moderator: Information for journalists reporting our session: when citing today’s chat you are required to specify the source. If you have any questions or doubts, please contact: ##qxjgd#at#hidrzlpirw.ea##

moderator: You may ask your questions now. Our guest will start answering them at 2:00 pm. If you can’t see the answers, please refresh the page. Participants are also encouraged to share the chat and comment on it on social media using the #chatStockWatch hashtag.

Marek Wadowski: On behalf of Grupa Azoty, I want to welcome you to our chat. It gives us great pleasure to be able to talk to you again. You can ask your questions now.

Guest: Can the Group purchase liquefied natural gas on its own and lease the available infrastructure to bring it home by LNG carriers?

Marek Wadowski:It’s feasible but economically unviable at this point.

Guest: When or at what natural gas price levels will fertilizer production be resumed?

Marek Wadowski: Grupa Azoty is monitoring the price levels of all its raw materials and feedstocks and the profitability of production, and will make further decisions regarding production levels based on the results of that monitoring. Natural gas prices are the most important factor determining the profitability of production. Other elements are also relevant, such as gas price stability and the cost of other feedstocks.

Tom: There have been reports on production cuts in Puławy, Tarnów and Kędzierzyn. What about fertilizer production in Police? Has it been resumed after maintenance inspections?

Marek Wadowski: Yes, production has been resumed in Police after a planned maintenance shutdown. Please note that Police produces compound fertilizers, which are less sensitive to gas price fluctuations.

Morgenstern: Does the Company rely on local gas suppliers, or does it import natural gas on its own?

Marek Wadowski: Grupa Azoty doesn’t import natural gas on its own as this would be economically unviable given the current market and regulatory environment.

Shareholder: When can we expect more details on the progress of negotiations regarding the construction of the Brzezinka solar PV power plant? Regards.

Marek Wadowski: Grupa Azoty S.A. is negotiating the acquisition of the planned Brzezinka solar PV farm. Should any reportable events occur, the Company will issue a relevant report in compliance with applicable regulations.

Guest: Why doesn’t the Company increase the prices of its fertilizers to make production profitable in the high gas price environment? Wouldn’t you be able to find customers in Poland or in foreign markets if the prices were raised?

Marek Wadowski: We see signals from farmers’ organisations and the market suggesting farmers are not ready to accept higher fertilizer prices. Further price increases should be approached with great caution. This also holds true for other European markets.

Shareholder: What can you tell us about the support for fertilizer producers announced by Deputy Prime Minister Kowalczyk?

Marek Wadowski: Work is underway on possible legislative solutions, but we have no knowledge of any final support mechanisms at this point.

Guest: How are fluctuations in foreign exchange rates (USD and EUR) affecting the planned CAPEX for the Polimery project? How much money is left to spend to get the project ready for production?

Marek Wadowski: The Company is fully hedged against currency risk for the construction period, so the project’s CAPEX is not affected by exchange rate fluctuations. The project budget includes a sufficient reserve to cover the remaining expenses and to achieve production-ready status.

Shareholder: Is a dividend for 2022 likely to be paid to shareholders?

Marek Wadowski:The dividend policy of Grupa Azoty S.A. provides for continued ability to pay dividends once the strategic capex programme (including projects driving climate transition of the Grupa Azoty Group) has been completed, at a level above 40% of consolidated net profit.

The allocation of the Company’s net profit for a financial year in each case rests with the General Meeting.

Piotr Apanowicz, ISBnews: What is the estimated impact of fertilizer production shutdowns on the third-quarter 2022 EBITDA?

Marek Wadowski: It should be noted that until August 22nd 2022 Grupa Azoty maintained fertilizer production at maximum capacity while major European manufacturers significantly curtailed or completely stopped their production activities. Meeting fertilizer demand of the domestic market is a priority for Grupa Azoty and thus, over the first seven months of 2022, its domestic supplies were significantly higher, as a result of reduced exports, than in the same period last year or in previous years. As for nitrogen fertilizers, we are currently selling the product inventories we have in stock.

Adrian P: What is the price Grupa Azoty will pay to PGNiG to buy natural gas from the Baltic Pipe? Will the gas be more expensive than Russian gas?

Marek Wadowski: The cost and import sources of natural gas purchased by PGNiG have no impact on the prices we pay for gas.
Our contract contains pricing formulas that are linked to market prices.

inwestor_2k: I have a question about the integration with ZEW Niedzica. When will the transaction be consummated, and will it help curb the influence of the Russian oligarch?

Marek Wadowski: The Company is conducting work related to the integration of Zespół Elektrowni Wodnych Niedzica SA into the Grupa Azoty Group, also analysing possible ways to structure the transaction and potential transaction time frames. The Company will report on subsequent steps in the process when events reportable under applicable regulations take place.

Piotr: Some of the market players in Poland are cutting steel production. Will this cause delays in the Police project? Have the energy crisis and the impending strong economic slowdown in Europe, perhaps even stagflation, been factored into the price paths applied in impairment testing? Is Polimery still economically viable?

Marek Wadowski: The materials and equipment for process units built under the Polimery Police project have already been delivered to the site, so the risk of delay on this account has been minimised.

Please note the profitability and economics of the project are not based on short-term market assumptions but rather on long-term market growth projections, so the present situation has no major impact on the project. The long-term assumptions for the project indicate the project is economically viable.

shareholder: Hello. Why is Grupa Azoty publishing its half-yearly report so late?

Marek Wadowski: The publication date for the Grupa Azoty Group’s H1 2022 report was postponed to September 28th 2022 due to the extraordinary situation on the natural gas market in the third quarter of 2022, which led to production cuts or shutdowns on some process lines in plants belonging to leading Grupa Azoty Group companies. These circumstances necessitated additional analyses, particularly with regard to impairment testing.

Guest: Saving the planet has for now ended in an energy crisis across most of Europe. Do you intend to continue green (not to be confused with greenback) energy and CO2 reduction projects?

Marek Wadowski: We know and keep in mind that a new reality emerges from every crisis. We assume that to some extent this new reality will be ‘greener’ than before the pandemic and the energy crisis, which is not fundamental in nature. Indeed, we are preparing a series of green projects in line with the stated strategy of Grupa Azoty S.A. until 2030 and the Green Azoty project.

Adrian P: What are the stock levels of finished fertilizers held by Grupa Azoty? How long will they last for domestic suppliers?

Marek Wadowski: There has been a major decline in market demand. The stock levels at Grupa Azoty and its authorised distributors are sufficient to cover current demand.

Guest: Has Grupa Azoty used hedging instruments to protect itself against rising gas prices?

Marek Wadowski: We have the option to hedge natural gas prices for future periods under our contract with the supplier, and we use this option. We also used it during the first half of 2022.

Guest: What’s next with fertilizer prices? Is GA going to further increase prices?

Marek Wadowski: Fertilizer prices depend primarily on natural gas prices. Given the gas market instability it’s impossible to predict future gas market developments at this point.

Guest: Is the extremely volatile geopolitical situation affecting the strategy you outlined more than a year ago?

Marek Wadowski: Definitely. One advantage of our 2021–2030 Strategy is that we have developed certain strategic options and are able to respond to various scenarios of market volatility, even those largely deviating from the assumptions we made over a year ago.

Contrary to appearances, the essential needs that our products meet do not change significantly in a war or a pandemic.

Guest: What can you tell us about production at Compo Expert? Have high gas prices affected specialty fertilizers?

Marek Wadowski: Feedstock prices are also affecting Compo Expert’s products, albeit to a much lesser extent. The company’s global presence (in more than 100 markets) enables diversification that helps to significantly reduce business risks.

Guest: Is fertilizer production suspended or just reduced at any of the plants besides Police?

Marek Wadowski: Production has been temporarily curtailed in Puławy, Tarnów and Kędzierzyn, with no production cuts implemented in Police or Gdańsk.

Guest: At what TTF gas prices is production at the Group profitable?

Marek Wadowski: In addition to natural gas prices and their stability as the most important factor, profitability of production is also influenced by achievable product prices and prices of other feedstocks used in production. Grupa Azoty is monitoring all these aspects on an ongoing basis and will use this knowledge to make further decisions regarding production levels.

Guest: To what extent are high product prices affecting customer demand? Would you say there is a slump in any of the sectors?

Marek Wadowski: High prices translate into lower demand. Given the present market situation, a slowdown in industries served by the Group is an additional factor driving down demand for the Group’s products. The market circumstances have triggered a slowdown across many sectors, but it doesn’t appear to be a sign of a market collapse.

Guest: What amount of compensation will the Group receive under the programme of support for energy-intensive companies prepared by the Ministry of Development and Technology?

Marek Wadowski: It’s too early to tell what amount of the potential compensation will be.

Gość 123: Why hasn’t the Group put in place an integrated system to manage commodity and currency risks, etc.? European peers have long been able to deal with issues like that.

Marek Wadowski: Grupa Azoty manages risks in all important areas of its operations. Grupa Azoty was among the last producers in the European Union to cut fertilizer production. Also, it’s worth noting that, according to Fertilisers Europe estimates, around 70% of the European fertilizer production capacity is offline. The present situation at Grupa Azoty is no different from other European producers.

Guest: ‘We see signals from farmers’ organisations and the market suggesting farmers are not ready to accept higher fertilizer prices’. Isn’t it better to market fertilizer at production cost than not to market any fertilizer at all? Won’t this end in the Company losing market share as fertilizer imports from distant countries where natural gas costs are lower become economically viable?

Marek Wadowski: Production stoppages due to planned maintenance are a normal practice. We are using the current downtime for this purpose as well.

From the beginning of the year to the end of July 2022, Grupa Azoty supplied more fertilizer to the Polish market than last year, so the concerns over a potential loss of market share are unwarranted. Also, nitrogen fertilizers are applied in spring, so farmers still have time to stock up on this agricultural input.

GA Shareholder: The Company has announced a temporary production curtailment, yet it has entered into a contract to buy imported coal. Does this mean existing suppliers are failing to perform under their contracts or that management has failed to secure the Company’s needs in advance?

Marek Wadowski: The Company has long-term contracts for the supply of thermal coal that meet its basic production needs. Additional volumes of coal have been purchased to hedge against any external issues faced by existing suppliers, such as production problems at the Bogdanka mine.

Guest: Will the launch of the Baltic Pipe allow full-scale fertilizer production to resume?

Marek Wadowski: The launch of the Baltic Pipe will not influence a decision to increase production. The factors we take into account are the cost of feedstocks (mainly natural gas) and the achievable market prices of our products.

inwestor GPW: How much will natural gas prices need to fall before a decision is made to restore normal fertilizer production?

Marek Wadowski: Profitability of production is influenced by achievable product prices and, first and foremost, prices of feedstocks used in production, primarily the level and stability of natural gas prices. Grupa Azoty is monitoring the market environment on an ongoing basis and will use this knowledge to make further decisions regarding production levels.

Guest: The Company postponed the publication of its report to the very end of the third quarter of 2022 but failed to explain the financial impact of production stoppages related to high gas prices. What can we expect in the third-quarter 2022 results? Is the Company able to generate positive EBITDA in September?

Marek Wadowski: The publication date for the Grupa Azoty Group’s half-yearly 2022 report was postponed to September 28th 2022 due to the extraordinary situation on the natural gas market in the third quarter of 2022, which led to production cuts or shutdowns on some process lines in plants belonging to leading Grupa Azoty Group companies. These circumstances necessitated additional analyses, particularly with regard to impairment testing. All the available information on the effects of curtailing or shutting down production in the third quarter of 2022 is included in the consolidated financial statements for the first half of 2022 in Note 26. Events after the reporting date. The third-quarter 2022 results will be published on November 9th 2022.

Guest: Won’t a long plant outage related to natural gas costs disrupt the operation of the process plant and increase its susceptibility to failure after startup?

Marek Wadowski: During the downtime, maintenance and repair work is being performed and the technical condition of the equipment is being monitored on an ongoing basis. Some parts of the process plant are kept in ‘hot reserve’ to enable production to be quickly resumed when market conditions permit.

Guest: The Company has spent PLN 4.0bn on Polimery Police so far. According to your report, the total project budget is over PLN 7.2bn and the EPC contract is 94% complete. What will the remaining PLN 3bn be spent on given only 5% is left to reach the finish line?

Marek Wadowski: The amount of payments made under the EPC contract is based on both the progress of work, which the general contractor uses to issue invoices, and the payment schedule established in the EPC contract. Hence, the progress in construction work does not correspond to the progress in payments.

Most of the balance will be spent on payments to be made under the EPC contract in accordance with its terms.

Guest: What can you tell us about Siarkopol? Are record sulfur prices translating into record results at the company?

Marek Wadowski: The results of Grupa Azoty Siarkopol are contributing positively to the performance of the Chemicals Segment. Please note that in addition to rising sulfur prices, the company is facing higher energy prices that directly affect profitability.

Guest: Why doesn’t the Company buy US LNG on its own to diversify its supply sources? Does the contract with PGNiG prohibit the Company from buying gas on its own account?

Marek Wadowski: The contract with PGNiG allows Grupa Azoty to purchase natural gas from other suppliers. We are constantly analysing the market, but buying LNG would not be economically viable at this point.

Guest: PGNiG is buying more and more natural gas from the US. Why is your pricing formula linked to European market prices when part of the gas you receive is US gas?

Marek Wadowski: We apply this gas pricing formula because a vast majority of our products are marketed in Poland and other European countries, where we compete with companies that buy natural gas at market prices prevailing on our continent, like we do.

Marek Wadowski: Thank you for your attendance and participation in today’s chat. I hope to see you again at Grupa Azoty chat sessions in the future.

moderator: Welcome to our online Q&A chat session with Marek Wadowski, Vice President of the Grupa Azoty Management Board. Please ask questions concerning the financial performance delivered by Grupa Azoty Group companies in the first quarter of 2022.

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Marek Wadowski: Hello and welcome to our chat. The purpose of Thursday’s chat is to discuss the performance of the Grupa Azoty Group companies in the first quarter of 2022. You can ask your questions now.

Guest: Realistically, when will Azoty be able to start paying dividends again?

Marek Wadowski: Our objective until 2030 is to ensure our ability to pay dividends once the strategic capex programme (including climate transition projects) has been completed, at a level above 40% of consolidated net profit

KarolOlszanowski: Hello, I would like to ask how the margins on agro products changed in the first quarter of 2022 compared to the first quarter of 2021. I would also like to know whether the Group plans to increase the fertilizers production volume this year. If so, how did you secure the supplies natural gas given that the supplies from Russia have been halted? Thank you for your reply. Karol Olszanowski

Marek Wadowski: The average margin on Agro products rose by 6.9 p.p. to 19.3%. The suspension of gas supplies from Russia to Poland has no negative impact on the Grupa Azoty’s output, which is maintained at the maximum possible level.

Guest: Why was the allocation of general and administrative expenses to segments changed this quarter? I have to say I cannot see any particular reason for such a change other than lowering the result of the politically sensitive fertilizer segment and increasing the result of the plastics segment which, despite the investments made, has been generating operating losses so far.

Marek Wadowski: Staring from January 1st 2022, the Group changed its method of accounting for general and administrative expenses by reportable segment. Previously, these expenses were accounted for based on the share of cost of individual products in the total cost of products sold. The change in the allocation key takes into account the approach based on the margin on variable costs earned by each segment in the total margin on variable costs of the entity in which the reportable segments have been identified. The margin based on variable segment costs reflects variable costs of products sold as well as selling and distribution expenses.

BiznesAlert.pl: We hear that Grupa Azoty is interested in SMR technology. When can we learn more about this?

Marek Wadowski: We are considering a potential entry into the wind power and small modular reactor (SMR) segments. This may give us additional few hundred megawatts of zero-emission energy if, of course, a legal framework for such small nuclear power systems is created.

Guest: Do you think that introduction of fertilizer subsidies for farmers by the government is possible in the current (EU) legal regime?

Marek Wadowski: Such subsidies, of PLN 500 per hectare of arable land and PLN 250 per hectare of grassland, have already been introduced. They will be paid to farmers based on invoices or receipts issued to their name, in respect of fertilizer purchases made before May 15th 2022.

Guest: Good afternoon. So far, we are managing to increase the levels of gas in storage facilities, but it seems that if the Baltic Pipe is not put in service, for whatever reason (diversion, other problems), we may face tight supplies of gas at the end of the next heating period. I have two questions, then. How advanced is the Baltic Pipe project? Does Grupa Azoty have any alternative scenarios for gas supplies, if possible at all?

Marek Wadowski: Gas from Norwegian deposits has been delivered to Denmark, via the North Sea section of the Baltic Pipe, since April. The Danes confirm that the entire gas transmission system will be launched, to a limited extent, on October 1st this year. During the first three months, Baltic Pipe’s throughput will be several times lower than the assumed maximum, and from January 1st 2023 the system is to be in full swing, with a throughput of 10 bcm per year.

If limitations are put in place in the event of an imbalance in the national gas system, we will comply with them, regardless of what alternative supply scenarios might exist. Nevertheless, such a scenario seems quite unlikely.

KB BDM: How much of the PLN 60m losses reported after the accident at Police were incurred in the first and how much in the second quarter of 2022? Is the company operating at full capacity now?

Marek Wadowski: The financial consequences of the plant failure were estimated at PLN 34.2m at the Group level, thanks to taking steps enabling the use of some of GA Police’s energy commodity resources by the Group companies while the failure lasted. The entire impact was allocated to the first quarter of 2022. Grupa Azoty Police units have regained the production capacities they had before the accident.

BiznesAlert.pl: What is the risk of a food crisis in Poland because of the high gas and fertilizer prices?

Marek Wadowski: Despite the challenging market landscape and feedstock pressure, Grupa Azoty maintained fertilizer production at maximum available capacity throughout last year and the first quarter of 2022, which enabled it to fully meet domestic demand. Poland produces more food than it consumes, so a food crisis is not likely.

BiznesAlert.pl: What will be the role of hydrogen in Grupa Azoty’s future strategy?

Marek Wadowski: We are aware that our energy and climate transition cannot be completed without green hydrogen. However, green products, such as hydrogen or ammonia, should not be expected to quickly become widely available in quantities and at prices acceptable to European consumers, despite the probably much lower cost of their production outside the EU.  Given the conditions we now have, own production of hydrogen requires purchasing significant amounts of electricity and today Poland is facing the challenge of building a power generation system based on low-carbon energy sources. Hydrogen is to facilitate this transition by being a repository of energy from renewables and acting as a universal energy carrier for various sectors of the economy.

KKuba: You said in a current report that the cost of the plant failure at Police was more than PLN 34m. Has that estimate remained unchanged? Were the costs of repair and lost profits recognised in full in the first quarter or will they be recognised pro rata in the second quarter as well?

Marek Wadowski: The costs of repairing the failure and lost profits from sales of compound fertilizers, titanium white, and nitrogen products (urea and its solutions and ammonia), which in all likelihood would have been earned had the plant operated normally, were recognised in full in the first quarter of 2022. The estimate has not changed and the costs will not be reported in the second quarter of 2022.

Tomasz Stępień: Can you tell us about the progress of the project to construct an LPG terminal together with Orlen Gaz since the execution of the letter of intent in January? When can the decision to build be made? Can you already give us some metrics for the terminal, such as the handling and storage capacity?

Marek Wadowski: The project to build an LPG terminal on the port premises is to involve, in particular, the construction of a facility comprising cryogenic and pressurised tanks, as well as handling infrastructure for cargoes delivered by ships, trucks and railcars. The terminal will enable collection of propane delivered by sea and butane delivered by rail or road and their further distribution for the purposes of ORLEN Paliwa’s business.

Esg maniac: Hello. I’d like to ask if GA Polyolefins’ business fits into the taxonomy objectives, and if not, whether you can see a risk of increased interest expense in the long term in connection with the financing of these assets?

Marek Wadowski: The Polimery Police project is financed by leading financial institutions, including the European Bank for Reconstruction and Development, which automatically requires the company to fit into the taxonomy objectives. The production technologies to be used at GA Polyolefins have one of the best emission rates and low waste generation compared with other propylene and polypropylene production technologies. The company will calculate the carbon footprint of the production and the product, and also plans to purchase renewable energy.

Guest: Is the New Energy Concept at ZAK a response to the changing environment and growing environmental requirements, or is it also a project with a positive IRR given the current state of the law and the assumption that it will be continued?

Marek Wadowski: The New Energy Concept at GA ZAK SA is a portfolio of investment projects and tasks. It is an economically viable venture, 86% complete. Its viability lies primarily in reducing hard coal-based energy production.

Guest: It seems to me that the strong performance of the Agro segment is partly an effect of low imports of nitrogen fertilizers. How long do you think the situation is going to continue?

Marek Wadowski: Lower imports result, among other things, from the fact that fertilizer prices in Poland are lower than in other countries, making the Polish market less attractive for importers. High transport costs also play a role. Due to very dynamic changes in the commodity and fuel markets, it is impossible to predict how long this situation will last.

Guest: What is the total amount that the Grupa Azoty Group has donated to support Ukraine?

Marek Wadowski: The Grupa Azoty Group companies donated more than PLN 1.1m to organisations providing aid to refugees, mainly to Caritas Polska and the Polish Red Cross (PCK). In addition, the Group companies became involved in organising charity collections, blood donation drives, transport, and similar initiatives. They also provided temporary accommodation on premises owned by the Group.

Guest: How many Ukrainians were employed at the Grupa Azoty Group before Russia’s invasion and how many of them left after the war broke out?

Marek Wadowski: The Grupa Azoty Group did not employ any Ukrainian citizens.

Krakus56: In the first quarter of 2022 you sold about 45,000 tonnes of plastics. What percentage of that were compounds?

Marek Wadowski: Sales of compounds accounted for approximately 15 percent of total sales of plastics.

Guest: Does the company import potassium chloride from sources east of Poland?

Marek Wadowski: Currently, the company does not import potassium chloride from across our eastern border.

Guest: At the conference, you brought up the topic of logistics problems. What exactly are those problems? Procurement, transport, deliveries?

Marek Wadowski: Extended delivery times and high transport rates translate into higher costs and, consequently, higher product prices.

Guest: When exactly are you going to put the Police project on stream? I’m asking about a date after the start-up, the tuning, when the units are practically “operational”.

Marek Wadowski: On January 28th 2022, after obtaining the required corporate approvals, the company executed Annex 3 to the EPC Contract. The Annex provides, among other things, for a six-month extension of the timescale for the Polimery Police project. Under the current schedule, Integrity Testing is planned to be completed in the third quarter of 2023. The completion of these tests marks the date as of which the units will be ready for commercial operation. However, production is planned to be launched already at the commissioning stage, which is scheduled for the first quarter of 2023.

Guest: There was a sharp rise in employee costs reported for the first quarter of the year. Do you expect this trend to continue in the coming quarters? Are you holding talks with the trade unions about pay levels for this year?

Marek Wadowski: Growing pay expectations of employees are a natural reaction to rising inflation, especially CPI inflation, and to the overall wage growth in the market. The provisions of the 2021–2022 pay agreement signed with the trade unions were implemented in January 2022. Under the agreement, wage levels for 2022 were determined.

Guest: Has the Company selected a propane supplier for the Polimery Police project yet?

Marek Wadowski: The procedure to select a propane supplier is currently underway.

Guest: Why did the net debt in the first quarter of 2022 increase by almost 100% quarter on quarter?

Marek Wadowski: In the first quarter of 2022, the increase in net debt calculated in accordance with the definition contained in the Group’s financing agreements was mainly due to the planned use of surplus funds allocated to reduce liabilities under reverse factoring agreements by approximately PLN 1 billion (in order to, among others, reduce financing costs), while decreasing liabilities towards suppliers by approximately PLN 1 billion (mainly due to the cumulative timely payment, in the first quarter of 2022, of invoices for gas deliveries for four months). The other items are shown in the presentation of the Group’s results on the slide summarising the Grupa Azoty Group’s financial position on the ‘net debt bridge’ chart. Importantly, in the first quarter of 2022 the debt to EBITDA ratio slightly increased, from 0.96x to 1.29x, and this covenant is fully met, as are the other covenants under the financing agreements. In the first three months of 2022, the Group’s total debt ratio fell from 62.2% to 56.1%, which demonstrates that the increase in the Group’s net debt calculated according to the agreements with the banks was accompanied by a decrease in the Group’s other liabilities.

KKuba: What portion of the 2023 emission allowances have you signed contracts for?

Marek Wadowski: We have signed contracts for just over 80 percent of emission allowances for 2023.

Guest: How long do you think the shortage of fertilizer supplies from the east will continue? Are Ukrainian plants operating as usual or are they yet to return to the market?

Marek Wadowski: The main source of fertilizer supplies from the east are exports by Russia. Trade between Russia and Europe continues to depend on the sanctions policy. We have received reports on disruptions in the operation of Ukrainian plants, which are mainly caused by the ongoing military conflict. Further developments depend on how the conflict across our eastern border unfolds.

TonyMontana: Are the current fertilizer prices likely to stay for longer?

Marek Wadowski: It is possible. The current market and geopolitical situation upsets the stability of the market. This is particularly evident with regard to raw materials, especially natural gas, whose price directly translates into the cost of products and thus their prices.

Guest: The last dividend payment was made by the Grupa Azoty Group from its 2017 profit. Why, despite being defined in its strategy as a dividend paying company, did the Company once again recommend that the profit be retained?

Marek Wadowski: In 2021, the Grupa Azoty Group and its subsidiaries completed the development of the “Grupa Azoty Group Strategy for 2021–2030”. The Strategy envisages further pursuit of the ongoing investment projects, in particular the development of the new business segment of Polyolefins through the implementation of the Polimery Police project, and also commencement of further important projects, relating especially to the climate and energy transition aimed at lowering environmentally harmful emissions through reduced consumption of coal, decarbonisation, and development of RES and zero-carbon sources. These goals are to be achieved primarily through the “Green Azoty” project, which provides for capital expenditure of approximately PLN 2.7 billion on green and decarbonisation projects until 2030. Considering the above, we recommended that no dividend be paid for 2021.

Krakus56: Can the outbreak of war affect the completion of the Polimery Police project?

Marek Wadowski: Grupa Azoty Polyolefins is constantly monitoring the risks identified to date which are related to the war in Ukraine and which may affect the Polimery Police project. These risks involve:

• supplies and logistics,
• employee attrition,
• availability of raw materials,
• legislative measures to declare a general mobilisation of Ukrainian men of conscription age.

To date, we have not experienced any negative impact of the hostilities on the project.

Guest: What about your work on the commercialisation of clean hydrogen generation? When will the Company launch its production?

Marek Wadowski: The Grupa Azoty Group has undertaken various initiatives related to 
the growth of Hydrogen Economy. We are a member of the Lower Silesian and the Silesian and Lesser Poland Hydrogen Valleys. With our partners, we keep looking closely into various hydrogen projects. Production of green hydrogen depends primarily on the availability of green energy. This is why we take measures to develop our own renewable sources through GA Energia. We are preparing to launch an alternative fuel analysis laboratory for fuel cells, which will allow us to enter the market as a pure hydrogen supplier. We are also probing into the market for hydrogen and renewable energy technologies, in line with our energy strategy/transition.

Guest: Some time ago, you announced your plans to invest in startups. How many startups have you invested in so far, which of those investments paid off and which proved to be a waste of money?

Marek Wadowski: We invest time in initiating cooperation with start-ups and we try to do it mainly as part of programmes co-financed with public grants from the Polish Agency for Enterprise Development (PARP). The funds for starting the cooperation and conducting pilot projects/tests come from PARP. If a start-up proves promising, we enter into a business relationship and begin to cover the costs. In 2020–2022, at least four products/services have been successfully implemented in collaboration with start-ups. To date, the costs incurred by the Grupa Azoty Group have amounted to PLN 500 thousand, while grants from PARP – to almost PLN 1 million.

Marek Wadowski: Ladies and Gentlemen, our meeting today has come to an end. Thank you for your questions. See you at our next chat session.

moderator: On behalf of StockWatch.pl, I would like to thank you for an interesting discussion and invite you to our future chat sessions.

Kamil Zatoński, Puls Biznesu: Hello! Welcome to our Q&A chat session with Marek Wadowski, Vice President of Grupa Azoty.

Kamil Zatoński, Puls Biznesu: You can ask your questions now. We have about 45 minutes.

Marek Wadowski: Hello and welcome to our chat. The purpose of today’s chat is to discuss the performance of the Grupa Azoty Group companies in the fourth quarter of 2021 and in 2021. You can ask your questions now.

Investor: Does the company plan to invest in green hydrogen and become its producer? If so, when? 

Marek Wadowski: Investing in green energy sources is part of our long-term investment plan. The availability of technologies for large-scale green hydrogen production is growing year by year and we hope that it will reach a level we find attractive in the second half of this decade.

Investor: The company has announced that gas keeps flowing and production continues as usual. But how will the current developments affect the economic viability of fertilizer production in Poland in the long term?

Marek Wadowski: I can confirm that at the moment there are no threats to the continuity of production. Obviously, the profitability of nitrogen fertilizer production is affected by the price of natural gas. The price is now high, but stable, allowing us to generate positive margins. It should also be noted that high prices of natural gas translate into continuing high prices of nitrogen fertilizers across Europe and compound fertilizers and DAP on global markets.

Investor: What is the reason behind the growth in the Chemicals segment’s EBITDA in the fourth quarter? What are the chances that this trend will continue?

Marek Wadowski: In the fourth quarter of 2021, the Chemicals segment’s performance improved significantly year on year as a result of higher prices of all products, with the strongest rise reported for melamine, technical-grade urea and NOXy, spurred by strong demand for those products. The margins were also supported by higher sales volumes. The segment was negatively impacted by higher prices of raw materials, but these were more than offset by the prices and sales volumes of the products. We are cautious about the outlook for 2022. Nevertheless, the year-on-year outlook for the Chemicals segment appears to be stable.

Investor: How will Russia’s announcement concerning gas supplies affect the company’s operations?

Marek Wadowski: Poland has already sufficiently diversified its gas supply sources and we do not expect any constraints in supplies to our plants in the near future. This is why this announcement has no effect on our operations.

Investor: Have the gas prices suppressed fertilizer demand from customers in Poland in the 2021/2022 season? If so, what is your estimate of the decline?

Marek Wadowski: Clearly, the current fertilizer prices are a challenge. The Grupa Azoty Group was able to sell its fertilizer output on the Polish market due to lower imports.

Investor: Besides gas prices, what other factors are crucial for the Group’s performance?

Marek Wadowski: The Group’s results depend mainly on the prices of main energy commodities (gas, coal, electricity), petroleum products (benzene, phenol, propylene), as well as the prices of CO2 emission allowances. They account for approximately 70% of the Group’s total operating expenses.

Investor: What is the outlook for long-term demand trends, including price trends, in the company’s main product groups?

Marek Wadowski: We do not expect any significant changes in the demand for our products, with the exception of fertilizers, the demand for which typically declines in the second quarter of the year. The automotive industry is facing a challenging period and much will depend on developments in that sector. The prospects for the other industries where we sell our products, that is plastics, OXO products, titanium white and melamine, remain stable.

XxX: How big is the risk of production cuts after Gazprom has halted all gas supplies into Poland?

Marek Wadowski: Russia’s decision to stop the supplies to Poland does not increase the risk of production cuts at our plants.

Investor: Will the company actively look for acquisition targets? If so, who might become one?

Marek Wadowski: In line with our strategy, by 2030 we plan to make acquisitions that will enable us to achieve our strategic objectives in the area of technologies for low-carbon energy production and to participate in joint ventures.

Mateusz: Hello! My question is: how does/will the halting of gas supplies from Russia affect the company’s business? How is the company prepared for this?

Marek Wadowski: Russia’s decision to halt gas supplies to Poland has had no effect on gas balance in the Polish gas system. It should be noted that for Poland the risk of gas supply cuts has been present for years. The Grupa Azoty Group has in place appropriate response procedures depending on the scale and duration of potential supply constraints.

Investor: What are your equity/structural links with Acron PAO, controlled by V. Kantor, who has been included in the Polish sanctions list?

Marek Wadowski: Mr. Kantor holds indirectly a 19.82% interest in Grupa Azoty S.A.’s share capital, which does not have any significant consequences for the Company. Mr. Kantor:

• is not the owner of the Company,
• does not control the Company, 
• does not nominate any members of its governing bodies, 
• does not exert any influence on its operations,
• is it a beneficial owner of Grupa Azoty S.A.

The sanctions levied on minority shareholders restrict, to the extent specified by the applicable regulations, their ability to exercise the rights attached to their shares, including the freezing of such shares, dividend on the shares and the value accrued from or generated by those shares.

Investor: How will the sanctions imposed on Grupa Azoty Group’s competitors from Russia affect Poland’s fertilizers market? What sources can be used to replace imports from the sanctioned Russian companies?

Marek Wadowski: Poland’s fertilizer output exceeds the domestic demand. Polish companies produce both nitrogen and compound fertilizers that suit the local weather conditions and agrotechnical requirements. The absence of fertilizer imports from Russia and other countries will not translate into a shortage of fertilizers for Polish farmers. The Grupa Azoty Group gives priority to the domestic market and its fertilizers are sold all year long.

Marek Wadowski: Ladies and Gentlemen, our meeting today has come to an end. Thank you for your questions. See you at our next chat session.

Kamil Zatoński, Puls Biznesu: Thank you for your answers and participation.

moderator: Welcome to our online Q&A chat session with Marek Wadowski, Vice President of the Management Board of Grupa Azoty, responsible for financial management, accounting policy, plan implementation monitoring, planning, budgeting, management control, M&A, and investor relations. We are here to discuss the performance of the Grupa Azoty Group companies in the third quarter of 2021.

moderator: A quick reminder of the rules of our chat room. First, you send your questions to the moderator. The questions selected by our guest will be published together with the answers. You can see the order of questions at the bottom of the screen. The moderator has the right to reject questions which do not comply with the rules.
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Marek Wadowski: Hello everyone. I am ready to take your questions now.

Guest: Does Grupa Azoty plan to pay out dividend?

Marek Wadowski: Under the strategy for 2021–2030, Grupa Azoty plans to distribute dividend at the level of at least 40% of consolidated net profit once the strategic capex programme (including projects designed to drive the Group’s energy transition) is completed, which is expected to take place in the second half of this decade. The payment of dividend in a given year will depend on the Group’s financial position and current investment needs.

Guest: Hello. How long do you expect to see high gas prices and the resulting low price of Azoty shares?

Marek Wadowski: This will depend on the weather conditions in Europe, but also on LNG supplies in Asia and the volume of gas supplied to the European market by pipeline from Russia and Norway in the winter season. High gas prices might persist until spring. And if we start next summer with low gas stocks again like we did this year, gas prices may stay high even longer.

Piotr Apanowicz, ISBnews: Hello. When do you expect to close negotiations with Hyundai Engineering regarding the amendments to the EPC Contract for the Polimery Police project?

Marek Wadowski: The Company has announced its decision to sit at the negotiating table with the general contractor and at this stage, given the number of proposed amendments and the complexity of the negotiation process, we cannot specify the close date. Please bear in mind, however, that the negotiations are not affecting the progress of ongoing work carried out by the general contractor on the Polimery Police project.

Tomasz Stępień: Have you signed any term contracts for the purchase of propane for the Polimery Police project? Do the current price increases and feedstock supply constraints also concern propane and could they affect feedstock availability for PDH and PP units? And a similar question concerning polypropylene sales. Are you negotiating any offtake contracts? Can you tell us anything about the potential customers and sales markets?

Marek Wadowski: In keeping with the project schedule, the company is currently working on the commercial terms of future propane supplies. We are watching closely both feedstock and product markets on an ongoing basis. Despite high propane prices, the propane-polypropylene spread remains stable. The company has no plans for signing any offtake contracts for the sale of polypropylene. The plan is to sell our products via direct sales and distribution channels.

Guest: What is the status of negotiations with the contractor of the polymers unit?

Marek Wadowski: Today the Management Board of Grupa Azoty Polyolefins S.A. approved the instruction and strategy concerning negotiations with the general contractor, according to which the company will negotiate the proposed amendments to the EPC contract. The exact negotiations opening date will be agreed with the general contractor shortly.

Tomasz Stępień: Can you give us the volume of Grupa Azoty S.A.’s fertilizer production in the third quarter of 2021 and a comparison with the second quarter of 2021 and the third quarter of 2020 to demonstrate that it has not been reduced? How has the domestic vs export sales structure changed given your declaration that the domestic market is now given priority?

Marek Wadowski: The fertilizer output sold in the third quarter of 2021 reached 1.3 million tonnes vs 1.1 million tonnes in the second quarter. The quarter-on-quarter increase was mainly due to the adopted and delivered schedule of planned maintenance shutdowns. Grupa Azoty did not reduce fertilizer production in the second or in the third quarter of 2021. A comparison of the quarters shows an increase in the share of domestic sales at the expense of export sales.

Mata: Some manufacturers decided to cut back on AdBlue production. What about you?

Marek Wadowski: Production of NOXy, Azoty Group’s brand of our AdBlue product, is going up steadily, keeping pace with the rising market demand driven by exhaust gas emission standards for the transport industry. We expect that in 2021 Grupa Azoty will report yet another year-on-year single-digit increase in our production and sales figures.

BenSol: One of the objectives of the new fertilizer strategy is to expand your sales in new markets based on the Compo Expert sales network. The question is, why haven’t you done it so far? After all, that was one of the reasons behind the acquisition of that company...

Marek Wadowski: The main objective behind our decision to acquire COMPO EXPERT was not to sell fertilizer products manufactured by the Grupa Azoty Group companies in new markets, but to add high-margin speciality fertilizers to our product portfolio.
As regards our trade partnership potential, we have been tapping on it since the beginning of 2019. In particular, one of the major achievements is the launch of sales of Grupa Azoty’s compound fertilizers on Greek and Balkan markets by COMPO EXPERT Hellas S.A. based in Greece. We will continue developing our collaboration in this area.

Pace70: Are the sales of ammonium sulfate included in the Fertilizers or Plastics segment’s sales figures?

Marek Wadowski: Ammonium sulfate is a simple nitrogen fertilizer with sulfur, containing 21% nitrogen and 24% sulfur. It is a by-product in the manufacture of caprolactam or flue gas desulfurisation. The Group manufactures a wide range of ammonium sulfate in various granule forms and sizes: selection, macro, standard, and crystalline. It is reported as part of the FERTILIZERS-AGRO segment.

Guest: Aren’t you worried that the situation in the automotive industry will eventually have a severe impact on the performance of the Group’s plastics segment?

Marek Wadowski: The market for the application of Grupa Azoty products includes the following industries: automotive, packaging, fibres, electronics, household appliances, construction, health care and sports infrastructure. The automotive sector is one of the many target markets, currently accounting for around 25% of the total portfolio. We estimate that the growing demand from other industries, thanks to market diversification, should offset the lower demand from the automotive industry.

BenSol: Looking at LPG prices we can see a sharp increase, and LPG is the main feedstock in the production of propane.After a temporary spike, polypropylene prices have returned to roughly year-end levels, which seems to have a strong impact on the profitability of PDH installations and, by extension, also polypropylene production units. Assuming that the current LPG and polypropylene market price trends will continue, will this segment still remain profitable after accounting for plant depreciation?

Marek Wadowski: Grupa Azoty Polyolefins keeps a watchful eye on the feedstock and product markets. Indeed, the prices of LPG and, by extension, of propane are rising sharply. However, current polypropylene prices are definitely higher than at the end of 2020. As a result, the propane-polypropylene spread remains stable. Please note that the project’s profitability and economic viability are not based on short-term market assumptions but rather on long-term market growth projections. Our expectations as to the long-term strong and stable propane-polypropylene spread remain unchanged.

Guest: Is it still profitable to produce nitrogen fertilizers with gas prices at EUR 90/MWh? Are you able to pass on those price hikes to consumers?

Marek Wadowski: With the current uptrend in gas prices, passing on feedstock costs to final product prices remains a challenge. Given that our production units continue to operate at maximum available capacity, we expect our production to remain profitable.

Djam78: Can you explain why Compo Expert managed to report a stable year-on-year performance in the third quarter, while Puławy reported a sharp decline in its results, even though both companies are typical fertilizer producers?

Marek Wadowski: Compo Expert products do not depend on gas prices to the same extent as the nitrogen fertilizers manufactured by Puławy. Many Compo Expert products are manufactured without any use of gas whatsoever. Of course, their production costs depend on the prices of energy and other feedstocks, whose prices were much less volatile.

BenSol: Does the polyamide strategy only include expansion of the current portfolio? The sector’s profitability has been weak for quite some time, and there are no ideas on how to turn the tide. There was a plan once to extend the chain from caprolactam to polyamide, but market landscape has changed and a shift in strategy would be required, but there is none.Or am I missing anything in the strategy that you have presented?

Marek Wadowski: The Plastics Segment strategy for 2021–2030 puts a greater focus on circular economy and recycling of plastics. We also want to concentrate on the next link in the value chain, namely polyamide compounding, that is customised polyamide blends.

Guest: Hello. I would like to ask whether the new coal-fired unit at Puławy will incorporate any hybrid technologies and could it possibly run on gas or hydrogen in the future?

Marek Wadowski: Hello. We are currently carrying out technical and economic analyses to determine whether the coal-fired unit in Puławy could operate as a hybrid unit. 

Pace70: Have you reached agreement on the increase in the general contractor’s fee for the Polyolefins project? What is the amount of that increase? And what is the new deadline for Polyolefins to be brought on stream?

Marek Wadowski: On August 27th, the general contractor submitted proposed amendments to the EPC contract, including an extension of the project deadline by 181 days and an increase in the general contractor’s fee by a total of EUR 127.4 million. The Management Board of Grupa Azoty Polyolefins S.A. has endorsed the negotiation strategy earlier today, so at this stage it is still too early to specify the final amount of the contractor’s fee increase and the unit’s commissioning date.

Guest: Given current gas and fertilizer prices, are your EBITDA margins higher in export sales or in Poland?

Marek Wadowski: The situation is volatile. The actual exports vs domestic margins vary depending on the product, time and target market.

Guest: What was the reason for the huge increase in revenue from sales of granulated fertilizers at Compo Expert? Did you launch any new production capacities there, or did you utilise the existing capacities more effectively? Or maybe Compo Expert sold their stocks?

Marek Wadowski: This increase was driven by a higher volume of fertilizer sales on the back of strong demand for speciality fertilizers and rising prices.

Guest: Hello. What are the Management Board’s projections as to market conditions, that is continuing high prices of gas and emission allowances, and on the other hand – high demand for plastics, alcohols or titanium white, and the resulting price hikes?

Marek Wadowski: We expect that the strong demand for products offered by the Plastics and Chemicals Segments will continue at least until mid-2022. Much will depend on pandemic-related restrictions affecting the economy.

Andrzej: How many megawatts of photovoltaic energy do you expect to produce in 2030?

Marek Wadowski: Our new Strategic Project ‘Green Azoty’ assumes an average share of renewables in electricity production at 40% in 2030.

Bartłomiej Sawicki, Parkiet: Hello. My question concerns the 2.7 billion złoty to be spent on green projects according to the strategy. How much of this amount will be invested in new zero-emissions production capacities over the next 10 years? What will be your remaining investments? Thank you.

Marek Wadowski: 2.7 billion złoty will be spent on green and decarbonisation projects – they are not one and the same. We will invest about one billion złoty in renewable energy sources. Green and decarbonisation projects will also include circular economy investments and technological upgrades in existing units that will reduce the carbon footprint of our production plants.

Pace70: According to the Strategy, the ‘Green Azoty’ project includes a 00 MW PV project to be launched in 2022. What is the current progress of work and who is you partner in that project? I am talking about 100 MW of solar energy.

Marek Wadowski: A large photovoltaic installation will include several smaller farms located on the site of a single production plant. We are currently working on the pricing for a fairly standard technology. It’s too early to drop any names of service providers or suppliers, there are plenty to choose from.

Marek Wadowski: Ladies and gentlemen, thank you for taking part in the chat. As always, it was a most interesting experience. See you next time.

moderator: On behalf of StockWatch.pl, I would like to thank you for an interesting discussion and invite you to our future chat sessions.

Grupa Azoty Management Board: Ladies and Gentlemen, yesterday we adopted a New Grupa Azoty Group Strategy for 2021–2030. There is surely a great deal to discuss, so feel free to ask questions.

Gwidon: The strategy envisages that the Group will distribute 40% of its profits as dividend on completion of investment projects. Am I right to assume that you will pay out that dividend starting in 2030?

Grupa Azoty Management Board: Under the Strategy for 2021–2030, Grupa Azoty plans to distribute dividend at a level of at least 40% of consolidated net profit once the strategic capex programme (including projects designed to drive the Group’s energy transition) is completed. The payment of dividend in a given year will depend on the Group’s financial position and current investment needs.

Michał Kozak: Does the target net debt/EBITDA ratio of <3x from 2025 take into account the entire debt of Polimery Police (including non-covenant debt), potential hybrid bonds and leases?

Grupa Azoty Management Board: The target net debt/EBITDA ratio of <3x starting from 2025 given in the strategy is based on the definition consistent with the provisions of Grupa Azoty’s financing agreements, and therefore does not take into account the debt attributable to the Polimery Police project, which is financed under the project finance formula without recourse to Grupa Azoty.

Krystian Brymora (BDM): What is the assumed EBITDA margin for the Polimery Police project versus the >16% target? Is this target valid until 2030 or throughout the strategy period?

Grupa Azoty Management Board: The Group does not publish margin figures for the Polimery Police project. Having said that, we can expect that the planned project deliverables will ensure its profitability, which is supported by current market conditions.

Iwona: Are further fertilizer price hikes planned? What is the company’s power as regards product price increases due to higher production costs?

Grupa Azoty Management Board: Fertilizer prices must reflect the costs of feedstocks used for their production and therefore depend on the prices paid on feedstock markets. Current fertilizer prices go hand in hand with their production costs.

Krystian Brymora (BDM): Does the assumed decline in the net debt/EBITDA ratio to <3.0x in 2025 take into account the Polimery Police project? Is this a ratio assumed for the purposes of bank covenants only, without investments and leases? And if it does include Polimery Police, what is the assumed project EBITDA?

Grupa Azoty Management Board: The planned net debt/EBITDA ratio at <3.0x in 2025 assumes continuation of the Polimery Police project in the project finance formula without recourse to Grupa Azoty, and therefore it does not take into account any debt or EBITDA figures generated by the project. The ratio is calculated in accordance with the definition contained in Grupa Azoty’s financing agreements.

Gwidon: What is the total capex figure assumed for Grupa Azoty in the new strategy until 2030? The amount of PLN 2.7 billion includes only green and decarbonization projects, am I right?

Grupa Azoty Management Board: In addition to capex projects paving the way for Grupa Azoty’s transition towards the European Green Deal, a number of investments are also in the pipeline to diversify the Group’s product portfolio and optimise production processes. For more details, see the 2021–2030 Long-Term Investment Plan, which is updated on an ongoing basis as our business environment evolves.

Krystian Brymora (BDM): Regarding the annual reduction of carbon emissions by 0.8 million tonnes and a cumulative cost of PLN 2.7 billion – is that a total cost or does it assume potential participation of your partners? The amount of outlays in this area (about PLN 270 million per year) seems low compared with the costs necessary to reduce emissions (about 200 million PLN per year) or very low and questionable compared with the costs necessary to purchase third-party generated energy (about PLN 200 million).

Grupa Azoty Management Board: Under the new strategy, CO₂ emissions will be reduced by 11.3% versus the 2020 baseline. To that end, the Group plans to spend PLN 2.7 billion. This amount has been estimated to the best of our knowledge and we believe it to be reliable.

Damian: What could be the biggest challenge to successful delivery of your strategy?

Grupa Azoty Management Board: Volatility of the regulatory environment. The condition of European industry in general, not only of the chemical industry, will be driven in the coming years as much by the business and market landscape as by the regulatory environment. Our ESG strategy and our growth options, like nuclear power, hinge on the adoption of new effective regulations.

Tymek: I haven’t read the strategy yet, but I have an important question – does it envisage any mergers and acquisitions?

Grupa Azoty Management Board: We encourage you to read the strategy to learn more about Grupa Azoty’s plans, especially those related to climate transformation. As regards M&A transactions, Grupa Azoty’s strategy assumes an option to tap such market opportunities as they arise, as was the case in 2018 when we acquired the COMPO EXPERT Group.

Maks: When do you plan to complete the Polimery Police project? Have you reached an agreement on project timeline extension with Hyundai and will the original deadline be met without affecting the budget?

Grupa Azoty Management Board: The project is to be completed in 2023. At present the merits of the claims are under analysis.

Maks: Have you chosen a partner for the nuclear power project, like other companies did (such as Ciech and Synthos)?

Grupa Azoty Management Board: We are a large and diversified Group. To start with, we will analyse the global and European regulatory environment, which is not ready yet for local-scale captive nuclear power projects. As regards our partner for that project, we will obviously let you know as soon as we have made our choice.

Serek: Dividend is to be paid out on completion of the strategic capex programme. So when can we expect dividend payment again?

Grupa Azoty Management Board: The payment of dividend in a given year will depend on the Group’s financial condition and current investment needs. It might be paid before 2030, it is not impossible.

Paweł B/: During the period covered by the strategy, what will be the share of the fertilizer segment and the other segments in the Grupa Azoty’s revenue and EBITDA?

Grupa Azoty Management Board: As part of its investment projects, Grupa Azoty is striving to diversify its business so as to deliver stable financial performance. One of these projects is Polimery Police, which will strengthen the Plastics segment while maintaining a well-balanced contribution of the individual segments across Grupa Azoty.

Michał Kozak: Was the Polimery Police capex figure revised in the Strategy, as proposed by the contractor?

Grupa Azoty Management Board: The total budget for the Polimery Police project takes account of the proposed amendments to the EPC contract. The proposals are currently under consideration as to their merits.

Mirek: Do you plan to merge the Group companies or to delist any Group companies currently listed on the stock exchange?

Grupa Azoty Management Board: As regards the Group’s organisation and management, we plan to roll out segment-based management. It does not involve any business combinations or delisting of any listed companies.

Weronika: What is the current structure of the Group’s energy segment and how can it evolve in the coming years? What percentage of energy demand can be covered by the Group’s in-house capacities?

Grupa Azoty Management Board: We currently purchase 50% of electricity from third parties and the other 50% is produced by our own coal-fired generation sources. We will seek to increase the share of green energy both for externally purchased electricity and for our in-house production. Until 2030, we will seek to roll out technologies harnessing zero-emission and renewable energy sources. Accordingly, the average share of renewables in our electricity generation mix will reach 40%.

Maks: Is the 16% EBITDA margin to be reached every year, or only in 2030?

Grupa Azoty Management Board: Successful delivery of the investment programme envisaged in the strategy will be the key driver behind the EBITDA margin increase over 16%. Please bear in mind that the Polimery Police project will enhance our profitability once it is ready for operation.

Bartłomiej Sawicki, Parkiet: What are the drivers behind your decision to invest in SMRs? Do you plan to launch new wind power projects or acquire existing facilities? Are there any plans to file offshore licence applications?

Grupa Azoty Management Board: Investments in industrial nuclear power generation will depend primarily on the enactment of appropriate legislation. Our investment plans include wind power projects, just as other renewables, both on our own land and in adjacent locations. We have made it clear in the Strategy that we will use equity investments to achieve our goals. We prefer investments in renewables on our own land, given the transmission costs.

Igor W.: What about your revenue figures? Can we expect them to grow?

Grupa Azoty Management Board: In the Strategy, Grupa Azoty assumes revenue growth by 2030, driven mainly by the deliverables of our planned investment projects.

Eryk: Are you considering any issue of green bonds?

Grupa Azoty Management Board: In the Strategy until 2030, Grupa Azoty assumes a number of potential financing sources for our climate transformation projects. Green bonds are also an option.

Sopek: What are your major growth projects in the pipeline?

Grupa Azoty Management Board: The Strategy of Grupa Azoty defines the directions of our growth, also through investments. In addition to Polimery Police, our flagship investment during the first years of by the Strategy period, as well as the “Green Azoty” projects, we will focus our capex projects on selected Business Segments: AGRO, Plastics and Chemicals. The Energy segment, which is and will remain our Strategic Business Area, will also be given due attention.

Jarula: Will Grupa Azoty be able to boost its sales volumes? Do you plan to increase your production capacities?

Grupa Azoty Management Board: Grupa Azoty assumes sales volumes growth through expansion of the portfolio of new products extending the value chain in both current and new ones (Polyolefins) business segments.

Łukasz: Do you believe the Group’s profits will go up in the long term? Or should we rather expect them to stabilise at a certain level?

Grupa Azoty Management Board: In the new Strategy, Grupa Azoty expects to generate and maintain a consolidated EBITDA margin at a stable level of over 16%, which will ensure successful delivery of key capex projects and growth of our businesses.

Pola: What is the potential of the growing hydrogen market? How can you get involved in this market and cash in on hydrogen?

Grupa Azoty Management Board: We are Poland’s largest hydrogen producer and Europe’s major player.

We want to play a part in the production-transport-storage-marketing value chain. In two locations, we have already adapted our hydrogen sources for the purposes of hydrogen transport. The “Green Azoty” project also assumes larger hydrogen production volumes based on conventional methods and a launch of an alternative fuels laboratory, focusing specifically on analysis of hydrogen conforming to the ISO standard, in partnership with a certified laboratory based in London.

Adam Kornecki: Can we talk about your investment in the polyolefins segment? What revenue figures and margins can we expect? What is the bigger picture of the market and competition?

Grupa Azoty Management Board: As assumed in the project, Grupa Azoty Polyolefins S.A. plans to produce 437 thousand tonnes of polypropylene annually, and the actual revenues will depend on market prices. Based on strong and stable long-term assumptions, the project is expected to bring profits. Grupa Azoty Polyolefins S.A. plans to market its products all over Europe, but it will focus largely on the Polish market as well as on CEE markets, where the company has a significant competitive edge over its Western European competitors in terms of logistics.

Grupa Azoty Management Board: Dear all, we have been informed that we are running out of time for the chat. Unfortunately, we have not answered all your questions. The large number of questions you ask and your inquisitiveness clearly confirm the rationale for organising such meetings in the future. Let me invite you to join us at the next chat, which will take place after the publication of our results for the third quarter of 2021.

moderator: Welcome to our online Q&A chat session with Marek Wadowski, Vice President of the Management Board of Grupa Azoty, responsible for financial management, accounting policy, plan implementation monitoring, planning, budgeting, management control, M&A, and investor relations. Today we will discuss Grupa Azoty’s performance in the first half of 2021.

moderator: A quick reminder of the rules of our chat room. First, you send your questions to the moderator. The questions selected by our guest will be published together with the answers. You can see the order of questions at the bottom of the screen. The moderator has the right to reject questions which do not comply with the rules.

moderator: Information for journalists reporting our session: when citing today’s chat you are required to specify the source. If you have any questions or doubts, please contact: ##qxjgd#at#hidrzlpirw.ea##.

moderator: You may ask your questions now. Our guest will start answering them at 2:00 pm. If you can’t see the answers, please refresh the page. Participants are also encouraged to share the chat and comment on it on social media using the #chatStockWatch hashtag.

Marek Wadowski: Hello and welcome to our chat. Today we will discuss financial performance of the Grupa Azoty Group companies in the second quarter and first half of 2021. You can ask your questions now.

inwestor_2k: Hello. Several days ago PGNiG announced it expected the high gas prices would continue until the first quarter of 2022. How is Grupa Azoty going to respond to the high price environment? Are further increases of product prices a viable option that would be acceptable to customers? In other words, is there any more room for passing the higher costs on to customers?

Marek Wadowski: The rising gas prices will continue to put pressure on profit margins in Agro Fertilizers, which is bound to impact sales prices in the coming quarters. The surging gas prices are affecting all manufacturers in the European Union, so the uptrend in nitrogen fertilizers has been seen across all European markets.

Gacek: Ciech and Synthos are looking into the possibility of building small nuclear reactors or microreactors. KGHM has announced similar plans. Is Grupa Azoty considering such an option?

Marek Wadowski: We will address the matter in our 2021–2030 strategy, whose key points will be unveiled in the coming weeks.

Mata: In the second quarter 2021, nitrogen fertilizer sales volumes dropped by around 10%. Is the drop attributable to a lack of price flexibility on the demand side, part of urea streams having been redirected to non-fertilizer sectors, or other factors?

Marek Wadowski: The lower sales volumes were due to a combination of factors, including urea having been redirected to make technical grade products and, first and foremost, maintenance shutdowns, which were longer than in the corresponding period of the previous year.

Adam Jarosz: Your results presentation mentions strong demand for caprolactam and polyamide. At the same time, EBIT posted by the segment broke into positive territory for the first time in a time, reaching PLN 6m. Do you think a positive EBIT is a permanent thing?

Marek Wadowski: Performance delivered by the Plastics segment reflects the current market conditions, which clearly show signs of a post-pandemic revival. Demand significantly exceeds supply, pushing prices up. Despite strong volatility in the prices of key feedstocks (benzene and phenol), margins were much wider compared with prior quarters. This will allow Grupa Azoty to sell increased volumes of modified and non-modified polyamide.

Guest: Why do you expect to receive more free CO₂ emission allowances than last year?

Marek Wadowski: We expect units of key Group companies to be allocated more free CO₂ emission allowances in 2021 based on a list of eligible units and emission allowances allocated for 2021–2025, published by the Ministry of Climate and Environment on July 7th 2021. The Group companies made their assumptions regarding free CO₂ emission allowance allocations for 2021 based on that list, with downward adjustments made to reflect verified emissions data for 2019 and 2020.

Guest: What were the main drivers of your recent performance?

Marek Wadowski: The main contributors to performance were the Chemicals and Plastics businesses, which are experiencing a post-pandemic recovery and recording increased sales volumes. The results were further supported by wider margins, driven mainly by spot sales in the OXO Alcohols/Plasticisers business. Performance in Agro Fertilizers was driven by rising prices of natural gas as the main feedstock. A revision of estimated free CO₂ emission allowance allocations had a positive impact on the results.

Guest: What about pricing pressure from fertilizers imported from countries east of Poland in these past six months? What do you expect in the second half of the year?

Marek Wadowski: As regards compound fertilizers, the greatest pricing pressure came from Russian and Belarusian producers. Prices of imported nitrogen fertilizers were similar to those charged by Grupa Azoty. In the second half of 2021, we expect a slight correction in prices of compound fertilizers and DAP, which may affect prices, particularly towards the end of the year. As for nitrogen fertilizers, all European manufacturers pay similar prices for gas, so we don’t expect any significant pricing pressure there. Russian producers pay a duty on ammonium nitrate and UAN, which reduces the risk of excessive imports.

Gracz: Hello. Why were second-quarter outlays on Polimery Police only PLN 28m? Are there any delays on the project?

Marek Wadowski: The amounts paid to the General Contractor on Polimery Police depend on the progress of work, which is the basis for invoicing, and on payment schedule arrangements. As announced in a current report, the General Contractor has proposed the completion date be extended by 181 days. The proposal is being considered by the Company.

Guest: Good afternoon. Will the new granulated fertilizer unit ultimately increase sales volumes by the expected several hundred thousand tonnes a year, or will it replace some of the existing products?

Marek Wadowski: We plan to gradually replace existing products, by replacing prilled ammonium nitrate, small-granule Pulan, with granulated ammonium nitrate, Pulan Makro, in line with customer needs and requirements.

In the future, the new granulation plant will increase the output of ammonium nitrate to several hundred thousand tonnes per year.             

Guest: What is the reason for a lower EBITDA margin?

Marek Wadowski: EBITDA margin was driven down by high feedstock prices, which pushed up production costs. The decrease was partly offset by stronger performance delivered by Chemicals (notably OXO alcohols and Plasticizers) and Plastics. A revision of estimated CO₂ emission allowances also had a positive impact on the results. It should be noted that year on year EBITDA rose PLN 160m in the second quarter of 2021.

Guest: Taxes and charges went up nearly 10%, or PLN 9m, which is relatively little given the almost two-fold increase in the cost of emission allowances. The question is what share of the taxes and charges expense is provisions for CO₂ emissions recognised during the quarter?

Marek Wadowski: Taxes and charges increased only slightly because of larger expected free CO₂ emission allowances allocation. The effect of the larger-than-expected allocation was factored in the second-quarter 2021 results. Also, please remember that free allowances are accounted for by allocating them proportionately to the planned emissions throughout 2021.

Guest: Hello. What do you think emission allowance prices will be during the fourth quarter and 2022? Has the EUR 50 mark been exceeded permanently, or is a correction likely?

Marek Wadowski: According to the latest up-to-date information we have, prices of emission allowances are expected to average around EUR 51 per EUA in 2021. We don’t expect any significant correction in the fourth quarter. Currently, the prices are ranging between EUR 60 and EUR 62 per EUA. Our forecasts put the average price of emission allowances in 2022 at EUR 62. Indications exist (EU carbon emission reduction policies and targets) that this price level may be exceeded.             

Guest: How is the integration with Compo progressing?

Marek Wadowski: The integration of Grupa Azoty and COMPO EXPERT is progressing as planned, as reflected in the COMPO EXPERT Group’s financial results and growing turnover with Grupa Azoty Group companies.

Guest: Would a potential increase in remuneration paid to the general contractor on the Polimery Police project necessitate impairment testing and recognition of impairment losses, or are there substantial reserves in your DCF?

Marek Wadowski: The project budget contains reserves for additional costs related to the project execution, which were taken into account in calculating profitability indicators for the project. Accordingly, we see no need to recognise impairment losses if these reserves are used.

Guest: The future of your key project, Polimery Police, is uncertain given Hyundai Engineering’s problems. Is there a risk you fail to reach an agreement on completion deadlines and remuneration? If the answer is yes, what happens next?

Marek Wadowski: GA Polyolefins is analysing amendments to the EPC contract proposed by the General Contractor. A decision on whether to enter into negotiations will be made once the analysis has been completed. The work on the project is continuing, and the project is 73% complete. In line with the applied project finance model, the project budget includes reserves for additional costs related to the project execution. The reserves have been created to cover any overruns in construction costs and costs incurred by GA Polyolefins during the construction phase. The Company is dealing with the proposed amendments in a professional way, putting the interests of the Group and the project front of mind. Hence the Group has not identified the risk of the project being discontinued.

Tymek: Hello. Unlike other Group companies, ZAK reported a sharp decline in profits delivered by the fertilizer business. Why?

Marek Wadowski: When we compare EBITDA margin delivered by Grupa Azoty ZAK S.A.’s Fertilizers business with consolidated EBITDA margin of the Azoty Group’s Agro Fertilizers business, it was less than 0.6pp higher in the first six months of 2021.

The second-quarter variance was due to the summer maintenance shutdown, which led to lower production and sales volumes.

Guest: You recorded nearly PLN 1bn in reverse factoring liabilities. Is this form of financing less costly than working capital facilities or bonds?

Marek Wadowski: Due to its very nature of a short-term working capital financing option, reverse factoring is among the most attractively priced sources of finance, particularly that its cost is linked to the financial rating of the Group assigned by banks and factoring companies providing this type of funding.             

Guest: Do you expect energy-intensive businesses will be paid more in compensation for the cost of current emission allowance prices? This year’s figures are far lower: PLN 8m vs PLN 44m.

Marek Wadowski: The main reason for an expected reduction in compensation for energy-intensive businesses was the exclusion of ammonia, fertilizer and plastics production from this support mechanism. The compensation amount depends on the average annual price of CO₂ emission allowances, which means the amount of compensation due increases with the rise of carbon prices. However, since the total annual compensation amount is capped under applicable laws, this factor may have a limited effect on whether Group companies are paid higher compensation.             

Guest: By what amount will discontinuation of the POM business reduce third-quarter earnings?

Marek Wadowski: The decision to discontinue POM operations will have no material impact on any other operations in the Plastics segment. We don’t expect discontinuation of POM operations will have any adverse impact on the third-quarter 2021 performance.

Guest: To what extent is the company hedged against rising interest rates? What amount of your liabilities is not covered by derivatives and exposed to interest rate risk?

Marek Wadowski: The Group has long-term fixed-rate loans in EUR, representing approximately 25% of all loans. Some of the Group’s other loans are denominated in PLN (around 50%) and bear interest at a variable rate based on WIBOR and some are denominated in EUR (around 25%) and bear interest at a variable rate based on EURIBOR, which helps to additionally diversify interest rate risk.

The loans advanced under the project finance model to fund the Polimery Police project are fully hedged against interest rate risk.             

Donald: Have you selected further diversification directions to follow once the Polimery Police project has been completed? Or it is too early to say?

Marek Wadowski: We will address the matter in our 2021–2030 strategy, whose key points will be unveiled in the coming weeks.             

Pace70: How did the market react to the quality of the product from the new granulation line in Puławy?

Marek Wadowski: The feedback has been positive. We are able to market 100% of production from the unit. The product is ammonium nitrate Pulan Makro 32, and its main sales market is Poland, but we also export it to other countries, including the UK.             

AT: What’s next with Polimery Police? When do you expect analysis of the claims raised by the Koreans will be completed?

Marek Wadowski: The documentation attached to the amendment proposal submitted by the General Contractor is extensive. The formal and technical analysis must be done thoroughly, which may take several weeks.

Masa: Would you again give the go-ahead to build the coal-fired unit in Puławy given the current prices of CO₂ emission allowances?

Marek Wadowski: The unit in Puławy generates electricity and process steam. The current gas prices and boiler efficiency make the project economically viable. Please note we don’t have any surplus gas we could use to produce electricity and process steam.

Marek Wadowski: Thank you very much for your participation. As usual, you were very inquisitive. I hope to meet you again when we release our third-quarter results. Until then, goodbye!             

moderator: On behalf of StockWatch.pl, I would like to thank you for an interesting discussion and invite you to our future chat sessions.

Marek Wadowski: Hello everyone. You may ask your questions now.

Rafał Toba: What conditions in the fertilizer segment do you expect to see in the second half of 2021 and in 2022?

Marek Wadowski: We expect our Fertilizers business will be driven by developments in the grain and rapeseed markets for the rest of the year, with grain and rapeseed prices projected to remain at the stable-to-high levels. We expect strong crop yields in Poland and the European Union. The situation is so dynamic that it’s difficult to make any meaningful predictions about 2022. However, we believe that, with increased grain exports, we will step into the upcoming 2021/2022 season with heavily depleted grain stocks, providing strong support to domestic grain prices. In other words, rising grain prices on global commodity markets coupled with low domestic grain supply will push up grain prices and, consequently, fertilizer prices at least for the remainder of the year.

Dawid M.: How has the COVID-19 pandemic affected your fertilizer business?

Marek Wadowski: The COVID-19 pandemic has had no major impact on the volumes of fertilizers placed on the domestic or European markets. Right now the pandemic is having a growing impact on commodity prices, which have entered an uptrend globally. For Grupa Azoty, what matters the most is the development of natural gas prices.

Feedstock prices will also be key during the period – natural gas prices in the case of nitrogen fertilizers and phosphate rock prices in the case of compound fertilizers. Unless gas prices in Europe experience steep falls, nitrogen fertilizer prices should follow an uptrend until the end of the year. The markets for ammonium phosphate and, consequently, for compound fertilizers will also stay in an upward trend.

Developments in Belarus will also play a role – restricted fertilizer imports from Belarus and possible problems with buying feedstock (potassium chloride) will give an additional boost to fertilizer prices in Poland and wider Europe.

Szczepek: To what extent will movements in the prices of natural gas and CO2 emission allowances affect your Q2 2021 results?

Marek Wadowski: The impact of rising gas prices is being offset by stronger fertilizer prices. As regards CO2 emission allowances, the Company has effectively hedged against any major adverse upwards price movements.

Anna - Anonim Have your plant operations changed relative to the pre-pandemic situation?

Marek Wadowski: During the pandemic, we used tools to maintain business continuity in line with a stringent sanitary regime, effectively preventing the spread of the disease. Some employees worked remotely, we eliminated employee movement around plants, and we isolated groups of production personnel. No major increase in sickness-related absences was recorded.

misiek: What are the most acute impacts of the coronavirus pandemic from the company’s perspective?

Marek Wadowski: The most acute impacts of the coronavirus pandemic for the Company are consumer uncertainty in plastics end-use industries and supply chain disruptions affecting availability of raw materials and components. It is important to note, however, that these adverse effects of the pandemic are being offset by rising product prices.

Guzera: What are the company’s investment plans for this year?

Marek Wadowski: This year we are continuing our largest project, Polimery Police, comprising a polypropylene plant located in Police, as well as our other capital investment projects, including both growth investments and investments seeking to ensure proper maintenance and/or timely replacement of the Group companies’ existing production assets. We are nearing completion of a mechanical granulation plant for our basic nitrate fertilizers.

Adam Analityk - Anonim: Does Grupa Azoty expect gas prices to keep going up in the second half of 2021?

Marek Wadowski: We believe the room for further gas price rises is slowly running out. EU gas stocks have started to expand at a rate exceeding the long-term average. LNG supplies to Europe should also be higher in the coming months compared with last year’s very low levels. As a result, we expect gas prices to show a downward trend in the third quarter of this year.

Izek - Anonim: How did the 2021 Suez Canal obstruction affect Grupa Azoty’s operations?

Marek Wadowski: The one-week obstruction had no immediate impacts on Grupa Azoty’s operations. However, it did cause delays in shipping of some petrochemical products from the Middle East, including benzene, and it contributed to the price rise seen at the beginning of the second quarter of this year.

BerMok - Anonim: What have been the effects of the coronavirus pandemic on the company’s operations?

Marek Wadowski: In addition to the impact on the market environment which I explained when answering a previous question, the pandemic primarily prompted a change in work organisation at the company. The measures taken to maintain the sanitary regime allowed us to keep work efficiency fully intact.

Blazej M.: What factors contributed to the revenue growth reported for the first quarter of 2021?

Marek Wadowski: Revenue growth was recorded across all key segments in the first quarter of 2021 (year on year).

In Fertilizers, the growth was led by higher prices supported by solid increases in fertilizer prices on global markets (driven by rising crop prices and increased purchasing power of farmers).

In Plastics, the revenue growth was driven both by prices (following the uptrend in feedstock prices) and increased demand resulting in higher volumes.

In Chemicals, the key drivers were rising prices of technical-grade urea (following the uptrend in urea prices on global markets) and surging demand for OXO products.

J GruneInvestor - Anonim: What are the benefits of the company joining the Clean Hydrogen Alliance.

Marek Wadowski: Being Poland’s largest producer of hydrogen, Grupa Azoty is vitally interested in developing new its applications. By joining the Clean Hydrogen Alliance, we will gain access to a platform dedicated to knowledge sharing and technology exchange, consulting ideas and concepts, and seeking partners for hydrogen projects.

Artur - Anonim: Is it certain that no dividend will be paid for the previous year?

Marek Wadowski: The Management Board of Grupa Azoty S.A. has recommended that the Company retain its entire net profit for 2020, mainly to secure the existence of a liquidity buffer for the implementation of further investment plans. However, the final dividend decision always rests with the General Meeting.

GruneInvestor - Anonim: Does the Company plan to invest in RES projects?

Marek Wadowski: Yes, of course! Power generation is an important element of Grupa Azoty’s production processes. The development and implementation of RES projects will also help reduce CO2 emissions.

Fundamentalista: How has the pandemic affected margins in each of the Company’s business segments?

Marek Wadowski: The impact of the pandemic on our business segments must be considered in terms of changes in demand. 

In the fertilizers segment, demand has remained very strong, but rising gas prices have had a limiting effect on margin growth.

In 2020, our pigments business reported strong profit margins, while the decline in demand for plastics and melamine resulted in negative operating margins.

At present, we are seeing a substantial recovery in demand, which has translated into improved margins on engineering plastics and melamine, with solid margins reported also on other products of the Chemicals segment (pigments and OXO).

Filip – Anonim:  Businesswise, what are your hopes for the new biodegradable polymers unit?

Marek Wadowski: The current production volumes of biodegradable polymers are low, however we expect their market to grow at a considerable pace in the future, not least thanks to their contribution to environmental protection.

Przemek: What progress has Grupa Azoty made toward developing a new strategy?

Marek Wadowski: As has been previously announced, work on the new strategy is well under way. We expect to publish it as soon as the necessary corporate approvals are secured.

Przemek: What segments will the Company focus on in the new strategy?

Marek Wadowski: This question has already been answered above.

Broker: When is the Company going to publish the new strategy until 2030?

Marek Wadowski: This question has already been answered above.

Maciej: Does Grupa Azoty expect to see changes in demand and feedstock prices following the easing of lockdown restrictions?

Marek Wadowski: A certain economic recovery was already noticeable when most of the lockdown restrictions were still in force. The plastics market has been on the rise since Q4 2020, and since early 2021 so has the fertilizers market, with demand driven by the spring application season. The third quarter of every year, which largely overlaps with summer holidays, usually sees a seasonal drop in demand for fertilizers, followed by a rebound in the autumn. However, given the current level of uncertainty due to the pandemic, it is difficult to project the market’s behaviour, which has recently been driven mostly by the balance of supply and demand. The supply and demand situation will continue to have a direct impact on feedstock prices, which will in turn affect product prices.

Restrictions and their easing tend to have the greatest effect on people’s mobility; as it increases, so does demand for transport fuels, which translates into improved performance of petrochemicals. A more balanced petrochemicals market should help stabilise prices.

Majki: What projects does the Company intend to pursue under the European Green Deal?

Marek Wadowski: Grupa Azoty has carried out a number of projects to support environmental protection, including launching new fertilizer lines which conform with the NEC Directive setting reduction targets for ammonia emissions, or getting involved in hydrogen projects to reduce CO2 emissions. Grupa Azoty has also developed new biodegradable plastics, with a new pilot production line for thermoplastic starch launched in May 2021. For more information of these and many other environmental protection measures that we take, see our reports; Grupa Azoty’s further plans related to the implementation of the European Green Deal will be presented in the new Strategy.

Marek Wadowski: Thank you for all your questions. Our first meeting has been a positive challenge for me. See you at our next chat session.

moderator: Welcome to our online Q&A chat session with Tomasz Hryniewicz, Vice President of the Grupa Azoty Management Board. The subject of the meeting will be the company’s 2020 results.

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moderator: Ladies and gentlemen, because Grupa Azoty’s earnings conference for analysts, attended by Mr Tomasz Hryniewicz, is attracting strong interest, it is taking longer than expected. For this reason, the start of the chat will be delayed by at least 15 minutes. Thank you for your patience.

Tomasz Hryniewicz: Dear guests, we are sorry about the minor delay caused by the prolonged conference for analysts. The chat will kick off in no time.

anty_teresa: What will be the raw material for the production of biodegradable plastics and what will be their price compared with normal plastics?

Tomasz Hryniewicz: Biodegradable plastics decompose when exposed to environmental factors such as temperature, fermentation, etc. The raw materials for their production can be either hard commodities such as crude oil and natural gas or bio-based materials, such as bioethanol made from plants. Recycled plastics converted into a form similar to crude oil will, of course, play an important role.

Michał: Have margins on plastics and chemicals improved significantly in recent weeks/months?

Tomasz Hryniewicz: Recent weeks have seen margins rise in the plastics market.

Michał: Have the recent significant increases in plastics segment’s margins been due to higher prices of polyamide? Given the simultaneous increase in the prices of benzene and phenol, shouldn’t we expect your results to improve in the near term?

Tomasz Hryniewicz: Plastics prices are rising mainly on the back of strong demand. The increases are accompanied by growing prices of raw materials.

Krystian Brymora (BDM): Did the company report any non-recurring events in the fourth quarter of 2020 apart from the compensation (PLN 69m) and financial support under the 4.0 Anti-Crisis Shield (PLN 9m)?

Tomasz Hryniewicz: At the consolidated level, there were no significant non-recurring events other than those specified in your question.

Szymon Struzik: Will Grupa Azoty be able to carry the burden of the Polyolefins investment project while fulfilling the objectives of the Green Deal, which will certainly involve huge investment outlays?

Tomasz Hryniewicz: Grupa Azoty has already made the entire required contribution to the Polimery Police project (equity contributions and subordinated loans), and has secured additional sources of financing (guarantees). Since at present the Group does not expect to make any additional spending on the project, the matters related to the Green Deal will be given priority as regards the Group’s capital expenditure in the coming periods. The Group intends to finance the required actions both with its own resources and with the EU and national funds for financing the energy transition. It can also carry out Green Deal-related projects together with other business partners.

Guest: Do you think that the rebound in titanium white prices in the fourth quarter is sustainable and low margins are now a thing of the past?

Tomasz Hryniewicz: Considering the results without the impact of the test, the situation on the titanium white market in the first quarter of 2021 provides grounds for improvement in performance. Demand for titanium white remains strong, and its prices are expected to grow in the first quarter of 2021.

Michał: Does the Company intend to remeasure provisions in the period from the second to the fourth quarter of 2021 due to rising CO2 prices? Will higher provisions related to CO2 emission allowances have a negative impact on EBITDA in that period?

Tomasz Hryniewicz: As the Company has already secured the required number of CO2 emission allowances for 2021 under futures, it is not expected that the higher market prices of emission allowances seen from the beginning of the year will have a negative impact on the Company’s results and EBITDA in 2021.

Guest: What was the share of Green Deal-compliant fertilizers in Grupa Azoty’s overall sales in the fourth quarter?

Tomasz Hryniewicz: In the Polish market, Grupa Azoty has started selling urea with an urease inhibitor (Pulrea), which is to reduce ammonia emissions to the air, and Fosfarm, a line of compound fertilizers which fit with the principles of circular economy. The Green Deal-compliant fertilizers had a small share in overall sales volumes in the fourth quarter, but it will be increased in 2021.

Guest: How does Grupa Azoty intend to compensate for the absence of subsidies for CO2 emission allowances in the coming years? It appears that the 2020 result was driven mainly by those subsidies.

Tomasz Hryniewicz: We mainly expect that the coming years will not be marred by market turbulence, which has significantly increased the risk of doing business, especially in our B2B segments (Plastics, Melamine), which were hit quite badly by the pandemic.

Michał: What is Grupa Azoty’s (including the consolidated Grupa Azoty Police’s) share of equity at Polimery Police?

Tomasz Hryniewicz: The joint share of Grupa Azoty and Grupa Azoty Police in the share capital of GA Polyolefins is 64.93%.

Guest: Is the construction of a coal-fired unit economically viable considering the current prices of CO2 emission allowances?

Tomasz Hryniewicz: Yes, it is now the only source that can supply power in the required amount to that location.

Michał: Do the costs of freight have a negative impact on any of the segments?

Tomasz Hryniewicz: By and large, the cost of sea transport is falling, with the costs of freight plummeting after a period of record hikes, in some parts of the world even to the levels seen in 2018 or 2019. I believe that their impact, if any, on the individual segments of the Group will be relatively low, if only due to the fact that Grupa Azoty Group’s relevant market is Europe.

Guest: What is the Group’s net debt to EBITDA ratio, including the debt financing for the Polimery Police project?

Tomasz Hryniewicz: In our opinion, providing this type of information is not meaningful as the Polimery Police project is being implemented on a project-finance basis with no recourse to the Group. The equity contribution and the amount of subordinated loans that Grupa Azoty extended to GA Polyolefins is reflected in that ratio, which – let me remind you – did not exceed 2.1 as at December 31st 2020.

Guest: When will the Plastics segment return to profitability at the operating profit level? Were the pricing deltas more favourable in the first quarter than in the fourth?

Tomasz Hryniewicz: The plastics segment has delivered significantly better results and we expect this situation to continue over a longer term. Spreads between selling prices and commodity prices in the first quarter of 2021 are higher than those observed in the fourth 2020.

Guest: Hello. What is the Management Board’s opinion about the current price of the Company shares? Are they currently undervalued given the sound performance figures for 2020 and favourable stock market conditions for other industrial companies?

Tomasz Hryniewicz: The Company’s Management Board spares no effort to build shareholder value. The good financial and operating results delivered in 2020 despite the extremely unfavourable macroeconomic environment are one of the results of those efforts. An update of the 2021–2030 strategy is currently at an advanced stage. The Management Board is of the opinion that the consistently applied measures should be reflected in the Company’s stock price.

Guest: Has the Company purchased all the CO2 emission allowances for 2021 yet? What is the approximate annual cost of purchasing additional emission allowances?

Tomasz Hryniewicz: Let me repeat my answer to an earlier question: the Company has already secured the required number of additional CO2 emission allowances for 2021 under futures. The costs of purchase of these allowances for 2021 (that is the cost of performance of the previously executed futures) will be above EUR 14m.

Guest: What will be the average annual EBITDA generated by Polimery Police after its launch in 2023?

Tomasz Hryniewicz: The average annual EBITDA generated by Polimery Police will largely depend on the effective spread between the raw material (propane) and the product (polypropylene), which are valued on a monthly basis, their prices depending on market conditions. The projections included in the company's financial model indicate that the Project has a solid footing and is capable of generating substantial positive cash flows.

inwestor_2k: The prices of feedstocks, materials and services are skyrocketing. Will the capital expenditure on Polimery Police be higher than originally planned?

Tomasz Hryniewicz: The Polimery Police project is being implemented on an Engineering, Procurement and Construction Lump Sum Turn Key (EPC LSTK) basis, which means, among other things, that the contractual provisions protect the company against any potential increase in the prices of feedstocks, materials and services.

Guest: Hello. Does the new strategy envisage consolidation of departments from the individual Group companies and potential workforce downsizing?

Tomasz Hryniewicz: The Grupa Azoty Group Strategy for 2021–2030 is still under development. It will encompass the strategies of the business segments and the functional strategies of the support areas. One of the key chapters of the functional strategies will be the chapter entitled ‘Grupa Azoty’s People’, which will address the development of human capital, human resources policy and personal data protection.

AT: Have the strategic EBIT and EBITDA profitability targets remained unchanged following the update of objectives and change of price paths associated with the COVID-19 pandemic?

Tomasz Hryniewicz: We adhere to our existing strategy as well as EBIT and EBITDA results. Changes, if any, will be announced in our new strategy.

le rom: ATT generates EPS of PLN (-0.6) – PLN 3.7. Its 2020 EPS was PLN 3.14. Will the results continue to depend on the weather and can we expect dividend of PLN 1.5, so that the share price of at least PLN 23 reflects the current market conditions?

Tomasz Hryniewicz: Grupa Azoty’s EPS was PLN 3.14 in 2020. Currently, Grupa Azoty’s stock trades at PLN 34.38, much above PLN 23.

guest: If you are optimistic about margins on plastics, chemicals and fertilizers, why did the Company, in today’s interview with the Polish Press Agency, speak about the negative outlook due to higher cost of raw materials?

Tomasz Hryniewicz: Or considerable challenges, to be more exact – yes, given the uncertainty over the impact of COVID-19 on both commodity prices and market turmoil.

Guest: If it hadn’t been for the drop in interest rates, would the company have been compelled to recognise impairment losses on the plastics facilities?

Tomasz Hryniewicz: We would like to note that in the period preceding the interest rate cuts we saw no need for impairment losses in the Plastics segment, either.

Guest: As regards the implementation of Green Deal projects, are you considering switching from coal to gas at the Puławy Power Plant, as PKN Orlen did at the Ostrołęka Power Plant?

Tomasz Hryniewicz: At present, there is no alternative for that location considering the required power supply – please refer to my earlier answer.

Guest: Why is ZAK developing its own R&D centre rather than conducting research at the Group level?

Tomasz Hryniewicz: The Group develops its R&D competencies in different locations according to different profiles depending on business needs as well as market and regulatory trends. The R&D centre in Tarnów specialises in research into plastics and fertilizers and, as a superior unit, coordinates research work across the Group. The R&D centre in Puławy focuses on developing biotechnology competencies, while the R&D centre in Kędzierzyn will be dedicated to ZAK-specific OXO products and alternative fuels, including hydrogen.

Guest: What is the new Management Board’s opinion about the decision made in previous years to expand the plastics production capacity?

Tomasz Hryniewicz: It was a very good decision.

Guest: What portion of emission allowances for 2022 and 2023 have you secured to date?

Tomasz Hryniewicz: Currently, the shortage of emission allowances for 2022 is covered in more than 30%, while the shortage for 2023 has not been covered so far.

Guest: How much higher, in percentage terms, are your margins on modified polyamide?

Tomasz Hryniewicz: Margins earned on modified polyamide are higher than in the fourth quarter of 2020.

Guest: Did I understand correctly during the conference that the company had reversed impairment losses? Is the reversal also reflected in the consolidated results?

Tomasz Hryniewicz: Grupa Azoty carried out impairment tests at the separate and consolidated levels, which indicated no need to recognise or reverse any impairment losses on property, plant and equipment or intangible assets. Impairment losses on property, plant and equipment were reversed at the subsidiaries Grupa Azoty Police and Grupa Azoty Puławy, as reported in their respective financial statements and current reports. Given the different values of assets at the level of the subsidiaries and at the consolidated level, resulting from asset valuations made on acquisition of subsidiaries, those events had no impact on the Grupa Azoty Group’s 2020 consolidated financial data.

Guest: Does the new strategy provide for any significant expenditure on environmentally-friendly solutions?

Tomasz Hryniewicz: We have every reason to believe that in 2021–2030 both EU and national laws will be even tighter with respect to industry, especially the chemical sector. Fortunately, they are consistent with the expectations of the general public in Europe, which means that the number of customers who are interested in eco-friendly products is also growing. This changes our not only our, but also our competitors’ way of thinking. Obviously, our investment plans envisage environmental spending, but not as high as it might have seemed at first glance.

Guest: In the fourth quarter, the prices of wheat, rapeseed and maize were the highest in many years. Why didn’t that drive up fertilizer prices?

Tomasz Hryniewicz: Fertilizer price increases always occur with a delay after increases in prices of agricultural produce, which is why they will be more significant in the first quarter of 2021.

Guest: Good morning. Did high prices of grains push up fertilizer prices in the first quarter? How did the prices change year on year and quarter on quarter? Did Grupa Azoty manage to seize this favourable opportunity and will it report robust performance figures in the fertilizers segment for the first – the most important – quarter of the year?

Tomasz Hryniewicz: Grain prices are just one in a host of factors we consider in our pricing policy. We cannot disclose any detailed data, but it should be stressed that grain prices supported fertilizer prices. Grain prices reached long-term highs and we hope that farmers themselves took advantage of those favourable conditions.

Guest: Are you experiencing any problems in transporting your products for exports?

Tomasz Hryniewicz: Only a few isolated cases.

Michał: Are margins/spreads on plastics for the first quarter of 2021 higher quarter on quarter?

Tomasz Hryniewicz: Yes, margins delivered in the first quarter of 2021 by the plastics business were higher than those in the fourth quarter of 2020.

Guest: What is the reason for the sharp decline in the Company’s revenue? According to the Management Board, the acquisition of Compo was to increase revenue to 12bn, while now it stands at 10.5bn.

Tomasz Hryniewicz: 40% of Grupa Azoty Group’s operations are based on B2B businesses, where product prices largely reflect the prices of raw materials, which – given the all-time low prices of crude oil – naturally led to a reduction of our prices. It should also be noted that those businesses experienced suppressed demand too, which translated into lower sales volumes of plastics and melamine.

Guest: How many of your employees are now on sick leaves or are quarantined/isolated? Are you experiencing any workforce shortages related to the third wave of the pandemic?

Tomasz Hryniewicz: To date, at the Grupa Azoty Group we have not recorded any major workforce shortages due to the third wave of the pandemic. The measures we have implemented to mitigate the risk of spreading coronavirus infections proved sufficient to ensure the continuity of production and continuity of support operations.

Guest: Have the prices of products manufactured at the polymer plant, projected for future years, changed due to the pandemic?

Tomasz Hryniewicz: As for the prices of polypropylene, the company relies on long-term forecasts prepared by reputable market advisors. At the moment, the company does not expect the long-term price trends to change significantly.

Guest: How much did you pay for the greenhouse gas emission allowances that will be accounted for this year? What percentage of those emission allowances did you receive for free and what do you expect the percentage of free allowances will be this year?

Tomasz Hryniewicz: The total cost of CO2 emission allowances for 2020 exceeded PLN 130m. We secured all the required emission allowances for 2020. The Group received just over a half of the required emission allowances for 2020 free of charge, with the balance purchased on the market. The Group pursues an active policy of hedging the costs of CO2 emissions, but since it does not publish any financial forecasts, information on the costs of emission allowances for 2021 cannot be disclosed.

Guest: Are fertilizer prices growing further in the second quarter or are they past their peak and now will stabilise or, possibly, go down?

Tomasz Hryniewicz: The prices of nitrogen fertilisers in the second quarter of the year in Europe and Poland always decrease. However, the extent of the decrease will depend, among other things, on gas and urea prices across global markets. The prices of compound fertilizers are expected to remain roughly unchanged due to the continuing high prices of DAP and NPK on global markets.

Raven: If we take into account external factors, such as prices of gas and CO2 emission allowances, is there any chance of improved performance in the first – the most important – quarter of the year, which has just ended?

Tomasz Hryniewicz: Gas prices were definitely not on our side in the first quarter. We are actively working to address this risk, though. We have signed contracts for most of the CO2 emission allowances for this year, which will have a neutral effect on our results if market prices rise.

Guest: Is the work on the Polimery Police project progressing as scheduled or is the pandemic getting in the way?

Tomasz Hryniewicz: The project is approximately 55% complete now (this includes design, procurement, deliveries and construction work). The stage of completion is consistent with the current project schedule.

Guest: Hello. How do you think the pandemic will affect your current and future results? The prolonged lockdown continues to weigh heavily on restaurants and the agricultural sector. Given the circumstances, will the demand for fertilizers and their prices have a strong negative impact on the company’s results this and next year? I am also curious when you expect a return on investment under the Polimery Police project. And my last question: besides Europe, does the company plan to expand into other continents? Aren’t you concerned about, for instance, stronger competition from Chinese manufacturers in Europe?

Tomasz Hryniewicz: Despite the pandemic, our 2020 financial performance deteriorated only slightly relative to the previous year. Earlier today, an earnings conference was held during which the impact of the pandemic was discussed at length. I invite you to read the investor presentation available on our website. You will also find there answers to questions about the progress of work on the Polimery Police project, as well as information about market situation, including in the fertilizers market.

Guest: How much assistance did the company receive under the various government support programmes?

Tomasz Hryniewicz: The amount received in 2020 was PLN 284m, including PLN 65m under the anti-crisis shield. The balance comprises compensation for rising prices of carbon emission allowances.

Guest: What is the margin generated by the compounding department? Did the Company increase its polyamide compound sales last year?

Tomasz Hryniewicz: The margin on modified plastics is higher than in the fourth quarter of 2020. Sales of PA6 compounds in 2020 rose year on year.

Guest: In the first quarter, gas prices on the Polish Power Exchange were nearly 70% higher y/y. Are such increases in the cost of gas to be expected in the Q1 report, or did you somehow hedge the price of gas to keep it lower?

Tomasz Hryniewicz: The increase in gas market prices in the first quarter of this year was attributable to the simultaneous impact of higher gas consumption in winter, as well as the parallel increase in the prices of raw materials and products due to the anticipated gradual easing of the COVID pandemic. Therefore, the Grupa Azoty Group is purchasing gas at market prices, but at the same time is it gradually raising the prices of fertilizers. Importantly, global gas consumption is expected to go down naturally once the winter season is over, leading to a gradual decrease in gas market prices.

Guest: Will the Group’s capital expenditure peak in 2021 (CAPEX of PLN 3.7bn) and gradually decline in the coming years?

Tomasz Hryniewicz: In 2021, we have an accumulation of expenditure: PLN 1.8bn under the Polimery Police project and more than PLN 0.5bn under the power generation project in Puławy. What remains after deducting those amounts is PLN 1.4bn, which is not much different from the total planned CAPEX in previous years.

Guest: Did you also hedge the prices of CO2 emission allowances for 2020? If so, why did the negative effect on that account in fourth quarter of 2020 was 19m and 59m for the entire 2020?

Tomasz Hryniewicz: Grupa Azoty pursues an active policy of hedging the costs of CO2 emissions, under which carbon emission allowances are purchased in advance and contracts are signed only for a portion of allowances during a given year. The differences are a consequence of the major increase in the prices of emission allowances in the second half of 2020.

Guest: Looking at the situation in the Company’s plastics segment, which regularly generates losses and has profitability issues, do you think that Polimery Police might share the same fate as the final product to be manufactured there is similar?

Tomasz Hryniewicz: Polypropylene is a versatile plastic with a wide range of applications in various market segments, which ensures greater resilience to demand fluctuations in particular industries. Moreover, market forecasts indicate a steady increase in demand for polypropylene from European customers, and Polimery Police is the only project of this type currently implemented in Europe.

Guest: If the performance of plastics and chemicals segments is to improve, why did you say the following words in an interview with the Polish Press Agency: ‘Grupa Azoty expects a significant increase in raw material prices, which will affect its margins’?

Tomasz Hryniewicz: Improvement in the plastics market is driven by higher demand. Market prices are determined by the current supply and demand dynamics. Higher prices of raw materials are not the only factor with effect on margins.

Guest: Will the new strategy envisage further acquisitions or just organic growth of the Group?

Tomasz Hryniewicz: We are working hard on the 2021–2030 strategy. What is important is that we think about the strategy segment-wise – about managing the Group through relatively independent business segments. We will see whether segment strategies will identify M&As as an important tool for strategy operationalisation in the future.

Guest: Were the prices under the electricity supply contracts you signed significantly higher? Do you somehow hedge those prices on the market, or is it your counterparty’s job?

Tomasz Hryniewicz: Since 2020, electricity prices in Poland have been subject to significant volatility of up to 20%. The increase in electricity prices is directly linked to prices of CO2 emission allowances.

Electricity is purchased as part of the Group companies’ joint procurement procedures based on their respective electricity requirements and using a procurement strategy providing for a partial purchase of electricity for the next three years. The prices are hedged by electricity suppliers.

Guest: Will the individual Group companies maintain their status of separate entities?

Tomasz Hryniewicz: I am not aware of any plans to change the status quo.

Tomasz Hryniewicz: Ladies and Gentlemen, our meeting today has come to an end. Thank you for all your questions – they came in abundance. See you again next time.

moderator: On behalf of StockWatch.pl, I would like to thank you for an interesting discussion and invite you to our future chat sessions.

Tomasz Hryniewicz: Welcome everyone. We have just released our third quarter 2020 performance figures. You can ask your questions now.

bjerre: Has the Grupa Azoty Group benefited from any government assistance granted in connection with the epidemic?

Tomasz Hryniewicz: The total amount of employee wage subsidies received by the Grupa Azoty Group under the Anti-Crisis Shield 4.0 legislative package was PLN 59m.

Skibek: What full-year performance figures do you expect to see for 2020?

Tomasz Hryniewicz: As a rule, the Grupa Azoty Group does not publish any forecasts for subsequent reporting periods.

RvP: Are there any plans to distribute the 2020 net profit in 2021?

Tomasz Hryniewicz: You will need to wait a little bit longer for any declarations regarding dividend payment – the entire month of December is still ahead of us, and afterwards we will summarise the extremely challenging year 2020.

Ewa: How do you look back on your decision to acquire Compo Expert in 2018?

Tomasz Hryniewicz: We believe our decision to acquire COMPO EXPERT in 2018 was a good one. It enabled the Group to significantly expand its product portfolio, capture a new promising segment of speciality fertilizers, and considerably enhance its geographic diversification. The integration activities have also helped identify and achieve synergies both for the Grupa Azoty Group and for COMPO EXPERT.
The acquisition was also a good move in economic terms, as COMPO EXPERT’s financial performance remains solid despite the challenging year due to the pandemic.

inwest: Since the beginning of the year, Grupa Azoty’s capex has reached PLN 1.72bn. What projects has it been spent on?

Tomasz Hryniewicz: 55% of the amount has been spent on the Polimery Police project. 27% is the total capital investment made at Grupa Azoty Puławy, including on the construction of the CHP plant and ammonium nitrate-based granulated fertilizers unit. Overall the growth capex has amounted to PLN 1,158m, while the amounts spent on maintenance and replacement projects have been around PLN 200m in each case.

Mirek: Which segment will see the heaviest investment in the coming years?

Tomasz Hryniewicz: The Plastics segment including the Polimery Police project, which is the Group’s strategic investment and one of the largest petrochemical projects undertaken in recent years both in Poland and Europe. It will allow us to extend our product value chain and diversify revenue sources, making the Group more resilient to the fertilizer market volatility.

WSE_fan: What is your most promising business segment?

Tomasz Hryniewicz: Against the backdrop of the recent ‘Covid-19’ months, the Fertilizer business remains the Group’s most promising segment. It is part of the food production market, which has been least affected by the pandemic. Also, the acquisition of COMPO EXPERT has allowed the Grupa Azoty Group to expand its product portfolio and its foothold in new markets, such as Greece.

Nowy: What factors were the positive drivers of the Grupa Azoty Group’s performance in the third quarter of 2020?

Tomasz Hryniewicz: Our third quarter performance was driven mainly by the fertilizer product volumes, which increased year on year, and general stability in the agricultural sector with a limited impact of the pandemic.The compensation for higher prices of CO2 emission allowances and the financial support we received under the Anti-Crisis Shield 4.0 legislative package also made a difference. Some of the product categories in the Chemicals segment, such as OXO alcohols, also performed better year on year despite the pandemic.

Tomasz Stępień: When do you expect to sign contracts for the supply of propane for the Polimery Police project?

Tomasz Hryniewicz: Negotiations with propane suppliers are being held as we speak. The propane contracting strategy of Grupa Azoty Polyolefins S.A. is aimed at securing supplies under both short-term (1–2 year) contracts and spot contracts. The final contract negotiations are expected in the second half of 2021, which is long before production starts.

Tomasz Stępień: Could you comment on the current reality in the Polish fertilizer market and the market outlook for early 2021?

Tomasz Hryniewicz: The baseline situation is very promising. Farmers saw higher yields this year (up 15% according to preliminary estimates by Statistics Poland) and the grain prices in Q4 2020 are up 15-20% year on year. As a result, the purchasing power of Polish and European farmers is much higher than a year earlier. In general, we see prospects for an upward trend in nitrogen fertilizer prices in Q1 2021. In the case of compound fertilizers, price movements will be less pronounced and much will depend on the prices of fertilizers such as DAP (ammonium phosphate). The supply of fertilizers in the coming months will also depend on weather conditions (rainfall).

Piotr - Anonim: Hello. As a new senior executive, where do you discern a potential for cutting costs and boosting efficiency?

Tomasz Hryniewicz: In order to maintain a competitive edge in our business segments, we regularly analyse the efficiency of all key business areas driving the Company’s and the Group’s performance. The outcome of these analyses will certainly be reflected in our newly developed strategy, to be revealed in the first half of 2021.

Janek: What are the synergies between the Group’s and Compo Expert’s business?

Tomasz Hryniewicz: The main synergies between the Grupa Azoty Group and the COMPO EXPERT Group include:
- the use of some feedstocks coming from Polish units of the Grupa Azoty Group as components in fertilizer production at COMPO EXPERT,
- joint purchases of some feedstocks on global markets,
- joint commercial activities, especially in southern Europe,
- financing of the COMPO EXPERT Group’s operations out of cheaper sources of financing available to the Grupa Azoty Group,
- the use of the Grupa Azoty Group’s IT infrastructure at COMPO EXPERT,
- other operational savings resulting from the shared organisational structure and procurement of many support services.

biznes: What is your planned CAPEX for 2021?

Tomasz Hryniewicz: Once again, the Grupa Azoty Group has a policy of not publishing any forecasts. However, the two key investment projects that are still in progress, namely the Polimery Police and the Puławy CHP plant, will require the largest capex amounts under the total budget planned for 2021.

ABA - Anonim: Could you discuss the Company’s planned dividend policy for the coming years?

Tomasz Hryniewicz: In line with our dividend policy set out in the Grupa Azoty Strategy for 2013–2020, the Company may share up to 60% of its net profit with shareholders. Having said that, the dividend policy also assumes that the overriding objective of our financial structure is to ensure long-term financial security and internal coherence among all funding sources. The strategy also provides that, in justified cases such as the delivery of an extensive investment programme or the risk of a downturn, the Management Board may recommend against a dividend payment.
The Grupa Azoty Group’s planned dividend policy for the coming years will be set out in our new strategy until 2030, which is still in the works and is expected to be announced to the public in the first half of next year.

XYZ - Anonim: Are there any plans for new acquisitions in the coming years?

Tomasz Hryniewicz: We prefer to talk about successfully delivered projects rather than plans, especially that the coming years will see a large-scale investment programme at the Group. We believe the ongoing pandemic will not bring any acquisition opportunities in the Fertilizer segment of the chemical industry. It may bring minor ones in the Plastics segment and naturally prospects for mergers with technology start-ups.

Walet: What economic trends do you expect to see in the Fertilizers business in 2021?

Tomasz Hryniewicz: We have a very optimistic outlook on the first quarter of the year, but uncertainty will rise as the year unfolds. The economic trends will depend, as usual, on the prices of gas, potassium chloride, and phosphate rock. The weather conditions, especially rainfall, will be another decisive factor. In addition, the Polish legislation is changing so that, as of August 1st 2021, Polish farmers will be required to use urea with urease inhibitors (following implementation of the NEC Directive), which may change their approach to fertilization. However, the Group sees this change as an opportunity to increase the volumes of sales with higher margins.

Lukasz - Anonim: What is the outlook in terms of demand for the Group’s products?

Tomasz Hryniewicz: The Grupa Azoty Group has an extensive product portfolio, reaching many industries. As a result, the Group is able to offset any adverse market trends within individual business segments.
We are now experiencing a general crisis triggered by the pandemic and its economic impacts both in Poland and the Group’s other key markets. AGRO fertilizers, which are of key importance to food security, have proved to be our most resilient segment. We are currently expecting a rise in demand for fertilizers from the Polish agricultural sector, but the application season for nitrogen fertilizers in Poland will only begin on March 1st, in accordance with the applicable laws. Obviously, the weather conditions will also play a role. The other segments have been affected by pandemic-related restrictions to a lesser or greater extent. We are expecting the markets to bounce back, as the first signs of recovery are already visible. Still, this will depend on how the pandemic continues to play out.

Tobiasz: What is the Company’s position on the European Green Deal? How will it affect the Company’s cost and performance figures?
 
Tomasz Hryniewicz: The Company subscribes to the ideas behind the European Green Deal, especially that they are by no means novel, but have been compiled and structured as a single document, setting out the scope and often the time frames within which the European Commission plans to achieve its overriding objectives of climate neutrality. As regards costs, it would be difficult to quantify them at this point, even though it seems only logical that they should increase (e.g. in the case of R&D and mandatory investment costs), given that the European Green Deal is not only about ambitious environmental goals, but will also require funding to achieve them. Therefore, it seems that priority should be given to ‘green’ investment projects, meeting the state aid eligibility criteria.
However, it must be noted that the potential impact of the European Green Deal on both our costs and performance figures will be spread over a longer period of time, until 2030 and then until 2050.

Roman: The Grupa Azoty stock price is a far cry from last year’s quotations. Do you expect an increase in your stock price next year?

Tomasz Hryniewicz: The current price of Grupa Azoty shares is indeed not satisfactory. This is mainly attributable to the exceptionally weak performance of stocks listed on the Warsaw Stock Exchange relative to global indices, not only in the current year. We are keeping a close eye on the capital market, which has been badly affected this year, both locally and globally. Grupa Azoty has taken steps to build the Group’s value and deliver added value to shareholders, through ambitious investment projects such as Polimery Police, acquisitions such as COMPO EXPERT, and successful expansion of the product portfolio through M&As.

Merc: Do you think the current market valuation of the Company stock is accurate?

Tomasz Hryniewicz: I refer you to my answer above to a similar question.

Junior: Are you leaning more towards acquisitions or organic growth?

Tomasz Hryniewicz: I believe our track record says it all. We have behind us a consolidation process which created the Grupa Azoty Group in 2011–2013 and further strengthened the Group in 2014–2020. In 2019, we successfully acquired and integrated COMPO EXPERT, a large player in the market of speciality fertilizers with international business roots. At the same time, we are also able to implement a large-scale investment project, the most ambitious one we have undertaken to date, under the project finance model – namely, Polimery Police. Grupa Azoty will tap any opportunities to upscale its business, but it leans more towards capital investment, that is towards organic growth.

Lukasz - Anonim: What are your expectations regarding gas prices and their impact on the Group’s bottom line over the next five years?

Tomasz Hryniewicz: I believe the impact of gas prices on our profit figures over the next five years will be neutral. Just like any other European fertilizer producer, the Grupa Azoty Group purchases gas at market prices and is sensitive to any gas price volatility to the same extent as its competitors. There is a clear correlation between gas and fertilizer prices, albeit with a certain delay. In the coming years, we expect an oversupply of LNG and higher consumption of gas as a generation fuel, combined with a rising share of RES. This means that the increasingly volatile gas market will depend even more heavily on weather conditions. Therefore, we can expect gas prices to go up during exceptionally cold winters and hot summers, and then fall down when weather conditions improve. This will result in unexpected declines in our profit figures or in exceptionally high profits on our fertilizer sales, as the case may be.
On the other hand, the forecast oversupply in the liquefied gas market in the coming years will exert pressure on gas prices, keeping them at currently recorded levels across European markets, i.e. at EUR 12-15/MWh.

Paweł: In a nutshell, how would you encourage me to invest in the Grupa Azoty Group?

Tomasz Hryniewicz: The Group operates in attractive industries, significantly contributing to the entire economy, and its business is based on sound foundations. It is true that the Company’s current stock price is far from satisfactory. Generally speaking, the chemical industry has not recently enjoyed the best investor sentiment. However, as the pandemic subsides, we expect to see signs of economic recovery across the board and a more favourable climate for equity investments, also in the chemical sector.

Tomasz Hryniewicz: Thank you for all your questions, I am really glad to see your interest in Grupa Azoty. We’re out of time, so we must say goodbye. Thank you for be.

Moderator: On Monday September 21st 2020 at noon we will be hosting a live web chat with a representative of Grupa Azoty. You may ask questions concerning the financial perfomance delivered by Grupa Azoty Group companies in the first half of 2020.

Moderator: Hello. Welcome everyone. We will be happy to take your questions now. Paweł Łapiński, Vice President of the Grupa Azoty S.A. Management Board, will answer your questions concerning the financial performance, developments and market environment of the Grupa Azoty Group companies.

Kamil: How sensitive is the Company’s performance to movements in natural gas prices? What is the share of natural gas in total costs?

Paweł Łapiński: It’s no secret that we conduct a commodity feedstock-intensive business, and natural gas, as a key feedstock for fertilizer production, represents the largest share of our feedstock costs. In the first six months of 2020, for instance, natural gas accounted for some 11% of total operating costs and for 32% of variable costs.

Tomasz Stępień: COVID-19 has triggered certain shifts in the polymer market: a rise in demand for packaging and personal protection equipment rose and a collapse in automotive demand. Are these trends affecting Polimery Police’s sales plan? And my second question. What milestones (and when) do you expect to be delivered on the Polimery Police project, both on the construction front and in contracting feedstocks and products?

Paweł Łapiński: The current market conditions created by the COVID-19 pandemic are having no major impact on Grupa Azoty Polyolefins’ sales strategy. We believe that the auto market’s collapse is only transitory and the situation should improve and normalise before the products are brought to the market. Our sales strategy relies on a diversified product portfolio and market presence (food packaging, personal hygiene, automotive and construction industries).

On to the milestones.

The process to select the suppliers of strategic feedstocks (propane, ethylene) is scheduled for the third quarter of 2021, with final contracts to be signed in the first quarter of 2022.

As to finished products, the company has signed a number of Letters of Intent exceeding by far the target production capacity. Polypropylene supply contracts will be signed after production has been launched and after products from the new plant have undergone initial validation.

Tomasz Stępień: Could you comment on the situation in the nitrogen and compound fertilizers market in Poland in the third quarter and the outlook for the coming months?

Paweł Łapiński: The situation in the nitrogen fertilizers market remains stable despite the pandemic and temporary difficulties in the first six months of the year. We don’t expect any deviations from our previous assumptions for the coming months. Our compound fertilizers are under strong pricing pressures driven by the price war between Russian, Moroccan and other players. We are facing numerous challenges and a lot of work on this front in the coming months.

RvP: How do you expect the situation in your industry will develop in the second half of the year?

Paweł Łapiński: Let there be no mistake – a balance in the plastics market can only be restored if the leading European and global economies return to normal. Of key importance will be consumers’ propensity to buy, which is currently under great pressure given the prevailing job and income uncertainty. The melamine business also poses a challenge given a plunge in demand in the furniture and other markets. The fertilizers business should deliver as expected in the second half of the year, although sharp swings are occurring in the compound fertilizers market, where we can see strong pricing pressures and a ceiling to our price raising efforts. Price competition is also getting fiercer in the pigment business.

Marcinek: Do you hedge against foreign exchange risk?

Paweł Łapiński: Grupa Azoty hedges its planned FX exposure (mainly in the euro and US dollar) chiefly through natural hedging, entering into foreign currency or foreign currency-denominated contracts for the sale and purchase of products and feedstocks. Grupa Azoty also has long-term euro-denominated loans (including from the EIB) for which hedging links with future euro-denominated inflows have been established. There is also the umbrella overdraft facility linked to the cash pooling arrangement with PKO BP denominated in the euro, which allows us to effectively manage the euro exposure of the Group companies, including short-term mismatches between inflows and outflows in that currency. The remaining net foreign exchange exposures in the euro and US dollar are hedged with forward contracts concluded on a rollover basis for up to two years.

Karol: What is your opinion on the Company’s second-quarter results in the context of the coronavirus pandemic?

Paweł Łapiński: For a period of complete turmoil across markets, I think we delivered quite solid results. As you could see during our results presentation, many of our foreign peers reported greater variances in revenue and earnings for the period. Also, please remember we signalled the difficult situation of the plastics business long before the pandemic, when we were preparing the targets for 2020. The situation in this particular industry is closely correlated with macroeconomic conditions in key economies, which have been steadily deteriorating over the past few months.

bjerre: Have you seen any positive reversal in market trends, for instance in prices or in demand for NOXy, OXO alcohols and melamine, or is the current situation still unfavourable to the Group?

Paweł Łapiński: The COVID-19 situation has had a strong impact on markets. Some of them will need time to recover from the shock, but the first signs of recovery can already be seen. Feedstock and product prices are rising in step with the firming up of crude prices. The pandemic situation has been peculiar because a slump in demand due to lockdowns is considered one of the reasons. But demand is slowly recovering despite concerns around a possible second wave of the pandemic. At this point it’s difficult to predict how the market might develop in the light of the most recent measures taken to contain the spread of pandemic.

Kamil: Do you hedge against unfavourable movements in natural gas prices?

Paweł Łapiński: Yes. We can lock in gas prices through forward contracts. But this comes at a price. Statistical analysis shows the cost of supplies covered by monthly contracts exceeds that of supplies bought on the spot market by almost EUR 0.5 per MWh on average, and the more distant the delivery date, the higher the cost. Spot prices are currently at around EUR 11 per MWh, while gas deliveries for the entire 2021 and 2022 cost approximately EUR 14 per MWh and EUR 15 per MWh, respectively. But in periods of strong price volatility and side trends, particularly steady uptrends, hedging against price volatility, particularly around the short term end of the forward curve, makes economic sense. And we seek to use this option during such periods. Our team monitors the market on an ongoing basis and makes decisions according to future natural gas prices predictions.

Matt: Have you encountered any problems with payments from trading partners, or are the payments made on time like in the first half of 2020?

Paweł Łapiński: Grupa Azoty has global credit risk insurance policies with leading insurers (including KUKE, Euler Hermes and Atradius), allowing the Group to manage trade receivables from customers and to adjust credit limits according to their credit standing. Consequently, problems occurred only occasionally and involved customers in markets or sectors that were particularly hard hit by the pandemic. Please note, however, that no major problems with payments from trading partners are reported at this point.

Tomek: Were fertilizer sales figures for July and August consistent with the Company’s internal targets and the budget?

Paweł Łapiński: In terms of volumes, the answer is yes. Demand for nitrogen fertilizers was particularly strong. Some farms buy fertilizer early, in July and August, as investment. In the case of compound fertilizers, farmers deferred purchases, and demand has peaked since mid-September.

Warszawiak: How many coronavirus cases have been reported across the Group?

Paweł Łapiński: We had a few cases of coronavirus infection at the Group and in each case we took prompt action to minimise the risk of the disease spreading. These cases caused no disruption to our operations. Grupa Azoty has procedures in place to ensure prompt response of competent emergency services, and recommendations were issued to mitigate the risk of infection spreading among our employees, including specific guidelines for health monitoring, restrictions on business travel, and remote work.

Cam: Can you see any chance of the situation in Chemicals improving during the remainder of the year?

Paweł Łapiński: We all expect the situation will improve, and the first signs of recovery can already be seen. Demand across segments related to chemicals is rising slowly yet steadily. We are moderately optimistic about the coming months given the ongoing pandemic. A major factor influencing the near future will be restrictions imposed by countries, which affect consumer behaviour and, by extension, demand.

Kris: Has the COVID situation had any impact on your relationships with banks?

Paweł Łapiński: Grupa Azoty pursues a consistent disclosure policy, communicating all information on the potential impact of the COVID pandemic on its financial position in current and periodic reports. We believe these disclosures are satisfactory to our financing banks as well. Importantly, we meet all material covenants and maintain all financial ratios at the levels set in credit facility agreements, which promotes strong relationships with banks and bodes well for the future. Grupa Azoty maintains a strong liquidity position and has sufficient funds under the available lines of credit to fund its operations and key capital investment projects (including to fund its equity contribution to the Polimery Police project).

Stanek: What are your predictions about gas prices during the remainder of 2020 and in 2021?

Paweł Łapiński: I expect gas prices to hover at around EUR 10–EUR 12 per MWh until late October and early November, with sharp daily fluctuations depending on RES generation volumes. As the winter season approaches, gas prices will likely rise to EUR 14 or EUR 15 per MWh. In 2021, we expect the average price to stay close to EUR 12 per MWh, that is some 50% more than this year. We expect the upcoming winter will be normal, with inventory levels going down to usual levels after the winter season ends. Also, suppliers tested market stabilisation instruments during this year’s supply glut, and I seriously doubt they will do anything to drive oversupply and push down prices to the levels seen for several months of this year.

Ted: What is the capex planned for the Polimery Police project this year?

Paweł Łapiński: Unfortunately, we can’t provide details on this, but it’s important to note that capital expenditure is incurred based on the actual progress of work under project milestones.

Żeglarz: Why were sales prices realised by Compo Expert on each product category higher in the second quarter?

Paweł Łapiński: The Compo Expert Group realised higher sales prices in the second quarter across all product categories except for NPK fertilizers, where the average price fell 3.5% year on year due to strong competition and softer demand. As for the other product categories, the average sales price on foliar feed fertilizers rose 3.5%, on controlled-release fertilizers – 10.4% and on liquid fertilizers – 14.5%. The rise reflects our marketing strategy and focus on the specialty B2B segment, which sells specialty products at higher prices. The effect of higher prices on the Group’s consolidated financial statements is also attributable to the weakening of PLN against EUR and USD, the two currencies in which the Compo Expert Group sells its products in Europe and other markets.

Robson: Couldn’t the Company take advantage of the falling prices of feedstocks used in the production of alcohols and plasticizers, for example to increase the inventory of these feedstocks?

Paweł Łapiński: We are actively managing this area, of course. Our Kędzierzyn subsidiary buys as much propylene as possible when its price falls, with the maximum purchase volumes depending on the availability of free freight railcars. They are a warehouse on rails.

Kowalski: With the Chemicals business facing tough conditions, was it difficult to negotiate funding for Polimery Police with banks?

Paweł Łapiński: The key terms and conditions for financing of the Polimery Police project were agreed upon and confirmed before the end of 2019, that is before the outbreak of the COVID-19 pandemic, and the banks then issued commitment letters for the Project. Therefore, subsequent negotiations of project financing agreements had to take account of current market developments, but, importantly, the required debt finance had already been secured. This enabled the process of signing all debt and equity financing agreements for the Project to be completed by May 31st 2020, and the Group is on track to satisfy the conditions precedent to disbursement of the funds by Joint Sponsors and banks. Please note that the Sponsors and Financing Banks have been provided with the updated Project Financing Model, which upholds all material assumptions concerning the Project’s economic viability.

Tomek: What is your opinion on Grupa Azoty’s current stock price?

Paweł Łapiński: After a period of the COVID-related panic and capital flight, stock markets are slowly picking up, with stock prices rising in selected industries. Although chemical stocks were not popular with investors during this difficult time, with the ambitious EU climate policy goals additionally weighing on investor sentiment, earnings were buoyed by low gas prices in the first six months of 2020. A company’s market value is driven by a multitude of factors. What’s important is the strong fundamentals on which we build our business, but the current stock price is far from what I would call satisfactory.

ciekawy: Do prices of carbon emission allowances have a major impact on your performance?

Paweł Łapiński: They are not a critical factor but they do play a role in terms of performance. Their effect reported at the Group level in the first six months of 2020 was PLN +22m. But remember the unusual base effect reflecting the equipment failure in Police in 2019. Answering your question, with annual consumption of approximately 7.5 million tonnes, the effect of an increase in the price of carbon emission allowances by 1 EUR on profit or loss is approximately PLN 16–18m, including free allowances, of course.

ciekawy: Are you facing labour shortages? Has the COVID-19 situation helped the Company in this respect? Did you feel any wage pressures in the first and second quarters, or did the pandemic restrain pressures to raise pay?

Paweł Łapiński: There have been no wage pressures from our employees, who displayed a great sense of responsibility in this difficult time, taking a long-term perspective on the Group’s future. Where relevant conditions were met, Grupa Azoty Group companies applied for government support under the Shield 4.0 legislative package to counteract the impact of the coronavirus pandemic.

Moderator: Ladies and gentlemen, we are running out of time. Thank you very much for taking part in this chat and for your questions. We couldn’t meet in person at the WallStreet conference this year, for obvious reasons. I hope the event will be held soon in a changed format. I’ll see you there!

moderator: Welcome to an investor chat with Paweł Łapiński, Vice President of Grupa Azoty, and Marek Czyż, Vice President of Grupa Azoty Polyolefins SA. Our meeting will focus on Grupa Azoty companies’ first-quarter 2020 results and the Polimery Police project.

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Grupa Azoty: Hello. Welcome everyone. We will be happy to take your questions now. Paweł Łapiński, Vice President of the Grupa Azoty S.A. Management Board, will answer your questions concerning the financial performance, developments and market environment of the Grupa Azoty Group companies. Marek Czyż, Vice President of Grupa Azoty Polyolefins S.A., will take your questions concerning Polimery Police. 

pasha: Hello. When will final agreements on equity financing of Polimery Police be signed? 

Paweł Łapiński: Yesterday, May 31st 2020, Grupa Azoty S.A. and Grupa Azoty Police proudly announced the signing of financing agreements for the Polimery Police project. These included credit facility agreements with a syndicate of Polish and international financial institutions and transaction documents setting out the terms of equity investment and financing with Grupa LOTOS S.A., Hyundai, and KIND.

With these agreements, we have secured full fundng for the project. 

shareholder: Hello. Will Police consolidate the Polimery Police SPV with the full method? In other words, will the company control the SPV, or exercise joint control and use the equity method? 

Paweł Łapiński: The equity method will be used from the time of entry by joint sponsors and reduction of our equity interest in Police to below 50%.

guest: Funding has been secured. What will the next step be? When do you expect turnkey delivery of the complete project? 

Marek Czyż: Having achieved the major milestone of signing debt and equity financing agreements, we can fully concentrate on the performance of the EPC contract. We are currently in the process of obtaining further building permits. Hyundai is hard at work on all subprojects.
The plant is to start commercial operation in the fourth quarter of 2022. 

inwestor_2k: Hello. Let me first congratulate you on securing full funding for Police. The deadline was the end of May, and you met it. I’m wondering, though, why part of the credit facility is denominated in the euro and the other part in US dollars? Has the general contractor requested to be paid in those two currencies? 

Paweł Łapiński: The currency structure of the financing was subject to an in-depth analysis and its current form reflects the conditions prevailing on the polypropylene market. 

Tomasz Stępień: Can you tell us something about the proposed propane purchasing structure: number of suppliers, contract duration, supply sources by geography? At what stage is the agreement signing process right now? 

Marek Czyż: We are negotiating commercial terms with propane suppliers. The potential feedstock suppliers to Grupa Azoty Polyolefins S.A. are leaders of the European, Asian and American markets. The negotiations have already led to the execution of letters of intent initially providing for the supply of propane in volumes significantly exceeding the Polimery Police production capacity. The propane contracting strategy of Grupa Azoty Polyolefins is aimed at securing supplies under short-term (1–2 year) contracts and spot contracts. The final contract negotiations are scheduled for 2021, which is long before production starts. 

Guest: Hello. The credit facilities are a Children’s day gift from you to us :) When are you finalising the financing from KIND, Hyundai and LOTOS? 

Paweł Łapiński: We are glad to see the financing transaction closed and our shareholders happy :)
The financing agreements have just been finalised. As previously announced, a credit facility agreement was concluded yesterday with a syndicate of Polish and international financial institutions, and that equity investment and financing agreements were signed with Grupa LOTOS, Hyundai and KIND in respect of the Polimery Police project. 

policki_inwestor: Will the port terminal under construction also be used to handle raw materials currently transported via the Mijanka terminal? 

Marek Czyż: Given the technology used, the planned propane and ethylene terminal will be used to handle only those particular feedstocks. 

Tomasz Stępień: What impact is Covid 19 having on the progress of work under the Polimery Police project? 

Marek Czyż: The company has not identified any significant impact of the coronavirus pandemic on the progress of Polimery Police. The company and the general contractor Hyundai Engineering are constantly monitoring the status of deliveries and purchase orders, particularly with respect to plant components with long delivery times. No delays are expected that could affect the project schedule.
The main challenge facing the general contractor will be to recruit highly qualified staff. Hyundai Engineering is thoroughly analysing the potential of the domestic labour market and establishing relationships with subcontractors, particularly local ones.
Since the beginning of the pandemic, Hyundai has implemented strict safety procedures, which have enabled construction work to be carried on all subprojects. 
Guest: How much are you going to spend on research this year? As I can see from your presentation, project budgets are quite sizeable. 

Paweł Łapiński: Our R&D plans are defined in the same way as budgets. First of all, we are driven by our goal of allocating up to 1% of the Group’s revenue to innovation (including research services and own research as well as pilot process units). Recently we have communicated success in obtaining grants from the National Centre for Research and Development for R&D projects. A month ago, as many as four of our grant applications received positive recognition. 

Guest: Propylene, plastics and OXO prices suggest your results should have been worse. Are the improved earnings reported by this segment at ZAK an effect of reconstruction of power generating assets or are there other factors at play? 

Paweł Łapiński: No, it’s not only that. The improved first-quarter performance delivered by the OXO segment came also as a result of higher volumes we managed to place on the market, as well as lower natural gas prices. We are very pleased with the earnings given the segment’s poor performance in 2019. 

Andy: Is it possible that the company will change its approach to the fuel used by the Puławy CHP Plant? Given the current prices of carbon allowances and natural gas prices, aren’t you reconsidering the technology? Or is the project one hundred percent sure to be coal-fired and any changes are out of the question? 

Paweł Łapiński: The Puławy CHP Plant project is already under way. No sufficient reasons exists to stop the project at this point. The production plant in Puławy needs energy independence and a balanced supply. And independence can only be achieved with competitive access to fuel. 

Guest: The company has recently brought a plastic compounding unit on stream, yet, looking at volumes, no year-on-year growth in sales of modified plastics can be seen. Why is that? 

Paweł Łapiński: Compound plastics sales volumes are growing at a rate lower than expected. The reasons are a drop in demand caused by COVID-19 and the continued downturn in the automotive industry. 

policki_inwestor: Will Grupa Azoty Polyolefins S.A. collaborate with 3D printing companies? 

Marek Czyż: As a rule, polypropylene is not commonly used in 3D printing, which primarily uses engineering plastics, such as ABS, PLA, PET, PVA, PA, etc. The company is now gauging market demand, and if there is any demand for polypropylene from 3D printing companies, it will consider cooperation with potential customers for the product.
 
Guest: Hello. In an interview for the Parkiet daily, Mr Wardacki mentioned the cost reduction measures. Can you specify the size (in millions or in percentage terms) of cost savings planned to be achieved this year as a result of those measures relative to the previous year? Will those savings be permanent or are they rather designed to cut administrative expenses? 

Paweł Łapiński: Such a question is very difficult to answer. The thing is: what is the benchmark? If it is the previous year, it should be remembered that in 2020 we have to deal with a number of costs which we refer to at the Group as mandatory ones, that is costs beyond our control, required by law. These are, for instance, higher costs of services brought about by an increase in the minimum wage, the introduction of occupational pension schemes (PPE) and employee capital plans (PPK), change in the basis of measuring some provisions, etc. As a result, the cost reduction we achieved relative to the adjusted previous year’s level has been cancelled out by mandatory costs. Nevertheless, we strive to effectively keep fixed costs at a reasonable level. 

Guest: Will the Management Board recommend retaining the profit at the company in the coming years as well? 

Paweł Łapiński: Each decision about profit distribution is preceded by a thorough analysis. The Management Board must seek to ensure long-term financial security and internal coherence between all funding sources of the Grupa Azoty Group.

Our dividend recommendations ultimately depend on the investment projects we are pursuing, prevailing market conditions and our plans concerning cash flows across the Group. As for now, a binding declaration on the allocation of the Grupa Azoty Group’s future profits would be premature. 

Guest: How long will it take you to pay off the credit facilities? What will be the maximum ratio of net debt to EBITDA? Will the banks which did not finance this project include this debt in the covenants or not? 

Paweł Łapiński: The senior credit facilities will be repaid by Grupa Azoty Polyolefins until December 2030, with the option to extend the period by five years with the bank syndicate’s consent, which will reduce the last repayment instalment (balloon payment).

The Grupa Azoty Group’s net debt to EBITDA (adjusted for the exclusion of Grupa Azoty Polyolefins) will be below 3.5. With regard to the Grupa Azoty Group’s corporate financing, the SPV’s net debt and EBITDA will be excluded from the calculation of covenants, which has been provided for in the loan agreements. 

anty_teresa: Has there been an increase in prices of compound fertilizers in the second quarter? 

Paweł Łapiński: As always, the prices of compound fertilizers in Poland go down in the second quarter of the year to go up in the following months, and this year is no different.
No significant price movements are seen on foreign markets, where the prices of DAP, now in a sideways trend, are the key driver. 

Misio: Gentlemen, we are pleased both with the results and the Polimery Police project, but the question is: what next? What does the situation in the Fertilizers segment look like now? When do you expect to bring the Plastics segment’s sales back to normal? 

Paweł Łapiński: The main reason behind declining sales in the Plastics segment is lower demand triggered mainly by consumer uncertainty in the end-user sectors. The situation should improve after the first signs of an economic rebound.
The Fertilizers segment has already entered a new season, starting in June and ending in May of the next year. To be more specific, we have just signed agreements with Authorized Distributors for the sale of nitrogen and compound fertilizers on the Polish market. We are also entering into short-term and spot contracts on foreign markets, mainly in the EU.
We are optimistic about the prices of nitrogen fertilisers and their projected movements in the coming months – it appears that the drought’s impact on agricultural production will be moderate, and the prices of grains and rapeseed look promising for the medium term. 

księgowy: Why did you decide to swap reverse factoring for a loan? If a loan is a cheaper form of financing, why didn’t you use it right from the start? 

Paweł Łapiński: The Grupa Azoty Group uses various forms of working capital financing, including overdraft facilities, receivables factoring and reverse factoring. The financing costs are comparable. The Group uses this mechanism depending on current conditions. 

Marek: Why should the financing by Grupa Azoty, KIND or LOTOS be partly provided in the form of subordinated loans and not only with equity and share issues? What will be the proportions of these two forms of financing in the case of external partners? 

Marek Czyż: The Polimery Police project financing structure is a result of arrangements between all the entities involved in its financing. A partial share of subordinated loans in this structure is typical of the project finance model and was preferred by some of the parties to the transaction, for instance due to a high flexibility in distributing free funds to the investors. In the case of LOTOS, the subordinated loan amounts to PLN 200m, that is 40% of the total investment amount (PLN 500m). In the case of KIND, the loan amount will be USD 52m; KIND will buy shares for USD 5m. Hyundai will invest USD 73m exclusively in the share capital of Grupa Azoty Polyolefins.
 
Guest: What is the capacity utilisation rate of the new compound line? 

Paweł Łapiński: At present, production of various types of plastics is being tested on the new compound line, which involves frequent changes in the production structure and changeover of the line. It will be possible to determine the capacity utilisation rate only after the end of the year. 

Guest: Let me then put it in a different way. Is it reasonable to expect that there will be no dividend distribution before the Polimery Police project is completed? 

Paweł Łapiński: All scenarios are possible. 

Guest: Mr Łapiński, how can you explain such poor performance of Police given that gas prices are so low? 

Paweł Łapiński: Police’s performance was largely affected by the result on compound fertilizers. Please bear in mind that, unlike in the case of nitrogen fertilizers, gas is not a major performance driver in the NPK segment. Additionally, the NPK market, and the DAP (phosphate fertilizer) market in particular, were flooded with imported fertilizers, which suppressed not only their prices (significant price cuts already in October 2019), but also their volumes (in fact, the volume effect had the largest bearing on the NPK result year on year). Also, the prices of phosphate rock and potassium chloride (key feedstocks in the compound fertilizers segment) increased by 11% and 3%, respectively. 

brutalp: What do you think demand for fertilizers in Q2 2020 will be? Is the Chemicals segment still experiencing a major slump in demand? 

Paweł Łapiński: We have a good starting position for compound fertilizers and a very good one for nitrogen fertilizers.

Rainfall in May improved the condition of crops in Poland and the EU. Farmers are still applying nitrogen fertilizers for maize crops, grassland and winter grains (third dose).

By and large, stock levels are low, which should prompt farmers to buy fertilizers for the next season.

The PLN/EUR and PLN/USD exchange rates have also been supportive to our business, making export sales of fertilizers more profitable.
 
Andy: The poor performance delivered by Police in the high-season quarter is a bit worrying. Is the post-financial-crisis situation from years ago likely to occur again? Will the company need assistance, particularly that it has to partially support a project like Polimery Police? 

Paweł Łapiński: The results posted by Police were dragged down by the performance in compound fertilizers. Large volumes of goods, mainly DAP, were imported to Poland in the first quarter of 2020, significantly dampening our sales prices and volumes. We also recorded an increase in the cost base, reflecting rising prices of key raw materials: potassium salt and phosphate rock. On the other hand, strong results in nitrogen (ammonia and urea) made a positive contribution. Demand is strong and profit margins are wide in the segment, particularly thanks to very low natural gas prices. Obviously, we are monitoring performance on an ongoing basis, but no serious disruptions in the company’s full-year performance are expected. 

Guest: Tell me again why Police was chosen as the site for the Polimery Police project? What are the synergies with Police? 

Marek Czyż: The project’s location in Police offers strategic advantages in terms of supplies (feedstocks delivered by sea) and the proximity of and easy product distribution to key sales markets.

The project site being close to the existing plant of GA ZCh Police (one of the original shareholders in GA Polyolefins responsible for implementing the project) will create a number of synergies with GA ZCh Police’s infrastructure, including with respect to the supply of process media (electricity, steam, demi water, etc.) and services (wastewater treatment, etc.). GA ZCh Police will also receive hydrogen, a by-product of the propane dehydrogenation process from the PDH unit. 

brutalp: Hello. What will be the capex spending on the PDH project this year, and what amount of capex can we expect to be spent by the entire group? Has the overall project budget been revised versus original assumptions (can you tell us again what is the expected total expenditure on the PDH project)? 

Marek Czyż: Total capex planned to be spent on Police Polimery (PDH+PP) by the end of 2020 will exceed EUR 600m, out of ca. EUR 1.5bn of total estimated costs. There were no major revisions in the Polimery Police budget.
 
Guest: What is your average locked-in price of CO2 emission allowances? 

Paweł Łapiński: It’s a trade secret. Hedging transactions with respect to the purchases of CO2 emission allowances are entered into regularly in line with the applied hedging policy, so the purchase prices factor in the average market price for a given period. 

Guest: Are you going to recognise any electricity price adjustments/subsidies this year? How much income from subsidies did you book last year? 

Paweł Łapiński: Grupa Azoty Group companies are entitled to receive public aid on account of the pass-through of emission costs to the prices of electricity used to make products in energy-intensive sectors and subsectors. No compensation income was recognised given the uncertainty surrounding the allocation of compensation payments in 2019. The total amount of compensation to be received for 2019 is estimated at about PLN 83.4m, and it was recognised as a contingent asset (an off-balance sheet item). If the President of the Energy Regulatory Office grants the applications filed by the Group companies, this amount will be paid to them in the second quarter of this year. The companies may also receive compensation for 2020 in a similar amount in 2021. If the payment of these amounts is considered probable, the Group will recognise them on an accrual basis in the 2020 statement of profit or loss. 

Guest: When do you expect growth in plastics? How do orders compare to last year? 

Paweł Łapiński: The situation in the plastics industry is strongly linked to the overall economic conditions. Orders dropped significantly. It’s hard to predict right now when deliveries will again be taken regularly. We expect this to happen when the economy recovers. 

Guest: What proportion of compound fertilizer do you place on the home market, and how much do you export? Are these proportions different for nitrogen fertilizers? 

Paweł Łapiński: Generally speaking, Poland is our priority market, accounting for ca. 70% of total nitrogen and compound fertilizer sales.

We export more nitrogen than compound fertilizers, which is directly linked to production capacities. 

Guest: Why doesn’t ZA Puławy pay a higher dividend if it holds so much cash? 

Paweł Łapiński: The dividend recommended by the Management Board of Azoty Puławy Group equals 36.7% of profit earned in 2019. The dividend policy set in Grupa Azoty’s corporate strategy provides for sharing up to 60% of its net profit with shareholders. However, the company’s capex programmes and financing needs must be taken into account. 
 
Guest: Where do you plan to sell your products, given the market in Poland is already highly saturated: large imports virtually from all around the world + BOP’s dominating position. 

Marek Czyż: According to Grupa Azoty Polyolefins’ data, global demand for polypropylene in 2017 was 80 million tonnes, with ca. 10 million tonnes in Europe alone. Market advisers estimate that demand reachable by the company in Europe (including Turkey) will exceed 12 million tonnes of PP in 2022. PP imports from outside Europe to the target market in the same year are estimated at ca. 3 million tonnes. The target market comprises Poland, Germany, Austria, Switzerland, Scandinavian countries, Czech Republic, Slovakia, and Hungary. According to advisors, PP demand in this market will exceed 4.3 million tonnes in 2022. The size of the domestic polypropylene market in 2017 was 700,000 tonnes, of which about two-thirds were imports.

The predominance of PP imports to Poland and Europe from distant markets creates conditions for the product being marketed by Grupa Azoty Polyolefins as a local producer based in the heart of Europe.
 
księgowy: As Puławy has changed its segmentation to bring it in line with the rest of the Group, melamine is now recognised in Agro revenue. Shouldn’t it be shown separately to increase transparency? 

Paweł Łapiński: The change was introduced as part of yet another stage of implementing segmental management at the Grupa Azoty Group. The melamine business was moved to the Agro Segment as a result of the existing process links, including the use of the same feedstocks for production, and the melamine sales function being part of the Agro Segment. Pursuant to IFRS 8, the presentation of operating segments should reflect how management monitors the particular business activities, and the change addresses this requirement. 

Alone in the Dark: Has the company already held talks with customers for the plastics from the new line? 

Paweł Łapiński: The company has its own customer base. Also, talks are held with new partners. 

Guest: How many jobs will be created under the Polimery Police project? 

Marek Czyż: Once the units are launched, Grupa Azoty Polyolefins, the SPV responsible for the Polimery Police project, will employ up to 400 people.

The company also expects that the construction of new units may create three times as many new jobs in its environment. 

Guest: Current reports published yesterday mention call and put options for Polyolefins shares held by Hyundai and KIND. Which of the Grupa Azoty Group companies has a liability under the put option? I understand that this is not an equity investment on the part of the Koreans since the option exercise price (in USD) is equal to the price originally paid. 

Marek Czyż: The liability under the put option is shared by Grupa Azoty and Grupa Azoty ZCh Police. It does not apply to all of the shares held by Hyundai and KIND, but to the shares with an aggregate original value of up to USD 70m. The exercise of the call or put option is one of the ways in which our Korean partners can exit the investment; another way of doing so, provided for in the documentation, is the option to carry out a public offering. In addition to investing in GA Polyolefins shares, KIND will also extend a subordinated loan to that company, also understood by the entities financing the Project as an equity investment. 

Alone in the Dark: Dou you think it is possible for the Grupa Azoty Group to deliver results exceeding the five-year average this year? 

Paweł Łapiński: It will hardly come as a surprise if I say that this year will be a challenging one for us. The pandemic does have a bearing on some of our segments. We won’t be able to avoid the consequences of the downturn in the automotive market (dragging down the Plastics segment’s performance) or in the furniture market (with adverse effect on melamine). Nevertheless, the Management Board is taking steps to achieve the best possible economic results, as demonstrated by our Q1 performance. Can we outperform the five-year average? It will certainly be a feat, but it is still doable.
 
księgowy: Are you considering acquisitions? Isn’t it now an opportune moment (as prices are low) to acquire such companies as Compo? 

Paweł Łapiński: Following the acquisition of COMPO EXPERT, specialty fertilizers were added to the Grupa Azoty Group’s product mix, so now we can now offer a broad fertilizer portfolio. Irrespective of the bold investment programme pursued by the Grupa Azoty Group, we are closely monitoring market developments, also in the context of potential investment opportunities. For now though, we are focusing on the implementation of our investment programme, including on the Polimery Police project, which we have discussed in detail today. 

Guest: Hello. The project implemented by GA Polyolefins was supposed to be financed under the project finance model, but from what I see you had to issue a subordinated loan guarantee for more than EUR 100m. 

Paweł Łapiński: The Polimery Police project is financed under a project finance formula and is excluded from the Grupa Azoty Group’s corporate financing.

The Group’s financial exposure is strictly defined and may not exceed PLN 1,832m, as announced in the current report of May 31st 2020. The EUR 105m relates to the guarantee of contingency financing secured through the conclusion of a guarantee agreement for granting a support loan, which can be disbursed in specific circumstances, in particular in the event of an unforeseen increase in capital outlays, additional working capital requirement or the SPV’s difficulties in payment of financial liabilities. At present, the Polimery Police project’s financial model does not provide for the need to use this amount. The guarantee you are referring to was required by the financial institutions providing senior financing. 

Guest: How much did you spend in total on counteracting the pandemic and supporting local hospitals? I’m asking about one-off costs in Q1 and the costs you have incurred so far in Q2. 

Paweł Łapiński: Our support was not always of a monetary nature (for instance, we lent vehicles, provided assistance in purchasing the equipment), but if you’re asking about the exact amount we have so far directly allocated to fighting the pandemic, it is PLN 3.2m. 

Guest: Gentlemen, what do you think was the key reason for the mismatch between analysts’ expectations and the Group’s actual performance? 

Paweł Łapiński: I think that most analysts did not expect the nitrogen fertilizers segment to deliver such impressive sales volumes. Also Compo Expert posted much better results on its product mix. We should also keep in mind our Chemicals segment’s performance, especially in terms of OXO sales. These are the key drivers of what I believe to be a welcome discrepancy between our actual performance and market expectations. 

Guest: To my mind, it takes a chemist to grasp the nature of the Grupa Azoty Group’s business. Perhaps it would be a good idea to make a presentation during a conference of what you manufacture on individual lines, what feedstocks and semi-finished products are used and in what quantities? 

Paweł Łapiński: Thank you for your suggestion. We'll try and show you the ins and outs of our chemical business. Our investor presentations contain a slide showing the path from the raw material to the product – a production diagram. It is, of course, a simplified version. 

Guest: Who is the region’s largest propylene and polypropylene manufacturer? 

Marek Czyż: If the region is understood as the domestic market, the largest and currently the only manufacturer of polypropylene is Basell Orlen Polyolefins and of propylene – PKN Orlen. If the region is understood as Europe, the three largest polypropylene manufacturers are Lyondell Basell, Borealis, and Total. The leading propylene producers include BASF, Sabic, Naphtachimie, and Shell. 

Guest: Will the Pigments segment report a loss in Q2 due to the pandemic in Italy? 

Paweł Łapiński: The titanium white segment is certainly under pressure from current market conditions due to the pandemic, but it is unlikely that it should post a loss for the second quarter. 

Guest: Which do you think is the most undervalued and overvalued company on the market? 

Paweł Łapiński: Generally speaking, the recent months were far from ideal for the capital market, including for the Warsaw Stock Exchange, hence the stock performance of companies was way below expectations. In recent weeks, as stock exchanges start to get used to the pandemic crisis, also the chemical sector has been showing signs of recovery. Keep your fingers crossed for us, please. 

Guest: Will the propane contracts (with terms of 1–2 years) have fixed or variable delivery prices, depending on market prices? 

Marek Czyż: The market price of propane (and all petroleum products) is variable. Therefore, no fixed price contracts for propane are concluded on the market. 

Guest: Is there any construction work in progress on the key project? 

Marek Czyż: The general contractor has already begun construction work on all sub-projects, concentrating mainly on foundation work, such as preparation of screeds and reinforcement (the PDH unit and the port). Earthwork has already started on the site of the future polypropylene unit.

Most headway has been made in the port terminal: reinforcement of foundation slabs for propane and ethylene tanks has already been completed. 

Paweł Łapiński and Marek Czyż: Ladies and gentlemen, our meeting today has come to an end. Thank you very much for taking part in this chat and for your questions. We wish everyone good health. See you at our next chat session. 
moderator: On behalf of StockWatch.pl, I would like to thank you for an interesting discussion and invite you to our future chat sessions.