Moderator: Visit our investor chat room for a chat with Mr Andrzej Skolmowski and Mr Marek Kapłucha, representing the Management Board of Grupa Azoty, to be held at 12:00 pm on September 5th (Thursday). You can post your questions in advance!

 

Moderator: Welcome to today’s chat with representatives of the Management Board of Grupa Azoty. Mr Andrzej Skolmowski, Vice-President of the Management Board in charge of finances, and Mr Marek Kapłucha, Vice-President of the Management Board in charge of the supply chain management, will be answering your questions.

 

Management Board of Grupa Azoty: Having joined WIG30 we have reached one of our three key strategic objectives announced in the Grupa Azoty Group Strategy for 2012−2020. It means recognition and prestige to the Group, and a guarantee of quality and high standards of communication to the investors. We are now on the radar of foreign investors, and have become part of the barometer of Poland’s economy.

 

Management Board of Grupa Azoty: At present, there is still anti-dumping duty in force in the EU on imports of Russian nitrate, at EUR 47/tonne. It is the main product protected by ADD. Anti-dumping duty measures have been extended for another 15 months, during which the EC will review the situation and take a final decision. Representatives of the Grupa Azoty Group participate in the activities of Fertilizers Europe, an association which actively supports the European fertilizer industry in combating dumping.

 

Management Board of Grupa Azoty: Answer to f.bernat: We are investing in Tarnów. In 2008−2013, we invested more than PLN 550m there. We are currently working on a project which may generate another PLN 500m within the next three years and includes expansion of the production capacity.

 

##u.qtgcpi#at#de.ea##: Questions to Vice-President Andrzej Skolmowski. 1. When are development and investments going to start in Tarnów − I mean new products, new production capacities, new jobs? 2. Why are wages in Tarnów lower than in any other WIG30 company and how long will it take before they go up?

Management Board of Grupa Azoty: I am not familiar with an analysis of wages in WIG30 companies; we review wages in a different context. To note, WIG30 includes financial institutions. The issue of wages is under scrutiny by a joint consolidation team. We are soon going to open a public dialogue about long-term pay policy.

 

Management Board of Grupa Azoty: The Company is not planning on downsizing as a result of the merger. There are many new investment plans, so we will be allocating employees to new projects. There is no need to downsize the workforce. 

 

Management Board of Grupa Azoty: No, the Company does not run any management stock option plan.

 

Management Board of Grupa Azoty: As at June 30th, the Group’s borrowings amounted to almost PLN 761m, of which PLN 219m were current borrowings and PLN 540m − non-current borrowings. Anticipating the next question about net debt: it was PLN 145m as at the end of June. However, in proportion to EBITDA for H1, the Group’s net debt is only 14%, showing a very good debt coverage ratio.

 

bjerre: How do you assess the current diversification of feedstock suppliers? Is the Management Board going to increase the diversification?

Management Board of Grupa Azoty: We constantly plan and implement the policy of supply source diversification. We strongly believe that with several suppliers of a given type of feedstock, we can take full advantage of the free market and negotiate the best prices.

 

węzłon: Is the Company planning on further acquisitions?

Management Board of Grupa Azoty: We are at the final stage of acquisition of Siarkopol (communicated on many occasions), Grupa Azoty Puławy has submitted a non-binding bid for Sarzyna, and quite recently Grupa Azoty Police has acquired a company in Senegal as part of an upstream project. All these projects are part of the Group Strategy. We have been quite open about the fact that we are watching the developments and taking advantage of acquisition opportunities as they arise. However, for now, there are no other major projects.

 

Management Board of Grupa Azoty: The Company operates on the B2C market (accounting for ca. 60% of revenues). The key products on this market are mineral fertilizers. Our customers are fertilizer distributors and end users, both in Poland and the rest of Europe. The only exception is ammonium sulfate − this fertilizer is exported mainly to South America. The remaining 40% of revenues are generated on the B2B market, so our products are used as manufacturing components. In the B2B sector we sell our products to customers on all continents, in more than 50 countries. 

 

Marcin Piec: Is the Company going to pay dividend?

Management Board of Grupa Azoty: Our dividend policy included in the Group Strategy for 2012−2020 provides for the distribution of dividends ranging from 40% to 60% of the Grupa Azoty’s net profit. 

 

Management Board of Grupa Azoty: In line with the rules adopted by the Management Board, Grupa Azoty does not publish forecasts.

 

Management Board of Grupa Azoty:  Grupa Azoty Group’s profitability is going to depend mostly on the performance of the Fertilizers segment. There are no indications of any major change of the trend in the chemicals segment

 

Management Board of Grupa Azoty: There is still some chance. The process is in progress. We expect final decisions in the coming months. As a result of the acquisition, the Group will expand its product portfolio with plant protection products − a segment which has the same customers as fertilizers. For us this means synergies, while farmers get an opportunity to purchase a wide range of products from a single supplier. It is a win-win situation.

 

Management Board of Grupa Azoty: In Q2, key performance items were down relative to Q1. However, we must bear in mind the seasonality of our business and analyse the performance in comparable periods. To the question about the Plastics segment and its performance in the discussed period: the whole of 2013 saw high prices of strategic feedstocks (higher prices of benzene and phenol) and lower spreads underlying the structure of pricing paths for the polyamide range. Additionally, increased production capacities in China and dropping prices of caprolactam on the Asian market affected sales of caprolactam from Puławy, the subsidiary which is being consolidated within the Plastics segment.

 

Musiolilk_Marek: Hello! What drove the record high performance in Q1? Should it be attributed mainly to Puławy?

Management Board of Grupa Azoty: The Grupa Azoty Group closed Q1 2013 with EBIT of PLN 419,067,000 and net profit of PLN 410,447,000. These figures are significantly up on the corresponding period of 2012, mainly as a result of the fact that the consolidated data included the results of Grupa Azoty ZA Puławy S.A. from its acquisition on January 18th 2013. Breaking down the performance by key business segments, we can see that revenues surged (by almost 50%) in the Fertilizers segment, predominantly as a result of the acquisition. Other than that, steady prices and demand, especially in the segment of nitrogen fertilizers and intermediates, brought a higher EBITDA margin, at 21%, compared with 18% in the corresponding period of 2012. The Chemicals segment, which comprises the former OXO segment and mainly melamine products, reported revenues higher by nearly 60% y/y, and improved EBITDA margin to 9%, from 8% for Q1 2012. Apart from the acquisition, the improvement was brought by favourable developments on the melamine market, where low supply led to an almost 35% rise in prices. In the Plastics and Pigments segments, the trends seen in Q4 2012 continued. Further increase in the prices of key feedstocks and continuing pressure on prices for key products caused a sharp fall of the EBITDA margin, to -3% for plastics (17% in Q1 2012) and -2% for pigments (27% in Q1 2012). An important factor shaping the consolidated EBIT was the recognition of a gain from a bargain purchase of shares in the amount of PLN 174,252,000, which reflected the valuation of net assets of the acquired company at fair value.

 

Management Board of Grupa Azoty: We are considering both a credit facility and bonds. We will be communicating our decisions but first we need to agree on long-term CAPEX.

 

zeus: What made EBIT plummet on a separate basis?

Management Board of Grupa Azoty: The result is attributable to poor performance of the Chemicals segment (i.e. 50% of operations in Tarnów) due to high prices of feedstocks and lower prices of products.

 

Management Board of Grupa Azoty: Ha ha, we don’t stroll through cemeteries or suck in dirt like a vacuum cleaner. All acquisitions were preceded by due diligence processes which involved profound analyses, including legal ones. In fact, we gave some of the projects up. This can’t really be called ‘skeletons’. The acquisitions speak for themselves.

 

Management Board of Grupa Azoty: The Management Board takes into account different scenarios, including a drop in fertilizer prices. However, based on our view of the developments in the market, we expect fertilizer prices to remain stable in the short term. We also assume that the low prices of crops are merely temporary and that they may partly result from speculations on international markets. Thus, we expect no adverse change to the favourable conditions for further development of the fertilizer industry, which is driven by high population growth and steadily increasing demand for food, with less and less possibility of expanding arable land globally.

 

Management Board of Grupa Azoty: When the process commenced, we estimated synergies at no less than PLN 100m. Based on the work done so far, the actual synergies should be at least in line with these estimates, however, more work and more analyses will be needed before we arrive at any definite figures. The synergies are significant, and their full utilisation is a long-term process.

 

Management Board of Grupa Azoty: We are going to wait for decisions. We have enough revelations.

 

Management Board of Grupa Azoty: It certainly prompted an important and necessary decision on the consolidation of the Polish chemical sector. It will depend on the actors and well-prepared stage whether the play based on this scenario will be successful for many seasons.

 

Management Board of Grupa Azoty: In the case of fertilizers, accounting for approximately 63% of the Company’s revenues, we sell half of the production in Poland and the rest in other European countries. Ammonium sulphate, on the other hand, is particularly suitable for South American soil. Other chemical products (approximately 37% of revenues) are sold to over 50 countries on all continents. Settlement currencies for export sales are the euro for Europe and the US dollar for other countries.

 

dystrykt: What is the effect of currency movements on the Company’s results? Does the Company hedge against currency risk?

Management Board of Grupa Azoty: The Company has a positive currency exposure mainly to the euro. At the same time, as part of risk management we apply a currency hedging policy whereby up to 50% of our exposure is hedged in a six months’ horizon, which makes it possible to stabilise the effect of currency fluctuations on the Company’s results.

 

Management Board of Grupa Azoty: Especially as the sun is shining in Krynica, as you can see.

 

Management Board of Grupa Azoty: We are still working on CAPEX for 2014, but replacement CAPEX should not exceed PLN 750m (CFO’s expectations :) )

 

mmmaslov: :) OK, I get it :) It must have been really hot yesterday :)

Management Board of Grupa Azoty: Do you know that Tarnów is the warmest town in Poland? Come to visit!

 

Management Board of Grupa Azoty: Profit from a bargain purchase of Puławy is included in the CF under profit before tax. It is then eliminated under (profit) loss from investing activities. That is where this large negative figure comes from.

 

Michał_Pol: How does the Management Board rate global demand for Grupa Azoty’s products? Is it on an upward trend?

Management Board of Grupa Azoty: The Management Board believes there is a strong case for growth in demand for mineral fertilizers as it is necessary to intensify agricultural production. In Poland, for example, fertilizer consumption is still 20% lower than the European average (pure component per hectare). On the other hand, there has been significant growth of world population and continuous growth of demand for food, including high-protein food, which we are unable to produce in the required quantities and with the required quality without mineral fertilizers. In the case of other chemical products, these is a higher correlation with the general economic situation in Europe and globally. If the economic situation is relatively poor, demand for our products is stable but weaker. For us, any rebound after a period of recession means growth of demand. We hope Europe will return on the growth path soon, which will be reflected in our revenues.

 

waldi: Hardly any Polish companies succeeded in upstream investments in distant countries. Why should Police be successful?

Management Board of Grupa Azoty: Someone has to be first :) We have no choice - we need upstream acquisitions if we want to stabilise Police’s performance in the long term. Africa has rich raw material deposits, which triggered our decision to pursue an acquisition on this continent. We are prepared to manage this project.

 

Management Board of Grupa Azoty: We do not engage in sponsorship in the strict sense, but we undertake advertising activities to promote the Grupa Azoty brand. Our involvement with professional sports is part of these efforts. We employ specialist agencies to regularly conduct research and monitor effectiveness of our advertising activities in all media. We cannot, however, disclose the amount of expenditures on professional sports as it is a trade secret.

 

inny: The level of trade receivables has increased by nearly 100%. Is it mainly a result of the acquisitions?

Management Board of Grupa Azoty: Yes, it results chiefly from the acquisition of Grupa Azoty Puławy.

 

Management Board of Grupa Azoty: The Management Board is looking into all possible acquisition options, including the ones involving foreign companies. We don’t limit ourselves to the Polish market, as we sell almost 50% of our products outside of Poland. And since we are already present on foreign markets, we also take into account development through acquisitions. A case in point is our equity investment in Senegal announced last week (phosphate rock mines, with phosphate rock being a key raw material in the production of NPK fertilizers).

 

jasiek76: How does the Company measure the effectiveness of its sports sponsorship activities? What are annual expenditures in this area?

Management Board of Grupa Azoty: We do not engage in sponsorship in the strict sense, but we undertake advertising activities to promote the Grupa Azoty brand. Our involvement with professional sports is part of these efforts. We employ specialist agencies to regularly conduct research and monitor effectiveness of our advertising activities in all media. We cannot, however, disclose the amount of expenditures on professional sports as it is a trade secret.

 

step: What were the costs of rebranding?

Management Board of Grupa Azoty: We did not publish the costs but I assure you that they were not significant.

 

Management Board of Grupa Azoty: We haven’t cooled down yet after joining WIG30, which we are so proud of. Another market that soon...??? Our market capitalisation is still around EUR 2bn, so we leave possible decisions on listing on foreign markets to the future. We have been included in the MSCI Emerging Markets index, which gives us better visibility with foreign investors. There is a lot of work, including organisational work, ahead of us. If we finish it, we will start thinking about that.

 

Bergu: What are the Management Board’s assumptions regarding key product prices next year?

Management Board of Grupa Azoty: The Management Board assumes that the prices of fertilizers will remain stable, supported by expected growth in crop prices following the current temporary drops, which are probably due to speculations on global markets. In the case of chemical products, their prices will depend on the general economic situation in Europe and globally, so the key question is whether, and if so when, we will see stronger growth rates in the main European and other countries.

 

mario: As at the end of June, the Company held PLN 545m in bank deposits maturing in three months. Can’t the Company invest its cash in other instruments, such as corporate bonds, or simply repay part of its credit facilities?

Management Board of Grupa Azoty: You are right. Nonetheless, we have some investment decisions to make, so the target balance sheet structure will be much different.

 

Management Board of Grupa Azoty: In terms of value, interest expense has increased y/y due to the higher amount of debt, including more expensive debt contracted to finance investments. However, given the Group’s very good financial standing and the low share of net debt in EBITDA, we are trying to implement an optimum financing structure, and, consequently, we will seek to lower our interest expense on a separate basis.

 

Jerzyk_K: Is profit of PLN 550-600m a pessimistic or optimistic estimate?

Management Board of Grupa Azoty: The Management Board has adopted a policy of not publishing forecasts. You can arrive at your own opinions on the basis of our results for the first half of the year and the market situation.

 

bjerre: Is it possible in your business to implement a policy of protecting against changes in the prices of raw materials, which are rather unique?

Management Board of Grupa Azoty: We seek to guarantee the best purchase terms to the Company in the long term by diversifying raw material supply sources on the basis of long-term agreements with key suppliers. We don’t use any financial instruments to hedge prices of raw materials.

 

Moderator: Thank you for participating in the chat. It’s been a very interesting experience, as always. See you next time! Best regards from the Heat Pole.