August 14th 2008

Puławy Ends the Financial Year with Better-than-Expected Performance

Zakłady Azotowe Puławy S.A . (“Puławy”) managed to benefit from the favourable trends prevailing on the markets of fertilisers and chemicals. Therefore the Management Board decided to make an upward revision of its forecast for the financial year 2007/2008. According to the revised forecast, Puławy will earn a net profit of PLN 330.8m (an improvement on the previous year’s result of more than 154%) and an operating profit of PLN 358.7m (up by nearly 137%).

In the fourth quarter, Puławy achieved a record-breaking performance, with net profit tripling to PLN 75.5m (versus PLN 24.5m in the corresponding period of the previous year) and operating profit rising by 212%, to over PLN 83.4m. Sales revenue exceeded PLN 662.3m and was nearly 10% higher that the result posted in Q4 2006/2007. 
The Company recorded a significant improvement in financial performance driven by the rising prices of fertiliser products, despite the fact that the trend in foreign-exchange rates observed for over a year now, especially the USD/PLN and EUR/PLN exchange rates, has not been favourable to exporters. 

The value of fertilisers and chemicals sales generated by Puławy increased by 5% (to PLN 586.4m), despite a decrease of the total sales volume. 

There was a marked improvement in sales margin – the most remarkable price increases where seen in the case of the following fertiliser products:  UAN (a rise in the selling prices of more than 35%) and ammonium sulphate (a rise in the selling prices of almost 49%). The selling prices of urea and ammonium nitrate went up in relation to the prices from Q4 2006/2007 by 24% and 26%, respectively.

The market conditions (especially the conditions on the fertilisers market) translated into record-high financial performance of Puławy. Compared with the fourth quarter of the previous financial year, sales of fertilisers grew by PLN 51.7m (that is by more than 15%). The most substantial sales revenue growth was seen in the case of ammonium nitrate (up by 46%), ammonium sulphate (up by nearly 32%) and urea (up by over 23%). 
The previous quarter saw the share of domestic sales increase, as the Company adjusted its sales structure to the existing price trends and the demand from the domestic market. The share of exports in total sales fell to 30.8% (from 41.6% in the comparable period of the previous year).

Another piece of good news relates to the cost of strategic raw materials used by the Company, which fell by nearly PLN 2m. This can be explained by the fact that the revised gas price tariff came into effect later than initially expected – bringing up the cost by only 4.9% – as well as by a considerable drop (of 16.4%) of the purchase cost of benzene (the weighted average purchase price went down by 15.7%).  
 
Overview of the Nitrogen Fertilisers Market

The prices on the global and domestic markets of fertilisers have reached very high levels. In Poland the demand for nitrogen fertilisers has increased markedly, in spite of delayed disbursement of direct EU subsidies for farmers. We expect that in the first quarter of 2008/2009 the robust demand for agricultural production materials from retail customers will continue. It reflects increased acreage of farmed land (production of biofuels), but can also be attributed to the rising produce and food prices, which prompt farmers to intensify the application of fertilisers in order to increase the yield of their crops.  

The most important markets experienced an undersupply of urea. The Chinese authorities’ decision to introduce export duties (currently 135% of the price) and to re-channel Chinese production to the domestic market, coupled with strong demand from Asia and North America, resulted in a negative supply-demand balance of urea globally. Thus, at the end of the fourth quarter, market prices of urea reached their all-time highs, and the upward trend is expected to continue. In the short term, the prices of urea will be driven by the Russian government’s decision to levy export taxes on domestically produced nitrogen fertilisers.

Despite the drop in UAN prices seen in June, the prices of that product on the global market are expected to rise, due to their strong correlation with the prices of urea. 

It is worth noting that thanks to high market prices of fertilisers in transaction currencies, Puławy’s exports remain profitable despite the appreciation of the Polish złoty.

Overview of the Key Chemicals Market

The favourable price trends offer a good outlook for melamine producers in the following quarter. The limited supply coupled with the growing demand as well as depleting stocks of melamine will be the chief positive contributors to Puławy’s sales performance.

The same trends can be observed on the caprolactam market. The upward trend in the caprolactam prices on the Asian market was driven primarily by an undersupply of that chemical, whereas in Europe the prices were driven by the rising prices of benzene, which in turn depend on the prices of crude oil.