3. Financial standing and assets
The structure of assets and liabilities attests to the Group’s stable financial standing. Return on equity (ROE) has reached a high level of 13,6%. Liquidity ratios are kept at levels significantly exceeding the values generally recognized as safe. The Group recorded an increase in sales revenues and improved its operating result, which resulted in a higher EBITDA to equity ratio.
The General debt ratio went up from 52% to 67% at yearend 2016, which is still considered a safe value.
The Consolidated Net Leverage Ratio calculated as at 31 December 2016 signifying the ratio of 1) financial debt less cash and cash equivalents to 2) the adjusted operating result plus depreciation computed in accordance with the terms and conditions of the financial documentation related to the Bond issue and the Revolving Credit Facility was 1.95.
The Fixed Charge Coverage Ratio, calculated for the year as the ratio of (1) adjusted operating result plus depreciation and (2) the amount of interest on financial debt, was 7.92.
During the financial year the Group did not change its capital management and liquidity policies.
| SELECTED POSITIONS OF THE STATEMENT OF FINANCIAL POSITION | 31 Dec. 2016 | 31 December 2015 | structure 2016 | structure 2015 | 2016/2015 growth |
|---|---|---|---|---|---|
| Non-current assets, of which: | 2 799 | 2 545 | 50% | 53% | 110% |
| Property, plant and equipment | 2 472 | 2 287 | 44% | 48% | 108% |
| Long-term investments | 6 | 6 | 0% | 0% | 100% |
| Current assets, of which: | 2 837 | 2 247 | 50% | 47% | 126% |
| Inventories | 551 | 467 | 10% | 10% | 118% |
| Trade and other receivables | 1 085 | 666 | 19% | 14% | 163% |
| Cash and cash equivalents | 1 152 | 1 051 | 20% | 22% | 110% |
| Equity, of which: | 1 883 | 2 306 | 33% | 48% | 82% |
| Share capital | 40 | 40 | 1% | 1% | 100% |
| Non-current liabilities | 3 000 | 2 023 | 53% | 42% | 148% |
| Liabilities on loans, borrowings and other debt instruments | 2 548 | 1 685 | 45% | 35% | 151% |
| Other non-current liabilities, financial leases | 31 | 30 | 1% | 1% | 103% |
| Current liabilities | 753 | 463 | 13% | 10% | 163% |
| Liabilities on loans, borrowings and other debt instruments | 22 | 21 | 0% | 0% | 105% |
| STATEMENT OF COMPREHENSIVE INCOME | from 1 January 2016 to 31 December 2016 | from 1 January 2016 to 31 December 2015 |
|---|---|---|
| Net revenues on sales of products, goods and materials | 4 755 | 4 058 |
| Costs of services sold | (3 862) | (3 301) |
| Gross profit (loss) on sales | 893 | 757 |
| Profit (loss) on operating activities | 451 | 450 |
| Financial income | 38 | 31 |
| Financial expenses | (154) | (56) |
| Profit (loss) before tax | 335 | 467 |
| Income tax | (79) | (41) |
| Net profit (loss) | 256 | 426 |
| 2016 | 2015 | |
| LIQUIDITY RATIOS | ||
| Working capital | 954 | 754 |
| Current ratio | 3,77 | 4,85 |
| Quick ratio | 3,04 | 3,84 |
| PROFITABILITY RATIOS | ||
| Return on equity (ROE) | 13,60% | 18,47% |
| Return on assets (ROA) | 4,54% | 8,89% |
| Net return on sales (ROS) | 5,38% | 10,50% |
| EBITDA / equity | 35,16% | 26,76% |
| DEBT RATIOS | ||
| General debt ratio | 67% | 52% |
| Debt to equity ratio | 199% | 108% |
The Group’s operating performance is affected by a number of factors; many of them influence the chemical industry as a whole. They include: global supply and demand on the end markets on which the Group’s clients compete, raw material prices, general economic conditions and ensuring compliance with environmental regulations. The Group’s operating performance and cash flows are also subject to structural and operational factors specific to the Company, such as a broad product offering or geographic diversification through intensification of the sales of the Synthos Group products in North and South American markets.
The Group’s operations comprise production and sales of chemicals used in a broad range of industries, including in particular in the automotive, packaging and construction industries. These branches and consequently also demand for the Group’s products, are affected by the general business conditions. The Group’s operations are also cyclical and, what is even more important, the variation in the balance between supply and demand in the chemical industry. The Group’s future operating results may still be subject to such cycles and variation.
Increase of the Group’s revenues depends on the overall situation in Poland and on a broader European and global business environment.
In the past, the results of the Group’s activity were affected (and it is expected that the Group’s financial performance will continue to be affected) by the key macroeconomic factors, such as GDP growth, inflation, interest rates, exchange rates and unemployment rates.
The Synthos S.A. Group’s operations are largely dependent on market conditions in the industries which use the raw materials and indirect products of the Group, including in particular the automotive and the construction industry.
In 2016, good business conditions persisted in the European automotive industry. Throughout the year, the European Union’s passenger car sales were 14,641,356 cars. The number of new cars registered rose by 6.8% over 2015 (source: European Automobile Manufacturers’ Association (ACEA)). The largest growth was recorded by Italy (15.8%) and Spain (10.9%). In France, growth was 5.1%, in Germany it was 4.5% and the United Kingdom it was 2.3%.
In 2016, 206.7 million so-called consumer replacement tires (tires for passenger cars, SUVs and trucks with a weight of up to 3.5 tons) were sold in the European Union, i.e. 1.9% more than in 2015.
In the long run, a real increase in demand for tires is expected on Asian markets, such as China and India and, to a lesser extent, on South-American markets (mainly Brazil). In addition, the Group’s operating results are subject to long-term effect of the tire labelling regulations, which boosted demand for NdBR and SSBR rubber used in the manufacture of modern summer tires and winter tires with improved performance in terms of their resistance to wear and tear, rolling resistance and traction on a wet surface.
The next important factor supporting the performance of the rubber industry in the years to come will be the increasing use of the production capacity of the SSBR rubber installation commissioned in 2015.
2016 was characterized by bad market conditions in the Polish construction industry. In the period from January to December 2016, construction and assembly output was 14.1% lower than a year earlier when growth of 2.8% was recorded (based on data from the Central Statistical Office, January 2017).
This situation affected the performance of the Dispersions, Adhesives and Latexes Segment of the Synthos S.A. Group, since a large portion of its products is used by the construction industry.
In 2017, the economic situation in the domestic construction industry is expected to improve. Moreover, the improved results in the adhesives area should be favorably affected in the medium term by the gradual expansion of the product portfolio as well as an increase in the scale of business.
Prices of raw material are an important component of the Group’s operating expenses. In the year ended 31 December 2016, the Group’s costs of raw materials purchases accounted for 75.3% of total operating expenses. The Group’s key raw materials include: butadiene, styrene, ethylbenzene, butyl acrylate, vinyl acetate monomer, ethylene, benzene and C4 fraction. Accordingly, the Group’s operating expenses may be directly influenced by the volatility of the costs of raw materials, which are affected by global demand and supply and other factors beyond the Group’s control. The prices for the Group’s raw materials are to some extent correlated with global crude oil prices, since oil is the initial raw material of the European crackers, which in turn supply the raw materials to the Group. In Europe, the prices of raw materials purchased by the Group are only to a slight extent dependent on gas prices.
Generally, the Group attempts to transfer the increases in raw material prices to its customers. However, in connection with the price pressures and other forms of competitive and market pressures, the Group may be unable to transfer all or any such costs. Moreover, the volatility of the costs of such raw materials makes it difficult to manage prices and there may be a delay between the hike of raw material prices and the rise of prices for the Group’s clients. Even though the changes in raw material prices usually drive the changes of product prices in the long term, the prices for the Group’s products may not immediately reflect the changes in raw material prices because of the pricing mechanisms employed by the Group or delays in updating the prices for Group’s products. This affects the Group’s capacity to transfer price hikes to its customers on a timely basis. Accordingly, variation of raw material prices may have a significant impact on profit before tax, gross margin or other operating results of the Group.
Moreover, in order to optimize such price variations in long-term contracts to supply raw materials, the price formulas in such contracts signed by the Group reflect the current situation on the raw materials market. The formulas used in the contracts reduce the risk of high deviations between contracted purchase prices and market prices. Backward integration and obtaining long-term supply contracts at attractive prices are the key factors that allow the Group to control its raw material costs.
Any changes in raw material prices have a direct impact on the level of the Group’s working capital. Generally, rising prices lead to increased working capital requirement by the Group; falling prices result in lower demand for working capital.
Margins on the Group’s markets are strongly affected by industrial capacity utilization, which in turn is affected by the supply and demand of products and the costs of the major commodities. Certain markets, such as plastics and synthetic rubber markets, are more mature and therefore their overall growth is usually more correlated with movements in global GDP. As demand for products increases and comes nearer to the level of available supply, capacity utilization increases along with prices and margins. Supply on the Group’s markets are usually cyclical and features periods of limited sales, which drive up operating rates and margins, which is followed by the periods of oversupply, usually stimulated by the development of additional production capacities, which in turn cause a reduction in operating rates and margins.
In addition to cyclicality, the Group’s margins are also susceptible to potential significant short-term volatility caused by various factors, such as scheduled and unscheduled stoppages, political and economic conditions affecting prices and changes in inventory management policies by clients (such as building inventories or reducing inventories in the periods of expected price hikes).
The Group is subject to extensive environmental and occupational health and safety regulation at both national and European level. There are numerous laws that affect the Group’s operations and the Group incurs and expects to continue to incur significant capital expenditures to ensure compliance with the current and future laws and regulations. The Group may also incur the costs of remediation measures, liquidation and ongoing upgrades and the costs of compliance with the requirements in connection with its production facilities and other real properties. Nevertheless, the Group is convinced that the potential costs of corrective measures will not be high and does not expect them to affect the results of its operation.
The REACH regulation imposed significant obligations on the Group and the entire chemical industry in respect to testing, evaluation and registration of key chemicals and semi-finished chemical products. The Classification, Labelling and Packaging Regulation (“CLP”) imposes on the group significant obligations in respect to testing, evaluation and registration of key chemical products, which are expensive, time-consuming, drive up the Group’s production costs and erode operating margins earned on the Group’s products.
The Group expects that within the next few years it will be additionally affected by new environmental requirements arising, among others from the Industrial Emissions Directive (“IED”) and the EU Emissions Trading System (“EU ETS”). The Group is striving to follow the increasing environmental awareness of its customers by producing NdBR rubbers used to manufacture tires with improved operational parameters that reduce fuel consumption. Moreover, the Group participates in the development of alternative paths of obtaining butadiene from renewable sources. The Group is also considering building a municipal waste incineration plant that would comply with the Polish national waste management regulations.
The Group operates internationally and consequently it is exposed to various currency risks, in particular in respect to EUR, PLN, USD and CZK. The presentation currency used in the financial statements is Polish zloty, however in 2016, 76% of the Group’s revenues and 90% of its costs were linked to transactions settled in currencies other than Polish zloty. Accordingly, the Group is affected by transactions in foreign currencies and the effects of currency conversion and FX rate fluctuations. In the recent years, the value of these currencies vs. Polish zloty has fluctuated significantly. This situation may recur in the future. The possible depreciation of these currencies vs. Polish zloty will reduce the PLN equivalent of these amounts, which present the operating performance in the consolidated financial statements. A possible appreciation of these currencies will increase these amounts accordingly. FX rate fluctuations affect the amount of sales revenues and the cost of raw material purchases. Appreciation of the Polish zloty against other currencies may have a negative effect on the profitability of the Group’s export and domestic sales, however such changes in export and domestic sales revenues caused by FX rate fluctuations are partially offset by changes in the costs of importing raw materials. One of the consequences of the fact that the Group purchases raw materials, sells products, incurs loans and borrowings and holds cash in foreign currencies, is that the Group has been and will be exposed to FX rate changes, which may materially influence the its operating results, assets and liabilities and cash flows expressed in Polish zlotys. FX rate volatility may also interfere significantly with the comparability of operating results in individual periods.
The Group is exposed to typical threats and risks of disruption related to chemical production and the related storage and transportation of raw materials, products and waste. Such potential risks and disruptions include, among others, explosion, fire, adverse weather conditions and natural disasters, as well as failures of mechanical devices ensuring safety of the process and reducing the emission of pollutants.
If any disruption occurs, alternative plants with adequate capacity may not be available, may cost much more or may require ample time to launch production, which may adversely affect the Group’s operations and financial results. Even though such events are nothing out of ordinary, they occur rarely, no more frequently than once or twice a year and usually are short-lasting.
On 13 August 2015, as a result of a failure of the ethylene installation, a fire broke out in the Chempark Zaluži chemical facilities in Litvinow in the Czech Republic owned by the Unipetrol Group (which is part of the PKN Orlen Group).
Synthos Group sources raw materials from the cracking installation at facilities owned by Grupa Unipetrol and is connected to these facilities by a pipeline used to feed C4 fraction, ethylene and benzene to Synthos’ production facilities in the Czech Republic. The failure and fire put a temporary halt to supplies of raw materials. Consequently, once reserves of materials have been exhausted, the Synthos Group turned to alternative supply sources. The supplies of this raw material from the steam cracking installation following its repair in late October 2016 were restored.
For the purpose of this discussion of the results of the Group’s activity, the key items of the statement of comprehensive income are: sales revenues, costs of sales, selling expenses, other operating income, general and administrative expenses, other operating expenses, financial income, financial expenses, income tax and net profit. This discussion refers also to EBITDA and the Group’s performance by operating segment
Sales revenues
Sales revenues include revenues on sales of merchandise and finished products, provision of services, materials and rental income related to investment property.
Segment results
Segment results include sales revenues of each segment reduced by the total cost allocated to such segment. Reconciliation of segment results with profit before tax is presented in the Consolidated Financial Statements.
Costs of sales
Costs of sales include, among others, consumption of materials and energy, salaries and cost of purchase of goods and materials sold.
Selling expenses
Selling expenses include, among others, costs of transportation, loading and unloading, customs duties, trading fees and insurance of goods.
General and administrative expenses
General and administrative expenses include general expenses associated with the operation of the management board and general production expenses associated with the maintenance and operation of general purpose units.
Other operating income
Other operating income include, among others, revenues associated with the sale of fixed assets, reversal of provisions, impairment losses, indemnities from insurance companies and contractual penalties.
Other operating expenses
Other operating expenses include, among others, restatement of provisions, impairment losses, charges and costs of unused production capacity.
Financial income
Financial income includes revenues on the valuation of derivatives, interest according to the amortized cost using the effective interest rate, FX gains net of FX losses on account of cash assets, loans and borrowings and other assets and liabilities.
Financial expenses
Financial expenses include interest paid calculated using the effective interest rate, FX differences net of positive FX differences on account of cash assets, loans and borrowings and other assets and liabilities.
Income tax
Income tax includes the cost of current and deferred income tax.
Net profit
Net profit is calculated as total income less total expenses.
EBITDA
EBITDA is calculated as operating profit plus depreciation of property, plant and equipment and amortization of intangible assets.
The table below presents the consolidated result on the Group’s activity in each of the stated periods.
| from 1 January 2016 to 31 December 2016 | from 1 January 2015 to 31 December 2015 | |
|---|---|---|
| Sales revenues | 4 755 | 4 058 |
| Cost of sales | (3 862) | (3 301) |
| Gross profit | 893 | 757 |
| Selling expenses | (152) | (126) |
| General expenses | (203) | (164) |
| Cost of research and development work | (30) | (16) |
| Other operating (expenses)/income | (57) | (1) |
| Operating profit | 451 | 450 |
| Financial income | 38 | 31 |
| Financial expenses | (154) | (56) |
| Profit on the sale of financial assets available for sale | - | 42 |
| Profit before tax | 335 | 467 |
| Income tax | (79) | (41) |
| Net profit | 256 | 426 |
Components of other comprehensive income that may be reclassified to the net result in a future period:
| from 1 January 2016 to 31 December 2016 | from 1 January 2015 to 31 December 2015 | |
|---|---|---|
| FX differences from converting foreign operations | 45 | 23 |
| Measurement of financial assets available for sale | - | (48) |
| Valuation of pension plans | (23) | - |
| Net other comprehensive income | 22 | (25) |
| Total comprehensive income | 278 | 401 |
| Profit attributable to: Parent Company shareholders | 256 | 426 |
| Net profit for the financial year | 256 | 426 |
| Comprehensive income attributable to: Parent Company shareholders | 278 | 401 |
| Total income for the period | 278 | 401 |
Sales revenues
Total sales revenues in the year ended 31 December 2016 were PLN 4,755 million and were PLN 697 million or 17.2% higher than PLN 4,058 million in the year ended 31 December 2015.
The table below presents the Group’s historical sales revenues for the years ended 31 December 2016 and 2015.
| from 1 January 2016 to 31 December 2016 | from 1 January 2015 to 31 December 2015 | |
|---|---|---|
| Revenues on sales of products | 4 421 | 3 782 |
| Revenues on sales of services | 51 | 37 |
| Revenues on sales of goods and materials | 282 | 238 |
| Rental income from investment properties | 1 | 1 |
| 4 755 | 4 058 |
Segment analysis for the year ended 31 December 2016 compared to the year ended 31 December 2015
The segment result in the year ended 31 December 2016 was PLN 508 million, making it PLN 57 million or 12.6% higher than PLN 451 million in the year ended 31 December 2015.
The table below presents the Group’s historical sales revenues and results for the years ended 31 December 2016 and 2015, by operating segment.
| from 1 January 2016 to 31 December 2016 | from 1 January 2015 to 31 December 2015 | |
|---|---|---|
| Sales revenues | ||
| Synthetic Rubber Segment | 2 146 | 1 870 |
| Styrene Plastics Segment | 2 111 | 1 697 |
| Dispersions, Adhesives and Latexes Segment | 195 | 184 |
| AGRO Segment | 81 | 76 |
| Other operations | 222 | 231 |
| Total sales revenue | 4 755 | 4 058 |
| Costs by segment | ||
| Synthetic Rubber Segment | (1 852) | (1 650) |
| Styrene Plastics Segment | (1 955) | (1 549) |
| Dispersions, Adhesives and Latexes Segment | (177) | (169) |
| AGRO Segment | (83) | (69) |
| Other operations | (180) | (170) |
| Total costs | (4 247) | (3 607) |
| Segment results | ||
| Synthetic Rubber Segment | 294 | 220 |
| Styrene Plastics Segment | 156 | 148 |
| Dispersions, Adhesives and Latexes Segment | 18 | 15 |
| AGRO Segment | (2) | 7 |
| Other operations | 42 | 61 |
| Total segment results | 508 | 451 |
Synthetic Rubber Segment
The result of the Synthetic Rubber Segment in the year ended 31 December 2016 was PLN 294 million and was PLN 74 million or 33.6% higher than PLN 220 million in the year ended 31 December 2015.
The increase in the Segment’s result is a consequence of greater sales volumes of products and improved unit margins in the ESBR and NdBR rubbers.
Styrene Plastics Segment
The result of the styrene plastics segment in the year ended 31 December 2016 was PLN 156 million and was PLN 8 million or 5.4% higher than PLN 148 million in the year ended 31 December 2015.
This increase stems from a greater quantity of products sold, especially EPS and XPS, at margin levels comparable to or lower than those of the previous period.
Dispersions, Adhesives and Latexes Segment
The result of the Dispersions, Adhesives and Latexes Segment in the year ended 31 December 2016 was PLN 18 million and was PLN 3 million or 20.0% higher than PLN 15 million in the year ended 31 December 2015.
The increase in the Segment’s result is a consequence of greater sales volumes and improved unit margins.
Agro Segment
The result of the Agro Segment in the year ended 31 December 2016 was PLN -2 million and was PLN 9 million or 128,6% lower than PLN 7 million in the year ended 31 December 2015.
This decline resulted predominantly from lower margins caused by the competitors’ aggressive pricing policy and higher costs of research and development work associated with new product registrations.
Other Operations
The result of the Other Operations Segment, covering utilities and products not classified into any of the above segments, in the year ended 31 December 2016 was PLN 42 million and was PLN 19 million or 31.2% lower than PLN 61 million in the year ended 31 December 2015.
This change was driven predominantly by a weaker performance of the energy business due to a lower sales volume of utilities.
Costs of sales
Costs of sales in the year ended 31 December 2016 were PLN 3,862 million and were PLN 561 million or 17.0% higher than PLN 3,301 million in the year ended 31 December 2015.
This change was driven by an increase in the volume of sales recorded in 2016, including improved sales of EPS, largely related to the acquisition of the EPS business from the INEOS Group in the second half of the year.
Selling expenses
Selling expenses in the year ended 31 December 2016 were PLN 152 million, up by PLN 26 million or 20.6% from PLN 126 million in the year ended 31 December 2015.
The increase in selling expenses is correlated with increased levels of product sales volumes.
General and administrative expenses
General and administrative expenses in the year ended 31 December 2016 were PLN 203 million, up by PLN 39 million or 24.8% from PLN 164 million in the year ended 31 December 2015. The increase in the general and administrative expenses resulted mostly from the acquisition of new entities.
Other operating income
Other operating income in the year ended 31 December 2016 were PLN 73 million, up by PLN 51 million or 231.8% from PLN 22 million in the year ended 31 December 2015. The main items which drove the increase in other operating income in 2016 were a reversal of a provision for finished goods in the SSBR rubbers group of PLN 20 million and recognition of a settlement of grands received on amount of PLN 18 million.
Other operating expenses
Other operating expenses in the year ended 31 December 2016 were PLN 130 million, up by PLN 107 million or 465.2% from PLN 23 million in the year ended 31 December 2015. The increase in other operating expenses was driven mainly by creation of an additional provision for liquidation of inactive industrial facilities in the amount of PLN 46 million. Moreover, another element influencing the increase was development work revaluation write-offs of PLN 38 million. The main factor behind the write-off was the efficiency ratio of these projects which turned out to be lower than expected.
Financial income
Financial income in the year ended 31 December 2016 was PLN 38 million and was PLN 7 million or 22.6% higher than PLN 31 million in the year ended 31 December 2015. This increase was driven mainly by gains on financial derivatives.
Financial expenses
Financial expenses in the year ended 31 December 2016 were PLN 154 million, up by PLN 98 million or 175.0% from PLN 56 million in the year ended 31 December 2015. The increase in financial expenses was mainly due to negative FX differences.
Income tax
Income tax in the year ended 31 December 2016 was PLN 79 million, up by PLN 38 million or 92.7% from PLN 41 million in the year ended 31 December 2015.
The Group’s effective tax rate in the years ended 31 December 2016 and 2015 was 24% and 9%, respectively. In 2016, the Group recognized an additional tax liability in its corporate income tax for 2010-2015 in the amount of PLN 63 million. The related proceedings are currently at the stage of appeals filed with the Tax Chamber in Kraków and complaints filed with the Voivodship Administrative Court in Kraków.
Net profit
For the above reasons, net profit for the year ended 31 December 2016 was PLN 256 million, down by PLN 170 million or 39.9%% from PLN 426 million in the year ended 31 December 2015.
EBITDA
In the year ended 31 December 2016 the Group’s EBITDA was PLN 662 million, up by PLN 45 million or 7.3% from PLN 617 million in the year ended 31 December 2015. The growth in EBITDA ensued chiefly from better performance in the synthetic rubber and styrene plastics segment.
The table below provides the Group’s historic EBITDA by segment for the years ended 31 December 2016 and 2015.
| from 1 January 2016 to 31 December 2016 | from 1 January 2015 to 31 December 2015 | |
|---|---|---|
| Synthetic Rubber Segment | 363 | 276 |
| Styrene Plastics Segment | 226 | 207 |
| Dispersions, Adhesives and Latexes Segment | 29 | 25 |
| AGRO Segment | 3 | 10 |
| Other operations | 41 | 99 |
| Total | 662 | 617 |
Historically, the Group’s liquidity needs have resulted mainly from the need to finance capital expenditures, working capital, dividend payments and service the Group’s debt. The Group’s main source of liquidity consists of operating cash, credit lines, disposal of assets and EU subsidies for capital expenditures.
Cash flows
The table below presents the Group’s consolidated cash flows for each of the stated periods.
| from 1 January 2016 to 31 December 2016 | from 1 January 2015 to 31 December 2015 | |
|---|---|---|
| Net cash on operating activity | 482 | 732 |
| Net cash on investing activity | (414) | (284) |
| Net cash on financing activity | 8 | (183) |
Net cash on operating activity
In the year ended 31 December 2016, net cash on operating activity was PLN 482 million, down by PLN 250 million or 34.2% from PLN 732 million in the year ended 31 December 2015. This decline was driven mainly by higher demand for working capital which resulted from higher prices for the main products in the latter half of the year and ramping up the magnitude of the EPS segment as a result of acquiring the EPS business from the INEOS Group.
Net cash on investing activity
Net cash used in investing activity in the year ended 31 December 2016 was PLN 414 million, up by PLN 130 million or 45.8% from PLN 284 million in the year ended 31 December 2015. The movement in cash used in investing activity resulted primarily from the acquisition of the EPS business from the Ineos Group.
Net cash on financing activity
In the year ended 31 December 2016, net cash on financing activity was PLN 8 million, up by PLN 191 million or 104.4% from PLN -183 million in the year ended 31 December 2015. The main reason for the change was an increase in net financial debt by PLN 784 million and the payment of an interim dividend of approx. PLN 701 million in 2016.
Working capital requirement
The Group defines working capital as current assets less cash less short-term liabilities, excluding financial liabilities. The Group’s net working capital requirement depends mainly on the prices of raw materials, the sale prices of products and on the management of receivables, liabilities and inventories.
As at 31 December 2016, net working capital was PLN 954 million, up PLN 200 million from PLN 754 million at yearend 2015. This growth was driven by higher prices for the main products in the latter half of the year and ramping up the magnitude of the EPS segment as a result of acquiring the EPS business from the INEOS Group.
Off-balance sheet arrangements
As at 31 December 2016, the Group had no contingent liabilities towards unaffiliated entities.
Capital expenditures
The Group's capital expenditures for the year ended December 31, 2016, including expenditures on fixed capital formations and the acquisition of EPS business from the INEOS Group, totaled PLN 478 million.
The table below presents the Group’s capital expenditures incurred on fixed capital formations, in the specified periods, by operating segment.
| from 1 January 2016 to 31 December 2016 | from 1 January 2015 to 31 December 2015 | |
|---|---|---|
| Synthetic Rubber Segment | 25 | 369 |
| Styrene Plastics Segment | 43 | 33 |
| Dispersions, Adhesives and Latexes Segment | 9 | 33 |
| AGRO Segment | 3 | 14 |
| Other operations | 106 | 128 |
| Total | 186 | 577 |
The Group implements an extensive capital expenditure program focused on the construction, maintenance and improvement of its production facilities. Considerable capital expenditures are needed to maintain the current production level in the Group’s plants, to satisfy the requirements of new regulations and to maintain a license for business activity. Additional capital expenditures are also required for the modernization of the ageing or outdated equipment, to increase energy efficiency, increase production capacity and improve control over processes.
The Group’s significant investment projects include in particular: (i) construction of a product formulation plant in the Agro segment; (ii) construction of an installation to produce InVento X in the styrene material segment; and (iii) increase of the production capacity of neodymium butadiene rubber (NdBR). All the capital expenditure amounts stated above are estimates and may change or be modified at any moment.
The Group intends to execute its investment plans, which include organic growth and acquisitions.
As at the date of this report, the Group had the following equity investments.
| Statement of shares held in 2016 | Number of shares | Value in PLN million |
|---|---|---|
| - Global BioEnergies | 59 525 | 6 |
| Total | 59 525 | 6 |
| Statement of shares held in 2015 | Number of shares | Value in PLN million |
|---|---|---|
| - Global BioEnergies | 59 625 | 6 |
| Total | 59 625 | 6 |
The fair value of financial instruments available for sale has been determined using stock quotations.
| Limitations of property rights to assets | 31 Dec. 2016 [PLN million] |
|---|---|
| Liability on account of collateral established on property, plant and equipment items | 0 |
| Assignment of receivables | 377 |
| Assignment of inventories | 119 |
On 30 September 2014, Synthos Finance AB (publ) with registered seat in Stockholm, Sweden (“Bond Issuer”), a subsidiary fully owned by Synthos S.A., issued senior notes with a total nominal value of EUR 350,000,000 (“Initial Bonds”). The Initial Bonds bear a fixed interest rate of 4.000% p.a., with interest payable every half a year (on 30 March and 30 September of each year) starting on 30 March 2015 and their maturity date is 30 September 2021. The Initial Bonds were issued for a price equal to 100% of their principal, for a total price of EUR 350,000,000. The Initial Bonds are unsubordinated and rank equally in right of payment to any existing and future unsecured unsubordinated debt.
The Initial Bonds are unsecured and guaranteed jointly and severally by Synthos S.A., Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna, SYNTHOS Kralupy a.s., TAMERO INVEST s.r.o. and SYNTHOS PBR s.r.o. (“Guarantors”). The guarantee extended by the Guarantors covers all the obligations of Synthos Finance AB (publ) under the Initial Bonds (including the obligation to repay the face value of the Initial Bonds and interest on the Bonds) and has been extended to all Bondholders. The guarantee will expire after the expiration of the Bondholders’ claims against Synthos Finance AB (publ). The fee charged for the extension of the guarantee was awarded on an arm’s length basis.
In connection with the Initial Bond issue, the group is also subject to covenants which are typical for high-yield bonds, which may impair its ability to finance future activity and capital needs and to take advantage of business opportunities and conduct current operations. These covenants are subject to numerous exceptions and exclusions and therefore if certain terms and conditions are met, the debt amount incurred in compliance with those covenants may be considerable.
The Initial Bonds are listed on the Official Listing Market of the Irish Stock Exchange and have been admitted into trading on the Global Exchange Market.
The Initial Bond Issue Agreement, the Initial Bonds and Guarantees are governed by New York state law and will be construed accordingly.
At the same time, in order to transfer the proceeds from the Initial Bond issue, the Company’s Management Board adopted a resolution on 30 September 2014 on the issue of intra-group bonds, which were subscribed by Synthos Finance AB (publ) and which are unsecured registered bonds issued under the Act on Bonds of 29 June 1995. The par value of the intra-group bonds is EUR 350,000,000 and corresponds to the par value of the Bonds. The total issue price of the intra-group bonds is EUR 344,001,000. The proceeds from the intra-group bond issue have been designated for repayment of the Group’s debt, payment of Initial Bond issue costs and for general corporate purposes of the Group. The maturity date of the date of payment of interest on the intra-corporate bonds correspond to those applicable to the Bonds.
Additional Bonds
On 2 April 2015, Synthos Finance AB (publ) with registered seat in Stockholm, Sweden, a subsidiary fully owned by Synthos S.A., issued senior note bonds with a total par value of EUR 50,000,000, fixed interest of 4.000% per annum and maturity on 30 September 2021 (“Additional Bonds”). The Additional Bonds are an additional issue (“tap issue”) for the Initial Bonds.
As in the case of the Initial Bond issue, the obligations of Synthos Finance AB (publ) under the Additional Bonds were secured by a guarantee extended, jointly and severally, by the Guarantors.
At the same time, in order to transfer the proceeds from the Additional Bonds, on 2 April 2015, Synthos Finance AB (publ) granted an intra-group loan to Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością sp. j., an indirect subsidiary of Synthos S.A. in the amount of EUR 50 million and with an interest rate of 4.7% p.a. maturing on 30 September 2021.
As in the case of the Initial Bonds, the Additional Bonds were listed on the official listing market of the Irish Stock Exchange and were admitted into trading on the Global Exchange Market.
Loans granted
In the reporting period, on 10 February 2016 Synthos S.A. signed a loan agreement with Green Papper SCSp with a possible debt amount up to EUR 50 thousand with an option of drawing tranches in foreign currencies: PLN, EUR, USD, GBP, CZK. The loan repayment date was set at 31 December 2020 and the interest rate was set as a fixed rate of 4.89% per annum. During the reporting period, a loan of EUR 30 thousand was drawn down and repaid.
On 21 July 2016 FORUM 62 Fundusz Inwestycyjny Zamknięty [Closed-end Investment Fund] (lender) signed a loan agreement with Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna for PLN 245 million. The loan repayment date was set at 31 December 2018 and the interest rate was set as a fixed rate of 4.7% per annum. The entire loan amount of PLN 245 million was disbursed. The entire amount was repaid in the reporting period.
On 26 August 2016 FORUM 62 Fundusz Inwestycyjny Zamknięty [Closed-end Investment Fund] signed a loan agreement with a subsidiary, i.e. Synthos Styrenics Synthos Dwory 2 spółka z ograniczoną odpowiedzialnością spółka komandytowa with a possible debt amount up to PLN 120 million. The entire amount was disbursed. The loan repayment date was set at 31 August 2017 and the interest rate was set as a fixed rate of 4.7% per annum. The drawn down loan was repaid in its entirety during the reporting period.
On 24 August 2016, Synthos Kralupy a. s. signed a loan agreement with Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna with the possible debt amount up to PLN 150 million with the option of drawing tranches in foreign currencies - PLN, EUR, USD, GBP, CZK. The loan repayment date was set at 30 September 2016 and the interest rate was set as fixed at 4.89% per annum. The loan amount of PLN 100 million was disbursed and repaid during the reporting period.
On 24 November 2016, Synthos PBR s.r.o. signed a loan agreement with Styrenics Synthos Dwory 2 spółka z ograniczoną odpowiedzialnością spółka komandytowa with the possible debt amount up to EUR 30 million with the option of drawing tranches in foreign currencies - PLN, EUR, USD, GBP, CZK. The loan repayment date was set at 30 December 2020 and the interest rate was set as a fixed rate of 4.89% per annum. The loan amount of EUR 20 million was disbursed during the reporting period.
On 24 November 2016, Synthos PBR s.r.o. signed a loan agreement with Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna with the possible debt amount up to EUR 20 million with the option of drawing tranches in foreign currencies - PLN, EUR, USD, GBP, CZK. The loan repayment date was set at 30 December 2020 and the interest rate was set as a fixed rate of 4.89% per annum. The loan amount of EUR 15 million was drawn down during the reporting period.
On 24 November 2016, Synthos Kralupy a. s. signed a loan agreement with Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna with the possible debt amount up to EUR 50 million with the option of drawing tranches in foreign currencies - PLN, EUR, USD, GBP, CZK. The loan repayment date was set at 30 November 2020 and the interest rate was set as a fixed rate of 4.89% per annum. The loan amount of EUR 40 million was drawn down during the reporting period.
Explanation of differences between the financial results of the Synthos S.A. Group reported in the annual report and the previously published forecasts of the results for the given year.
Forecasts were not prepared or published.
Evaluation of financial resources management
In 2016, the Group generated operating cash flow of PLN 481 thousand. These funds were earmarked predominantly to finance investments and acquisition targets. In 2016, to secure financial resources for the execution of investment programs and its day-to-day activity, the Group additionally entered into a Revolving Credit Facility up to EUR 220 million, with usage at yearend 2016 being EUR 180 million. In addition, the financial resources of the consolidated Group entities allow for full payment of incurred liabilities. Financial liquidity does not create any threats to the business activity conducted by the Company and its subsidiaries.
Auditor
On 28 July 2016, the Company’s Supervisory Board selected Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp.k. as the entity authorized to audit the Company’s financial statements for 2016 and the Group’s consolidated financial statements for 2016, and to review the Group’s interim consolidated financial statements for H1 2016. Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp.k. with its registered office in Warsaw, at Rondo ONZ 1, 00-124 Warsaw, is entered on the list of entities authorized to audit financial statements (kept by the National Chamber of Statutory Auditors) under the number 130. In the past the issuer has not availed itself of the services of Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. The Supervisory Board selected the entity authorized to audit the Company’s financial statements based on Article 15.1.b of Synthos S.A.’s Articles of Association, in accordance with the binding regulations and professional standards.
Further to the resolution of 28 June 2016, on 20 October 2016, the Supervisory Board of Synthos S.A. selected Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp.k. with its registered office in Warsaw as the entity authorized to audit and review the standalone financial statements of Synthos S.A. and the consolidated financial statements of the Synthos S.A. Group in 2016, 2017 and 2018.
The Supervisory Board selected the entity authorized to audit the standalone financial statements of Synthos S.A. and the consolidated financial statements of the Synthos S.A. Group in 2016, 2017 and 2018 in accordance with the provisions of the Issuer’s Articles of Association and in accordance with the binding regulations and professional standards.
On 8 August 2016, the Company entered into a one-year agreement to review and audit its financial statements and consolidated financial statements for 2016 with Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. with its registered office in Warsaw. On 21 October 2016, the Parties executed an annex to the agreement to expand the scope of services to include audits and reviews of the standalone financial statements of Synthos S.A. and other entities belonging to the Synthos Group (based on agreements between these entities and entities belonging to the EY Group) and the consolidated financial statements of the Synthos S.A. Group in 2016, 2017 and 2018.
The auditor’s total fee for auditing the annual financial statements and the consolidated financial statements for 2016 and reviewing the condensed financial statements of the Company and the Synthos Group for the first 6 months of 2016 was PLN 110 thousand. The auditor’s (and its affiliates) total fee for other assurance services, including reviews of the financial statements of the Company and its affiliates (in all locations) was PLN 1372 thousand. The auditor’s fee for other services was PLN 30 thousand.
For the previous year (2015) auditors fee for audit of annual financial statement and revision of shortened financial statements of the Company and its affiliates was PLN 500 thousand.
Internal control and risk management system
Internal control and risk management in reference to preparing financial statements are provided on the basis of an internal regulation on financial policies. At the same time, interim reports are prepared on the basis of legal regulations prevailing in this respect (Minister of Finance regulation). The financial data constituting the basis for the financial statements and periodic reports come from the financial and operational reporting used by the Company. Substantive and organizational supervision over preparation of the financial statements is exercised by Financial Director.
The financial statements prepared are verified by the Management Board. One of the most important elements in the process of drawing up the Company’s and the Group’s financial statements is verification of the financial statements by an independent auditor. The independent auditor is selected by the Supervisory Board. After the auditor completes the audit of the financial statements, they are sent to the Company’s Supervisory Board members and the Supervisory Board assesses the Company’s and the Group’s financial statements.
Additionally, the Company manages the risk associated with preparation of the financial statements through monitoring on an ongoing basis of the changes required by external regulations relating to reporting requirements and preparation for their introduction.