PhosAgro has announced its reviewed interim consolidated IFRS financial results for the nine months ended 30 September 2016. PhosAgro’s revenue for the period grew by 4% year-on-year to RUB 147.6 billion. EBITDA for 9M 2016 was RUB 58.9 billion (USD 862 million), with an EBITDA margin of 40%.
Production and sales
During 9M 2016, fertilizer production and sales volumes grew by 8% and 7.7%, respectively, year-on-year thanks to the ongoing debottlenecking activities. Revenue for the period grew by 4% year-on-year, as higher volumes and further RUB depreciation were offset by lower global fertilizer prices.
In August-September 2016, PhosAgro opened two additional trading companies in Western Europe. This aims to strengthen the Company’s position in its priority European market and enable PhosAgro to better understand the needs of local customers, help it to react faster to market demand, facilitate promotion of the PhosAgro brand and ensure that the Company offers local customers the right nutrient solutions. PhosAgro’s sales to the EU market in 9M 2016 increased by over 20% year-on-year.
EBITDA for 9M 2016 decreased by 6% year-on-year to RUB 58.9 billion from RUB 62.8 billion in 9M 2015. The EBITDA margin for the period declined 4 p.p. to 40%, compared to 44% a year earlier. PhosAgro’s operating profit in the reporting period was RUB 51.3 billion, a 9% decrease from RUB 56.2 billion in 9M 2015. Net profit for 9M 2016 grew 54% year-on-year to RUB 48.5 billion. Basic and diluted earnings per share increased by 54% to RUB 375 for 9M 2016 from RUB 244 in 9M 2015.
The higher average USD exchange rate during 9M 2016 in comparison with 9M 2015 had a net positive impact on PhosAgro’s results in the reporting period, as prices for most of the Company’s products are denominated in USD, while costs are primarily RUB-based. Appreciation of the rouble as of 30 September 2016 (RUB 63.16 per USD) compared to 31 December 2015 (RUB 72.88 per USD) resulted in a foreign exchange gain of RUB 13 022 million (USD 190 million) in 9M 2016.
Cash flow from operating activities decreased by 3% year-on-year in 9M 2016, to RUB 49.5 billion, compared to RUB 50.9 billion in 9M 2015, due to lower operating cash flow and higher income tax payments, which was partially offset by more favourable dynamics in working capital.
Gross debt at 30 September 2016 decreased to RUB 118.3 billion (USD 1873 million), compared to RUB 134.5 billion (USD 1846 million) at 31 December 2015. Net debt at 30 September 2016 stood at RUB 95.1 billion (USD 1506 million), down from RUB 105.2 billion (USD 1443 million) at 31 December 2015, as a result of rouble appreciation vs USD as of 30 September 2016. Most of the Company’s debt is denominated in US dollars as a natural hedge against primarily USD-denominated sales. The Company’s net debt to EBITDA ratio decreased to 1.21 as of 30 September 2016, from 1.28 as of 31 December 2015.
Commenting on the 9M 2016 results, PhosAgro CEO, Andrey Guryev said: “I am delighted to report a 9M 2016 EBITDA margin of 40%, coupled with strong earnings per share, in what is a very challenging year for the global fertilizer market across all nutrient groups. Prices for all concentrated fertilizers have bottomed out at levels seen in 2009, during the financial crisis, while in urea specifically we saw prices going as low as 2005 levels. Even in these conditions, the Company generated over RUB 20 billion of free cash flow in a peak period of our capital expenditure programme, enabling the Board of Directors to recommend another dividend of RUB 39 per share (RUB 13 per GDR). This would bring total dividend payouts for this year to RUB 135 per share (RUB 45 per GDR). On an annualised basis, this indicates a 7% dividend yield. We continue to deliver successfully a mix of organic production growth and cost optimisation, providing high returns to shareholders. I think that this makes PhosAgro a rather unique case in our industry at the moment.”
“Our excellent financial results were supported by strong operating achievements, with 8% year-on-year production growth on the back of continuing modernisation and debottlenecking projects that cost significantly less than new brownfield or greenfield projects. In terms of product mix, most of our volume growth is coming from complex fertilizers, which is in line with global trends; an increasing share of farmers favour complex fertilizers, which provide a better solution for many crops and a variety of types of soil.”
“In terms of the market environment, we saw another year of record yields across most agricultural markets, which has kept grain prices under pressure. In addition to favourable weather conditions in most agricultural regions, such yields were due to solid fertilizer consumption. India looks stable year-on-year, although P2O5 fertilizer imports has been partially offset by increased local production, as we see higher phosphoric acid imports. In Latin America (the #1 global soybean producer), we saw a significant increase in imports of phosphate-based fertilizers: for 9M 2016 Brazil and Argentina were up by 15% and 70% year-on-year, respectively. Brazil is an especially interesting case, with the import of complex NPK fertilizers up by over 80% year-on-year.”
“Looking at our domestic market, supplies of phosphate-based fertilizer grew by an impressive 28% in January-September 2016, while overall nutrient demand is up by nearly 20% compared to 9M 2015. We are extremely pleased that our home market holds one of the best opportunities globally in terms of the potential of the agricultural sector, as Russian agricultural enterprises become more competitive thanks to the depreciation of the ruble and state support for the sector. Our sales to local farmers grew by 34% year-on-year in 9M 2016, while our share of the overall Russian fertilizer market is nearing 30%, with the second-largest supplier among Russian fertilizer producers lagging far behind.”
“Alongside positive dynamics on the demand side, we saw dramatic changes on the supply side. Ambitious, large-scale development projects in the sector combined with a gradual shift in the behaviour of several large market players has put pressure on global prices. Additional production volumes were supported by continued declines in feedstock prices as ammonia and sulphur hit lows not seen in many years. However, the average cash cost in the industry, for both the phosphate and nitrogen nutrients we produce, is well above current prices. This suggests that the current low price environment should lead to a rationalisation in the industry, and gradual closure of non-efficient or less integrated and non-subsidised market players. In fact, we are already seeing signs of such rationalisation, with Chinese phosphate fertilizer exports in 9M 2016 down by 30% year-on-year, which was replaced by volumes from new production capacities of the major industry players. Last week, for the first time ever, we saw an unprecedented release from Chinese phosphate fertilizer producers announcing further substantial cuts in production, by 30% for the biggest producers, 20% by companies with 1 to 2 million t of annual capacity, and 10% by smaller phosphate producers already operating at very low utilisation rates, around 60%.”
“We are currently in low season, but looking at future price developments I think we are unlikely to see any further downside. In addition to significantly reduced utilisation rates in China, we already see feedstock prices going up, specifically ammonia, where prices recently fell below the cash costs of most producers that sell ammonia, and we saw a significant increase in Chinese production cash costs due to increased coal prices and as a result the curtailment of capacity in China. We are also witnessing the first signs of improvement in the urea market, which normally reacts faster than the DAP market.”
“Looking to 2017, I am very hopeful that we will be closer to normal seasonal price dynamics, as we are approaching the new season from a lower base, which is very supportive for global demand. I would be cautious about predicting any significant upside, however, as further capacity additions are scheduled for next year, although at the moment it appears this will be less than current curtailments in China. At PhosAgro, we will focus on completing our main investment projects on schedule. The new ammonia and urea units will not only add additional volumes, but will help to significantly reduce our cash costs even further, though we are already at one of the lowest levels in the industry on this measure. This contribution, in addition to reduced capital expenditure, should further improve our free cash flow, which I would expect to be reflected in returns to shareholders.”
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