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PhosAgro announce 2Q20 and 1H20 financial results

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World Fertilizer,

PhosAgro, one of the world's leading vertically integrated phosphate-based fertilizer producers, has recently announced its consolidated IFRS financial results for 2Q20 and 1H20.

2Q20 and 1H20 highlights

Revenue for 2Q20 increased 3.1% y/y to RUB 59.9 billion (US$828 million) due to an increase in export sales while maintaining a high share of sales to the Russian market. Revenue for 1H20 decreased by 4.9% y/yr and totalled RUB 124.0 billion (US$1.8 billion). The decrease in revenue was due to a downward correction in fertilizer prices over the course of the previous year.

In 2Q20, EBITDA increased 11.0% y/y to RUB 20.3 billion (US$281 million), with the EBITDA margin increasing to almost 34% (from 31.5% in 2Q19). 1H20 EBITDA decreased 9.9% y/y to RUB 38.8 billion (US$560 million), with an EBITDA margin of 31%.

Free cash flow in 2Q20 totalled RUB 2.0 billion (US$28 million), compared with RUB 10.2 billion (US$158 million) in 2Q19. This decrease was due to an accumulation of working capital related to the active recovery in seasonal demand in export markets and an increase in exports. In 1H20, free cash flow was RUB 20.3 billion (US$303 million). In 2Q20, net profit adjusted for non-cash FX items amounted to RUB 6.9 billion (US$95 million).

As of the 30 June 2020, the net debt/EBITDA ratio was 1.95x, increasing since 31 December 2019 due to the lower value of the rouble against the US dollar in June, since most of the company's debt portfolio is denominated in US dollars. As of 30 June 2020, net debt totalled RUB 138.8 billion (US$2.0 billion).

Financial and operation highlights

Commenting on the company's financial results, PhosAgro CEO, Andrey Guryev, said: "PhosAgro delivered strong financial results in the second quarter. Revenue and EBITDA increased y/y, while the EBITDA margin reached 34%.

"This growth was mainly driven by higher sales volumes amid a recovery in fertilizer prices and continued low prices for key inputs. Our flexible sales model enabled us to redirect sales to export markets once the high season in the Northern Hemisphere ended, focusing on the development of seasonal demand in Latin America and India.

"Increased profitability was also facilitated by lower production costs due to the transfer of portion of scheduled maintenance to 2H20. This was done as part of a set of measures to reduce the risk of the spread of the novel coronavirus at PhosAgro enterprises and in the cities where the company operates, as it made it possible to reduce the number of external contractors involved.

"Stable debt levels combined with solid profitability enabled us to continue implementing our investment programme to support PhosAgro's long-term development. Capital expenditure for the quarter amounted to 48% of EBITDA.

"In the context of these strong financial results, PhosAgro's Board of Directors has recommended that shareholders approve a dividend payout, in line with the company's dividend policy, in the amount of RUB 33 per share, which exceeds free cash flow and is equivalent to 62% of adjusted net profit for 2Q20.

"In terms of our expectations for market developments in the coming months, I would note that we are optimistic about the outlook for seasonal demand in Europe and Africa, which should support a continued upward trend in pricing for our products, and enable us to optimise working capital levels during 2H20.”

2Q20 market conditions

In 2Q20, global phosphate fertilizer markets remained stable despite fading seasonal demand in the United States, Europe and Russia. Export supply from China remained limited due to, among other factors, reduced MAP/DAP production and stable demand in the domestic market. According to preliminary estimates, DAP/MAP exports from China in 2Q20 decreased by 700 000 t, a 27% decline y/y.

In view of this, there was an earlier revival of seasonal demand in India driven by favourable weather conditions and reduced domestic production due to quarantine restrictions. In Brazil, demand was fuelled by the favourable global soybean market conditions and increased fertilizer availability (favourable pricing relationship between fertilizers and key agricultural products). As a result, Brazil's MAP imports in 2Q20 amounted to 1.4 million t, up 0.5 million t, or 62%, y/y.

The average price for DAP in 2Q20 was US$301/t (FOB Tampa), while the average price for MAP was US$295/t (FOB Baltic).

The off-season in key nitrogen-based fertilizer markets at the start of the reporting period impacted urea prices, which dropped to US$200/t (FOB Baltic) and lower. Subsequently, the resumption of tender activity in India, along with higher demand in key Latin American markets, facilitated a rapid recovery in prices. Export supply from China remained limited, which also helped keep prices stable in the global market. The average price for prilled urea in 2Q20 was US$209/t (FOB Baltic), and the average price for granulated urea was US$216/t (FOB Baltic).

No significant changes were observed in the principal sulfur and phosphate markets: prices for sulfur remained stable, ranging from US$37 – US$50/t (FOB Black Sea) and within US$70 – 90/t (FOB Morocco) for phosphate raw materials.

The average price for ammonia was US$199/t (FOB Yuzhny). These low prices are attributable to the excess supply stemming from the off-season decline in demand in the US and Western Europe coupled with low demand for commercial ammonia from industrial consumers, particularly in Asian countries.

Potash prices stabilised in the range of US$170 – 230/t (FOB Baltic), depending on product type and sales markets, following long-term contracts for supplies to China and India signed by major global producers in May 2020.

2Q20 and 1H20 financial performance

In 2Q20, PhosAgro's revenue increased 3.1% y/y to RUB 59.9 billion (US$828 million) mainly because of the positive trend in demand in foreign markets, which stimulated an increase in export sales of 28.2%. An additional factor in revenue growth was the 12.1% depreciation of the rouble against the US dollar. At the same time, the lower price for fertilizers compared to 2Q19 (down 22.9% for DAP/MAP on average) limited revenue growth.

Following the spring application season in its priority domestic market, fertilizer demand was strongest in Latin American and Asian markets. As a result, the share of external markets in PhosAgro's revenue increased to 68%, up from 62% in 2Q19. Growth in export sales was also driven by the decrease in fertilizer production in regions where quarantine measures were implemented.

Gross profit in 2Q20 increased by 8.1% y/y and amounted to RUB 28.6 billion (US$395 million). The gross margin was 48%, up from 45% in 2Q19. Gross profit and gross profit margin in the phosphate-based and nitrogen-based fertilizer segments were as follows:

  • Gross profit in the phosphate-based fertilizer segment increased by 5.7% to RUB 22.6 billion (US$313 million). At the same time, the gross profit margin increased to 47% (from 45% in 2Q19).
  • Gross profit in the nitrogen-based fertilizer segment increased by 18.7% to RUB 5.8 billion (US$81 million). The gross profit margin increased to 58% (from 56% in 2Q19).

PhosAgro's EBITDA for 2Q20 increased by 11.0% y/y and amounted to RUB 20.3 billion (US$281 million). EBITDA margin for 2Q20 was 34%, up from 32% in 2Q19. The company's solid EBITDA profitability was due to a decrease in prices for basic raw materials and the postponement of a part of scheduled maintenance work until 2H20.

Net profit adjusted for non-cash FX items for 2Q20 decreased by 25.3% y/y to RUB 6.9 billion (US$95 million).

Capital expenditure in 2Q20 amounted to RUB 9.8 billion (US$135 million), which corresponds to 48% of EBITDA for the reporting period. The company primarily invested in the development of its resource base in Kirovsk, the construction of new and upgrades to existing sulfuric acid and phosphoric acid production facilities in Cherepovets and Balakovo, as well as the comprehensive development of the Volkhov production site.

Free cash flow for 2Q20 amounted to RUB 2.0 billion (US$28 million). The main reasons for the y/y decline were an outflow related to higher working capital associated with an increase in export sales (including to Latin America) and high base effect in 2019.

As of 30 June 2020, the net debt/EBITDA ratio was 1.95?. The increase from 31 December 2019 was due to the devaluation of the rouble against the US dollar in June 2020, since most of the company's loan portfolio is denominated in US dollars. Net debt as of 30 June 2020 amounted to RUB 138.8 billion (US$2.0 billion).

Cost of sales in 2Q20 decreased by 1.1% y/y, despite growth in fertilizer sales, and amounted to RUB 31.4 billion (US$433 million). This decline was mainly due to lower costs for sulfur and sulfuric acid as a result of a drop in market prices and a decrease in external purchases of sulfuric acid after the pilot launch of a new sulfuric acid production line in Cherepovets. Ammonium sulfate costs also decreased after the launch of a production line for this input.

  • The cost of materials and services remained practically unchanged y/y and amounted to RUB 9.6 billion (US$132 million). The main factor constraining cost growth was an increase in PhosAgro's own rolling stock in 2H19, which made it possible to reduce transportation costs for phosphate rock and fertilizers. Additionally, the company postponed part of its planned maintenance work from 2Q20 to 2H20 due to measures introduced in the spring of 2020 to prevent the spread of COVID-19.
  • Raw material costs decreased in 2Q20 by 19.6% y/y to RUB 8.3 billion (US$114 million) as a result of:
    • A reduction in sulfur and sulfuric acid costs of 53.6% to RUB 1.1 billion (US$15 million) as a result of a decrease in market prices for sulfur and sulfuric acid, as well as the pilot launch of a sulfuric acid production line, which made it possible to reduce external purchases of sulfuric acid.
    • A 25.9% decline in potash costs to RUB 2.8 billion (US$39 million) due to a decrease in market prices and lower production of fertilizer grades with a high K content.
    • A 68.9% decrease in ammonium sulfate costs to RUB 0.2 billion (US$3 million) mainly due to the launch of an ammonium sulfate production line and lower prices for this raw material.
    • A rise in ammonia expenditures of 61.3% to RUB 1.1 billion (US$15 million) due to an increase in ammonia consumption due to growth of fertilizers output and following the launch of the ammonium sulfate production unit.

Administrative expenses increased by 2.9% y/y in 2Q20 to RUB 4.2 billion (US$57 million) mainly as a result of a 12.1% y/y increase in payroll and social security expenses to RUB 2.6 billion (US$37 million) due to a rise in the number of employees and the payment of bonuses.

In 2Q20, selling expenses increased by 9.9% y/y to RUB 9.3 billion (US$129 million). The main drivers of growth were an increase in freight, port and stevedoring costs of 29.9% y/y to RUB 4.6 billion (US$63 million) mainly due to an increase in sales to export markets and rouble devaluation. However, a 22% correction in transport tariffs due to a slowdown in economic activity partially constrained the growth in costs.

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