Financial Review

03

Financial Highlights for Full Year 2011 Results

PhosAgro’s financial performance in 2011 was strong, and this was underpinned by sustained growth in the business. Consolidated revenue grew by 31% year-on-year to more than RUB 100 billion for the first time in PhosAgro’s ten-year existence; earnings before interest, taxes depreciation and amortization (EBITDA) increased by 73% year-on-year, and profit for the period rose by 88%. Cash flow from operations increased by 114% to RUB 32,375 million, reflecting strong growth in profitability. In July 2011, PhosAgro’s initial public offering successfully raised US$ 565 million, and the Company was admitted to trading on the London Stock Exchange and listed on MICEX and RTS.

Key financial performance indicators

RUB million 2011 2010
Revenue 100,518 76,951
Cost of sales (56,196) (47,670)
Gross profit 44,322 29,281
Gross profit margin 44% 38%
Operating profit 29,319 14,687
Operating profit margin 29% 19%
Profit for the period 22,476 11,981
Profit margin 22% 16%
EBITDAPhosAgro defines EBITDA as profit or loss for the year before finance income and finance costs; income tax expense or benefit; and depreciation, amortisation and other material non-cash items 35,370 20,464
EBITDA margin 35% 27%
Net debt 15,207 3,671
Net debt/EBITDA ratio 0.4x 0.2x

Income Statement

Revenue

PhosAgro generated consolidated revenue of RUB 100,518 million in 2011, compared to RUB 76,951 million in 2010, largely as a result of higher prices and increased sales volumes for both phosphate-based products and nitrogen fertilisers. In 2011, the Company’s phosphate-based products segment contributed to 89% (FY10: 89%) of PhosAgro’s consolidated revenue, with the nitrogen fertilisers segment accounting for 11% (FY10: 9%). Export revenues increased for all markets, with revenue generated by sales to North and Latin America doubling. Revenue from export sales accounted for 70% of PhosAgro’s consolidated revenue in 2011, compared to 65% in 2010. Furthermore, the regional sales structure has changed due to the existing flexible sales model, which reduces the Company’s dependency on specific markets.

Segment revenue structure

RUB million 2011 2010 2011/2010 (%)
Phosphate-based products 88,982 68,832 29%
Nitrogen fertilisers 10,727 7,012 53%
Other operations 809 1,106 (27%)
Total 100,518 76,950 31%

Breakdown of export revenue by region, %

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Phosphate-based products segment revenue

Revenue from the phosphate-based product segment increased by 29% year-on-year, to a total of RUB 88,982 million in 2011, mainly as a result of an increase in prices and sales volumes for phosphate-based products.

The average revenue per tonne grew for all phosphate-based fertilisers and feed phosphate (MCP) in domestic and export markets. This was due to a tight supply-demand balance, as crop market prices were strong in 2011, boosting fertiliser demand. The average revenue per tonne for DAP and MAP grew by 45% and 21%, from RUB 11.9 thousand and RUB 14.1 thousand in 2010, up to RUB 17.2 thousand and 17.0 thousand in 2011, respectively. The growth in average revenue per tonne for NPKUnless indicated, the analysis of changes in revenue per tonne is conducted for export markets was 39%, from RUB 10.7 thousand in 2010 to RUB 14.9 thousand in 2011. Sales volumes of phosphate-based fertilisers and feed phosphates increased by 6% in 2011. This was mainly driven by a 27% increase in NPK sales to 1,163 thousand tonnes in 2011 from 914 thousand tonnes in 2010, while changes in sales volumes of other phosphate-based fertilisers and feed phosphates (MCP) were insignificant.

Revenue from export sales of phosphate-based fertiliser products accounted for 87% of PhosAgro’s export revenue in 2011, compared to 88% in 2010.

Nitrogen fertilisers segment revenue

The nitrogen fertilisers segment generated revenue of RUB 10,727 million in 2011, an increase of 53% year-on-year, from RUB 7,012 million in 2010, mainly as a result of an increase in nitrogen fertiliser prices and sales volumes. The growth in nitrogen fertiliser prices was driven by high prices for soft-commodities, which were at their highest levels since 2008, and resulted in strong demand for fertilisers.

The average revenue per tonne for AN grew by 50%, from RUB 6 thousand in 2010 to RUB 9 thousand in 2011. The average revenue per tonne for urea increased by 45%, from RUB 7.8 thousand in 2010, to RUB 11.3 thousand in 2011. Phosagro further capitalised on an increase in demand for AN by re-allocating the Company’s own ammonia, in favour of AN, to provide further capacity at improved margins to meet market demand. Nitrogen fertilisers sales volumes were up 5% year-on-year to RUB 889 thousand in 2011 (FY10: RUB 850 thousand), while ammonia sales volumes remain at the 2010 level.

Revenue from export sales of nitrogen fertilisers accounted for 13% of PhosAgro’s export revenue in 2011, compared to 12% in 2010.

Phosphate-based products segment revenue

Revenue from the phosphate-based product segment increased by 29% year-on-year, to a total of RUB 88,982 million in 2011, mainly as a result of an increase in prices and sales volumes for phosphate-based products.

The average revenue per tonne grew for all phosphate-based fertilisers and feed phosphate (MCP) in domestic and export markets. This was due to a tight supply-demand balance, as crop market prices were strong in 2011, boosting fertiliser demand. The average revenue per tonne for DAP and MAPUnless indicated, the analysis of changes in revenue per tonne is conducted for export markets grew by 45% and 21%, from RUB 11.9 thousand and RUB 14.1 thousand in 2010, up to RUB 17.2 thousand and 17.0 thousand in 2011, respectively. The growth in average revenue per tonne for NPK was 39%, from RUB 10.7 thousand in 2010 to RUB 14.9 thousand in 2011. Sales volumes of phosphate-based fertilisers and feed phosphates increased by 6% in 2011. This was mainly driven by a 27% increase in NPK sales to 1,163 thousand tonnes in 2011 from 914 thousand tonnes in 2010, while changes in sales volumes of other phosphate-based fertilisers and feed phosphates (MCP) were insignificant.

Revenue from export sales of phosphate-based fertiliser products accounted for 87% of PhosAgro’s export revenue in 2011, compared to 88% in 2010.

RUB million 2011 2010
Europe 16,197 14,381
India 12,029 9,127
North and Latin America 28,287 14,334
Other regions 13,750 12,242
Total 70,263 50,084

Revenue per tonne for principal phosphate-based
products in the domestic market
, ‘000 RUB

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Revenue per tonne for principal phosphate-based products in export markets, ‘000 RUB

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Sales volumes of principal phosphate-based fertilisers
and feed phosphates (MCP)
, ‘000 t

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Sales volumes of phosphatebased fertilisers, feed phosphates (MCP) and phosphate rock, ‘000 t

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Breakdown of export sales volumes of phosphate-based fertilisers and feed phosphate (MCP) by region, %

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Nitrogen fertilisers segment revenue

The nitrogen fertilisers segment generated revenue of RUB 10,727 million in 2011, an increase of 53% year-on-year, from RUB 7,012 million in 2010, mainly as a result of an increase in nitrogen fertiliser prices and sales volumes. The growth in nitrogen fertiliser prices was driven by high prices for soft-commodities, which were at their highest levels since 2008, and resulted in strong demand for fertilisers.

The average revenue per tonne for AN grew by 50%, from RUB 6 thousand in 2010 to RUB 9 thousand in 2011. The average revenue per tonne for urea increased by 45%, from RUB 7.8 thousand in 2010, to RUB 11.3 thousand in 2011. Phosagro further capitalised on an increase in demand for AN by re-allocating the Company’s own ammonia, in favour of AN, to provide further capacity at improved margins to meet market demand. Nitrogen fertilisers sales volumes were up 5% year-on-year to RUB 889 thousand in 2011 (FY10: RUB 850 thousand), while ammonia sales volumes remain at the 2010 level.

Revenue from export sales of nitrogen fertilisers accounted for 13% of PhosAgro’s export revenue in 2011, compared to 12% in 2010.

Revenue per tonne for the principal
fertilisers in the domestic market
, ‘000 RUB

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Revenue per tonne for the principal nitrogen
fertilisers in Export markets
, ‘000 RUB

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Sales volumes of principal nitrogen fertilisers, ‘000 t

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Sales volumes of nitrogen fertilisers and ammonia, ‘000 t

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Breakdown of export sales volumes of nitrogen fertilisers by region, %

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Cost of Sales

The Company’s cost of sales increased by 18% year-on-year to RUB 56,196 million in 2011 (FY 10: RUB 47,670 million). Excluding the effect of a greater than 6% increase in sales volumes during 2011, PhosAgro’s cost of sales would have amounted to an inflationary increase of 12%, in line with Russian PPI inflation.

Structure of cost of sales

RUB million 2011 2010 2011/2010
Materials and services 23,032 40% 21,013 44% 10%
incl. potash costs 3,323 1,927 72%
Salaries and social contributions 11,078 20% 8,789 18% 26%
Depreciation and amortisation 5,486 10% 4,774 10% 15%
Natural gas 4,951 9% 4,459 9% 11%
Sulphur and sulphuric acid 4,838 9% 2,447 5% 98%
Fuel 4,207 7% 3,674 8% 15%
Electricity 3,290 6% 3,152 7% 4%
Other items 51 0% 43 0% 19%
Change in stock of WIP and finished goods (737) (1%) (681) (1%) 8%
Total 56,196 100% 47,670 100% 18%

The additional increase in cost of sales was due to the following factors:

  • An increase in salaries and social contributions by 26% year-on-year to RUB 11,078 million in 2011, from RUB 8,789 in 2010, primarily due to increases in labour rates and higher payroll tax rates introduced in Russia in 2011;
  • The price of natural gas in Russia, while significantly lower than prices for producers in Europe, continued to increase in 2011 as Gazprom gradually moves towards liberalising domestic gas prices. PhosAgro’s costs for natural gas, required for the production of ammonia, increased by 11% in 2011, to RUB 4,951 million, from RUB 4,459 million in 2010. In 2011, the Company’s average natural gas purchase price increased by 15%, from RUB 2,633 per one thousand cubic metres in 2010 to RUB 3,015 per one thousand cubic metres. PhosAgro’s consumption of natural gas decreased by 3% in 2011, from 1,693 million cubic meters in 2010 to 1,642 million cubic meters, while the production of nitrogen fertilisers grew by 2% in 2011, primarily due to the modernisation of the Company’s ammonia production lines in Cherepovets;
  • A 98% year-on-year increase in expenditure on sulphur and sulphuric acid to RUB 4,838 million in 2011, from RUB 2,447 million in 2010, mainly due to an increase in PhosAgro’s sulphur purchase prices from RUB 1,742 per tonne in 2010 to RUB 3,270 per tonne in 2011, or by 88%. PhosAgro’s sulphur purchase price is linked to export prices for sulphur and DAP, both of which increased in 2011. This growth was supported by a 4% increase in sulphur consumption by the Company due to an increase in production volumes;
  • An increase in the Company’s expenditure on fuel by 15% to RUB 4,207 million in 2011, from RUB 3,674 million in 2010, mainly as a result of a general rise in oil prices. Fuel costs mainly consist of heating oil and diesel. The purchase price for diesel increased by 41%, while the purchase price for heating oil grew by 13%. This growth in prices was partly offset by a 6% decrease in heating oil consumption by the Company in 2011;
  • A 10% year-on-year increase in the cost of materials and services from RUB 21,013 million to RUB 23,032 million, due to an increase in raw material prices. Approximately half of PhosAgro’s materials and services costs are variable, and include, among other things, the external purchasing of phosphate rock production materials such as steel balls for the grinding process, and tyres and other transportation machinery replacement parts. Costs for these items grew as a result of general cost inflation in Russia. This growth was supported by an increase in purchase volumes of raw materials such as ammonia and potash, as a result of growth in production volumes. The purchased volumes of potash increased by 26%. Another important factor for the higher cost of materials and services was the 37% increase in average purchase cost per tonne for potash to RUB 7,144 per tonne (FY10: RUB 5,204). By the end of 2010, the potash market had been liberalised as agreed with the Federal Anti-Monopoly Service (FAS), which links prices to the lowest export netback on exported NPK and local prices on NPK sold in Russia;
  • A 4% year-on-year increase in the cost of electricity, to RUB 3,290 million in 2011, from RUB 3,152 million, mainly due to a 14% increase in electricity tariffs from RUB 1.47 in 2010 to RUB 1.65 in 2011 per one KWh. This was partly offset by a 8% decrease in electricity purchases by the Company as a result of increased output from its own power generating facilities. Electrical power purchases decreased by 152.4 million kWh, from 2,144.8 million kWh in 2010 to 1,992.4 million kWh in 2011.

Selling, General and Administrative Expenses

Administrative expenses rose by 10% or by RUB 511 million to RUB 5,758 million in 2011 (FY 10: RUB 5,247 million), which is below the Russian PPI inflation of 12%, mainly due to an increase in salaries and social contributions. Selling expenses were RUB 6,588 million in 2011 (FY 10: RUB 6,515 million), up 1% year-on-year.

Gross Profit, Operating Profit, EBITDA and Profit for the Period

Gross profit was up 51% year-on-year and totalled RUB 44,322 million in 2011 (FY 10: RUB 29,281 million) with gross margin increasing from 38% in 2010 to 44% in 2011.

Operating profit for 2011 doubled year-on-year and amounted to RUB 29,319 million, compared to RUB 14,687 million in 2010. The Company’s operating profit margin increased to 29% in 2011, up from 19% in the previous year. PhosAgro’s EBITDA increased by 73% year-on-year in 2011 to RUB 35,370 million (FY10: RUB 20,464 million) with EBITDA margin expanding to 35% from 27% in 2010. The Company’s net profit for 2011 increased by 88% year-on-year and amounted to RUB 22,476 million, compared to RUB 11,981 million in 2010. The increase in margins was primarily due to strong consolidated revenue growth, which was supported by higher prices for fertilisers and increased sales volumes. The higher margins achieved by the Company were also driven by revenue growth that exceeded the growth in costs. The two main factors contributing to this are firstly, that PhosAgro is fully integrated in key feedstocks like phosphate rock and ammonia. This enables the Company to control around 65% of its cash costs in DAP production and helps contain cost growth for raw materials to nearly the same rate as inflation. The second factor that contributed to the reporting of higher EBITDA and profit margins was the modernisation of certain production lines, which enabled PhosAgro to reduce gas consumption and the external purchasing of electricity.

Financial Position

The Company’s cash and cash equivalents stood at RUB 16,946 million as at 31 December 2011, compared to RUB 5,261 million as at 31 December 2010. PhosAgro’s total debt amounted to RUB 32,153 million as at 31 December 2011, compared to RUB 8,932 million as at 31 December 2010. This increase was primarily due to additional EUR- and USD-denominated long- and short-term debt facilities obtained during the first half of 2011 at very low interest rates. The Company’s net debt stood at RUB 15,207 million as at the end of 2011, compared to RUB 3,671 million as at end of 2010.

Inventory

Inventories increased by 31% year-on-year to RUB 10,096 million, largely due to an accumulation of raw materials and the stockpiling of products prior to the spring planting season.

Cash Flow

RUB million 2011 2010
Cash flows from operating activities 32,375 15,133
Cash flows (used in) investing activities (6,739) (16,975)
Cash flows (used in)/from financing activities (13,989) 1,481
Net increase/(decrease) in cash and cash equivalents 11,647 (361)

Cash Flow from Operating Activities

Net cash flow from operations increased by 114% year-on-year to RUB 32,375 million in 2011, compared to RUB 15,133 million in the previous year. This is the result of strong growth in the Company’s profitability.

Cash Flow used in Investing Activities

Net cash used by investing activities totalled RUB 6,739 million in 2011, compared to RUB 16,975 million in 2010. The decrease was primarily due to the repayment of loans issued, totalling RUB 3,125 million, partly balanced by dividends received from PhosInt of RUB 1,840 million.

Cash Flow used in Financing Activities

Net cash outflow from financing activities amounted to RUB 13,989 million in 2011, compared to net cash inflow of RUB 1,481 million in 2010. This was mainly due to dividend payments being made to shareholders.

Capital expenditure

PhosAgro’s total capital expenditure in 2011 increased by 58% to RUB 16,801 million (FY10: RUB 10,614). Cash used in capital expenditures during 2011 amounted to RUB 12,905 million, compared to RUB 13,040 million in 2010.

The most significant portion of the Company’s capital expenditure during 2011 was focused on the construction of the following facilities:

  • ore shaft № 2 at the Kirovsky underground mine at Apatit;
  • new production facilities such as the new urea plant at Cherepovetsky Azot;
  • a 32 Mw gas-powered electricity generation facility at Cherepovetsky Azot.
RUB million 2011 2010
Phosphate-based products/Mining and Beneficiation 5,940 5,103
Phosphate-based products/Fertilisers facilities 2,070 3,263
Nitrogen fertilisers 6,561 1,100
Other 2,230 1,148
Total capital expenditures 16,801 10,614

Financial reporting

The financial statements included in this report were prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board.