EuroChem Reports IFRS Financial Information for 2Q 2011
OREANDA-NEWS. August 19, 2011. EuroChem today reported a consolidated IFRS net profit for the second quarter of 2011 of RUB 9.5bn, representing an increase of 283% compared to the second quarter of 2010. Consolidated revenues for the group increased 30% to RUB 30.9bn, up from RUB 23.8bn in the second quarter of 2010. EBITDA for the three months ended June 30 2011 came in at RUB 11.9bn, a 54% increase on the RUB 7.7bn of the previous year. EBITDA margin improved 6 percentage points to reach 38%, compared to 32% the same period a year ago.
Nitrogen and Phosphate fertilizer sales volumes, excluding iron ore and baddeleyite mining operations, amounted to 2,004 thousand tonnes (KT) in the second quarter of 2011, marginally up from the 1,999 KT sold in the first quarter of 2011. During the same period, iron ore and baddeleyite sales volumes decreased by 10% to 1,438 KT, compared with 1,605 KT in Q2 2010 on lower production volumes.
With fertilizer production facilities running at close to full capacity, the strong Q2 2011 performance was mainly the result of the significantly stronger pricing environment and focus on value-added products.
CEO Dmitry Strezhnev commented: “We had another quarter of strong demand for fertilizers which helped prices for our products increase and compensated for the seasonal drop in demand. While the economic growth prospects globally become less certain, we feel that – for as long as a severe disruption in the financial markets is avoided – the fertilizer industry should continue to benefit from the structural changes in the supply-demand balance. Against this background, we are comfortable with the industry’s prospects and continue to advance our investment projects in potash, nitrogen, phosphates, logistics, and other raw materials.”
Market Conditions
Both fertilizer demand and prices appeared unfazed by the first half macroeconomic jitters and the growing debt concerns in the
Fertilizer prices continued their upward momentum in the second quarter of 2011. During Q2 2011, prilled urea (FOB Yuzhny) averaged USD 414/tonne, representing increases of 18% and 75% on the first three months of the year and the second quarter of 2010, respectively. Ammonium Nitrate (AN, FOB
Phosphate and potash prices mirrored the trends observed in Nitrogen. DAP (FOB
According to preliminary figures from AzotEcon, first half 2011 fertilizer production in
BUSINESS SEGMENTS
Segment revenues (both volume and value) are shown gross and inclusive of intra-segment sales.
Nitrogen segment
In the second quarter of 2011, sales volumes for the Company’s Nitrogen segment increased slightly by 4% to 1,418 KT compared to 1,361 KMT for the same period the previous year. Urea, UAN and CAN registered the strongest year-on-year growth, increasing 26%, 33%, and 78%, respectively. Urea sales volumes increased from 411 KT in Q2 2010 to 517 KT in the second quarter of 2011. Over the same period, UAN sales volumes increased to 196 KT, while CAN amounted to 50 KT.
The strength in prices observed across the Nitrogen segment provided for a 31% year-on-year increase in revenues to RUB 14.3bn in the second quarter of 2011. Nitrogen EBITDA amounted to RUB 5.1bn, representing an increase of 78% as compared to the second quarter of 2010. For the first six months of 2011 Nitrogen segment EBITDA amounted to RUB 11.0bn, an increase of 68% on the first six months of 2010.
Following the latest yearly 15% rise in Russian gas prices effective 1 January 2011, average natural gas prices for the second quarter remained at the level of the first three months of the year. For the six month period ended 30 June 2011, average gas prices at EuroChem’s Novomoskovskiy Azot and Nevinnomysskiy Azot nitrogen fertilizer facilities were RUB 3,178 and 3,342 per 1,000m3 respectively (c. USD 3.45 and 3.63/mmBtu), compared to RUB 2,748 and 2, 909/1,000m3 (c. USD 2.74 and 2.90/mmBtu) in the first six months of
Phosphate segment
During the second quarter of 2011, iron ore sales volumes decreased 11% while sales volumes for MAP and DAP came down 4% to 442 KT over the same period last year. The decrease is attributable mainly to the fact that sales in H1 2010 benefited from liquidation of inventory accumulated in 2009, while no such effect was in place this year.
The slightly weaker sales volumes observed in Q2 2011 were largely offset by very healthy pricing conditions. Second quarter 2011 revenues for the Phosphate segment increased 24% as compared to the second quarter of 2010 and amounted to RUB 15.7bn. Phosphate segment EBITDA in the second quarter of 2011 came in at RUB 6.2bn, a 25% increase on the RUB 5.0bn achieved in Q2 2010. Phosphate segment EBITDA for the first 6M of 2011 was RUB 12.0bn, which is 78% higher than in the first six months of 2010.
Raw material mining co-products, which include iron ore and baddeleyite contributed RUB 3.9 bn, or 51%, to the second quarter Phosphate segment EBITDA.
Potash segment
EuroChem’s potash projects continued to move ahead as planned. The sinking and lining operations of the 7 meter-diameter skip shaft at the Gremyachinskoe deposit (
Further East in the Urals, Phase I of the Verkhnekamskoe project (
Capex spending was increased in the second quarter of the year and an aggregate amount of RUB 4.2bn was spent on the Gremyachinskoe and Verkhnekamskoe deposits in the first six months of the year 2011.
As a reminder, both projects have
Distribution segment
Sales at EuroChem distribution and sales outlets almost doubled, registering a 92% increase in the second quarter of 2011 compared to Q2 2010 as sales reached RUB 3.5bn or 11% of EuroChem’s overall sales for Q2 2011. Distribution segment EBITDA for the second quarter of 2011 amounted to RUB 186m, compared to RUB 67m in the same period a year earlier. EuroChem fertilizer outlets recorded a 45% year-on-year increase in sales volumes with second quarter sales amounting to 281 KT.
FINANCIAL
Income statement
Buoyed by the strong pricing environment, EuroChem consolidated revenues for the second quarter of 2011 increased by 30% to RUB 30.9bn as compared to RUB 23.8bn in the second quarter of 2010. Mining co-products contributed RUB 5.8bn and RUB 3.9bn to consolidated revenues and EBITDA in Q2 2011, respectively.
Reflecting the growth in revenues, cost of sales increased 30% in the second quarter of 2011 to RUB 15bn compared to RUB 12bn in the second quarter of 2010. Cost of sales in the second quarter of 2011 marginally decreased when compared to the first quarter of the year. Materials and components used or resold increased 41% year-on-year to RUB 10bn and accounted for 61% of Q2 2011 costs of sales. During the same period, overall gas costs for fertilizer production increased by 16% to RUB 3.4bn, or by 15% due to increased prices and by 1% due to increased volumes.
Energy costs increased by 27% to RUB 1.6bn in the second quarter of 2011 (Q2 2010: RUB 1.3bn). This increase was primarily brought on by the liberalization of the wholesale electricity market from January 2011 and increases in energy tariffs.
Labour costs, including contributions to social funds, represented 13% of cost of sales in the second quarter of 2011 and amounted to RUB 2bn. The 23% increase from RUB 1.6bn a year earlier came as a result of salary indexation and increased social insurance contributions. For the first six months of the year, labour costs increased slightly by 3% compared to the same period the previous year.
Compared to the second quarter of 2010, distribution costs decreased by 12% to RUB 4.2bn in Q2 2011. Representing 85% of distribution costs, transportation costs fell 14% and amounted to RUB 3.6bn. The reduction in distribution costs reflected the 11% decrease in iron ore sales volumes coupled with a considerable reduction in shipping rates, as reflected by the 58% drop in the Baltic Dry Index over the same period.
Total general and administrative (G&A) expenses increased by 12% in the second quarter of 2011 and amounted to RUB 1.0bn, up from RUB 0.9bn in Q2 2010. G&A labor costs, which accounted for 53% of G&A expenses, rose 2% year-on-year to RUB 544m. In the second quarter of 2011, total G&A staff costs (including social expenses) grew to RUB 2.8bn compared to RUB 2.4bn for the three months ended 30 June, 2010.
Other operating expenses for the second quarter of 2011 amounted to RUB 135m, compared to a Q2 2010 other operating income of RUB 413m. The main components behind this change were operating foreign exchange losses of RUB 178m compared to gains of RUB 520m the previous year due to the effects of a weakening USD in Q2 2011 versus its strong appreciation against the rouble in Q2 2010.
Below the operating profit line, EuroChem recognized a gain of RUB 752m on the sale of 1,016,425 shares of KplusS Group during the second quarter for an aggregate amount of RUB 2.2bn. EuroChem recorded an unrealized financial foreign exchange gain of RUB 407m in the second quarter of 2011, compared to a RUB 2.5bn loss in Q2 2010 mainly from the effects of a weakening
Interest expenses increased 22% year-on-year as the Company’s debt increased over last year’s levels and its maturity was extended. Other financial income of RUB 218m was mainly realized on USD/RUB non-deliverable forward contract and changes in the fair value of cross currency interest rate swap in amounts of RUB 116m and RUB 64m, respectively.
Balance sheet
As a result of robust pricing, net working capital increased to RUB 14.6bn as of June 30, 2011, as compared to RUB 10.8bn at 31 December 2010.
EuroChem uses fixed rate and floating rate debt to finance its operations. Major facilities include a USD 1.5bn syndicated facility due in October 2012 (USD 558m outstanding as at 30 June 2011), a 10-year USD 261m ECA-backed facility secured for the construction of the Gremyachinskoe potash deposit cage shaft (USD 85.5 outstanding as at 30 June 2011). Fixed rate debt comprises ruble bonds and Eurobonds. EuroChem placed two domestic bond issues of RUB 5bn each in July and November 2010, both due in 2018, with a 5-year put option and coupon of 8.90% p.a. and 8.25%p.a., respectively (the latter RUB-denominated bond was subsequently swapped into a 3.85% p.a. fixed rate USD liability). The Company also has USD 290m Eurobonds, placed in 2007 and maturing March 2012 with a 7.88% p.a. coupon.
At 30 June 2011 EuroChem held 15,440,170 shares, or 8.07% of the issued share capital (31 March 2011: 16,456,595 shares, or 8.60% of the issued share capital) of German potash and salt producer KplusS Group with a fair value of RUB 33bn according to the 30 June 2011 closing price of EUR 53.0 per share.
The net debt to 12-month rolling EBITDA ratio as at 30 June 2011 substantially improved to reach 0.84x (Q2 2010: 1.79x)
Cash flow
Operating cash flow for the second quarter of 2011 amounted to RUB 5.8bn, compared to RUB 6.2bn for the same period of the previous year. The decrease was mainly caused by an increase in in inventories and trade receivables due to rising prices. Free cash flow amounted to RUB 3.2bn compared to RUB 2.3bn in Q2 2011.
Events after the reporting period
A USD1.3 billion five-year syndicated loan facility bearing a floating interest rate of 1-month Libor plus 1.8 % was signed on 28 July 2011 with a club of 13 international banks. The loan benefits from a two-year grace period for the repayment of principal.
OUTLOOK
We expect to see global stock-to-use ratios in major grains remaining below their long-term averages over the next few quarters and continue to act as the main drivers behind fertilizer application. Despite a recent softening in grain prices, strong farmer economics in the
In the global nitrogen trade,
In an already tight phosphate market environment, the increase in Chinese DAP export prices has given a new floor to global prices. We expect phosphate demand to remain robust in the third quarter, buoyed by a strong fall application and a supply chain in need of replenishment. At the same time, we could see prices soften towards the end of the year in the unlikely event newly build capacity in the
The recent outcome of
Iron ore prices have shown resilience at USD 180/t CFR China, and we expect to see stability at these relatively high levels as Chinese producers build up inventory reserves before the winter months.
EuroChem is a top ten agrochemical company globally by nutrient capacity, producing primarily nitrogen and phosphate fertilizers, as well as certain organic synthesis products and iron ore. EuroChem’s main manufacturing assets include the Nevinnomysskiy Azot, Novomoskovskiy Azot, Phosphorit, EuroChem – BMU, and Kovdorskiy GOK facilities in
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Q2 2011 |
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Q2 2010 |
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H1 2011 |
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H1 2010 |
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RUB bn |
USD m |
|
RUB bn |
USD m |
Y-o-Y, % |
|
RUB bn |
USD m |
|
RUB bn |
USD m |
Y-o-Y, % | |
Revenue |
30.9 |
1,103 |
|
23.8 |
786 |
plus30% |
|
62.1 |
2,169 |
|
45.4 |
1,510 |
plus37% |
EBITDA |
11.9 |
424 |
|
7.7 |
255 |
plus54% |
|
23.4 |
818 |
|
13.0 |
433 |
plus80% |
Net profit |
9.5 |
341 |
|
2.5 |
82 |
plus283% |
|
20.9 |
730 |
|
7.0 |
231 |
plus200% |
Cash from operations |
5.8 |
209 |
|
6.2 |
206 |
-6% |
|
15.5 |
543 |
|
11.1 |
370 |
plus40% |
|
|
|
|
|
|
|
|
|
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30 June 2011 |
|
30 June 2010 |
|
31 December 2010 |
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Net Debt/ LTM* EBITDA |
0.84x |
|
1.79x |
|
1.13x |
|
Average RUB/USD exchange rate for periods: Q2 2011: 27.99; Q2 2010: 30.24; H1 2011: 28.62; H1 2010: 30.07
* Last Twelve Months
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