Polish fertilizers and chemicals group Grupa Azoty AS, Tarnów, has confirmed the group net loss of Pln555 million (approximately $132.3 million at current exchange rates) and an EBITDA loss of Pln401 million for the first quarter ended March 31, 2023, and in line with the preliminary results reported by the group on May 15 (GM May 19, p. 26).
The net loss attributable to shareholders of the group was Pln522 million versus an attributable net profit of Pln854 million for the first quarter of last year. Last week’s report of a first-quarter 2023 attributable net loss of Pln0.6 million was incorrect.
Revenues for the quarter were 43% lower year-over-year at Pln3.895 billion, in line with the group’s preliminary estimates and down from Pln6.83 billion for the same prior year period.
“The first quarter of this year saw a continuation of the supply-demand imbalance in the European market, reflecting Russia’s invasion of Ukraine, soaring energy prices, and duty-free imports of fertilizers and plastics produced outside of the European Union from cheaper feedstocks,” Azoty said in its May 22 results report.
Azoty cited another challenge faced by its Fertilisers/Agro segment, the group’s biggest division in terms of turnover – the EU Council’s decision late last year to temporarily suspend all duties on imports of urea and ammonia from Dec. 16 for six months (GM December 23, p. 3). Some market watchers believe the suspension may be extended for a further six months.
“The macro environment led to lower demand for the group’s products, driving down sales volumes and product prices. The market turbulence also disrupted end-user buying behaviour typical of the first quarter of prior years,” the group said.
The first-quarter loss comes despite the receipt of some Pln234 million in funding granted to the Azoty group by the Polish government’s National Fund for Environmental Protection and Water Management as part of the support provided to the country’s energy-intensive industries amid the unprecedented rises in natural gas and electricity prices last year.
Azoty’s Fertilisers/Agro segment posted a Pln140 million EBITDA loss in the first quarter versus a Pln814 million positive EBITDA a year ago, also in line with preliminary results.
The year-over-year decline in the price of natural gas, being a key feedstock for the production of nitrogen fertilizers, did not offset the drop in product selling prices and sales volumes, Azoty said.
The group’s sales volumes of nitrogen fertilizer dropped 51% year-over-year in the first quarter as farmers limited usage to curb costs amid the uncertain outlook for product prices.
Azoty said it is “actively” responding to the market challenges by adjusting its production volumes “on an ongoing basis” to current supply and demand in Europe, among other measures. Azoty reported a 44% decline in its nitrogen fertilizers production to 176,000 mt in April, down from the year-ago 312,000 mt, as it aims to bring output in line with market demand (GM May 19, p. 5).
Azoty Vice President of the Management Board Marek Wadowski told participants in a May 22 news conference, as cited by a Polish Press Agency (PAP) report, that the group wants to stabilize fertilizer prices in order “to make them more predictable,” The current situation on the fertilizers market causes “big uncertainty” for farmers, he said.
Wadowski said Azoty is continuing its efforts to further diversify its energy sources. He said the group is in talks with Polish energy group PKN Orlen on a new gas supply contract, as the existing contract expires at the end of September.
The Polish fertilizers and chemicals group on May 22 confirmed that it may breach debt covenants at the end of the second quarter, first flagged by the group earlier this month.
Azoty likely will exceed the 4.0x net debt to EBITDA level allowed in covenants at the end of the first half of 2023, but hopes to reach an agreement on the issue with financing institutions, Wadowski – as cited by the PAP report – told news conference participants.
He said the group’s liquidity situation is “good,” but due to the decrease in the first-quarter result, Azoty sees a risk that the net debt to EBITDA ratio will exceed the acceptable values contained in financing agreements.
Net debt to EBITDA already exceeded the maximum 4.0x level included in covenants at the end of the first quarter, but end-first quarter levels are not reported to financial institutions, Wadowski explained.
The end-first-quarter debt stood at 4.77x EBITDA, according to Azoty’s first-quarter financial report.
Reports have been circulating that Azoty may need to sell its prized Puławy subsidiary to PKN Orlen to improve its financial standing. The Puławy unit production includes ammonium nitrate and urea, as well as caprolactam and melamine, and is the group’s most profitable entity.
Erste analyst Jakub Szkopek, as cited in a Bloomberg report on May 23, said selling the Puławy unit would solve Azoty’s problem “for a while,” by reducing debt.
“Following such a potential transaction, there would be an efficient entity on the market consisting of Puławy and Anwil, both belonging to PKN Orlen, itself a gas producer,” he said.
In such a scenario, Azoty will be left with its Police, Tarnów, and Kędzierzynie units, “all less efficient and less competitive than Puławy,” Szkopek said.
Trigon analyst Michal Kozak, as cited by Bloomberg, also believes a sale of Puławy may be seen as negative in the long term.