Investor webchats

On Thursday, December 3rd 2013, the Polish Association of Individual Investors held an investor webchat.

Moderator: Visit our investor chat room for a chat with Andrzej Skolmowski and Marek Kapłucha, representing the Grupa Azoty Management Board S.A., to be held at 12:00 pm on December 3rd (Tuesday). You can post your questions in advance!

Moderator: Welcome to today’s chat with representatives of the Grupa Azoty Management Board. 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.

Ewa74: Has the chat begun?

Grupa Azoty Management Board: Welcome to the chat.

Geremi: Why did administrative expenses increase so much in Q3? Is this just a result of consolidation of newly acquired companies?

Grupa Azoty Management Board: The year-on-year increase in administrative expenses results from the acquisition of Grupa Azoty Puławy S.A. and implementation of projects related to the consolidation of the Grupa Azoty Group.

Mariusz86: Is there any Acron’s representative on the Supervisory Board of Grupa Azoty?

Grupa Azoty Management Board: No, the Shareholders have not appointed any Acron representative to the Company’s Supervisory Board, and no such candidate was proposed.

gruby: Hello! Are there any estimates of the financial results for the entire year 2013?

Grupa Azoty Management Board: We do not publish any forecasts so we cannot provide such information.

f.bernat: What are the reasons of the declining performance of Grupa Azoty?

Grupa Azoty Management Board: The decline results chiefly from the downturn on the markets of some of the Group’s key products (such as caprolactam) due to the global economic deceleration and China’s increasing production capacity. In the last quarter, we also reported some negative trends in fertilizers due to low prices of agricultural produce, which was related to increased production output in the agricultural sector (approximately 8% in Europe compared with the previous season). The 15-20% year-on-year drop in prices of agricultural produce resulted in lower incomes and, consequently, lower expenditure on fertilizers. Furthermore, the third quarter is the overhaul period, which has a major impact on the performance in the quarter.

gpw_fan: How are you going to finance the acquisitions of such companies as Siarkopol, Organika Szarzyna, and other? Do you consider issuing shares or bonds?

Grupa Azoty Management Board: We have already acquired Siarkopol. The financing comprised a credit facility (75%) and our own funds (25%). The decision to acquire Organika Szarzyna has not been made yet, the financing structure may be similar. We have said many times that we are considering issuing bonds, but the financing sources will be decided after our CAPEX has been approved.

Stefan: What is the value of Grupa Azoty’s capital expenditure planned for 2014? What will be the sources of financing?

Grupa Azoty Management Board: As the budget is still awaiting approval, we do not want to reveal any details right now. However, we can assume that the value of capital expenditure will not differ significantly from this year’s level. Naturally, I am not speaking here about large development projects or acquisitions.

BruceLee: Could you say something more about the investment project to be carried out with Grupa Lotos?

Grupa Azoty Management Board: Today, we signed an agreement on the formation of a special purpose vehicle to conduct a comprehensive feasibility study on the construction of a new petrochemical complex, to be located in the vicinity of both Grupa LOTOS’ and Grupa Azoty’s existing installations. The two companies also have signed a preliminary agreement with Polskie Inwestycje Rozwojowe S.A., as a potential financial investor in the project. The project’s value is estimated at approximately PLN 12bn, making it the largest investment in the Polish industrial sector in recent years. The project is at an initial stage, and the decision on whether to proceed will be made based on its profitability.

profesor: Was Grupa Azoty required to obtain approval from the local trade unions (e.g. by granting them job security) in order to acquire Siarkopol?

Grupa Azoty Management Board: Prior to the acquisition of Siarkopol, an agreement was concluded with the trade unions.

f.bernat: Have you arranged financing sources for Grupa Azoty’s investments and development prospects planned for the coming years?

Grupa Azoty Management Board: As soon as the Group’s CAPEX is ready, we will arrange the financing for future investments.

Pawel73: How does the results of Grupa Azoty ZAK S.A. compare with the performance of the whole Group?

Grupa Azoty Management Board: The performance of Grupa Azoty ZAK S.A. is very good (in Q3 2013, its share in the Group’s EBITDA was 12-13%; net of non-recurring events, the share would be approximately 20%). Despite the difficult situation in one of our key segments (the OXO segment), the year-on-year drop in EBITDA was not significant and amounting to PLN 156m (compared with PLN 177m in the first nine months of the previous year), due to stimulation of the OXO alcohols market and stable situation in the Fertilizers segment.

inwestor_ka: What are Grupa Azoty’s development prospects for 2014? Can we expect a recovery in the industry and revenue growth?

Grupa Azoty Management Board: We expect to see a recovery in the Fertilizers segment (representing approximately 60% of the Company’s revenue) following successful consolidation of production and sale in this segment. We concentrated on increasing exports already in 2013. We are going to continue this trend in the next year. Our new paths of development include re-entering the North American market and increasing sales in South America (including a significant contract with NITRON). However, the situation in the Chemicals segment (representing 40% of the Group’s revenue) is less optimistic. The segment’s revenue is adversely affected by the slowdown in the EU economy, in particular in the construction and automotive industries. In 2014, we expect better results, compared with 2013, on the markets of pigments and OXO alcohols, as well as a continuation of the favourable climate on the melamine market observed at the end of 2013.

Damianek: Does the company use currency hedging? If so, what percentage of its exposure does it hedge?

Grupa Azoty Management Board: The Company has a positive currency exposure, both for the euro and the US dollar. 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.

Brucelee: Could you say something more about the new petrochemical complex? What will it produce?

Grupa Azoty Management Board: The agreement concerns a feasibility study for the potential construction of a steam cracker complex. The materials produced at the complex would be further processed by our Organic Chemistry and Plastics segments.

JurekM: What are the reasons of lower revenue and the loss in the Plastics segment next year?

Grupa Azoty Management Board: The results of the Plastics Segment should be analysed in the context of the raw materials markets (benzene and phenol), and the sale market in Asia (caprolactam produced at the Puławy plant). The loss is also a consequence of high prices of these raw materials, whose increase has not been fully accepted by the polyamide market. Moreover, the growing price competition in Asia, related to the growth of Asia’s caprolactam production capacities, puts strong pressure on prices, tightening the margins on caprolactam from the Puławy plant.

Junior: Why does the company not publish any forecasts? Will there be no forecasts in 2014?

Grupa Azoty Management Board: Over the last three years we have made acquisitions which have expanded the Group’s business scale five times. Being responsible to our shareholders, we choose to publish only reliable reports on our actual performance. Given the unstable situation on the market, we are not going to publish any 2014 forecasts.

Zed: Is the possibility of importing cheaper gas from the US realistic, and if so, what is the earliest date we could see that happen?

Grupa Azoty Management Board: Such a possibility exists, of course, but not earlier than in a time horizon of 2-3 years, however in my opinion it is rather unrealistic, due to the fact that the US economy focuses rather on processing shale gas and possibly selling the processed products for which gas is the production input. The currently negotiated agreement between the US and the EU to lift protective customs duties may help achieve that end (export of finished products). However, with increasing deregulation of the gas market in Poland, we are expecting a growth in the share of gas from sources other than PGNiG (interconnectors, reverse flow on the Yamal pipeline).

shareholder: In Q3, Grupa Azoty spent PLN 34m on mandatory investments. What does this stand for?

Grupa Azoty Management Board: The mandatory expenditure we made included mostly spending on the investment project “Flue gas treatment unit and upgrade of the EC II CHP plant at Zakłady Chemiczne Police S.A.,” in the amount of approximately PLN 30m.

misioo: What is the current share of PUŁAWY in the consolidated sales of the Group?

Grupa Azoty Management Board: Assuming that your question relates to the share of revenue of Grupa Azoty Zakłady Azotowe Puławy SA in the consolidated revenue of the Grupa Azoty Group, at the end of September that share was 35% (revenue net of the intra-group transactions, eliminated on consolidation).

##plcjz.wdbt#at#vbpxa.rdb##: Shares held by the employees of the Tarnów company are admitted to stock-exchange trading, while those held by the employees of the Kędzierzyn-Koźle plant are not. What would be the effect of ZAK going public or of exchanging ZAK shares for shares in Grupa Azoty on the quarterly or annual performance figures? Are any such measures planned?

Grupa Azoty Management Board: As we have said before, we decided not to take any steps to buy back the shares held by minority shareholders. This issue has been raised, among others, by private investors who purchased ZAK shares at a price in some cases vastly exceeding their current value, expecting quick profits. But we will come back to this subject at some point in the future, after completing the projects which are very urgent.

PC: Does the Company use any hedging in relation to its foreign exchange or commodity risk exposure?

Grupa Azoty Management Board: A similar question has already been asked (and answered) in this chat by chat user Damianek.

inwestor_chemia: What are the estimated savings that could be generated within the Group in 2014 thanks to cost synergies?

Grupa Azoty Management Board: We estimated synergies from the consolidation project at PLN 100m or more in 2013-2014. At the end of Q3, we announced synergy-related savings of PLN 72m. This value comprises both revenue synergies (e.g. exports of fertilizers to new markets, broader product portfolio, etc.), as well as cost synergies. We continue working on synergies. The values originally planned in March-April are being gradually achieved, some of the synergy effects are recurring in nature, so they are expected to be generated in the next year, too. We will regularly report on synergies in our quarterly reports.

##plcjz.wdbt#at#vbpxa.rdb##: In current report 119/2013, the Management Board provided a very evasive answer to questions asked by a shareholder (employee) of Zakłady Azotowe Kędzierzyn SA, a Group company. Among other things, the current report includes information that the Management Board was considering buying back ZAK shares from the employees. What would be the effect of such buy-back on the financial performance of the Group? What would be the cost of such operation at Group level?

Grupa Azoty Management Board: The answer is provided in the current report you just mentioned, as well as below. The amount is significant enough to have a potential effect on mandatory investments.

Mędrzec: How do you see the chance of acquiring Petrokemija, in percentage terms? Who is your main competitor in the acquisition process?

Grupa Azoty Management Board: The process has been launched by the Croatian government only recently and this is a really early phase. We expect that other key European fertilizer market players will join in.

inwestor_chemia: Why is the Company investing in such installations as caprolactam plant, that is in chemical products with respect to which global oversupply and price decline are forecast?

Grupa Azoty Management Board: The purpose of the investment projects we are implementing is not to increase caprolactam production capacities, but rather to maintain them. With our production capacities of 170,000 tonnes per year, we want to make capital expenditure on more processed products (compounds) to be manufactured using our own feedstock.

bjerre: To what extent is the Management Board aware of the situation inside Petrokemija? Have you done your own audit already?

Grupa Azoty Management Board: It wouldn’t be appropriate to reveal what we know about our competitors to the general public. The due diligence is scheduled for a later date.

inwestor_chemia: What was the amount of the one-off costs incurred in 2013 in connection with the consolidation and synergy-building processes within the Group?

Grupa Azoty Management Board: The costs related to the consolidation and building synergies within the Group are insignificant compared with the synergy effects that have already been reported (PLN 72m at the end of Q3). These costs are mostly connected with an increased number of meetings involving key managers of Grupa Azoty and travel. As a result of those meetings, synergy plans are being developed and implemented. At the same time, we have increasingly been opting for conference calls and video conferences, which seem to be the most effective form of communication. The most important effect of those meetings/contacts is breaking the ice and achieving better collaboration. Managers see clearly the need to work together within the framework of the Group that has been created.

Inwestor: Is the takeover of Anwil currently viable?

Grupa Azoty Management Board: Before Christmas? We won’t make it! :) But seriously, this is an important question, not so much about the acquisition of Anwil as about a deeper integration of the chemical and petrochemical industries. More time is needed to give an answer. At the present moment, it is the Seller that must show readiness to sell.

Kolikom: Is the chemical industry affected by economic cycles? Is performance closely dependent on the macroeconomic environment?

Grupa Azoty Management Board: Changes in the macroeconomic environment have a considerable impact on the Company’s performance – consider for instance the scale of our currency risk exposure, the relation between our production feedstocks and market prices, etc. We try to prevent adverse trends, for instance by implementing a currency risk hedging policy or expanding our own base of raw materials. As far as economic cycles are concerned, looking back we may find some, in particular in the Plastics and Chemicals segments, but this cyclicality varies and covers different time spans.

Solimon: Will the fourth quarter be better than the third quarter?

Grupa Azoty Management Board: We do not publish performance forecasts, so also in this case we cannot provide you with a forecast of our fourth quarter results.

suchar: Besides phosphate rock and sulfur, what other raw materials would need to be “secured” to further diversify supplies?

Grupa Azoty Management Board: Among other things, the project we are pursuing jointly with Lotos relates to that area. It is about supplies of propylene, benzene, phenol. The issue of gas supplies is also important.

Iross: What is the current workforce at the Group? Is the workforce growth trend gaining or losing speed?

Grupa Azoty Management Board: The Group has about 13,100 employees. The acquisition of Siarkopol will further increase the staff numbers. The Group has optimum staffing levels and a number of Group companies have already undergone deep workforce restructuring.

PC: Does the Company use any hedging in relation to its foreign exchange or commodity risk exposure?

Grupa Azoty Management Board: A similar question has already been asked (and answered) in this chat by chat user Damianek.

mk: The Ciech CEO does not rule out retaining Organika-Sarzyna in the Ciech Group if they are not offered a satisfactory price. Does Grupa Azoty take such a scenario into consideration?

Grupa Azoty Management Board: Negotiations are under way. Any scenario is possible. Grupa Azoty Puławy will not make the acquisition at any price.

Mistrzu: Do trade unions play an important role in the Company? Recently, they have had more and more to say at many companies, particularly at JSW, and in addition they are a source of cost pressure. What does this look like at Grupa Azoty?

Grupa Azoty Management Board: There are trade unions active at Grupa Azoty Group companies. The role of the trade unions is regulated by appropriate laws, and both sides observe these laws. The Management Board keeps the trade unions informed of the initiatives in undertakes and of the current situation at Group companies in order to work out optimum solutions for both parties. Taking the ongoing consolidation process as an example, the cooperation between the Management Board and the trade unions is very good.

Inwestor: I have a question regarding acquisitions in the upstream programme. Is this single acquisition of a phosphate rock mine sufficient to meet the Group’s needs to diversify the sources of supply of this raw material?

Grupa Azoty Management Board: As far as phosphate rock is concerned, the Group is not working on any other upstream project. However, for instance in the case of sylvinite, a cooperation agreement providing for joint exploration for sylvinite in Poland and abroad has been signed. These projects are an important element of our strategy and we plan to continue them.

dero: The Group includes a number of companies which can easily be classified as non-core business simply judging by their names, for instance Zakład Opieki Zdrowotnej Medical (Medical Healthcare Clinic) or Zarząd Portu Morskiego Police (Police Port Authority). Would it not be better to consolidate such entities or to get rid of them rather than keep their management boards and administration?

Grupa Azoty Management Board: The necessity to keep some companies is determined by law – the port authority, for instance. As far as other companies are concerned, we have been gradually selling or liquidating them – for instance the hotels.

Tom: From the point of view of revenue generation, the fertilizer segment is the most important one. What percentage of the fertilizer segment’s sales is generated on the domestic market? Are the segment’s margins higher in the case of domestic or export sales?

Grupa Azoty Management Board: The Group has no choice but to export because the demand on the domestic market is lower than the Group’s production capacities. We export fertilizers to regions with different vegetation cycles, which may have an impact on the margins we generate. In addition, margins are affected by changes in foreign exchange rates, therefore the profitability of export and domestic sales should be analysed in relation to the entire segment.

agronom: Does the Grupa Azoty Management Board have any plans to increase sales of its own brands of NPK fertilizers on the domestic market?

Grupa Azoty Management Board: The Management Board considers any possibility to increase sales, not only of NPK fertilizers, but also of other products from our vast portfolio. We have been analysing our plans to increase sales of compound fertilizers from the perspective of the Polish market (in conjunction with sales of nitrogen fertilizers) but also by expanding our foreign customer base (Senegal, South America).

tarnowianin: Is Grupa Azoty planning to move its registered office from Tarnów to another city?

Grupa Azoty Management Board: The Management Board is not planning to move the Company’s registered office from Tarnów to any other city. We invite everyone to come to our beautiful historic city of Tarnów.

BruceLee: How would the Management Board comment on the draft act on the State Treasury retaining special powers at Grupa Azoty.

Grupa Azoty Management Board: Grupa Azoty operates under the supervision of the Department of Key Companies of the Ministry of State Treasury, just like KGHM and PZU. We will not comment on the legislative process at this stage.

PC: What is your opinion on the plans concerning the draft act on the State Treasury retaining special powers at Grupa Azoty and at its subsidiary Zakłady Azotowe Puławy. Are you not concerned that such an act will in the future make it difficult for the Company to raise capital through share issues? Are you not afraid that the Company will be perceived less favourably by investors as a result?

Grupa Azoty Management Board: Without quoting names, there are also other companies in which the State Treasury holds special powers, and that does not prevent them from implementing their development plans. Because this is just the beginning of the legislative process, and the Grupa Azoty Management Board is not its initiator, please understand that we will not comment.

gomels: Mr Skolmowski has mentioned various options of raising external financing for an implemented project, hinting shares, bonds, etc. When can any concrete information on this subject be available?

Grupa Azoty Management Board: As I have said, the basis here is the Group’s long-term capex programme, and this programme is yet to be approved. We will inform you of the details in due time, of course.

Ewa74: What is your assessment of the prospects of the Polish agricultural market (the downward trend in the prices of agricultural produce) in the context of the fertilizer segment?

Grupa Azoty Management Board: We are looking closely at the situation in the fertilizer segment: we are evaluating not only the prices of raw materials and our products, but also the prices of agricultural produce, and we are reacting to various signals coming from the market. We believe, however, that given the level of direct subsidies, further intensification of agricultural production, and consolidation of the agricultural market, prospects for the Polish agricultural market remain optimistic.

mk: Is the Group planning any activity in the area of bioplastics?

Grupa Azoty Management Board: We have been conducting some research in the area of biotechnologies, but this is primary research. Such activities are not a core area of the Company’s operations.

Jeremiasz: What savings (in percentage terms) is the Management Board expecting to make in connection with negotiating the price of gas supplies?

Grupa Azoty Management Board: The Management Board looks closely at each element in any area under its management to identify any savings that can improve the efficiency of the Group’s business. Things are not different in the case of gas. We try to negotiate with our partners (suppliers) to obtain better prices, as well as to improve diversification of our supplies, and such negotiations translate into reduced production costs (for instance, the growing share of local gas for the Tarnów plant).

Zenit: Are you planning any acquisitions? What are the ideas for fostering the Company’s further growth? Have you been expanding the product portfolio?

Grupa Azoty Management Board: You know about all acquisitions which are at an advanced stage. Of course, we are watching and analysing the environment and we will take advantage of any emerging opportunities. Our strategy includes one key sentence: “We want to act as a single company”. This will be one of the most important tasks for us in the nearest future. We want to enhance our management model and capitalize on the synergies generated in the consolidation process while improving our services and product portfolio. We are facing the challenge of implementing our investment plans, including the mandatory investments projects which – unfortunately – will not add to our EBITDA. We have our plate full!

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.

On Thursday, September 5th 2013, the Polish Association of Individual Investors held an investor webchat.

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.

kosik: I see the Directors are very proud of the Group having joined WIG30. What does it mean to you?

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.

Jerzyk_K: What imports are affected by the anti-dumping duty imposed by the European Union and for how long?

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.

##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: 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.

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.

kremi: Has any workforce downsizing been planned or carried out as a result of the merger, and if so, could you give any figures?

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.

majster1: Is there a management stock option plan in place at the company? If so, what is its structure?

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

Zdziasław: What is the Company’s short-term and long-term debt?

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.

ziajka: Who are the Company’s major customers? Do they have long-term contracts signed with the Company?

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.

gpw_fan: Does the Company plan to publish forecasts in 2014?

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

Geniusz: What is going to be the key driver of the Group’s profitability in the coming quarters?

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

Mariusz: What is the chance of the acquisition of ZCh Organika-Sarzyna? What is the Company going to gain as a result?

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.

Mazankiewicz: The Q2 2013 performance is rather unsatisfactory. The Chemicals and Fertilizers segments did well. What drove the poor performance of the Plastics segment?

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.

Mazankiewicz: One more question, please. Mr Vice-President Andrzej Skolmowski mentioned that the Group needed external financing − probably no sooner than in 2014. What forms of financing is the Management Board considering?

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.

Geniusz: Haven’t you found any ‘skeletons in the cupboard’ after the acquisition of big companies?

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.

tomson: The financial situation of farmers is deteriorating, owing chiefly to low crop purchase prices and reduced subsidies. This deterioration is reflected, for instance, in the poor results of Ursus. Is the Management Board taking into account a drop in fertilizer prices and analysing possible safeguards against its results?

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.

igor: How do you estimate potential benefits from merging Azoty Tarnów and Puławy?

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.

mmmaslov: What is your opinion on yesterday’s government revelations concerning pension funds?

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

zen: With hindsight, is the Management Board’s perception of the acquisition of Y by Acron positive? The course of events has turned into a positive scenario...

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.

Michał_Pol: What is the general geographical division of products sold? Are the US dollar and euro the settlement currencies?

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.

mmmaslov: I understand the issue is political, which makes it awkward for you to reply officially :)

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

komar: What is the planned CAPEX for 2013/2014?

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!

kondi: Could you please explain the following item in the statement of cash flows from operating activities: loss from investment activities of -PLN 462.8m.

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.

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.

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.

wiślak: Do you envisage any acquisitions abroad?

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?

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.

kolumni: Isn’t Grupa Azoty too small for the Polish stock exchange after the merger? Have you considered listing on another European market?

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.

golum: What was the average cost of debt service in the first half of the year? Is it going up or down?

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.