ANNUAL REPORT 01.01.2014 - 31.12.2014 SYNTHOS GROUP
CONSOLIDATED ANNUAL REPORT FOR SYNTHOS GROUP FOR THE PERIOD FROM 1 JANUARY 2014 TO 31 DECEMBER 2014
Table of Content 1. INTRODUCTION ...... 1 2. RISK FACTORS ...... 2 3. BUSINESS DESCRIPTION OF SYNTHOS GROUP ...... 23 4. OPERATIONAL AND FINANCIAL REVIEW ...... 40 5. MANAGEMENT ...... 57 6. PRINCIPAL SHAREHOLDERS ...... 63 7. STRUCTURE OF THE CAPITAL GROUP ...... 64 8. CORPORATE GOVERNANCE ...... 68 9. DEFINITIONS ...... 75
INTRODUCTION
2 RAPORT ROCZNY 2013
1. INTRODUCTION The Group is one of the leading manufacturers of chemical raw materials in Central and Eastern Europe, headquartered in Poland with its main production operations located in Poland and the Czech Republic. The Group is the leading producer of synthetic rubber and the leading producer of expandable and extruded polystyrene in Europe, based on data provided by IHS Chemical. The Group’s upstream integration with a stable source of raw materials, including C4 fraction, butadiene, benzene and ethylene, which the Group sources mainly from regional crackers, has allowed the Group to achieve a leading cost position in the synthetic rubber industry. The Group has a broad and diverse customer base across a wide range of industries, including the automotive, construction and packaging industries, which accounted for approximately 38.2%, 30.6% and 11.3% of product volumes sold for the year ended December 31, 2014, respectively. The Group has developed long-term relationships with its key customers, which include market leaders such as Michelin and Goodyear, many of which have lasted over several decades. Over the years, the Group has successfully leveraged its key proprietary technologies and transformed itself into a modern synthetic rubber and styrenics producer with global operations. The Company’s shares have been listed on the Warsaw Stock Exchange since 2004, and the Company has been a member of the blue chip WIG20 index on the Warsaw Stock Exchange since 2012. As at December 31, 2014, the Company has a market capitalization of PLN 5,438.6 million. For the year ended December 31, 2014, the Group has generated consolidated revenues from sales of PLN 4,618.8 million and EBITDA of PLN 635.8 million. The Group’s business is divided into three main business segments: butadiene and rubber (the “Synthetic Rubber Segment”), styrene and styrene derivatives (the “Styrene Plastics Segment”) and dispersions adhesives and latex (the “Dispersions, Adhesives and Latex Segment”). Other sources of revenues include auxiliary operations related to the production and distribution of thermal energy from the Group’s own power plants, as well as revenues derived from the trading and distribution of electricity (“Other Operations,” including “Media,” which is reported as a separate segment in the Consolidated Annual Report). Other Operations also include income and costs not allocated to any segments.
RISK FACTORS
3 RAPORT ROCZNY 2013
2. RISK FACTORS
2.1 Risks Related to the Group’s Business and Industry Disruptions in the global economy and the financial markets in which the Group operates may adversely impact its business The business of the Group is largely based on the sales of chemical products used as raw materials and intermediate products in a wide range of industries, including, in particular, the automotive, packaging and construction industries. Demand for the Group’s customers’ products is affected by general economic conditions and other factors, including conditions in the automotive and packaging industries, labor and energy costs, currency changes, fluctuations in interest rates and other factors beyond the Group’s control. As a result, the volume and profitability of the Group’s sales depend upon these fluctuations, as well as the economic situation in Poland, the Czech Republic, Europe and worldwide. The recent economic downturn in the Group’s end markets and the geographic areas where the Group sells its products, including the automotive industries in Europe, has substantially reduced demand for the Group’s products and resulted in decreased sales volumes. While demand for certain of Group’s products began to recover in 2010 despite the Eurozone crisis, the Group cannot assure you that events having an adverse effect on the industries and markets in which the Group operates, such as a downturn in the Polish, European or global economies, increases in interest rates, unfavorable currency fluctuations or other factors, will not occur or continue. Any significant downturn in the Group’s customers’ businesses or in Polish, European or global economic conditions could result in a reduction in demand for the Group’s products and could adversely affect the Group’s business, results of operations, financial condition or prospects.
Price fluctuations in the cost of raw materials used to manufacture the Group’s products or disruptions in the supply of raw materials may adversely affect Group’s production costs The Group’s manufacturing costs may be directly affected by volatility in the cost of the Group’s raw materials and fuel, which are subject to global supply and demand and other factors beyond the Group’s control. The Group’s principal raw materials (C4 fraction, butadiene, benzene, ethylene or styrene) together represented PLN 2,41 billion, or 56,9% of the Group’s total cost of goods sold for the year ended December 31, 2014. As a significant portion of the Group’s cost of goods sold is represented by these raw materials, the Group’s gross profit and margins could be adversely affected by changes in the cost of these raw materials if the Group is unable to pass any increased costs on to its customers. The probability of such a risk may be greater if suppliers accumulate considerable stock and, as a consequence, temporarily limit their orders. Although in the long term, changes in the prices of raw materials will be reflected in product prices, in the short term, raw material cost volatility poses a challenge as the Group may be unable to manage passing cost increases on to its customers in a timely manner by adjusting its prices. The Group believes that rapid changes in pricing may also affect customer demand. In extraordinary cases, such as the notification of a force majeure event by a key supplier, the Group may find itself with insufficient materials to produce its products. Alternatively, if the availability of any of its principal raw materials is limited, the Group may be unable to produce some of its products in the quantities demanded by the Group’s customers, which could have an adverse effect on plant utilization and the sales of the Group’s products requiring such raw materials. In addition, the Group’s production process requires significant amounts of energy and fuel. The Group uses thermal coal and natural gas to generate electricity, operate its facilities and generate heat and steam for its various manufacturing processes. For the year ended December 31, 2014, the costs of thermal coal and natural gas accounted for 7% of the Group’s
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cost of sales, compared to 6% for the year ended December 31, 2013 and 4,5% for the year ended December 31, 2012. Thermal coal and natural gas prices have experienced significant volatility in the past several years, and the Group may not be able to pass on any increased costs of production and distribution of its products to its customers. Any disruptions in the thermal coal or natural gas supply to the Group’s production facilities could severely impact the Group’s business, results of operations, financial condition or prospects.
The chemicals industry is subject to cyclicality, which may cause fluctuations in the Group’s results of operations The Group’s operations are subject to the cyclical and, more importantly, variable nature of the supply and demand balance in the chemicals industry, and the Group’s future results of operations may continue to be affected by this cyclicality and variability. Historically, the chemicals industry as a whole has experienced alternating periods of capacity shortages leading to tight supply conditions and increasing prices and margins, followed by periods when substantial capacity was added resulting in oversupply, declining capacity utilization rates and declining prices and profit margins. Several factors that have historically contributed to volatile margins in the chemicals industry, and in the Group’s business particularly, most of which are beyond the Group’s control, include:
• exchange rate fluctuations for producers with a global manufacturing footprint or distribution;
• oversupply due to capacity expansions by existing or new competitors;
• short-term utilization rate fluctuations due to planned turnarounds and unplanned production downtime;
• regulatory requirements driving required technology and manufacturing changes; and
• political and economic conditions, which drive rapid changes in prices for the Group’s key raw materials, including C4 fraction, butadiene, benzene, ethylene or styrene. Given the current uncertainty in the global economic environment (that could result in lower demand) and the implications of the variable supply and demand balance in the chemicals industry, increasing supply could increase pressure on the Group’s margins and could materially adversely affect the Group’s business, results of operations, financial condition or prospects.
The Group is highly dependent on a limited number of regional suppliers of its main raw materials and its revenue and profit could decrease significantly if the Group loses one or more of these suppliers The Group’s operations require substantial amounts of raw materials, including C4 fraction, butadiene, benzene, ethylene and styrene, which the Group sources mainly from regional crackers such as PKN Orlen (which together with Unipetrol forms one group), Sabic and OMV who deliver raw materials to the Group’s production facilities in the Czech Republic and Poland. The Group’s regional production facilities are also linked through pipelines with certain of the Group’s suppliers, including a pipeline with Unipetrol through which the Group obtains C4 fraction, ethylene and benzene for the Group’s production facility in the Czech Republic In addition, the Group owns 49% in a joint venture established together with Unipetrol, which provides the Group with approximately 50% of the Group’s annual requirements for butadiene, which is the key raw material for the Group’s synthetic rubber production.
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The nature of the Group’s business depends on regular deliveries of raw materials to the Group’s production facilities, which means that the Group might not always be able to avoid reliance on a single supplier. Any disruption or delay in the supply of raw materials from a particular supplier, or the loss of a supplier where the Group is unable to find a suitable alternative within a required time frame, could force the Group to curtail its production. If any one of the Group’s suppliers becomes unable to meet its delivery requirements for any reason (for example, due to insolvency, destruction of production plants or refusal to perform a contract), the Group may be unable to source input products from other suppliers at the required volume, and/or at the same or lower prices. The realization of any of these risks could have a material adverse effect on the Group’s business, results of operations, financial condition or prospects.
The Group depends on certain key customers for a significant proportion of the Group’s sales volumes, and the Group’s revenue and profits could decrease significantly if the Group loses one or more of these key customers The Group derives a substantial portion of its revenue from sales from certain key customers. For example, for the year ended December 31, 2014, the Group’s top five customers accounted for 25.3% of the Group’s revenues from sales, four of which are car tire manufacturers. As a result, it is critical that the Group maintains close relationships with its key customers. The deterioration in or termination of these relationships could lead to a material decline in sales, revenues, profitability and cash flows and impair the Group’s business and reputation. Furthermore, the Group is exposed to credit risk, which relates to the non-payment or non- performance by customers with respect to trade and other receivables. The failure of the Group’s customers to perform their obligations or the possibility that they may terminate their agreements with the Group could result in the Group being unable to meet its working capital requirements. Financial difficulties experienced by customers, including bankruptcies, restructurings and liquidations, or potential financial weakness in the industry, increase this risk. The failure of a customer to pay outstanding amounts owed to the Group could have a materially adverse effect on the Group’s business, results of operations, financial condition or prospects. Although the Group has adopted procedures and policies aimed at minimizing this risk, such as insuring receivables, monitoring credit exposures and assigning credit limits to customers, these credit procedures and policies may not be adequate, and they may not protect the Group against the risk of non-payment and/or non-performance by customers.
The Group’s ability to manufacture its key specialty products may be impaired by the Group’s failure to maintain relevant licenses and the Group cannot assure you that it will be able to renew all necessary certificates, approvals and permits for the Group’s operations The Group’s ability to manufacture key specialty products requires licenses to use certain patents, patent applications and other intellectual property. In July 2011, the Group launched the production of NdBR rubber (required for production of high performance tires) under a license agreement with Michelin at the Group’s production facility in the Czech Republic. In June 2012, the Group signed a license agreement with Goodyear under which the Group gained access to the technology for producing advanced SSBR rubber. These licenses are for an infinite period and will continue in full force insofar the Group does not comply with their requirements, which may include the payment of royalties, maintenance of confidentiality, obeying any restrictions on not use and construction of additional capacity. The Group cannot assure you that it will be able to maintain its licenses, including the license agreements the Group has with Michelin and Goodyear. If the Group is unable to maintain or secure alternative licenses on acceptable terms or develop its own proprietary technology,
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which does not infringe intellectual property rights of third parties, the Group may not be able to sell certain of its products, which could have a material adverse effect on the Groups business, results of operations, financial condition or prospects.
The Group’s operations are subject to various certificates, approvals and permits in various jurisdictions. The Group cannot assure you that it will be able to renew its certificates, approvals and permits upon their expiration. The eligibility criteria for such certificates, approvals and permits may change from time to time and may become more stringent. In addition, new requirements for certificates, approvals and permits may come into effect in the future. The introduction of any new or more stringent laws, regulations, certification requirements, approvals and permits relevant to the Group’s business may significantly escalate the Group’s compliance and maintenance costs, preclude the Group from continuing its existing operations or limit or prohibit the Group from expanding its business. Any such event may have an adverse effect on the Group’s business, financial results and future prospects.
The commodity organic chemicals industry is highly competitive and the Group may struggle to maintain its current market position The Group’s industry is highly competitive and the Group faces significant competition from large international producers, as well as from smaller regional competitors. The Group’s most significant competitors in the synthetic rubber market include Lanxess, Trinseo and Versalis. In the styrenics market, the Group’s competitors include Styrolution, Total and Ineos. Competition is based on a number of factors, such as product quality, service and price. The Group’s competitors may improve their competitive position in the Group’s core end-use markets by successfully introducing new products, improving their manufacturing processes or expanding their capacity or manufacturing facilities. In addition, if the Group is forced to increase the prices of its principal synthetic rubber, latex raw materials, polystyrene plastics, or butadiene, other manufacturers who offer similar products made with less expensive raw materials for example, as a result of a different chemical composition, may be able to improve their market position and force the Group to lower its prices in order to compete with them. Competition between styrene-based chemical products and other products within the end- use markets in which the Group competes is intense. Supply (production capacity) exceeds potential demand in this market and the Group may need to adjust its prices to meet competitors’ offers. In addition, increased competition from existing or new products may reduce demand for the Group’s products in the future and the Group’s customers may decide on alternate sources to meet their requirements. The long-term impact of competition for these products is unclear. Some of the Group’s competitors may be able to drive down prices for the Group’s products if they have lower operating costs. Alternatively, some of the Group’s competitors may have greater financial, technological and other resources, enabling them to better withstand cost and demand changes in the market. Such competitors may be better able to withstand changes in market conditions than the Group. The Group’s competitors may also be able to respond more quickly than the Group can to new or emerging technologies or changes in customer requirements. If the Group is unable to keep pace with its competitors’ product and manufacturing process innovations, the Group may be unable to maintain its current market position. In addition, consolidation of the Group’s competitors or customers may result in reduced demand for the Group’s products or make it more difficult for the Group to compete with its competitors. If the Group is unable to successfully compete with other producers of styrene- based chemical products or if other products can be successfully substituted for the Group’s products, the Group’s sales may decline.
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The Group may not be able to adjust its products or technologies to address the Group’s customers’ changing requirements or competitive challenges in a timely manner, and the Group’s customers may substitute its products with other products that the Group does not offer. The market segments where the Group’s customers compete are subject to periodic technological changes, ongoing product improvements, product substitution and changes in customer requirements. Increased competition from existing or newly developed products offered by the Group’s competitors or companies whose products offer a similar functionality to the Group’s products may negatively affect demand for the Group’s products. For example, in the EPS industry, where competition between producers leads to the constant introduction of improved grades with lower thermal conductivity, which requires the Group to adjust its products in order to address the Group’s customers’ requirements and sustain market demand for the Group’s products.
The Group works to identify, develop and market innovative products on a timely basis to meet its customers’ changing requirements and competitive challenges. However if the Group is unable to substantially maintain or further develop its product portfolio, customers may elect to source comparable products from competitors which could have a detrimental impact on the Group’s business, results of operations, financial condition or prospects. The Group may not be able to develop products that adequately address its customers’ needs. In addition, the timely commercialization of products that the Group is developing may be disrupted or delayed by manufacturing or other technical difficulties, industry acceptance or insufficient industry size to support a new product, competitors’ new products, and difficulties in moving from the experimental stage to the production stage, which is usual for the process of product development, especially during the scale up from laboratory to semi-technical stage. These disruptions or delays could adversely affect The Group’s business, results of operations, financial condition or prospects. The Group cannot be certain that the investments it makes in its technology department and research and development department will result in proportional increases in net sales or profits. The Group’s research and development and application technology teams work closely with the Group’s customers to develop high-quality, innovative products and applications that are tailored to meet their specific requirements. In addition, alternative materials, procedures or technologies may be developed, or existing ones may be improved, and replace those the Group currently offers. For example, substitute products may affect the demand for the Group’s products, in particular for emulsion rubber and polystyrene. Production advances, including increased demand for substitute end products, which use different materials, and increases in the quality of competing substitute materials used in the production of current end products, as well as product and raw material price fluctuations, may increase the comparative advantage of substitute products and result in a decline in demand for the Group’s products as customers may switch to substitutes. For example, the tire labelling regulations in the EU have led to increased demand for higher- performance (SSBR and NdBR rubbers) tires for personal vehicles with better properties than emulsion rubber, which is the Group’s main product offering. Polystyrene is also subject to substitution risks. Competing materials, such as other polymers, particularly polypropylene, polylactic acid and paper, can also be used in packaging applications. While the cost of switching to one of these alternatives is relatively low, as modern conversion lines can generally switch between polymers, additional investment may be required to process polyethylene terephthalate (“PET”), and in some cases, polypropylene. If such newly developed, improved products or alternative products are being offered at lower prices, have
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preferable features or other advantages, particularly from a regulatory perspective, and the Group is not able to offer similar new or improved products, the Group may lose substantial business, which could have an adverse effect on the Group’s business, results of operations, financial condition or prospects.
Any future acquisitions may prove difficult for the Group to consummate
The Group has a history of making acquisitions, including as recently as in July 18, 2014, with the Group’s acquisition of 100% of the share capital in Oristano Investment, which is a manufacturer of dispersions and adhesives, the Group’s acquisition of 100% of share capital in Zakład Doświadczalny “Organika” sp. z o.o., the Group’s R&D company specializing in plant protection products (“PPP”), which will allow the Group to develop manufacturing of PPP and in third quarter of 2014, the Group finalized the takeover of the registration of plant protection products and biocidal products from Zakłady Chemiczne Organika-Azot S.A. in Jaworzno. The Group is likely to continue to acquire companies or assets engaged in similar or complementary businesses if the Group identifies appropriate acquisition targets. To finance future acquisitions, the Group may need to borrow money, which will increase the Group’s debt service requirements and could impact the Group’s ability to make payments on its debt instruments, and the Group may not be able to obtain acquisition finance on favorable terms, if at all. In order to manage any acquisitions the Group successfully completed, the Group will need to expand and continue to improve its operational, financial and management information systems and the Group’s increased leverage may limit its ability to do so. The Group’s excess cash may be limited, and the Group may not be able to invest in the acquired company to achieve the desired synergies. The Group has in the past and may continue to pursue opportunistic acquisitions in order to widen the Group’s current product portfolio or to provide further geographic or product diversification of the Group’s business segments, which could be subject to a number of risks, including:
• problems with the effective integration of operations;
• the inability to maintain key pre-acquisition business relationships;
• increased operating costs;
• costs related to achieving or maintaining compliance with laws, rules or regulations, including in particular in relation to any expansion into new markets;
• the loss of key employees of the acquired company;
• exposure to unanticipated liabilities; and
• difficulties in realizing projected efficiencies, synergies and cost savings. The Group cannot assure you that any acquisition it consummates will ultimately provide the benefits the Group originally anticipates. Furthermore, the Group may not succeed in identifying attractive acquisition candidates or financing or completing potential acquisitions on favorable terms.
Fluctuations in currency exchange rates may significantly impact the Group’s results of operations and may significantly affect the comparability of the Group’s results between financial periods The Group conducts its operations in a number of different countries. The Group’s results are reported in relevant foreign currencies and then translated into Polish złoty at the applicable exchange rates for inclusion in the Group’s consolidated financial statements. The main currencies to which the Group is exposed are the euro, Polish złoty, U.S. dollar and Czech
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koruna. The exchange rates between these currencies and the Polish złoty in recent years have fluctuated significantly and may continue to do so in the future. A depreciation of these currencies against the złoty will decrease the złoty equivalent of the amounts derived from these operations reported in the Group’s consolidated financial statements. An appreciation of these currencies will result in a corresponding increase in such amounts. As the Group sells its products in foreign currencies and that proceeds exceed the Group’s raw material costs which are procured in euro or U.S. dollar, an appreciation of the złoty against euro or U.S. dollar may have an adverse effect on the Group’s profit margins or the Group’s reported results of operations. Additionally, because the relation of the sale in euro versus U.S. dollar exceeds the similar relation on cost side, a depreciation of euro against U.S. dollar may have an adverse effect on the Group’s profit margins or its reported results of operations. Additionally, to the extent that the Group is selling its products in foreign currencies, the appreciation of złoty against foreign currencies will tend to negatively impact the Groups results of operations. In addition, currency fluctuations may affect the comparability of the Group results of operations between financial periods. As a result of the currency composition of the Group’s purchases of raw materials, product sales, loans and borrowings raised and cash in foreign currencies, the Group has been and expects to continue to be exposed to foreign exchange rate fluctuations, which could materially affect the Group’s results of operations, assets and liabilities, and cash flows as reported in złoty. In 2014, 77% of the Group’s revenues and 93% of the Group’s costs related to transactions settled in foreign currencies (mainly in euro and in the U.S. dollar). Fluctuations of exchange rates have an impact on the volume of sales revenue and purchase costs of raw materials. Strengthening of the domestic currency has a negative impact on export profitability and domestic sales; however, changes in revenues from export or from domestic sales valued on the basis of listing, caused by fluctuations of exchange rates, are balanced by changes in the costs of import of raw materials (or valued on the basis of foreign currency quotations), mitigating, to a great extent, the Group’s exposure to currency exchange risk. The Group incurs currency transaction risk whenever the Group enters into either a purchase or sale transaction using a currency other than the local currency of the transacting entity. Given the volatility of exchange rates, the Group cannot assure you that it will be able to effectively manage its currency transaction risks or that any volatility in currency exchange rates will not have a material adverse effect on the Group’s business, results of operations, financial condition or prospects.
The shutdown of crackers may impact the ethylene and butadiene market As producers adapt to meet market demand, cheap ethylene or polyethylene imported from the United States or the Middle East may decrease the profitability of European crackers and subsequently lead to closures of the least competitive ones. In addition, switching the European crackers to a light feed (ethane) could also impact the butadiene market. According to figures from IHS Chemical, in the period from 2008 to 2012, crackers representing approximately 0.5 million mt/year of capacity, or 2.3%, have closed in Western Europe. In 2013, this trend continued and Versalis shut one of its two lines in Priolo, Italy with a capacity of 300,000 mt/year. As a result of narrow margins, petrochemical plant operators have made a decision to change a raw material feed of installations producing ethylene from petrol fraction to ethane (INEOS in Grnagemouth (United Kingdom) and Rafnes (Norwey), Borealis in Stenungsund (Sweden), SABIC in Wilton (United Kingdom), which will limit butadiene yield. On the other hand, the investment projects were made in relation to butadiene extraction from hydrotreated C4 fraction in Europe aiming at increasing butadiene supply (BASF and Evonik in Antwerp, LyondellBasell in Vesseling, OMV in Burghausen, TVK in Tiszaujvaros). Shutdowns of European crackers and change to slight feed may result in limited availability of butadiene and increased shipment costs from non-European countries. As a consequence, it may become
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economically less viable to purchase raw materials from crackers outside of Europe. As a result, the Group’s manufacturing costs could increase which may impact the Group’s business, results of operations, financial condition or prospects.
Overcapacity of synthetic rubber in China may adversely impact the Group’s business China is one of the world’s most dynamic synthetic rubber markets and has a significant impact on the global synthetic rubber market. In recent years, the overall volume levels of the Chinese synthetic rubber market have improved significantly, increasing industrial concentration and leading to the rapid growth of production capacity. The capacity of the synthetic rubber industry in China has far exceeded actual market demand and the carrying capacity of the market has been unable to fully digest total production in the industry. Therefore, China may export its products to the EU at a competitive price, which would increase the quantity of synthetic rubber offered in Europe. This could result in decreased demand for the Group’s products which could adversely affect the Group’s business, results of operations, financial condition or prospects.
Many of the Group’s contracts with suppliers contain terms that may limit the amount of raw materials delivered to the Group in force majeure circumstances Many of the Group’s contracts with suppliers contain provisions that allow them to limit the amount of raw materials delivered to the Group below the contracted amount in force majeure circumstances. If the Group is required to obtain alternative sources for raw materials because a supplier is unwilling or unable to perform its obligations under a raw material supply agreement or if a supplier terminates its agreements with the Group, the Group may not be able to obtain these raw materials from alternative suppliers in a timely manner on terms comparable or favorable to the Group, which could have a material adverse effect on the Group’s business, results of operations, financial condition or prospects.
The Group’s main shareholder may influence actions, such as dividend distributions, which benefit shareholders at the expense of creditors, or might cease to control the Group’s business Mr. Michał Sołowow directly and indirectly owns 62.46% of the Company’s shares and controls the Group’s business as at December 31, 2014. Mr. Sołowow is able to exert considerable influence over the appointment of the Company’s supervisory board and the management board and may take actions that favor the interests of the Company’s shareholders over those of the Company’s creditors, including decisions with respect to dividend payments. The dividend payout ratio on the Group’s shares amounted to 98% of the Group’s statutory consolidated net profit for 2013 and 172% of the Group’s statutory consolidated net profit for 2012 and the Group may continue to distribute dividends in line with its internal policies and the restrictions of the Group’s agreements. Dividends distributed from the Group’s retained earnings, which may be significantly higher than the net profits generated by the Group in future periods, could weaken the Group’s capital strength, reduce the Group’s cash flow and impact the Group’s ability to repay its debt. In accordance with the issuance of the Notes, the Group is also subject to typical for high-yield bonds debt covenants that may limit its ability to finance its future operations and capital needs and to pursue business opportunities and activities. In addition, if Mr. Sołowow were to sell all or part of his shareholding, any new controlling shareholder could pursue a strategy which is different from that of the Group’s business at the date of this Consolidated Annual Report. Any influence or instability in corporate governance matters relating to the Group’s business could have a material adverse effect on the Group’s business, results of operations, financial condition or prospects.
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Failure to comply with the regulations related to subsidy grants may impact the Group’s business The Group has been approved to receive certain EU and state budget subsidies for the Group’s investment and R&D projects which amounted to approximately PLN 290 million as at December 31, 2014 which were partly paid out or will be disbursed in the next few years. In 2014, the Group received PLN 108 million from Ministry of Economy, Polish Agency for Enterprise Development, National Fund for Environmental Protection and Water Management and National Centre for Research and Development. In 2014, the Group signed the grants agreements which amounted to approximately PLN 19,4 million, in 2013 amounted to – PLN 45 million and in 2012 amounted to PLN 207.9 million, including PLN 43.3 million from the Operational Program ‘‘Innovative Economy” to finance the Group’s R&D Center in Oswiecim and PLN 146.8 million for the ‘‘Implementation of an innovative technology for manufacturing SSBR X3 rubbers in Synthos Dwory 7” project, in relation to which the Group started construction of a new 90kt per year production line for advanced SSBR and Li-BR rubbers as part of the Group’s aim to expand its portfolio by introducing new innovative products. The Group has also been granted subsidies from the National Fund for Environmental Protection and Water Management (Narodowy Fundusz Ochrony Środowiska i Gospodarki Wodnej). In order to maintain the grants the Group has obtained, it is required to fulfill strict regulatory obligations, such as promotion of the project, maintaining the integrity of a project during the five years following completion and reaching the employment rate targets set out in the program application. If the Group fails to fulfill its obligations, it will be required to return the grants it has received with statutory interest. Non-compliance with such regulations may impact the Group’s business, results of operations, financial condition or prospects.
The Group is subject to different tax regulations, customs, international trade, export control, antitrust, zoning and occupancy and labor and employment laws that could require the Group to modify its current business practices and incur increased costs The Group is subject to numerous regulations, including customs and international trade laws, export/import control laws, and associated regulations. These laws and regulations limit the countries in which the Group can do business, the persons or entities with whom the Group can do business, the products which the Group can buy or sell, and the terms under which the Group can do business, including exposure to anti-dumping restrictions and investigations. In addition, the Group is subject to antitrust laws, zoning and occupancy laws that regulate manufacturers generally and govern the importation, promotion and sale of the Group’s products, the operation of factories and warehouse facilities and the Group’s relationship with its customers, suppliers and competitors. If any of these laws or regulations were to change or were violated by the Group’s management, employees, suppliers, buying agents or trading companies, the costs of certain goods could increase, the Group could experience delays in shipments of its goods, be subject to fines or penalties, or suffer reputational harm, all of which could reduce demand for the Group’s products and hurt the Group’s business and negatively impact results of operations. For example, the Group faces the risk of dumping prices of products from China or India, where the prices charged are below the prices charged in China or India, or below the cost of production, which may harm the group’s competitive position and business. In addition, in some areas the Group benefits from certain trade protections, including anti-dumping protection and the EU’s Authorized Economic Operator program, which provides expedited customs treatment for materials crossing national borders. If the Group was to lose these protections, the Group’s results of operations could be adversely affected. In addition, changes in statutory minimum wage laws and other laws relating to employee benefits could cause the Group to incur additional wage and benefits costs, which could negatively impact the Group’s profitability.
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The Group exercises significant judgment in calculating its worldwide provision for income taxes and other tax liabilities, and the Group believes its tax estimates are reasonable. However, the accuracy of such tax estimates may be reduced, because the Group files tax returns in many jurisdictions in which the Group does not have a deep knowledge of tax regulations. The Group may be subject to audits by tax authorities in the future and the tax authorities may disagree with the Group’s tax treatment of certain material items, including past or future acquisitions and/or dispositions, and thereby require the Group to recalculate and potentially increase the Group’s tax liability. In addition, changes in existing laws may also increase the Group’s effective tax rate. The Group may also be subject to new tax regulations that may affect the Group’s tax structure, in particular the expected substance-over-form regulations and CFC regulations (controlled foreign companies) which may have a negative impact on the Group’s business. A substantial increase in the Group’s tax burden could have a material adverse effect on the Group’s business, results of operations, financial condition or prospects.
Legal requirements are frequently changed and subject to interpretation, and the Group is unable to predict the ultimate cost of compliance with these requirements or their effects on the Group’s operations. The Group may be required to make significant expenditures or modify its business practices to comply with existing or future laws and regulations, which may increase the Group’s costs and materially limit the Group’s ability to operate its business.
Failure to fulfill the conditions of the state tax incentive programs may affect the Group’s business results SYNTHOS PBR s.r.o, the Group’s Czech entity, benefits from state tax incentive programs in the form of tax relief granted by the Czech government for the years 2011-2015, during which it is exempt from income corporate tax. This tax relief is only effective if SYNTHOS PBR s.r.o fulfills the requirements imposed by the Czech and EU law and the Czech Government, otherwise the Group may lose any unused relief and be required to pay back the relief already used including any applicable penalties, which could affect the Group’s business, results of operations, financial condition or prospects. In addition, on July 2, 2014 the Group was granted three permits to operate in the Krakow Special Economic Zone, which allows the Group to benefit from Polish state tax incentives. However, benefits related to this admission to the Special Economic Zone will apply only if the Group fulfills certain requirements as set out in the rules on regional aid in the EU. If the expected investment expenditures are not realized and investment in the region for which the permit was obtained are not maintained for at least five years, the Group’s permits could be withdrawn and the Group would no longer benefit from state tax incentives which may impact the Group’s business, results of operations, financial condition or prospects. Furthermore, under current Polish regulations Special Economic Zones are scheduled to cease to exist in 2026.
The Group could be held liable in connection with pollution A large number of the Group’s current, past or discontinued production facilities have a long history of industrial use which may include chemical processing, hazardous substances and waste storage and related activities such as landfill activities. As a result, soil and groundwater contamination can occur due to releases of hazardous substances in the future as has occurred at certain facilities in the past, and it is possible that further contamination could be discovered at these sites or other sites in the future.
Certain environmental laws, regulations and court decisions impose liability for contamination on present and former owners, operators or users of facilities and sites, whether on or from such facilities and sites without regard to causation, negligence or knowledge of contamination. At any time, the Group could be responsible for investigating and remediating
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contamination that originated at its facilities or was caused by operations at its facilities, which could result in substantial unanticipated costs. The occurrence of future releases of hazardous materials, the discovery of previously unknown contamination, or the imposition of new obligations to investigate or remediate contamination at the Group’s facilities, could result in substantial unanticipated costs. The Group may also become obligated to pay fines or fees if its emissions and/or other activities are in excess of regulatory limits, and the Group has paid such fines and/or fees in the past. The Group’s financial results may also be adversely affected if environmental liability arises for which the Group is not adequately indemnified. Although the Group believes the indemnities given by the selling parties from whom the Group has acquired assets or businesses will help to defray the cost associated with pre-acquisition environmental liabilities, the Group’s financial results may still be adversely affected to the extent (i) the sellers do not fulfill their respective indemnification obligations, and/or (ii) the Group breaches its obligations not to undertake certain activities that may aggravate existing conditions or to mitigate associated losses. Additionally, the Group could be required to establish or substantially increase financial reserves for obligations or liabilities in relation to remediation costs. If the Group fails to accurately predict the amount or timing of such costs, the related impact on the Group’s business, results of operations or financial condition, in any period in which such costs need to be incurred, may be material. In addition, in certain jurisdictions, authorities are empowered to impose liens on real estate and attach to accounts of the property operator to cover remediation costs.
Provisions for environmental liabilities may be insufficient The Group regularly reviews all of its environmental risks and the provisions made for such risks. A provision is recorded when the Group has a present obligation as a result of a past event, the amount of the obligation can be reliably estimated, and it is probable that an outflow of resources of economic value will be required to settle the obligation. Provisions are determined based on, among other factors, known events, the type and scope of pollution, site rehabilitation techniques, applicable laws and regulations, and estimated risks, at each balance sheet date and adjusted as needed at subsequent balance sheet dates. Since such determinations are based on a range of factors, many of which may change and are subject to unforeseeable or unpredictable circumstances, the Group cannot assure you that such provisions will be sufficient. For example, from time to time the Group may incur remediation costs at its current facilities and newly acquired facilities. If environmental harm is found to have occurred as a result of the Group’s current or historical operations (as a successor), the Group may incur significant remediation costs and be required to pay substantial fines. Should provisions made for environmental liabilities fall short of any unforeseen environmental compliance costs and/or liabilities, the Group may have to make additional payments, which could have a material adverse effect on the Group’s business, financial condition and results of operations.
Compliance with extensive and evolving environmental, health and safety laws may require substantial expenditures The Group uses large quantities of hazardous substances, generates hazardous wastes and emits wastewater and air pollutants during the course of its manufacturing operations. Consequently, the Group’s operations are subject to extensive environmental, health and safety laws and regulations at both the national and local level in multiple jurisdictions. Many of these laws and regulations have become more stringent over time and the costs of compliance with these requirements may increase further, including costs associated with any capital investments for pollution control facilities. In addition, the Group’s production facilities
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require operating permits that are subject to periodic renewal and, in circumstances of noncompliance, may be subject to revocation. The necessary permits may not be issued or continue in effect, and any issued permits may contain more stringent limitations that restrict the Group’s operations or that require further expenditures to meet the permit requirements. For example, in connection with the EU’s Registration, Evaluation, Authorization and Restriction of Chemicals (the “REACH Regulation’’), or the new EU Classification, Labeling and Packaging Regulation (the ‘‘CLP Regulation’’), any key raw material, chemical or substance, including the Group’s products, could be classified as having a toxicological or health-related impact on the environment, on users of the Group’s products or on the Group’s employees. The REACH Regulation imposes significant obligations on the chemicals industry as a whole with respect to the testing, evaluation, assessment and registration of basic chemicals and chemical intermediates. Any delay in implementing the full registration of substances in accordance with these requirements could result in penalties for violation of these laws and regulations or the inability to sell the Groups products containing them. The REACH Regulation processes are expensive and time-consuming and lead to increased production costs and reduced operating margins for chemical products.
In 2014, the new Polish Environmental Protection Act (“EPA’’), the Industrial Emissions Directive of the European Parliament (‘‘IED Directive’’) and additional regulations on land, soil and underground water contamination was implemented in Poland. The EPA introduces new, lower emission standards for the energy industry and new responsibilities for the land owner with regards to research and reclamation of contaminated land. The Group expects to have expenditures in order to comply with the requirements of the EPA for the year ended December 31, 2015, both for research and activities connected with land reclamation itself, and has already begun to make relevant investments. The Group’s necessary investments are in progress with the first such expenditures expected in 2015. Compliance with more stringent environmental requirements could also increase the Group’s costs of transportation and storage of raw materials and finished products, as well as the costs of storage and disposal of wastes. Additionally, the Group may incur substantial costs, including penalties, fines, damages, criminal or civil sanctions and remediation costs, or experience interruptions in the Group’s operations for failure to comply with these laws or permit requirements.
Compliance with current and future regulations targeting greenhouse gas emissions may cause the Group to incur significant additional operating and capital expenses.
Emissions such as carbon dioxide, methane and other greenhouse gases (“GHG”) are a standard by-product of the Group’s production process. Over the past few decades, concerns about the relationship between GHG and global climate change have resulted in increased levels of scrutiny from regulators and the public alike, and have led to proposed and enacted regulations on both national and supranational levels, to monitor, regulate and control carbon dioxide and other GHG emissions. In the EU, the Group’s emissions are regulated under the European Union Emissions Trading Scheme (“EU ETS”), an EU-wide trading system for industrial GHG emissions. The Group has been subject to the EU ETS since January 1, 2013. The Group has obtained emission allowances for the period from 2014 to 2020, and the Group has to purchase additional CO2 emission allowances. The EU ETS is anticipated to become progressively more stringent over time. If the current proposals are implemented this could have an impact on the Group’s costs of compliance under the EU ETS.
Compliance with current or future GHG regulations governing our operations, including those discussed above may result in increased capital expenditures for measures such as capital
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expenditures to install more environmentally efficient technology or the purchase of allowances to emit carbon dioxide or other greenhouse gases. On January 6, 2011, the IED Directive came into effect. The IED Directive limits the amount of gas emissions at new and existing large fuel combustion plants, with existing plants subject to stricter requirements and consequently the IED Directive provides a transitional period to bring existing plants into compliance. The IED Directive was adopted into Polish law in 2014.
The Group is currently in the process of implementing a modernization program and investing in new equipment to bring the heat and power plant at Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka into compliance with these new limits and expect this to be completed by the end of 2015. As part of this process, the Group is building a new installation for desulphurization and dust removal in one of the existing boilers, a new installation for denitrogenation of flue gases in one of the existing boilers, and a new fluidized bed boiler. Any delay in the implementation of the processes described above could result in penalties for violation of these regulations.
There is no way to predict the form that future regulations may take or to estimate any costs that the Group may be required to incur with respect to these or any other future requirements. In addition to the increased expenditures outlined above, such requirements could also adversely affect the Group’s energy supply, or the costs (and types) of raw materials the Group uses for fuel, and ultimately reduce demand for our products. The realization of any or all of these consequences could have a material adverse impact on Group’s business, results of operations, financial condition or prospects.
Regulatory and statutory changes in jurisdictions where the Group manufactures and sells its products could lead to increased costs or decreased demand. The Group’s products are also used in a variety of end-uses that have specific regulatory requirements, such as those relating to products that have contact with food used in the packaging industry or those used in the automotive industry. Many of the applications for the products in the end markets in which the Group sells its products are regulated by various national and local rules, laws and regulations. For example, materials such as aromatic compounds like benzene and styrene, as well as more complex compounds such as antioxidants and plasticizers, are used in the manufacturing of the Group’s products and have come under increased regulatory scrutiny due to potentially significant or perceived health and safety concerns. Changes in regulations could result in additional compliance costs, seizures, confiscations, recall or monetary fines, any of which could prevent or inhibit the development, distribution and sale of our products. Changes in environmental and safety laws and regulations banning or restricting the use of these residual materials in the Group’s products, or the Group’s customers’ products, could adversely affect the Group’s business, results of operations, financial condition or prospects. Failure to appropriately manage safety, human health, product liability and environmental risks associated with our products, product life cycles and production processes could adversely impact employees, communities, stakeholders, our reputation and the results of our operations.
Production at our manufacturing facilities could be disrupted for a variety of reasons and any disruptions could expose us to significant losses or liabilities. Due to the nature of the Group’s business, the Group is exposed to the hazards associated with chemical manufacturing and the related storage and transportation of raw materials, products and wastes. These hazards could lead to an interruption or suspension of our operations and have an adverse effect on the productivity and profitability of a particular manufacturing facility or on the Group as a whole. These potential risks of disruption include, but are not necessarily limited to:
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• pipeline and storage tank leaks and ruptures;
• explosions and fires;
• inclement weather, including floods, and natural disasters;
• terrorist attacks;
• failure of mechanical, process safety and pollution control equipment;
• contamination, chemical spills and other discharges or releases of toxic or hazardous substances or gases; and
• exposure to toxic chemicals. In the course of its operations the Group has experienced such hazards and disruptions as listed above (except for terrorist attacks), which are customarily associated with chemical manufacturing. For example, the Group has experienced a downtime lasting a few days caused by flooding at our production plant in Kralupy in June 2013. The Group believes its Kralupy plant remains at a potential risk of flooding due to its location. The Group also experienced a fire at its production plant in Oświęcim in February 2014. Moreover, the Group’s production plant in Poland is listed by the Polish State Fire Service as a plant with high risk of the occurrence of the industrial accident. As the Group’s facilities operate close to large population centers, any fires could affect the nearby communities. In 2010, the Group also experienced a leakage of our rainwater sewer system which was caused by insufficient care taken to manage oil tank levels by an unaffiliated company whose place of business was on our premises, which caused the Group to incur expenses for the clean-up of such incident. Following this incident, the Group invested in a special protection system to avoid the re- occurrence of the problem in the future. All the above hazards could also expose employees, customers, the community and others to toxic chemicals and other hazards, contaminate the environment, damage property, result in personal injury or death, lead to an interruption or suspension of operations, damage the Group’s reputation and adversely affect the productivity and profitability of a particular manufacturing facility or the Group as a whole, and result in the need for remediation, governmental enforcement, regulatory shutdowns, the imposition of government fines and penalties and claims brought by governmental entities or third parties. Legal claims and regulatory actions could subject the Group to both civil and criminal penalties, which could affect the Group’s product sales, reputation and profitability. The Group cannot be certain that environmental, health and safety compliance, management and response systems currently in place will be sufficient to prevent such potential risks or to remedy any such disruption or incident. Moreover, the type of activities performed by the Group’s employees during the production process and resultant contact with harmful and hazardous substances could increase the risk of accidents. Despite the Group’s best efforts to promote awareness through trainings and briefings and ensure safe working conditions for the Group’s employees, the Group cannot be certain the safety measures and programs it has implemented will prevent accidents occurring onsite or employees contracting occupational diseases, which may have a negative impact on the Group’s operating activities and financial performance.
In the event that an individual successfully brings a claim against the Group, it may not have adequate insurance to cover such claims or may not have sufficient cash flow to pay for such claims. Such outcomes could have a material adverse effect on the Group’s business, results of operations, financial condition or prospects.
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If any disruptions occur, alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more or may take a significant amount of time to start production. Each of these scenarios could negatively affect the Group’s business, results of operations, financial condition or prospects. If one of the Group’s key manufacturing facilities is unable to produce our products for an extended period of time, its sales may be reduced by the shortfall caused by the disruption and the Group may not be able to meet its customers’ needs, which could cause them to seek out other suppliers. Furthermore, to the extent a production disruption occurs at a manufacturing facility that has been operating at or near full capacity, the resulting shortage of the product could be particularly harmful because production at the manufacturing facility may not be able to reach levels achieved prior to the disruption.
Although the Group maintains property, environmental impairment and comprehensive general liability insurance, among others, of the types and in the amounts that the Group believes are customary for the industry, it does not currently maintain business interruption insurance and furthermore may not be fully insured against all potential causes of disruption due to limitations and exclusions in the Group’s policies. While the hazards associated with chemical manufacturing have not resulted in incidents that have significantly disrupted the Group’s operations or exposed it to significant losses or liabilities to date, the Group cannot assure you that it will not suffer such losses in the future.
The Group is dependent on the continued service and recruitment of key executives, the loss of any of whom could adversely affect its business. The Group’s ability to maintain its competitive position and to implement its business strategy is dependent to a large degree on our senior management team. The loss or diminution in the services of members of the Group’s senior management team, or the inability to attract and retain additional senior management personnel could have a material adverse effect on the Group’s business, results of operations, financial condition or prospects. Competition for personnel with relevant expertise is intense due to the relatively small pool of qualified individuals, and this affects the Group’s ability to retain existing senior management and attract additional qualified personnel. If any of the Group’s key senior managers leave, it may have difficulty replacing them, and additional costs and expenses may be incurred in securing their replacement. The Group does not maintain key person life insurance on any of its executive officers and does not intend to purchase any in the near future. The Group also relies on its ability to recruit, retain and train skilled managerial, sales, marketing, administration, operating, research and development and other personnel. The nature of the Group’s business and operations and its research and development activities require the employment of personnel who are skilled and qualified in chemistry and other scientific and technical fields. Qualified and skilled technical personnel, including chemists, remain in high demand, and the competition among potential employers is intense. If these qualified and skilled employees leave or if the Group is unable to attract, retain, train and motivate additional qualified and skilled employees, this could have a material adverse effect on the Group’s business, results of operations, financial condition or prospects.
The Group may be unable to implement its business strategies. The Group’s future financial performance and success largely depend on its ability to implement its business strategies successfully. The Group cannot assure you that the Group will successfully implement the business strategies developed by the Group’s management or that implementing these strategies will sustain or improve its competitive position. The Group’s business strategies are based on assumptions about future demand for our current products and the new products and applications the Group is developing, as well as on Group’s continuing ability to produce its products profitably. The Group’s ability to implement
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its business strategies depends on, among other things, its ability to divest businesses or discontinue product lines on favorable terms and with minimal disruptions, finance its operations and product development activities, maintain high quality and efficient manufacturing operations, respond to competitive and regulatory changes, access quality raw materials in a cost-effective and timely manner, and retain and attract highly-skilled technical, managerial, marketing and finance personnel.
The Group may be unable to implement its business strategies, including the expansion into new markets such as South America and North America. Preparations for the expansion of the Group’s product portfolio may not be economically viable or the introduction of its innovative products may be difficult to achieve. In addition, the costs involved in implementing the Group’s strategies may be significantly greater that the Group currently anticipates and the costs involved in its own research may not be fully recovered. Any failure to develop, revise or implement the Group’s business strategies in a timely and effective manner could have a material adverse effect on its business, results of operations, financial condition, prospects and cash flows.
The success of the Group’s business is inextricably linked to its ability to maintain and protect its intellectual property. The Group relies on a combination of patents, trade secrets, copyrights and trademarks to establish and protect its intellectual property rights in its products and processes for the development, manufacture and marketing of the Group’s products. The Group uses non- patented know-how, trade secrets, processes and other proprietary information and employs various methods to protect this proprietary information. These methods include confidentiality agreements, invention assignment agreements, and agreements with employees, independent sales agents, distributors, consultants, universities and research units with whom the Group has partnerships. However, these agreements may be breached. Governmental agencies or other national and state regulatory bodies may require the disclosure of such information in order for us to obtain the right to market a product. An agency or regulator may also disclose such information on its own initiative if it decides that such information is not confidential business or trade secret information. Trade secrets, know-how and other unpatented proprietary technology may also otherwise become known to, or independently developed by, the Group’s competitors. In addition, the Group holds patents related to a number of its components and products and have patent applications pending with respect to other components and products. The Group also applies for additional patents in the ordinary course of its business, as it deems appropriate. However, these precautions offer only limited protection, and would not, for example, protect against our proprietary information becoming known to, or being independently developed by, competitors. The Group cannot assure you that the Group’s existing or future patents, if any, will afford it adequate protection or any competitive advantage, that any future patent applications will result in issued patents or that the Group’s patents will not be circumvented, invalidated or declared unenforceable. Furthermore, the Group’s proprietary rights in intellectual property may be challenged, which could have a material adverse effect on the Group’s business, results of operations, financial condition or prospects. In some cases, intellectual property litigation may be used to gain a competitive advantage. The Group has in the past and may in the future become a party to lawsuits involving patents or other intellectual property. If a third- party brings a legal action against the Group, the Group may incur substantial costs in defending itself, and the Group cannot assure you that such an action would be resolved in our favor. If such a dispute were to be resolved against the Group, the Group may be subject to significant damages, and the testing, manufacture or sale of one or more of its technologies or products may be enjoined.
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Any proceedings before a national patent or trademark governmental authority or in a national or state court could result in adverse decisions as to the priority of the Group’s inventions and the narrowing or invalidation of claims in issued and pending patents. The Group could also incur substantial costs in any such proceedings. In addition, the laws of some of the countries in which the Group’s products are or may be sold may not protect its products and intellectual property to the same extent as in Europe, if at all. The Group may also be unable to protect its rights in trade secrets, trademarks and unpatented proprietary technology in certain countries.
The Group’s products may infringe the intellectual property rights of others, which may cause the Group to incur unexpected costs or prevent it from selling its products. The Group continually seeks to improve our business processes and develop new products and applications. Many of the Group’s competitors have a substantial amount of intellectual property that the Group must continually monitor to avoid infringement. Although it is the Group’s policy and intention not to infringe valid patents, whether present or future and other intellectual property rights belonging to others, it cannot assure you that the Group’s processes and products do not and will not infringe issued patents. If patents belonging to others already exist that cover the Group’s products, processes, or technologies, or are subsequently issued, it is possible that the Group could be liable for infringement of such patents and the Group could be required to take remedial or curative actions to continue its manufacturing and sales activities with respect to products that are found to be infringing. Intellectual property litigation is often expensive and time-consuming, regardless of the merits of any claim, and the Group’s involvement in such litigation could divert the Group’s management's attention away from operating our business. If the Group was to discover that any of its processes, technologies or products infringe the valid intellectual property rights of others, it might seek to obtain licenses from the owners of such rights or substantially re- engineer its products in order to avoid infringement. The Group may not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to re-engineer its products in a manner that is successful in avoiding infringement. Moreover, if the Group is sued for infringement and lose, it could be required to pay substantial damages or be prohibited from using and selling the infringing products or technology. Any of the foregoing could cause the Group to incur significant costs and prevent us from selling its products.
Failure to maintain an effective system of internal controls could adversely impact the Group’s ability to both timely and accurately report its financial results. The Group has established and maintains internal controls necessary to provide reliable financial results and to assist in the effective prevention of fraud. The Group has not identified any material weaknesses as at December 31, 2014. The Group continues to evaluate and enhance its internal controls over financial reporting, however, it cannot assure you that any measures it has taken to date, or any measures it may take in the future, will be sufficient to avoid potential control deficiencies which could materially adversely affect the Group’s ability to comply with applicable financial reporting requirements.
A deterioration in the Group’s relationships with its employees or trade unions or a failure to extend, renew or renegotiate on favorable terms its collective bargaining agreements could have an adverse impact on the Group’s business. As at December 31, 2014, the Group had 2,208 full-time equivalent employees. Maintaining good relationships with the Group’s employees, unions and other employee representatives is crucial to the Group’s operations. As a result, any deterioration in the Group’s relationships with its employees, unions and other employee representatives could have an adverse effect on the Group’s business, results of operations, financial condition or prospects.
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Some of the Group’s employees are covered by national collective bargaining agreements. These agreements typically complement applicable statutory provisions in respect of, among other things, the general working conditions of our employees such as maximum working hours, holidays, termination, retirement, welfare and incentives. National collective bargaining agreements and company-specific agreements also contain provisions that could affect the Group’s ability to restructure its operations and facilities or terminate employees. The Group may not be able to extend existing company-specific agreements, renew them on their current terms or, upon the expiration of such agreements, negotiate such agreements in a favorable and timely manner or without work stoppages, strikes or similar industrial actions. The Group may also become subject to additional company-specific agreements or amendments to the existing national collective bargaining agreements. Such additional company-specific agreements or amendments may increase the Group’s operating costs and have an adverse effect on the Group’s business, results of operations, financial condition or prospects.
Legal proceedings filed by or against the Group and adverse outcomes may harm the Group’s business. The Group cannot predict with certainty the cost of prosecution, the cost of defense or the ultimate outcome of litigation and other proceedings filed by or against the Group, including remedies and damage awards. The Group has been, and in the future may be, involved in litigation and other proceedings relating to intellectual property, commercial arrangements, environmental, health and safety, labor and employment or other harms, including claims resulting from the actions of individuals or entities outside of the Group’s control. In the case of intellectual property litigation and proceedings, adverse outcomes could include the cancellation, invalidation or other loss of material intellectual property rights used in the Group’s business and injunctions prohibiting our use of business processes or technology that are subject to third party patents or other third party intellectual property rights. Litigation based on environmental contamination or exposure to hazardous substances in the workplace or from the Group’s products could result in material liability for the Group. Adverse outcomes in any litigation or other proceeding could have a material adverse effect on the Group’s business, results of operations, financial condition or prospects.
The Group’s business involves risk of exposure to product liability claims. Even though the Group is generally a materials supplier rather than a manufacturer of finished goods, the development, manufacture and sales of specialty emulsion polymers and other materials by the Group involve inherent risks of exposure to product liability claims, product recalls and related adverse publicity. While the Group attempts to protect itself from such claims and exposures in its adherence to standards and specifications and contractual negotiations, it cannot assure you that its efforts in this regard will ultimately protect it from any such claims. For instance, the Group’s customer may attempt to seek contribution from it due to a product liability claim brought against them by a consumer, or a consumer may bring a product liability claim directly against the Group. A product liability claim or judgment against the Group could result in substantial and unexpected expenditures, affect consumer or customer confidence in the Group’s products, and divert management’s attention from other responsibilities. A successful product liability claim or series of claims against the Group in excess of its insurance coverage payments, for which the Group is not otherwise indemnified, could have a material adverse effect on the Group’s business, results of operations, financial condition or prospects.
The insurance that the Group maintains may not fully cover all potential exposures. The Group maintains insurance typical of similarly situated companies in our industry but such insurance may not cover all risks associated with the operation of the Group’s business or its
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manufacturing process and the related use, storage and transportation of raw materials, products and wastes in or from our manufacturing sites or its distribution centers. While the Group has purchased what it deems to be adequate limits of coverage and broadly worded policies, the coverage is subject to limitations, including higher self-insured retentions or deductibles and maximum limits and liabilities covered. Notwithstanding diligent efforts to successfully procure specialty coverage for environmental liability and remediation, the Group may incur losses beyond the limits or outside the terms of coverage of the Group’s insurance policies, including liabilities for environmental remediation. In addition, from time to time, various types of insurance for companies in the specialty chemicals industry have not been available on commercially acceptable terms or, in some cases, at all. The Group is potentially at additional risk if one or more of our insurance carriers fail. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the ratings and survival of some insurers. Future downgrades in the ratings of enough insurers could adversely impact both the availability of appropriate insurance coverage and its cost. In the future, the Group may not be able to obtain coverage at current levels, if at all, and the premiums may increase significantly on coverage that it maintains.
The Group may be subject to information technology systems failures, network disruptions and breaches of data security. Information technology systems failures, including risks associated with upgrading our systems, network disruptions and breaches of data security could disrupt the Group’s operations by impeding the Group’s operational efficiencies, delaying processing of transactions and inhibiting our ability to protect customer or internal information. The Group’s computer systems, including our back-up systems, could be damaged or interrupted by power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, events such as fires, earthquakes, floods, and/or errors by the Group’s employees. Although the Group has taken steps to address these concerns by implementing sophisticated network security, back-up systems and internal control measures, it cannot assure you that a system failure or data security breach will not have a material adverse effect on the Group’s business, results of operations, financial condition or prospects.
2.2 Risks Related to the Group’s Financial Profile Substantial leverage and debt service obligations could adversely affect the Group’s business and prevent from fulfilling each of obligations with respect to the Notes. After the issuance of the Notes the Group is highly leveraged. As at December 31, 2014, the Group’s total borrowings have been approximately PLN1,491.1 million. Moreover, the Group may incur substantial additional indebtedness in the future, including indebtedness in connection with any future acquisition. Although the Indenture contains restrictions governing the incurrence of additional indebtedness, the restrictions are subject to a number of significant qualifications and exceptions and, under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial.
The Group may incur additional indebtedness, including at the level of its subsidiaries, which could increase risk exposure from debt and could decrease your share in any proceeds. Subject to restrictions in the Indenture, the Group and its subsidiaries may incur additional indebtedness, including debt that will effectively rank senior in right of payment to the Notes by virtue of being secured by certain of the assets. Any indebtedness that will be incurred in the future at a non-Guarantor subsidiary level would be structurally senior to the Notes. Additionally, the Group could raise additional debt that could mature prior to the Notes.
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Although the Indenture contains restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with those restrictions could be substantial. If new debt is added to the Group or its subsidiaries’ existing debt levels, the related risks that the Group now face would increase. In addition, the Indenture does not prevent the Group from incurring obligations that do not constitute indebtedness under those agreements.
The Group will require a significant amount of cash to service its debt and sustain its operations. The ability to generate sufficient cash depends on many factors beyond the Group’s control, and it may be forced to take other actions to satisfy the debt obligations, which may not always be successful. The ability to make payments on and to refinance the debt, and to fund working capital and capital expenditures, will depend on a future operating performance and ability to generate sufficient cash. This depends, to some extent, on the success of business strategy and on general economic, financial, competitive, market, legislative, regulatory and other factors, as well as the other factors discussed in these “Risk Factors” many of which are beyond Group’s control. The Group cannot assure you that our business will generate sufficient cash flow from operations or that future debt and equity financing will be available to the Group in an amount sufficient to enable to pay debts when due, including the Notes or to fund other liquidity needs. If the future cash flow from operations and other capital resources are insufficient to pay the obligations as they mature or to fund the liquidity needs, the Group may be forced to:
• reduce or delay business activities and capital expenditures;
• sell assets;
• obtain additional debt or equity capital; or
• restructure or refinance all or a portion of the debt, including the Notes, on or before maturity. The Group cannot assure you that it would be able to accomplish any of these alternatives on a timely basis or on commercially reasonable terms, if at all. In particular, the ability to restructure or refinance the debt will depend in part on the Group’s financial condition at such time. Furthermore, the Group may be unable to find alternative financing, and even if it could obtain alternative financing it might not be on terms that are favorable or acceptable to the Group. If the Group is unable to satisfy the obligations through alternative financing, it may not be able to satisfy the debt obligations, including under the Notes. In that event, borrowings under other debt agreements or instruments that contain cross acceleration or cross default provisions, including the Notes, may become payable on demand, and the Group may not have sufficient funds to repay all its debts, including the Notes. Any failure to make payments on the Notes on a timely basis would likely result in a reduction of the Group’s credit rating, which could also harm our ability to incur additional indebtedness. In addition, the terms of the debt, including the Notes and any future debt may limit the ability to pursue any of these alternatives. In the absence of such operating results and resources, the Group could face substantial liquidity problems and might be required to dispose of material assets or operations to meet its debt service and other obligations. The terms of the Group’s debt, including under the Indenture, restrict the ability to transfer or sell assets. In addition, there can be no assurance that any assets which the Group could be required to dispose of
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can be sold or that, if sold, the timing of such sale and the amount of proceeds realized from such sale will be acceptable. If any of these efforts were unsuccessful, the Group may not have sufficient cash to meet the obligations.
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BUSINESS DESCRIPTION OF SYNTHOS GROUP
4 RAPORT ROCZNY 2013
3. BUSINESS DESCRIPTION OF SYNTHOS GROUP
3.1 Overview The Group’s business is divided into three main business segments: butadiene and rubber (the “Synthetic Rubber Segment”), styrene and styrene derivatives (the “Styrene Plastics Segment”) and dispersions adhesives and latex (the “Dispersions, Adhesives and Latex Segment”). Other sources of revenues include auxiliary operations related to the production and distribution of thermal energy from the Group’s own power plants, as well as revenues derived from the trading and distribution of electricity (“Other Operations,” including “Media,” which is reported as a separate segment in the Consolidated Financial Statements). Other Operations also include income and costs not allocated to any segments.
The Group’s operations are comprised of the following three core business segments:
Synthetic Rubber Segment The Group’s Synthetic Rubber Segment is its core business segment. 77% of the volume of products sold in this segment is attributable to large tire industry participants, including Michelin, Continental, Bridgestone, Goodyear and Pirelli. The remaining 23% of the volume of products sold in this segment is derived from other markets, including those involved in the production of technical rubber, soles for footwear, flexible cables and transmission belts. For the year ended December 31, 2014, the Group’s Synthetic Rubber Segment generated revenues from sales of PLN 2,309.1 million and EBITDA of PLN 345.8 million.
Styrene Plastics Segment The Group’s Styrene Plastics Segment produces three main types of products, which differ in their application. The first is expandable polystyrene (“EPS”), which is primarily used in the production of thermal insulation boards, a basic thermal insulation material used in Central Europe. The second includes general purpose polystyrenes (“GPPS”) and high impact polystyrenes (“HIPS”), which are primarily used in the food packaging industry. Polystyrene is also used for making disposable tableware, cups, and containers for dairy products, trays and cutlery. It is also used as a raw material in the production of shower cubicles, jewelry packaging, and other materials requiring a stiff but transparent packaging material. The third is extruded polystyrene board (“XPS”), which is produced by the Group’s new production line for extruded polystyrene. XPS is used primarily in the construction industry, as a thermal insulation material for the perimeters of buildings, roofs with reverse layer sequences, flooring and in thermal bridges and cavity walls. For the year ended December 31, 2014, the Group’s Styrene Plastics Segment generated revenues of PLN 1,905.1 million and EBITDA of PLN 159.2 million.
Dispersions, Adhesives and Latex Segment The Group’s Dispersions, Adhesives and Latex Segment produces acrylic, styrene-acrylic, vinyl acetate polymer dispersions: wood- and paper-adhesives and two different types of synthetic latex: concentrated styrene butadiene and styrene butadiene carboxylic latex. The main application for these materials is in the production of high-quality paints, acrylic plasters, primers, sealers and other chemicals used in the construction industry. Polyvinyl acetate dispersions are used in the manufacturing of adhesives for wood and in the paper, textile and construction industries. The Group’s adhesives are used mainly in the wood, furniture and paper industries. For the year ended December 31, 2014, the Group’s Dispersions, Adhesives and Latex Segment generated revenues from sales of PLN 169.5 million and EBITDA of PLN 10.3 million.
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3.2 History The Group was founded in 1945 as the Factory of Synthetic Fuels in Oświęcim, Poland. During the 1950s and 1960s, the Group completed construction of a synthetic rubber plant, and in June 1959 the Group started emulsion synthetic rubber production. The Group continued to grow our business, reaching full productivity and production of high employment levels in the 1970s. In 1996, the Group was privatized, with 60% of our shares transferred to the Polish National Investment Fund.
In December 2004, our shares were listed on the Warsaw Stock Exchange and in 2006 our controlling shareholder Michał Sołowow increased his controlling shareholding in the Company to over 50%. In July 2007, the Group became the owner of 100% of the shares of the Czech company Kaucuk a.s., one of our biggest competitors in Central and Eastern Europe. In 2007, the Group also signed a NdBR license agreement with Michelin relating to polybutadiene rubber production technology as well as a commercial contract for deliveries of this type of rubber. In June 2010, the Group launched a butadiene production plant in Kralupy through a joint venture with Unipetrol. The Group owns 49% of this joint venture and operationally co- manage butadiene production in the plant, which has a production capacity of 130,000 tons per year. In the third quarter of 2011, the Group started production of NdBR polybutadiene rubber in Kralupy. In March 2012, the Group was included as a member of the blue chip WIG20 index on the Warsaw Stock Exchange. In the same year, the Group signed a license agreement with Goodyear, under which the Group was granted a license for advanced SSBR rubber production technology. In 2013, the Group started construction of our SSBR plant in Poland. The Group also opened a research and development center in Poland for the purpose of researching new product technologies and further developing our existing products. In March 2014, the Group announced its plan to construct a neodymium polybutadiene rubber plant in Brazil and continue investment preparatory work. In 2014, the Company decided to develop the AGRO segment.
3.3 Recent Developments Execution of investment activities related to SSBR In 2014 work was continued in the plant in Oświęcim in connection with executing the investment to build an installation to produce modern SSBR rubber. This installation is slated to be commissioned in mid2015. Executing this investment will lead to expanding the Group’s manufacturing capabilities in terms of modern SSBR rubber by a nominal amount of roughly 90,000 tons per annum. This installation will also be capable of manufacturing polybutadiene rubber and will be able to service leading manufacturers of tires.
Building the AGRO segment The Group has resolved to develop a new business segment, i.e. manufacturing means of plant protection. The overriding objective is to gain the greatest possible share of the global market for means of plant protection in the shortest possible amount of time. The Company intends to achieve the foregoing by (i) acquisitions, (ii) registering and selling means of plant protection in Poland and abroad, (iii) building its own research and development center for means of plant protection, (iv) conducting research and devising new lists of ingredients for means of plant protection, (v) building installations to synthesize active substances, (vi) building formulation and packaging installations for means of plant protection, and (vii) building distribution structures in selected countries.
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In 2014, the Company acquired a 100% stake in the share capital of Zakład Doświadczalny „Organika” Spółka z ograniczoną odpowiedzialnością, the Group’s R&D company specializing in plant protection products. In its product portfolio this company has a means of plant protection called ORKAN 350 SL used to fight weeds in apple orchards. This means of plant protection bases its efficacy on combining two active substances, i.e. glyphosate and MCPA.
In the third quarter of 2014 the Group completed a takeover of the registration of means of plant protection and biocides from Zakłady Chemiczne Organika-Azoty S.A. The major products forming the transactions are fungicides sold under the commercial names of Miedzian, Kaptan and Funaben as well as reputable biocides such as Muchozol, Mrówkozol and Insektozol. The purchase of the registration for means of plant protection and biocides from Zakłady Chemiczne Organika-Azoty S.A. and the manufacturing and formula services offered by Zakład Doświadczalny „Organika” will enable the Group to penetrate the market quickly employing products branded as Synthos AGRO. The Group’s current penetration of the market using new products such as means of plant protection will make it possible to prepare clients for a much broader product portfolio of greater magnitude to be offered after completing the construction of its own complex of manufacturing installations for active substances and means of plant protection. In 2014 the sales of agro products and services amounted to PLN 14.4 million, of which PLN 4.9 million from exports.
Acquisition in the dispersion and adhesive segment On 18 July 2014 an agreement was signed with SPV Boryszew 3 Spółka z o.o., seated in Warsaw, (Boryszew S.A.’s subsidiary) relating to purchase of 20,550 (twenty thousand five hundred fifty) shares constituting 100% of the share capital of Oristano Investment Spółka z o.o., for PLN 40,000,000.00 (forty million Polish zloty). The transaction was completed on 12 August 2014. In October 2014, Oristano Investment Sp. z o.o., company dealing with production of vinyl dispersions and adhesives, was incorporated into the Company’s structures, in the trading part (purchasing, sales), and into Synthos Dwory 7 Spółka z ograniczoną odpowiedzialnością spółka jawna, in the production part. The acquisition was another step in building the position of a leading supplier of chemical products and market leader offering high quality solutions in the dispersions and adhesives segment, taken mainly with buyers and end users in mind. The Group significantly increased its share in the Polish vinyl dispersion, wood adhesive and paper industry adhesive market. The Company’s long term strategy assumes successive development of the market value of the dispersions and adhesives business. The objective is to maximize the potential of the production facility in Sochaczew and, in the longer run, develop this unit.
Receiving permits to operate in the Krakow Special Economic Zone On July 1, 2014, the Group received three new permits to operate in the Kraków Special Economic Zone. The new permission will allow the Group to pursue three new investments planned by the Group (i) the construction of a plant for the production of styrene-butadiene solvent rubber (batch production method); (ii) the construction of a plant for pesticides production; (iii) the construction of a plant for production of innovative expanded polystyrene for use during production of improved insulation materials for construction.
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Intensification of sales in North America At the beginning of 2014, the Company announced entering into a trading agreement with Harwick Standard, distribution company with an established position and experience in the sale of synthetic rubbers for production of tires and other applications. Harwick Standard became the exclusive partner in distribution of the Group products in the American market. In September 2014, the Company made a decision to support the above actions directly on site by opening, in H1 2015, the first official representation office in the US and launching rubber warehouses which will secure customers in the event of sudden shortages of the product, shorten the delivery time to the factories and secure ad hoc redistribution needs of Harwick Standard.
Plans to build a NdBR production facility in Brazil In June 2014, a Tentative Environmental Permit for construction of the installations was obtained. A contract was concluded with an engineering company and a cost analysis of the installation was carried out, taking into account the local conditions and the possibility of import of materials, devices and equipment. The analyzes have shown that the originally assumed financial outlays would be exceeded hence a modification of the project scope is being considered. In addition the documents required to submit an application for financial support under investment incentive programs for projects of strategic importance for the Rio Grande do Sul state have been prepared. An application for the construction permit for the installations was prepared and submitted.
3.4 Expected development Increasing shareholder value is the strategic objective of the Company’ Management Board. Execution of this objective will be supported by maintaining stable long-term relationships with business partners, improving operating efficiency and expanding and modernizing the product portfolio. The key investments in the production area envisaged in the Group strategy pertain to raw material security and expansion of the product offering for the customers. The strategy of growing the value Group pursued by the Management Board assumes the strengthening of the Group’s position in the key business areas, i.e. production of synthetic rubbers, polystyrenes, dispersions and adhesives and means of plant protection. The Company intends to attain this objective through, among other things, production and capital investments (acquisition of other companies conducting similar activity). The strategy of the Group assumes maintaining a safe level of debt in the development process. The maximum net debt/EBITDA ratio should be 2.5. The Group assumes constant development and optimization of the product portfolio meeting the customer expectations. Product development is to rely primarily on own research carried out by the Research and Development center, whose task is to develop and implement the production of new, innovative products, primarily new types of synthetic rubbers. The objective of the Group is to systematically improve the quality and cost competitiveness in relation to leading enterprises in the chemical industry. Acquisitions will focus on entities that have modern products expanding the existing product portfolio of the Group or market opportunities, i.e. relatively low-priced companies with good market prospects.
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3.5 Group’s Operations Synthetic Rubber Segment Overview Synthetic Rubber Segment is Group’s core business segment. Group produces synthetic rubber using emulsion technology through the polymerization of butadiene and styrene (or other chemicals such as acrylonitrile or the appropriate organic acid). For the year ended December 31, 2014, Group’s annual production capacity for synthetic rubber amounted to approximately 295,000 tons. For the year ended December 31, 2014 Group’s Synthetic Rubber Segment generated revenues from sales of PLN 2,309.1 million and EBITDA of PLN 345.8 million.
Group produces four different types of synthetic rubber: styrene butadiene rubber, high-styrene rubber and polybutadiene, as well as NBR nitrile- butadiene rubber.
Main Products and End-Uses
Group’s Synthetic Rubber Segment consists of the following products:
• Styrene butadiene rubber is produced in a low-temperature emulsion copolymerization process and is coagulated using the acid-synthetic coagulant system. Some types of styrene butadiene rubber contain aromatic oils. Staining or non-staining antioxidants are used for stabilization of styrene rubber. Styrene butadiene rubber is used for the production of tires, tire tubes, conveyor belts, shoes, cables, hoses and other technical rubber products. The non-staining rubber types are used for floor coverings in light colors, bicycle tires and tubes, shoes, toys, cables, hoses and other rubber products in light, pastel colors. ESBR is the most commoditized of all synthetic rubber types. Although consumed in all regions of the world, demand levels in North America, Western Europe, and Northeast Asia, especially China, are particularly high. The majority of ESBR is used to produce tires, though other demand sectors are also significant. Group sells its styrene butadiene rubber under the trade names KER® and KRALEX®. KER® synthetic rubber is manufactured at Group’s production plant in Poland and KRALEX® synthetic rubber is manufactured at Group’s production plant in the Czech Republic.
• High-styrene rubber and resins are appropriate for the production of floor finishes, cables, toys and micro porous rubber for footwear industry and to produce hard rubber articles. Group produces high-styrene rubber KER® 1904, which is standard-grade high-styrene rubber. It is produced by mixing styrene-butadiene latex and high styrene resin in appropriate proportions. It is coagulated with the use of synthetic coagulant and is stabilized by a non-staining antioxidant. Group also produces high-styrene rubber KER® 1909 which is an off-grade high-styrene rubber. It is stabilized with a non-staining stabilizer. High styrene resin KER® 9000 is obtained via the emulsion copolymerization of styrene and butadiene and coagulated with the use of aluminum sulphate. Both are stabilized with a non-staining stabilizer. Group sells its high-styrene rubber and resins under the trademark KER®, which is manufactured at Group’s plant in Poland.
• Polybutadiene rubber is produced in the polymerization process in a solution based on a neodymium catalyst system. It contains no plasticizer and is stabilized with a non-staining anti-oxidant. Polybutadiene rubber has become the second largest type of synthetic rubber Group produces in terms of volume after ESBR. In the year ended December 31, 2014, Group’s annual production capacity amounted to approximately 80.000 tons. Car tires (mainly the treads and sidewalls), are the most important
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application of PBR, and account for approximately 70% of global PBR consumption. Other PBR applications include technical products, such as hoses, belts, soles for footwear, golf balls, and modified styrene plastics. Due to its low polydispersity and glass transition temperature, it is preferred for tires with low rolling resistance, so- called “green” tires, which result in lower fuel consumption. Regulations promoting the production of these “green” tires have already been introduced in Western Europe and have led to a significant increase in demand for PBR. Group sell butadiene rubber under the trade name SYNTECA®, which is manufactured at Group’s plant in the Czech Republic.
• Nitrile (acrylonitrile-butadiene) rubber are produced by the cold emulsion copolymerization of butadiene and acrylonitrile, and coagulated by a system of acid and synthetic coagulant, stabilized by non-staining antioxidant. Nitrile rubber is appropriate for the production of technical items resistant to oils and liquid fuels. They contain a non-staining stabilizer and consequently can be used for the production of goods in light colors. The Group sells nitrile rubber under the trademark KER®, which is produced in Poland. Customers Group’s main customers are car tire manufacturers, who represent 77% of Group’s customers in Synthetic Rubber Segment. Group supply international car tire manufacturers such as Michelin, Continental, Bridgestone, Goodyear and Pirelli delivering rubber mainly to their European factories. The Group also supplies rubber to smaller tire manufacturers, including Nokian Tyres, Trelleborg and Vredestein. Other customers include manufacturers of technical rubber products, conveyor belts, rubber floor covering, shoe soles and various rubber mixtures, such as Kraiburg (Austria), Metso (Sweden), Fenner Dunlop (the Netherlands), Semperit (Austria), Geyer & Hosaja Mielec, Sempertrans Bełchatów (Semperit group), Stomil Sanok and Fagumit. For the year ended December 31, 2014 and the year ended December 31, 2013, the Group sold 60,3% and 57.9%, respectively, of Group’s manufactured synthetic rubber in Europe, with the remaining amount in Asia and the Americas. Raw Materials and Energy The main raw materials required for the production of synthetic rubber are butadiene and styrene. Butadiene is a product obtained from C4 fraction during the steam cracking process. The amount of butadiene yielded is highly dependent on a cracker’s feedstock, i.e., the higher the molar mass of the feedstock, the greater the possibility of obtaining butadiene. The Group produces butadiene from C4 fraction through an extraction process. Most European steam crackers are currently running on heavier feedstock, such as naphtha or LPG, which produces a stable supply of butadiene. With the development of shale gas exploration, more crackers are shifting towards lighter feedstock, such as ethane, as it offers higher profit margins, but produces lower yields of butadiene. This shift is especially evident in North America, which has experienced a butadiene deficit in recent years. Group’s strong relationships with major petrochemicals suppliers have enabled the Group to secure long-term contracts for both C4 fraction and butadiene. The Group has also started developing own purpose-built monomer production technology from renewable feedstock. In addition, the Group produces styrene from ethylene and benzene and uses it for own derivatives, such as polystyrene, EPS and synthetic rubber. The Group reduces production costs through relatively low labor costs, favorable feedstock supply agreements and low energy costs due to Group’s in-house power plant. Moreover, the Group is the only producer of styrene in Central and Eastern Europe, which gives the Group a logistical advantage over competitors with operations in Western Europe or Russia. In addition, styrene as a raw material
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is available from external sources in significant volumes from both European and overseas producers. Therefore, the Group always has the possibility to conclude long-term agreements for significant volumes of styrene at prices that vary depending on the scale of purchases.
Competition The Group was the largest European producer of high-quality commodity grades of emulsion synthetic rubber and the second largest European producer of neodymium butadiene rubber in Europe by production capacity in 2014. Most of Group’s products have been known in Group’s markets for decades, with Group’s KER®, KRALEX® trademarks having been marketed for over 50 year. This team recently joined SYNTECA®. Group’s main competitors include Lanxess, a German chemicals producer that offers a range of products for the tire and general rubber goods industries, Versalis, one of the top European rubber producers, Trinseo, international manufacturer of plastics, latex and rubber and Kumho Petrochemical, a multinational chemical company based in South Korea which focuses on synthetic rubber, synthetic resins, specialty chemicals, electronic chemicals, energy, building materials and advanced materials.
Styrene Plastics Segment Overview The group was one of the top polystyrene and expandable polystyrene producers in Europe in 2014. Group’s Styrene Plastics segment produces four main types of products obtained in the styrene polymerization process, which each differ in their application: EPS, GPPS, HIPS and XPS. For the year ended December 31, 2014 Group’s Styrene Plastics Segment generated revenues of PLN 1,905.1 million and EBITDA of PLN 159.2 million. Main Products and End-Uses EPS is a polymer compound which is used as a feedstock for styrofoam production. EPS may contain additives enhancing the process or giving the foam specific properties, for example fire-retardant properties, agents for reducing heat transfer and water absorption, external lubricants for enhanced processing, and colorants. Group’s EPS products are sold under the brand name InVento®, InSphere® and SYNTHOS EPS.
• InVento® is self-extinguishing expandable polystyrene with low thermal conductivity and a reduced amount of blowing agent. The material is formed by spherical polystyrene particles that contain a flame retardant system and a hydrocarbon blowing agent. Their surface is treated against adhesion during processing and the formation of electrostatic charges. InVento® 0814FR is mainly used in the production of thermal insulation blocks for heating buildings.
• InSphere® type 0513F, 0814F and 1020F is self-extinguishing EPS with a reduced thermal conductivity. InSphere® type 0513FR-P is self-extinguishing EPS with a reduced water absorption and reduced amount of hydrocarbon blowing agent. The materials are formed by spherical polystyrene particles that contain a flame retardant system and a hydrocarbon blowing agent and their surfaces are treated against gluing during processing and the formation of electrostatic charge. InSphere® 0513F is mainly used for the production of shipping packaging for glass and electrical goods, building bricks, floor and roof shaped parts and other thermal insulation products. InSphere® 0814F is mainly used for the production of thermal insulation blocks and in packaging technology. InSphere®1020F and 1640F is mainly used for the production of thermal insulation blocks. InSphere® 0513FR-P is mainly used for perimetric and skirting boards
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shipping packaging for glass and electrical goods, building bricks, floor and roof shaped parts; and other thermal insulation products.
• Synthos EPS (KOPLEN F and OWIPIAN FS) are self-extinguishing EPS products. The product takes the form of spherical polystyrene “pearls” containing flame retardants and a hydrocarbon-based blowing agent in a concentration below 7% weight. SYNTHOS EPS FR (KOPLEN FR) is a self-extinguishing type of expanded polystyrene with reduced hydrocarbon-based blowing agent. The product comes in a form of polystyrene “pearls” containing a flame retardant and hydrocarbon-based blowing agent in a concentration below 5% weight. SYNTHOS EPS FR is an environmentally-friendly alternative to EPS for its considerably lower amount of blowing agent released to the atmosphere (by around 30%). Low residual content of the blowing agent in the finished products allows also a considerable reduction of the stabilization time. SYNTHOS EPS S (KOPLEN S) is a standard (combustible) expanded polystyrene product in a form spherical “pearls,” containing below 7% hydrocarbon blowing agent, but contains no flame retardants.
Group’s GPPS and HIPS products are as follows:
• SYNTHOS PS GP 137, 152, 535, 154, 525, 171, 585C, 174 and 545 GPPS with high-specification optical properties, gloss and increased heat resistance. It is a thermoplastic material designed for injection molding, extrusion, thermoforming and blow extrusion. SYNTHOS PS GP 585A is a GPPS with excellent optical properties, gloss, high heat resistance and mechanical strength. It is a thermoplastic material designed for extrusion, thermoforming and injection molding. SYNTHOS PS GP 585X is a GPPS of high- specification t heat resistance and good rheological properties. It is a thermoplastic material designed for extrusion, thermoforming and injection molding.
• SYNTHOS PS HI 336M is a high-impact polystyrene (HIPS) with very easy flow, making it easy to process. It is a thermoplastic material designed for injection molding. SYNTHOS PS HI 552M is high-impact polystyrene (HIPS) with a balanced combination of rheological, mechanical and thermal properties, suitable for use in general applications. It is a thermoplastic material designed for injection molding and extrusion. SYNTHOS PS HI 562E and 945E is a type of HIPS with properties suitable for extrusion and thermoforming. SYNTHOS PS HI 662E is a type of HIPS with a matte appearance and properties that are suitable for extrusion and thermoforming. Group’s XPS products are as follows:
• Synthos XPS PRIME and Synthos XPS PRIME S are modern ecological insulation products, with a formula that is based on Synthos XPS white board. Customers In the Styrene Plastics Segment, the Group focuses operations mainly on servicing the construction industry, manufacturers of EPS and XPS packaging. Group’s main customers in this product group EPS include Arbet (Koszalin), GPS (Poland), Termo Organika (Kraków), Austrotherm (Oświęcim), Bachl (Germany), Lippstaedter (Germany), Saint Gobain (Germany). GPPS and HIPS are sold mainly to the packaging industry, primarily to operators in the food sector. Group’s main customers in this product group are Krakchemia (Kraków) and Huhtamaki Foodservice Group (Skierniewice) in Poland, Coveris Group (France), Polycasa (Belgium), Greiner (Austria), DFI (Italy). We sell XPS boards using two channels: wholesalers of building materials and EPS converters, who buy raw material for the production of EPS boards, and also to resell finished XPS insulation boards. Main customers in this product group are:
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Termo Organika (Kraków), Saint-Gobain (Czech Rep.), Styroprofile/Styrotrade (Czech Rep.), SIG (Kraków). Raw Materials and Energy
The Group produces styrene from ethylene and benzene and uses it to manufacture Group’s own derivatives, i.e., polystyrene, EPS and synthetic rubber. XPS is produced on the basis of own raw materials, such as GPPS. The Group also purchases a certain volume of styrene at the market and as a result of the large amounts the Group purchases, the Group is able to negotiate favorable prices with price formulas.
Competition The Group is the fourth combined largest manufacturer of EPS in Europe and largest manufacturer of XPS in Central and Eastern Europe in 2014.
Group’s main competitors are Styrolution and Total. Styrolution is a joint venture set up by BASF and INEOS, which focuses mainly on synergies resulting from asset consolidation and price synergies achieved by virtue of the large scale of its operations, vertical integration and large-scale production plants. INEOS is one of the largest chemical companies globally in terms of revenues and Europe’s largest producer of EPS, with a focus on delivering products with excellent insulation properties, is vertically integrated, and has a large product portfolio.
Dispersions, Adhesives and Latex Segment Overview Group’s Dispersions, Adhesives and Latex Segment produces acrylic dispersions, styrene and acrylic dispersions, dispersions of vinyl acetate polymers; wood- and paper- adhesives and two different types of synthetic latex: concentrated styrene butadiene and styrene butadiene carboxylic latex. The main application of these materials is the production of high quality paints, acrylic plasters, primers, sealers and many other construction chemicals. Polyvinyl acetate dispersions are used in the manufacture of adhesives for wood and in the paper, textile and construction industries. The textile industry and the construction industry use polyvinyl acetate dispersions to enhance textile fabrics and for the modification of concrete and paint production, respectively. Group’s adhesives are used mainly in the wood, furniture-making and paper industries. For the year ended December 31, 2014 Group’s Dispersions, Adhesives and Latex Segment generated revenues from sales of PLN 169.5 million and EBITDA of PLN 10.3 million. Main Products and End-Uses Group’s current portfolio of dispersions offered on the market includes 18 products sold under the registered trade names Osakryl® and Winacet®.
• Osakryl® is the registered trade name for a range of water-based acrylic, styrene-acrylic and vinyl-acrylic copolymer dispersions, obtained with the addition of ionic or nonionic surfactants. The Osakryl® range may be used at either its full concentration, or diluted with water. The products are miscible with other polymer and copolymer dispersions, with inorganic fillers and pigments as well as with other additives intended for water-based products. Once the water has evaporated, a uniform, transparent film is formed, with good adhesive properties when applied to various types of mineral substrates, particularly cement, cement-lime, wood and other porous materials.
• Winacet® is the registered trade name of a range of products we manufacture based on polyvinyl acetate. The Winacet® range is an aqueous dispersion, obtained by a
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process entailing the emulsion polymerization of vinyl acetate using polyvinyl alcohol as a protective colloid or nonionic emulsifiers. Some products in the range also contain a plasticizing agent. Plasticized products do not contain phthalate plasticizers.
Group’s current portfolio of adhesives contains two brand names: Woodmax® and Papermax®. Currently, sale targets have been realized for the portfolio of adhesives containing 46 products.
• Woodmax®
• Papermax® Group’s portfolio of latexes contains two different types of synthetic latex:
• Concentrated styrene-butadiene latex (“LBS”) and styrene-butadiene carboxylic latex (“LBSK”) are used mainly in the production of elastic latex foam and latex mattresses, gelled or non-gelled foam carpet backings, adhesive floor coverings and other carpet backing, as well as for fabric finishing. Latex is also used for the production of bitumen emulsion (construction isolation material) and reinforcement meshes (modification of fiber glass). We currently offer 11 varieties of latex.
Customers For the year ended December 31, 2014 and the year ended December 31, 2013, 61% and 63.8% of dispersions, respectively, in terms of volume, were sold in the Polish market and the remaining range is an aqueous dispersion, obtained in a process entailing the emulsion polymer. Group’s main customers for dispersions are the leading manufacturers of liquid chemical products for the construction industry, including Śnieżka, PPG Deco, IMCD, Atlas, Knauf, Tikkurila, Imprefarb. Group’s main markets also include Ukraine, Belarus, Greece, Italy, Spain, Romania and the Baltic countries. WOODMAX adhesives are mainly sold to manufacturers of furniture and doors and windows. PAPERMAX adhesives are designed for the paper industry and sold to manufacturers of paper, cardboard and paper packaging, among others. Synthetic latex sold by the Group is supplied primarily to customers who manufacture floor coverings and carpets, foam products (foam latex and mattresses) and bitumen emulsions for the construction industry. Group’s major customers include Derkim Kimya (Turkey), Artilat (Belgium), Beaulieu (Belgium). Raw Materials and Energy Group’s water dispersions are manufactured on the basis of acetate-vinyl and acrylate dispersions, styrene-acrylate dispersions, and copolymers of acrylate monomers, along with other monomers for construction chemical producers. The Group purchases these raw materials under both long-term and short-term agreements. Competition Group’s leading competitors in this segment are large international chemical companies such as BASF, DOW and Momentive that have large and diversified product portfolios. Other Operations The Group engages in auxiliary operations related to the production and distribution of thermal energy, heat and electricity generation and electricity trading and distribution. Group’s power plants are located on Group’s industrial sites in Oświęcim (Poland) and Kralupy (the Czech Republic). In Oświęcim, Group’s main fuel is hard coal bought from local mines. In addition, the Group derives a portion of Group’s energy from “coal bed methane” (fuel gas extracted in some underground mines in order to make coal extraction). In the Czech Republic,
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Group’s main energy sources are natural gas and, to a certain extent, fuel oil. In 2014, total fuel costs for Group’s power plants amounted to PLN 323,8 million of the total cost of goods sold. In addition, the Group is involved in a limited number of other activities, including maintenance services, logistics, laboratory services and warehouse leasing. For the year ended December 31, 2014 Group’s Other Operations (including energy) generated revenues from sales of PLN 235.1 million and EBITDA of PLN 120.5 million, respectively.
3.6 Sales and Marketing The Group sells synthetic rubber predominantly to global producers of tires, such as Michelin, Pirelli, Goodyear, Bridgestone and Continental, many of which are well known market leaders. The Group’s production facilities are strategically located near these key customers in Central Europe with easy access to their tire plants, as well as to areas of growing demand.
The Group’s marketing team is comprised of five people. The Group’s marketing strategy is initiated by its global marketing team, with specific market activities further developed and implemented within its segments. In particular, the Group’s global marketing team is responsible for general market analyses and advertisement and promotion, while each segment’s marketing team tailors and implements this marketing strategy within its segment by conducting market analyses, monitoring customer satisfaction, analyzing competition, promoting the Group’s products in new markets outside Europe and developing effective sales plans.
3.7 Raw Materials The Group’s main raw materials are butadiene, C4 fraction, ethylene, benzene and styrene, of which butadiene is most significant for its business. For the year ended December 31, 2014, butadiene accounted for 24,3% of the Group’s total raw materials expenses. The Group buys or derives butadiene from C4 fraction. Another important raw material for its business is styrene which the Group produces from ethylene and benzene (through ethylbenzene) at its Czech site. In Poland, the Group produces styrene from ethylbenzene which is transported from its plant in the Czech Republic. For the year ended December 31, 2014, the Group’s self-sufficiency in key inputs were as follows: approximately 74%, 83%, 100%, 166% and 238% for butadiene, styrene, ethylbenzene, heat and electricity, respectively. The Group’s main suppliers include European petrochemical producers such as PKN Orlen (which together with Unipetrol forms one group), Sabic and OMV, who deliver raw materials to the Group’s production facilities in the Czech Republic and Poland. The Group’s regional production facilities are also linked through pipelines with some of its suppliers, including a pipeline with Unipetrol through which the Group obtains C4 fraction and ethylbenzene for its production facility in the Czech Republic, or its pipeline with Braskem through which the Group will obtain butadiene for the Group’s production facility in Brazil. In addition, Butadien Kralupy a.s., its joint venture with Unipetrol, provided the Group with approximately 52% of the Group’s annual supply of butadiene for the year ended December 31, 2014, which is the key raw material for its synthetic rubber production at the Group’s production facility in the Czech Republic. The recent trend relating to the shutdowns of European crackers may have an impact on the availability of the Group’s ethylene and butadiene market. The following is a detailed list of the contractual arrangements under which the Group sources its main raw materials:
• Purchases of butadiene, which is used for the production of synthetic rubber and latex, are carried out primarily under long-term contracts with suppliers with stable
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market positions. These long-term contracts are from three to ten years or are concluded for an undefined period. Certain of them include the provisions of renewal of rights. Raw materials purchased are based on pricing formulas related to butadiene quotations. In addition to securing raw material supplies through long-term agreements, the Group purchases small amounts of butadiene under short-term contracts.
• Vinyl acetate monomer, which is used for the manufacture of vinyl and vinyl-acrylic dispersions, is purchased under annual as well as short-term contracts with suppliers offering the best commercial terms at a given time.
• Ethylene and benzene used for ethylbenzene production is purchased primarily under long-term contracts concluded with Unipetrol, which are valid until the end of 2017, with prices based on the pricing formulas related to ethylene and benzene quotations. Additionally, small amounts of benzene are purchased under short-term contracts at the current market price.
• Purchases of C4 fraction used in the production of butadiene are made under long-term contracts with prices based on the pricing formulas related to naphtha quotations.
• Auxiliary raw materials for all types of chemical production, due to their relatively high level of availability, are purchased mainly under short-term contracts in order to obtain the best commercial terms at a given time. The Group chooses its raw material suppliers from among the most reliable producers and suppliers offering the most competitive terms. All the Group’s raw material suppliers are subject to constant reviews and assessments.
Key sources of energy The Group’s power plants are located on its industrial sites in Oświęcim, Poland and Kralupy, Czech Republic. In Oświęcim, the Group’s main fuel is hard coal bought from local mines. In addition, the Group derives a portion of its energy from “coal bed methane,” which is fuel gas extracted in some underground mines used for coal extraction. In the Czech Republic, the Group’s main energy sources are natural gas and, to a certain extent, fuel oil. For the year ended December 31, 2014, the Group’s energy costs accounted for 7,1% of its total operating expenses of Group.
3.8 The Group’s Production Facilities The Group operates production facilities in Poland and in the Czech Republic for the production of synthetic rubber and styrenics. The table below provides an overview of its production facilities and the main products manufactured at such production facilities as at December 31, 2014:
Production Country Segment Main Products Capacity (kt/y) Poland ...... Synthetic Rubber ESBR, NBR. HSR 185 EPS EPS 105 XPS* XPS 165 PS HIPS, GPPS 50 Dispersions & Adhesives Dispersions, Adhesives 58 Latices Latex 16 Czech Republic ..... Synthetic Rubber ESBR 110 NdBR 80
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Production Country Segment Main Products Capacity (kt/y) EPS EPS 105 XPS* XPS 165 PS HIPS, GPPS 80 *in thous. m3
In 2013, the Group started work on a production facility for modern SSBR rubber in Oświęcim, Poland. At the beginning of 2014, the Group began installation works, including the construction of a chemical and storm drain system. As at December 31, 2014, the Group has completed earthworks, reinforcement, concrete and insulation works, as well as the construction of a reinforced concrete structure for the plant. The Group believes that the plant could be ready to begin production in the third quarter of 2015. In addition, the Group owns 49% in a joint venture established together with Unipetrol, which provided the Group with 51% of its annual requirements for butadiene for the year ended December 31, 2014, which is the key raw material for the Group’s synthetic rubber production at its production facility in the Czech Republic.
The Group is also planning to build an NdBR facility in Rio Grande do Sul, Brazil, which is scheduled to start operations within the next few years. This production facility would produce NdBR for high-performance car and truck tires with enhanced properties and various technical rubber products based on a license granted by Michelin. The planned capacity of the production facility is expected to be up to 90,000 tons per year. Commencement of construction is contingent on entrance into force of raw materials supply agreements, including butadiene supply agreement with Braskem executed in October 2013. The Group has also entered into off-take arrangements with Michelin and Pirelli involving pre-sold volumes of NdBR from the Group’s Brazilian facility to support its future production capacities. The Group can make no assurances that such contracts will enter into force and that construction of the planned NdBR production facility in Brazil will commence at such point.
3.9 Research and Development The Group considers research and development activities an important tool for competing effectively and the Group commits significant resources to such activities. The Group’s research and development team is based both in Poland and the Czech Republic. The department of 52 people focuses mainly on three strategic areas: synthetic rubber, polystyrene (expandable) plastics as well as dispersions and adhesives. The Group owns key intellectual property and know-how in these fields. The Group’s R&D department has many ongoing research collaborations with external institutes, which range from outsourcing of non-core activities to co-development. The Group currently maintains an international network with reputable institutes, e.g. University of New Hampshire (USA), Global Bioenergies (France), Fraunhofer Polymer Pilot Plant Center (Germany), Akron Rubber Development Laboratory (USA), Elastomer Research Testing BV (Holland), University of Bath (UK) and VSCHT (Czech Republic). This allows the Group to develop the innovative products in a timely and cost-effective manner, guided by the Group’s clients’ preferences and specifications. The Group’s research and development activity in 2014 focused on development of three strategic areas: synthetic rubbers, polystyrenes (expandable), and dispersions and adhesives. Last year construction of the second stage of the R&D center, focusing on development of new synthetic rubbers and expandable polystyrenes. In addition, work on several tens of projects was continued. The Group’s recent new product introductions include:
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• InVento 814FR - grey self-extinguishing expandable polystyrene (EPS) with a low thermal conductivity and reduced amount of blowing agents. Styrofoam produced from InVento reaches thermal conductivity of λ 0.032 W/m*K.
• Osakryl APS 040 - acrylic dispersion for production of self-adhesives (PSA – Pressure Sensitive Adhesives) for different types of adhesive tapes.
• New polystyrene products: Koplen S (expandable polystyrene product in the form of spherical “pearls,” containing less than 7% of hydrocarbon blowing agent, but containing no flame retardants; very low-benzene product; used in manufacturing packaging.), InSphere (expandable polystyrene with improved thermal insulation properties; mainly used in the production of shipping packaging for glass and electrical goods, building bricks, production of thermal insulation blocks and in packaging technology and for perimetric and skirting boards shipping packaging for glass and electrical goods) and InSphere P (expandable polystyrene with reduced water absorption and reduced amount of hydrocarbon blowing agent; used for manufacturing perimetric boards)
• New adhesive products: Osakryl AP 40 (a water dispersion of acrylic copolymer produced in the presence of emulsifying system composed of ionic and non-ionic surface active agents; designed for the formulation of deep penetrating primers and wood stains or impregnations) and Woodmax FF 12.47 (an adhesive based on water dispersion of polyvinyl acetate and enriching additives for wood applications). Other projects will be successfully implemented in the next years. In 2013, the Group completed another stage of construction of the Group’s new research and development center in Oświęcim, Poland, which allowed the Group to commence synthesis processes (laboratory and semi-technical scale) in the main laboratories, and analytical and application research. At the beginning of 2014, the Group started its R&D activities in the analytical laboratory of its new R&D center in Oświęcim. The new research and development center will allow the Group to develop new products and gradually transition from producing commodity chemical products to more specialized products with higher margins. The main goal of the research and development center is to develop and implement new and innovative products, with a particular focus on producing new types of styrene-butadiene synthetic rubber through polymerization in solution. This new type of synthetic rubber will allow tire manufacturers to develop products with a much lower rolling resistance and improved adhesion to surfaces, which will translate into a significant reduction in fuel consumption and improved safety. The research and development center will also focus on developing new technology for manufacturing raw materials, such as butadiene, for the synthesis of the new synthetic rubber that is to be developed. This technology will be based on renewable raw materials, which will allow the Group to be less dependent on oil, for which prices can be more volatile prices. In addition, the Group has also recently established a cooperation agreement a French biotechnology company to develop a biobutadiene manufacturing technology through the direct fermentation of sugar. The Group’s investment in developing a biotechnological method of obtaining butadiene will insulate the Group from the high prices of butadiene, as the Group could obtain at lower prices from biofeedstock. Additionally, the Group will be able to reduce its exposure to the risk of a limited supply of petrochemical butadiene, for example if naphtha crackers were to close due to the expansion shale gas exploration.
3.10 Information Technology The Group uses several business support applications. An enterprise resource planning (“ERP”) platform supports most of the Group’s basic management and business processes, and
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supports the Group’s process of forecasting and budgeting, both in terms of sales, production, purchasing, as well as fixed and variable costs and cash flow. Budgeted activities are recorded operationally in different operational modules, which allow the Group to oversee processes and at the same time monitor and block undesirable actions (such as exceeding customer credit limits, late payments or shortages/surplus in inventory levels).
In addition to the Group’s ERP system, the Group uses tools for analyzing and reporting data such as the MicroStrategy Business Intelligence system. Moreover, advanced warehouse management, registration of manufactured goods and preparation of customer shipments are carried out using the Warehouse Management System-Oprtipromag. The Group has not had any significant information technology problems in the past.
3.11 Intellectual Property The Group has developed and maintain an extensive portfolio of registered patents and trademarks. Proprietary protection of the Group’s processes, apparatuses, and other technology and inventions is important to its business. In addition to the Group’s patents, patent applications, trademarks and know-how, the Group is party to certain licensing arrangements and other agreements authorizing the Group to use trade secrets, know-how and related technology or operate within the scope of certain patents owned by other entities. Because of the breadth and nature of the Group’s intellectual property rights and the Group’s business, the Group is not wholly dependent on any single intellectual property right. The Group is not aware of any threatened, proposed or actual proceedings that have or will be brought against the Group for infringement of third party rights or any infringement of the Group’s rights by third parties that if successfully prosecuted would have a material adverse effect upon the Group’s business, results of operations, financial condition or prospects.
3.12 Environmental, Health and Safety Matters Environmental Performance Like other chemical manufacturers, the Group’s operations are subject to a broad range of environmental laws and regulations. The Group’s manufacturing processes use many chemicals, gases and other hazardous substances. the Group’s strive to minimize the impact of its operations on the environment through an efficient use of raw materials and energy, waste management and the development and application of solutions aimed at reducing air, water and soil emissions, and improving the security of the Group’s technological installations.
The Group is also subject to increasingly stringent environmental, health and safety (“EHS”) laws and regulations, including those governing air emissions; water supply, water use and discharge into the water; the construction and operation of sites; the use, management, storage and disposal of waste and other hazardous materials; the health and safety of the Group’s employees; the investigation and remediation of contaminated land; and the health and safety impact of its products. The Group is required to obtain and periodically renew permits or licenses for industrial operations that result in discharge into the soil, air or water as well as the use and handling of waste and other hazardous materials. Such permits and licenses establish limitations and standards with respect to the Group’s operations that require compliance. The Group maintains the highest standard of care and employ adequate staffing to properly dispose of waste. The Group’s sites are regularly audited and inspected by governmental bodies in each of Poland and the Czech Republic. Among other EHS laws and regulations, the Group expects that its business will be affected, over the next few years, by new legal requirements under the IED, the EU ETS, the environmental liability directive (“ELD”) and the REACH Regulation which imposes significant obligations on the Group’s business with respect to the testing, evaluation, assessment and
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registration of basic chemicals and chemical intermediates. The IED and EU ETS directives aim at reducing the emission of pollutants and greenhouse gases into the air. In particular, the IED will introduce tighter emissions standards for SO2, NOx and dust from existing heat and power plants such as the Group’s, effective from January 1, 2016. The Group expects capital expenditures for environmental issues in the near term to be allocated to eco-innovative and energy-saving solutions. The Group estimates that it will spend approximately PLN 183.6 million in 2015.
Health and Safety The Group’s main environmental initiative is in relation to its energy sources, such as the installation for desulphurization and NOx removal. In addition, the Group’s new coal boilers in Poland and the Czech Republic will comply with all European and Polish environmental requirements. In addition, the Group is committed to manufacturing safe products and achieving an incident-free workplace. To protect employees, the Group has established health and safety policies, programs and processes at all its sites. The Group’s employees’ safety is one of its priorities. The Group constantly monitors work conditions, making improvements as necessary. The Group’s employees play a key role in this process by providing suggestions for improvement during risk assessments, which are reported under the Group’s specialty management system KAIZEN. During the last five years, the Group has not had any fatal accidents and accidents causing serious injury.
3.13 Employees As at December 31, 2014, the Group had 2,208 full-time equivalent employees, principally located in Poland and the Czech Republic, of which 802 were located in Poland and 1,406 were located in the Czech Republic. As a result of the technical nature of the Group’s business, the Group maintains a highly qualified and skilled workforce and emphasizes the importance of regular training and development by participating in training programs. The Group also promotes employee development through its annual bonus scheme. The Group believes that its labor relations are good. The Group’s conditions of employment are negotiated with trade unions each year. Negotiations usually start in the third quarter of the year and finish with the signing of an agreement which outlines the new conditions that become part of the Group’s internal labor law. In Poland, the Group is also subject to certain Polish wage regulations and some of the Group employees are party to a collective bargaining agreement. In the Czech Republic, the Group operates under collective bargaining agreements. The Group generally aims to systemize and standardize its wages, with minor distinctions, in compliance with legal regulations. 54% of the Group’s employees in Poland and 29% in the Czech Republic are trade unions representatives. In the last five years, the Group has not been involved in any disputes with trade unions. In the Group does not exist any employee share plans.
3.14 Insurance The Group believes that the types and amounts of insurance coverage the Group currently maintains are in line with customary practice in its segments of the chemicals industry and are adequate for the conduct of the Group’s business. More specifically, the Group has insurance policies with a number of international and local insurance companies relating to certain operating risks, including certain property damage, operational and product liability, cargo in
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transit insurance (for certain companies), rolling stock and vehicles insurance (in certain locations) and receivables insurance (for certain receivables).
3.15 Legal Proceedings The Group is involved in a number of legal proceedings in connection with its operations in the ordinary course of our business. These may include actions by regulatory authorities, tax authorities, suppliers and customers, employment-related claims, contractual disputes, claims for personal injury or property damage that occur in connection with the Group’s services performed relating to projects or construction sites, tax assessments, environmental claims and other matters. Many of the Group’s contracts contain provisions relating to alternative dispute resolution proceedings in order to settle any contract disputes. If the parties to the contract are unable to reach an agreement, legal proceedings may be necessary to resolve the dispute.
The Group has not, during the financial year of 2014 been involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which we are aware), which have had in the recent past, or may have, significant effect on our financial condition and profitability.
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OPERATIONAL AND FINANCIAL REVIEW
5 RAPORT ROCZNY 2013
4. OPERATIONAL AND FINANCIAL REVIEW
4.1 Key Factors Influencing Our Results of Operations Our results of operations are driven by a combination of factors, many of which affect the chemicals industry generally, such as: global supply and demand in the end markets where our customers compete, prices of raw materials, general economic conditions and compliance with environmental legislation. Our results of operations and cash flow are also affected by company specific structural and operational factors.
Economic environment, demand and cyclicality in the chemicals end markets Our business is dependent on the sales of chemical products, which are used in a wide range of industries, including in particular the automotive, packaging and construction industries. Such industries, and therefore the ensuing demand for our products, are affected by general economic conditions. Our operations are also subject to the cyclical and, more importantly, variable nature of the supply and demand balance in the chemicals industry, and our future results of operations may continue to be affected by this cyclicality and variability. Our revenue growth is dependent on the broader European and global economic environments, as well as the overall condition of Poland. In the past, our results of operations were affected by, and we expect that our financial results will continue to be affected by, key macroeconomic factors such as GDP growth, inflation, interest rates, currency exchange rates, unemployment rates, rate of corporate insolvencies and financial condition of our competitors. During the recent economic downturn, the Polish economy performed better than many of the other European economies and was the only economy in the EU to continue to grow in each year from 2008 to 2010, according to Eurostat. Generally, weak economic conditions in Europe, including in Poland, may weigh on the growth prospects of our markets. Prospects for GDP growth in Europe, including in Poland, and other macroeconomic factors are by their nature uncertain and strongly dependent upon, among other factors, the general economic environment. Our markets can also be affected by the rate of economic development in other countries, as demonstrated by the negative impact of the declining Chinese growth rate on the global bulk petrochemical industry.
Automotive and construction industry Our business is largely based on the market conditions of the industries which use our raw materials and intermediate products, including, in particular, the automotive and construction industries. In 2014, sales of passenger cars in the European Union amounted to 12 550 771 pieces. New car registrations rose by 5.7% compared to 2013 (source: European Automobile Manufacturers' Association (ACEA)). The largest increase was recorded in Spain (18.1%) and the UK (9.3%). In Italy, the increase was 4.2% and Germany 2.9%. In France, demand was stable and its growth was only 0.3%. Compared to 2013, demand for replacement tires on European markets in 2014 was stable (with the exception of agricultural tires). In the case of passenger car tires sales growth in 2014 was 2% (source: European Tyre & Rubber Manufacturers Association (ETRMA)). In the case of tires for trucks and buses, sales rose 4%. In the case of agricultural tires in the reporting period, there was a decrease compared to the year 2013 by 2%. The long-term effect of the introduced regulations for the labeling of tires will increase the demand for rubber NdBR and SSBR rubbers, which are used to produce modern tires with
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improved properties in terms of abrasion resistance, rolling resistance and better wet grip. The development of the automotive industry leads to a continuous increase in demand for synthetic rubbers produced i.a. by the Group which is observed for many years. The Company assumes that in the long term it should expect a systematic increase in demand for synthetic rubbers in the context of the expected increase in the number of cars in developing countries.
In 2014, our financial results, in particular in our Dispersions, Adhesives and Latex Segment and our Styrene Plastics Segment, were affected by the difficult situation in the construction industry.
In 2014 in Poland there was moderate annual growth of value added in construction industry, which was 5.0 per cent and sold production 3.6 percent. In the last three months of the year, however, there has been a slowdown in the growth of this industry. The added value increased only by 1.8 per cent, and sold production by 1.1 percent. (Source: State and forecast of economic conditions, Instytut Badań nad Gospodarką Rynkową, February 2015).
In 2015 Synthos expects a small improve of the business climate in construction and the results of this segment
Fluctuations in the prices of raw materials The costs of raw materials constitute a significant component of the operating costs of our business. For the year ended December 31, 2014, raw materials constituted 72% of our total revenue from sales. Our principal raw materials are butadiene, styrene, ethylbenzene, butyl acrylate, vinyl acetate monomer, ethylene and benzene and C4 fraction. Our results of operations are therefore directly affected by any volatility in the cost of our raw materials, which are subject to global supply and demand and other factors beyond our control. The prices of our raw materials are to a certain extent correlated with the global price of crude oil because crude oil is the source of feedstock for European crackers, which in turn provides us with raw materials. In Europe, the prices of our raw materials depend only to a small extent on the price of gas. We generally seek to pass on to our customers increases in raw material prices. However, due to pricing and other competitive or market pressures we may be unable to do so completely or at all. Furthermore, volatility in the cost of these raw materials makes it more challenging to manage pricing and we may experience a time lag between an increase in raw material prices and any increase in our prices to our customers. Although changes in the prices of raw materials usually translate to changes in product prices in the long run, prices of our products may not immediately reflect changes in the prices of raw materials as a result of our pricing mechanisms or delays in updating our product prices. This impacts our ability to pass the increases on to our customers in a timely manner. Accordingly, fluctuations in the prices of raw materials can have a significant impact on our gross profits, gross margins and other operating results. Furthermore, in order to minimize the price fluctuations in our long term contracts for supplies of raw materials, the price formulas in our long term contracts reflect the current situation on the raw material market. The formulas reduce the risk of large deviations of contracted purchase prices from market prices. Backward integration and obtaining long term supply contracts at attractive prices are key factors for controlling the costs of raw materials.
In 2014, the prices of basic types of polystyrenes, i.e. GPPS and HIPS were influenced by volatile prices of raw materials (high in the first half of the year and steadily falling in the second half). The variable situation favored achieving higher margins by manufacturers of polystyrenes based on its own production of styrene.
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Changes in the prices of raw materials have a direct impact on our working capital levels. In general, increases in prices lead to an increase in our working capital requirements and decreases lead to a decrease in our working capital requirements.
Fluctuations in margins and supply and demand for our products The margins in our markets are strongly influenced by industry utilization, which is affected by supply and demand for products and the costs of principal raw materials. Certain markets, such as those for plastic and synthetic rubber products, are more mature, so their overall growth tends to correlate closely with global GDP growth. As demand for products increases and approaches available supply, utilization rates rise, and prices and margins typically increase. Supply in our markets tends to be cyclical, generally characterized by periods of limited supply, resulting in higher operating rates and margins, followed by periods of oversupply, typically stimulated by the creation of additional capacity, resulting in lower operating rates and margins.
In addition to being cyclical, our margins are also susceptible to potentially significant swings in the short term due to various factors, including planned or unplanned plant outages, political or economic conditions affecting prices and changes in inventory management policies by customers (such as inventory building or de stocking in periods of expected price increases).
Current and future environmental regulatory considerations We are subject to extensive environmental, health and safety regulations at both the national and European levels. There are numerous laws that affect our business, and we have incurred, and expect to continue to incur, substantial ongoing capital expenditures to ensure compliance with current and future laws and regulations. We may also incur remediation, decommissioning and ongoing upgrade or compliance costs in connection with our production facilities and other properties. However, we believe that the potential remediation costs would not be high, and we do not anticipate that they could influence our results of operations. The REACH Regulation imposes significant obligations on us and the chemicals industry as a whole with respect to the testing, evaluation, assessment and registration of basic chemicals and chemical intermediates. The EU Classification, Labeling and Packaging Regulation (“CLP”) imposes on us significant obligations with respect to the testing, evaluation, assessment and registration of basic chemicals, which are expensive, time consuming and lead to increased production costs and reduced operating margins of our products. Over the next few years, we expect to be affected by new legal requirements related to environmental protection, resulting from, among others, the Directive on Industrial Emissions (“IED”) and the EU Emissions Trading System (“EU ETS”). We keep up with the growing eco awareness among our customers by producing NdBR, which is used in high performance tires that minimize fuel consumption. Additionally, we are involved in development of alternative routes for obtaining butadiene from renewable sources. Finally, we are considering the construction of an incineration plant for municipal waste, which will be in line with Polish national regulations concerning waste management.
Foreign currency exchange rate fluctuations We operate internationally and as a result, are exposed to various currency risks and exposures, including in particular, in relation to the euro, Polish złoty, U.S. dollar and Czech koruna. Although our reporting currency is the złoty, in 2014, 77% of our revenues and 93% of our costs related to transactions settled in a currency other than Polish złoty. We are therefore affected by both the transaction effects and translation effects of foreign currency exchange
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rate fluctuations. In recent years, the exchange rates between these currencies and the złoty have fluctuated significantly and may continue to do so in the future. A depreciation of these currencies against the złoty will decrease the złoty equivalent of the amounts derived from these operations reported in our consolidated financial statements. An appreciation of these currencies will result in a corresponding increase in such amounts. Fluctuations in exchange rates have an impact on the volume of revenue from sales and purchase costs of raw materials. While an increase in the relative strength of the złoty against other currencies may have a negative impact on the profitability of our export and domestic sales, changes in our revenues from export and domestic sales caused by exchange rate fluctuations are offset in part by changes in the costs of raw material imports. As a result of our purchases of raw materials, product sales, loans and borrowings and cash in foreign currencies, we have been, and expect to continue to be, exposed to foreign exchange rate fluctuations, which could materially affect our results of operations, assets and liabilities, and cash flows as reported in złoty. Variability in exchange rates could also significantly impact the comparability of our results of operations between periods.
Hazards and risks of disruption associated with chemical manufacturing We are exposed to the typical hazards and risks of disruption associated with chemical manufacturing and the related storage and transportation of raw materials, products and wastes. These potential risks of disruption include, among others, explosions and fires, inclement weather and natural disasters, and failure of mechanical, process safety and pollution control equipment. In 2013, we experienced two such disruptions. In June 2013, we experienced a temporary shutdown in our manufacturing facility located in Kralupy upon Vltavou in the Czech Republic due to flooding in the region for a few days, and in September 2013, the Unipetrol cracker in Litvinov, Czech Republic experienced unplanned shutdowns for a few days, which resulted in a shortage of raw material supplies, as we rely on it as a source of C4 fraction, ethylene and benzene. The Group also experienced a fire at its production plant in Oswięcim in February 2014. When such disruptions occur, alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more or may take a significant time to start production, which could negatively affect our business and financial performance. Although these kinds of events are standard, they occur infrequently, usually not more than once or twice per year, and are typically short lived.
4.2 Presentation of Financial Information For the purposes of the following discussion of our results of operations, the key line items from the statement of comprehensive income include the following: revenues from sales, cost of sales, selling costs, other operating income, general and administrative expenses, other operating expenses, financial income, financial costs, income tax and net profit. The following discussion also refers to our EBITDA and segment results.
Revenues from sales Revenues from sales are comprised of revenues from the sales of goods and finished products, provision of services, materials and income from lease of investment properties.
Segment results Segment results are comprised of revenues from each segment’s sales minus total cost allocated to such segment. Reconciliation of the segment results to profit before tax was included in the Consolidated Financial Statements.
Cost of sales
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Cost of sales includes, among others, consumption of materials and energy, salaries, costs of goods and materials sold.
Selling costs Selling costs are comprised of, among others, transportation, loading and unloading costs, duty fees, trade fees and cargo insurance.
Other operating income Other operating income includes, among others, income associated with the sale of fixed assets, reversal of provisions, impairment losses, compensation from insurance companies and contractual penalties.
General and Administrative Expenses General and administrative expenses include general administrative costs associated with the maintenance of our management board and general production costs related to the maintenance and operation of general purpose units, e.g. laboratories.
Other operating expenses Other operating expenses include, among others, revaluations of provisions, impairment losses, write offs, costs of unused production capacity, utilization of CO2 allowances and decommissioning costs.
Financial income Financial income comprises income from valuation of derivatives, interest at amortized cost using the effective interest rate, surplus of foreign exchange gains over losses on cash, loans and borrowings as well as other assets and liabilities.
Financial costs Financial costs primarily comprise, among others interest charges determined on the basis of the effective interest rate and a surplus of foreign exchange rate differences over the positive exchange rate differences on cash assets, loans and borrowings as well as other assets and liabilities.
Income tax Income tax comprises current and deferred income tax expense.
Net profit Net profit comprise total revenues minus total expenses.
EBITDA EBITDA is calculated as operating profit plus depreciation of property, plant and equipment and amortization of intangible assets.
4.3 Our Results of Operations The following table sets forth our consolidated results of operations for each of the periods indicated.
For the year ended December 31,
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2014 2013 (PLN million) Revenues from Sales ...... 4,618.8 4,989.0 Cost of sales ...... (3,853.4) (4,228.0) Gross profit/Loss on sales ...... 765.4 761.0 Other operating income ...... 21.8 31.5 Selling costs ...... (135.6) (141.5) General and administrative expenses ...... (165.5) (148.8) Other operating expenses ...... (14.4) (32.0) Profit/(Loss) on sale of property, plant and equipment ...... 7.9 4.0 Operating profit/loss ...... 479.6 474.2 Financial income ...... 7.5 23.7 Financial costs ...... (49.6) (26.7) Net financial costs ...... (42.1) (3.0) Loss on selling financial assets available for sale ...... (10.4) — Profit before tax ...... 427.1 471.2 Income tax ...... (69.6) (53.9) Net profit ...... 357.5 417.3 Other comprehensive income that may be later reclassified to profit or loss Foreign exchange differences on subordinated entities ...... 25.4 (118.7) Valuation of financial assets available for sale ...... (27.1) 71.4 Other (net) comprehensive income ...... (1.7) (47.3) Total comprehensive income ...... 355.8 370.0 Profit attributable to: Equity holders of the parent ...... 356.9 416.9 Non-controlling interests ...... 0.6 0.4 Net profit for the period ...... 357.5 417.3 Comprehensive income attributable to: Equity holders of the parent ...... 355.2 369.6 Non-controlling interests ...... 0.6 0.4 Comprehensive income for the period ...... 355.8 370.0
4.4 Year Ended December 31, 2014 Compared to Year Ended December 31, 2013 Revenues from Sales Total revenues from sales for the year ended December 31, 2014 were PLN 4,618.8 million, a decrease of PLN 370.2 million, or 7.4%, from PLN 4,989.0 million for the year ended December 31, 2013. The decrease was driven mainly by challenging market conditions including the slow recovery of the EU economy and the lower than expected growth in the Chinese economy, strong completion out of EU in PS segment and the low prices of butadiene and synthetic rubber. The following table sets forth our historical revenues from sales for the years ended December 31, 2014 and 2013.
For the year ended December 31, 2014 2013 (PLN million) Revenues from sales of products ...... 4,377.9 4,642.1 Revenues from sales of services ...... 25.2 24.1
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Revenues from sales of materials and goods ...... 214.5 320.8 Income from rental of investment properties ...... 1.2 2.0 Total ...... 4,618.8 4,989.0
Segment analysis for the year ended December 31, 2014 compared to the year ended December 31, 2013 Segment results for the year ended December 31, 2014 were PLN 464.3 million, a decrease of PLN 6.4 million, or 1.4%, from PLN 470.7 million for the year ended December 31, 2013. The following table sets forth our historical revenues from sales and results by business segment for the years ended December 31, 2014 and 2013.
For the year ended December 31, 2014 2013 (PLN million) Revenues from sales Synthetic Rubber Segment ...... 2,309.1 2,598.6 Styrene Plastics Segment ...... 1,905.1 1,962.1 Dispersions, Adhesives and Latex Segment ...... 169.5 168.9 Other Operations ...... 235.1 259.4 Total revenues from sales ...... 4,618.8 4,98 9.0 Costs by segment 8.8 989.0 Synthetic Rubber Segment ...... 2,005.6 2,301.2 Styrene Plastics Segment ...... 1,795.2 1,868. 1 Dispersions, Adhesives and Latex Segment ...... 165.8 162. 5 Other Operations ...... 187.9 186. 5 Total costs ...... 4,154.5 4,518. 3 Segment results Synthetic Rubber Segment ...... 303.5 297.4 Styrene Plastics Segment ...... 109.9 94.0 Dispersions, Adhesives and Latex Segment ...... 3.7 6.4 Other Operations ...... 47.2 72. 9 Total segment results ...... 464.3 470. 7
Synthetic Rubber Segment The segment results in our Synthetic Rubber Segment for the year ended December 31, 2014 were PLN 303.5 million, an increase of PLN 6.1 million, or 2.1%, from PLN 297.4 million for the year ended December 31, 2013.. The Group achieved almost the same number as year before. Styrene Plastics Segment
The segment results in our Styrene Plastics Segment for the year ended December 31, 2014 were PLN 109.9 million, an increase of PLN 15.9 million, or 16.9%, from PLN 94.0 million for the year ended December 31, 2013. The increase was driven mainly by better sales volume and margins in EPS and XPS. Dispersions, Adhesives and Latex Segment
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The segment results in our Dispersions, Adhesives and Latex Segment for the year ended December 31, 2014 were PLN 3.7 million, a decrease of PLN 2.7 million, or 47.2%, from PLN 6.4 million for the year ended December 31, 2013.
This decrease reflected the significant increase of main raw materials prices in the first half of 2014, such as vinyl acetate and butyl acrylate.
Other Operations
The segment results from our Other Operations Segment for the year ended December 31, 2014 were PLN 47.2 million, a decrease of PLN 25.7 million, or 35.7%, from PLN 72.7 million for the year ended December 31, 2013.
Cost of Sales Cost of sales for the year ended December 31, 2014 was PLN 3,853.5 million, a decrease of PLN 374.5 million, or 8.9%, from PLN 4,228.0 million for the year ended December 31, 2013. This decrease was mainly due to main monomers average quotations which fell down in year 2014 in comparison to the year 2013 (eg. butadiene by 14.8%, styrene by 8.5%, naphtha by 7.3% and ethylene by 5.8%). In the consequence the cost of raw materials and energy consumed was PLN 3,305.5 million for the year ended December 31, 2014 while in previous year it was PLN 4,462.5 million. Additionally, bigger part of cost of sales in year 2014 was allocated to the stock of finished products on the balance sheet date as opposed to year 2013.
Other Operating Income Other operating income for the year ended December 31, 2014 was PLN 21.8 million, a decrease of PLN 9.7 million, or 30,8%, from PLN 31.5 million for the year ended December 31, 2013. The decrease was primarily attributable to decrease of income from the contractual penalties which the Group received and the lower reversal of the impairment for receivables.
For the year ended December 31, 2014 2013 (PLN million) Reversal of impairment losses for receivables ...... 4.0 5.4 Grants and subsidies ...... 2.1 - Reversal of other provisions ...... 0.006 0.02 Compensations received from insurance companies ...... 1.8 3.2 Contractual penalties received ...... 4.2 13.1 Other ...... 9.7 9.8 Total ...... 21.8 31.5
Selling costs Selling costs for the year ended December 31, 2014 were PLN 135.6 million, a decrease of PLN 5.9 million, or 4.2%, from PLN 141.5 million for the year ended December 31, 2013. The decrease in selling costs was mainly due to lower revenues from spot sales of synthetic rubber with a high transport costs.
General and Administrative Expenses General and administrative expenses for the year ended December 31, 2014 were PLN 165.5 million, an increase of PLN 16.7 million, or 11.2%, from PLN 148.8 million for the year ended December 31, 2013. The increase in general and administrative expenses was mainly due to
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costs associated with the preparation and issuance of bonds on international markets (notes with a nominal value of EUR 350.0 million), and increase of costs of R&D and strategy activities.
Other Operating Expenses Other operating expenses for the year ended December 31, 2014 were PLN 14.4 million, an decrease of PLN 17.5 million, or 54.9%, from PLN 31,9 million for the year ended December 31, 2013. The increase in other operating expenses was mainly due to establishment of lower impairment losses for receivables.
The following table sets forth our historical other operating expenses for the years ended December 31, 2014 and 2013.
For the year ended December 31, 2014 2013 (PLN million) Revaluation of provisions ...... 0.1 0.1 Establishment of impairment losses for receivables...... 3.1 14.7 Cost of unused production capacity ...... 2.2 1.6 Receivables written off ...... 2.1 3.6 Utilization of CO2 emission allowance ...... 0.5 1.6 Costs of decommissioning of inactive facilities - 2.5 Other ...... 6.4 7.7 Total ...... 14.4 31.9
Financial Income Financial income for the year ended December 31, 2014 was PLN 7.5 million, a decrease of PLN 16.2 million, or 68.4%, from PLN 23.7 million for the year ended December 31, 2013. The decrease in financial income was mainly due to lack of profit from the foreign exchange and decrease in the amount of deposits held in our bank accounts .
Financial Costs Financial costs for the year ended December 31, 2014 were PLN 49.6 million, an increase of PLN 22.9 million, or 85.8%, from PLN 26.7 million for the year ended December 31, 2013. The increase in financial cost was mainly due to foreign exchange losses.
Income Tax Income tax for the year ended December 31, 2014 was PLN 69.6 million, an increase of PLN 15.7 million, or 29.1%, from PLN 53.9 million for the year ended December 31, 2013. This was mainly due to write-off of deferred tax of some assets of tax incentive. Our effective tax rate for each of the years ended December 31, 2013 and 2012 was 11% and 11%, respectively.
The following table sets forth our historical income tax for the years ended December 31, 2014 and 2013.
For the year ended December 31, 2014 2013 (PLN million) Income tax Income tax expense for the current period ...... 25.4 40.4 Adjustment of tax for previous years...... (5.1) 1.2
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Total ...... 20.3 41.6 Deferred tax Creation / reversal of temporary differences ...... 49.3 12.3 Total deferred tax ...... 49.3 12.3 Income tax reported in the statement of comprehensive income ...... 69.6 53.9
Net Profit For the reasons discussed above, our net profit for the year ended December 31, 2014 was PLN 357.5 million, a decrease of PLN 59.8 million, or 14.3%, from PLN 417.3 million for the year ended December 31, 2013.
EBITDA Our EBITDA for the year ended December 31, 2014 was PLN 635.8 million, an increase of PLN 3.1 million, or 0.5%, from PLN 632.7 million for the year ended December 31, 2013. The increase in EBITDA was primarily due to the performance of our main Synthetic Rubber Segment. The following table sets forth our historical EBITDA by segment for the years ended December 31, 2014 and 2013.
For the year ended December 31, 2014 2013 (unaudited) (PLN million) Synthetic Rubber Segment ...... 345.8 334.5 Styrene Plastics Segment ...... 159.2 160.2 Dispersions, Adhesives and Latex Segment ...... 10.3 12.0 Other Operations(1)...... 120.5 126.0 Total ...... 635.8 632.7
(1) For Other Operations, EBITDA also include income and costs not allocated to any of segments
4.5 Liquidity and Capital Resources Historically, our liquidity needs have arisen primarily from the need to fund capital expenditures and working capital and service our debt obligations. Our principal sources of liquidity have been cash generated from our operations, bank loans and facilities, disposal of assets, and EU grants for capital expenditures.
Cash Flow The following table sets forth our consolidated cash flow data for each of the periods indicated.
For the year ended December 31, 2014 2013 (PLN million) Net cash from operating activities ...... 611.9 685.0 Net cash from investing activities ...... (297.6) (256.2) Net cash from financing activities ...... 12.7 (736.8)
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Net Cash from Operating Activities Net cash from operating activities for the year ended December 31, 2014 was PLN 611.9 million, a decrease of PLN 73.1 million, or 10.7%, from PLN 685.0 million for the year ended December 31, 2013. This decrease was principally due to gross profit change. Net Cash from Investing Activities
Net cash used in investing activities for the year ended December 31, 2014 was PLN 297.6 million, an increase of PLN 41.4 million, or 16.2%, from PLN 256.2 million for the year ended December 31, 2013. This increase was principally due to higher expenditures on the purchase of intangible assets and property, plant and equipment. Net Cash from Financing Activities
Net cash from financing activities for the year ended December 31, 2014 was PLN 12.7 million, an increase of PLN 749.5 million, or 102%, from PLN 736.82 million for the year ended December 31, 2013, principally due to proceeds from the issuance of the Notes.
Working Capital Requirements We define our net working capital as current assets except for cash flows minus short-term liabilities except for financial liabilities. Our net working capital requirements primarily depend on the prices of raw materials and the management of receivables, liabilities and stock. As of December 31, 2014, net working capital was PLN 825.6 million, a decrease of PLN 41.0 million, from PLN 866.6 million as of 2013. This decrease resulted mainly from lower raw material prices and better inventory management.
Off-Balance Sheet Arrangements As at December 31, 2014, we did not have any contingent liabilities in relation to unrelated entities.
Contractual Obligations and Commercial Commitments The following table summarizes our contractual obligations and commitments as at December 31, 2014. The table does not include outstanding purchase contracts with suppliers, payments due under arrangements related to provisions, maintenance and contingent liabilities entered into in the ordinary course of business.
Above Total Up to 1 year 1-5 years 5 years (PLN million) Payments due by period Bonds obligations ...... (1 909.5) (59.7) (238.7) (1 611.1) Bank loans ...... (9.0) (3.6) (5.4) - Trade payables and other ...... (633.1) (633.1) - - Interest rate swaps(1)...... (2.2) (2.2) - - Total ...... (2 553.7) (698.5) (244.1) (1 611.1)
(1) [As at December 31, 2014, we had [three] open interest rate swaps: (i) between SYNTHOS Kralupy a.s. and BNP Paribas for the amount of EUR 15 million with settlement on December 15, 2015, (b) between SYNTHOS Kralupy a.s. and RBS for the amount of EUR 15 million with the settlement on December 15, 2015, and (c) between SYNTHOS PBR s.r.o. and HSBC in the amount of EUR 15.1 million with the settlement on June 30, 2017.] [to update]
Investment Expenditures
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Our investment expenditures were PLN 444.4 million for the year ended December 31, 2014.
The following table sets forth our capital expenditures by business segment for the periods indicated.
For the year ended December 31, 2014 2013 (PLN million) Synthetic Rubber Segment ...... 183.0 127.8 Styrene Plastics Segment ...... 20.6 23.2 Dispersions, Glues and Latex Segment ...... 1.2 3.8 Other Operations ...... 239.6 146.9 Total ...... 444.4 301.7
We have an extensive capital expenditure program in place to fund the construction, maintenance and improvement of our production facilities. Significant capital expenditures are required to maintain our plants’ current production, meet the requirements of new regulations, and retain our licenses to operate. Additional capital expenditures are further required to upgrade aging or obsolete equipment, improve energy efficiency, increase production capabilities, and improve process control. We expect our aggregate capital expenditure for the year ended December 31, 2015 to amount to approximately PLN 662.5 million, and we expect our capital expenditure for the year ended December 31, 2016 to be approximately PLN 946.5 million. Our largest single current investment project is the construction of a SSBR rubber plant in Oświęcim, Poland, which we are committed to complete. We expect our total investment in this project to be approximately PLN 555 million upon completion in 2015. Our other significant investment projects are the construction of an NdBR production facility and additional SSBR rubber production capacity at the Triunfo Petrochemical Complex in Rio Grande do Sul, Brazil. Additional ongoing projects may include: (i) the construction of a fluid boiler in Oświęcim, Poland; (ii) a DeNOx DeSOx installation to treat exhaust gas at our production facility in Oświęcim; and (iii) the construction of a fluid boiler in our utilities production facility in Kralupy. All of our stated investment figures are only estimates and are subject to change or amendment at any time. The Group intends to execute investment plans which comprise organic and equity growth.
4.6 Key equity investments As of the date of preparing this report, the Group had the following capital investments.
Statement of shares held in 2014 Number of shares Value in PLN 000s - Echo Investment SA ...... 17 884 050 125 903 - Global BioEnergies ...... 59 625 6 650 Total ...... 132 553
The fair value of financial instruments available for sale has been determined using stock quotations.
4.7 Off-balance sheet items Limitations of property rights to assets 31 December 2014 PLN 000s
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Obligation for security on property, plant and equipment 0 Assignment of receivables 120,000 Total 120,000
4.8 Financing Activities The Notes On 30 September 2014, Synthos Finance AB (publ), with its registered seat in Stockholm, Sweden (the “Issuer of the Notes”), the 100% owned subsidiary of Synthos S.A., issued senior notes with a total nominal value of EUR 350,000,000 (“Notes”). The Notes bear fixed interest of 4.000% per annum, with the interest payable semi-annually (on March 30 and September 30 of each year), payable for the first time on March 30, 2015, and will mature on September 30, 2021. The Notes were issued for a price equal to 100% of their principal amount for a total consideration of EUR 350,000,000. The Notes constitute senior debt and rank equally in right of payment with its existing and future unsecured senior debt. The Group will use the proceeds from the issuance of the Notes for the repayment of existing indebtedness of the Group in the amount of EUR 258.6 million, estimated fees and expenses associated with the Notes issuance and general corporate purposes of the Group. The Notes are unsecured and are jointly and severally guaranteed by Synthos S.A., Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością sp. j., SYNTHOS Kralupy a.s., TAMERO INVEST s.r.o. and SYNTHOS PBR s.r.o. (the “Guarantors”). The guarantee provided by the Guarantors covers all obligations of Synthos Finance AB (publ) stemming from the Notes (including the obligation to pay a nominal value of the Notes and interest on Notes) and has been granted to all Noteholders. The guarantee shall expire after extinction of claims of Noteholders against Synthos Finance AB (publ). Remuneration obtained for providing the guarantee has been granted on the arm’s length basis. In relation with the issuance of the Notes, the Group is subject to typical covenants for high- yield bonds which may limit its ability to finance future operations and capital needs and to pursue business opportunities and activities. The restrictions are subject to a number of significant qualifications and exceptions and, under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. Notes are subject to listing on the Official List of the Irish Stock Exchange and were admitted to trading on the Global Exchange Market. The Indenture, the Notes and the Guarantees are governed by, and construed in accordance with, the laws of the State of New York. Concurrently, in order to transfer the funds from the Notes issue, the Management Board of the Company adopted a resolution dated 30 September 2014 regarding the issue of the intercompany bonds by Synthos S.A., which constitute unsecured registered bonds issued pursuant to the Bonds Act of 29 June 1995. The nominal value of the intercompany bonds is equal to 350.000.000 EUR and corresponds to the nominal value of the Notes. The total issue price of the intercompany bonds is equal to 344.001.000 EUR. Funds raised from the issue of intercompany bonds were allotted for the repayment of indebtedness of the Group, estimated fees and expenses associated with the Notes issuance and general corporate purposes of the Group, including the Company and other Guarantors. Terms and conditions of intercompany bonds redemption and interest payment redemption correspond to the Notes.
Credit facilities and loan agreements From January 1 to December 31, 2014, the Group repaid:
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• credit facility of 18 December executed with PEKAO S.A. to refinance a PBR line in the amount of EUR 51,352, the interest rate in the credit facility is EURIBOR + margin, maturity date of 30 June 2019.
• credit facility of 20 November 2013 executed with PKO BP S.A. to repay the credit to acquire Synthos Kralupy and to refinance the capital expenditures incurred in the amount of EUR 95 million, the interest rate of the credit facility is EURIBOR + margin, maturity date of 30 September 2018.
Loans granted Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna. (lender) signed a loan agreement with a subsidiary, Zakład Doświadczalny ORGANIKA Sp. z o.o. for PLN 5.5 million during the reporting period on 15 May 2014. The loan’s purpose was to finance current activity. This loan has been repaid. The loan interest is equal to WIBOR 12 M plus the margin. The date of repayment is 3 December 2019. On 24 August 2014 Kralupy a.s. (lender) signed a loan agreement with a company from the Synthos PBR s.r.o. group for the amount of EUR 43,340 million. This loan was repaid by 31 October 2014. The loan interest is equal to EURIBOR 1 M plus the margin. The below mentioned loans were granted for repayment of the bank debt, according to the terms of the issuance of Notes described in 4.8.1 above. On 29 September 2014 Synthos S.A. signed a loan agreement with a subsidiary, Synthos Agro spółka z ograniczoną odpowiedzialnością spółka jawna, with the amount of possible debt being up to PLN 60 million with the possibility of drawing tranches in foreign currencies - PLN, EUR, USD, GBP, CZK. The loan repayment date was specified as 30 September 2021 and the interest rate was specified as fixed in the amount of 4.89% per annum On 30 September 2014 Synthos S.A. signed a loan agreement with a subsidiary, Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna, with the amount of possible debt being up to EUR 150 million with the possibility of drawing tranches in foreign currencies - PLN, EUR, USD, GBP, CZK. The loan repayment date was specified as 30 September 2021 and the interest rate was specified as fixed in the amount of 4.89% per annum. On 29 September 2014 Synthos S.A. signed a loan agreement with a subsidiary, Synthos Agro spółka z ograniczoną odpowiedzialnością spółka jawna, with the amount of possible debt being up to PLN 60 million with the possibility of drawing tranches in foreign currencies - PLN, EUR, USD, GBP, CZK. The loan repayment date was specified as 30 September 2021 and the interest rate was specified as fixed in the amount of 4.89% per annum. On 29 October 2014 Synthos S.A. signed a loan agreement with a subsidiary, Synthos Dwory 5 spółka z ograniczoną odpowiedzialnością spółka jawna, with the amount of possible debt being up to PLN 5 million with the possibility of drawing tranches in foreign currencies - PLN, EUR, USD, GBP, CZK. The loan repayment date was specified as 30 September 2021 and the interest rate was specified as fixed in the amount of 4.89% per annum. On 29 October 2014 Synthos S.A. signed a loan agreement with a subsidiary, Synthos Dwory 4 spółka z ograniczoną odpowiedzialnością spółka jawna, with the amount of possible debt being up to PLN 10 million with the possibility of drawing tranches in foreign currencies - PLN, EUR, USD, GBP, CZK. The loan repayment date was specified as 30 September 2021 and the interest rate was specified as fixed in the amount of 4.89% per annum. On 29 October 2014 Synthos S.A. signed a loan agreement with a subsidiary, Zakład Doświadczalny ORGANIKA spółka z ograniczoną odpowiedzialnością spółka jawna, with the
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amount of possible debt being up to PLN 5 million with the possibility of drawing tranches in foreign currencies - PLN, EUR, USD, GBP, CZK. The loan repayment date was specified as 30 September 2021 and the interest rate was specified as fixed in the amount of 4.89% per annum. On 30 September 2014 Synthos S.A. signed a loan agreement with a subsidiary, Tamero Invest s.r.o., with the amount of possible debt being up to EUR 30 million with the possibility of drawing tranches in foreign currencies - PLN, EUR, USD, GBP, CZK. The loan repayment date was specified as 30 September 2021 and the interest rate was specified as fixed in the amount of 4.89% per annum.
On 30 September 2014 Synthos S.A. signed a loan agreement with a subsidiary, Synthos PBR s.r.o., with the amount of possible debt being up to EUR 50 million with the possibility of drawing tranches in foreign currencies - PLN, EUR, USD, GBP, CZK. The loan repayment date was specified as 30 September 2021 and the interest rate was specified as fixed in the amount of 4.89% per annum.
On 30 September 2014 Synthos S.A. signed a loan agreement with a subsidiary, Synthos Kralupy a.s., with the amount of possible debt being up to EUR 90 million with the possibility of drawing tranches in foreign currencies - PLN, EUR, USD, GBP, CZK. The loan repayment date was specified as 30 September 2021 and the interest rate was specified as fixed in the amount of 4.89% per annum. On 12 December 2014 Synthos S.A. signed a loan agreement with a subsidiary, Miejsko Przemysłowa Oczyszczalnia Ścieków sp. z o.o., with the amount of possible debt being up to PLN 1 million with the possibility of drawing tranches in foreign currencies - PLN, EUR, USD, GBP, CZK. The loan repayment date was specified as 30 September 2021 and the interest rate was specified as fixed in the amount of 4.89% per annum. In 2014, the Company and its subsidiaries did not enter into transactions with related entities on terms and conditions that were not at arm’s length.
Sureties On 24 May 2013 Synthos S.A. extended to a subsidiary: Synthos Dwory 7 Spółka z ograniczoną odpowiedzialnością spółka jawna a surety forming collateral for the multi-purpose line of credit extended to Synthos Dwory 7 on 24 May 2013 in the amount of PLN 250,000,000 (say: two hundred fifty million Polish zloty). Then according to the annex of 16 September 2014 it was reduced to the amount of PLN 100,000,000 (say: one hundred million Polish zloty). The extended surety remained in the amount of PLN 150,000 thousand. The surety was extended for the period until 24 May 2016.
Explanation of differences between the financial results of the Group reported in the annual report and the previously published forecasts of the results for the given year. On 19 February 2015 the Company issued current report no. 4/2015 in which it conveyed the following estimated and selected consolidated financial results of the Group for 2014 in the following amount:
(a) Revenues: roughly PLN 4,618.8 million (b) Operating result: roughly PLN 479.6 million (c) Depreciation: roughly PLN 156.2 million (d) Net result: roughly PLN 357.5 million
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(e) Net debt: PLN 732.2 million
(f) NET DEBT/EBITDA: 1.15 As a result of verifying the estimates, after preparation of the financial statements, ultimately these results assumed the following amounts:
(a) Sales revenues: PLN 4,618,845 thousand
(b) Operating result: PLN 479,571 thousand
(c) Depreciation: PLN 156,213 thousand (d) Net profit: PLN 357,490 thousand
(e) Net debt: PLN 707,505 thousand
(f) NET DEBT/EBITDA: 1.11 Hence the differences between the estimate results and the actual results did not exceed 10%, which would entail the Company’s obligation to publish an additional report on change of the estimate results.
Assessment of financial resources management In 2014, the Group generated a financial surplus on operating activity of PLN 611,852 thousand. These funds were earmarked predominantly to financing of investments. To ensure financial resources for execution of investment programs and day-to-day activity, the Group issued long-term bonds for the total amount of EUR 350,000 thousand. In addition, the financial resources of the Group entities subject to consolidation 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.
4.9 Auditors and internal control and risk management systems in reference to preparing financial statements and consolidated financial statements
Auditor On 13 June 2014, the Company’s Supervisory Board selected PricewaterhouseCoopers Sp. z o.o. as the entity authorized to audit financial statements of Synthos S.A. for 2014 and consolidated financial statements of the Group for 2014, and review the interim consolidated financial statements of the Group for H1 2014. PricewaterhouseCoopers Sp. z o.o. with its registered office in Warsaw, at al. Armii Ludowej 14, 00-638 Warsaw, is entered in the list of entities authorized to audit financial statements (kept by the National Chamber of Auditors) under number 144. The Company used the services of PricewaterhouseCoopers Sp. z o.o. in the past in the area of tax and corporate consulting services. The Company carried out an audit of Synthos S.A.’s financial statements for years: 1999 and 2000, review of the consolidated financial statements of the Synthos S.A. Capital Group for H1 2008-2013, and audit of the stand-alone financial statements of Synthos S.A. and consolidated financial statements of the Synthos S.A. Capital Group for 2008-2013. The Supervisory Board selected the entity authorized to audit the financial statements of Synthos S.A. in accordance with Article 22 Item b of Synthos S.A.’s Articles of Association. The agreement with PricewaterhouseCoopers Sp. z o.o. was concluded for a one-year term.
On 1 July 2014, Synthos S.A. entered into a one-year agreement on review and audit of the financial statements and consolidated financial statements for 2014 with PricewaterhouseCoopers Sp. z o.o. and with PricewaterhouseCoopers Audit, s.r.o. The total amount of the remuneration following from the agreement concluded with the entity
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authorized to audit and review financial statements and consolidated financial statements for 2014 amounts to PLN 529 thousand, for 2013 - audit and review of the financial statements - PLN 547 thousand.
Internal control and risk management systems Internal control and risk management systems 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 subject to verification 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.
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MANAGEMENT
6 RAPORT ROCZNY 2013
5. MANAGEMENT In accordance with Polish corporate law, the Company conducts its decision making processes through the general shareholders’ meeting, the Supervisory Board and the Management Board. The powers of, and relationships among, these governing bodies are governed by the applicable provisions of the Commercial Companies Code, the Company’s articles of association and internal by laws including Management Board and Supervisory Board by laws.
5.1 Supervisory Board As at the date of the publication of this Consolidated Annual Report, the Supervisory Board is comprised of the following members:
Name Age Position Jarosław Grodzki ...... 48 Chairman Mariusz Waniołka ...... 48 Vice Chairman Krzysztof Kwapisz ...... 55 Vice Chairman Grzegorz Miroński ...... 47 Secretary Robert Oskard ...... 53 Member The following is a summary of the business experience of the members of our Supervisory Board:
Jarosław Grodzki is a graduate of the Faculty of Finance and Statistics at the Warsaw School of Economics. In 1994 he graduated from the Postgraduate School of Taxation at the Warsaw School of Economics. From 1992 to December 1997 he worked at Bank Handlowy w Warszawie S.A. He participated in the organization of Centrum Operacji Kapitałowych Banku Handlowego w Warszawie S.A., and then worked in the Department of Issuance of Securities of the Commercial Bank, initially as department head and then as Division Chief. In 1996, he was appointed Director of Financial Advisory Services. In the first half of 1998, Mr. Grodzki was employed at Hydrocentrum S.A. as the Advisor to the CEO. Later that year he joined Echo Investment S.A, initially as Director of Sales, then as Vice President of the Board, and served as President of the Board from 2007 2008 as President of the Board of Echo Investment S.A. From 2002 to 2007 and from 2007 to 2008 he was a proxy and President of the Board of Est On Property Management sp. z o.o., respectively. Since 2010 he has been the Managing Director of Columbus Prime sp. z o.o. Since 2011, he has been a Managing Director of FTF Galleon S.A. and since 2012 of Columbus Pro sp. z o.o.
Mariusz Waniołka is a graduate from the Kraków University of Economics. Between September 1992 and May 1994, he worked at Sando sp.z o.o. From May 1994 to August 1994, he was employed with Pilkington Sandoglass sp. z o.o. From 1994 to 1996, he worked at the Warsaw based company PepsiCo Trading sp. z o.o., most recently in the position of Finance Director. Between November 1996 and June 2001, he worked as Finance Director for the Kielce based company NOMI S.A. where from December 1997 he also held the post of Vice Chairman of the Management Board of NOMI S.A. In 2005, he was temporarily relocated for a period of three months to perform certain duties as a member of the Management Board of Synthos S.A. and in 2007 he was temporarily relocated for a period of three months to perform duties as a member of the Management Board of Echo Investment S.A. Currently, Mr. Mariusz Waniołka holds the post of Administrative Director at Pro Service sp. z o.o. based in Kielce and is also a member of the supervisory boards of: Rovese S.A., Barlinek S.A., Megastore.pl. S.A., Sklepy Komfort S.A., North Food Polska S.A., Ustra S.A. and Echo Investment S.A. He was also a member of Synthos S.A.’s Supervisory Board during its fifth and sixth term of office.
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Krzysztof Kwapisz is a graduate of the Mechanical Engineering Department at the Kielce University of Technology. In 1987, he started work at Przedsiębiorstwo Wielobranżowe in Kielce as Deputy Chief Technical Officer. From 1990, he worked at Przedsiębiorstwo Wielobranżowe “Sigma,” initially as Vice President and later as President. Beginning in 1993, he worked at Echo Investment S.A. in Kielce, initially as Chief Business Development Officer and then from January 1, 1995 to 1998 as Finance Director, then Managing Director until 2004. He is currently a proxy of Echo Investment S.A. He was Chief Business Development Officer at Przedsiębiorstwo Budowlane “Mitex” from 1994 1998. Previously, Mr. Kwapisz was a member of the supervisory boards of: Cersanit S.A, Barlinek S.A. and Ultra Pack S.A. From 2006 to 2010, he was a Chairman of the Management Board at Magellan Pro Equity Fund I, S.A.
Grzegorz Miroński is a lawyer. He studied law at the Department of Law and Administration of Jagiellonian University and graduated in 1992. Since 1997, he has provided legal services to many companies, some of which are listed on the Warsaw Stock Exchange. In 1997 he started his relationship with Echo Investment S.A., where he advised on the company’s largest investment projects, many of its financing arrangements and also on its current operations. Moreover, Mr. Grzegorz Miroński has worked for companies such as Cersanit S.A., Barlinek S.A., and Media Projekt sp. z o.o., where he worked on their investment and financing projects. Mr. Grzegorz Miroński also runs a law firm and is a member of the supervisory boards of the following companies: Barlinek S.A, Rovese S.A., Sklepy Komfort S.A., North Food S.A., Ustra S.A. and Megastore.pl S.A. Mr. Grzegorz Miroński is currently a member of Synthos S.A.’s Supervisory Board and he also held this position during its fifth term of office until October 10, 2007.
Robert Oskard is a graduate of the Warsaw University of Technology, Faculty of Technical Physics and Applied Mathematics. From 1987 to 1990, he worked at Fabryka Łożysk Tocznych Iskra as an IT designer and programmer, and between 1990 and 1992, at the Province Office in Kielce as the Head of IT. From 1992 to 2000, he was employed at Exbus S.A. as Director of Financial analysis and Planning, Corporate Development Director and Director of the Management Systems. From 2000 to 2002, he worked as Strategic Projects Director at Echo Investment S.A. After which, he was the Managing Director at Columbus Pro Equity Fund II Sp. z o.o., Magellan Pro Equity Fun I S.A. and Columbus Prime sp. z o.o. Currently, he is the Managing and Commercial Director at Columbus Pro sp. z o.o. In the past, Mr. Oskard was the president or a member of several other supervisory boards, some of which were public companies, such as North Food S.A. from 2007 2011. Currently, in addition to Synthos S.A., Mr. Robert Oskard is a member of the supervisory boards of: Echo Investment S.A., SYNTHOS Kralupy a.s., Barlinek S.A., Rovese S.A., Sklepy Komfort S.A., Megastore.pl S.A. and Ustra S.A.
Supervisory Board Practices The Supervisory Board is responsible for supervising the Company’s activities in accordance with the provisions of the Polish Commercial Companies Code and other laws. The Supervisory Board is also authorized to conclude on behalf of the Company agreements with members of the Management Board and represent the Company in disputes with the members of the Management Board. The Supervisory Board may authorize, by resolution, one or more members to perform such legal actions. Pursuant to Article 14 of the Company’s articles of association, the Supervisory Board consists of not less than five members. The maximum number of Supervisory Board members is seven. The composition of the Supervisory Board is determined in each case by the General Meeting of the Company. The Supervisory Board is appointed for a joint term of three years. Pursuant to Article 385 of the Commercial Companies Code, the General Meeting of the Company of the Company appoints and revokes the Supervisory Board. The Company’s articles of association do not provide any other manner of appointing and revoking members of the Supervisory Board. Pursuant to the articles of association, the Supervisory Board elects from its members
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the President and one or two Vice Presidents and the Secretary. For the proper performance of its activities, the Supervisory Board may appoint special teams and experts from outside the Supervisory Board in order to develop relevant opinions or expert reports. The Supervisory Board performs its tasks and competences collectively at the meetings of the Supervisory Board by written vote and through supervisory and control activities in the form of: (i) a right to request the Management Board and the employees of the Company submit all documents, reports and explanations concerning the Company’s operations and (ii) the right to review the state of the Company’s assets.
The Supervisory Board holds meetings when needed, but at least on a quarterly basis. The meetings of the Supervisory Board are convened by the President of the Supervisory Board and if he is unable to do so due to objective reasons, by one of the Vice Presidents, on his own initiative, or at the request of the Management Board or one of its members. The Supervisory Board prepares and submits to the General Meeting a report on the results of the Company’s financial statements and the Management Board’s proposal regarding the distribution of profit/ loss coverage, together with the report on the activities of the Supervisory Board.
Board Committees No committees operate under the Supervisory Board. Matters are addressed collectively by our Supervisory Board and decisions are made in the same manner. The members who sit on the Supervisory Board have the knowledge and competence appropriate to their position.
Salaries, bonuses and benefits The President of the Supervisory Board and Members of the Supervisory Board of the Company have guaranteed severance pays in their employment contracts. The severance pays are expressed as a multiple of their remuneration or as an amount presented in thousand zlotys.
Remuneration of the Supervisory Board 2014 2013 Jarosław Grodzki ...... 84 84 Krzysztof Kwapisz ...... 60 60 Grzegorz Miroński ...... 48 48 Robert Oskard ...... 48 48 Mariusz Waniołka ...... 60 60
Shares and ownership interests in the Company’s subsidiary entities The Supervisory Board members did not have any ownership interests and shares in the Company’s subsidiary and affiliated entities.
The Company’s shares held by the Supervisory Board members as at December 31, 2014 and as at the date of this report
Number Number of shares held - of shares as at Par value as at 31 the date of shares Full name December 2014 of this report held [PLN] Jarosław Grodzki Supervisory Board Chairperson ...... 350 350 10.5 Mariusz Waniołka Supervisory Board Deputy Chairperson ...... 0 0 0 Krzysztof Kwapisz 0 0 0
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Supervisory Board Deputy Chairperson ...... Grzegorz Miroński Supervisory Board Secretary ...... 0 0 0 Robert Oskard Supervisory Board Member ...... 0 0 0
5.2 Management Board As at the date of the publication of this Consolidated Annual Report, the Management Board is comprised of the following members:
Name Age Position Tomasz Kalwat ...... 38 President of the Management Board Tomasz Piec ...... 46 Member of the Management Board Zbigniew Lange ...... 45 Member of the Management Board Zbigniew Warmuz ...... 51 Vice-President of the Management Board Jarosław Rogoża ...... 42 Member of the Management Board
The following is a summary of the business experience of the members of our Management Board:
Tomasz Kalwat is a lawyer. He graduated from the Warsaw University Faculty of Law, School of Economics and the Banking and Finance and University of Ottawa, where he was a recipient of the Edward Berry McDougall Scholarship. In 2001 2006, he was a lecturer at the Warsaw University Faculty of Law. He has previously worked at Altehimer & Gray (2001 2002), GleissLutz (2002 2003), Baker & McKenzie (2004 2006). He joined Synthos S.A. in 2006, initially as a consultant and then from 2009 2011 he was the Chairman of the Synthos S.A. Supervisory Board during its sixth term. He has been the President of the Management Board since May 13, 2011.
Zbigniew Warmuz is a graduate of Silesian University of Technology, specializing in business management. In 2004, he graduated from the Academy of Economics in Katowice. Between 1984 2006 he worked at POCH S.A., initially as a mechanic, and later as a master in the Department of Organic Production. In 1999, he became Product Manager for products for the heavy industry and electroplating. Until 2002 he worked as Head of Sales and Marketing and then became Chief Engineer and then Director of Production. He also served as a proxy in the Company. Since 2007, he has worked in the Group. Zbigniew Warmuz holds a position as a Vice-President of the Management Board in the Company since 13 January 2014.
Tomasz Piec received his Master’s Degree from Kraków University of Economics, Management and Marketing, in 1994. He graduated from the University of Copenhagen in Business Management in 1992. He graduated from the Academy of Gastronomy and Wines D’Orsay in 1990. Since 1993, he has been employed at Elector sp. z o.o. in Kraków. Since 1994, he was the Regional Director of the REMY COINTREAU GROUP Polska. From 1995 to 2001, he was the Regional Manager at COLGATE PALMOLIVE Polska, and from 2001 to 2003, the Head of Sales at COLGATE PALMOLIVE Adria a.s. in the Balkans. Since 2003, he has been employed at Tchibo Polska as Sales Director. From 2004 to 2007, he was a board member of SIGMA KALON DECO Polska sp. z o.o. and in 2007, he was a board member of SIGMA KALON Deco Eastern a.s. in Prague. Since 2008, he has been associated with the Group as Director of Sales.
Zbigniew Lange is a graduate of the Economics Section of the Faculty of Social Sciences at the Catholic University of Lublin. In 1994, he started as an economics specialist at Lubelskie Zakłady Zielarskie sp. z o.o. From October 1995 until September 1996, he worked in the Financial Analysis Department of Lublin’s Przedsiębiorstwo Przemysłu Chłodniczego S.A., becoming the department’s director in February 1996. At that time, he was also working with
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Biuro Konsultingowe TIM sp. z o.o. in Lublin, drawing up investment plans and financial analyses. Between 1996 1997, he was the Head of the Finance Department at the Lublin branch of Pepsico Trading sp. z o.o. From October 1997 to May 1998, he provided management services, incorporating the duties of Financial Director, to Cersanit Krasnystaw S.A., with its registered office in Krasynstaw. In June 1998, he became a member of the management board of Cersanit S.A. and Cersanit Capital Group S.A. and was responsible for the company’s financial affairs. From December 2002 to December 2004, he performed the duties of Chairman of the Cersanit S.A. Management Board. Following this, he worked as Financial Director for Polmos Lublin S.A. and Medi Sept sp. z o.o. In February 2007, he assumed the role of Financial Director for Opoczno S.A. and from 2007 to 2008, he performed the duties of Chairman of the Opoczno S.A. Management Board. Since 2008, he has worked in the Group and has been responsible for financial matters.
Jarosław Rogoża is a graduate of the University of Technology, where in 2001 he earned his PhD in Chemical Technology. He is also a graduate of the Executive MBA program run by the School of Banking in Poznań and of the Helsinki School of Economics, from which he graduated in 2004.From 2000 2006, he worked at GlaxoSmithKline Pharmaceuticals S.A., starting as a technologist in the manufacturing division, then, beginning in 2002, as Manager of Research and Development Projects in the Research and Development Division. From 2006 2009, he worked as Director of Research and Development and SHEQ at PPG Deco Poland sp. z o.o., where he was responsible for, in addition to research and development, quality management, environmental protection and health and safety. Since September 2009, he has worked for the Group as Director of Research and Development. Jarosław Rogoża holds a position as a member of the Management Board in the Company since 13 January 2014.
Management Board Practices The Management Board exercises all the powers of management of the Company with the exception of the powers reserved by law or by the Company’s articles of association for other governing bodies of the Company. The Commercial Companies Code and the articles of association determine the competences and functions of the Management Board. Functions of the Management Board, as well as the matters that can be assigned to its members and the competences and responsibilities of individual members of the Management Board, are detailed by the Rules and Regulations of the Management Board, adopted by the Management Board and approved by the Supervisory Board. The employees of the Company are subject to the Management Board. The Management Board concludes and resolves employment agreements and determines their remuneration, pursuant to the rules determined by the Management Board and applicable law. Pursuant to the Company’s articles of association, the Management Board consists of one or more members. The Management Board is appointed for a joint term of three years. The President of the Board and other Members of the Management Board are appointed by the Supervisory Board, which also determines the number of members of the Management Board. The Supervisory Board may dismiss the President of the Board, member of the Board or the whole Management Board before the expiration of the term of the Management Board. In addition, the members of the Management Board may be revoked or suspended at any time by the General Meeting. Pursuant to the Rules and Regulations, the Management Board makes decisions at meetings by the adoption of resolutions. The Management Board holds meetings when needed, but at least once a month. Meetings of the Management Board are convened by the President of the Management Board. The President of the Management Board establishes the agenda and chairs the meeting of the Management Board. The Vice President of the Management Board exercises the rights of the President of the Management Board in the case of the expiry of the mandate of the President of the Management Board, until the new President of the
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Management Board is chosen, as well as during his illness or temporary inability to perform the function in the Management Board. The Management Board may adopt a resolution only if the meeting is attended by at least half of its Members, provided that all members of the Management Board were duly notified of the meeting. Resolutions of the Management Board are adopted by an absolute majority of votes cast. In the event of equal split of votes, the Management Board President’s vote prevails. The appointment of proxy requires the consent of all the Members of the Management Board. Each Member of the Board may revoke the proxy.
Salaries, bonuses and benefits The President of the Management Board and Members of the Management Board of the Company have guaranteed severance pays in their employment contracts. The severance pays are expressed as a multiple of their remuneration or as an amount presented in thousand zlotys.
Remuneration of Synthos S.A.’s Management Board 2014 2013 Tomasz Kalwat ...... 1,534 1,542 Zbigniew Lange ...... 620 667 Tomasz Piec ...... 1,051 981 Jarosław Rogoża ...... 635 - Zbigniew Warmuz ...... 905 740
Shares and ownership interests in the Company’s subsidiary entities The Management Board members did not have any ownership interests and shares in the Company’s subsidiary and affiliated entities.
The Company’s shares held by Management Board members as at December 31, 2014 and as at the date of this report
Number Number of shares held - of shares as at Par value as at 31 the date of shares Full name December 2014 of this report held [PLN] Tomasz Kalwat President of the Management Board ...... 786,000 786,000 23 580 Zbigniew Warmuz Vice-President of the Management Board . 0 0 0 Tomasz Piec Management Board Member ...... 0 0 0 Zbigniew Lange Management Board Member ...... 0 0 0 Jarosław Rogoża Management Board Member ...... 0 0 0
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PRINCIPAL SHAREHOLDERS
7 RAPORT ROCZNY 2013
6. PRINCIPAL SHAREHOLDERS As at December 31, 2014 our issued share capital amounted to PLN 39,697,500 and was divided into 1,323,250,000 ordinary bearer shares with a par value of PLN 0.03 each.
We are a public company and our shares are listed on the regulated market of the Warsaw Stock Exchange. Therefore, we do not have detailed information on all of our shareholders. We receive information on our significant shareholders only if these shareholders comply with the notification requirements prescribed by Polish law. The following table sets forth the list of shareholders as at December 31, 2014, based on their notifications of holding at least 5% of votes at the shareholders meeting of Synthos.
Percentage of Number of votes voting rights at general at the general Percentage of shareholders’ shareholders’ Shareholder Number of shares share capital (%) meeting meeting Michał Sołowow, indirectly through subsidiaries: ...... 826,559,009 62.46% 826,559,009 62.46% FTF Galleon S.A ...... 682,918,112 51.61% 682,918,112 51.61% Ustra S.A...... 143,640,897 10.85% 143,640,897 10.85% Others(1) ...... 496,690,991 37.54% 496,690,991 37.54% Total ...... 1,323,250,000 100% 1,323,250,000 100%
(1) Other than the shareholders set forth in the table above and based on notifications of holding received at the shareholders meeting, no shareholder owns more than 5% of the shares in the Company.
The Company is unaware of any agreements which may result in future changes to the proportions of shares held by the current shareholders.
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STRUCTURE OF THE CAPITAL GROUP
8 RAPORT ROCZNY 2013
7. STRUCTURE OF THE CAPITAL GROUP
7.1 Organization of the Group The parent company of the Capital Group SYNTHOS S.A. is SYNTHOS S.A. (hereinafter referred to as: the Company). The main area of operation of the Company is the management of the Capital Group. The Company’s share capital amounts to PLN 39,697,500 (thirty nine million six hundred ninety seven thousand five hundred zlotys), and is divided into:
(a) 854,250,000 (eight hundred fifty four million two hundred fifty thousand) A series ordinary bearer shares with a nominal value of PLN 0.03 (three grosz) each, numbered from A 000,000,001 to A 854,250,000,
(b) 469,000,000 (four hundred sixty nine million) B series ordinary bearer shares with a nominal value of PLN 0.03 (three grosz) each, numbered from A 000,000,001 to B 469,000,000,
In the structure of the Capital Group Synthos S.A. there are three key manufacturing companies: Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna, Synthos Kralupy a.s. and Synthos PBR s.r.o., whose principal activity is the production of mainly rubber and styrene plastics. In the reporting period the Group did not acquire treasury stock.
7.2 The subsidiaries being part of the Company’s Group and being subject to consolidation: The branch of Synthos S.A. operating under the name Synthos S.A. (organisačni složka) with its registered office in Kralupy nad Vltavou, the Czech Republic, which started its operations on the day of its registration in the Czech Commercial Register, i.e. on 22 January 2008.
Synthos Dwory 7 sp. z o.o. with its registered office in Oświęcim. The Company holds 100% shares in the share capital and represents 100% votes at the Shareholders’ Meeting of Synthos Dwory 7 sp. z o.o.
Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna with its registered office in Oświęcim. The company is engaged in the production of synthetic rubber and synthetic latex, styrene plastics, vinyl dispersions and acrylate and copolymer dispersions and the generation and distribution of electricity, generation and distribution of heat, collection and treatment of water. Synthos Dwory 7 sp. z o.o. z with its registered office in Oświęcim, in which the Company holds 100% shares in the share capital, and Green Pepper SCSp with its registered office in Luxemburg (an indirect subsidiary of the Company) are the shareholders of that company. Synthos Dwory 7 sp. z o.o., a 100% subsidiary of the Company, is the shareholder entitled to exclusive representation.
Synthos Kralupy, a.s. with its registered office in Kralupy nad Vltavou, Czech Republic. It is a chemical producing such materials as synthetic rubber, styrene plastics, ethylbenzene, butadiene. The sole shareholder of Synthos Kralupy a.s. is the Company, which represents 100% of the share capital of that company.
Synthos PBR s.r.o. with its registered office in Kralupy nad Vltavou, Czech Republic. The company is engaged in the production of synthetic rubbers on the basis of a license granted by the Michelin Group. The Company holds 100% of shares in the share capital of that company and represents 100% votes at the Shareholders’ Meeting of that company.
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Tamero Invest s.r.o with its registered office in Kralupy nad Vltavou, Czech Republic. The areas of operation of the company are the generation and distribution of electricity, generation and distribution of heat, collection and treatment of water. Synthos Kralupy a.s. holds 100% of shares in the share capital of that company.
Synthos Dwory 4 Sp. z o.o. with its registered office in Oświęcim. Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna holds 99% of shares in the share capital and represents 99% votes at the Shareholders’ Meeting of that company. SYNTHOS S.A. holds 1% of shares in the share capital and represents 1% votes at the Shareholders’ Meeting of that company. The areas of operation of that company include the generation of electricity.
Synthos Dwory 5 Sp. z o.o. with its registered office in Oświęcim. Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna holds 99% of shares in the share capital and represents 99% votes at the Shareholders’ Meeting of that company. SYNTHOS S.A. holds 1% of shares in the share capital and represents 1% votes at the Shareholders’ Meeting of that company. The areas of operation of that company include the generation of electricity.
Synthos Dwory 8 Sp. z o.o. with its registered office in Oświęcim. Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna holds 100% of shares in the share capital and represents 100% of votes at the Shareholders Meeting of that company. The areas of operation of that company include the generation of electricity.
Miejsko-Przemysłowa Oczyszczalnia Ścieków Sp. z o.o. with its registered office in Oświęcim. Company operates in the areas of collection, treatment and discharge of waste water, waste disposal and the provision of sanitation and related services. Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna holds 76.79% of shares in the share capital of that company and represents 76.79% of votes at the Shareholders’ Meeting of that company. The Oświęcim Municipality holds other 23.21% of shares in the share capital and represents 23.21% of votes at the Shareholders’ Meeting of that company.
SYNTHOS Fundusz Inwestycyjny Zamknięty in liquidation – entered into the register of investment funds under the number 655, managed by FORUM TFI S.A. with its registered office in Cracow. The Company indirectly holds all certificates issued by SYNTHOS FIZ. Of the total number of two certificates, both (Series A) are held by the Company.
FORUM 62 FIZ managed by FORUM TFI S.A. with its registered office in Cracow. The Company holds directly and indirectly all certificates issued by the fund. Of the total number of 1,379,911 certificates, Synthos S.A. holds 250 certificates Series A, and Red Chilli Ltd. (100% subsidiary of the Company) holds 1,379,661 certificates Series B.
CALGERON INVESTMENT LIMITED with its registered office in Nicosia, Cyprus. Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością jawna holds 99.87% of the share capital of CALGERON INVESTMENT Ltd., which conducts investment and capital activity with the Capital Group Synthos S.A.
Red Chilli Ltd. with its registered office in Nicosia, Cyprus. SYNTHOS S.A. holds 100% of shares in the share capital and represents 100% votes at the Shareholders’ Meeting of that company, which conducts investment and capital activity with the Capital Group Synthos S.A.
Butadien Kralupy, a.s. with its registered office in Kralupy nad Vltavou, Czech Republic. Synthos Kralupy a.s. holds 49% of shares in the share capital of that company – the area of operation of Butadien Kralupy a.s. is C4 fraction processing to obtain butadiene and raffinate-1 products. The company is consolidated using the equity method.
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Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością Holding spółka komandytowo-akcyjna with its registered office in Oświęcim, entered into the National Court Register on 26 September 2013 under the no KRS 0000478085. The company’s share capital is PLN 50,000.00. The only general partner of the company is Synthos Dwory 7 sp. z o.o. (100% subsidiary of the Company), being at the same time its shareholder (100 registered Series B shares). 49,900 (forty nine thousand nine hundred) of A Series shares are held by Synthos Fundusz Inwestycyjny Zamknięty (indirectly 100% subsidiary of the Company).
Zakład Doświadczalny “Organika” Sp. z o.o. with its registered office in Nowa Sarzyna, in which the Company holds 100% of shares in the share capital and represents 100% votes at the Shareholders’ Meeting of that company. The area of operation of that company is the production of pesticides.
Synthos Finance AB (publ.) – Swedish special purpose vehicle, conducts capital activity. The share capital of that company is EUR 55,005.61 and is divided into 4951 shares, and the nominal value of the shares is EUR 11.11 each. The Company owns 100% of shares of this Company.
Green Pepper SCSp with its registered office in Luxemburg, registered in the Commercial and Companies Register in Luxemburg under the number RCS: B 192143 on 27 November 2014. The company is in 100% indirectly controlled by Synthos S.A. In the Capital Group Synthos S.A., it conducts the investment and capital activity.
Synthos Agro Sp. z o.o. (formerly under the name Synthos Dwory 6 Sp. z o.o.) with its registered office in Oświęcim. The company conducts commercial and marketing activity in the area of plant protection products. Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna holds 99% of shares in the share capital and represents 99% votes at the Shareholders’ Meeting of that company. SYNTHOS S.A. holds 1% of shares in the share capital and represents 1% votes at the Shareholders’ Meeting of that company.
Oristano Investment Spółka z ograniczoną odpowiedzialnością w likwidacji with its registered office Oświęcim. The Company holds 100% of shares in the share capital and represents 100% of votes on the Shareholders’ Meeting of that company. On 15 October 2014, the Shareholders’ Meeting adopted a resolution on the liquidation of the company. Accordingly, from 15 October 2014 the liquidation procedure has been started.
7.3 The companies not subject to consolidation but being part of the Capital Group: Synthos Dwory 2 Sp. z o.o. with its registered office in Oświęcim. The planned area of operation of that company is the laboratory activity. Synthos Dwory 7 spółka z ograniczoną odpowiedzialnością spółka jawna holds 100% shares in the share capital and represents 100% votes at the Shareholders’ Meeting of that company.
Synthos XEPS s.r.o. with its registered office in Kralupy nad Vltavou, Czech Republic. The Company holds 100% of shares in the share capital of that company and represents 100% votes at the Shareholders’ Meeting of that company. The company will be used as a special purpose vehicle for the planned investment activities relating to new products.
Synthos do Brasil Industria e Comercio de Quimicos Limitada, registered in the National Register of Legal Persons of the Federal Republic of Brazil on 21 November 2013 under the number 19.297.642/0001-22. On 11 August 2014, the Company’s share capital has been increased and currently amounts 3,544,400.00 of Brazilian real and is divided into 3 544 400 000 shares. Synthos S.A. holds 3 542 400 shares in the share capital. Synthos Dwory 2 Sp. z o.o. holds 2 000 shares in the share capital.
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7.4 Branches On 30 November 2007 the Management Board of Synthos S.A. adopted a resolution to form a branch outside the Republic of Poland in the Czech Republic under the name of Synthos S.A. (organizačni složka) with its registered office at 278 52 Kralupy nad Vltavou O.Wichterleho 810 Czech Republic. The branch commenced operations on the date of its registration in the Czech Commercial Register, i.e. on 22 January 2008.
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CORPORATE GOVERNANCE
9 RAPORT ROCZNY 2013
8. CORPORATE GOVERNANCE Synthos S.A. is subject to corporate governance principles contained in the document entitled "Code of Best Practice for WSE Listed Companies”, adopted by Resolution no. 19/1307/2012 of the Warsaw Stock Exchange Supervisory Board on 21 November 2012. The wording of these principles is publicly available on the Internet at http://www.corp-gov.gpw.pl, which is the official website of the Warsaw Stock Exchange devoted to corporate governance issues for companies listed on the WSE main market and on the NewConnect market. At the same time, Synthos S.A. explains that it does not apply any other corporate governance best practices, including principles going beyond the requirements envisaged by Polish law. The Management Board of Synthos S.A. informs that the corporate governance principles listed below, contained in the document entitled "Code of Best Practice for WSE Listed Companies”, adopted by resolution no. 19/1307/2012 of the Warsaw Stock Exchange Supervisory Board on 21 November 2012, are not and will not be applied in the Company.
8.1 Part I. “Recommendations for Best Practice for Listed Companies”. Recommendation 1. A company should pursue a transparent and effective information policy using both traditional methods and modern technologies and latest communication tools ensuring fast, secure and effective access to information. Using such methods to the broadest extent possible, a company should in particular: - maintain a company website whose scope and method of presentation should be based on the model investor relations service available at ; Partial deviation from application of recommendation 1 bullet point 1. The Company does not maintain a website according to the model specified at http://naszmodel.gpw.pl/. The Company informs that the information contained in its own Internet service comprises most of the information required in the model service. The Company intends in the nearest future to gradually model its website so that ultimately its scope and information presentation method correspond to the model corporate governance website.
Recommendation 5. „A company should have a remuneration policy and rules of defining the policy. The remuneration policy should in particular determine the form, structure, and level of remuneration of members of supervisory and management bodies. Commission Recommendation of 14 December 2004 fostering an appropriate regime for the remuneration of directors of listed companies (2004/913/EC) and Commission Recommendation of 30 April 2009 complementing that Recommendation (2009/385/EC) should apply in defining the remuneration policy for members of supervisory and management bodies of the company.” This recommendation is not and will not be applied. In the opinion of the Synthos S.A. Management Board, the regulations contained in the prevailing provisions of law in combination with Synthos S.A.’s Articles of Association and the Supervisory Board Bylaws pertaining to remuneration of members of the supervisory and management bodies are sufficient. Setting the remuneration for Management Board members belongs to the powers of the Supervisory Board and the remunerations of Supervisory Board members are set by shareholder meeting.
Recommendation 9. “The WSE recommends to public companies and their shareholders that they ensure a balanced proportion of women and men in management and supervisory functions in companies, thus reinforcing the creativity and innovation of the companies’ economic business.”
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This principle is not and will not be applied. When selecting candidates for members of the supervisory and management bodies, the authorized bodies are guided by the best interest of Synthos S.A. and its shareholders, taking into account the candidates’ qualifications satisfying Synthos S.A.’s expectations following from the uniqueness of its operations, without discriminating women in this process.
Recommendation 12. “A company should enable its shareholders to exercise the voting right during a General Meeting either in person or through a plenipotentiary, outside the venue of the General Meeting, using electronic communication means.” This recommendation will not be applied. The Company, in accordance with the provisions of its Articles of Association and provisions of law, makes it possible for shareholders to exercise their voting rights in person or by proxy. The Company does not have the infrastructure making it possible to exercise voting rights by means of electronic communication.
8.2 Part II. “Best Practices for Management Boards of Listed Companies” Recommendation 1 “A company should operate a corporate website and publish on it, in addition to information required by legal regulations:
point 6: “annual reports on the activity of the Supervisory Board taking account of the work of its committees together with the evaluation of the internal control system and the significant risk management system submitted by the Supervisory Board” This recommendation is not and will not be applied in the part pertaining to the report from the work of the committees and evaluation of the internal control system and the significant risk management system. No committees existing as part of the Supervisory Board’s activities. The 5-person Supervisory Board performs the tasks of the audit committee. As there is no internal control system and significant risk management system lying within the powers of the Supervisory Board, the Supervisory Board will not present an evaluation of these systems.
point 7: “shareholders’ questions on issues on the agenda submitted before and during a General Meeting together with answers to those questions” This recommendation is not and will not be applied. The Company does not keep a detailed record of the shareholder meetings, comprising all statements and questions. The chairperson decides about putting individual issues in shareholder meeting minutes, relying on the provisions of law, the importance of the given matter and the shareholders’ justified requests. Shareholder meeting participants, in accordance with the Commercial Company Code, have the right to make representations in writing, which are attached to the minutes. The Company believes that these principles sufficiently ensure transparency of the shareholder meetings.
point 9a: “a record of the General Meeting in audio or video format.” This principle will not be applied. The Company does not have the infrastructure for audio and/or video recording of shareholder meetings and then its publication on its website.
point 11: “information known to the Management Board based on a statement by a member of the Supervisory Board on any relationship of a member of the Supervisory Board with a shareholder who holds shares representing not less than 5% of all votes at the company’s General Meeting” The above recommendation is not and will not be applied by the Company’s Management Board because the Company’s Management Board does not receive such statements from Supervisory Board members in connection with non-application of principle no. 2 from Part III of the WSE Best Practices.
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Recommendation 2 “A company should ensure that its website is also available in English, at least to the extent described in section II.1.”
This recommendation is not and will not be applied in the part pertaining to publication of English periodic reports and current reports submitted by 31 December 2008 on the Company’s website. Periodic and current reports are submitted from 1 January 2009 are published on the Company’s website also in English. Partial departure from the above principle is dictated by the considerations of reduction of operating costs and the historical nature of the reports published before 31 December 2008.
Recommendation 3 “Before a company executes a significant agreement with a related entity, its Management Board shall request the approval of the transaction/agreement by the Supervisory Board. This condition does not apply to typical transactions made on market terms within the operating business by the company with a subsidiary where the company holds a majority stake. For the purpose of this document, related entity shall be understood within the meaning of the Regulation of the Minister of Finance issued pursuant to Article 60.2 of the Act on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and Public Companies (Dz.U. No. 184, item 1539, as amended).”
This recommendation is not and will not be applied. In the opinion of the Company’s Management Board, the regulations contained in the prevailing provisions of law in combination with the Company’s Articles of Association and the Supervisory Board Bylaws, pertaining to concluded transactions/agreements with related entities are sufficient. The powers of the Supervisory Board comprise permanent supervision over the Company’s activity, also with regard to decisions on all material agreements of the Company, using the agreement value criteria specified in the Company’s articles of association.
8.3 Part III. “Best Practice for Supervisory Board Members” Recommendation 1: “In addition to its responsibilities laid down in legal provisions the Supervisory Board should:
point 1: “once a year prepare and present to the Ordinary General Meeting a brief assessment of the company’s standing including an evaluation of the internal control system and the significant risk management system” This recommendation is not and will not be applied in the part pertaining to assessment of the systems. As there is no internal control system and significant risk management system, the Supervisory Board will not present an assessment of these systems to the Ordinary Shareholder Meeting.
Recommendation 2: “A member of the Supervisory Board should submit to the company’s Management Board information on any relationship with a shareholder who holds shares representing not less than 5% of all votes at the General Meeting. This obligation concerns financial, family, and other relationships which may affect the position of the member of the Supervisory Board on issues decided by the Supervisory Board.” This recommendation is not and will not be applied by the Company’s Supervisory Board. The above recommendation is redundant in the context of exclusion of a Supervisory Board member from participation in the Supervisory Board’s decision in a conflict of interest situation. Against the background of prevailing law, the criterion of the objective and effect that the Supervisory Board member wants to bring about and brings about with his/her actions, is a correct and sufficient criterion. Such a criterion includes: acting for the good of the Company and the shareholders and liability for actions, if any, to the detriment of the Company or the shareholders.
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Recommendation 6: “At least two members of the Supervisory Board should meet the criteria of being independent from the company and entities with significant connections with the company. The independence criteria should be applied under Annex II to the Commission Recommendation of 15 February 2005 on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board. Irrespective of the provisions of point (b) of the said Annex, a person who is an employee of the company or an associated company cannot be deemed to meet the independence criteria described in the Annex. In addition, a relationship with a shareholder precluding the independence of a member of the Supervisory Board as understood in this rule is an actual and significant relationship with any shareholder who has the right to exercise at least 5% of all votes at the General Meeting.” This recommendation is not and will not be applied by the Company. In accordance with prevailing provisions of law, Supervisory Board members are appointed independently by the Company’s shareholder meeting. Considering this, there are no grounds for restriction of the freedom in selection of the Company’s Supervisory Board members. In addition, the “independence” criterion does not serve well in determining the positions and criteria which a Supervisory Board Member should follow when making a decision in performance of his/her mandate. Considering the appointment and the possibility of dismissal by the shareholders and the functions of the Supervisory Board member, which is to represent shareholders, this criterion is illusory and unclear. In the Company’s opinion, “independence” of the members of the Company’s governing bodies means the possibility and necessity to act within the boundaries of law and in the Company’s interest - and the Company respects independence understood this way.
Recommendation 8: “Annex I to the Commission Recommendation of 15 February 2005 on the role of non-executive or supervisory directors… should apply to the tasks and the operation of the committees of the Supervisory Board. This recommendation is not and will not be applied. There are no committees operating within the Supervisory Board.
Recommendation 9: “Execution by the company of an agreement/transaction with a related entity which meets the conditions of section II.3 requires the approval of the Supervisory Board.” This recommendation is not and will not be applied. The regulations contained in the prevailing provisions of law in combination with the Company’s Articles of Association and the Supervisory Board Bylaws, pertaining to concluded transactions/agreements with related entities are sufficient. The powers of the Supervisory Board comprise permanent supervision over the Company’s activity, also with regard to decisions on all material agreements of the Company, using the agreement value criteria specified in the Company’s articles of association.
8.4 Part IV. “Best Practices for Shareholders” Recommendation 1: “Presence of representatives of the media should be allowed at General Meetings.” This recommendation is not and will not be applied. The Company’s shareholder meetings are attended by authorized persons and persons supporting the meetings. The Company does not see the need to introduce additional obligations for the shareholders regarding special facilitation of the presence of representatives of the media in shareholder meetings. The prevailing regulations sufficiently regulate performance of the information duties imposed on public companies as regards openness and transparency of matters reviewed at the shareholder meeting. In the case of questions regarding the shareholder meeting addressed
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to the Company by representatives of the media, the Company will immediately provide pertinent replies.
Recommendation 9: “A resolution of the General Meeting to split the nominal value of shares should not set the new nominal value of the shares at a level which could result in a very low unit market value of the shares, which could consequently pose a threat to the correct and reliable valuation of the company listed on the Exchange.”
This recommendation is not and will not be applied. The current par value of one Synthos S.A. share is PLN 0.03 (three grosz). Adoption of this principle for application would make it impossible to carry out any division of the par value of Synthos S.A.’s shares.
Recommendation 10: “A company should enable its shareholders to participate in a General Meeting using electronic communication means through:
1) real-life broadcast of General Meetings;
2) real-time bilateral communication where shareholders may take the floor during a General Meeting from a location other than the General Meeting.”
This recommendation is not and will not be applied. In accordance with the provisions of the Commercial Company Code, the possibility of participation in the shareholder meeting using means of electronic communication requires authorization of such procedure in the articles of association. Synthos S.A.’s articles of association do not permit such a method of conducting the shareholder meeting. Restrictions on voting rights or on the transfer of the ownership title to the Company’s securities The Company’s articles of association do not envisage any restrictions on exercise of voting rights or provisions according to which, with the cooperation of the company, capital rights attached to securities would be detached from the holding of the securities. Restrictions on exercise of the voting rights may follow, in the case of the Company, only from generally binding provisions of law. Pursuant to Article 8.2 of the Company’s Articles of Association, shares can be disposed of and pledged without any limitations, subject to Article 336 paragraph 1 of the Commercial Company Code as regards shares issued in exchange for non-cash contributions.
Amendments to the Company’s Articles of Association Amendments to the Company’s Articles of Association are introduced by Resolution of the General Meeting, in accordance with the provisions of the Code of Commercial Partnerships and Companies. Pursuant to Article 19.5 of the Company’s Articles of Association on the resolution amending the Articles on the increase of the shareholders' benefits or limiting the rights granted to individual shareholders require the consent of all affected shareholders. Determination of the consolidated text of the Company’s Articles of Association falls within the competence of the Supervisory Board.
General Meeting The competences and functioning of the General Meeting are regulated by the Code of Commercial Partnerships and Companies and the Articles of Association, and they are as follows:
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The General Meeting is convened by the Management Board. The Annual General Meeting shall be convened by the Management Board no later than 6 months after the end of the financial year.
The Supervisory Board is entitled to convene the General Meeting if the Management Board fails to convene it in the proper period. The Supervisory Board or shareholders representing at least half of the share capital or at least half of the total number of votes are entitled to convene the Extraordinary General Meeting, should they consider it expedient. The convening entity shall present, in a notice convening the General Meeting, its program, including the draft resolutions regarding the proposed agenda.
A Shareholder or shareholders who own at least one twentieth of the share capital may request to summon an Extraordinary General Meeting as well as to add specific items to the agenda of this General Meeting. The request to convene the Extraordinary General Meeting shall be submitted to the Management Board in writing or in electronic form. The request to convene the Extraordinary General Meeting of Shareholders shall include a justification and draft resolutions regarding the proposed agenda. A Shareholder or shareholders who own at least one twentieth of the share capital may request to add specific items to the agenda of the upcoming General Meeting. This request should be submitted to the Management Board no later than 21 days prior to the date of the Meeting. The request should include a justification and a draft resolution on the proposed agenda. The request may be submitted in electronic form. The Management Board announces the changes to the agenda introduced at the request of shareholders. The General Meeting shall be held at the registered office of the Company or in any other place in the Republic of Poland indicated in the notice of the General Meeting. The General Meeting may adopt resolutions regardless of the number of shareholders present at the meeting or the represented shares, unless otherwise provided. The resolutions of the General Meeting are taken by simple majority of votes, unless the Company’s Articles of Association or the applicable law provide otherwise. The following requires the resolutions of the General Meeting:
a. examining and approving the financial statements and the Report of the Management Board on activities of the Company and the financial statements for the previous financial year,
b. distribution of profit/ payment of loss, c. exonerating members of the bodies of the Company in respect of their duties; d. conclusion of a loan agreement, guarantee or other similar agreement with a member of the Management Board, Supervisory Board, proxy, liquidator or on behalf of any of these persons,
e. acquisition or sale of the Company’s business or an organised part thereof and establishment of a limited property right thereon,
f. decision on the claims for redressing damages suffered during the establishment of the company or its management or supervision,
g. issue of convertible bonds or bonds with pre-emptive rights to acquire shares,
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The resolution amending the Company’s Articles of Association on the increase of the shareholders' benefits or limiting the rights granted to individual shareholders require the consent of all affected shareholders.
Voting at the General Meeting is open. A secret ballot shall be ordered for elections and in the case of motions for dismissal of members of the Company’s bodies or liquidators, for holding them liable as well as in the case of personnel issues. A secret ballot shall also be ordered at the request of at least one of the shareholders present or represented at the General Meeting. Resolutions on amendments to the Company's business shall be passed by roll call open voting.
The General Meeting is opened by the President of the Supervisory Board or its Vice-President, and then among the persons entitled to vote, the President of the General Meeting is chosen. In the absence of the President of the Supervisory Board or the Vice-President, the General Meeting is opened by the President of the Management or by another person designated by the Management Board.
Pursuant to the Company’s Articles of Association, the General Meeting may adopt its rules and regulations. Nevertheless, the General Meeting did not make use of this power and did not adopt its rules and regulations.
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9. DEFINITIONS “C4 fraction” means a mixture of liquidated hydrocarbons with prevailing content of four carbon atoms in their molecules;
“Company” means Synthos S.A.;
“Consolidated Annual Report” means the audited consolidated financial statement of the Group for the period from January 1, 2014 to December 31, 2014;
“EPS” means expandable polystyrene;
“EU” means European Union;
“GDP” means gross domestic product;
“GHG” means carbon dioxide, methane and other greenhouse gases;
“GPPS” means general purpose polystyrenes, clear, hard, usually colorless thermoplastic resin;
“Group” or “Synthos Group” means Synthos S.A and all its subsidiaries;
“Guarantor” or “Guarantors” means each 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. guaranteed the Notes;
“HIPS” means high impact polystyrenes;
“Indenture” means the indenture governing the Notes.
“Issuer of Notes” means Synthos Finance AB (publ), with its registered seat in Stockholm, Sweden who issued Notes on September 30, 2014;
“LBS” means concentrated styrene-butadiene latex;
“LBSK” means styrene-butadiene carboxylic latex;
“LPG” means Liquefied Petroleum Gas;
“Notes” means senior notes with a total nominal value of EUR 350,000,000 which Synthos Finance AB (publ) issued on September 30, 2014;
“PET” means polyethylene terephthalate;
“PPP” means plant protection products;
“R&D” means Research and Development;
“WSE” means Warsaw Stock Exchange;
“XPS” means extruded polystyrene board.
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SYNTHESIS.ORTHOS
10 RAPORT ROCZNY 2013