The future economic performance of the PCC Group is highly dependent on the development of the economy going forward, not only in our main sales markets in Europe but also worldwide. The further development of energy prices and inflation as a whole will likewise be a major factor. For further details, please refer to the section “Outlook for 2024 and beyond”.
The ongoing war in Ukraine also poses a not insignificant political risk to our Group beyond our control. A further escalation of the war could lead to renewed transportation and supply chain problems. The continued existence of our remaining investments in Russia could likewise be jeopardized. At the time of preparing this management report, however, this is not anticipated. Moreover, the proportion of Russian assets in relation to the total assets of the PCC Group is also only in the low single-digit percentage range. In addition to a further escalation of the Russia-Ukraine war, the Middle East conflict, which again erupted in October 2023 and is now causing transport and supply chain problems in the Suez Canal and the Red Sea, could likewise have a negative impact on the global economy. The same applies to a possible escalation of the conflict between China and Taiwan. Similar restrictions on global economic activity could also arise in the context of any new pandemics. Due to the many current imponderables, however, the financial impact of the above on the PCC Group as a whole cannot be accurately assessed at present.
Another challenge is posed by the “European Green Deal” and the “Fit for 55” package of measures adopted by the EU Commission in July 2021, implementation of which is intended to secure achievement of the European climate targets by 2055. For the European chemical industry, and thus also for large parts of the PCC Group, this means a far-reaching transformation of their production processes, changes that will entail considerable additional cost which as yet cannot be estimated with any degree of accuracy. This could also have a negative impact on the future dividend earnings of the Group holding company. At the same time, this transformation and the associated introduction of innovative processes, on the development of which the PCC Group is also working at several levels, will likely open up further growth opportunities going forward.
The business units within the chemical-producing segments are also exposed to the risk of rising environmental protection costs in the wake of increasingly stringent pan-European regulations relating to waste, wastewater, effluent and other environmental regulations. Investment requirements possibly resulting from these could, in the future, have a negative effect on the earnings position of these segments and thus also on the dividend income streams flowing from the portfolio companies concerned to the Group holding company. The same applies to possible additional expenses arising in connection with the EU’s REACH Regulation (covering the registration, evaluation and authorization of chemicals). REACH-like regulations are also currently being planned or are already being introduced by other countries. This applies to Türkiye, the USA and some Asian countries, among others. It remains to be seen what consequences this will have for the future development of the PCC Group.
Particularly for the affiliates operating in the chemical-producing segments and the Silicon & Derivatives segment, there are also risks in the sourcing of strategically important raw materials. The number of suppliers for these feedstocks, already limited in the past, was further reduced in 2022 in a few cases by the loss of Russian supply sources due to sanctions. Gratifyingly, the PCC Group was able to conclude a long-term offtake agreement with its most important supplier for the key raw material ethylene oxide back in 2021, although this will entail substantial capital expenditures on the PCC side over the coming years. In the long term, these investments will contribute to the further growth of our chemical-producing segments.
Other indirect factors that could affect the performance of our affiliates and thus their dividend payments to the Group holding company PCC SE include price change and credit or default risks. These risks should be effectively mitigated as far as possible through the conclusion of commercial credit insurance policies by our Group companies. Price change risks are minimized through the conclusion of back-to-back transactions, through price formulas and/or through the use of price hedging instruments.
In addition, both PCC SE and the operationally active affiliates are exposed to the risk of changes in interest rates and foreign exchange parities. However, these again can be at least partially eliminated by hedging transactions. The foreign exchange rate and foreign currency risk encountered in the PCC Group should be significantly reduced once the euro has been introduced by Poland as its official currency. This is, however, unlikely to happen in the near future.
Further risks may arise from changes in the legal or regulatory framework. For example, applicable tax law, including its administrative application, is subject to constant change. Future changes in the legal framework and differing interpretations of the law by the tax authorities or courts cannot be ruled out. This could result in higher tax charges for the companies of the PCC Group in Germany and abroad.
Negative effects may also result from subsequent changes in the assessment of state subsidies and similar aid measures and from any associated repayment claims. For example, the European Commission is currently examining whether the financial aid granted directly by the Polish government to PCC MCAA Sp. z o.o. in the years 2012 and 2013, equating to around € 16 million, is compatible with the EU regulations on state regional aid. The proceedings are directed against the Polish government and are being conducted in an open-ended manner. A negative decision by the EU Commission could, however, lead to said financial aid being clawed back. The occurrence of similar scenarios in the future can also not be
ruled out.
Some Group companies also find themselves confronted with growing asset obsolescence. This applies particularly to the production facilities of PCC Synteza S.A. With further intensive use of these assets, the expenses for maintenance and servicing increase, as does the risk of accidents and production
downtimes.
In our financial planning, we anticipate continuing, regular cash inflows arising in the future from the issuance of corporate bonds by the holding company. Obstacles that may arise within the SME bonds market segment could possibly – at least temporarily – lead to liquidity bottlenecks. Consequently, work is continuing to replace the liquidity loans granted to subsidiaries by loans from local banks. Moreover, any new large-scale projects will only be implemented where appropriate project financing can be obtained for them. In addition to corporate bonds, the development of alternative sources of financing at the institutional level is likewise to be considered over the longer term. The latter requires a stable level of indebtedness. At Group level, the aim is to achieve and maintain a leverage ratio of less than 5.0, with ever lower values desirable.
In addition to the financing risk, there are various other risks associated with projects during the planning and construction phase, such as technical risks, risks relating to property rights, and risks relating to licensing law. Furthermore, it cannot be ruled out that external market conditions may change during the implementation phase and that market developments may not pan out as originally expected. Despite the most careful of appraisals, an investment project may therefore be significantly delayed or generate a substantially lower return than projected. A complete failure of a project and thus a total loss of the capital invested by the Group holding company or one of its subsidiaries can likewise not be ruled out. Depending on the size of the project, this could have a significant negative impact on the liquidity situation of the respective company. Hence, the Group holding company will continue to seek project financing in the future based as far as possible on the viability of the respective project.
Last but not least, the PCC Group is also exposed to personnel risks. The possible departure of key personnel, including from management or from the field of research and development, and the associated possible loss of long-standing contacts, industry experience or know-how, for example, could have at least temporary negative effects on the continuation of business activities. Moreover, the considerable influence of the sole shareholder of PCC SE could, under certain circumstances, entail a higher risk of erroneous business decisions being taken than might be the case with a more widely diversified ownership structure. This risk was reduced by the change from a monistic to a dualistic board structure at the Group holding company in 2021, serving to strengthen the position of the holding company’s operational management. Notwithstanding this reorganization, the sole shareholder, who is also Chairman of the Supervisory Board of PCC SE, remains in close and accessible proximity, thus maintaining the ability to react quickly and flexibly to new investment opportunities and to align activities in a timely fashion to the continued sustainable growth of the PCC Group.
The increasing focus of our portfolio companies on highergrade products and the planned diversification with respect to sales markets will, in the view of management, be the primary source of opportunity for the future growth of the PCC Group. In addition, there will be further investments in modernization and expansion, geared to both backward and forward integration. In this way, we aim both to further enhance our market positions in the individual segments and to increase the sustainability – and secure the future viability – of our business operations by investing in highly efficient and environmentally compatible production facilities. In the long term, the holding company PCC SE should benefit from the increased earnings expected from these investments in the form of improving dividends. Additional earnings potential could result from the sale of peripheral activities or marketable projects, portfolio entities and investments.