Directors’ Report on the operations of Grupa Azoty Spółka Akcyjna

and the Grupa Azoty Group

in the 12 months ended December 31st 2020

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This Directors’ Report presents the key events which occurred in the 12 months ended December 31st 2020 at the Grupa Azoty Group and Grupa Azoty S.A., the Group’s Parent.

This Report includes all information which is essential for the assessment of the Group’s and the Parent’s financial condition and assets, including the results of their operations, as well as a description of risks and threats. It also presents financial and non-financial indicators, if material for the assessment of the Group’s and the Parent’s condition, as well as additional explanations on the amounts presented in the consolidated and separate financial statements.

‎ Contents

1. General information on the Grupa Azoty Group and its Parent

1.1. Organisation and structure

1.2. Subsidiaries’ organisational or equity ties

1.3. Changes in the organisational structure

2. Management policy

2.1. Parent’s organisational chart

2.2. Changes in key management policies

2.3. Workforce

3. Business overview

3.1. Business segments

3.2. Overview of key products

3.3. Sales markets and procurement sources

3.4. Seasonality of operations

3.5. Agreements, including credit facility and loan agreements, guarantees and sureties

3.5.1. Significant agreements

3.5.2. Loan agreements and annexes

3.5.3. Commercial contracts

3.5.4. Insurance agreements

3.5.5. Project co-financing agreements

3.5.6. Agreements between the Grupa Azoty Group companies

3.5.7. Sureties and guarantees

3.6. Significant events

3.6.1. Implementation of the Polimery Police project

3.6.2. Information on the effects of the COVID-19 pandemic

3.6.3. Other significant events

4. Growth strategy and policy

4.1. Strategy and growth directions

4.2. Growth prospects and market strategy

4.3. Key investments in Poland and abroad

4.4. Equity investments

4.5. Feasibility of investment plans

4.6. Significant R&D achievements

5. Current financial position and assets

5.1. Assessment of factors and one-off events having a material impact on the Group’s operations and financial performance

5.2. Market overview

5.3. Key financial and economic data

5.3.1. Consolidated financial information

5.3.2. Segments’ consolidated financial information

5.3.3. Structure of consolidated operating expenses

5.3.4. Structure of consolidated assets, equity and liabilities

5.3.5. Consolidated financial ratios

5.3.6. Separate financial data

5.3.7. Separate financial data by segment

5.3.8. Structure of separate operating expenses

5.3.9. Structure of separate assets, equity and liabilities

5.3.10. Separate financial ratios

5.4. Financial liquidity

5.5. Management of capital and assets

5.6. Bank deposits

5.7. Material off-balance-sheet items

5.8. Financial instruments – risk management policy and risk management instruments, objectives and methods

5.9. Expected financial condition

6. Risk, threats and growth prospects

6.1. Significant risk factors and threats

6.2. Significant external and internal growth factors

7. Shares and shareholding structure

7.1. Total number and par value of Grupa Azoty shares, holdings of the shares by supervisory and management personnel, and interests of such persons in the Parent’s related entities

7.2. Treasury shares held by the Parent, the Group companies and persons acting on their behalf

7.3. Grupa Azoty shares

8. Statement of compliance with corporate governance standards

8.1. Corporate governance code applicable to the Parent and the place where the text of the code is available to the public

8.2. Information on the Parent’s non-compliance, if any, with the corporate governance standards and reasons for such non-compliance

8.3. Internal control and risk management systems

8.4. Management standards and systems

8.5. Shareholding structure

8.6. Special control powers of securities holders

8.7. Rules governing amendments to the Parent’s Articles of Association

8.8. Restrictions on voting rights

8.9. Restrictions on the transferability of securities

8.10. Rules governing appointment and removal of the management staff; powers of the management staff, including in particular the authority to resolve to issue or buy back shares

8.11. Operation of the General Meeting

8.12. Composition and operation of the Company’s management and supervisory bodies

8.13. Diversity policy

8.14. Remuneration policy

8.15. Sponsorship, charitable or similar activities

8.16. Report on entertainment expenses, legal costs, marketing costs, public relations and social communication expenses and management consultancy fees, and report on compliance with best practices issued pursuant to the Act on State Property Management

8.16.1. Introduction

8.16.2. Expenses

9. Other material information and events

9.1. Qualified auditor

9.2. Environmental performance

10. Non-financial statement

11. Supplementary information

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1. General information on the Grupa Azoty Group and its Parent

1.1. Organisation and structure

Parent of the Grupa Azoty Group

Grupa Azoty S.A. is the Parent of the Grupa Azoty Group (“Grupa Azoty”, the “Group”, the “Grupa Azoty Group”). Its principal business activities include manufacturing, trading in and service activities related to nitrogen fertilizers, engineering plastics and intermediates.

The Company operates its own research facilities. It concentrates both on research into new products and technologies, and on advancing existing products.

The Parent, Grupa Azoty S.A., has been listed on the Warsaw Stock Exchange (“WSE”) since June 30th 2008. The company is included in the WIG, WIG-CHEMIA, WIG30, mWIG 40, WIG, WIG-Poland, InvestorsMS, WIG.MS-PET and WIG-ESG indices, as well as in CEEplus, the index of stock exchanges from the Three Seas Initiative countries. It is also represented in foreign indices: MSCI Emerging Markets. The Company is an ESG (environmental, social and governance) reporting company.

The Company’s registered office is located at ul. Eugeniusza Kwiatkowskiego 8, Tarnów, Poland. Since April 22nd 2013, the Company has been trading under the name Grupa Azoty Spółka Akcyjna. Its history goes back to 1927, when Państwowa Fabryka Związków Azotowych was established in Mościce, a township later incorporated into Tarnów. The plant’s construction was one of the largest investment projects undertaken in the Republic of Poland after it regained independence in 1918.

Grupa Azoty S.A. is an integrated manufacturer of polyamide 6, marketed as Tarnamid®; it also specialises in the manufacturing of nitrogen fertilizers (nitrogen-sulfur and nitrate).

The Grupa Azoty Group is one of Central Europe’s major chemical groups with a strong presence on the market of mineral fertilizers, engineering plastics, OXO products, and other chemicals.

Grupa Azoty has brought together companies with different traditions and complementary business profiles, seeking to leverage their potential to deliver a common strategy. This has led to the creation of Poland’s largest chemical group and a major industry player in Europe. Thanks to its carefully designed structure, the Group offers a diverse product mix, ranging from nitrogen and compound fertilizers, engineering plastics, to OXO products and melamine.

As at December 31st 2020, the Grupa Azoty Group comprised: Grupa Azoty S.A. (the “Parent”), direct subsidiaries:

 COMPO EXPERT Holding GmbH (“COMPO EXPERT”, formerly Goat TopCo GmbH) – wholly-owned,

 Grupa Azoty ATT Polymers GmbH – wholly-owned,

 Grupa Azoty Compounding Sp. z o.o. – wholly-owned,

 Grupa Azoty Kopalnie i Zakłady Chemiczne Siarki Siarkopol S.A. (Grupa Azoty SIARKOPOL) – a 99.56% interest,

 Grupa Azoty Zakłady Azotowe Puławy S.A. (Grupa Azoty PUŁAWY) – a 95.98% interest,

 Grupa Azoty Zakłady Azotowe Kędzierzyn S.A. (Grupa Azoty KĘDZIERZYN) – a 93.48% interest,

 Grupa Azoty Zakłady Chemiczne Police S.A. (Grupa Azoty POLICE) – a 62.86% interest,

 Grupa Azoty Polskie Konsorcjum Chemiczne Sp. z o.o. (Grupa Azoty PKCh Sp. z o.o.) – a 63.27% interest, with Grupa Azoty KĘDZIERZYN holding a 36.73% interest,

 Grupa Azoty Koltar Sp. z o.o. (Grupa Azoty KOLTAR) – a 60% interest, with Grupa Azoty PUŁAWY and Grupa Azoty KĘDZIERZYN each holding a 20% interest,

as well as the indirect subsidiaries and associates presented in the charts on the next pages.

The Parent and the Group companies were incorporated for an indefinite period.

Parent’s direct subsidiaries

Grupa Azoty PUŁAWY

The company’s registered office is located in Puławy.

Grupa Azoty PUŁAWY (full name: Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna) specialises in the production of nitrogen fertilizers and is also one of the largest melamine manufacturers in the world.

Grupa Azoty POLICE

The company’s registered office is located in Police.

Grupa Azoty POLICE (full name: Grupa Azoty Zakłady Chemiczne Police Spółka Akcyjna) is a major producer of compound fertilizers, nitrogen fertilizers and titanium white.

Grupa Azoty KĘDZIERZYN

The company’s registered office is located in Kędzierzyn-Koźle.

The business of Grupa Azoty KĘDZIERZYN (full name: Grupa Azoty Zakłady Azotowe Kędzierzyn Spółka Akcyjna) is based on two pillars: nitrogen fertilizers and OXO products (OXO alcohols and plasticizers).

COMPO EXPERT

The company’s registered office is located in Münster, Germany. The company (full name: COMPO EXPERT Holding GmbH) is a holding company for a group of subsidiaries, including the main operating company COMPO EXPERT GmbH, one of the world’s largest manufacturers of speciality fertilizers for professional customers. The group’s products are sold in many countries in Europe, Asia, Africa, as well as North and South Americas.

Grupa Azoty ATT Polymers GmbH

The company’s registered office is located in Guben, Germany. It manufactures polyamide 6 (PA6).

Grupa Azoty PKCh Sp. z o.o.

The company’s registered office is located in Tarnów. The services of Grupa Azoty PKCh Sp. z o.o. (full name: Grupa Azoty Polskie Konsorcjum Chemiczne Spółka z ograniczoną odpowiedzialnością) encompass comprehensive design support for investment projects in the chemical industry − from study and concept work to engineering design, building permit design and working plans, to services provided during the construction, commissioning and operation of process units.

Grupa Azoty KOLTAR Sp. z o.o.

The company’s registered office is located in Tarnów.

Grupa Azoty KOLTAR provides countrywide railway transport services. It is one of the few organisations in Poland to hold licences required to perform comprehensive repairs of rail car chassis and tank cars used in the transport of dangerous materials (according to RID).

Grupa Azoty SIARKOPOL

The company’s registered office is located in Grzybów.

Grupa Azoty SIARKOPOL (full name: Grupa Azoty Kopalnie i Zakłady Chemiczne Siarki Siarkopol Spółka Akcyjna) is Poland’s largest producer of liquid sulfur.

Grupa Azoty Compounding Sp. z o.o.

The company’s registered office is located in Tarnów. Its business model is based on a portfolio of specialised engineering plastics manufactured through the compounding of plastics, with the use of innovative technological solutions.

The company manufactures and sells modified plastics.

Parent’s equity interests in subsidiaries as at December 31st 2020

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The Parent and its subsidiaries as at December 31st 2020

Source: Company data

 

1.2. Subsidiaries’ organisational or equity ties

Equity interests held by the subsidiaries in other entities of the Group as at December 31st 2020

Grupa Azoty PUŁAWY

¹⁾Grupa Azoty POLICE holds 7.35% of shares in Prozap Sp. z o.o.

Grupa Azoty POLICE

¹⁾The Parent holds 30.52% of shares in Grupa Azoty Polyolefins S.A.

²⁾Grupa Azoty PUŁAWY holds 78.86% of shares in Prozap Sp. z o.o.

Grupa Azoty KĘDZIERZYN

¹⁾Grupa Azoty KOLTAR Sp. z o.o holds 0.783% of shares in ZAKSA S.A.

Grupa Azoty PKCh Sp. z o.o.

¹⁾Grupa Azoty Jednostka Ratownictwa Chemicznego Sp. z o.o. holds 60% of shares in Konsorcjum EKO TECHNOLOGIES and 12% of shares in EKOTAR Sp. z o.o.

²⁾Grupa Azoty Prorem Sp. z o.o. holds 12% of shares in EKOTAR Sp. z o.o.

Compo Expert Holding GmbH Group

COMPO EXPERT International GmbH

¹⁾ 0.000003% of the share capital is held by COMPO EXPERT GmbH.

²⁾ 0.01% of the share capital is held by COMPO EXPERT GmbH.

³⁾ 0.0103% of the share capital is held by COMPO EXPERT GmbH.

⁴⁾ 0.000311% of the share capital is held by COMPO EXPERT GmbH.

⁵⁾ 0.1% of the share capital is held by COMPO EXPERT GmbH.

⁶⁾ 3.83% of the share capital is held by COMPO EXPERT GmbH.

⁷⁾ 10.000024% of the share capital is held by COMPO EXPERT GmbH.

COMPO EXPERT GmbH holds shares in:

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COMPO EXPERT Holding GmbH Group and its subsidiaries as at December 31st 2020 – Europe

Source: Company data

COMPO EXPERT Holding GmbH Group and its subsidiaries as at December 31st 2020 – rest of the world

Source: Company data

 

Parent’s significant minority interests in related companies as at December 31st 2020

1.3. Changes in the organisational structure

Changes in the Group’s structure, including changes resulting from business combinations, acquisitions or disposals of Group entities, as well as long-term investments, demergers, restructuring or discontinuation of operations in the reporting period.

Deregistration of Infrapark Police S.A. w likwidacji (in liquidation)

On January 9th 2020, the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, deleted Infrapark Police S.A. w likwidacji (in liquidation) from the Business Register of the National Court Register. As the company was not consolidated and the value of its shares was zero, the event had no financial effect on the Group’s consolidated financial statements.

Registration of an increase in Grupa Azoty POLICE’s share capital

On January 10th 2020, the District Court for Szczecin-Centrum of Szczecin, 13th Commercial Division of the National Court Register, registered an increase in the share capital and amendments to the Articles of Association of Grupa Azoty POLICE. The share capital was increased from PLN 750,000,000 to PLN 1,241,757,680 through an issue of 49,175,768 Series C ordinary bearer shares with a par value of PLN 10.00 per share.

After the registration of the increase, the share capital of Grupa Azoty POLICE amounts to PLN 1,241,757,680 and is divided into 124,175,768 shares with a par value of PLN 10.00 per share, including:

 60,000,000 Series A shares,

 15,000,000 Series B shares,

 49,175,768 Series C shares.

The total number of voting rights attached to all the shares in issue is 124,175,768.

Grupa Azoty POLICE raised capital amounting to PLN 501,592,833.60. The purpose of the share issue was to raise proceeds to support the implementation of the Group’s strategy for the coming years, in particular to diversify revenue streams and increase profitability, and to step up the efforts to expand the non-fertilizer business lines. The key task undertaken in the pursuit of these strategic goals is the Polimery Police project.

As a result of its participation in the public offering of new shares in Grupa Azoty POLICE, the Parent acquired 28,551,500 shares and now holds in aggregate 78,051,500 shares in Grupa Azoty POLICE, representing 62.86% of its share capital. Prior to the issue, the Parent’s holding in Grupa Azoty POLICE represented 66% of its share capital.

Increase in Grupa Azoty Polyolefins S.A’s share capital

On January 24th 2020, an Extraordinary General Meeting of Grupa Azoty POLICE, and on February 17th 2020 – an Extraordinary General Meeting of the Parent approved the purchase by the companies of shares, for the issue price specified by the General Meeting of Grupa Azoty POLYOLEFINS, by way of a private placement, within the meaning of Art. 431.2.1 of the Commercial Companies Code, in a number ensuring that the companies’ current percentage shareholdings in Grupa Azoty POLYOLEFINS are maintained.

On February 18th 2020, an Extraordinary General Meeting of Grupa Azoty POLYOLEFINS passed a resolution to increase the share capital by PLN 131,944,310.00 through the issue of 13,194,431 new Series F registered shares with a par value of PLN 10.00 per share. The issue price of each Series F share is PLN 47.90.

The new shares were to be acquired in a private placement by Grupa Azoty POLICE, which was to acquire 6,993,048 shares for a total issue price of PLN 334,968 thousand, and the Parent, which was to acquire 6,201,383 shares for a total issue price of PLN 297,047 thousand.

The share subscription agreements were to be executed and payments for the shares were to be made by April 30th 2020.

On March 18th 2020, the Parent’s Management Board passed a resolution to acquire 6,201,383 shares in Grupa Azoty POLYOLEFINS as part of the issue of Series F shares, for the issue price of PLN 47.90 per share (total consideration of PLN 297,046,245.70). In order to implement the resolution, the Management Board requested the Supervisory Board to grant consent for the above actions.

On April 7th 2020, the Supervisory Board of the Parent approved the execution of an agreement to acquire Grupa Azoty POLYOLEFINS shares.

As Grupa Azoty POLYOLEFINS’ requirement for funds was deferred in time, the above equity contributions were not made and on April 30th 2020 the Extraordinary General Meeting of Grupa Azoty POLYOLEFINS resolved to amend the resolutions and postpone the deadline for payment in respect of Grupa Azoty POLYOLEFINS’ share issue until July 31st 2020. On August 3rd 2020, the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, registered an increase in the share capital of Grupa Azoty POLYOLEFINS from PLN 467,339,000.00 to PLN 599,283,310.00. The percentage interests in Grupa Azoty POLYOLEFINS’ share capital held by its existing shareholders (the Parent and Grupa Azoty POLICE) remained unchanged at 47% and 53%, respectively.

On November 16th 2020, the Extraordinary General Meeting of Grupa Azoty POLYOLEFINS passed a resolution to issue new shares and increase the company’s share capital by PLN 323,684,990 to PLN 922,968,300. In accordance with relevant agreements, the new shares were subscribed for by Hyundai Engineering Co., Ltd (“Hyundai”) – 15,348,963 shares, Korea Overseas Infrastructure & Urban Development Corporation (“KIND”) – 1,052,184 shares, and Grupa LOTOS S.A. (“Grupa LOTOS”) – 15,967,352 shares.

The cash contributions made to pay for all the shares totalled PLN 594,699,600. Hyundai made a payment of USD 73m (equivalent to PLN 275,808,600), KIND made a payment of USD 5m (equivalent to PLN 18,891,000), and Grupa LOTOS made a payment of PLN 300,000,000. The share premium of PLN 271,014,610 was allocated to the statutory reserve funds of Grupa Azoty POLYOLEFINS.

As a result, Grupa Azoty POLICE holds 34.41% of the shares, the Parent – 30.52%, Grupa LOTOS – 17.3%, Hyundai – 16.63%, and KIND – 1.14%. The percentages represent both the respective ownership interests and shares in total voting rights at the General Meeting of Grupa Azoty POLYOLEFINS.

On November 27th 2020, the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, registered the increase in the share capital of Grupa Azoty POLYOLEFINS.

Koncept Sp. z o.o. and Prozap Sp. z o.o. merger registration

The merger was entered with the National Court Register on January 29th 2020. Following the merger of Prozap Sp. z o.o. (acquirer) and Koncept Sp. z o.o. (acquiree), Grupa Azoty POLICE received, in exchange for 1,023 shares in Koncept Sp. z o.o., 131 shares in Prozap Sp. z o.o.

As of January 29th 2020, the registered office of Koncept Sp. z o.o. in Police was transformed into a branch of Prozap Sp. z o.o. in Police, with the status of a separate employer.

In addition, on June 23rd 2020 3 shares in Prozap Sp. z o.o., previously held by a former employee, were cancelled, and on December 3rd 2020 Grupa Azoty PUŁAWY acquired 7 shares from the other shareholders.

As a result, Grupa Azoty PUŁAWY and Grupa Azoty POLICE hold, respectively, 78.86% and 7.35% of shares in Prozap Sp. z o.o.

Repurchase of minority interests in Grupa Azoty SIARKOPOL

On March 26th 2020, an entry was made in the share register concerning acquisition by the Parent of 2,159 shares, by way of repurchase in accordance with Art. 418¹ of the Commercial Companies Code.

On March 30th 2020, the Parent received a declaration of the State Treasury’s acceptance of a repurchase offer for 7,604 employee-stock shares in Grupa Azoty SIARKOPOL which had not been acquired by that company’s eligible employees or their heirs. On May 8th 2020, a global certificate for the shares was delivered against a transfer report; accordingly, the Parent’s interest in the share capital of Grupa Azoty SIARKOPOL increased to 99.56%.

On July 31st 2020, the Annual General Meeting of Grupa Azoty SIARKOPOL passed a resolution to repurchase the shares under Art. 418¹ of the Commercial Companies Code. Based on the resolution, the Parent was to repurchase 463 shares for PLN 46.83 per share. On August 21st 2020, the Parent paid for the 463 registered shares.

The shareholder entitled under the resolution to sell the shares did not submit the share certificate to Grupa Azoty SIARKOPOL within the statutory deadline in order to sell them, and notified the company of its decision not to sell the shares.

Therefore, Grupa Azoty SIARKOPOL returned the amount transferred to repurchase the registered shares to the Parent.

Change of name of Zakłady Azotowe Chorzów S.A.

On May 26th 2020, a change of the name of Zakłady Azotowe Chorzów S.A. to Grupa Azoty Zakłady Azotowe Chorzów S.A. (Grupa Azoty CHORZÓW) was registered in the National Court Register.

Cancellation of Remzap Sp. z o.o. shares

In 2020, 56 shares in Remzap Sp. z o.o., previously held by its former employees, were cancelled. As a result, the percentage of total voting rights at the General Meeting of Remzap Sp. z o.o. held by Grupa Azoty PUŁAWY increased from 96.83% to 97.05%.

Registration of COMPO EXPERT Egypt LLC

On August 10th 2020, a new company under the name of COMPO EXPERT Egypt LLC was registered (with a share capital of EGP 100,000.00 owned in 99.9% by COMPO EXPERT International GmbH, and in 0.1% – by COMPO EXPERT GmbH). The company’s objects are to strengthen the presence on the Egyptian market and protect intellectual property.

Liquidation of Grupa Azoty Folie Sp. z o.o. w likwidacji (in liquidation)

On November 20th 2020 the General Meeting of Grupa Azoty Folie Sp. z o.o. w likwidacji (in liquidation) passed resolutions concerning, among other things, consideration of the Liquidator’s report on the company’s operations between January 1st 2020 and October 19th 2020 (the day preceding distribution to shareholders of assets remaining after satisfying or securing creditors’ claims), consideration of the financial statements (liquidation report) as at October 19th 2020 (the day preceding distribution to shareholders of assets remaining after satisfying or securing creditors’ claims), approval of the Liquidator’s statement on completion of actions necessary to wind up the company, distribution of the company’s assets and closure of the liquidation, consideration of the financial statements as at October 21st 2020 (the date of liquidation closure), and selection of a place for archiving documents.

On December 10th 2020 Grupa Azoty Folie Sp. z o.o. was deleted from the National Court Register.

Registration of Grupa Azoty FOSFORY Sp. z o.o. name change

On December 15th 2020, a change of the name of Gdańskie Zakłady Nawozów Fosforowych Fosfory Sp. z o.o. to Grupa Azoty Zakłady Fosforowe Gdańsk Sp. z o.o. (abbreviated to Grupa Azoty FOSFORY Sp. z o.o.) was registered.

Events after the reporting date

On February 9th 2021 two shares in Prozap Sp. z o.o., previously held by a deceased shareholder (employee of the company) were cancelled.

As a result, the percentage of voting rights held by Grupa Azoty PUŁAWY at the General Meeting of Prozap Sp. z o.o. rose from 80.30% to 80.39%. The share in the capital did not change.

2. Management policy

2.1. Parent’s organisational chart

Source: Company data.

 

2.2. Changes in key management policies

In August 2020, a Remuneration Policy for the Management Board and Supervisory Board Members was adopted by resolutions of the General Meetings of Grupa Azoty companies listed on the WSE. The Remuneration Policy defines the rules and terms of remunerating members of the management and supervisory bodies of Grupa Azoty Group’s public companies, which are draw up in accordance with the Act on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and Public Companies, dated July 29th 2005, on the basis of Remuneration Policies for the Management Board and Supervisory Board Members adopted by resolutions of the General Meetings of these companies.

The total remuneration of a Manager consists of a fixed component (Fixed Remuneration), representing a monthly base pay, and a variable component (Variable Remuneration), representing additional remuneration payable for the Company’s financial year.

As Variable Remuneration is of an incentive nature and its amount is set based on achievement of management objectives, it is an instrument ensuring the implementation of the Company’s business strategy, pursuit of the Company’s long-term interests, stability and growth of the Company and increase in its value.

A Manager is remunerated based on a managerial contract concluded between the Company and the Manager for the period of appointment as a Management Board member. A Supervisor may be remunerated based on a supervisory services contract or directly under the Remuneration Policy.

The Remuneration Policy determines the Fixed Remuneration range for a Manager, the upper limit of Variable Remuneration, and the remuneration of the Supervisory Board members. As Variable Remuneration is of an incentive nature and its amount is set based on achievement of management objectives, it is an instrument ensuring the implementation of the Company’s business strategy, pursuit of the Company’s long-term interests, stability and growth of the Company and increase in its value. The Policy also sets out the conditions subject to which a Manager receives Variable Remuneration for the year and based on which the amount of Variable Remuneration is defined.

The Remuneration Policy also provides that assessment of achievement of management objectives by a Manager, determination of the Variable Remuneration amount, and payment of Variable Remuneration may be deferred, and also specifies cases where the right to demand Variable Remuneration may be lost or the Manager may be obliged to return Variable Remuneration received prior to disclosure of such cases.

The Remuneration Policy for Management Board and Supervisory Board Members takes into account the rules of remunerating Managers and members of Supervisory Bodies in place at a given company and complements the regulations governing remuneration by:

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extending the criteria for granting and determining the amount of variable remuneration components to include criteria related to social interests, the company’s contribution to environmental protection, and taking measures to prevent and eliminate adverse social impacts of the company’s operations;

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indicating how the Remuneration Policy for Management Board and Supervisory Board Members, and in particular the criteria (management objectives) for granting and determining the amount of Variable Remuneration, should contribute to ensuring implementation of the company’s business strategy, long-term interests, stability, development and value growth;

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ensuring that the method of calculating the achievement of the criteria (management objectives) for granting and determining the amount of variable remuneration components is defined in a resolution of the General Meeting;

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expressly empowering the Supervisory Body to adopt the Variable Remuneration Rules;

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indicating:

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how the terms of service and remuneration of Company employees other than managers and members of Supervisory Bodies are taken into account in determining the remuneration of Managers,

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the decision-making process for establishing, implementing and reviewing the Remuneration Policy for the Management Board and Supervisory Board Members,

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measures to ensure that conflicts of interest relating to the Remuneration Policy for the Management Board and Supervisory Board Members are avoided or managed,

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the company’s right to discontinue granting or paying and to demand the return of Variable Remuneration;

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benefits for members of the Supervisory Body other than Remuneration, such as reimbursement of travel expenses;

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the nature and stability of the legal relationship between the company and members of its governing bodies.

Neither Managers nor Supervisors receive remuneration in the form of financial instruments. Nor are they covered by any supplementary pension schemes or early retirement schemes, subject to mandatory provisions of law.

The Remuneration Policy also specifies additional benefits and rights (including severance pay, non-compete compensation, provision of equipment and technical devices owned by the company, reimbursement of expenses, etc.)

Definition of Remuneration Policies for Management Board and Supervisory Board Members and any amendments thereto are initiated by the Supervisory Bodies of Grupa Azoty Group’s public companies, using the support of their relevant functions, including legal assistance. This is without prejudice to the General Meeting’s powers to adopt or amend the policy, also without prior initiative of the Supervisory Body.

The Remuneration Policy for Management Board and Supervisory Board Members should be updated at least every four years. Any material amendments to the policy are approved by resolution of the General Meeting.

The Supervisory Bodies of Grupa Azoty Group’s public companies monitor whether the Remuneration Policy for Management Board and Supervisory Board Members needs to be updated, and if any need for amendments is identified they adopt a relevant proposal and submit it so that the amendment can be adopted by resolution of the company’s General Meeting.

The Supervisory Body draws up an annual remuneration report providing a comprehensive overview of the remuneration, including all benefits, in whatever form, received or due to individual Managers and members of the Supervisory Body in the previous financial year in accordance with the Remuneration Policy for Management Board and Supervisory Board Members.

Where necessary for furthering the long-term interests and ensuring financial stability or profitability of a Grupa Azoty Group public company, the Supervisory Body may decide to temporarily waive the Remuneration Policy for Management Board and Supervisory Board Members. Such a decision may be made in the event of:

 a change in the legal framework governing remuneration of Managers and members of the Supervisory Bodies of state-owned companies,

 permanent discontinuation or material limitation of the Company’s operations caused by circumstances that could not be prevented,

 opening of restructuring, liquidation or similar proceedings of a restructuring nature.

The Remuneration Policy for Management Board and Supervisory Board Members is waived by resolution of the Supervisory Body of a Grupa Azoty Group public company, which defines the substantive and temporal scope of the waiver.

2.3. Workforce

Number of employees at the Group

Number of employees at the Parent

Number of employees at consolidated subsidiaries

Average for the year and as at the end of 2020

Number of employees at the Parent: average for the year and as at the end of 2020

Number of employees at consolidated subsidiaries: average for the year and as at the end of 2020

Employee turnover at the Grupa Azoty Group

Employee turnover at the Parent

3. Business overview

3.1. Business segments

The Group is the largest chemical group in Poland and a significant player in Central Europe. It offers mineral fertilizers and B2B products, including engineering plastics, OXO products and melamine.

Grupa Azoty – core business areas

Source: Company data.

The Group’s business is divided into the following segments:

 Agro Fertilizers,

 Plastics,

 Chemicals,

 Energy,

 Other Activities.

Agro Fertilizers

Mineral fertilizers are the key area of the Group’s business. The Agro Fertilizers segment manufactures nitrogen and compound fertilizers, as well as speciality fertilizers, ammonia and other nitrogen-based intermediate products.

The segment’s manufacturing activities are conducted by the companies based in Tarnów (the Parent), Puławy, Kędzierzyn, Police, Gdańsk, Chorzów, as well as Germany and Spain. The Grupa Azoty Group is Poland’s largest and European Union’s second largest manufacturer of mineral fertilizers.

Grupa Azoty Group’s production capacities vs competition (mineral fertilizers)

Source: Fertilizers Europe 2021

Plastics

The segment’s key products are engineering plastics (polyamide 6 (PA6) and modified plastics) as well as auxiliary and intermediate products, such as caprolactam and other chemicals. They are manufactured by the companies in Tarnów, Puławy, and Guben (Germany). The Group is the leading manufacturer of PA6 in Poland and the third largest producer of this polyamide in the European Union.

Grupa Azoty Group’s production capacities vs competition (Polyamide 6)

^*)Integrated manufacturers

Source: PCI Nylon 2018.

Chemicals

The Chemicals segment is an important part of the Group’s business, comprising OXO alcohols, plasticizers, melamine, technical grade urea, titanium white, sulfur, AdBlue^® , and other products.

They are manufactured in Kędzierzyn, Puławy, Police, and Grzybów. The Group is a major manufacturer of melamine globally and the third largest in the European Union. As regards OXO products, the Group is the only manufacturer of OXO alcohols in Poland and the fifth largest in the European Union. The Group is Poland’s only producer of titanium white.

Grupa Azoty Group’s production capacities vs competition (Plasticizers)

Source: CEH 2018.

Grupa Azoty Group’s production capacities vs competition (OXO)