Engro Fertilizers Limited 0 Table of Contents S. No. Contents Page Number 1 Introduction 2 2 Milestones 3 3 Products 4 4 National Outreach 5 5 Corporate Achievements 6 6 Risks and Mitigants 7 7 Financial Trends 8 8 Key Highlights 9 9 Directors Profiles 10-11 10 Appendix 12-17 1 EFERT– Introduction . Engro Fertilizers Limited (listed on all 3 stock exchanges of Pakistan), is an 86% owned subsidiary of Engro Corporation (ENGRO), which is involved in the business of manufacturing and marketing of urea and NPK (compound) fertilizers. EFERT is Pakistan’s largest urea player in terms of capacity, with Engro Urea as Pakistan’s oldest domestic urea brand. Over the Profitability Trend years, production capacity of its base plant has been enhanced from 173 kt/year to 975 kt/year through various projects including a relocation from USA. (PkRmn) (PkRmn) . In 2010, it completed construction of the EnVen project which at that time was the world’s largest single train urea plant, adding 70,000 10,000 1.3mn tpa of urea production capacity, making Daharki world’s 5th largest urea production site . As per Fertilizer Policy 2001, EnVen (COD: 2011) was contracted to receive feedstock gas from the SNGPL network at 60,000 8,000 US$0.70/mmbtu for 10yrs (vs. normal pricing of US$4.2/mmbtu). After a gap of 04 years, with delays due to GoP back tracking, 50,000 6,000 EFERT has received confirmation of concessionary gas pricing in Mar’15. EFERT has entered into an agreement with GENCO II (endorsed by ECC) to install compressors for Guddu Power Plant at its cost. In 40,000 4,000 lieu of this it is understood that 60MMSCFD of Guddu gas will continue to flow to EFERT till December 2015. 30,000 2,000 . During 2015 , Engro Eximp’s trading arm is being sold to EFERT (subject to shareholders approval), after which the Company will also be engaged in import and marketing of phosphate based fertilizers (DAP & MAP) and micronutirents. 20,000 - 10,000 (2,000) . EFERT has posted all-time high sales of PkR61.42bn in CY14. In CY14 alone, revenue grew by 23%YoY on account of 1) 16%YoY volumetric growth - (4,000) 2010 2011 2012 2013 2014 Revenues in offtake to 1.82mn tons urea sold in CY14 and 2) increase in urea prices by 5%YoY. Production dropped in CY12 to 974k tons (2 plant operational for just 45 days due to Sales (PkRmn) Profit / (loss) after taxation gas curtailment) but has since increased with a CAGR of 37% after gas supply issues were resolved with the GoP EFERT: Profitability Margin trend . Proactive management has reduced D/E to 1.3x in CY14 vs. 4x in CY12. As a result, financial charges reduced by 33%YoY in CY14 which can further improve in lower EFERT: Key Financial Ratios interest rate environment 2012 2013 2014 Debt Profile . With debt covenants met in 3Q14, EFERT has initiated dividend payments announcing a full year dividend of PkR3.0/sh. Sales (3-Yr CAGR) 1% 38% 25% . At the same time, lower debt can lead to Shariah compliance where domestic Earnings (3-Yr CAGR) -211% 14% 21% Islamic mutual funds can start adding EFERT, thereby leading to improved price discovery. Gross Margins 32% 44% 37% Operating Margins 22% 37% 30% . Last 5-yr GMs average of 43% is reflective of strong pricing power. This has been buttressed by the higher efficiency of the EnVen plant Net Margins -10% 11% 13% Earning Drivers . CY14 profits were up 49%YoY to PkR8.2bn in CY14 Source: Company Reports . EFERT has signed long term GSA with E&P companies to receive additional gas from dedicated gas fields, giving EFert more more sustainability. 2 EFERT - Milestones Milestones leading up to EFERT… 1965 1978 2013 2007 Successful IPO The company Esso Pakistan 2010 2015 was Construction Fertilizer 1991 Enven plant During CY15 incorporated of World’s Company Exxon divests started Engro Corp. is as Esso largest single- Limited its equity from producing selling its Pakistan 1968 train urea 2011 renamed as fertilizer urea trading arm Fertilizer Urea plant 1993 plant started Enven 1964 Exxon business demerger of Engro Eximp 1957 Limited, to commissioned; Completion of capitalized Signed Chemical globally; the Engro (the single manufacture largest Pakven 600 – and started agreement Pakistan company is Chemcial largest Mari gas field and market foreign commercial with the Limited renamed as Engro’s first Pakistan Ltd. importer of discovered by fertilizer investment in production government Engro post start-up & transfer of phosphate Esso Mobil private sector to set up a Chemical expansion fertilizer fertilizers in Joint Venture in the history urea plant Pakistan project results business to a Pakistan) to of Pakistan with an Limited in increase in separate Engro annual through an production company, Fertilizers*. capacity from capacity of employee led Engro 268KT to 173,000 tons buyout Fertilizer Ltd. 600KT per annum. Engro Chemcial renamed Engro Corp. with the holding company structure Source: Company Reports * Subject to approval at AGMs of Ecorp and EFert 3 EFERT - Products Widest spectrum of products in the country One of the largest Leading brand in Premium fertilizer distributors of DAP the micro-nutrient designed for Pakistan’s first in Pakistan One of the highest categoryLargest Importer urban markets Company to market shares in of DAP in Pakistan produce Urea Sindh Only branded NPK Pakistan’s first One of the highest fertilizer in Company to market shares in Pakistan produce Urea lower Sindh 4 EFERT– National Outreach . 90-120 warehouses across Pakistan . Spreading over 300 cities and towns . Reaching out 1.5mn farmers 5 EFERT – Corporate Achievements Major Awards & Innovations Engro Urea Zingro Best Coordinator Silver for Green Brands of Brands of Achieve- Office by the Year the Year ment WWF Finland 2010 2010 2012 2014 • 3rd out of 63 Amongst the Safety & Fire Safety Companies Top 5 Sustainability in IFA safety Employers in Award Award Survey Pakistan 2013 2013 • 2014 2013 Achievements in Key Safety Initiatives • EFERT head office awarded fire safety award by National Forum for Environment and Health - 2013 • EFERT Safety Management System at the Daharki plant is the only fertilizer site worldwide to have achieved a Level 4 Rating from Dupont - 2013 • British Safety Council Third Party Audit conducted and 4 Star rating achieved. (Daharki) - 2014 Impact of CSR Initiatives (2014) • A total of over 20K+ patients treated. • Sahara Clinics, Daharki: 13K+ • Snake-bite Vaccination: 9.6K+ • Total Students under education of EFERT & EPQL program: 30K+ 6 EFERT – Risks & Mitigants Gas Availability . The Fertilizer sector competes with the power, industrial and domestic sectors for gas supply with order of preference being Domestic, power, general industries and cement sector. Allocation of gas is dependent on Government policy. Risks are mitigated by signing of long-term GSAs with the E&P companies. Currently the company has guaranteed gas supply for one plant from Mari gas fields, and has entered into an agreement with Genco II (endorsed by ECC) under which 60MMSCFD of Guddu gas will continue to flow to EFERT till December 2015 . Gas Price Increase . Local urea prices already at a discount to int’l urea prices which gives room for price increase . Rupee devaluation against US$ to further provide room to increase local urea prices . Concessionary gas made available to EnVen plant Foreign Exchange Impact . This could have an adverse impact on the Company considering that it has obtained US$ denominated loans.. However, this is mitigated by 1) the company having partially hedged its exposure against FX denominated borrowings through forward contracts & FX options ; 2) recent conversion of IFC loan further reducing USD Debt; and 3) rupee devaluation which will also increase the landed cost of imported urea; providing fertilizer manufacturers with more room for increasing prices. The foreign exchange loans have come down to USD 123 m from a peak of USD 315m in 2011 Interest Rate Risks . EFERT’s profitability can be impacted by 1) increase in domestic interest rates and 2) PkR depreciation vs. the US$. However, mitigating factors exist as Pakistan is in the midst of a monetary easing cycle . Urea Imports . While int’l urea prices are at a premium to local prices, the GoP has resorted to imports from time to time. Propensity to import can increase if gas is diverted away from the fertilizer sector and/or int’l urea prices further reduce. Floods/Natural Disaster . Agriculture growth has been volatile over the last 5yrs on instances of flooding. However, strong GoP support has led to resilient farmer incomes that has not affected demand for fertilizers. Also, usually flooding can yield positive effects the following year as farmers benefit from the replenished water tables and increased soil fertility. 7 EFERT – Financial Trends Positive Trend in Topline & Bottomline… …reflecting in return metrices! (PkRmn) 70,000 25.00% 32% 60,000 20.00% 22% 15.00% 50,000 12% 10.00% 40,000 2% 5.00% 30,000 -8% 0.00% 20,000 -5.00% -18% 10,000 -10.00% -28% - -15.00% CY10 CY11 CY12 CY13 CY14 CY10 CY11 CY12 CY13 CY14 Return on Assets (RoA) Return on Equity (RoE) Net Sales Net Margins Increasing profitability due to improved gas supply Swift Deleveraging… …leading to lower financial charges! (PkR mn) Times (PkR mn) (PkR mn) 75,000 12,000 75,000 6.0 60,000 10,000 60,000 5.0 8,000 4.0 45,000 45,000 3.0 6,000 30,000 30,000 2.0 4,000 15,000 15,000 1.0 2,000 - - - - CY10 CY11 CY12 CY13 CY14 CY11 CY12 CY13 CY14 Long Term Debt Debt to Equity CY10 Long Term Debt Finance Costs (RHS) Strong cash flow position vindicated by first ever DPS (PkR3.00) in in CY14 Existing long term debt matures in 2019 8 EFERT – Key Highlights No.