MANAGEMENT BOARD REPORT ON ACTIVITIES OF THE CIECH GROUP AND CIECH S.A. IN 2016 - 1 MANAGEMENT BOARD REPORT ON ACTIVITIES OF THE CIECH GROUP AND CIECH S.A. IN 2016 Dear Sirs and Madams, The year 2016 is yet another period of very good financial results of CIECH Group. In the last year we attained an income of PLN 3 455 million and PLN 877 million normalized EBITDA (N) - these are the highest figures in the history of our Group. Comparing this to the previous year, we recorded a 5.6% increase in revenue and 17.2% EBITDA (N). Such good financial results are mainly the effect of consistent implementation of our strategy - developing towards an international, more and more diversified chemical group. In 2016 we worked mainly on completing our key investments and on developing our product portfolio in all the aspects of our business. In March 2016 we completed the second stage of SODA+200 project, allowing us to increase our production powers of soda ash in Poland by another 140 thou. tonnes per annum (up to 1450 thou. tonnes). The increase in our sales volume has significantly supported our financial results. Due to the effective efforts of our sales team, we have also man- aged to maintain attractive contract prices of soda sold from Poland and Germany. For the most part of the year we were also fortunate in terms of the external conditions: the fall in prices of fuels and the weakening of Polish Zloty and Romanian Ley against Euro and Dollar. In the salt and baking soda area we mostly focused on developing specialist products. Thanks to the investment completed in 2015 (line for processing wet salt into dry salt, and new packaging line), we are currently able to produce almost all of our salt in dry form, selling our products mostly in packages. We are also working on geographical expansion, and on increasing our share in the Polish market - mostly in respect of our basic products, being cooking salt and salt tablets for water purifi- cation. Baking soda is, in turn, the object of our increased efforts in the area of developing high specialty products, such as pharmaceutical soda, including soda for dialysis. Our development steps in the soda segment were very strongly supported by our trade marketing operations. We have successfully carried out the branding of our soda products, standardizing the packages, marketing materials, and refreshing our brand management strategy. In the organic segment, despite the challenging agricultural market situation, we are satisfied with the effects of our works. Here, I particularly mean the multiple product registration procedures and the intense foreign expansion. In 4th quarter we carried out our second pre-season sales campaign, with repeated success. We have also succeeded in increasing our resins profitability by optimizing our portfolio towards products of higher margin. In the foams segment - apart from product development, we have achieved further benefits from the continuously performed optimizing actions. The Silicate and Glass segment most of all saw the completion of an investment of particular importance – the replacement of the furnace for manufacturing sodium silicate, which doubles our production capacity, as well as the commencement of execution of a contract with Solvay for the delivery of this product, to be continued for many years. In June 2016 the Ordinary General Meeting has resolved on the payment of dividend in the amount of PLN 150 million, which gives 2.85 PLN per share. In August 2016, the shares of CIECH S.A. were introduced for trade on the Frankfurt Stock Exchange. Dual listing is our next step in realizing our strategy of foreign markets expansion. In the long term it will also allow us to expand our investor base, and, hopefully, to support the building of CIECH S.A. value for all our shareholders. I would like to proudly emphasize that we are the first company to be listed both at the Warsaw and Frankfurt Stock Exchanges. Another element of our strategy for international development was participating in one of the previous year's largest acqui- sition processes in the agricultural industry. We made a decision regarding the potential acquisition transaction of compa- nies included in the portfolio of a Portuguese company SAPEC operating in the business of manufacturing plant protection agents and plant supplements. The transaction was not effected by CIECH S.A., but we are not resigning from our geograph- ical expansion plans. We are currently developing organically, but will be ready to seize the next attractive opportunity consistent with our development plans - potentially including acquisition. The year 2017 has numerous challenges lying in wait for us, mostly related with higher prices of fuels, and the expected appearance of Turkish soda ash powers on the market. I believe, however, that we are well-prepared for them, and we will work hard to minimize the potential negative impact of these factors on our business. I am convinced that this will be pos- sible not merely due to the proper management of resources and the number of initiatives undertaken in the soda ash area, but also due to our intense actions for the development of specialist portfolio - particularly in the salt, baking soda and agricultural business, which will allow us to become an even more diversified Group. In order to fulfill these plans, apart from developing our products and sales networks, we will also be performing a number of investments. The largest capital expenditures of 2017 will be related to the continued construction of flue gas desulfuri- 2 MANAGEMENT BOARD REPORT ON ACTIVITIES OF THE CIECH GROUP AND CIECH S.A. IN 2016 zation and denitrification systems by our Polish CHP plants, to the processes of registering active substances and agricultur- al products, to the development of our baking soda portfolio in Germany, and to the improvement in productivity of our plants. We also remain open to new possibilities, and will consider any new, potentially interesting projects. To conclude, I would like to give my heartfelt thanks to our Shareholders and the Supervisory Board on behalf of the entire Management of CIECH S.A. for another year of their trust and support, and to give my special thanks to all those workers particularly who are building the value of CIECH Group through their everyday work. Yours sincerely, Maciej Tybura CIECH S.A. Board President 3 MANAGEMENT BOARD REPORT ON ACTIVITIES OF THE CIECH GROUP AND CIECH S.A. IN 2016 Dear Sirs and Madams, The year 2016 was particularly important for CIECH Group in the context of its development. With the full support of our strategic investor and the entire Supervisory Board, the Company Management has consistently implemented the strategy drafted upon the acquisition of the majority stake of CIECH SA by Kulczyk Investment. According to this vision, in the nearest future CIECH is to become a company that will be setting standards for modern management, high quality of products and model co-operation with clients and business partners. The company's ambition is to become one of the best-managed and most transparent companies listed on the Polish stock exchange. A brand that brings to mind responsible development, the highest business ethics standards, and a novel model of co-operation with local communities. We are seeing already how the implementation of our new strategy is translating into systematically improving financial results and the long-term increase in value. In 2016, the Company Management has attained the best results in the whole of CIECH Group history. This statistics confirms that the previous years were spent on intense and effective work. However, the vision of CIECH development most of all includes ranking high on the international markets. Therefore, we responded with satisfaction to the decision of Management on the simultaneous listing of shares at both the Warsaw, as well as the Frankfurt Stock Exchange. Thanks to this step, the company has placed itself among the world's industry leaders, and its financial evaluation will be the reflection of its actual value and potential. This will allow us to strengthen the credi- bility of CIECH Group on the world's markets. Both our presence in Frankfurt, as well as our best corporate governance practices make CIECH one of the most transparent companies in the eyes of stock investors. I am hoping for CIECH to soon become a symbol of successful foreign expansion, and a brand to strengthen the image of our country. We will continue to actively support any actions of the Management aiming at the implementation of our international expansion strategy, be it based on organic development or potential acquisitions. The effect of this will be long-term and consistent building of the company value, for the benefit of all its shareholders. On behalf of the members of CIECH SA Supervisory Board, I wish to thank the Management and the Company Employees for their intense and fruitful work in the year 2016, and wish you further success in 2017. Yours sincerely, Sebastian Kulczyk Chairman of the Supervisory Board of CIECH S.A. 4 MANAGEMENT BOARD REPORT ON ACTIVITIES OF THE CIECH GROUP AND CIECH S.A. IN 2016 MANAGEMENT BOARD REPORT ON ACTIVITIES OF THE CIECH GROUP AND CIECH S.A. IN 2016 5 MANAGEMENT BOARD REPORT ON ACTIVITIES OF THE CIECH GROUP AND CIECH S.A. IN 2016 TABLE OF CONTENTS 1. CIECH GROUP’S OPERATING ACTIVITIES 9 1.1 MAJOR EVENTS AND ACHIEVEMENTS IN 2016 9 1.2 CHARACTERISTICS OF THE CIECH GROUP 10 1.3 OPERATING SEGMENTS 13 1.4 SIGNIFICANT AGREEMENTS AND TRANSACTIONS 24 2. EXTERNAL ENVIRONMENT 26 2.1 FACTORS WITH MAY IMPACT ON THE CIECH GROUP’S ACTIVITIES 26 2.2 CHARACTERISTICS OF THE MARKET AND POSITION OF THE CIECH GROUP 28 2.2.1 SODA SEGMENT 28 2.2.2 ORGANIC SEGMENT 35 2.2.3 SILICATES AND GLASS SEGMENT 41 3.