ADAMA Ltd. (000553) Earnings Call Transcript & Summary

Dear investors, good afternoon. I am Guo Zhi, the Board Secretary of ADAMA Ltd. Welcome to our 2023 H1 online Roadshow. [Operator Instructions] And on the screen, you can see that well we have here are Mr. Steve Hawkins, ADAMA President and CEO; Ms. Efrat Nagar, CFO of ADAMA; Mr. Elad Shabtai, Global Operations, EVP; and Ms. Rivka Neufeld, Global Head of Investor Relations. They are joining us from Israel today. And now we are ready to share with you the H1 performances of ADAMA, and we are also ready to answer your questions. You can raise your questions in our chat box and in our Q&A session, we'll be able to answer your questions. For our roadshow today, we have a presentation. And as usual we will, first of all, show the legal notice. Please have a review. Let's welcome Mr. Steve Hawkins, ADAMA President and CEO to give everyone a illustration of our performance. Steve the floor is yours.

Good afternoon, everyone. It's my pleasure to present to you our second quarter and first half results of ADAMA. As we see on Slide #3, we have sales of minus 17%, minus 15% in constant exchange rate. Our gross profit down 37% as we compare to the very strong year of 2022. And at the EBIT level, we are down 53% as compared, again, to a very strong year in 2022, and we'll come on to more detail as we go through the rest of the slides. Next slide, please. If we look at the first half overall, we are down 14% at the sales level. We are down 28% of the gross profit level. And at the EBITDA level, we are down 39%, again, all compared to a very strong performance in 2022 and against a very strong global market that we experienced last year. If we go to the next slide, which is Slide #6, we can see the regional performance, and I think it's important to point out here that this trend of performance is consistent across different markets around the world in different geographies. So whether it's Europe or North America, we saw in the Northern Hemisphere markets an early indication of the challenges of the demands from customers, in particular distributors versus the previous year. And now we are into the Southern Hemisphere markets, Latin America, obviously, and parts of Asia Pacific, where we are seeing the similar trend of down 20%, for example, 25% in Asia Pacific. So, this trend that we saw in the Northern Hemisphere, we are now seeing in the Southern Hemisphere in the second quarter as we have finished off in the first half. Next slide, please. Now if we look at our -- not only our regional mix, as I've already mentioned, and some of the challenges that we've seen from distribution demand, in particular, based on high stocks and inventory from the very high sales of ourselves and the industry in 2022. If we look at the same time on the mix of our products and our innovation pipeline, we can see that part of our strategy working very well. And we have a number of examples here in Brazil, in particular, in the biologicals area but also across all product lines, herbicides and insecticides based on our formulation technologies. We also have an Australian example here of Expert Grow and Novali. These are really exciting new products and demonstrating our ability to be differentiated in the market, in the crop protection market. And then also one of our other portfolio of product lines, the consumer and professional business, we have a really exciting example that I had a chance to engage with customers at the end of last year Suprado, which is AI Novaluron, which is a really exciting technology for us in the ant and cockroach [indiscernible] area. So this is a consumer market. So this reflects our ability to deliver technology in different market segments and differentiate ourselves, which delivers to us overall higher-margin products as we think about the business in the future. Next slide, please. And with this next slide, I'm going to hand over to our CFO, Efrat. Please Efrat.

Thank you, Steve. So in H1 2023, ADAMA reached $2.5 billion sales, which are 14% lower than what we achieved during the call period last year, which will, if you recall, we achieved record sales in H1 2022. The reduction in sales is due to the lower quantities 9%. This is because of the wait and see approach in the market. Follow, but now by just-in-time approach that the market is taking because of the high interest rate in the direction of the challenge to manage working capital. Prices are down by 2%. This is both because of the lower demand from the market and also because the expectation for lower prices from -- of AI raw materials from China. In spite of this, we see 3 geographies in ADAMA in maintaining the prices in Europe, we see some price maintenance. However, in Q3, we see some softening in Canada. They started to hold prices versus last year and also in our C and P, consumer and professional markets. Exchange rate. The strong dollar during H1 2023 as a result from the attractive interest rate on the dollar together with a strong economy -- the U.S. economy impacted ADAMA negatively in this quarter as we are selling in local currencies and when translating it into dollar we're basically [indiscernible] into lower dollar. Next slide, please, Slide #12. Looking on the gross profit, we achieved $670 million versus $852 million last year. So beyond the losses of gross profit because we sold less quantities and the negative impact of prices, we see also $56 million decrease in gross market and profit because of our cost. This is because ADAMA in this quarter depleted relatively high cost inventory mostly for fuel during 2022. Looking on the EBITDA, we reached $277 million versus $441 million record EBITDA in 2022. You can see that the decrease in EBITDA is lower than the decrease in gross profit because the company took measures regarding OpEx management to manage the situation and to reduce the OpEx in a way that we will reduce the negative impact of the market. Next slide, please. Looking at our working capital. So inventory reduced by $13 million versus last year. But 2023 versus 2022 is not apples to apples. 2022 was an abnormal yield from demand point of view, very high demand, while 2023 is very low demand. So if we would like to understand what was happening with the inventory, we should look on the right [ table ]. We have started the year with inventory of $2.5 billion, and we succeeded with a measure that we decided to take in order to face a situation in the market to reduce the inventory already in Q2 by $200 million. This is a combination of lower procurement and depletion of expensive inventory. Looking into account receivables lowered by $186 million. This is to demonstrate intensive collection and also as results from our lower sales. The suppliers of products also lower, and this is mainly because we significantly reduced procurement during this quarter. So the next slide, please, Slide #14. All this reflected by positive operating cash flow of $288 million in Q2, it is again because we took measures around procurement, a selective procurement only for high-margin product, but which also support our mix and our OpEx management, as you saw in the EBITDA bridge. If we are looking on our free cash flow also there, we can see free cash flow of $ 405 million, and this is on top of procurement management and OpEx management, we also took some measures on CapEx prioritization in order to make sure that we are generating cash in this quarter. Thank you, Steve. Back to you.

Thank you, Efrat. Well, now that you've seen the numbers, it is helpful to understand somehow what's behind and what are the trends in the market. So if we look at what's happening in the industry and some of the factors impacting the numbers, you see the comments here. So if I start on the top left-hand side, we see a customer dynamic of wait and see. And this is based on an oversupply in a way to the industry in '22 and also somehow in 2021, and also with declining active ingredient prices, in particular from China, but also globally, customers are waiting to order product as they restock their shelves. If I go across to the right-hand side, you'll also see therefore a slower order pace than what we've seen historically based on this customer wait and see approach. And then on the far right-hand side, this is somehow impacting pricing because for sure when demand is declining, there's more price competition and more of a buyer's market than a seller's market. And the seller's market is very much what we've seen in the last couple of years post pandemic supply chain issues. If we go on the bottom left-hand side, we do see prices for raw ingredients and the components of our products somehow stabilizing, although they have been declining sharply for all of this calendar year. And the next comment on the right-hand side is reflecting, as I've said, lowering demand based on high channel stock and when we say channel stock, we're speaking about the stock on hand that the distributors or retailers have around the world and countries. But also if we think at the manufacturing level and the raw ingredient level, there's also high stock levels based on this overproduction dynamic after the pandemic of a couple of years ago. And then on the right-hand side, as far as macroeconomics, we are seeing higher interest rates around the world, which is also somehow slowing down customers ordering products that they are obviously paying us for. So they are wanting to have less stock on hand based on higher interest rates and operating costs, and they are, therefore, looking for more just-in-time sales. They want their sales -- sorry, purchases from us to be more just-in-time. Those are some of the major industry trends. If we go to the next slide, Slide #16, you'll see our action plan in this very challenging market that we see. The first one is that we are focused, as Efrat said, and we showed very good results of $288 million in Q2. We are very much focused operationally on improving our cash flow. We are focused on delivering higher margin products. So as we look at our portfolio, we are focused on the segments of our business and the liquidation of our inventory that is higher margin. And then if we move to somehow the next phase of the market as the market cycle changes on the midterm objectives, we continue to focus on new product introductions. At the moment, you saw our Q2 results of 22% of our portfolio, and we continue to improve the ratio of our new product introductions. And of course, as we replenish our inventory, we will continue to lower our cost of goods based on the current market values. And then finally, really our competitive advantage, we believe, globally in many key markets around the world, in the Americas, in Europe and Southeast Asia, for example, in Australia is our local go-to-market differentiation. This is as I've had the opportunity to move around the world in my role, this is the feedback we get as customers see us and it's really a differentiated product, bringing products to them that are very much of value to their businesses. If we go to the next slide, #17. This is -- on the last point I made really at the heart of how we are competing in the market. We have a very strong commercial engine, as I said, that I get excellent customer feedback and information as I interact in different markets around the world. The second point from the left-hand side, we continue to focus on our portfolio strategy, which we call the core leap strategy. This is targeting the most value-adding active ingredients that are coming off patent around the world and focusing on our manufacturing excellence to deliver those products. The next point on the right-hand side is how we deliver the differentiation from a technical perspective, which is what we call formulation mastery, which is a key pillar of our strategy, where customers see our products, even though the active ingredient is all patent, we have very differentiated formulations and mixtures that bring benefits to crop production to farmers around the world. And then finally, on the right-hand side, in terms of profitability is operational excellence, in particular, in our manufacturing areas where we bring world-class safety standards and operational effectiveness and efficiency so that we can be competitive around the world. Those are our value propositions as a company. And finally, I invite you on the next slide, 18. If you haven't had a chance to look on our website on our ESG highlights and report from last year, we are very proud of this. We believe we are best-in-class in our industry. If I point you to the second pillar here around environmental sustainability, something we're very proud of as a zero carbon footprint intensity change from last year to this past year in our '22 results. This is, we believe, really industry leading and we're very much thinking about the environment, safety and supporting farmers and the planet as we implement our strategy and deliver our products and portfolio around the world. And with that, I believe we are complete with the formal part of the presentation. And I'm now going to hand over then to Elad, to get a bit deeper on our operations. Please, Elad.

Thank you, Steve. Maybe to share a bit more on the way we operate. On the next slide, just to talk the way to support ADAMA in achieving its strategic and business goals, the best way for us is to operate as 1 team, 1 global operation. So by that, we can leverage on our global network. We can, of course, creating center of excellence all over the organization and leveraging expertise from 1 unit to the other, developed a common way of working within GO, within the operation and of course, aligning on global standards all over our sites. So this is the way we operate today from a content point of view. So on the next slide, actually, we have 2 focus areas within our business within GO. One has to do with the active ingredients, and we call it AIMS. And the other 1 has to do with the formulation, the product level. We call it FMS. So according to that, we established 2 operating arm within GO, one which is focused on manufacturing and sourcing of active ingredient. This is a production-driven organization. They're trying to do the best on cost competitiveness, on supply, sustainability and production of active ingredients and the other organization focused on the formulation, manufacturing and supply. And of course, this is a market-driven organization, work very closely with the market, trying to ensure supply reliability, flexibility and cost optimization. So if you combine a global team, 1 team that focus on 2 active -- 2 core activity in GO. For the next slide, you can see our network. Talking about formulation, we have 22 sites globally. This is how we are trying to better serve our customer to support business needs by being close to the market, close to our end user. And actually, we at present in almost all relevant geography. This is our in-house production and formulation site. And this is supported by a network of dozens of tollers that's supporting locally our activity. So this is on the formulation of the product level close to the market. The second slide shows you the -- our network in active ingredients. So of course, it's more focused, more concentrated in only few areas. As for active ingredients, you want to be close to the technology, close to the raw material sources. So we have 2 big hubs in China and Israel. In Brazil and Europe, additional smaller hub to support our active ingredients. Of course, on top of it, not everything is being done by our sites -- in our sites. So we have corn manufacturing activity, mainly focusing in China and India to support our synthesis and AI activity. So this is the overall network of ADAMA. If you go to the next slide, you can see in the 3 main synthetic hub of ADAMA, China, Israel and Brazil, we are producing a number of dozen of active ingredients. The biggest one or the leading one, of course, in China, we have the Acephate, we have Ethephon. We have Captan, Folpet. In Israel, we have some other big and important active ingredients like Epoxyconazole, Prothioconazole, Picoxystrobin and other. So these are the biggest ones. And of course, we have a long list of active ingredients that are produced by us or in collaboration with the [indiscernible] manufacturing and network that we are sharing more strategic relationship. Focusing more on the China side, the China activity. So you can see in this slide, in China, ADAMA has 3 sites that were acquired by ADAMA in the last almost 5 to 6 years. So on the left side, you can see Hubei Province, the Sanonda, the first one to be acquired in 2017 and today, it's operating -- fully operating after being relocated into the new site, the Anpon site, which is a base in Jiangsu Province was the second one to be acquired by ADAMA. And today, again, it's in the process of relocation into its new sites. And the last one, just 2 years ago, Huifeng also in Jiangsu province was joined our overall network in China recently, and now it's in a process to get back its permit and to be fully back to full production. You can see the overall amount -- number of people, employees that we have in China, which is about 3,400 people. And of course, the revenue that is coming today last year from China. So this is on the China part, which, as I said before, we do see China operation as part of the ADAMA global operation and integrity part and an important part of the overall network that we have for ADAMA, both for synthesis and formulation. The next slide shows you just in one number what we did, what are the level of commitment that we have for all our sites. It will be overall investment of close to $1 billion in the last 5 or 6 years, mainly to upgrade this time that HSE standard, the quality standard, technology standard in all our sites, but also to support relocation processes and new activity, new processes, increasing capacity and improving the cost and focusing on operational excellence of our activity. So massive investment just to demonstrate our commitment. And last slide -- on last 2 slides is what we are focusing today more and more. So one is, of course, not just HSE, which I know the high priority in our operation, but also the environment. So full commitment to reduce carbon footprint in all our sites, in all our operations, to reduce according to the annual requirement of 5% per year for all our sites. Major work has been done in Israel hub to reduce significantly more than 40% in the last 10 years of our carbon emissions. But we're also investing a lot and putting a lot of effort on waste treatment system. So we have the state-of-the-art wastewater system to support our activity and reuse of hazardous waste to burn it to make sure that we are getting the energy back in order to support other processes. So this is a clear focus of the operation and the company. And the last slide shows where we are focusing to implement the GO strategy, actually 5 core activity -- core area. One is, as I said before, network optimization to leveraging on our relatively broad network and to get the most -- the best out of it. Manufacturing excellence and cost competitive to focus area to further improve cost position, but also to increase the standard of operation within all our sites. Segmented service level, it's more to do with the way we approach the market, getting close to the market and serve our customer. And the last, but not least, HSE, as I said, clear focus for the company on HSE all over, a special focus in China with a different methodology that we're implementing both methodology in the rest of our sites. And that's it, and back to you Steve.

Thank you, Elad. Now I believe we're moving to questions.

Okay. So you have just learned about ADAMA's H1 performances, and we already received some questions from our investors. So question number one, what is the inventory level in the Northern and the Southern Hemispheres for ADAMA, especially about the inventory at the factory level and also at the distributor level. When is the destocking expected to be finished. South America will also enter into the high season for [ clouding ]. So what is their current stock situation in progress.

Great. Well, thank you for your interest, and thank you for the number of questions. We have many questions coming through on the chat. So thank you for those. Question number 1 is what is the inventory level in the various geographies? And how do we see those in some of the markets that are unfolding as the year goes on. So I think as we've seen for sure, the stock level or inventory level at distribution around the world is higher than it has been historically. And based on the grower of the farmer level consumption of that inventory in the Northern Hemisphere markets, in particular, Europe and North America, we see a normal consumption pattern from this past season. At the same time, if we think about the inventory level going into next season, we see it slightly higher than what it's been historically. So it's for sure much lower than it was at the beginning of the season, where they somehow higher than it's been historically. And as far as the Southern Hemisphere markets, which for agriculture now, the big market remaining is Brazil, the soybean planting has not started yet, it starts in a few weeks. So we are seeing demand for sure from farmers in the China and Brazil. This is really a busy part of the market and the season there. We are going into that market or that season with higher level inventories than historical, similar situation to the Northern Hemisphere. But at this time, it's unclear because we haven't entered the season on what the ending inventory would be in a market like Brazil. So we have to wait and see what happens in the market in Brazil on where we end with inventory. Okay. Second question then Guo. I can answer the second question.

The second question has something to do with ADAMA's registration. What is the ratio of regular or ordinary registrations versus differentiated registrations and how should those products be evaluated separately?

Along ADAMA's registrations, what's the ratio of ordinary registrations versus differentiated products and how do we evaluate them separately. Okay. So we do have metrics or key performance indicators on our portfolio overall. And I mentioned to you that in the first half, we had 22% of what we call the differentiated portfolio. And as I mentioned, we still have many key markets to deliver the rest of the year, in particular, Brazil. So let's see how the rest of the season unfolds. What we do know is Brazil does have a number of key product launches, which we mentioned in the materials, which we're very excited about, and that's for sure helping us grow market share in Brazil. But overall, we have 22% delivered in the first half, and we would expect to see that trend continue in the second half.

As for question number three. This is about the price of formulation. What is the current formulation pricing level in the Northern and also in the Southern Hemisphere? And what is the future pricing trend of [indiscernible].

So question number 3 is, how would you describe the current level of formulation pricing in the Northern and Southern Hemisphere. And what kind of pricing trends would we expect in the future. Well, I think when it comes to pricing, what we've seen -- as you saw in our results, is the active ingredient prices have declined sharply this year and began the end of last year. And that somehow translates into the market pricing, and you've seen very minor price declines from ourselves. So at this time, the good news is the market demand at the farmer level continues to be strong. So regardless of our product costs, the demand side and what farmers are willing to pay continues to be higher than historical levels. So pricing, the trends we see in the first half it's difficult to assume what will happen in the second half, we have to see in particular how the Brazilian market develops.

Question #4, could you share more information on the 3 production sites in China and also various sales as well as profitability status.

Maybe I can take this one, Steve. Okay? So just to -- I talked before about the 3 side in China to acquire in the last 6 to 7 years, starting from Sanonda. Sanonda was the first 1 since the acquisition. We first relocated the site and brought it up to standard, ADAMA Standard and HSE standard and environment standard. This was a long process. It took us a few years. During this process, we also, of course, improve the chemistry, improve the process, improve the technology. So here today with Sanonda, we have a site fully operational state-of-the-art site, meets all relevant standards and fully operational in terms of capacity and production. This was the first one. Second was Anpon. Anpon was acquired, as I said, in 2019 and went to a similar process. So still under this relocation process, we are about to complete this process by end of this year. And by completing the process, we'll be ready again to start operating the site, full capacity and with state-of-the-art technology and processes that we have today in the site. The third one is Huifeng. So Huifeng was just recently acquired by ADAMA. It's a big site, many processes [indiscernible] shutdown for almost 2 to 3 years. So the first year was about getting back the permits. It took us some time to get -- to gain back the trust and to get back the permit to be able to operate in core processes in the site, now we did it successfully. So we are ready to operate the site fully with all the processes. And the focus now in this year onwards would be more to improve processes, to bring them up to standard, both on the cost and technology and HSE level, and this is a process that will take us in the coming 2 to 3 years to complete -- to be completed and by that, to align all 3 sites to be at the same standard.

Question number 5, the fluctuation of the RMB exchange rate this year is volatile. So what is the impact of the company's foreign exchange gains and losses? And what are your expectations, especially for quarter 3 this year?

Question #5, Efrat please.

Yes, I will take it. So although the company ADAMA is reporting the consolidated financial statement in RMB, the company basically is nominated -- a dollar nominated company, which means that every transaction that are done in the company to sales, [indiscernible] cost of goods or operational expenses are translated from local currencies to the dollar. Specifically regarding the RMB, we saw in the last few months that the RMB exchange is depreciated versus [indiscernible]. In ADAMA, the RMB in ADAMA is basically we see more cost, more expenses with RMB because we are operating in 3 factories in China, as described by Elad, so basically, we are enjoying from the soft RMB as every transaction in RMB in the local currency is translated into lower dollar. Thank you.

Question #6. This is about Russia-Ukraine conflict. What is the impact of this conflict to ADAMA and Russia just recently withdrew from the Black Sea agreement? And what is the implication on global food supply and demand for [indiscernible] products?

Thank you, Efrat. So question #6 is, for sure, a dynamic situation based on the conflict in Russia-Ukraine. It continues to change -- we historically have had a very strong business in Ukraine. We have a smaller business in Russia. As far as commodity prices globally and locally, they are obviously impacted by how the conflict is evolving. And recently, with some of the changes on the Black Sea agreement, we do see lower prices locally for Ukraine grain in particular. So that's impacting farmer profitability in the countries surrounding Ukraine. And it's actually the opposite effect in Russia. So farmer profitability continues to evolve based on different outcomes or situations based on the conflict. And then the grower's ability and/or desire to purchase products is based on their profitability. So it's quite a dynamic situation. Let's see how things unfold. But overall, we see a relatively minor impact to our business results at this point in time.

Question #7. What is ADAMA's expected CapEx for this year and also the next year? And what are your investment focuses and market reasons?

Okay. Maybe I can relate to it. So in the last few years, also this year, ADAMA is investing actually in 3 main areas. One of them is completing the relocation processes for some of our sites globally. The second has more to do with infrastructure, focusing on HSE and environment as well. So this is a major investment that we are still making in all our sites in order to elevate -- increase the level of the HSE to be up to standard. And the last part is about increasing capacity, improving processes and adding new processes and new product into our production lines. So these are the 3 main areas we invested in the last few years in all of them and we'll continue making the same level of investment also in the next years to come.

[indiscernible] has been mute himself.

Regarding the next question #8, I'm not sure what actually the question is speculating on. I'm not aware of different activities happening within Sinochem as far as other divisions. As ADAMA, we are focused on our business and we are, of course, an integral part of the Syngenta Group. So I'm not aware of any implication specifically to our KPIs.

Question #10, the operating expense and the interest-bearing liabilities are growing. And when do you expect to see a better cash flow status?

Okay. So we already saw got this free cash flow in Q2. So as mentioned by Steve and also, I will present you during the presentation, ADAMA took serious significant measure in order to manage the cash flow and it were reflected in our positive free cash flow of $280 million in Q2. We will continue going in this direction. We will continue to manage our selective procurement and focusing only on profitable profit, we will push for depletion of our expensive inventory to reduce working capital and, of course, to improve the cash also, both in collection, how we continue the intensive management and collection. And last but not least, CapEx and OpEx management, prioritization around CapEx investments, doing must have and of course, OpEx management, as we already saw in the presentation we succeeded to reduce the OpEx by $54 million during this period. So the focus of ADAMA today and of course will continue is to have a positive free cash flow.

Question #11 is about the overseas CP products inventory status, and when do you expect the high inventory to be effectively depleted. And how should investors track the inventory situation of overseas market and in terms of different categories of CP products, meaning the inventory situation on herbicides, fungicides and insecticides, are they similar? And do you think all the high inventory are mostly herbicides. This is question #11, mostly about the overseas market inventory.

So question #11. Well, for sure, we are here -- still in August, so agriculture continues to happen around the world and the inventory levels continue to evolve in the Northern Hemisphere markets. Again, we still have, for example, serial planting in Europe, which is the next big market. And so in that example, herbicides are being purchased and consumed at the moment. So the inventory overall is a very dynamic situation. And specifically, there is no sort of official tracking or system to track inventory around the world. This is very much a local situation. And based on informal information that we get from our in-market teams. And it is also reflective of the -- both the seasonality of the crops and there is some weather impact as well. So the question about which product line is more impacting one versus the other, it really depends on the local market. So there is no specific answer to how to track inventory. It's really based on informal information that we get from our in-market teams. And as far as the difference in inventories between the product lines, it's highly variable depending on the local market consumption.

Question #12. How do you control the sales expense on a day-to-day basis because according to your periodical reports from time to time, your operating expenses have been rising regardless of your revenue generation capacity. This is actually the first part of this question. The second part is about the impact on the company sales and development due to the China's requirement to reduce the application volume of pesticides.

Steve, I will take the first 1 and you will take the second. Okay. So the first one, so the structure of ADAMA expenses, and I believe that it's relevant for all the companies in the industry and other industries is that we have a huge portion of fixed cost, fixed expenses while there are also some relatively small amount, which relates to the variable expenses, which depends on the level of sales. The portion of course, where the sales are down, the portion of the OpEx is obvious, it's higher. What we are trying to do now is to try and to minimize as much as we can, both fixed costs and variable costs. These are minimizing in OpEx in a way that we will not damage our short term to meet down the purpose or targets for ADAMA and to continue to support the ongoing business.

So Steve, please take the second part of...

Very important question, the industry around the reduction in volumes. And why it's important is because the answer is the volumes actually of crop protection products have continued to decline proportionately for multiple decades, and that's based on the technology of new active ingredients in particular. So, us as ADAMA focused on products that are coming off patent and we have in our core league strategy, a number more that we are focused on bringing to market the -- literally, the technical chemistry of these products means that they have lower use rates than the historical products. So overall, the volume declines based on the technology that we're bringing to market in the future, which very much aligns to the regulatory requirements across the world.

Question #13, ADAMA's annual revenue performance, it's quite impressive, but I cannot see the same for your profit. What cost management measures will you take in the future to generate more profit.

Okay. I will take it. So I believe that we all understand that 2023 is really abnormal yield while the prices are down and ADAMA or the industry holding relatively -- high costly inventory. So for 2023, ADAMA focus in the short term for this year is procurement management, as I already explained, selective procurement to support only profitable products and in additional cost, depletion of the cost of inventory, and this is all in order to be ready to the turnaround of the market with fresh and cheap or not cheaper, lower cost inventory. For the midterm, we have plans. We will continue with our plan positioning ADAMA in the market as innovative players. We have continued to invest in differentiated products, which are bringing more value to the farmers. And of course, as mentioned by Elad, we are focusing on cost position to have the best cost position in the market.

Question. #14 is about the loss in your H1 report. May I ask how the performance loss in the report can lead to an increase in net assets per share? Yes, #14.

So I explained how we are about to -- how 2023 is really abnormal year and how we are going to invest all our focus on improving our profitability once the market will turn around. And then, of course, it will be reflected in the net income share.

Question #15 is about EAME region. Do you think the business there can continue to grow?

Well, when we think about different geographies, 1 of the key elements of our strategy is the flexibility to develop products that are available in the industry that are off patent. So regarding Europe, that gives us the flexibility to develop a portfolio, not specific to proprietary products. And that's, we believe, 1 of our advantages in the European situation where there are fewer active ingredients, but at the same time, there remains many active ingredients that still have the efficacy required by farmers. So our business model enables us to continue to develop a very strong portfolio in Europe. We have multiple product launches next year. And in reality, we're very excited about our ability to grow in Europe.

Question #16 is about the production site in China. What is the current operation status? And are there any new products to be launched in these production sites?

ADAMA has a very detailed and focused plan on launching of new products in the market, mainly differentiated products. As part of this plan, we also are considering produce a production side, production buy versus a XXXXXXXXXXXXXXX and of course, also the Chinese factories that we are having in China, which are now getting to the level of very good quality. They are part of this plan, and we are about to move to some new products in the next year.

Question #17. There are many off-patent formulation companies of China having established their own sales channels in Brazil or the larger part of Latin America, and they have achieved significant sales growth. Many of them are ADAMA's suppliers, how do we evaluate your partnership with these Chinese company? Will you reduce the corporation with them?

Question #17, myself having recently been in China and traveled to many of our key markets. This dynamic of local Chinese companies being involved in local markets remains quite minimal. And part of that reason is it takes a very large investment. And a very strong strategy to be able to attract customers and deliver technology in markets around the world. And that's where our business model, we believe, is highly competitive. And as far as delivering on our strategy, we are open to partnerships with anyone who can support our strategy and deliver business to customers.

Question #18. This is about profit. Will ADAMA's profit return to a normal level or is the current profit and a reflection of ADAMA long term value creation?

So I believe that 2023 and 2022, 2022 and 2023, both of this year are abnormal year. In 2022, we see abnormal of higher demand in the market, while -- which are [indiscernible] to procure expensive inventory, and then we saw the lower demand from the market. And 2023 while continue for Q4, 2022 we receive the lower demand in the market, lower price expectations for lower prices from China, all these bring us with the abnormal situation, which means that, for sure, the current situation of our profit is not the normal. We have planned short-term plans to deplete the highly -- high cost inventory to have selective procurement to support profitable products. We make us ready to the turnaround of the market. So we will improve our profitability based on the lower cost inventory that we will hold. In addition, we have got a more strategic plan around positioning in the market around the more differentiated and new products, which will bring more value to farmers. And last not least is how we can improve our cost position in the market. All this will bring us back to a more profitable space.

Question #19, ADAMA's first biofungicide, ACTAVAN got registered in Peru. So what are some of your new products that are currently available or in the pipeline?

Great. And as Efrat said, this is a cyclical market. And as we know, looking across industries, we are in a different cycle post the pandemic. So agriculture is no different than other segments where the supply chain challenges during the pandemic has created a reaction in the market of oversupply that is now translated into higher inventory. So I think it's helpful if we look across industries as well. That's a very similar dynamic to what we're experiencing in agriculture. And if we look at question #19, specific to our portfolio, I mentioned 22% of sales in the first half, which we're very excited about. And for sure, it's a key area of our strategy to continue to bring new products and differentiated products. There's a long list of products and active ingredients and brand names I'd encourage you to all look at our prospectus, which all of those launches are available in detail by brand and by product.

Question #20. Right now, AI prices are dropping. So how long do you think it will take for the decline price of AI to be reflected by the end market of [ CP ] products?

Regarding question #20, it's not a direct correlation between the cost of active ingredients and the in-market pricing. And again, similar to many industries, the prices that our end-use customers, in our case, farmers pay is also based on their ability to pay. So it somehow connects also to commodity prices and the profitability of growers. So it's an indicator as far as in-market pricing that farmers pay as far as active ingredient prices coming from China, but it's not a direct correlation. So we see prices therefore relatively stable in the markets around the world. And it's difficult to anticipate what might happen based on the lower ingredient -- active ingredient prices that we've seen in the first half coming from China.

Question #21. Are you doing procurement as regular -- or will you start new procurement only after your inventories are depleted to their normal ratio?

So ADAMA's policy, in general, the way that we are managing procurement is we are basically looking on the support coming from the countries from our business unit we are looking on our existing inventory, if we have the inventory in our warehouse. So of course, we are going to deplete what we have in order to move it to the relevant country in order to study. And we are doing it for years. So basically, this is a policy of ADAMA. In 2023, because we had the issue of the market situation, we took a decision on how on selective procurement, which means, of course, we are not going to procure or produce any inventories that -- any product that is existing in our inventory. But on top of that, we are managing our margins. Basically, we are putting a budget for procurement. The use the allocation of this budget is based on profitability. And for lower-profit products, we are not buying, and we are not supported [indiscernible]

And I think these are all the questions that we've got so far. And we cannot talk forever. So I welcome all our investor friends to keep communicating and contacting us. Steve [ closing ] comments now we don't have more questions.

Great. Thank you. Well, first of all, thank you for your interest and support of ADAMA and also thank you for the many important questions today. And we hope that the answers we gave are helpful and informative to you. And also, we recognize that the results at this time are challenging. And we believe that with the questions and with our feedback and with our presentation, you can better understand what's behind the company results. And in particular, as we've said in different ways, a very unusual and unprecedented cycle change in the agricultural industry. And so the good news, we believe, going forward, is the underlying demand at the grower level based on farmer profitability and the continuing requirements of agriculture to feed the world remains strong. So we are in a very positive sector, agriculture. And overall, the demand for our technologies and our services around the world remain strong. And at the moment, it's part of this cycle that the inventory levels in the channel are being drawn down or lowered so that we can replenish those stocks we believe not only from today, but in particular, as we head towards the end of this year and next year. So we see the cycle normalizing, and the good news is the underlying demand remains very strong for our business and our technology. Thank you.

Okay. Thank you, everyone, for attending our H1 Online Roadshow. And I think that's the end. Thank you for keep paying attention to ADAMA. Thank you, and bye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]