Grupa Azoty S.A. (5PL.F) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and everyone to the conference call devoted to the financial performance of the Grupa Azoty Group for the first half of 2025. Today's speakers include Andrzej Skolmowski, President of Management Board of Grupa Azoty; Mr. Pawel Bielski, Vice President of Grupa Azoty; and Mr. Andrzej Dawidowski, Vice President. [Operator Instructions] And now the floor is over to Mr. Andrzej Skolmowski.

Good morning, everyone, and welcome to the earnings call devoted to the presentation of our performance after the half -- first half of the year. According to the recent report by Cefic, the European chemical sector deals with a deep crisis with the production figures way below the average of recent years, and the utilization of production capacity is lower than 70%. As sector, we need to face a lot of challenges related to regulation, high prices of energy and weak [ dwindling ] demand and ever growing dominance of China. We know that the most important problem we have to face in Europe are regulatory costs and electricity and energy costs between January and July 2025. The prices of gas in Europe were threefold the prices of -- those prices that are paid in the U.S. and China is strengthening its global contamination and those conditions that is important to discuss the regulatory issues and framework and looking for competitive energy sources. Let us remind you that the Chemicals segment uses natural gas in the range between 25% to 50% as a feedstock and the rest is used for the production of steam and electricity. We can expect the difference in prices between Europe and our global competitors will remain significant until 2030, which additionally will weaken our position and standing in Europe. If we analyze our production data in the first half of 2025, we can see that production in European countries was up by only 1% year-on-year. However, the chemical sector in Europe has reported a major drop of 2.5% and the businesses, which we sell our products to, for instance, the automotive business report a drop of over 4%. The production of chemicals in the European Union remains 20% lower compared to the precrisis times and the prices of chemicals remain at a level comparable to 2024. Chemicals, the chemistry in general is a mother of other sectors. But we need a brand new, more innovative approach in order not only to strengthen the position of the entire sector but in order to stop the closing down of the chemical production facilities across Europe. Concerning the major restructuring program, turnaround program, we need to remember that the first half of the year was another challenging period for the Grupa Azoty Group. We operate in a very challenging market conditions, but the consistent implementation of the Azoty business program is already bearing fruit. We are reporting a positive EBITDA in our core segment, core business segments. We'll talk about it later on. We continue negotiations with the banks in order to strike a long-term agreement. We have presented our proposals and negotiations are ongoing, and we are deeply convinced that we will, in the end, reach a compromise that will be satisfactory to all sites. We are paying our dues as they come, and we are keeping our liquidity level at a satisfactory level of liquidity. We are looking into Polimery Police, concerning a new partner and a new owner, potentially. We want to -- we have resumed the negotiations in order to find an agreement, and we do our best in order to stabilize the financial situation of GA Polyolefins and complete this project. We're looking at a potential transaction concerning the sale of all or part of the shares of the company. We do not want to present some solutions that are not real. We will not be able to solve these problems on our own because we do not have sufficient funds in order to complete this investment and commercialize it. So in these very challenging conditions, we are ready to complete this project using the resources that we have at our disposal. We have the guarantee from the general contractor and we are using this guarantee as it was intended before. We are keeping up with the work in order to enter the defense sector. We have signed letters of intent with the companies of Polska Grupa Zbrojeniowa. We want to have a strong presence in the defense sector. And we know that without the Polish chemical sector, those projects would not be possible. In those challenging conditions, we are arriving at very good agreements including with the Polska Grupa Górnicza or the supply of thermal coal with a value of PLN 350 million. As of July 1 this year, higher duties on fertilizer from Russia and Belarus were introduced. However, we need to wait for the results of these regulations coming into effect. To summarize this introduction, let us extend our heartfelt thanks to all our employees for their involvement or their engagement and for the cost they are actually bearing. And without their efforts, the improvement of our results across the group would not be -- would not have been possible. In recent time last week specific, the Supervisory Board announced changes in its composition. We have communicated the deals in our current reports. Last week, the Ministry of State Assets appointed a new representative to Supervisory Board. Moving on to work environment. From our perspective, Grupa Azoty Group's perspective, the key feedstocks and energy feedstocks were stable in terms of the prices or reported higher prices, for instance, gas. As far as gas is concerned, the 12% increase was mainly due to the ongoing conflict in the Middle East and Ukraine and some -- there were some problems with LNG transport and higher freight costs, which translated into the higher gas costs across Europe. Actions by the European Commission aimed at complete stop or ban on gas imports from Russia also translates into unstable situation and high gas prices. At the end of the period, we also saw lower demand from Asia, which in the last quarter of this period, that is the second quarter of 2025, resulted in a slight decrease in gas prices across the period. Compared to the last year's data, we are talking about an increase of gas prices by 12% and in terms of coal due to lower demand across Europe and lower production in the Chemicals segment reported a drop of 12%. Electricity reported stable prices and the same applies to CO2 emission allowances. In terms of our key market environment, I'm talking about our consumers, our farmers. The first half of the year recorded an increase in terms of agricultural sector. I'm talking about an increase of 1.5 percentage points quarter-on-quarter. This is mainly due to higher prices of agricultural products. We know that it was only temporary because the next quarter, quarter 3, already showed major drops in terms of prices, mainly the prices of wheat, which reported record low prices. What's important for the Grupa Azoty Group are higher prices of fertilizers in the world, which allowed us to increase the spread between gas prices and product by 21%, which allowed us to rebuild the profitability of fertilizer products across Europe, which will translate into the performance of our Fertilizer segment. In terms of compound fertilizers, the spread between feedstocks and final products, end products, was eroded going down by 3% in the second quarter of 2025 compared to second quarter of 2024. Also in comparison with other quarters, for instance, in the first quarter of 2025, the drop in spread was even higher. The only product that reported a positive increase in the spread and higher profitability was a key NP product [indiscernible] in which case, the spread went up by 30%, which was due to a major increase in prices in Europe. The Agro segment is looking at major increases and challenges in the future. 1st of July 2025, custom duties were imposed on imports of product from Russia and Belarus. However, we do not see any significant effect of those measures for European producers. The increase in the first half of the year was very high, 7% year-on-year. And imports from Russia and Belarus in the first half of the year were also up by 83%. We're looking at it, as we look into the future. Obviously, the introduction of custom duties was positive for European producers. However, we can expect the results to be seen only in the fourth quarter of 2025 and the first quarter of 2026. A major increase in imports in the first half of 2025 was mainly due to building high stocks in ports and terminals and also in warehouses in Poland before we have built stocks. As far as the market environment in the Chemicals segment, we are looking at a very critical situation and [ export ] to alcohol spread has dropped a lot by 43%, profitability of the business remains to be very challenging. The prospects for the second quarter 2025 and the third quarter of 2025 was a little bit better, but was rebuilt. However, demand remains very low, and the oversupply across European markets means that it will be very difficult to impact. So we saw 2023 and 2024 the situation in titanium white is a bit different. The introduction of custom duties on Chinese products, imports of Chinese products translated into higher spreads between feedstock prices and product prices and the upward trend has been reported until the first quarter of 2025. This was very stable. However, the increase of the spread was seen in the second quarter of 2025 after we let go of the stocks brought to Europe still in 2024.

Now the market situation in the plastics industry low spread since the first quarter '23 has continued ever since a slight increase in the probability of this business and the spread between the raw materials in the second quarter of 2025, mostly attributable to the slower -- fast decrease in prices of raw materials and lower price adjustment of end products. For raw materials, the decrease was stronger in Europe than in Asia, which increased profitability in Europe on sales of polyamide 6. From semi-finished products perspective, caprolactam at very similar levels. And as I mentioned, this decrease in the European market polyamide 6 versus raw material of benzene that was lower at 23% versus 47% in the decrease of benzane prices. And the results in the Plastics segment were mostly influenced by the effect of Azoty Polyolefins.

Now the financial performance, we are about to present for the first 6 months, is consistent with our estimates published a few days ago. Azoty Group delivered PLN 3.3 billion revenues, and that was comparable to the second quarter of 2024. We had somewhat lower revenues in Chemicals and Energy and higher revenues in our key segment that is Agro. We reduced our EBITDA losses from minus PLN 128 million to minus PLN 71 million and these results are strongly influenced by the loss of our daughter company, Azoty Polyolefins. Without that item, the group's EBITDA would have been positive at the level of PLN 73 million compared to the comparable figure in the year before -- sorry, in the year before, there will be minus PLN 113 million. Revenues for the first 6 months compared to the last year went up by 6% to [ PLN 7,139 million ]. So that's comparable to the first quarter of 2023. At the same time, we improved our EBITDA in the first quarter, it's group-wide including Polyolefins, EBITDA is negative, minus PLN 79 million. And again, if we adjust this by excluding Polyolefins, then our core business delivered a positive EBITDA of PLN 160 million. In the first half of the year, our EBITDA went up by PLN 100 million compared to a similar period in the year before and that's attributable to our restructuring efforts mostly on the cost side. And we started that initiative in March 2024. We can see the actual impact of our cost-cutting measures and these remedies have been delivering consistent EBITDA growth quarter after quarter. However, despite the strong negative impact of imported fertilizers from the East, in the first quarter of 2025, we sold more fertilizers compared to the similar period one year earlier. However, we struggled with growing gas prices. Our fixed costs in the first quarter of -- in the first 6 months of 2025 considered comparatively year-on-year in a normalized way is lower by PLN 93 million, mostly in terms of labor, which reflects lower employment across the group. Also, we terminated all our sponsoring and PR agreements, which reduced our other costs by time. We have lower material and repair costs, and that's attributable to the improved performance of our renovation companies. Depreciation costs included in the Polyolefins business was PLN 123 million. In the first half of the year, the raw material situation of the group was strongly affected by the growing natural gas prices. They were 43% higher than in the similar period of 2024. Per unit cost of coal consumption was definitely lower. The total cost of raw material was PLN 185 million higher than the year before and PLN 590 million in gas alone. We had lower cost of oil derivatives, PLN 276 million less for phenol and propane and we had lower fossil fuel costs. We also had lower coal consumption. We used less coal and prices were lower as well. In the first quarter, the share of gas in raw material was 41%, 12 percentage points more than in the year before. So it's been 18 months of intense demanding negotiations with financing institutions. We've been consistently implementing our remedy program in agreement with financing institutions. This program is monitored and updated if necessary. As a result of these negotiations, we have a green light to continue our stabilization agreement, which now terminates on the 30th of September. In mid-September, we received a waiver from financing institutions not to reach our debt-to-EBITDA ratios. The solutions that we're currently working on are aimed at switching from the stage of technical agreements with financing institutions and those agreements sometimes continue for weeks or months. So we're going to switch from the technical stage to a long-term understanding. We regularly and timely pay our obligations or liabilities under those agreements and any other agreements with financing institutions. Financing institutions provide credit facilities, defer payments and the facilities we have secured financing for the Azoty Group. In the first 6 months of the year, we used PLN 234 million more credits and factoring facilities. In total, available funds at the end of June was PLN 1.3 billion. A vast majority of the leading companies within the group have improved the performance in the first half of the year compared with 2024. For [ Pulawy ] EBITDA is at 0 level. In Police, it is 0 plus. However, you can see significant improvement over strongly negative figures last year. For Police, it's important to note that the company is back on positive EBITDA track. [indiscernible] doubled its last year's EBITDA, it's still not satisfactory. But for Compo Expert, our EBITDA went up by 32% and the company consistently delivers a positive net result. However, we have Azoty Polyolefins, which still has a negative effect on the group, just a technical downtime and incomplete use of capacity as well as low demand for polypropylene, coupled with low spreads, attributable to macroeconomic situation. All of that caused the poor performance of Polyolefins.

In the Agri sector, we've seen improvement in 2 areas as growing sales volume and growing revenues. Sales volumes went up in all product categories, which allowed us to deliver positive EBITDA at the level of PLN 119 million in the first half of the year. That's plus PLN 193 million if we compare the first half of 2025 to the first half of 2024. And the key factor here was obviously growing import in the first half of the year, it still keeps us far from standard margins that we used to have in Europe, even though those margins are improving. And we have more intense import of products from outside Russia and Belarus. Importantly, from the group's perspective, we have some protective measures that reduce expansion into the Polish market, and those efforts will continue. EBITDA from the first half of the year was at the level of 2.5%, which is 4.3 percentage points more than in the first half of 2024. In Chemicals, the group struggled with structural problems of the European market limited growth possibilities in terms of production volume and strong pressure caused by high gas and energy prices. As a result, the European market as a whole, this segment has been struggling with lower profitability for the last couple of quarters. And we've had shrinking sales and production volumes recorded by most European producers. In the Azoty Group, all figures in Chemicals went down with the exception of OXO alcohols. Across the sector, EBITDA has improved, but it's still negative at the level of minus PLN 82 million in the first half of 2025. But still, it's a major improvement over the previous year by PLN 71 million in 2024. In the first half, we have minus PLN 53 million. In the Plastics segment, we saw a higher volume production, higher volume of sales in polyamide segment. However, in the polypropylene segment, there was a drop, which was mainly due to underutilization of production capacities [indiscernible] production facilities and also problems with maintaining a constant level of production. EBITDA for the first 6 months of the year was mainly driven by the impact of sales of polypropylene going down versus the level reported in 2024, which was at minus PLN 91 million, which represents a drop of nearly PLN 200 million year-on-year. The entire segment continued to be under the pressure of ever-growing imports of end products from Asian market. We're talking about automotive market and the construction market, which were affected by higher imports of products from Asia and as a result, lower consumption of polyamides in the European market.

So we're talking about CapEx control tower, which analyzed in detail the entire investment portfolio across the group. And at the very beginning, the analysis of the portfolio was made in order to select objectively, select the key investments and CapEx projects from a number of angles, technical, legal market and business angle as well as regulatory angle because we need to remember that this analysis needed to be comprehensive. And based on that, we analyzed the effect for the entire group at the group level. We are continuing this process. So as by the end of the year, we will have a brand-new CapEx management model. As I said at the beginning, CapEx spending was limited to the minimum necessary level. So we are keeping key investments, which are of major importance for the group's business. Let me remind you that we have 4 major investments across the group to [indiscernible]. And I believe that in terms of the CapEx figure, the major one is the construction of a whole based unit [indiscernible]. Right now, we are performing the stocking and inventory take, and we are analyzing the major elements of this investment in order to finalize it after the contract was terminated due to the fault on the side of the general contractor that is Mostostal. As far as Polimery Police is concerned, 3 major areas in terms of this company and the project. First of all, a stabilization agreement with the banks was extended until September 30, 2025. We are in touch with our financing institutions in order to make sure that the process -- extension process for the stabilization agreement is ongoing. Secondly, we are working with one of the shareholders, ORLEN, as far as MOU is concerned, the memorandum of understanding was signed and then extended by an annex to include potentially the takeover of not only our port-based assets, but also all or part of the shares, acquisition of all or part of the shares which are held by Grupa Azoty and Grupa Azoty Police. And thirdly the relationship with the digital contractor, the termination of the agreement, contractual penalties and also the payment of guarantee and the effects for the company taking the next steps as part of the Polimery Police project. First of all, we have prepared an end-to-end plan for the completion of this project and relaunch of this installation. And according to this plan, the funds or the resources that we received under the guarantee payment for the proper performance of the agreement will be used to finalize these investments. Right now, we are negotiating the agreement with the financing institutions on how to use the funds under this guarantee. And we will move on to complete the project and relaunch the unit.

It's a wrap-up of the presentation, and we can now move on to the Q&A session. First question, where will we see the effect of the imposition of custom duties on the imports of fertilizers?

Well, first of all, as Grupa Azoty Group, we are very grateful to the European Commission, but also to the Polish NPs, who have supported the measures taken by Polish fertilizer producers, and we're also very active in the legislation process in order to impose additional duties on imported products from Russia and Ukraine. And we see the first effect of lower imports. We saw them in the months of July and August. However, what we presented shows that after the very strong period of -- we are after the very strong period. So we will see -- in terms of the stock levels, we will see the effect in the fourth quarter of 2025 or the first quarter of 2026 in terms of the first measurable effect for European producers.

Second question, can you tell us a little bit more about your plans in the defense sector? A question to Mr. Bielski.

Yes, we are consistently keeping our interest in these projects. We are taking steps to be present. We are in touch with the suppliers. We are negotiating it. We are defining our plans, but we have also launched first tenders. On the other hand, we need to secure the financing. As we said before, we have applied to [ FIC ] and this application is now being analyzed. We are keeping our fingers crossed that we will be ready to launch the investments shortly.

Moving back to fertilizers. What are the prospects for the spreads in the Agro segment in the quarters to come?

As we look at nitrogen-based fertilizer prices, they are stable, especially in Europe. What can be seen as a transitory period in terms of gas prices, winter in fourth quarter is when we can expect the correction of gas prices. But our stocks gas levels in Poland and across Europe are high, storage facilities are filled up to the brim or almost filled up. So the demand can be limited, the effect can be limited as well. So we can expect the spreads this year to be stable this year and the upward trend can only be seen in 2026 as a result probably of the imposition of customs duties on the fertilizer products from Russia and Belarus. In terms of compound fertilizers, the situation is a little bit different because the sulfur prices as well as potassium chloride prices have an effect there. So the spread went down a little bit in the second quarter of 2025. And I believe that the decrease or stabilization of the spread can be expected in the quarters to come. I'm talking about the fourth and the third quarter of 2025 for compound fertilizers.

What are the savings generated by the Azoty business program? Are you satisfied with this program and its implementation?

We have talked about the effects of this program already today especially in terms of costs by type going down by PLN 93 million, which was mainly due to the implementation of the Grupa Azoty, new Azoty business product, where we cut our costs. However, the structural approach to cost savings, cost reduction and improvement of our efficiency has another dimension because our goal is to resume the measures we are taking to consolidate the group and to share best experiences and best practices across the group. So this is an additional goal. In addition to reduction of cost and improvement of our efficiency, this is yet another major objective of this program.

What are -- what's the level or the climate in terms of negotiations with the banks? Are they difficult? Or are they promising?

Well, those negotiations are always difficult, yes. Let me put it straightforwardly here. These negotiations are difficult. We have been discussing it for many months. All sites of these negotiations -- all parties involved in these negotiations must present, motivate and defend their interests. Grupa Azoty has taken out a significant debt level which is mismatched with our business and financial capacities over long term. So this is why those negotiations are so challenging. We need to analyze a lot of versions and options with the financing institutions, a lot of models based on the prospects for our business for the future. We need to consider regulatory issues. We need to consider our capacities, but also the macro environment and our market environment in the global -- at the global level as well. So this is very difficult. And in terms of our internal discussions or the prospects of our business in Europe and in this part of the world, we see it as well. When we are discussing it with the financing institutions, we are also verifying our approach we took a couple of years ago and I'm not talking about only our approach, but the approach taken by a lot of businesses, it needs to be verified because it dates back to years, years ago. So we are sharing these takeaways with the financing institutions. This is why those negotiations are challenging, and they are really difficult. But you asked whether the financing institutions are ready and willing to be helpful. Well, this would mean that they are actually ready to take compromise and meet us halfway. And I believe that's concerning the future interest of the group and potentially a client of the financing institutions. This must be taken into account.

A question on PDH plant. Has the effect been removed? When will it resume?

Well, when we look at PDH and PP, we assumed that the renovation will take 3 years, and this is what we aimed at. After we resumed the plant's operation, we noticed that the first interval will be shorter than 3 years. So after 2 years, PDH plan had to stop that was in July 2025, and the company has a plan to repair the plant and to finish [indiscernible] project. So we secured financing for that project by using the good workmanship bond from a [ general ] contractor. Importantly, PDH when it has a downtime, the whole bond can keep working, so that's propane terminal and PP plant so if the market situation in polypropylene improves and the company will be able to resume PP production without PDH. So we will shorten the manufacturing chain. Anyways, we are now preparing for PDH renovation and the whole planning process is now over, cost estimate is also complete. So right now, all we have to do is to negotiate with financing institutions on how to use the good workmanship bond, which is in our account.

Next question. What is the current status of talks with ORLEN on the sales of your stock in polyolefins and when some outcome can be expected?

Last night, we just signed an annex to this agreement. So it's a very recent development. We're working hard on possible scenarios, and we hope that both parties without undue delay will continue talks over the next week or two. And whose initiative was it to sign a new annex, that's the effect of bilateral analysis. We constantly analyzed and modeled the group's forecasts, and we also look at alternative ways to use our assets, including our ports. So that's a bilateral effort and perhaps it's going to be a fresh look, a fresh perspective on the assets held by Polimery Police.

And the last question, financial question again, why is your debt growing quarter-on-quarter, taking into account leasing despite strong CV growth.

Well, the growing debt is directly caused by the fact that cash flows were worse in the first quarter -- sorry, in the second quarter. In the second quarter, we had a lot of expenses on renovation projects, preparing the plants for the new season. And also, we have some renovation downtime.

[indiscernible] question, professor Skolmowski will give us the prospects for a few months to come.

Well, we've been consistently driving our Azoty business project. In a structural perspective, this includes all measures aimed at long-term performance improvement in Azoty Group. We are happy to see improved performance in Kedzierzyn. And we are very close to positive 0 in [ Pulawy ]. We have positive EBITDA in Compo Expert. However, we frankly say, as we've always had in the past, we need to be back on the track of positive EBITDA. This is our objective for the quarters to come. This is why we are very serious about the situation in the Agro sector. As we said, the duties, the custom duties will not change the situation overnight. Warehouses are full of Russian and Belarusian fertilized and it's going to take months for these warehouses to empty. However, we've seen some first symptoms that give us more optimism about Agro. And Agro represents a fast majority of our core business. We've been repairing and solving the problem of Polimery Police. This is why we have consistently presented solutions that may provide a multifaceted response to that challenge. We have just signed an annex to the MOU with ORLEN and who -- we are also talking to financial institutions and this is a multilateral discussion, and it has to be multilateral because a solution that solves the problem has to be accepted by many of the stakeholders. We've been talking to financing institutions. We are frank and open in our communication. We present our results regularly. We discussed the outputs, the results of Azoty business. Looking at many scenarios that could solve the problem of restructuring our debt. We hope that these negotiations will take us to a place where we will be able to finalize them in the last additional factors of this year. The solution is proposed in the course of these negotiations and the counter proposals looking at many other additional factors will eventually work out a compromise. We will be consistently pursuing our goals and these goals include getting the group back on the growth track, the growth track of positive results and market environment is not easy. The European chemical industry is struggling, which includes our direct competitors. On top of that, our investment program weighs heavily on us. On top of that, we have another expensive project namely [ Pulawy HCP ]. This motivates us to work harder to improve performance with the help of our staff who are involved in the repair program and in searching for new initiatives that will respond to the problem that the group has been facing for years, namely deeper consolidation of many processes and reorganizing these processes segment by segment. We have some tough negotiations ahead of us at the group level and the project company level. However, we are sure that agreements will be reached in both of these processes. Thank you very much, and please take an in-depth look at our results and ask questions, if necessary. And now I will be available on the chat facility today and looking forward to see you at the next earnings call. [Statements in English on this transcript were spoken by an interpreter present on the live call.]