Consolidated interim report for Q1 2017

Transcription

1 Consolidated interim report for Q1 2017

2 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Contents I. FINANCIAL HIGHLIGHTS... 4 Consolidated financial highlights... 5 Separate financial highlights... 6 II INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31ST 2017, PREPARED IN ACCORDANCE WITH IAS 34 INTERIM FINANCIAL REPORTING AS ENDORSED BY THE EUROPEAN UNION... 7 Statement of the management board... 8 Condensed consolidated statement of profit or loss and other comprehensive income... 9 Condensed consolidated statement of financial position Condensed consolidated statement of changes in equity Condensed consolidated statement of changes in equity (continued) Condensed consolidated statement of cash flows Information about the Group Key events in the three months ended March 31st 2017 and until the authorisation date Composition of the Management Board and the Supervisory Board Share capital increase at PDH Polska Spółka Akcyjna, a subsidiary Policies applied in the preparation of the interim condensed consolidated financial statements Statement of compliance and general policies Accounting policies and computation methods Selected supplementary and explanatory notes Explanatory notes Related-party transactions Events after the reporting period that could affect financial results in the future Dividends Seasonality of operations III. VI. INTERIM CONDENSED SEPARATE FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31ST 2017, PREPARED IN ACCORDANCE WITH IAS 34 INTERIM FINANCIAL REPORTING AS ENDORSED BY THE EUROPEAN UNION Statement of the management board Condensed separate statement of profit or loss and other comprehensive income Condensed separate statement of financial position Condensed separate statement of changes in equity Condensed separate statement of cash flows Supplementary information to the interim condensed separate financial statements MANAGEMENT S DISCUSSION AND ANALYSIS OF THE GRUPA AZOTY ZAKŁADY CHEMICZNE POLICE GROUP S PERFORMANCE IN Q General information on the Group Financial condition and assets Assessment of non-recurring factors and events having a material impact on the Group s operations and financial performance Market overview Key financial and economic data Consolidated financial information Segments financial results Sales by product group Operating expenses Structure of assets, equity and liabilities Financial ratios Financial liquidity Borrowings Execution of key investment projects Factors which will affect the Group s performance over at least the next reporting period Other information Other significant events Significant agreements Page 2 of 66

3 Interim condensed consolidated financial statements for the three months ended March 31st Sureties for borrowings, guarantees granted Shareholding structure Parent shares held by management and supervisory personnel Composition of the Management Board and the Supervisory Board Environmental performance Other Information Page 3 of 66

4 I. FINANCIAL HIGHLIGHTS

5 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Financial highlights Consolidated financial highlights Jan 1 Mar PLN 000 EUR 000 Jan 1 Mar Jan 1 Mar Jan 1 Mar Revenue 699, , , ,609 Operating profit 59,784 84,497 13,939 19,398 Profit before tax 59,443 84,899 13,859 19,491 Net profit 46,875 68,172 10,929 15,650 Total profit or loss and other comprehensive income 49,275 67,703 11,489 15,543 Number of shares 75,000,000 75,000,000 75,000,000 75,000,000 Earnings per ordinary share (PLN) Net cash provided by/(used in) operating activities 26,473 (11,593) 6,172 (2,661) Net cash provided by/(used in) investing activities (82,245) (47,827) (19,176) (10,980) Net cash provided by/(used in) financing activities 64,917 16,349 15,135 3,753 Net increase/(decrease) in cash and cash equivalents 9,145 (43,071) 2,132 (9,888) Cash and cash equivalents at beginning of period 95,614 95,135 22,292 21,840 Cash and cash equivalents at end of period 103,691 52,213 24,176 11,987 as at Mar as at Dec as at Mar as at Dec Non-current assets 1,527,534 1,483, , ,419 Current assets 583, , , ,186 Non-current liabilities 413, ,124 97,901 95,191 Current liabilities 574, , , ,621 Equity 1,123,389 1,074, , ,792 Share capital 750, , , ,530 Non-controlling interests (21,116) (21,540) (5,004) (4,869) Page5 of 66

6 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Financial highlights Separate financial highlights Jan 1 Mar PLN 000 EUR 000 Jan 1 Mar Jan 1 Mar Jan 1 Mar Revenue 695, , , ,074 Operating profit 61,722 82,866 14,391 19,024 Profit before tax 55,793 80,413 13,008 18,461 Net profit 43,649 64,311 10,177 14,764 Total profit or loss and other comprehensive income 43,649 64,311 10,177 14,764 Number of shares 75,000,000 75,000,000 75,000,000 75,000,000 Earnings per ordinary share (PLN) Net cash provided by/(used in) operating activities 29,597 (22,870) 6,901 (5,250) Net cash provided by/(used in) investing activities (67,643) (41,035) (15,771) (9,421) Net cash provided by/(used in) financing activities 60,904 16,643 14,200 3,821 Net increase/(decrease) in cash and cash equivalents 22,858 (47,262) 5,329 (10,850) Cash and cash equivalents at beginning of period 39,939 57,210 9,312 13,134 Cash and cash equivalents at end of period 61,823 10,314 14,414 2,368 as at Mar as at Dec as at Mar as at Dec Non-current assets 1,530,461 1,512, , ,878 Current assets 520, , , ,411 Non-current liabilities 397, ,872 94,242 91,065 Current liabilities 550, , , ,707 Equity 1,103,273 1,059, , ,517 Share capital 750, , , ,530 The selected items of the statement of profit or loss and other comprehensive income, statement of financial position and statement of cash flows have been translated into the euro using the method specified below: individual items of assets and equity and liabilities in the statement of financial position have been translated using the exchange rate effective for the last day of the reporting period: the exchange rate as at December 31st 2016 was EUR 1 = PLN (table No. 252/A/NBP/2016), the exchange rate as at March 31st 2017 was EUR 1 = PLN (table No. 064/A/NBP/2017), items of the statement of profit or loss and other comprehensive income and statement of cash flows have been translated using the arithmetic averages of the EUR/PLN rates quoted by the National Bank of Poland as effective for the last day of each month in the reporting period: in January 1st March 31st 2016, the average exchange rate was EUR 1 = PLN 4,3559; in January 1st March 31st 2017, the average exchange rate was EUR 1 = PLN 4,2891. The translation was made using the exchange rates specified above by dividing amounts expressed in thousands of the złoty by the exchange rate. Page6 of 66

7 II INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31ST 2017, PREPARED IN ACCORDANCE WITH IAS 34 INTERIM FINANCIAL REPORTING AS ENDORSED BY THE EUROPEAN UNION

8 Interim condensed consolidated financial statements for the three months ended March 31st 2017 STATEMENT OF THE MANAGEMENT BOARD The Management Board of the Parent of the Grupa Azoty Police Group presents the interim condensed consolidated financial statements for the three months ended March 31st 2017, comprising: Condensed consolidated statement of profit or loss and other comprehensive income for the period January 1st March 31st 2017, Condensed consolidated statement of financial position as at March 31st 2017, Condensed consolidated statement of changes in equity for the period January 1st March 31st 2017, Condensed consolidated statement of cash flows for the period January 1st March 31st 2017, Supplementary information to the interim condensed consolidated financial statements. These interim condensed consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting, as endorsed by the European Union, and give a fair and clear view of the financial position and performance of the Group. Signatures of the Members of the Parent s Management Board Wojciech Wardacki, Ph.D. President of the Management Board Tomasz Panas Vice President of the Management Board Włodzimierz Zasadzki, Ph.D. Vice President of the Management Board Anna Tarocińska Member of the Management Board Person in charge of maintaining accounting records Józefa Żurawska Chief Accountant Police, May 10th 2017 Page8 of 66

9 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Condensed consolidated statement of profit or loss and other comprehensive income Jan 1 Mar unaudited Jan 1 Mar unaudited Revenue 699, ,530 Cost of sales (570,580) (531,783) Gross profit 128, ,747 Selling and distribution expenses (27,939) (23,906) Administrative expenses (41,955) (47,085) Other income 1,447 1,341 Other expenses (481) (600) Operating profit 59,784 84,497 Finance income Finance costs (4,240) (2,906) Net finance income/(costs) (3,408) (2,244) Share of profit of equity-accounted associates 3,067 2,646 Profit before tax 59,443 84,899 Income tax (12,568) (16,727) Net profit 46,875 68,172 Other comprehensive income Items that are or may be reclassified to profit or loss Exchange differences on translating foreign operations 2,400 (469) Total other comprehensive income 2,400 (469) Total profit or loss and other comprehensive income 49,275 67,703 Net profit/(loss) attributable to: Owners of the parent 47,582 67,521 Non-controlling interests (707) 651 Total profit or loss and other comprehensive income attributable to: Owners of the parent 48,851 67,043 Non-controlling interests Earnings per share: Basic (PLN) Diluted (PLN) The supplementary information and notes are an integral part of these interim condensed consolidated financial statements. Page 9 of 66

10 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Condensed consolidated statement of financial position as at Mar unaudited as at Dec audited Assets Non-current assets Property, plant and equipment 1,339,258 1,293,039 Perpetual usufruct of land 6,744 6,787 Intangible assets 95,561 97,827 Investment property 5,323 5,323 Shares 2,357 2,357 Equity-accounted investees 28,779 25,712 Other receivables 3,275 3,388 Deferred tax assets 46,237 49,460 Total non-current assets 1,527,534 1,483,893 Current assets Inventories 234, ,967 Property rights 31,262 37,993 Other financial assets 11,402 10,812 Derivatives 26 2,189 Trade and other receivables 201, ,367 Cash and cash equivalents 103,691 95,614 Total current assets 583, ,942 Total assets 2,110,732 2,059,835 The supplementary information and notes are an integral part of these interim condensed consolidated financial statements. Page10 of 66

11 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Condensed consolidated statement of financial position (continued) Equity and liabilities Equity as at Mar unaudited as at Dec audited Share capital 750, ,000 Exchange differences on translating foreign operations (1,118) (2,387) Retained earnings, including: 395, ,041 Profit for the period 47,582 87,874 Equity attributable to owners of the parent 1,144,505 1,095,654 Non-controlling interests (21,116) (21,540) Total equity 1,123,389 1,074,114 Liabilities Borrowings 283, ,562 Other financial liabilities 4,696 4,816 Employee benefit obligations 65,350 65,378 Provisions 42,398 42,412 Trade and other payables Grants 17,381 17,706 Total non-current liabilities 413, ,124 Borrowings 147,627 74,913 Other financial liabilities 1,706 1,840 Employee benefit obligations 9,376 9,409 Provisions 9,741 9,832 Current tax liabilities 3,255 9,956 Trade and other payables 383, ,167 Grants 18,530 1,480 Total current liabilities 574, ,597 Total liabilities 987, ,721 Total equity and liabilities 2,110,732 2,059,835 The supplementary information and notes are an integral part of these interim condensed consolidated financial statements. Page11 of 66

12 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Condensed consolidated statement of changes in equity For the period ended March 31st 2017 Share capital Exchange differences on translating foreign operations Retained earnings Equity attributable to owners of the parent Non-controlling interests Total equity Balance as at January 1st ,000 (2,387) 348,041 1,095,654 (21,540) 1,074,114 Profit or loss and other comprehensive income Net profit ,582 47,582 (707) 46,875 Other comprehensive income - 1,269-1,269 1,131 2,400 Total profit or loss and other comprehensive income - 1,269 47,582 48, ,275 Transactions with owners, recognised directly in equity Total transactions with owners Other Balance as at March 31st 2017 (unaudited) 750,000 (1,118) 395,623 1,144,505 (21,116) 1,123,389 The supplementary information and notes are an integral part of these interim condensed consolidated financial statements. Page12 of 66

13 Condensed consolidated statement of changes in equity (continued) For the period ended March 31st 2016 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Share capital Translation reserve Retained earnings Equity attributable to owners of the parent Non-controlling interests Total equity Balance as at January 1st ,000 (616) 385,315 1,134,699 93,308 1,228,007 Correction of prior period error - (1,199) (122,427) (123,626) (101,147) (224,773) Balance as at January 1st 2016 after adjustments 750,000 (1,815) 262,888 1,011,073 (7,839) 1,003,234 Profit or loss and other comprehensive income Net profit ,521 67, ,172 Other comprehensive income - (478) - (478) 9 (469) Total profit or loss and other comprehensive income - (478) 67,521 67, ,703 Transactions with owners, recognised directly in equity Total transactions with owners Other Balance as at March 31st 2016 (unaudited) 750,000 (2,293) 330,409 1,078,116 (7,179) 1,070,937 The supplementary information and notes are an integral part of these interim condensed consolidated financial statements. Page13 of 66

14 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Condensed consolidated statement of changes in equity (continued) For the year ended December 31st 2016 Share capital Translation reserve Retained earnings Equity attributable to owners of the parent Non-controlling interests Total equity Balance as at January 1st ,000 (616) 385,315 1,134,699 93,308 1,228,007 Correction of prior period error - (1,199) (122,427) (123,626) (101,147) (224,773) Balance as at January 1st 2016 after adjustments 750,000 (1,815) 262,888 1,011,073 (7,839) 1,003,234 Profit or loss and other comprehensive income Net profit ,874 87,874 (18,165) 69,709 Other comprehensive income - (572) (2,713) (3,285) (536) (3,821) Total profit or loss and other comprehensive income - (572) 85,161 84,589 (18,701) 65,888 Transactions with owners, recognised directly in equity Total transactions with owners ,000 5,000 Other - - (8) (8) - (8) Balance as at December 31st 2016 (audited) 750,000 (2,387) 348,041 1,095,654 (21,540) 1,074,114 The supplementary information and notes are an integral part of these interim condensed consolidated financial statements. Page14 of 66

15 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Condensed consolidated statement of cash flows Jan 1 Mar unaudited Jan 1 Mar unaudited Cash flows from operating activities Profit before tax 59,443 84,899 Adjustments 25,840 19,702 Depreciation and amortisation 24,459 22,121 Recognition of impairment losses on property, plant and equipment 1 - (Profit)/loss from investing activities (166) 41 Share of profit of equity-accounted associates (3,067) (2,646) Interest, foreign exchange gains or losses 2, Change in fair value of financial assets at fair value through profit or loss 2,163 - Operating profit before changes in working capital 85, ,601 Changes in trade and other receivables (43,582) (49,331) Changes in inventories and property rights 6,858 (39,642) Changes in trade and other payables (37,547) (42,398) Change in provisions, grants and employee benefit obligations 15,506 15,250 Cash from operating activities 26,518 (11,520) Income taxes paid (45) (73) Net cash provided by/(used in) operating activities 26,473 (11,593) The supplementary information and notes are an integral part of these interim condensed consolidated financial statements. Page15 of 66

16 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Condensed consolidated statement of cash flows (continued) January 1 March unaudited Jan 1 Mar unaudited Cash flows from investing activities Proceeds from sale of property, plant and equipment, intangible assets and investment property Acquisition of property, plant and equipment, intangible assets and investment property (79,570) (43,394) Exploration and evaluation expenditures (1,180) (4,628) Revenue from lease of investment property Loans (1,688) - Net cash provided by/(used in) investing activities (82,245) (47,827) Cash flows from financing activities Proceeds from borrowings 77,682 29,086 Payment of borrowings (9,140) (9,549) Interest paid (3,039) (2,142) Payment of finance lease liabilities (774) (1,152) Other proceeds Net cash provided by/(used in) financing activities 64,917 16,349 Net increase/(decrease) in cash and cash equivalents 9,145 (43,071) Cash and cash equivalents at beginning of period 95,614 95,135 Effect of exchange rate fluctuations (1,068) 149 Cash and cash equivalents at end of period 103,691 52,213 The supplementary information and notes are an integral part of these interim condensed consolidated financial statements. Page16 of 66

17 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Supplementary information to the interim condensed consolidated financial statements 1. Information about the Group Organisation of the The Group s parent, Grupa Azoty Zakłady Chemiczne Police Spółka Akcyjna, with its registered office in Police (the Parent or Company ), was established on December 14th 1995 on the basis of Notarial Deed A No The Parent operates as a joint-stock company in the territory of Poland. The Parent is registered with the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, under No. KRS The Parent has been assigned REGON (industry identification) No and NIP (tax identification) No The duration of the Parent and the entities comprising the Grupa Azoty Zakłady Chemiczne Police Group (the Group ) is unlimited. The Parent s business includes in particular: manufacture and sale of chemical fertilizers, manufacture and sale of titanium white and other chemicals, generation, transmission and distribution of electricity. The is part of the Grupa Azoty Group, whose parent is Grupa Azoty S.A. Composition of the Group As at March 31st 2017, the Group comprised Grupa Azoty Zakłady Chemiczne Police S.A. (the Parent) and: nine subsidiaries (in which the Parent held ownership interests above 50%), including one company in liquidation, one indirect subsidiary, two associates (in which the Parent held ownership interests below 50%, including one company in liquidation bankruptcy. Page17 of 66

18 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Composition of the Group Structure of the Group as at March 31st 2017: Grupa Azoty Zakłady Chemiczne Police S.A. Consolidated subsidiaries Non-consolidated subsidiaries Equity-accounted associates 100% Grupa Azoty Police Serwis Spółka z o.o. 100% Supra Agrochemia Spółka z o.o. 48,96% budchem Spółka z o.o. w upadłości likwidacyjnej 100% Koncept Spółka z o.o. 33,99% KEMIPOL Spółka z o.o. 100% TRANSTECH Usługi Sprzętowe i Transportowe Spółka z o.o. 99,99% Grupa Azoty Africa S.A. Senegal 0,01% 99,98% Zarząd Morskiego Portu Police Spółka z o.o. 96,09% PDH Polska S.A % INFRAPARK Police S.A. w likwidacji (in liquidation) 54.90% African Investment Group S.A. Senegal 0.10% 100% AFRIG Trade SARL Senegal Page

19 Interim condensed consolidated financial statements for the three months ended March 31st Key events in the three months ended March 31st 2017 and until the authorisation date 2.1. Composition of the Management Board and the Supervisory Board As at the date of authorisation of the interim condensed consolidated financial statements for issue, the composition of the Parent s Management Board was as follows: Wojciech Piotr Wardacki President of the Management Board of the seventh joint term of office, appointed by the Supervisory Board Resolution No. 206/VI/16 of April 7th 2016; Tomasz Grzegorz Panas Vice President of the Management Board of the seventh joint term of office, appointed by the Supervisory Board Resolution No. 207/VI/16 of April 7th 2016; Włodzimierz Zasadzki Vice President of the Management Board of the seventh joint term of office, appointed by the Supervisory Board Resolution No. 7/VII/16 of July 15th 2016; Anna Tarocińska Member of the Management Board of the seventh joint term of office, elected by Parent employees and appointed by the Supervisory Board Resolution No. 56/VII/17 of March 3rd As at the date of authorisation of the Group s interim condensed consolidated financial statements for issue, the composition of the Parent s Supervisory Board was as follows: Joanna Habelman Chairwoman of the Supervisory Board of the seventh joint term of office, appointed to the Supervisory Board by the Parent s Annual General Meeting s Resolution No. 22 of June 30th 2016 (appointed Chairwoman of the Supervisory Board on January 26th 2017); Mirosław Kozłowski Deputy Chairman of the Supervisory Board of the seventh joint term of office, appointed to the Supervisory Board by the Parent s Annual General Meeting Resolution No. 24 of June 30th 2016 and appointed Deputy Chairman on February 6th 2017; Bożena Licht Secretary of the Supervisory Board, Representative of the Ministry of State Treasury, appointed to the Supervisory Board by the Minister of State Treasury s letter of July 8th 2016; Agnieszka Ewa Dąbrowska Member of the Supervisory Board of the seventh joint term of office, appointed by the Parent s Annual General Meeting Resolution No. 23 of June 30th 2016; Andrzej Malicki Member of the Supervisory Board of the seventh joint term of office, appointed by the Parent s Annual General Meeting Resolution No. 25 of June 30th 2016; Maria Więcek Member of the Supervisory Board of the seventh joint term of office, appointed by the Parent s Extraordinary General Meeting Resolution No. 3 of December 14th As at the date of authorisation of the Group s interim condensed consolidated financial statements for issue, the composition of the Audit Committee was as follows: Joanna Habelman Chairperson of the Audit Committee, appointed by the Supervisory Board Resolution No. 3/VII/16 of July 15th 2016; Agnieszka Ewa Dąbrowska Secretary of the Audit Committee, appointed by the Supervisory Board Resolution No. 4/VII/16 of July 15th 2016; Mirosław Kozłowski Member of the Audit Committee, appointed by the Supervisory Board Resolution No. 5/VII/16 of July 15th Share capital increase at PDH Polska Spółka Akcyjna, a subsidiary On March 29th 2017, the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A. resolved to acquire up to 5,200,000 new Series C registered shares in PDH Polska S.A. The Parent s Supervisory Board approved the acquisition on March 31st The acquisition will be effected by the Company subscribing for the new shares in the increased share capital of PDH Polska S.A. On April 5th 2017, the General Meeting of PDH Polska S.A. passed a resolution to increase the company s share capital by way of issue of 5,200,000 new shares. Of that number, Grupa Azoty Zakłady Chemiczne Police S.A. intends to take up, on the first date for exercise of pre-emptive rights, 2,917,875 shares with a par value and issue price of PLN 10 per share. Page

20 Interim condensed consolidated financial statements for the three months ended March 31st Policies applied in the preparation of the interim condensed consolidated financial statements 3.1. Statement of compliance and general policies These interim condensed consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting, as endorsed by the European Union, and in accordance with the Minister of Finance s Regulation on current and periodic information to be published by issuers of securities and conditions for recognition as equivalent of information whose disclosure is required under the laws of a non-member state, dated February 19th 2009 (consolidated text: Dz.U. of 2014, item 133, as amended), and present the financial condition of the Grupa Azoty Police Group as at March 31st 2017, its operating performance for the three months ended March 31st 2017, and its cash flows for the three months ended March 31st These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Grupa Azoty Police Group for the financial year ended December 31st 2016, prepared in accordance with the International Financial Reporting Standards endorsed by the European Union (the IFRS ) and other applicable laws. All figures in these interim condensed consolidated financial statements are presented in thousands of złoty Accounting policies and computation methods a) Applied accounting policies The accounting policies applied in these interim condensed consolidated financial statements are the same as those applied in the full-year consolidated financial statements for b) Changes in International Financial Reporting Standards A number of new Standards, amendments to Standards and Interpretations were not yet effective for the interim periods ended on March 31st 2017 and, consequently, they were not applied in these financial statements. The Group intends to apply them to the periods for which they are effective for the first time. c) Judgements and estimates The preparation of interim condensed consolidated financial statements requires the Management Board to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The estimates and underlying assumptions are based on historical experience and other factors reasonable in the circumstances and are the basis for determining the carrying amounts of assets and liabilities that do not result directly from other sources. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Changes to accounting estimates are recognised in the period in which the estimates are revised or in current and any future periods affected. The key judgements and estimates made by the Management Board in preparing these interim condensed consolidated financial statements were the same as those made in preparing the consolidated financial statements for the financial year ended December 31st Page

21 Interim condensed consolidated financial statements for the three months ended March 31st Selected supplementary and explanatory notes 4.1. Explanatory notes Segment reporting Operating segments The Group identifies operating segments based on internal reports. The operating results of each segment are reviewed on a regular basis by the Parent s chief operating decision maker, who decides about the allocation of resources to different segments and analyses their results. Separate information prepared for each segment is available. The Group identifies the following operating segments: the Fertilizers Segment (the Fertilizers and Nitro Business Unit), the Pigments Segment (the Pigments Business Unit), and other activities, which include power generation, port services, wastewater disposal, waste storage, laboratory services, property rental, as well as other activities which cannot be allocated to any of the segments specified above. Subsidiaries Grupa Azoty Africa S.A. and African Investment Group S.A. together with its subsidiary AFRIG Trade SARL are included in the Fertilizers Segment, and other subsidiaries in other activities. The Group presents administrative, selling and distribution expenses and other income and expenses allocated to the segments. Performance of each of the segments is discussed in the Operating segments Note. Performance of each segment is measured based on its revenue, EBIT and EBITDA. Geographical areas The Group identifies the following geographical areas (countries or regions): Poland, Germany, Other European Union countries, South American countries, Other countries. If information is presented by geographical areas, revenue is determined based on the country of destination, i.e. the country where the product will be sold (irrespective of the location of the wholesaler whose operations frequently have a global reach). Assets allocated to a geographical area are identified on the basis of their geographical location. Page

22 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Operating segments Revenue, expenses and financial result of operating segments for the three months ended March 31st 2017 Fertilizers Pigments Other Activities External revenue 598,105 88,893 12, ,292 Inter-segment revenue 62, , ,025 Total revenue 660,983 88, , ,317 Operating expenses, including: (-) (615,251) (74,410) (198,838) (888,499) Selling and distribution expenses (-) (26,225) (1,714) - (27,939) Administrative expenses (-) (31,587) (4,692) (5,676) (41,955) Other income ,447 Other expenses (-) (31) - (450) (481) Segment s EBIT* 45,963 14,784 (963) 59,784 Finance income x x x 832 Finance costs (-) x x x (4,240) Share of profit of equity-accounted associates x x x 3,067 Profit before tax x x x 59,443 Income tax x x x (12,568) Net profit x x x 46,875 EBIT* 45,963 14,784 (963) 59,784 Depreciation and amortisation 18,499 4,764 1,196 24,459 EBITDA** 64,462 19, ,243 Total * EBIT is calculated as operating profit (loss) as disclosed in the statement of profit or loss. ** EBITDA is calculated as operating profit (loss) before depreciation and amortisation. Page22 of 66

23 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Revenue, expenses and financial result of operating segments for the three months ended March 31st 2016 Fertilizers Pigments Other Activities External revenue 605,456 71,105 9, ,530 Inter-segment revenue 86, , ,373 Total revenue 691,898 71, , ,903 Operating expenses, including: (-) (605,850) (73,653) (206,644) (886,147) Selling and distribution expenses (-) (22,355) (1,551) - (23,906) Administrative expenses (-) (36,821) (5,028) (5,236) (47,085) Other income ,341 Other expenses (-) (102) (61) (437) (600) Segment s EBIT* 86,097 (2,129) ,497 Finance income x x x 662 Finance costs (-) x x x (2,906) Share of profit of equity-accounted associates x x x 2,646 Profit before tax x x x 84,899 Income tax x x x (16,727) Net profit x x x 68,172 EBIT* 86,097 (2,129) ,497 Depreciation and amortisation 16,478 4,521 1,122 22,121 EBITDA** 102,575 2,392 1, ,618 Total * EBIT is calculated as operating profit (loss) as disclosed in the statement of profit or loss. ** EBITDA is calculated as operating profit (loss) before depreciation and amortisation. Page23 of 66

24 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Geographical areas Revenue Jan 1 Mar Jan 1 Mar Poland 398, ,698 Germany 98,311 81,098 Other EU countries 184, ,979 South American countries 2,179 - Other countries 15,310 15,755 Total 699, ,530 Note 1 Contingent liabilities, contingent assets and guarantees As at March 31st 2017, the Group did not identify any disclosable contingent assets. As at March 31st 2017, the Group disclosed a contingent liability of PLN 463 thousand in connection with a dispute between the subsidiary Infrapark Police S.A. w likwidacji (in liquidation) and its trade partner, concerning mutual settlement under an agreement for the sale of property, plant and equipment. The liability is secured with assets of Infrapark Police S.A. w likwidacji (in liquidation) the disputed amount has been placed in court depository. The case is pending. In the three months ended March 31st 2017, no significant changes occurred in the sureties and guarantees issued by the Group. Note 2. Accounting estimates and assumptions Changes in provisions and employee benefit obligations (excluding deferred tax liability) Jan 1 Mar Jan 1 Dec Jan 1 Mar Balance at beginning of period 127, , ,146 Recognised - 28, Reversed (-) (72) (13,112) - Used (-) (76) (7,216) (40) Effect of movements in exchange rates (18) 24 (3) Balance at end of period 126, , ,146 Page

25 Interim condensed consolidated financial statements for the three months ended March 31st 2017 Changes in impairment loss on property, plant and equipment Jan 1 Mar Jan 1 Dec Jan 1 Mar Balance at beginning of period 218, , ,712 Recognised 1 1,837 - Used (-) (203) (1,392) (90) Balance at end of period 217, , ,622 Changes in inventory write-downs Jan 1 Mar Jan 1 Dec Jan 1 Mar Balance at beginning of period 8,602 9,721 9,721 Recognised 167 7, Reversed (-) (256) (1,927) (477) Used (-) (167) (6,776) (337) Balance at end of period 8,346 8,602 9,125 Changes in impairment loss on receivables Jan 1 Mar Jan 1 Dec Jan 1 Mar Balance at beginning of period 40,613 19,997 19,997 Recognised 61 21, Reversed (-) (285) (307) (56) Used (-) (908) (505) (1) Effect of movements in exchange rates (752) Balance at end of period 38,729 40,613 19, Related-party transactions Significant related-party transactions: a) Significant related-party transactions executed by the Group on non-arm s length terms In the three months ended March 31st 2017, the Group did not execute any related-party transactions on non-arm s length terms. b) Transactions with members of the Management Board and Supervisory Board of the Parent, their spouses, siblings, ascendants, descendants or other closely related persons In the three months ended March 31st 2017, the Group did not grant any advances, loans, guarantees or sureties to management or supervisory personnel or persons closely related to them, nor did it enter into any agreements with them to provide any services to the Group, with the exception of the agreements on provision of legal services to the subsidiaries PDH Polska S.A. and Zarząd Morskiego Portu Police Sp. z o.o. by Kancelaria Radców Prawnych Licht & Przeworska s.c., whose partner is Bożena Licht, Secretary of the Parent s Supervisory Board. Page

26 Interim condensed consolidated financial statements for the three months ended March 31st 2017 The agreement with PDH Polska S.A. was executed on September 12th During the three months ended March 31st 2017, the parties to the agreement executed transactions with a value of PLN 66 thousand. As at March 31st 2017, the balance of the transactions was PLN 17 thousand. The agreement with Zarząd Morskiego Portu Police Sp. z o.o. was executed on March 21st In the three months ended March 31st 2017, no transactions were executed between the parties to the agreement. c) Significant related-party transactions executed by the Group. Transactions with the following entities are considered related-party transactions of the Grupa Azoty Police Group: companies of the Grupa Azoty Group, companies of the Grupa Azoty ZAK Group, companies of the Grupa Azoty PUŁAWY Group, companies of the Grupa Azoty PKCh Group, and with the associated and non-consolidated companies of the Grupa Azoty Police Group. The most important transactions executed by the Grupa Azoty Police Group with its related parties in the period January March 2017 were the following: sale of liquid ammonia to Grupa Azoty S.A. for PLN 22,000 thousand, sale of urea and fertilizers to Agrochem Puławy Sp. z o.o. for PLN 6,909 thousand, sale of urea to Grupa Azoty Zakłady Azotowe Kędzierzyn S.A. for PLN 955 thousand, purchase of liquid sulfur from Grupa Azoty Kopalnie i Zakłady Chemiczne Siarki Siarkopol S.A. for PLN 7,707 thousand, purchase of ammonium sulfate from Grupa Azoty Zakłady Azotowe Puławy S.A. for PLN 8,939 thousand. Moreover: a) Grupa Azoty S.A. granted the following loans to the Parent: on September 14th 2015, a PLN 104,000 thousand loan to finance the Company s capital expenditure, under the intragroup financing agreement of April 23rd As at March 31st 2017, the amount outstanding under the agreement was PLN 48,000 thousand; on September 14th 2015, a PLN 60,000 thousand loan to finance the share capital of the new subsidiary PDH Polska Spółka Akcyjna, under the intragroup financing agreement of April 23rd As at March 31st 2017, the amount outstanding under the agreement was PLN 20,000 thousand. b) In the three months ended March 31st 2017, the Parent disbursed two tranches under the loan granted in 2014 to its subsidiary Supra Agrochemia Sp. z o.o., in an amount of PLN 463 thousand. The loan is to be repaid by December 31st Events after the reporting period that could affect financial results in the future There were no reportable events subsequent to the end of the reporting period that could potentially affect the Group s future financial performance Dividends In the three months ended March 31st 2017, the Parent and the Group companies did not pay any dividends. Page

27 Interim condensed consolidated financial statements for the three months ended March 31st Seasonality of operations Seasonality of the Parent s operations is seen mainly on the markets for mineral fertilizers and pigments. Mineral fertilizers market The end of the first quarter and beginning of the second quarter of each year (March and April) as well as the third quarter of each year (August and September) are periods of increased activity in the agricultural sector, when demand for mineral fertilizers is high. In addition, on the Parent s key markets (Poland and Europe), the periods when fertilizers are purchased are the same. The seasonality of the fertilizers market is mitigated by various distribution and commercial efforts (including exports outside Europe), which ensure stable and continuous sale of fertilizers. Titanium white market In the Parent s key markets, which are Poland and Europe, the highest demand for titanium white is observed in spring and summer (second and third quarter), driven by increased demand for paints and varnishes in the construction industry. Sales of titanium white usually decline during the winter season in the fourth and first quarter of each year. Titanium white remains a seasonal product, but given its widespread application, demand for this product chiefly depends on general market conditions. Chemicals For other chemicals manufactured by the Parent (urea, AdBlue, Fespol), seasonality virtually does not occur or may occur to a limited extent and its effect on the Parent s performance is insignificant. Page

28 III. INTERIM CONDENSED SEPARATE FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31ST 2017, PREPARED IN ACCORDANCE WITH IAS 34 INTERIM FINANCIAL REPORTING AS ENDORSED BY THE EUROPEAN UNION

29 Grupa Azoty Zakłady Chemiczne Police S.A. Interim condensed separate financial statements for the three months ended March 31st 2017 STATEMENT OF THE MANAGEMENT BOARD The Management Board of Grupa Azoty Zakłady Chemiczne Police Spółka Akcyjna presents interim condensed separate financial statements for the three months ended March 31st 2017, comprising: Condensed separate statement of profit or loss and other comprehensive income for the period January 1st March 31st 2017, Condensed separate statement of financial position as at March 31st 2017, Condensed separate statement of changes in equity for the period January 1st March 31st 2017, Condensed separate statement of cash flows for the period January 1st March 31st 2017, Supplementary information to the interim condensed separate financial statements. These interim condensed separate financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting, as endorsed by the European Union, and give a fair and clear view of the financial position and performance of the Company. Signatures of the Members of the Management Board Wojciech Wardacki, Ph.D. President of the Management Board Tomasz Panas Vice President of the Management Board Włodzimierz Zasadzki, Ph.D. Vice President of the Management Board Anna Tarocińska Member of the Management Board Person in charge of maintaining accounting records Józefa Żurawska Chief Accountant Police, May 10th 2017 Grupa Azoty Zakłady Chemiczne Police S.A.Page

30 Grupa Azoty Zakłady Chemiczne Police S.A. Interim condensed separate financial statements for the three months ended March 31st 2017 Condensed separate statement of profit or loss and other comprehensive income Jan 1 Mar unaudited Jan 1 Mar unaudited Revenue 695, ,198 Cost of sales (571,307) (537,173) Gross profit 123, ,025 Selling and distribution expenses (27,939) (23,906) Administrative expenses (35,015) (40,059) Other income 1,469 1,026 Other expenses (666) (1,220) Operating profit 61,722 82,866 Finance income Finance costs (6,849) (3,007) Net finance income/(costs) (5,929) (2,453) Profit before tax 55,793 80,413 Income tax (12,144) (16,102) Net profit 43,649 64,311 Total profit or loss and other comprehensive income 43,649 64,311 Earnings per share: Basic (PLN) Diluted (PLN) The supplementary and explanatory notes are an integral part of these interim condensed separate financial statements. Grupa Azoty Zakłady Chemiczne Police S.A.Page

31 Grupa Azoty Zakłady Chemiczne Police S.A. Interim condensed separate financial statements for the three months ended March 31st 2017 Condensed separate statement of financial position as at Mar unaudited as at Dec audited Assets Non-current assets Property, plant and equipment 1,249,303 1,227,480 Perpetual usufruct of land 3,524 3,536 Intangible assets 20,984 21,891 Investment property 25,901 25,901 Shares 186, ,376 Other receivables 3,208 3,321 Deferred tax assets 41,165 43,965 Total non-current assets 1,530,461 1,512,470 Current assets Inventories 229, ,318 Property rights 31,262 37,993 Other financial assets 11,402 10,812 Derivatives 26 2,189 Trade and other receivables 186, ,207 Cash and cash equivalents 61,823 39,939 Total current assets 520, ,458 Total assets 2,051,119 2,000,928 The supplementary and explanatory notes are an integral part of these interim condensed separate financial statements. Grupa Azoty Zakłady Chemiczne Police S.A.Page

32 Grupa Azoty Zakłady Chemiczne Police S.A. Interim condensed separate financial statements for the three months ended March 31st 2017 Condensed separate statement of financial position (continued) as at Mar unaudited as at Dec audited Equity and liabilities Equity Share capital 750, ,000 Retained earnings, including: 353, ,624 Profit for the period 43,649 63,983 Total equity 1,103,273 1,059,624 Liabilities Borrowings 205, ,890 Other financial liabilities 3,340 3,544 Employee benefit obligations 53,350 53,350 Provisions 122, ,436 Trade and other payables Grants 13,077 13,402 Total non-current liabilities 397, ,872 Borrowings 147,627 74,913 Other financial liabilities 1,651 1,791 Employee benefit obligations 6,988 6,988 Provisions 9,450 9,450 Current tax liabilities 3,254 9,551 Trade and other payables 362, ,438 Grants 18,396 1,301 Total current liabilities 550, ,432 Total liabilities 947, ,304 Total equity and liabilities 2,051,119 2,000,928 The supplementary and explanatory notes are an integral part of these interim condensed separate financial statements. Grupa Azoty Zakłady Chemiczne Police S.A.Page

33 Grupa Azoty Zakłady Chemiczne Police S.A. Interim condensed separate financial statements for the three months ended March 31st 2017 Condensed separate statement of changes in equity for the period ended March 31st 2017 Share capital Retained earnings Total equity Balance as at January 1st , ,624 1,059,624 Profit or loss and other comprehensive income Net profit - 43,649 43,649 Other comprehensive income Total profit or loss and other comprehensive income - 43,649 43,649 Balance as at March 31st 2017 (unaudited) 750, ,273 1,103,273 for the period ended March 31st 2016 Share capital Retained earnings Total equity Balance as at January 1st , ,878 1,166,878 Correction of prior period error - (169,508) (169,508) Balance as at January 1st 2016 after adjustments 750, , ,370 Profit or loss and other comprehensive income Net profit - 64,311 64,311 Other comprehensive income Total profit or loss and other comprehensive income - 64,311 64,311 Balance as at March 31st 2016 (unaudited) 750, ,681 1,061,681 for the year ended December 31st 2016 Share capital Retained earnings Total equity Balance as at January 1st , ,878 1,166,878 Correction of prior period error - (169,508) (169,508) Balance as at January 1st 2016 after adjustments 750, , ,370 Profit or loss and other comprehensive income Net profit - 63,983 63,983 Other comprehensive income - (1,729) (1,729) Total profit or loss and other comprehensive income - 62,254 62,254 Balance at December 31st 2016 (audited) 750, ,624 1,059,624 The supplementary and explanatory notes are an integral part of these interim condensed separate financial statements. Grupa Azoty Zakłady Chemiczne Police S.A.Page

34 Condensed separate statement of cash flows Jan 1 Mar unaudited Jan 1 Mar unaudited Cash flows from operating activities Profit before tax 55,793 80,413 Adjustments 28,077 22,086 Depreciation and amortisation 24,090 21,760 Recognition of impairment losses on property, plant and equipment 1 - (Profit)/loss from investing activities (277) 215 Interest, foreign exchange gains or losses 2, Change in fair value of financial assets at fair value through profit or loss 2,163 - Operating profit before changes in working capital 83, ,499 Changes in trade and other receivables (40,807) (59,610) Changes in inventories and property rights 10,095 (36,913) Changes in trade and other payables (44,635) (44,823) Change in provisions, grants and employee benefit obligations 21,074 15,977 Cash from operating activities 29,597 (22,870) Net cash provided by/(used in) operating activities 29,597 (22,870) The supplementary and explanatory notes are an integral part of these interim condensed separate financial statements.

35 Grupa Azoty Zakłady Chemiczne Police S.A. Interim condensed separate financial statements for the six and three months ended June 30th 2016 Condensed separate statement of cash flows (continued) Jan 1 Mar unaudited Jan 1 Mar unaudited Cash flows from investing activities Proceeds from sale of property, plant and equipment, intangible assets and investment property Acquisition of property, plant and equipment, intangible assets and investment property (66,257) (40,918) Revenue from lease of investment property Loans (1,688) - Other disbursements (52) (342) Net cash provided by/(used in) investing activities (67,643) (41,035) Cash flows from financing activities Proceeds from borrowings 73,291 29,086 Payment of borrowings (9,140) (9,549) Interest paid (2,789) (2,049) Payment of finance lease liabilities (728) (1,132) Other proceeds Net cash provided by/(used in) financing activities 60,904 16,643 Net increase/(decrease) in cash and cash equivalents 22,858 (47,262) Cash and cash equivalents at beginning of period 39,939 57,210 Effect of exchange rate fluctuations (974) 366 Cash and cash equivalents at end of period 61,823 10,314 The supplementary and explanatory notes are an integral part of these interim condensed separate financial statements. Page 35 of 66

36 Grupa Azoty Zakłady Chemiczne Police S.A. Interim condensed separate financial statements for the six and three months ended June 30th 2016 Supplementary information to the interim condensed separate financial statements These interim condensed separate financial statements of Grupa Azoty Zakłady Chemiczne Police Spółka Akcyjna (the Company ) should be read in conjunction with the interim condensed consolidated financial statements of the Grupa Azoty Zakłady Chemiczne Police Spółka Akcyjna Group for the three months ended March 31st 2017 and the audited separate financial statements of Grupa Azoty Zakłady Chemiczne Police Spółka Akcyjna for the financial year ended December 31st The accounting policies applied in these interim condensed separate financial statements are the same as those applied in the full-year separate financial statements for In the opinion of the Management Board of Grupa Azoty Zakłady Chemiczne Police Spółka Akcyjna, notes to the interim condensed consolidated financial statements of the Grupa Azoty Zakłady Chemiczne Police Spółka Akcyjna Group contain all relevant information required to properly assess the Company s assets and financial position in the presented period. Page 36 of 66

37 VI. MANAGEMENT S DISCUSSION AND ANALYSIS OF THE GRUPA AZOTY ZAKŁADY CHEMICZNE POLICE GROUP S PERFORMANCE IN Q1 2017

38 Management s discussion and analysis: Q General information on the Group As at March 31st 2017, the comprised Grupa Azoty Zakłady Chemiczne Police S.A. (the Parent, the Company ) and: nine subsidiaries (in which Grupa Azoty Zakłady Chemiczne Police S.A. held ownership interests above 50%), including one company in liquidation, one indirect subsidiary, two associates (in which the Company holds ownership interests below 50%), including one in liquidation bankruptcy. For a description of the organisation of the Parent and presentation of the Group subsidiaries, see Section 1 of the Directors Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. and the in the twelve months ended December 31st The Company has for decades been a leading European manufacturer of fertilizers and one of the largest Polish chemical companies. High sales to external markets make it also one of the largest Polish exporters. The Company s advantages include a titanium white unit of a type unique in Poland, the size of its ammonia, phosphoric acid and sulfuric acid production, as well as strong position in compound mineral fertilizers. Internationally, the Company is recognised not only for its fertilizer production and sales volumes, but also for contributing to progress in the chemical industry and thus to the development of global agriculture. The Company has been successfully marketing new compound fertilizers, best suited to the mineral content of soil, and thus most effective in application and safe for the environment. The wide product range and the ability to customise products have enabled the Company to market its fertilizers in Poland and abroad, on several continents. The Company pays due regard to CSR matters, engaging in projects that support local communities and regional development. Liaising with local authorities, Grupa Azoty Zakłady Chemiczne Police S.A. supports vocational education, with a particular focus on professions useful to the Company. The Company has also established links with higher education institutions, sharing expertise with students writing their theses in chemistry, environmental protection, management and marketing. Some of those students are subsequently employed at the Police plant. Table 1. Parent s interests in subsidiaries as at March 31st 2017 Registered % of shares held by the Parent Company Share capital office/address directly indirectly Grupa Azoty Police Serwis Sp. z o.o. Koncept Sp. z o.o. Supra Sp. z o.o. Transtech Usługi Sprzętowe i Transportowe Sp. z o.o. Grupa Azoty Africa S.A. ZMPP Sp. z o.o. PDH Polska S.A. ul. Kuźnicka 1, Police, Poland ul. Kuźnicka 1, Police, Poland ul. Monopolowa 6, Wrocław, Poland ul. Kuźnicka 1, Police, Poland Route de Ngor Villa No. 12, Dakar, Senegal ul. Kuźnicka 1, Police, Poland ul. Kuźnicka 1, Police, Poland 9, , XOF 132,000 thousand 9, , , Page 38 of 66

39 Management s discussion and analysis: Q African Investment Group S.A. (AFRIG S.A.) Infrapark Police S.A. w likwidacji (in liquidation) Budchem Sp. z o.o. w upadłości likwidacyjnej (in liquidation bankruptcy) Kemipol Sp. z o.o. Route de Ngor Villa No. 12, Dakar, Senegal ul. Kuźnicka 1, Police, Poland ul. Moczyńskiego 8/10, Szczecin, Poland ul. Kuźnicka 6, Police, Poland XOF 340,000 thousand 9,559 1 /14, , , AFRIG Trade SARL Route de Ngor Villa No. 12, Dakar, Senegal XOF 33,000 thousand Financial condition and assets 2.1. Assessment of non-recurring factors and events having a material impact on the Group s operations and financial performance Dividends On March 20th 2017, the Management Board passed a resolution to propose to the Annual General Meeting that a dividend of PLN 31,500 thousand be paid to the Company s shareholders from the net profit earned in the period January 1st December 31st The proposal was approved by the Supervisory Board 4. Court registration of share capital increase at subsidiary On March 29th 2017, the Company s Management Board decided to acquire up to 5,200,000 Series C new registered shares in PDH Polska S.A. and on March 31st 2017 the Company s Supervisory Board gave its consent to the acquisition 5. On April 5th 2017, the General Meeting of PDH Polska S.A. passed a resolution to increase the company s share capital by way of issue of 5,200,000 new shares. Of that number, the Company intends to take up, on the first date for exercise of pre-emptive rights, 2,917,875 shares with a par value and issue price of PLN 10 per share Market overview FERTILIZERS Poland The Agency for Restructuring and Modernisation of Agriculture disbursed the final tranches of direct subsidies for A total of PLN 12.90bn out of PLN 14.81bn (approximately 87%) was planned to be disbursed by the end of March. The disbursement of subsidies was an important incentive for the cash-strapped agricultural market. Compared with previous years, more farmers purchased means of production on a deferred payment basis. The number of farmers in arrears with payments also grew. 1 Share capital of Infrapark Police S.A. w likwidacji (in liquidation) as disclosed in its balance sheet in accordance with PAS. 2 Share capital of Infrapark Police S.A. w likwidacji (in liquidation) as disclosed in the National Court Register. 3 The Company reported on the above developments in Current Report No. 14/2017 Management Board dividend recommendation, dated March 20th The Company reported on the above developments in Current Report No. 17/2017 Approval by the Supervisory Board of Grupa Azoty Zakłady Chemiczne Police S.A. of dividend recommendation, dated March 31st The Company reported on the above developments in Current Report No. 16/2017 Resolutions by the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A. concerning acquisition of shares in PDH Polska S.A., dated March 29th 2017, and in Current Report No. 18/2017 Approval by the Supervisory Board of Grupa Azoty Zakłady Chemiczne Police S.A. of acquisition of shares in PDH Polska S.A., dated March 31st Page 39 of 66

40 Management s discussion and analysis: Q In Q1 2017, the price of wheat was rising, but the sales volumes were not very high. High-protein wheat for export sales was the best-selling product. Rapeseed, whose price was falling steadily, was in demand on the market. Agricultural producers showed interest in signing contracts for the next harvest period. While the prices of new rapeseed were much lower than current prices, the contract prices of wheat were quite attractive and approximated current market prices. Following the abolition of sugar beet production quotas, farmers fear price declines and unfavourable contracts with sugar factories. Europe and the world The prices of wheat and corn on the MATIF exchange in Paris did not demonstrate significant volatility in January, and February saw their increase. In March, the prices of agricultural produce on the Paris exchange started to decline. Futures and forward contracts started to lose value as of March 6th when the prices of wheat and corn hit highs not seen for many months, and the price of rapeseed came close to its record high in two and a half years. Price slumps on the Paris exchange were a consequence of upward trend reversal and price declines on the Chicago exchange. In its March report, USDA raised its production forecast for grains and soybean. In mid-january, the situation on grain exchanges was stable, and the prices remained under pressure from record-high supply and stock levels. The area sown with new winter wheat in the United States has been the smallest in more than a hundred years, which might push up the price of wheat later during the season. This, however, is now offset by record-high global stocks of wheat and grains. Information on forecasts of record-high crops of soybean and corn in Brazil and wheat in Argentina began to pour in at the beginning of March. Earlier, Australia estimated that its wheat crops will reach record-high levels. In its March report (after reports of January and February, forecasting lower crops) USDA raised its forecasts of global grain and oilseed crops, which accelerated price declines on the Chicago exchange. Ammonia In January 2017, a strong upward trend in ammonia price was maintained, mainly due to the complete suspension of ammonia transit from Russia through Ukraine to the Yuzhny port (Black Sea) from December 22nd The average price of ammonia rose by approximately 25% relative to December Resumption of ammonia loading in the Yuzhny port in the Black Sea in early February curbed the growth in ammonia prices. In the first half of February, ammonia prices started to drop. The average price of ammonia fell by approximately 5% relative to January Figure 1. Ammonia and urea prices [USD/t] Ammonia Urea The price of ammonia was stable on most markets for the first three weeks of March. The last week of March saw indications of price increases in the United States and Asia, where demand outweighed supplies. Ammonia prices were also pushed up by the undersupply of ammonia that has persisted for a time. In March, the average price of ammonia was about 4% higher than in February. Urea In January 2017, urea prices continued on the upward trend first reported in December The key factor in the urea price growth in January was its limited supply from China (production reduced to 55%) and Ukraine (a number of urea production units were shut down). Urea price growth was also driven by demand rising before the approaching season of spring fertilizer Page 40 of 66

41 Management s discussion and analysis: Q application. In January, the average price of urea rose by approximately 12% relative to December In February, importers from the United States, Brazil and Europe began to reduce their urea purchases because of high prices and growing stocks. The global market was mainly affected by the situation in the US market, where port warehouses were overfilled with urea, and farmers showed little interest in urea purchases. Previously ordered imported ammonia carried by ships had to be sold on other markets. In February, the average price of ammonia fell by approximately 5% relative to January. Urea prices continued to decline throughout March due to lack of demand from end customers in the United States, Europe, South America and Middle America. Prices on global markets continued to grow despite a large tender for the supply of urea, announced by the Indian government and held in March for the first time in six months, where bidders competed by offering the lowest prices. In March, the average price of ammonia fell by approximately 9% relative to February. Fertilizers Poland November and December 2016 saw large sales of NPK fertilizers, driven by early disbursements of subsidies to farmers and price reductions by manufacturers. In January 2017, retail sales of both nitrogen and NPK fertilizers remained low due to weak demand from farmers. After a sluggish January, sales of NPK fertilizers rebounded in February. Sales growth was seen particularly in urea and nitrogen-sulfur fertilizers. In March, retailers reported strong demand for fertilizers. Favourable weather conditions in many regions of Poland were helpful during the first round of fertilizer application. Many farmers collected fertilizers purchased earlier and left for storage at the distributors. The prices of NPK fertilizers remained relatively stable in March. The supply of imported NPK fertilizers remained strong. NPK fertilizers imported from Norway, Finland, Russia and Belarus were available on a regular basis in Poland. Figure Prices of NPK, DAP [USD/t] NPK DAP Western Europe In Europe, low incomes in agriculture significantly reduced farmers purchasing power. The first quarter saw rather weak demand. A slight recovery in demand was seen from time to time only in some markets, such as Belgium, Ireland, and the UK. The prices of basic NPK fertilizers remained unchanged in January. In the UK, growing demand for NPK fertilizers for the first applications in early February drove up their prices. In France, growing demand caused Timac and Seco to put back in operation NPK fertilizer production units which had been stopped for scheduled maintenance in December Despite poor sales of NPK fertilizers on the European markets, in February some manufacturers increased the prices of standard NPK fertilizers by EUR 5 10 per tonne. There was growing demand among farmers for NPK blending fertilizers, as their prices are usually 10 15% lower than the prices of compound NPK fertilizers. Page 41 of 66

42 Management s discussion and analysis: Q DAP fertilizers In December 2016, DAP prices fell to a low last recorded in Low stocks of fertilizers before the spring application period and growing demand on many markets encouraged manufacturers to raise fertilizer prices in January and February. Also the continued manufacturing and shipment constraints in the United States, China and Morocco, which began in the autumn of 2016, were among the causes of the situation on the DAP/MAP market. On many markets, stocks accumulated ahead of the spring application season were low, hence increased purchases in early In the second half of March, the season for DAP in China ended, and the supply of Chinese DAP began to grow on global markets. The same held true for the supply of DAP and other phosphate fertilizers (MAP, NP, NPK) from new production units in Morocco. After a period of growth between December 2016 and February 2017, in March the price of DAP showed a downward trend as most global manufacturers started to lower the price in March in order to sell their planned April output. Between January and February 2017, the average price of DAP went up by approximately 12% and dropped by about 3% in March. RAW MATERIALS FOR THE PRODUCTION OF FERTILIZERS Phosphate rock In the middle of Q (February), prices of phosphate rock fell again, approaching the 2009 levels. After the February drop, in March the prices stabilised. Potassium chloride After a period of stagnation and price stability in late 2016, January 2017 was a busy month for the potassium chloride market due to the need to sign new contracts for Q In Europe, potassium chloride producers raised their prices. In February 2017, prices of potassium chloride changed neither on European nor on global markets. To reduce the accumulated stocks and support the upward trend in prices, a major US producer of potassium chloride ceased production entirely in one of its mines in January and reduced production in some other mines in January and February. In the second half of March, most markets saw a further increase in the prices of potassium chloride, a trend driven mainly by Brazil and other Latin American countries, where demand was on the rise. The United States was the only market where price levels either did not change or dropped slightly, depending on the region. Some leading suppliers on the Chinese market began negotiating large contracts for The new contract prices they offered to their customers were 14% higher than in Given their imported potassium chloride stocks of 2m tonnes, Chinese buyers have been hesitant to make the final decision, and new contracts are unlikely to be signed any time soon. It is crucial that the price of potassium chloride for China be set for the remainder of the year as it plays a key role as the usual reference price for exporters and importers in other markets. Sulfur Contract prices of liquid sulfur in Europe did not change in Q quarter on quarter. In other markets, e.g. in the Persian Gulf countries, prices of sulfur slightly dropped (January) and rose (March). Producers from the Persian Gulf increased their prices for March deliveries. In Q1 2017, the global supply of sulfur declined by 700,000 tonnes as a result of the failure of an FGD plant in Russia (Gazprom) and scheduled maintenance of FGD plants in Saudi Arabia and Kuwait. Gas In Q1 2017, the average price of natural gas on both the Leipzig exchange (EEK) and the Warsaw (TGE) exchange was trending upwards. However, in early February, the trend reversed and the prices began falling. The average price of natural gas on TGE in Q was up by 7.65% quarter on quarter and by 33.22% year on year. PIGMENTS Titanium white In Q1 2017, most global markets recorded an increase in the prices of titanium white. The average price of titanium white in most markets (Europe, United States, Asia) rose by 5%, while in China it surged by approximately 20%. Titanium white was becoming increasingly unavailable in spot trade. Page 42 of 66

43 Management s discussion and analysis: Q The price rise was mainly attributable to production cuts, seasonal increases in demand and low levels of producers stocks. Figure Market prices of titanium white [EUR/t] Titanium white In early February, a major failure of a Huntsman plant in Pori, Finland, led to production being halted there for months. The plant s output accounted for about 10% of supplies on European markets. Approximately 15% of Chinese production plants were decommissioned for environmental reasons, and production capacity in China accounts for 30% of global capacities. RAW MATERIALS FOR THE PRODUCTION OF PIGMENTS Ilmenite and titanium slag After a slump in early 2016, the prices of raw materials (ilmenite, titanium slag) for the production of titanium white kept trending upwards. Ilmenite and titanium slag production cuts in China and other markets resulted in the prices of those raw materials rising also in Q On the representative Chinese market, the prices of ilmenite soared respectively by 17% and 18% in January month on month and by another 15% in Q for both commodities. CHEMICALS Apart from titanium white, key chemicals produced for sale by the Company include ammonia, technical-grade urea and iron sulfate. Technical-grade urea is used mainly to produce glues for the furniture industry and to prepare the NOXY (AdBlue ) solution. In Q1 2017, the demand for urea used in glue production was stable. In the NOXY segment, despite strong competition, both domestic sales and exports increased year on year, which was attributable to the Grupa Azoty Group s joint strategy for the RedNOX segment (range of products designed to reduce nitric oxide emissions in the automotive and industrial segments): NOXY (32.5% urea solution, Adblue ); Likam (ammonia water); Pulnox (40% technicalgrade urea solution). Iron sulfate is a by-product of titanium white and steel production. In Q1 2017, the demand for iron sulfate remained high across European markets. This trend was particularly reinforced following the failure of the titanium white production plant in Pori, Finland (early February 2017), whose annual output of iron sulfate was approximately 390,000 tonnes. Relative to Q4 2016, Q saw a slightly lower demand for iron sulfate from the Polish cement industry and stronger domestic demand for fertilizer-grade iron sulfate. Page 43 of 66

44 Management s discussion and analysis: Q Key financial and economic data Consolidated financial information The Group s key achievements in Q included: optimum results achieved in a challenging market environment, increase in sales volumes and maximum utilization of the Company s production capacity, positive EBIT and higher (by 25%) revenue of the Pigments segment compared with the corresponding period of the previous year, an 11% year-on-year drop in administrative expenses, continued work on the key project Construction of a PDH propylene unit with infrastructure. In the reporting period, the Group posted a net profit of PLN 46,875 thousand, with EBIT at PLN 59,784 thousand and EBITDA at PLN 84,243 thousand. A year-on-year drop in gross profit was largely attributable to the continuing challenging situation on the global fertilizer market. The prices of compound fertilizers plunged despite positive changes in the prices of raw materials for the production of phosphate fertilizers, which proved insufficient to offset the steep decline in product prices. Furthermore, a 24% year-on-year surge in the prices of natural gas, a key raw material, had a direct bearing on results and margins, especially in the nitrogen fertilizer area. Figure 4 EBITDA main drivers 20,768 17,915 5,130 2,441 64,596 positive effect on EBITDA negative effect on EBITDA 4, ,618 84,243 EBITDA Q lower cost of sales higher sales volume lower administrative expenses higher net other income lower product prices higher selling and distribution expenses EBITDA Q Table 2 Consolidated financial data Item Q Q change % change Revenue 699, ,530 12, Cost of sales 570, ,783 38, Gross profit 128, ,747-26, Selling and distribution expenses 27,939 23,906 4, Administrative expenses 41,955 47,085-5, Net profit on sales 58,818 83,756-24, Other income/(expenses) EBIT 59,784 84,497-24, Finance income/(costs) -3,408-2,244-1, Share of profit/(loss) of equity-accounted associates 3,067 2, Profit before tax 59,443 84,899-25, Income tax 12,568 16,727-4, Net profit/loss 46,875 68,172-21, EBIT 59,784 84,497-24, Depreciation and amortisation 24,459 22,121 2, EBITDA 84, ,618-22, Page 44 of 66

45 Management s discussion and analysis: Q In the reporting period, revenue was higher by PLN 12,762 thousand relative to the corresponding period of the previous year. Despite the continuing challenging market environment of the Fertilizers Segment, the Company managed to offset the downward trend in product prices by taking effective measures to increase sales volumes. Q saw a year-on-year rise in selling and distribution expenses driven mainly by growing fertilizer sales, including a higher number of transactions in which the Company was responsible for transport logistics, an arrangement which translates into both higher costs and higher revenue. The decisions and measures taken by the Management Board to optimise administrative expenses resulted in their reduction by 11% (PLN 5,130 thousand) year on year Segments financial results In Q1 2017, the Group s sales performance was primarily affected by conditions on the Fertilizers Segment s market, in particular in the area of phoshpahte fertilizers, where a global downturn in product prices was only partially offset by falling prices of key raw materials. Table 3 EBIT by segment in Q Item Fertilizers Pigments Other Activities Revenue from external sales 598,105 88,893 12,294 Share [%] 85% 13% 2% EBIT 45,963 14, Table 4 EBIT by segment in Q Item Fertilizers Pigments Other Activities Revenue from external sales 605,456 71,105 9,969 Share [%] 88% 10% 2% EBIT 86,097-2, In addition, changes in the prices of nitrogen fertilizers were insufficient to offset the soaring prices of natural gas, a key raw material for the Fertilizers Segment, whose market prices rose by as much as 43% year on year. The negative impact of changes in the prices of natural gas on the Segment s performance in the comparative periods is estimated at nearly PLN 20m. Page 45 of 66

46 Management s discussion and analysis: Q Figure 5.5 Revenue by segment Q Fertilizers Pigments Other Activities Q Figure 6 Revenue by segment 1Q % 13% Fertilizers Pigments Other 85% 1Q % 10% Fertilizers Pigments Other The shares of individual segments in total revenue changed slightly year on year: the Fertilizers Segment s share dropped by 3pp, while that of the Pigments Segment grew by 3pp. FERTILIZERS In Q1 2017, the Fertilizers Segment s revenue amounted to PLN 598,105 thousand, accounting for 85% of the Group s revenue. The segment s EBIT was PLN 45,963 thousand. The segment s weakened performance was primarily due to the challenging market environment, in particular in the area of phosphate fertilizers, which had continued since Q The reported prices of NPK fertilizers decreased by an average of 15% year on year. The effect of the declining product prices was not fully offset by concurrent reductions in the prices of strategic raw materials. 88% Page 46 of 66

47 Management s discussion and analysis: Q Figure Revenue of the Fertilizers Segment Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Sales of nitrogen fertilizers and ammonia had a positive impact on the Fertilizers Segment s overall performance despite a 24% year-on-year surge in the prices of natural gas, a key raw material for the manufacture of those products. The negative impact of changes in the prices of natural gas on the Segment s performance in the comparative periods is estimated at nearly PLN 20m (a decline of 30%). Q also saw an increase of 29% and 13% year on year in the sales of ammonia and urea respectively. Domestic market accounted for approximately 62% of the Fertilizers Segment s total sales. PIGMENTS In Q1 2017, the Pigments Segment s revenue amounted to PLN 88,893 thousand, accounting for 13% of the Group s revenue. The 25% year-on-year hike in the Segment s revenue was largely attributable to the Company taking maximum advantage of the opportunities that arose in its internal and external environment. Year on year, the sales volume of titanium white grew by 13%, with sales prices higher by 11%. Foreign markets accounted for 56% of the Segment s total revenue. Figure 8. Revenue of the Pigments Segment Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q The reversal of the long-term downward trend in the prices of titanium white was due to production cuts in China, failure of Huntsman s production plant in Europe, and a seasonal increase in demand. Q was another quarter in which the Segment reported positive EBIT. The last time the Segment posted higher EBIT than in Q was Q OTHER ACTIVITIES Revenue from Other Activities amounted to PLN 12,294 thousand in Q1 2017, accounting for 2% of the total revenue, with EBIT lower than in the corresponding period of the previous year. Page 47 of 66

48 Management s discussion and analysis: Q Sales by product group In Q1 2017, the Company s revenue from sales of products and services was up by 1.6% year on year, amounting to PLN 693,328 thousand. Accounting for 56% of the Company s total revenue, compound fertilizers are a key category with the largest share in product sales. The total revenue from sales of fertilizers (NPK, NP, NS) in Q fell by 7.7% year on year, amounting to PLN 393,690 thousand. Sales by volume grew by 6%, while the selling prices of compound fertilizers dropped by 15%. In Q1 2017, revenue from sales of urea amounted to PLN 107,285 thousand, having risen 6% year on year. The growth was mainly attributable to a 13% increase in the sales volume, which surpassed a 6% decrease in prices. Figure Revenue by product group Compound fertilizers Urea Titanium white In Q1 2017, revenue from sales of titanium white amounted to PLN 85,305 thousand, having risen 25% year on year. The sales volume grew by 13%, and the prices by 11%. Chemicals Other Q Q Figure 10. Revenue by product group Q Titanium white 12% Chemicals 14% Other 2% Urea 16% Compound fertilizers 56% Page 48 of 66

49 Management s discussion and analysis: Q Q Titanium white 10% Chemicals 11% Other 2% Urea 15% Compound fertilizers 62% A growth of 25% year on year in the sales of chemicals, a product group where ammonia accounts for the largest share in sales by value, was mainly attributable to an over 29% surge in ammonia sales by volume, with price levels remaining unchanged. Revenue classified as Other accounts for around 2% of the Parent s total revenue and is derived mainly from occasional sales of merchandise and services Operating expenses In Q1 2017, operating expenses were PLN 656,376 thousand, up PLN 39,466 thousand (6%) year on year. The most important item of operating expenses was the cost of raw materials and consumables used, most of which were generated by the Parent. The main cause of the year-onyear increase in operating expenses was the higher output of ammonia, compound fertilizers and urea as well as a higher price of the key feedstock natural gas. The increase in taxes and charges was mainly attributable to higher costs of CO2 emission allowances and property rights (in the previous year, Q1 costs were reduced by the settlement for 2015), and higher waste storage fees, related to increased production of phosphoric acid. The completion and placement in service of investment projects as well as the completion of major overhaul work were reflected in higher depreciation. Salaries and wages rose year on year, chiefly due to the execution of wage agreements. Additionally, it should be noted that administrative expenses fell by 11% (PLN 5,130 thousand) year on year as a result of reduction of fixed costs (mainly costs of advisory and legal services) and advertising expenses. Table 5. Operating expenses by nature Item Q Q change % change Depreciation and amortisation 24,459 22,121 2, Raw materials and consumables used 461, ,378 28,274 7 Services 43,342 43, Salaries and wages, including overheads, and other benefits 84,799 79,334 5,465 7 Taxes and charges 27,219 22,523 4, Other expenses by nature 14,905 16,505-1, Total 656, ,910 39,466 6 Other expenses Other expenses (excluding raw materials and consumables used) remained stable year on year and accounted for 30% of total operating expenses. Page 49 of 66