Financial review

On 20 April 2015, Acron’s Board of Directors recommended to the annual general meeting declaring dividends for 2014 in the amount of RUB 139 per ordinary share and paying the dividends out of Acron’s retained earnings from previous years for the reason that Acron posted losses in its RAS non-consolidated statement. No interim dividends were paid in 2014. Dividends for 2013 were also paid out of retained earnings for past years. The dividend amount was RUB 6,161 mn (RUB 152 per share), or 47% of IFRS net profit.

The Group’s dividend policy stipulates that the annual dividend payment be no less than 30% of the Group’s IFRS net profit.

Net debt was up 52% to RUB 55,788 mn as of the end of 2014, against RUB 36,633 mn in 2013. The relative debt burden was also up, with the Net Debt/EBITDA ratio increasing from 2.4 to 2.8 year-on-year. The Group’s total debt as of 31 December 2014 was up 61% from RUB 50,187 mn to RUB 80,561 mn year-on-year. Short-term loans account for 65% and long-term loans make up the remaining 35% of the total debt. The increase in the Group’s total debt was related to re-evaluation of its foreign currency debt. The U.S. dollardenominated Net Debt/EBITDA ratio was down to 1.9 from 2.3 as of beginning of 2014, as was dollar equivalent of Total and Net Debt.

The major borrowers among the Group’s companies are its chemical production facilities (Acron, Dorogobuzh and Hongri Acron), as well as AS BCT and NWPC.

The principal creditor banks included AO Raiffeisenbank, Sberbank of Russia, Sviaz- Bank, VTB Bank and other Russian and international banks.

As of 31 December 2014, the share of U.S. dollar-denominated loans increased to 74%, against 73% in 2013; the share of rouble loans and borrowings was 15%, down from 16% in 2013; the share of euro loans and borrowings did not change yearon- year and was 6%; the share of yuan loans and borrowings was 6%, up from 5% in 2013.

As of 31 December 2014 the Group has made a public offering of three issues of its rouble bonds:

• Series 04 with a par value of RUB 3,750 mn to be redeemed in 2021 and offered in 2015. In 2012, Series 04 bonds worth RUB 1,380 mn were redeemed. The rest of the bonds are outstanding.
• Series 05 with a par value of RUB 3,750 mn to be redeemed in 2021 and offered in 2015. In 2012, Series 05 bonds worth RUB 1,997 mn were redeemed. The rest of the bonds are outstanding.
• Series BO-01 with a par value of RUB 5,000 mn to be redeemed in 2015 (no options are provided for this bond issue). All bonds from this series are currently outstanding.

The total volume of bonds outstanding as of 31 December 2014, was RUB 8,764 mn (less previously redeemed bonds and bonds held by Acron’s subsidiaries).

On 30 December 2014, Acron Group announced a five-year syndicated pre-export facility agreement for up to USD 525 mn with a club of partner banks. The loan was utilised to repay the USD 400 mn bridge loan the Group obtained in April 2014. The following banks are participating in the transaction: Societe Generale Corporate & Investment Banking, Rosbank (PJSC JSCB), HSBC Bank plc, HSBC Corporate Trustee Company (UK) Limited, Bank of China Limited (Luxembourg branch), AO UniCredit Bank and International Investment Bank. Later, they were joined by ING Bank and Black Sea Trade and Development Bank.

Revenue

In physical terms, sales volume of the Group’s main products was up 2% year-on-year to 6.3 mn t.

Most of the Group’s revenue is generated by sales of nitrogen and complex fertilisers. In 2014, Russia, China, the United States, Brazil, Thailand and Ukraine were the Group’s key markets by volume.

In 2014, the Group’s revenue was up 10%, to RUB 74,631 mn. This positive dynamic was basically driven by the weaker rouble relative to USD.

Source: Fertecon, FMB

* Calculated average nominal exchange rate for the corresponding period
Source: Central Bank of the Russian Federation

The reporting year saw changes in revenue distribution by region. Increased revenue was generated in Latin America, the United States and Canada, Asia and the European Union, due to higher sales volume in Brazil (up 17%), Thailand (up 39%), the United States and Canada (up 8%). Lower revenue was recorded in Africa: sales volume to Nigeria decreased 63%. Revenue from the CIS was down 20% due to reduced shipments to Belarus and Moldova.

Cost of Sales

In 2014, the cost of the Group’s sales was RUB 42,684 mn, up 2% year-on-year. The higher cost of sales was mainly driven by increased expenses for fuel and power due to boosted output and higher energy prices, increased repairs and maintenance expenses because of previously commissioned capacity and higher inventory and components costs. Depreciation expenses increased due to commissioning of capital construction facilities. The growth was partially offset by lower potash feedstock prices and reduced phosphate costs as the facilities switched to apatite concentrate from internal sources, as well as by lower production personnel costs.

Change in Inventories of Finished Goods and Work in Progress

In 2014, the index of change in inventories of finished goods and work in progress was negative RUB 730 mn (increase in inventory).

Staff Costs

Staff costs only include the cost of production personnel. The cost of administrative staff is included in Selling, General and Administrative expenses. In 2014, staff costs reflected in the cost of sales were down 7% to RUB 5,067 mn due to the cost cutting programme.

Total staff costs reflected in the Cost of Sales and in Selling, General and Administrative expenses in 2014 amounted to RUB 7,980 mn, up 4% year-on-year (against RUB 7,704 mn in 2013). This increase in total staff costs was caused by an indexation of wages and by the fact that management wages are partially denominated in U.S. dollars. Increased costs were offset in part by a 4% reduction of the Group’s staff to 15,100 (2013: 15,722).

Materials and Components Used. Fuel and Energy.
Natural Gas

These items account for the majority of Cost of Sales. In the reporting year, the cost of materials and components increased 3%. The cost of phosphates purchase from third-party suppliers decreased in 2014, since the Group’s Russian facilities obtained their feedstock from the Oleniy Ruchey mine and only Hongri Acron purchased phosphates outside the Group.

Fuel and Energy

Fuel, energy and natural gas costs were up due to higher 2014 average prices for these resources in Russia as compared to 2013.

* Inclusive of transportation costs and related expenses; unit prices: natural gas – per 1 k m³; phosphate and potash inputs, coal and sulphur – per 1 t; energy – per 1 k kWh; thermal power – per 1 Gcal.

Transportation Expenses

In 2014, transportation expenses were up 17% year-on-year, mainly due to an increase in container transportation and higher rouble-denominated freight costs due to a considerably weaker rouble. These factors notwithstanding, railway transportation costs decreased due to streamlined logistics and decreased shipments by Dorogobuzh, which was undergoing a scheduled overhaul.

Selling, General and Administrative Expenses

In 2014, selling, general and administrative expenses were up 22% to RUB 6,446 mn (against RUB 5,271 mn in 2013). This increase was primarily due to wages indexation,the fact that management salaries are partially denominated in USD and due to creating bad debt reserve.

EBITDA

EBITDA is calculated as operating profit (operating results) adjusted for depreciation and amortisation, foreign exchange gain or loss and other non-cash and extraordinary items. In 2014, EBITDA was RUB 20,249 mn, up 32% year-on-year. EBITDA margin in 2014 increased to 27% (against 23% in 2013). This increase was due to rouble depreciation against the U.S. dollar and implementation of a cost saving programme.

Gain on Disposal of Investments

In 2014, Acron’s gain on disposal of investments was up 50% to RUB 8,088 mn. The sale of a part of the Group’s stake in Uralkali brought in RUB 3,876 mn, against RUB 5,400 mn in 2013. This item increased because in 2014 the Group’s interest in Grupa Azoty S.A. was recognised as an Investment recorded based on equity method. As a result, the revaluation accumulated in equity as of the date of derecognition of investments for RUB 4,188 was reclassified as a gain.

Financial Income/Costs

In 2014, the Group’s financial costs was RUB 22,000 mn, against RUB 2,437 mn in 2013. This increase was caused by the negative effect of a revaluation of the Group’s liabilities due to appreciation of the dollar against the rouble. Foreign currency net losses were RUB 22,324 mn in 2014 (against net losses of RUB 2,930 mn in 2013).

Net Profit

In 2014, the Group’s net profit was down 47% to RUB 6,904 mn (against RUB 13,019 mn in 2013). This decrease was mainly due to the foreign exchange loss on revaluation of foreign currency liabilities. The Group managed to avoid a more substantial drop in net profit by increasing its Gain on sale of investments. The adjusted net profit margin was 9% in 2014, down from 19% in 2013.

Property, Plant and Equipment

In the reporting period, the Group’s PP&E was up 19% to RUB 72,552 mn, against RUB 61,068 mn in 2013, due to implementation of the Group’s investment programme, specifically of its mining projects and construction of a new ammonia plant. PP&E was 37% of the total book value of the Group’s assets in 2014.

Exploration and Evaluation Licences and Expenditures

In the reporting period, this item increased 17% to RUB 32,103 mn. The increase was due to capitalisation of interest on loans in cost of potash exploration licence in Russia. Additionally, the Group increased its share in Canadian potash exploration permits. Most of the item (82%) related to the Talitsky area of the Verkhnekamsk potassium-magnesium deposit.

Available-for-sale Investments

In the reporting year, this item was down to RUB 3,632 mn from RUB 19,398 mn at the beginning of 2014. This was mainly due to reclassification of the Group’s stake in Grupa Azoty S.A. as Investments recorded based on equity method, and disposal of Uralkali shares. The fair value of the Uralkali shares, at RUB 3,475 mn, is recognised as Current assets.

Investment in Equity Accounted Investees

In the reporting period, the Group’s share in Grupa Azoty S.A. increased from 15.34% to 20%, and Grupa Azoty S.A. was recognised as Investments in equity accounted investees.

Inventories

In the reporting period, raw materials and finished products inventories increased 23% to RUB 13,420 mn. This increase was due to a rise in rouble-denominated global end product and raw material prices and a weaker rouble.

Non-controlling Interest

The Group’s equity held by minority shareholders in its subsidiaries is recorded in Non-controlling interest under Equity. In the reporting period, this item increased to RUB 23,261 mn, against RUB 13,231 mn at the beginning of 2014. This decrease was primarily due to the sale of a stake in VPC to Sberbank Investments.

Operating Activities

Net cash flow from operating activities was down 12% in 2014 to RUB 12,694 mn (against RUB 14,360 mn in 2013). This decrease was due to an increase of RUB 4,088 mn in the Group’s Working Capital in 2014 (against a decrease of RUB 4,336 mn in 2013). This increase in Working Capital was caused by the higher value of inventories (see above), trade receivables, other receivables and advances to suppliers.

Investing Activities

In 2014, net cash used in investing activities was RUB 11,408 mn (against RUB 9,247 mn in 2013). In the reporting year, cash flow from investing activities was primarily affected by the following events:

• The Group’s capital expenditures (Purchase of property, plant, equipment and intangible assets) worth RUB 11,478 mn, including:

Upgrading chemical production facilities and implementing capacity expansion projects at these production facilities (including the Ammonia-4 project) worth RUB 8,755 mn;

Financing of the Oleniy Ruchey mine project in the amount of RUB 2,198 mn;

Financing of the Talitsky mine construction in the amount of RUB 454 mn.

• Net decrease in credits granted in 2014 was RUB 9 mn against 1,313 mn in 2013
• Proceeds from sale of available-for-sale investments (0.84% stake in Uralkali) were RUB 3,984 mn (against RUB 5,541 mn in 2013).
• Purchase of available-for-sale investments in the amount of RUB 4,115 mn (against RUB 3,840 mn in 2013); the largest item was the Group’s investment in Azoty Tarnów (Poland).

Financing Activities

Cash inflow from financing activities in 2014 totalled RUB 1,107 mn (against cash outflow of RUB 20,975 mn in 2013). This cash inflow was attributable to sale of a stake in VPC and a decrease in loan repayments. In 2014, the net loan increase was RUB 1,073 mn (against decrease of RUB 15,379 mn in 2013). The cash outflow was caused by dividend payment of RUB 6,255 mn, against RUB 2,692 mn in 2013.

A business segment is a component of the Group’s business that engages in economic activity that may yield a return or result in losses, including revenue and expenses from operations with other segments of the Group. Segment financial information includes revenues and EBITDA. Detailed information on business segments is presented in Note 4 to Acron’s IFRS financial statements.

Information on reportable segments for the year ended 31 December 2014 (RUB mn)

Acron, Dorogobuzh and Hongri Acron (jointly “Chemical Production”)

Commercial product output at the Group’s chemical production facilities in 2014 was down 0.4% to 6.094 mn tonnes. This output decrease was attributable to scheduled overhauls at Dorogobuzh, but partially offset by an increase in output at Acron (Veliky Novgorod). Output of nitrogenbased and complex fertilisers at the Acron facility was up 3% to reach a record high. UAN output was up 16% due to capacity expansion.

The Group’s Russian facilities are its most profitable assets, with the EBITDA margin at 25–33% in 2014, against 26–27% in 2014. This increase in EBITDA margin was attributable to higher product prices in roubles while expenditures were under control. The EBITDA margin at Hongri Acron increased to 7% in 2014, from 6% in 2013.

Logistics

In the reporting year, turnover at the Group’s seaport terminals was down 2% to 2.9 mn tonnes. The Group’s own products turnover represented 86% of the total, against 69% in 2013. Logistics generated EBITDA margin at 30% in 2014, against 22% in 2013.

Trading

The Group’s consolidated sales were 6.300 mn tonnes, with in-house commercial product output of 6.289 mn tonnes (including apatite concentrate for sale).

As a secondary segment of the Group, distribution generates the minimum profit required to secure its normal operations. The major objective of this segment is entry into promising sales markets. In recent years, the Group has achieved a strong footprint in rapidly growing markets in Asian and Latin American countries due to the efficient operation of its trading companies under the international brand Agronova. The Russian Agronova distribution network is one of the largest in the Russian mineral fertiliser market.

Mining at NWPC

This is the Group’s most intensively developing business segment. In 2014, EBITDA at NWPC was RUB 1,143 mn, against RUB 719 mn in 2013, with EBITDA margin at 23%. In July 2014, the mine reached capacity of 1 mn t of apatite concentrate. In the reporting period, the Group’s Russian production facilities received all their phosphate feedstock from NWPC. The surplus of 180,000 t of apatite concentrate was sold to third parties. The Group expects profits and profitability at the Oleniy Ruchey mine to go up over the next few years as output increases.