Public Joint Stock Company Acron (Moscow Exchange and LSE ticker AKRN) released its audited consolidated IFRS financial statements for 2016 today.Key Financials
- Revenue was down 3% year-on-year to RUB 89,359 million (USD 1,333 million) (2015: RUB 92,019 million)
- EBITDA* decreased 27% to RUB 29,856 million (USD 445 million) (2015: RUB 40,978 million)
- EBITDA margin was 33%, down from 45% year-on-year
- Net profit increased 53% year-on-year to RUB 25,525 million (USD 381 million) (2015: RUB 16,706 million)
- Net debt was up 1% to RUB 51,949 million (31 December 2015: RUB 51,185 million). In dollar equivalent, net debt was up 22% to USD 856 million from USD 702 million
- Net debt/EBITDA was 1.7, against 1.2 as of 31 December 2015. In dollar equivalent, Net debt/EBITDA was 1.9.
- Output of key commercial products was 6.489 million tonnes, up 14% year-on-year
- Sales of key products totalled 6.352 million tonnes, up 13% year-on-year
“The year 2016 was one of most challenging years for the global mineral fertiliser market over the past decade. Demand could not keep pace with increasing supply, and almost every market segment was oversupplied, which put pressure on prices. Prices for certain products like ammonia hit their lowest level since 2005.
However, 2016 was also a watershed year. We saw some longstanding trends broken after a price slump in Q3. This led to a spike in prices, so the year ended on a positive note. Urea exports from China decreased for the first time ever as Chinese producers became unable to compete due to high coal prices. Competition forced less efficient players out of the market and created a new balance. Acron Group finished the battle with record-high output of 6.5 million tonnes and even stronger confidence in the right choice of strategy.
The last year will go down in Acron Group’s history as the year the new Ammonia-4 unit was commissioned. It is no exaggeration to call this event a milestone for us. Immediately after the commissioning, we started noticing a huge synergistic effect of this process, even greater than we expected. Now we know that with sufficient key feedstock, output at the Group’s chemical facilities may show double-digit growth in the coming years.
In August 2016, we sold our stake in the Chinese plant Hongri Acron in order to focus on further development of our Russian production facilities and to capitalise on potential in the domestic fertiliser market. In 2016, our domestic sales increased 20% as Russia’s market outpaced the rest of the world.
We restructured our investment portfolio to focus on organic growth. Because of this, we sold our remaining stake in PJSC Uralkali at the beginning of the year. We also reduced our interest in Polish Grupa Azoty from 20% to 19.8%, which resulted in termination of equity accounting and its reclassification to investment available for sale.
The Talitsky potash mine project is still seeking partners and project financing. The Group is committed to its long-term goal to achieve vertical integration in potash feedstock and intends to complete this project; however, due to global market changes, we needed to shift our priorities. In this context, we bought out the stake of Eurasian Development Bank, a partner in this project.
With the Ammonia-4 project operating successfully and the first stage of the Oleniy Ruchey mine at design capacity, we have accomplished the relevant key objectives of the vertical integration strategy. Going forward, the Group’s strategy requires transformation. The focus of the new strategy will be on earning higher returns on invested capital while retaining a comfortable debt burden. Investments in the core business will continue through a larger number of projects with relatively low CAPEX and short payback periods. The Group will also pay more attention to marketing, market access and distribution. The Group expects to have an updated development strategy in place in 2017.
Having completed most of our major investment programme launched in 2005, we are optimistic about the Group’s ability to generate cash flows in the future. In this context, the Board of Directors recommended paying interim dividends for the first six months of 2016, thereby adding shareholder value. We are confident that Acron Group is in a position to pay higher dividends in the coming years, as it has already demonstrated, while maintaining financial stability”.
Notes on Key Items in the Financial Statements
Financial Highlights
Since the Chinese plant Hongri Acron was sold, its results were excluded from the continuing operations and presented as a separate line item in 2016 and 2015 profit and loss statements.
Revenue in 2016 was down 3% year-on-year to RUB 89,359 million. Higher sales and a weaker average RUB to USD exchange rate in 2016 positively affected the revenue dynamic. However, these factors were entirely offset by a decrease in global prices for the Group’s products.
Average global indicative prices for key products in 2016 were: USD 293 per tonne FOB for NPK 16-16-16 (down 18% year-on-year); USD 166 per tonne FOB for AN (down 25%); USD 139 per tonne FOB for UAN (down 30%); USD 194 per tonne FOB for urea (down 27%); USD 237 per tonne FOB for ammonia (down 39%). Averaged out, prices for Acron Group’s key products decreased 18-39%.
Based on the results of the reporting period, the cost of goods sold increased 20% year-on-year to RUB 45,311 million, largely due to a 13% increase in sales. In particular, natural gas expenses were up by 28% due to a 29% increase in ammonia output. Staff costs also went up. This increase in the cost of goods was partially compensated by lower prices for potash feedstock.
In 2016, selling, general and administrative expenses were up 19% year-on-year to RUB 7,806 million (2015: RUB 6,542 million) due to adjustment of rouble-denominated wages at the Group’s Russian companies and foreign currency-denominated staff costs, including at the Group’s foreign companies.
Transportation expenses in 2016 were up 15% due to increased sales and higher railway tariffs.
EBITDA decreased 27% year-on-year to RUB 29,856 million. EBITDA margin was 33%, down from 45% in 2015. Novgorod-based Acron and Dorogobuzh production segments operated with margins of 32% and 27%, respectively. NWPC’s (Oleniy Ruchey mine) EBITDA margin was the highest among the Group’s segments and reached 57%, up from 56% in 2015.
In Q2 2016, the Group reduced its share in Grupa Azoty S.A. from 20.0% to 19.8% and stopped applying equity accounting for this investment, which resulted in re-measurement of this investment down to the quotation prices from the date of loss of significant influence and reclassification to available for sale category. Therefore, the gain from derecognition of equity accounting investee in the amount of RUB 3,268 million was recognised in profit and loss. This gain attributable mainly to appreciation of Grupa Azoty S.A. value in rouble equivalent from the classification of as equity accounted investee in June 2014. Apart from that, the share in Grupa Azoty S.A. profit of RUB 1,544 million generated for the period until derecognition of equity accounted investee was recognised in the reporting period.
Due to the above factors, net profit for 2016 increased 53% year-on-year to RUB 25,525 million and was heavily influenced by a foreign exchange gain from revaluation of the Group’s foreign currency obligations and proceeds upon the disposal of portfolio investments.
Cash Flows
Net operating cash flows in the reporting period decreased 50% to RUB 18,102 million (2015: RUB 36,531 million), mainly due to lower global fertiliser prices. Management of working capital is the Group’s priority. During the reporting period, there was a release of RUB 1,119 million out of working capital, which positively affected the Group’s cash flow.
In 2016, net cash outflow on investing activities was RUB 6,545 million, against RUB 14,818 million in 2015. CAPEX was down 20% to RUB 12,128 million, against RUB 15,107 million in 2015. This change is related to completion of the active stage of the Group’s investment programme, specifically completion of Ammonia-4. At the same time, CAPEX was partially offset by proceeds from the sale of a 0.93% stake in Uralkali.
In 2016, net cash outflow on financial activity was RUB 10,611 million, against RUB 23,116 million in 2015. Cash outflow resulted from buyback of 9.1% of VPC shares held by Eurasian Development Bank in the Talitsky potash project and distribution of dividends. Cash inflow was due to an increase in loans. Net loan changes in 2016 were RUB 12,260 million, against RUB 16,504 million in 2015.
Debt Burden
As of 31 December 2016, the Group’s total debt on loans and borrowings due was down 3% to RUB 79,117 million, against RUB 81,606 million in 2015. Short-term and long-term borrowings were equal.
Net debt in the reporting year changed slightly, rising to RUB 51,949 million at the end of 2016, against RUB 51,185 million in 2015. However, the relative debt burden increased due to lower EBITDA, and net debt/EBITDA ratio was 1.7, against 1.2 in 2015.
Dividends
In the reporting year, the Group made two dividend distributions totalling RUB 13.3 billion. The 2015 annual general meeting approved distribution of annual dividends for 2015 in the amount of RUB 180 per share, which was 44% of the Group’s 2015 IFRS net profit. The Group also paid interim dividends for 6M 2016 in the amount of RUB 155 per share, or 49% of its IFRS net profit.
As of the date of publication of the IFRS statements, the Board of Directors has not issued a recommendation regarding the amount of dividends for the reporting year. The Group’s dividend policy calls for at least 30% of IFRS net profit to be distributed annually as dividends.
Market Trends
According to the IFA, global consumption of nitrogen fertilisers increased 1.9% in 2016. Urea remains the key product, with a 62% share in total production and consumption of nitrogen fertilisers.
Nitrogen fertiliser imports to Latin America increased due to recovery of demand after a slump in 2015. Demand also increased in Russia, where the agricultural sector is growing steadily. In India, while urea consumption remained high, urea imports decreased because of significant inventory at the beginning of the year coupled with an increase in domestic output. U.S. demand for imports was down due to the commissioning of new facilities and a greater degree of self-sufficiency.
In 2016, oversupply pushed nitrogen fertiliser prices to a long-term low. The reporting year was a turning point for China. Restrictions on coal production introduced by the Chinese government caused a surge in coal prices in second half of the year, which led to a significant increase in urea production costs for local producers later. Chinese urea producers had to cut output and increase prices. Capacity utilisation in China was approximately 70% in H1 2016, declined over in H2 2016 and dropped to 50% in December. Chinese urea exports decreased 35%, reaching a long-term low in the last two months of 2016. Urea FOB China prices increased from USD 190 in early August 2016 to USD 240-250 by the end of 2016. In this context, prices recovered in some other regions as well. The FOB Baltics price was up to USD 220, while in July 2016 it dropped to USD 170.
Prices continued to rise in early 2017, but China needed time to increase capacity utilisation, and the United States delayed commissioning several new production facilities. At the same time, global urea inventory was essentially low, and demand was high at the beginning of the spring sowing season. In February 2017, the price of urea was USD 260 (FOB Baltics).
The United States and other countries are expected to significantly increase their urea capacity, which will result in stronger competition. However, China’s production costs will continue to determine global prices because of the country’s imposing share in global urea production (approximately 40%) and exports (approximately 20%). Measures undertaken by the Chinese government to regulate coal production (a key component in the production cost for nitrogen-based fertilisers in China) are expected to be long-term and will keep coal prices higher than in H1 2016. Because of this factor, urea prices should remain over USD 200 (FOB China).
In 2016, the UAN premium to urea was under pressure from a 15% increase in U.S. output. U.S. imports were down 12%. UAN capacity in the United States was 12.5 mn t in 2015 and increased 1.5 mn t in 2016 when the new CF Industries facility in Donaldsonville, LA was commissioned. In 2017, OCI Iowa Fertilizer is expected to launch a new facility with capacity of 1.4 mn t. Despite stronger competition, Russian imports to the United States will continue because of Russian producers’ competitive edge. In addition to low production costs, Russian exporters can compete with new plants in the United States in terms of cost of delivery to coastal regions. The new U.S. plants are located deep in flyover country and supply products primarily to farms in the Corn Belt. It costs them more to deliver products to coastal areas over land than it costs Russian producers to send shipments by sea.
In 2016, AN remained a premium product. Consumption increased in Latin America and Africa as well as the United States, Uzbekistan, Russia and Ukraine. Imports to Brazil were up 14%. Almost all AN imports were from Russia, the world’s major AN producer and exporter.
Starting in midyear 2016, ammonia prices lost considerable ground as new capacity was brought on stream in Russia and the United States. The market for commercial ammonia is fairly narrow, with trade volume of approximately 18 million tonnes a year. As a consequence, even a slight increase in supply can have a strong impact on prices. In October 2016, ammonia prices hit USD 165 per tonne FOB Yuzhny, the lowest since 2005, making the product cheaper than urea. However, this situation did not last long, and by the end of the year prices spiked on the back of rising gas prices in Europe and the United States, declining production in many regions of the world, and recovering urea prices.
NPK is a niche product with stable demand. NPK prices are less volatile and traditionally follow the prices of basic products with a certain lag in time. In 2016, NPK prices declined on a drop in prices for nitrogen-based, phosphate and potash fertilisers. In the first quarter of 2017, the NPK market stabilised due to partial recovery of prices for basic products. NPK still retains its premium over the basic product basket.
Re-issuance of consolidated condensed interim financial information for the nine months ended 30 September 2016
Acron Group updated its previously issued consolidated condensed interim financial information for the nine months ended 30 September 2016 in order to make certain amendments to ensure consistency with the annual consolidated financial statements. As a result, net profit increased by RUB 6,884, due to recycle of accumulated foreign currency translation differences to profit or loss upon derecognition of the underlying equity accounted investment. Revaluation reserve decreased by RUB 718 and Cumulative currency translation difference decreased by RUB 6,166. The recycling adjustment had no impact on Total comprehensive income for the nine-month period ended 30 September 2016.
The full version of the financial statements and a presentation of results for the 2016 financial year are available at www.acron.ru. A detailed analysis of Acron Group’s operations is available in the 2016 Annual Report; a draft of the report will be available at www.acron.ru starting on 28 April 2017.
Note: The currency exchange rate was RUB 72.8827 to USD 1 as of 31 December 2015 and RUB 60.6569 to USD 1 as of 31 December 2016; the average exchange rate was RUB 60.9579 to USD 1 in 2015 and RUB 67.0349 to USD 1 in 2016.
* EBITDA is calculated as operating profit adjusted for depreciation and amortisation, Forex gains or losses, and other non-monetary and non-core items.
** Excluding the results of Hongri Acron, which was sold
