Integrated Report of Grupa Azoty 2021

TABLE OF CONTENT

[IR - Business model] [IR - Presentation of results]

We want the Grupa Azoty Group’s operations to stimulate growth of the Polish chemical sector and related industries. We are the leader of research and development initiatives in the Polish chemical industry, and our activity is creating opportunities to reduce the trade deficit in chemicals. By harnessing innovation, we are changing the Group’s revenue structure by moving towards high-margin, fine speciality chemicals.

We are building our brand in a balanced way, based on innovation, knowledge, responsibility and professionalism. Our operations in 2020 were underpinned by the business model presented below. In 2021, the business model and the strategy were updated.

Grupa azoty s.a.

Value creation model

OPERATIONAL EXCELLENCE STRATEGY

We will improve our operations based on three pillars: Logistics, Capital assets management, and IT.

INNOVATION STRATEGY

Our goal is to deliver new and improved products of high quality and maintain our competitive advantage in the long term.

FEEDSTOCK STRATEGY

Our key strategic goal in the feedstock area is to ensure the security and continuity of supplies. We also intend to continue efforts aimed at more efficient utilisation of our own feedstock assets.

MANAGEMENT STRATEGY BASED ON BUSINESS SEGMENTS

We plan the introduction of a new organisational model to fully realise the synergies between our companies that we have been consistently unlocking. We will completely integrate some support functions and introduce a management approach based on key business segments.

FINANCIAL STRATEGY

One of our strategic financial objectives is to continue the consolidation of the finance function, which will improve the management of the Grupa Azoty Group at the level of individual business segments.

ESG STRATEGY

We will develop the Grupa Azoty Group sustainably, meaning that we will consider environmental protection, concern for the society and responsible corporate governance (ESG aspects) in the process. The Group will continue to support the implementation of the United Nations 2030 Sustainable Development Goals.

At Grupa Azoty S.A., we regularly identify, analyse and control business risks, taking into account ESG risks (related to environmental, social and governance aspects, including climate risks) and regulatory risks.
In 2021, the Group had total assets of PLN 23,644,705 thousand, including non-current assets of PLN 14,905,836 thousand.
Financing sources of the Grupa Azoty Group in 2021:

- The Group's equity comprises retained earnings, share premium and share capital. Equity amounted to PLN 8,932,167 thousand.

- The key components of the Group's external sources of finance were bank borrowings of PLN 3,954,499 thousand, other borrowings of PLN 504,647 thousand and reverse factoring liabilities of PLN 1,755,695 thousand.

- The Net Debt to EBITDA ratio ¹ was 0.96.
The Group received over PLN 1,039,742 thousand in financial assistance from the government
[201-4]
Three Group companies (Grupa Azoty S.A., Grupa Azoty Zakłady Azotowe Puławy S.A. and Grupa Azoty Zakłady Chemiczne Police S.A.) are listed on the Warsaw Stock Exchange.
Stable management based on market standards – we manage the quality, environmental and safety aspects of our operations in accordance with the recognised framework of ISO standards, including: ISO 9001, ISO 14001, ISO 45001, and applicable industry systems.
The Grupa Azoty Group has been taking numerous measures to prevent and offset its negative impacts on natural resources. We measure our Scope 1 and 2 carbon footprint, seeking to mitigate our impact on the climate, including by implementing the TCFD recommendations (since 2020) and analysing risks and opportunities arising from climate change.

Output

The Group's readiness to address potential ESG risks in the future.
Improved operating performance of the Grupa Azoty Group in 2021:

- Consolidated revenue was PLN 15,901,259 thousand (up PLN 5,376,732 thousand on 2020)

- EBITDA was PLN 1,947,314 thousand (up PLN 624,242 thousand on 2020)

- EBITDA margin of 12.2% in 2021, expected to reach >16% by the end of 2030

- Consolidated net profit of the Grupa Azoty Group was PLN 633,687 thousand (up PLN 278,277 thousand on 2020)
The Group paid PLN 147,825 thousand in income tax for 2021.
The Grupa Azoty Group focuses on financial security and access to green project funding.
The Grupa Azoty Group mitigates its harmful emissions through coal use reduction, decarbonisation, and development of renewable energy and carbon-free sources. It also seeks to protect ecosystems and natural resources.

¹The Net Debt to EBITDA ratio was calculated in accordance with the definition set out in the financing agreements of the Grupa Azoty Group.

Input

Over 50 Grupa Azoty Group companies
We run production facilities in Poland, Germany, Spain, and other countries.
Our business comprises three segments: Agro, Plastics and Chemicals.
In 2021, we spent PLN 2,561,479 thousand in capital expenditures, of which approximately 50% was growth CapEx (2020: 60%).
We open new production facilities. In July 2019, Grupa Azoty Compounding commenced operations. Its business consists in the manufacture and sale of modified plastics.
In 2019–2021, Grupa Azoty Police started 115 capital investment projects and completed 81 projects, which helped raise production efficiency and product quality.
In 2019–2021, Grupa Azoty S.A. commenced or completed 42 CapEx projects involving its production and auxiliary facilities.
We are continuing capital projects started in recent years.. In 2021, we allocated over PLN 828,605 thousand to our largest project, Polimery Police, aimed to construct an integrated chemical complex that would comprise a marine gas terminal, a propane dehydrogenation (PDH) unit, a polypropylene production unit with logistics infrastructure, auxiliary facilities and interconnections. The total budget of the project, the largest such investment in Poland's chemical industry in recent years, is PLN 7,210,957 ² thousand.

Output

The Group is among the largest consumers of raw materials in Central and Eastern Europe, with the cost of raw materials used in 2021 totalling PLN 10,390,000 thousand.
The Grupa Azoty Group is Poland's largest and European Union's second largest manufacturer of mineral fertilizers.
The Grupa Azoty Group contributes to strengthening Poland's position on the European plastics market, including through addition of biodegradable plastics into its product mix. The Plastics Business Segment started work on implementing the ISCC Plus standard for polyamide 6.

²The project budget translated into PLN at the PLN/USD mid exchange rate assumed in the project financial model. The project budget approved by corporate bodies is USD 1,837,998 thousand.

Input

The amount of research and development work expensed in 2021 totalled PLN 19,524 thousand (PLN 5,549 thousand more than in 2020).
In line with its innovation strategy, the Group will allocate up to 2–3% of its total revenue to research and development until 2030.
In 2021, the research infrastructure of the Grupa Azoty Puławy Research Laboratory was upgraded with a focus on the development of new nitrogen fertilizers and biotechnological processes. A new Research and Development Centre is being developed in Puławy.
In 2021, Grupa Azoty Kędzierzyn added new equipment to its Fertilizer Application Laboratory. New research equipment was also procured for the Alternative Fuels Laboratory.
Work began to transform the existing Plastics Laboratory into the Plastics Application Design and Development Centre.
In 2021, Grupa Azoty S.A. had two ongoing acceleration programmes, KPT ScaleUP and IMPACT_POLAND 2.0, financed by the Polish Agency for Enterprise Development.
We have a long-standing relationship with the Łukasiewicz Research Network – Institute of New Chemical Syntheses.

Output

The four leading companies of the Grupa Azoty Group were awarded 16 patents in 2021.³
The Grupa Azoty Group mitigates its negative environmental impacts through pro-environmental investments, including in flue gas desulfurisation, industrial wastewater treatment, and reduction of water and electricity consumption. Compared with 2020:

- we reduced hard coal consumption by almost 13%

- we reduced sulfur dioxide emissions by over 36%

- we reduced our carbon footprint (Scope 1 and 2) by 104 thousand Mg CO2e, or approximately 1% in relative terms.
Agricultural innovations of the Grupa Azoty Group:

- A pilot line for the production of humic acids was launched at the Grupa Azoty S.A. Implementation Centre. In 2021, we had the capacity to produce 552 Mg of Tohumus (the main product) per year.

- Grupa Azoty Puławy brought online a granulated fertilizer plant comprising production lines with a daily capacity of 1,200 tonnes of granulated ammonium nitrate or 1,400 tonnes of calcium ammonium nitrate as well as Poland's most advanced packing and seasoning facilities.
Green innovations:

- As part of the Green Amber project, we continue work to develop an environmentally-friendly succinic acid production technology.

- We have developed a commercially viable method of producing ε-caprolactone, a feedstock for biodegradable plastics made from raw materials available at Grupa Azoty Puławy.
Other innovations:

- The deployment of advanced process controls (APC) has reduced the carbon footprint of one of the eight ammonia lines by more than 20 kg CO2 per tonne of ammonia.

- Grupa Azoty Kędzierzyn completed the implementation of an innovative oxygen dosing technology for the TK IV and TK V nitric acid units in 2021.

- We signed an agreement with Microsoft to use cloud computing for precision agriculture and other applications.

³ The number of patents awarded to each company: Grupa Azoty S.A.: 1 patent, Grupa Azoty Puławy: 8 patents, Grupa Azoty Kędzierzyn: 6 patents, Grupa Azoty Police: 1 patent.

Input

The leading Group companies worked with 4,886 local and international suppliers in 2021.
The Grupa Azoty Group sells its products to 109 countries, expanding its distribution capabilities in the following five geographical regions: European Union and other European countries, Asia, North America, South America, and Africa.
The Grupa Azoty Group is an active participant in industry organisations and initiatives, including organisations promoting sustainable development. In 2021, we signed a letter of intent with the State Forests National Forest Holding concerning thermoplastic starch production
[102-13]
.

Output

Our four leading companies added 1,243 new accounts to their customer base in 2021.
Net margin, calculated as net profit or loss to revenue, posted by the Grupa Azoty Group increased to 4 from 3.4 in 2020.
Expansion on new markets, including through COMPO EXPERT's distribution network and business links with traders on distant markets.
The Grupa Azoty Group is Poland's largest producer of:

- mineral fertilizers (second largest producer in the EU)

- polyamides (third largest producer in the EU)

- OXO alcohols (fourth largest producer in the EU) and plasticizers (fifth largest producer in the EU)

- melamine (third largest producer in the EU)

Input

Using the existing and constantly developed infrastructure, the research and development staff at the Group companies have the opportunity to test new technologies and conduct their own research.
In 2021, the Grupa Azoty Group spent PLN 2,425,000 thousand in CapEx directly related to product development.
We are responsible for our products along the entire supply chain. We operate the Product Stewardship Programme as a member of Fertilizers Europe.

Output

The Grupa Azoty Group is CEE's first producer to offer fully biodegradable plastics.
We add new speciality plastics to our product portfolio, including our first polymeric speciality plasticizer OxofineTM Poly2K.
We use efficient fertilizer formulas that help reduce greenhouse gas emissions, such as Fosfarm, which perfectly fits with the ambitions outlined in the EU's farm-to-fork strategy.
The Grupa Azoty Group seeks to identify the carbon footprint for all its products.
Our ambition is to maintain the lead in fertilizer production on the Polish market through ongoing identification of farmers' and consumers' needs. Some examples of our farmer support programmes include Grounded in Knowledge, Nawozy.eu, SatAgro, etc.

Input

The Grupa Azoty Group employs over 15,000 employees (almost 10,000 at the four leading companies), maintaining an unwavering commitment to employee development.
In 2021, the four main companies of the Grupa Azoty Group spent nearly PLN 2,000 thousand on employee training and development.
We develop courses of study in partnership with two universities.
In 2021, we continued the Grupa Azoty Brand Ambassador programme, which aims at building lasting relations between the academic community and industry. In 2021, the Grupa Azoty Group worked with six students promoting the Grupa Azoty brand in academic and scientific communities.

Output

The Group is the largest employer in the regions where it operates.
31% of managerial positions were held by women
[405-1]
in 2021.
We expand our intellectual capital by investing in employee development.
In 2021, the average number of training hours per employee was 6.6 for women and 7.0 for men
[404-1]
.

Input

We have implemented the Grupa Azoty Group Social and Sponsorship Policy (since 2013) and the CSR Policy for Grupa Azoty Group Companies (since 2020). Through charitable donations, the Grupa Azoty Group seeks to actively respond to the needs of its local communities, and its CSR Policy defines the rules for conducting CSR activities.
The total amount of donations to social causes made across the Grupa Azoty Group was PLN 3,353 thousand in 2021, including PLN 2,311 thousand at the four key companies.
In 2021, the Grupa Azoty Group's leading companies paid over PLN 124,244 thousand in local taxes
[203-2]
.
As part of our outreach and charitable activities, we have established relationships with about ten nationwide and 100 local non-governmental organisations and institutions, including Noble Gift and Caritas.
Our employees at Grupa Azoty Group companies engage in employee volunteering initiatives.
In 2021, we again supported local communities in their fight against coronavirus.

Output

We expand our social and economic capital by building stakeholder trust.
We build relationships with our neighbours and customers.
We seek to make the regions where the Group operates more attractive as places to live, work, pursue passions and fulfil ambitions.
The Grupa Azoty Group is a key partner to many nationwide sports, educational and charitable projects promoting physical activity, entrepreneurship and innovation, and helping those in need.

About the Grupa Azoty Group

Our products