Today Acron (Moscow Exchange and LSE: AKRN) has released its consolidated IFRS financial statements for 9M 2016.
- Revenue was RUB 66,785 million (USD 977 million), down 3% year-on-year (9M 2015: RUB 68,715 million)
- EBITDA* was down 26% year-on-year to RUB 22,347 million (USD 327 million) (9M 2015: RUB 30,057 million)
- EBITDA margin was 33%, against 44% year-on-year
- Net profit was up 2% year-on-year to RUB 14,539 million (USD 213 million) (9M 2015: RUB 14,322 million)
- Net debt as at the end of the reporting period was up 16% to RUB 59,196 million (31 December 2015: RUB 51,185 million). In dollar equivalent, net debt was up to USD 937 million
- Net debt/LTM EBITDA** was 1.8, against 1.2 as of 31 December 2015.
Operating Results of the Group***
- Output of key products was 4.700 million tonnes, up 13% year-on-year
- Sales of key products totalled 4.608 million tonnes, up 11% year-on-year.
Chair of Acron’s Board of Directors Alexander Popov commented on the results for 9M 2016:
“The third quarter was complicated for many fertiliser producers worldwide. Prices hit their record low in a decade, and many facilities had to reduce output.
“Market conditions notwithstanding, Acron group robustly resisted the global markets storm. After selling our Chinese facility, we focused on improving performance at our Russian production facilities. We will benefit from temporary weakness in the markets by increasing our market share. All of the pieces are in place for this to happen: we have an excellent position in terms of cost of production, an effective team, favourable logistics, high-level vertical integration and considerable potential to boost output. We believe that with these advantages that we put in place over recent years, we will enter a new cycle as a more powerful and sustainable entity.
“We estimate that our Russian facilities’ sales will increase more than 14% and reach 6.5 million tonnes, which will completely offset the output of the facility we sold in China. In 2017, we expect our Russian facilities to ramp up production and boost sales to over 7 million tonnes. Our growth points in the years to come are development of the Oleniy Ruchey mine and operation of the new Ammonia-4 unit with increased conversion of its output into high value-added products”.
Notes on Key Items in the Financial Statements
In August 2016, the Group sold its subsidiary that holds 50.5% of shares in Chinese Hongri Acron and stopped consolidating its financial results. In the profit and loss statement, the Chinese facility’s operating results for 9M 2016 and 9M 2015 are recorded as a standalone item Loss from discontinued operations. Hongri Acron operating results were excluded from EBITDA for both the reporting period and the same period of the previous year. Key financials for the Chinese facility were also excluded from balance sheet items upon its sale.
The Group’s revenue for 9M 2016 was RUB 66,785 million, down 3% year-on-year. In the reporting period, average global fertiliser prices decreased between 16% and 33% year-on-year in dollar equivalent, which was largely offset by an 11% jump in sales (exclusive of Hongri Acron) and a 15% decline in the rouble exchange rate.
Average global indicative prices for the Group’s main products in 9M 2016 were: USD 304 per tonne FOB for NPK 16-16-16, USD 162 per tonne FOB for AN, USD 191 per tonne FOB for urea, and USD 140 per tonne FOB for UAN. Despite an 11% increase in sales, the cost of goods sold in the reporting period went up 10% year-on-year to RUB 31,783 million. Higher costs were somewhat restrained by lower potassium chloride prices.
Selling, general and administrative expenses were up 19%, mainly due to indexation of wages. Transportation expenses were up 21% due to the 11% increase in sales and indexation of railway tariffs in Russia.
Over 9M 2016, EBITDA was RUB 22,347 million, down 26% year-on-year. EBITDA margin was 33%, against 44% year-on-year. The Veliky Novgorod-based Acron and Dorogobuzh facilities operated at 30% and 29% margin, respectively. NWPC maintained a high level of 62% for EBITDA margin due to expanded operations and streamlined costs.
Based on 9M 2016 results, the Group posted a net exchange gain of RUB 3,074 million from revaluation of assets, loans and liabilities, against a loss of RUB 5,274 million year-on-year due to volatile RUB/USD exchange rate.
In the reporting period, the Group reduced its share in Polish Grupa Azoty S.A. from 20% to 19.8%. The subsequent reclassification of this investment resulted in the equity method not being applicable. Due to this, a loss of RUB 3,616 million was recorded in Result from suspension of use of equity investee method related to a decrease in the market price of Grupa Azoty S.A. shares. In addition, the share of Grupa Azoty S.A. profit accrued based on the equity method before the reclassification totalled RUB 1,544 million, against RUB 1,720 million year-on-year. This share of profit was excluded from EBITDA for both the reporting period and the same period of the previous year.
In the reporting period, Acron Group posted RUB 5,406 million in profit on sale of investments, which was mainly due to the sale of the stake in PJSC Uralkali.
Also in the reporting period, the loss from discontinued operations (operating results of Hongri Acron up until its sale) was RUB 1,623 million, against a loss of RUB 727 million year-on-year.
Net profit for 9M 2016 was up 2% year-on-year to RUB 14,539 million.
Over 9M 2016, net operating cash flow was down 54% to RUB 10,555 million (9M 2015: RUB 23,113 million) due to increased working capital and reduced profit from operations.
Net cash spent on investments in the reporting period was RUB 5,093 million, against RUB 9,346 million in 9M 2015. Capital investments were down 3% in the reporting period to RUB 9,900 million, from RUB 10,171 million in 9M 2015. Capital expenditures were partially offset by proceeds from the sale of available-for-sale investments.
Net cash spent on financing activities in 9M 2016 was RUB 11,214 million, against generated net cash of RUB 4,947 million in 9M 2015. Cash outflow was RUB 13.345 million in dividends paid in the reporting period and RUB 8,952 million spent to repurchase shares from minority shareholders (mainly the repurchase of a partner’s stake in the Talitsky potash project). Against these expenditures, there was a net increase of RUB 11,543 million in borrowings.
In the reporting period, net debt in rouble equivalent was up 16% year-on-year to RUB 59,196 million. The relative debt burden also increased, and net debt/LTM EBITDA was 1.8, against 1.2 at the beginning of the year. This increased debt burden was largely due to lower EBITDA and the repurchase of a stake in the Talitsky potash project, and this was partially offset by proceeds from the sale of investments.
In 3Q 2016, prices for nitrogen fertilisers hit a record low for the past several years, falling to USD 165 per tonne FOB Baltics for urea. Subsequently, the prices dramatically recovered, and in November urea prices reached their highest levels for 2016. This upward pressure on prices was affected by Chinese producers’ cost of production. Prices for coal – a key input for nitrogen fertilisers in China – increased considerably due to coal mine operating restrictions introduced by Chinese authorities in 2016. This resulted in a sharp rise in prices for thermal coal, which rose from CNY 450 in August to CNY 730 in November per tonne FOB China. We estimate that this factor alone increased the cost of urea production to USD 230 per tonne FOB at the most efficient Chinese producers, forcing them to raise prices and reduce exports. In November, prices rose to USD 230-240 per tonne FOB China. Regions other than China also saw higher prices. In November, urea prices in the Baltic States reached USD 220-230 per tonne FOB. Against this background, prices for other nitrogen products such as AN and UAN also increased.
With the aim of reining in volatile prices and preventing the coal market from overheating, Chinese authorities eased regulations on the sector and allowed mines to operate more days each year. The government is also encouraging long-term contracts with a base price of CNY 535 per tonne of thermal coal (5,500 kcal/kg). These measures are slowly decreasing coal prices. As of 1 January 2017, the Chinese government will also slash to zero export duties for urea, which in 2015 and 2016 were CNY 80 (USD 11.5) per tonne. Meanwhile, the yuan exchange rate is gradually weakening. All of these factors will lead to a lower cost of urea production in China, which we estimate will be USD 215 FOB China in January for producers that rely on coal.
In contrast, urea capacity utilisation in China decreased to 50% in late 2016. Urea exports from China in late 2016 hit a record low for the past several years. According to analysts, this low capacity utilisation is insufficient to meet even China’s domestic needs. Higher prices are required in order for less efficient producers to recover.
Ammonia prices fell considerably since mid-year due to new capacity introduced in the U.S. and Russia. It should be noted that the commercial ammonia market is fairly narrow, with sales totalling about 18 million tonnes annually. Consequently, even a relatively small increase in supply can dramatically affect prices. By October 2016, ammonia prices hit a record low since 2005 of USD 165 per tonne FOB Yuzhny, making it cheaper than urea. This inevitably resulted in production cutbacks in many regions and ammonia prices sharply rebounded. In late 2016, prices reached USD 260 per tonne FOB Yuzhny. We believe that further growth is limited by the cost of production in Europe.
NPK prices continued their gradual decline since the beginning of the year, but the NPK premium over basic products remains at a sustainable level.
* EBITDA is calculated as operating profit adjusted for depreciation of fixed and intangible assets, Forex gains or losses, and other non-monetary and non-core items.
** LTM EBITDA is EBITDA calculated for the past 12 months. *** For comparison purposes, the information is provided for the Group excluding Hongri Acron.
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