Business development and financial performance

1 EBITDA (Earnings before Interest / financial result, Taxes, Depreciation and Amortization)
2 EBIT (Earnings before Interest / financial result and Taxes) = Operating profit = EBITDA – Depreciation and amortization
3 EBT (Earnings before Taxes) = EBIT – Interest / financial result
4 Gross cash flow = Net result adjusted for non-cash income and expenses
5 ROCE (Return on Capital Employed) = EBIT / (Average equity + Average interest-bearing borrowings)
6 Net debt = Interest-bearing borrowings – Liquid funds – Other current securities
7 Equity ratio = Equity capital / Total assets
8 Return on equity = Net result for the year / Average equity
9 Change in percentage points
10 Prior-year figure amended. Consolidated financial statements for fiscal 2022 showed gross profit of € 503.2 million, which amount included other internally generated assets valued at € 12.8 million.

Rounding differences possible.

The exceptional successes of fiscal 2022 continued through to the start of 2023. However, trading conditions declined noticeably in the summer of the reporting year and business development lost significant momentum. In particular, the slowing recovery following the coronavirus pandemic, increasingly restrictive conditions as a result of Russia’s war of aggression against Ukraine, and further geopolitical uncertainties, fueled the high level of economic uncertainty. While economic development in the US improved significantly, Europe’s economy was characterized by high inflation rates, rising interest rates and persistently high import pressures from China. Industrial production and demand for chemicals were therefore extremely weak in fiscal 2023. In this challenging environment, the PCC Group’s business declined in almost all segments, particularly in the second half of the year. Only in the fourth quarter did we see a reversal in the form of a slight upward trend.

Subdued demand in many sectors led to declines in production in numerous industries. The construction industry was particularly affected as a result of higher interest rates. Private consumption of furniture and consumer electronics, for example, was restrained. The processing of order backlogs continued. However, China’s domestic value added also continued to decline, with the result that, at times, large volumes of chemical products and silicon metal were exported to Europe. This led to further price competition in Europe, as some of the volumes were imported at low prices.

Overall, demand for chemical products was characterized by full inventories from the previous year and thus by a demand logjam which only eased slowly.

Silicon metal production in Iceland, which had continued with two furnaces throughout the previous year, ran with only one furnace in fiscal 2023. A declining market price level, coupled with a general reluctance on the part of customers to buy due to high economic uncertainty, led to the decision to shut one of the furnaces down. Production has been running at full capacity again since the start of 2024. Subdued domestic demand in China led to increased quantities of silicon metal hitting the market from that source, some of which was imported at dumping prices. However, commodity prices for reducing agents also declined in fiscal 2023, so that the cost position of this manufacturing operation improved further.

Overall, the PCC Group ended fiscal 2023 with earnings before interest / financial result, taxes, depreciation and amortization (EBITDA) of € 112.3 million, down € 179.8 million or 61.6 % on the previous year’s historic figure of € 292.0 million. Group sales in 2023 amounted to € 993.6 million, representing a decrease of € 331.0 million or 25.0 % compared to the prior-year figure of € 1,324.7 million. To put these figures in context: While this earnings and sales performance is in line with the general development of the chemical industry in Europe, 2022 was the best year ever for the PCC Group.

At € 112.9 million, the Chlorine & Derivatives segment accounted for the largest share of this decline in revenues, followed by the Trading & Services segment with a decrease in sales of € 73.9 million. The Polyols & Derivatives segment recorded a decline in revenues of € 68.7 million and the Logistics segment a sales decrease of € 10.2 million. There were no significant effects on sales due to changes in the scope of consolidation in 2023.

Most PCC Group companies have a functional currency other than the euro. Consequently, currency exchange rate effects on the translation of sales and earnings figures have an impact on the consolidated income statement. Based on exchange rates unchanged from the previous year, sales of the PCC Group would have come in at € 979.0 million, that is to say € 14.6 million or 1.5 % lower than the actual figure. This is due to the exchange rate movements of the currencies of relevance to the PCC Group, primarily the Polish złoty and the US dollar.

The gross profit* of the PCC Group also declined significantly in 2023, falling by 37.3 % to € 307.3 million (previous year: € 490.4 million). Our gross margin fell to 30.9 % (previous year: 37.0 %). In addition to selling prices, the purchase prices of key raw materials also fell. However, procurement costs for energy and logistics were almost unchanged compared to the previous year. Prices of the previous year, some of which were at record levels, fell correspondingly sharply, continuing the volatility of previous years.

Personnel expenses decreased from € 143.6 million in the previous year to € 138.0 million. Adjusted for performance-related remuneration components from the previous record year, however, there was another increase in fiscal 2023. Wages and salaries continued to rise disproportionately due to high inflationary pressure. The number of employees in the Group fell by 3.7 % from 3,391 to 3,265 as of the reporting date. Most of this decline was attributable to a reduction in excess capacity in the Trade & Services segment. The highest relative share of the decline was recorded in the Silicon & Derivatives segment. Here, the number of employees was reduced by 7.2 % due to the shutdown of one of the company’s two furnaces. From a regional perspective, 84 of the job cuts were in Poland. In the Other Europe region, there were 40 redundancies, with an additional two occurring in Germany.

Other operating income increased by € 2.3 million from € 31.6 million in the previous year to € 34.0 million in the year under review. The increase is mainly due to compensation payments in connection with CO2 certificates amounting to € 16.1 million (previous year: € 5.5 million). Income from insurance claims decreased compared to the previous year by € 4.9 million to € 0.8 million. In the previous year, a high level of one-off income from insurance reimbursements was received in connection with the fire at a tanker cleaning facility.

Research and development work aimed at creating new products, processes and technologies, and at further improving existing customer solutions, is a permanent feature of the business activities of the PCC Group. Cross-company project teams are also formed for this purpose. In the past fiscal year, the PCC Group recognized expenditures of € 7.0 million for research and development (R&D), thus underlining its commitment in this area (previous year: € 14.3 million). In addition, expenses for internally developed intangible assets and property, plant and equipment in the amount of € 10.2 million were capitalized. In fiscal 2023, our investment in the modern research and development center at the Polish chemicals site in Brzeg Dolny progressed to such an extent that it was completed and put into operation in the first quarter of 2024.

The investment volume amounted to a total of € 142.5 million in 2023, up 22.5 % on the previous year’s figure of € 116.3 million. In the year under review, capital expenditures were distributed primarily between the Logistics, Trading & Services and Surfactants & Derivatives segments, with funds also allocated to development projects in the Holding & Projects segment. The PCC Group focused primarily on long-term infrastructure investments. In addition to expenditure on container terminals, this also includes investments in locomotives and platforms. The new research and development center at the Brzeg Dolny site also made significant progress, with replacement investments likewise ongoing. Another aspect was investment in capacity expansions at the chemical plants accompanied by expenditures on modernization measures. In addition, the holding company PCC SE implemented a number of capital measures serving its subsidiaries. Further finance was allocated to the development of state-of-the-art materials for battery applications. And funds were also made available for the development and expansion of the silane product portfolio. All investments are expected to contribute to future sales and earnings growth of the Group. At the same time, capital expenditures mean for the consolidated statement of income an increase in depreciation, amortization and interest expenses, which continue to be capitalized for investments not yet completed. These effects are reflected in the balance sheet as of December 31, 2023, in the increase in non-current assets and, on the liabilities side, in the increase in non-current financial liabilities. Amortization of intangible assets, depreciation of property, plant and equipment, and depreciation of right-of-use assets increased slightly year on year to € 78.9 million (previous year: € 74.7 million).

Interest and similar expenses resulted mainly from bond liabilities, liabilities to banks and lease liabilities. These expenses rose by 33.4 % from € 33.9 million to € 45.2 million in the year under review. This increase was mainly due to higher interest rates. Key interest rates in the European Union, Poland and the USA were raised further in the fiscal year under review, reaching their short-lived peak in early fall 2023. Both the parent company PCC SE and other Group companies had to carry out follow-up financing and refinancing in this changing market interest rate environment. Some non-current financial liabilities are also subject to floating interest rates. The current level of key interest rates is thus having an immediate impact on the associated expenses. The PCC Group neutralizes such interest rate rises through appropriate hedging transactions. The weighted interest rate of all interest-bearing liabilities increased from 4.3 % in the previous year to 4.7 % in fiscal 2023. Financial liabilities increased year on year by a total of € 40.8 million or 4.7 % as of the respective reporting dates. Interest attributable to the creation of a qualifying asset is capitalized during the construction period.

Income and expenses from exchange rate differences are reported in the financial result under foreign currency translation result. In fiscal 2023, this exerted an effect on earnings in the amount of € –13.3 million (previous year: € +2.1 million). The effective tax rate of the PCC Group in the year under review was –20.4 % (previous year: 25.3 %).

Compared to the previous year, earnings before taxes (EBT) decreased by € 213.4 million to € – 20.8 million. In the previous year, the PCC Group reported positive EBT of € 192.6 million. The consolidated comprehensive income of the PCC Group decreased by € 143.0 million from € 141.3 million in the previous year to € – 1.7 million in the year under review, largely as a result of the aforementioned effects.

* Prior-year figure amended. Unlike in previous periods, the item “Other internal costs capitalized” is now reported below gross profit. The gross profit of € 503.2 million reported in the consolidated financial statements for fiscal 2022 included other internal costs capitalized amounting to € 12.8 million.

Year on year, total assets decreased by € 2.1 million or 0.1 % to € 1,590.1 million as at December 31, 2023. This virtually flat development is attributable to an increase in non-current assets as part of our capital expenditures being countervailed by a decrease in current assets resulting from the decline in receivables and inventories. Intangible assets increased by € 1.8 million to € 52.3 million. The net carrying amount of property, plant and equipment increased by € 68.1 million or 7.3 % to € 996.3 million. Right-of-use assets increased by € 22.8 million or 39.1 % to € 81.0 million. Investments accounted for using the equity method decreased only slightly by € –1.2 million to € 14.1 million, essentially reflecting the valuation of the Malaysian joint venture PCG PCC Oxyalkylates Sdn. Bhd. The balance sheet item also includes the pro rata allocation of the results of the Thai joint venture IRPC Polyol Company Ltd. and the Russian joint venture OOO DME Aerosol. If accumulated losses exceed the equity value, this is carried at an updated equity value of zero. As of the reporting date of the past fiscal year, this was still the case for OOO DME Aerosol.

Current assets amounted to € 385.9 million as of the reporting date, down € 106.3 million on the previous year (€ 492.2 million). Inventories decreased by € 41.7 million from € 149.4 million to € 107.7 million. Trade accounts receivable decreased by € 38.0 million to € 103.3 million. Both items reflect the declining average price level for commodities on both the purchasing and sales sides. In addition, the build-up in inventories of strategically critical raw materials in fiscal 2022 was reduced again due to an easing of potential supply chain problems or production bottlenecks at suppliers. Other receivables and other assets increased from € 31.1 million to € 31.8 million. Cash and cash equivalents decreased by € 35.2 million or 21.5 % to € 128.6 million due to the decline in cash flow from operating activities and to loss financing. Cash and cash equivalents disclosed in the balance sheet include an amount as of December 31, 2023, of € 4.1 million (previous year: € 3.8 million) in funds not freely available. These are almost entirely attributable to financing already earmarked for investment projects.

The equity of the PCC Group decreased by € 29.8 million from € 419.2 million in the previous year to € 389.4 million in the year under review. This development is mainly attributable to the negative consolidated net income result and a decline in minority interests. Hybrid capital is an equity instrument of the subsidiary PCC BakkiSilicon hf. In accordance with IAS 32, this is classified as equity, as there is neither a contractual obligation to repay the nominal amount nor to pay interest. Rather, repayment is subject to conditions that depend on the decision of the management of the company to make distributions to its shareholders. As soon as resolutions on distributions to them are passed, the hybrid capital will also be serviced on a pro rata basis. The € 0.6 million reduction in the hybrid capital total compared to the previous year is the result of offsetting pro rata transaction costs.

Revenue reserves / other reserves fell by € 28.7 million to € 248.1 million, again mainly due to the negative consolidated net income result. Minority interests fell by € 23.9 million to € 73.5 million. This decrease is mainly due to the share of losses of the co-shareholder in PCC BakkiSilicon hf. Other equity items increased by € 23.3 million to € –15.9 million, primarily as a result of currency translation differences recognized directly in equity. By contrast, the remeasurement of defined benefit pension obligations as at the reporting date did not result in any significant absolute change compared to the previous year. Measurement of the non-consolidated PCC Organic Oils, Ghana, at fair value resulted in a change in value of € 1.0 million, which is likewise reported under other equity items. The equity ratio fell from 26.3 % in the previous year to 24.5 % in the reporting year due to the aforementioned effects.

Long-term investments are financed with long-term borrowings. Non-current provisions and liabilities increased by 2.7 % to € 801.5 million as of December 31, 2023 (previous year: € 780.3 million). This was mainly due to the increase in non-current financial liabilities, which grew by € 5.1 million or 0.7 % year on year. Deferred tax liabilities rose to € 16.6 million (previous year: € 11.1 million). Other liabilities increased by € 9.1 million or 16.6 % from € 55.1 million in the previous year to € 64.2 million in the year under review.

Turning to bond liabilities, the holding company PCC SE redeemed in full and on schedule four bonds with a total volume of € 83.7 million in the course of 2023 (previous year: € 90.2 million). The issue volume placed by the end of the year amounted to € 85.6 million (previous year: € 75.2 million) and resulted from three new issuances. In the year under review, these funds were used both for the partial refinancing of maturing liabilities and for the financing of investments and subsidiaries. Aside from PCC SE, of which the bonds are denominated in euros, other Group companies also issue bonds. Those issued by PCC Rokita SA and PCC Exol SA in Poland, denominated in złoty, had a value of € 44.6 million as of year-end 2023 (previous year: € 47.8 million). The unutilized secured credit lines within the PCC Groupamounted to € 61.6 million as of the reporting date (previous year: € 40.7 million).

Current provisions and liabilities increased by € 6.5 million or 1.7 % to € 399.3 million. Tax liabilities decreased by € 26.4 million to € 5.5 million. Trade accounts payable fell by € 11.7 million or 11.8 % to € 87.2 million. Financial liabilities due within the next twelve months increased by € 35.7 million to € 190.0 million. Other liabilities increased by € 16.5 million to € 72.3 million.

Provisions for pensions and similar obligations and other provisions decreased by € 6.1 million from € 58.3 million in the previous year to € 52.1 million in the year under review.

The net debt of the PCC Group increased in the year under review by € 76.1 million or 10.9 % from € 699.4 million in the previous year to € 775.5 million. This was due not only to borrowings for capital expenditures but also to the decline in cash and cash equivalents. Due to the year-on-year decrease in earnings before interest / financial result, taxes, depreciation and amortization (EBITDA), the ratio of net debt to EBITDA deteriorated from 2.4 to 6.9 as of the reporting date. Our goal of steering this key metric to below 5.0 was therefore not achieved.

Overall, the company management considers the development of the net assets, financial position and results of operations in fiscal 2023 to be unsatisfactory after the record year 2022, with some figures actually coming in below expectations. The business performance of the PCC Group in some segments was in line with the market downturn in Europe. Only the Logistics segment declined less than the overall market for intermodal transportation in Europe. The decrease in earnings before interest / financial result, taxes, depreciation and amortization (EBITDA) exceeded the level of around 25 % forecasted. The fall in prices for chemical commodities and the reduction in manufacturing capacity in silicon metal production also led to unplanned declines in revenue, causing sales to come in below guidance. The developments described in the section “Business performance by segment” and the associated difficult market situation, particularly in our main market of Europe, meant that none of the operating segments were able to meet expectations for the past fiscal year. Adjusted for the significant losses in the Silicon & Derivatives segment, a pre-tax result in the mid-double-digit million euro range would nevertheless have been achievable. Ultimately, however, we posted a loss in the low double-digit million euro range.