Grupa Azoty SA

WSE:ATT

Earnings Call Transcript

[Monika Darnobyt, executive]

[Interpreted] Good morning, ladies and gentlemen. Welcome to the conference on the financial results of the Azoty Group for the first quarter. We are online only this time because of the fact that we are in Kraków. We will be participating in the Congress today, but of course you will have the possibility of asking us questions. [Technical Difficulty] on the website. For today's conference, I would like to welcome Vice President of Azoty Group, Andrzej Skolmowski, welcome Mr. President; Vice President of the Board, Chair of the Board, Hubert Kamola; and Vice President of Management Board, Andrzej Dawidowski. [Technical Difficulty]

Thanks. Now the floor goes to Andrzej Skolmowski.

[Andrzej Skolmowski, executive]

Before we proceed, ladies and gentlemen, before I share with you the financial results, at the beginning I would like to quickly summarize the most important events of the last weeks and the last quarter.

First of all, there has been changes in the management board. In the month of May, the Chair, Adam Leszkiewicz, has been dismissed and he has been appointed on the 1st of May to the Chair of the present Supervisory board.

On the 23rd of May, the Supervisory Board has dismissed Krzysztof Kolodziejczyk from the Vice President of the Management Board. On the very same day, of course, [indiscernible] resigned on his function of being the President of Management Board of [ Azoty ] Group. Right now the management board operates with the five member combination. And there is a [indiscernible] publication [indiscernible] for a member of Company's Management Board of the 13th term. With the intention of [Technical Difficulty] management board. The changes in the board directors do not affect the timetable of the turnaround program.

The corrective actions that we've been implementing are based on six key pillars. First of all, we are consequently implementing AZOTY BUSINESS program. This is the transformation of Group program which is aiming at creating a cost efficient capital group with a strong position on the European market. We've been improving operational results.

We've been supporting initiatives and engaging and also the initiatives related to regulations that impact the business or group. We've been conducting talks regarding Polimery Police project, especially a very important cooperation with Orlen.

We've been establishing the sources of financing of developmental investments, particularly investments supporting transformation of the group. It all is joined by the aim of signing and stabilizing agreements with financing institutions.

Each of the above pillars is a crucial element of our turnaround plan. We are right now finalizing works on the new strategy in the nearest future. We want to announce a ready document in which we will present the directions of action and of development of the Azoty Group.

It's worth noting that we have positive information regarding regulatory issues. The EU parliament approved a proposal for tariffs on fertilizers from Russia and Belarus. We will tell you more about it in a moment.

As a result of the restructuring measures, we've noted consistent improvement in financial and sales results. Majority of the leading companies from Azoty Group have noted improvement of results in the first quarter of 2025 compared to first quarter of the last year.

In the case of Pulawy and Police, EBITDA was on the level of -- on a positive level. We noted a significant improvement compared to the last year's negative values. It's worth to underline the fact that in the case of Police, it's been third quarter in a row that the company has had a positive EBITDA level.

Kedzierzyn managed to slightly increase last year's EBITDA. When it comes to COMPO EXPERT, EBITDA increased by more than 22% and the company generated positive net income. Unfortunately, the group's performance was negatively impacted by Polyolefins group, largely due to underutilization of production capacity associated with technical shutdowns due to plant regulation and a low demand on polypropylene market, which was related to macroeconomic factors.

Income in the first quarter of 2025 increased year-on-year by over 12% to the level of PLN 382 billion, which is close to the level of the first quarter 2023. We've improved the EBITDA level in the first quarter of 2025, and we are still moving it. If should we correct the results by negative impact of Azoty Polyolefins Group, in the first quarter, we've noted a result on the level of PLN 86 million compared to the first quarter of last year. This is a significant improvement. There has been a similar correction. In the last year, we've had minus PLN 8 million.

The net debt level as per bank formula compared to the end of quarter of the last -- first quarter 2024 has been changed only slightly. This means that our turnaround program has been significant. And this means that we've decreased CapEx to the minimum.

We've had a demanding year and with demanding quarter, including talks on finances. The result of which was an -- is an agreement of stabilizing agreement. At the end of April, we've obtained a waiver letter, an approval of the financing institutions for not meeting the levels of the net debt-to-EBITDA ratio. So we need to underline that we've been meeting all the requirements.

For the last 3 months of 2024, the group has increased the use multipurpose loan limit by PLN 242 million and by PLN 107 million utilization of factoring limits. The bank's net debt-to-EBITDA ratio was still negative at the end of the first quarter.

For the 3 months, the negative EBITDA of the group was limited to PLN 8 million. As I said a minute ago, should be corrected by the negative impact of polyolefins, then the group would note positive EBITDA of PLN 186 million. The net debt has been -- has continued fairly limited increase of PLN 180 million.

The free credit limits at the end of the quarter amounted to PLN 263 million. And the cash net at the end of the quarter amounted to PLN 324 million. EBITDA has increased compared to the last year by PLN 42 million, thanks to the measures undertaken related to risk factorization, mainly in the cost area, that we've been conducting from the end of March 2024.

We've observed a realistic impact of cost-cutting measures. Of course, remediation reports are yielding sustained EBITDA improvement in each consecutive quarter, despite of the observed large negative impact of fertilizer impact from Eastern directions in the first quarter, we're recording an increase in sales volumes in the Agro and Plastics segment.

Unfortunately, rentability was affected by the increases in gas prices. When it comes to consolidated -- the normalized fixed costs fell by PLN 58 million year-on-year. Additionally, ending of sponsoring -- sponsorship contracts and contracts related to PR resulted in a reduction of the other costs.

Lower material consumptions and repair costs are part of efficiency improvements of the subsidiary companies when it comes to renovation. In the first quarter of the year, the value of Azoty Group's assets stood at the level of PLN 25.183 billion, an increase by PLN 91 million compared to the balance at the end of March 2024. As of 31st of March, the fixed assets amounted to PLN 18.002 billion and current assets amounted to PLN 7.181 billion. Significant changes that occurred in the period and the review of asset side compared to the same period of the previous year, an increase in -- there was a decrease in other receivables by PLN 635 million decrease in inventories by PLN 49 million and decrease in property rights by PLN 354 million and decrease in cash balance by PLN 44 million. Significant changes that occurred in the period under review on the liability side compared to the same period of the previous year was a decrease of equity of PLN 1.224 billion, an increase of short-term financial liabilities by PLN 786 million and increase in trade and other short-term liabilities by PLN 671 million.

The first quarter of 2025, Azoty Group generated consolidated revenues on the level of PLN 3.822 billion and an EBITDA result of minus PLN 8 million with an EBITDA margin of minus 0.2%. This means an improvement of EBITDA result compared to the first quarter of 2024 by EUR 42 million. Positive profitability at the EBITDA level has been achieved in the Agro segment, while in the other key segments, the profitability has been negative. Significant negative impact on the achieved results was largely due to imported products from Eastern directions, which means Russia and Belarus. The demand in Agro segment has increased significantly. This allows production and sales volumes to grow.

[Hubert Kamola, executive]

When it comes to the resources in the first quarter, the situation has been influenced by a significant increase in the price of natural gas, with quotations on both TTF and PHE, which means Germany and Netherlands were 71% higher compared to the same period last year.

The price increase also affected electricity. The unit cost of coal consumptions were significantly lower year-on-year. This is mainly because of the lower prices negotiated by the Azoty Group. In the first quarter 2024, group recorded higher raw material consumption by PLN 409 million year-on-year, including gas costs of PLN 481 million. As I said, this is, most of all because of higher prices, but also the consumption volumes. The use of gas in the first quarter was 4.1 terawatt-hour compared to 4.2 terawatt-hour in the last year. And we can see a direct relationship with the higher level of the use of production installations.

On the other hand, the lower cost of consumptions were recorded by the petroleum raw minerals. Here, we mean fenol, propane, which is used for polyolefins production. The cost of fossil raw materials by minus PLN 31 million. And here we increased that potassium salt, phosphate, aluminate. And this is related to lower volume consumption and reduction in raw material prices.

In the first quarter of 2025, the share of gas in the cost of raw material consumption amounted to 41% and was 13 percentage points higher than we obtained in the same period last year. When it comes to the Agro segment in the first quarter of 2025 compared to the same period of last year, the main determinant results were a significant decrease in production and sales volumes with a slight increase in product prices and significant increase in natural gas prices.

The main reasons for the results was a significant increase of volume of sales and our increased expansion on the foreign market and increase of share in the national market with the significant increase of prices of gas and significant improvement and influence on the group's results is because of the higher import of the fertilizers produced in the East.

The European producers have been limiting their expansion of the Polish market, this was -- results increasing our portfolio by additional elements cost, an increase of the sales volume by plus 18% year-on-year in case of nitrogen fertilizers by 22% year-on-year.

As the Vice Chair, Andrzej Skolmowski mentioned on 22nd of May 2025, the European Parliament during preliminary session has approved finally the proposal of the European Commission of introducing additional tariffs on the fertilizers from Russia and Belarus. We've seen parliament determination by passing the new regulations as soon as possible. All the amendment tables were rejected by a trilogue and the main goal was -- actually, the main goal was to avoid the trilogue, which would be a lengthy procedure in the months to come and would extend over the time of Polish [indiscernible]. This is a very important decision on the EU level that we've been waiting for. This is a clear signal to support the European fertilizer industry and the agricultural industry as a whole, taking into account the security of the whole food chain.

Finally additional tariff besides for the standard tariffs will be increasing in 4 years all the way to EUR 350 level for nitrogen and EUR 340 for the compound fertilizers. We present the data for you in a quarterly -- quarter-by-quarter.

In the first quarter of 2025, we've seen an increase of the values. Current quarter is outstanding when it comes to the volumes. On the current level, the biggest share in import is still -- belongs to the nitrogen fertilizers. This is 48% this is mostly urea.

The share of the compound fertilizers grown, potassium fertilizers is, the levels are the same. This is affected by the import fertilizers.

Let me turn to chemicals. Q1 2025, the EBITDA is EUR 60 million negative, which is an improvement, because Q4 was EUR 90 million negative. But we are under pressure by imports from China and elsewhere and also downstream is not doing well. EBITDA margin is minus 10.2%, and yet it was better by 4.7 percentage points year-on-year. Volume of sales has dropped. Prices have grown for urea and then plasticizers, the prices have gone down. Prices of most feedstock have gone down. The main negative determinant was poor market conditions and poor demand for chemicals.

Q1 2025 is all about dropping demand for refinery products and growing prices of sulfur. We are concerned that these prices will be growing, also but are luckily available titanium white, we also are waiting for growing demand in this segment. The supply-demand conditions made us stop any kind of melamine production.

[Andrzej Dawidowski, executive]

Let me turn to plastics. This is affected by the negative result of POLYOLEFINS. And EBITDA of plastics is minus PLN 10 million, which is minus PLN 100 million, which is adjustment by 85% negative.

We have noted growth in production for polyamide and polypropylene, while prices were -- the sales were dropping. The prices of feedstock were also dropping, which means that we are able to improve our financial results. As for demand, Q1 2025 started with a stable and low demand for polyamide 6. We can see that there is growing demands for polypropylene, especially in the packaging industry, which is translated in great problems of orders. Demands for polyamide 6 is the automotive industry. And this industry is facing lower demand for cars in Europe and also tariffs imposed by the U.S. This is still determined by the possible response by the EU to those American tariffs. In 2025, Azoty, it have not relaunched or resumed the production of caprolactam. EBITDA margin that was 23.4% negative and was lower by 10 percentage points versus the previous period last year.

[Andrzej Skolmowski, executive]

Q1 2025, was followed by the all the operational -- operationalization of our works. We were controlling investment processes and we revised the entire portfolio of investment projects. We were forced to cut investment outlays, which can be seen versus Q1 2024. Those are investment outlays were limited to a bare minimum, which means that only those investments at Polskie are underway. They have an impact on our EBITDA.

Two investments are carried out in Tarnów, two in Pulawy, one in Kedzierzyn. New energy concept for Kedzierzyn is going to improve the energy efficiency of the entire plant.

President Hubert Kamola will talk about this more that is about the investment in Pulawy. We are now running inventories, and we are seeking the best possible solution to complete the project.

[Hubert Kamola, executive]

We are going through a legal dispute against Polimex, most personal. We filed a lawsuit at the regional court in Lublin. We are waiting for the coal-fired units to be completed, and we are waiting for the results of the inventory. Thank you.

[Andrzej Dawidowski, executive]

As of the Polyolefins is carrying out the development on the installation for the propylene production in Utah on the 30th of May. The stabilization agreement -- stabilization agreement will be valid by 30th of May 2025, we have also extended other stabilization agreements with other shareholders of POLYOLEFINS, that is ORLEN and Hyundai Engineering. This agreement will be valid by the 23rd of June.

On the 17th of March 2025, Grupa Azoty POLYOLEFINS concluded an agreement for loan to finance the purchase of propane. This loan is USD 28 million. Given the current production situation, we are facing technical problems. Some parts of the installation has not been commissioned. This means that these commissions will be carried out beyond the date in future months.

[Monika Darnobyt, executive]

Let me turn to Q&A session. So the first question is about negotiations with ORLEN. Are you thinking about other forms of cooperation? Do you think that installation can be bought by someone else in ORLEN?

[Andrzej Skolmowski, executive]

We have an agreement which is valid by 30th of June 2025. This is -- this involves analysis and the development of business concepts. When we complete this particular stage, then we will tell you more about the next steps. We are negotiating the future solutions with ORLEN, because ORLEN is our shareholder, and we do believe there is a chance for a satisfactory solution on both sides.

Can installation be bought by someone else in ORLEN? Well, we will be able to answer this question when we disclose the results of the negotiations with ORLEN.

[Monika Darnobyt, executive]

Another question. Given the current prices of natural gas and fertilizers and given tariffs will be imposed on fertilizers from Russia and Belarus, will there be a chance for the industry to bounce back?

[Hubert Kamola, executive]

We are now waiting for a new season. The season starts on the 1st of June each year. And we see that there are moderate chances to improve the prices of our products and to normalize the prices of natural gas, which is our key feedstock. The EU has decided to lower the recommended limit for the filling of the natural gas storage. These prices -- the price of natural gas are now lower than similar periods in previous years, but starting soon, we are waiting for -- we are expecting an improvement.

[Andrzej Skolmowski, executive]

As the company breached the terms of loan repayment,s, let me reiterate that we repay all the loans. This is one of the key conditions stipulated in the agreement that we concluded with financing institutions, which is why we do not breach any terms and any deadlines. Naturally, there is -- this is due to positive results of our negotiations with our business partners.

[Monika Darnobyt, executive]

Has there been any positive effects, one-off effects on EBITDA in Q1?

[Andrzej Skolmowski, executive]

The results of Q1 are not affected by any significant one-off events. These one-off events do not affect the results of Q1 versus previous year.

[Monika Darnobyt, executive]

Why the company has not disclosed the outlays on Polymer?

[Andrzej Skolmowski, executive]

We have disclosed these outlays. They are available in our documents. These outlays for polyolefins were PLN 908 million.

[Monika Darnobyt, executive]

And the final question. Can you see a chance of positive EBITDA in Q2?

[Andrzej Skolmowski, executive]

We underline that should be correct by the negative impact of the POLYOLEFINS Group, that it has on the results of the whole of the group, then the result of this current year, the first quarter 2025 is positive. It equals to PLN 86 million, and this is better by PLN 94 million compared to the previous year.

Every time we address those questions in a similar way, we do not publish forecasts, and we avoid answering such questions. But still, we want to ensure you that an ambition of the Management Board is to achieve the positive EBITDA this year. This is our goal that we are aiming for.

[Monika Darnobyt, executive]

Thank you very much. Ladies and gentlemen, this was the last question. Thank you for your presence, and we invite you to the chat on Monday with the Vice President of Azoty Group Andrzej Skolmowski at 11. We will be sending an invitation to you via e-mail. Thank you very much, and see you soon.