ADAMA Ltd. (000553) Earnings Call Transcript & Summary

Good afternoon, my dear investors. I am Guo Zhi, Corporate Secretary of ADAMA Ltd. You are most welcome to join us for this online roadshow for the 2023. We are providing simultaneous interpretation of both English and Chinese. You can see a sign of a globe to choose the channel, which you would like to hear. And you can also see on the screen together with us today, our CEO and President, Mr. Steve Hawkins; our CFO, Madam Efrat Nagar; Mr. Ge Ming; and Mr. Yang Guangfu, who are the independent directors of our company; as well as Madam Rivka Neufeld, Global Investors Relations Director. They are dialing in from our overseas headquarter. They will present to you how we have performed in the reporting period. And they will also answer your questions after the presentation. You can use the button on the right side of the screen to shoot your questions. We have prepared slides, as always, and also as a routine, we will share the screen, and you are kindly reminded to read through the legal claim in front of the slides about the performance. So as I said just now, please take a careful but a quick look of this disclaimer. And now I will give the floor to our CEO and President, Mr. Steve Hawkins to walk you through the updated business status in the year of 2023.

Welcome, everyone. Good afternoon in China. Also welcome to our directors. Professor Yang and Mr. Ming, welcome to them. And thank you for taking the time to listen to an update on Q4 2023 and the full year results for ADAMA Limited. And of course, as Guo has introduced, I have my CFO, Efrat Nagar joining me. So if we begin with a couple of slides and connect to our industry and our company, the Crop Protection industry. We will remember when we last spoke about the difficulties of the market of 2023 as compared to 2022. When after the pandemic supply issues around the world with very high purchasing, very high prices in 2022, the opposite happened around the world where purchasing declined severely from the channel to manufacturers and also prices decline. And we saw in 2023, high channel stocks of distribution stocks around the world in all the major markets. And then, of course, on the macroeconomic side, we saw interest rates increase and other economic issues and geopolitical issues around the world. At the same time, our industry continues to look positive on the bottom right-hand side with overall, higher than historical farmer profitability levels in many of our key markets. So the demand side for Crop Protection products at the farmer level remains strong. The challenge is overstocking at the channel level. Next slide, please. And to show some more detail on that, to be more specific, if you see on the left-hand side of this chart, this is the farmer consumption data that we have from public sources, Agbio, you'll see that approximately USD 75 billion is the consumption market that we saw '22 to '23. And then on the right-hand side, you see this dynamic of the oversupply in 2022. In this chart, example, $54 billion and then sharply declining in 2023 with many of the industry players suffering quite severely on the demand side, both volume and price, where you can see a 13% decline in the overall market at the sell-in to distribution globally. If we go to the next slide, again, to give us confidence going forward in the sector of the industry that we're in supplying Crop Protection input products to farmers worldwide. If we see on the left-hand side of this chart, U.S., this is U.S. farm income at nominal levels continues to be strong without government support. The government support is the blue part that in difficult times is offset sometimes by subsidies to farmers and on the right-hand side, you'll see expenses or the cost of inputs to farmers, the main input, seed, crop protection products, fertilizers energies. And you'll see those have been declining from the peak of 2022. So the input cost of farmers are declining, commodity prices -- so the prices that farmers are receiving for, in particular, corn, soybeans and wheat remains above historical levels. So with lower cost of inputs, that means good profitability to farmers. So we see that as a positive key macro factor beyond -- in 2023 and beyond '24. And with that short market background, I'll see you soon. I'll come back and dig into more details with you. And in the meantime, please I'll hand to Efrat for the financials for 2023. Thank you.

Thank you, Steve. Okay. So next slide. The challenging market conditions, as explained by Steve impacted the mainly performance in 2023. You can see here that our sales are down by 16%, the $1.7 billion, a 7% decrease in volumes and 8% decrease in prices. This is due to the high channel inventories as explained by Steve. And in addition, the high interest rate in the market also support all the channels to destock markets creating last-minute approach patterns. And also, we see huge pressure on prices due to the, of course, demand but also on the [ sale ]. This is follow in '22 when we saw high price increase. So more or less in 2023, it's balanced with a high increase in 2022. Gross profit decreased by 32%, reaching to a level of 22.7%, this decline driven mainly by the weaker pricing as explain. However, it's slightly moderated by better mix, better mix, meaning that we sold more profitable product and less non-profitable product. And also we saw and we will see it later, cost benefit in full year and in Q4 as the company took a serious measurement around inventory and procurement management, which means we are starting to enjoy from the low prices in the market. We mentioned the measure that took by the company. So when the company has understood that 2023 is not going to be as forecasted, we took also measures around OpEx management and we see a significant reduction in our OpEx in 2023 versus 2022, and we'll see it later. However, it's only partially compensated the decline in our gross profit, and we are reaching to EBITDA of $407 million in 2023, 45% lower than 2022. Although financial expenses also increased in 2023 due to the higher interest rate environment in 2023 and also because of the high loan that we had to take in order to finance our cash flow, our negative cash flow mainly in 2022. This is partially compensated by our bonds cost, mainly because of the lower CPI in Israel and the soft [ shekel ]. If we are looking on the next slide, which is the bridge. So I will start by explaining the bottom bridge, which is the full year. We can see here that we see a mixed trend, okay? We see that around the volume and prices that are more impacted by the market condition, as explained by Steve, we see negative impact. However, looking on the cost and OpEx, which are more under control of the company, where we see positive impact. So starting from the negative impact, we see a reduction in volume of $76 million. This is mainly on the lower demand in the market. Very important to mention that when we are speaking about mix of product, which product we sold, so we see in 2023 that we sold more profitable products and lower non-profitable products. Prices. I already -- as already explained, a huge reduction in the prices in 2023, this is following the high increase in 2022. So now more -- it's like around correction of the pricing level created in 2022. In addition, the lower demand expected for lower prices from China, all these created these, supported these negative impact. Looking on the positive side, this is exactly what ADAMA decided to focus in 2023, but we understand that we have an issue with the market conditions. So the $20 million improved in cost, this is due to our management and -- sorry, our inventory and procurement management, we will see later. So we are trying to enjoy from the market prices and $151 million decrease in OpEx due to the measures that ADAMA took in order to control our operational expenses, including headcount, contractors, and traveling. If we are looking on Q4 bridge, which is the above bridge, we can see that these are a positive impact or even stronger starting from the mix -- higher mix impact in Q4 2024. Look on the cost, $62 million better cost, the inventory sold in Q4 enjoyed from market prices and also the OpEx -- the OpEx improvement of $59 million. With that, Steve?

Thank you, Efrat, and you're giving our audience some ideas on how we reacted to the difficult market in 2023. And for sure, 2023, as we know for ourselves and the industry was very difficult. At the same time, and that's really important for our investors. We did react to the situation in the market, and we'll explain some more detail on that and in particular, to focus on the quality of our business. So if you go to the next slide, we believe we really took actions, strong actions although the overall profitability was obviously quite difficult in '23. We believe we offset what could have been a much more difficult year. And we also learned a lot about how to position ourselves in the future market. So I'll hand back to Efrat to explain what we called, our fight back plan in the difficult 2023. And then I'll come back and share with you our medium- and long-term plans and our overall transformation to take the learnings of '23 and apply a quality business mindset to the future of the company. Efrat, please, back to you.

Thank you, Steve. So one of the purpose of this fight back plan, as mentioned by Steve, was focusing on our cash flow. So we are very proud to share that Q4 is a third a quarter in a row that we are performing and bringing positive operating cash flow. This is due to the reduction of inventory, I already mentioned that we took measures around inventory and procurement management, and we will see it later. This support -- these inventory and procurement management supporting us in 2023, and we see already positive cost impact in 2023. And more importantly, positive sales mix, more profitable products supporting our gross margin and already mentioned decline in operating expenses. In 2023 in order to improve our free cash flow, not only the operating cash flow, we also decided to make prioritization around CapEx investment so we are going to invest only on mass to have a project, which will see the value in our financial already in the next 2 years. So with that, I will -- very proud to share with you the next slide. So while net income reduced significantly in 2023, $320 million reduction in our net profit, we succeeded to bring a $250 million higher operating income versus 2022, although -- sorry, that $250 million cash, although our financial -- our P&L was very challenging. We succeeded to generate $250 million higher operating cash flow and $270 million free cash flow. This is, of course, because we focus on collection. However, and we already mentioned the prioritization of investment of CapEx investment, but if you look on the next slide, we see that one of the major factors behind this great cash flow performance is our inventory procurement management. In the right side, you can see that our inventory level reduced by $583 million to $1.8 billion inventory end of 2023. This is what allow us to enjoy the better cost in the market. And this is done mainly by lower procurement. If you're looking on the left side of the slide, you can see that every quarter, 2023 versus 2022 and 2021, we used significantly our procurement in order to manage our cash situation and to have better cash performance in 2023. The next slide, we can see the impact of this plan, these measures that the management took during 2023 in our operating expenses, 17% decrease in our operating expenses, $189 million reduction in dollar. But for me, what is more importantly this is a reduction in OpEx to sales. So while our top line, our sales reduced significantly in 2023, we still succeeded to improve our OpEx to sales margin demonstrates that once a demand management focusing and deciding on improving certain areas that are under control, we can do it. And with this positive messages, Steve.

Well, thanks so much Efrat, and that for sure helps all of us, the leadership team and all of us in the company to give confidence that, as you say, regardless of how difficult the market with our hands-on approach, we can help turn the company around from a profitability perspective. And with that, I'll shift from what we did last year to more of the medium and the long term. And this is really about shaping our future overall as a company and being more specific about the segment of the market that we want to focus on. And we believe that will deliver operationally more efficiency, improved margin. And as Efrat has shared the story of 2023, a continued future of a much better cash flow. And there's a few key points here, 3 key points. The first one is a market repositioning and what we're calling is the focus on the Value Innovation segment of the market. This is a segment between pure commodities, and I'll show you that and new active ingredients. This has really been our focus, but we want to make it more clear in the company, to our employees, to our different departments, and for sure to customers. The second part of how we're going to evolve our focus going forward is really our portfolio management. And that includes the new products we bring on the range, the new innovation and also products that are much further on in their life cycle and they're somehow declining in sales. So this is a portfolio optimization, focus for us. And then the final point is continuing to focus on manufacturing excellence, improving our cost of goods, both in active ingredients and products. If we go to the next slide, just to come back on this first point about Value Innovation, and value is for ourselves, for our employees, and for our customers anchored in innovation because at the end, we are an innovation company. And we have a couple of building blocks. So this is leveraging the good work in the past number of years on a strategy. You probably heard about the Core Leap strategy and also our Formulation Mastery strategy. So they come together to build innovative products for our customers and meet the unique needs as farmer needs change based on weather and the environment and regulatory challenges. So if we go to the next slide, just to give a sense of this segment we're speaking of, it's the top segment in this chart. So the top segment is growing significantly. This is off-patent active ingredients with unique formulations and combinations of active ingredients. This is growing strongly. And on the bottom, you'll see what's not growing, which is new active ingredients as a percentage of the global Crop Protection market. And that's primarily driven, and this is a long-term trend. You can see all the way back 24 years ago because of the regulatory challenges and the cost and the length of time to register a new active ingredient globally. This is actually a declining area. And the middle part is somehow more commoditized products, for example, just glyphosate with not much value added in terms of formulation. On the right-hand side, you see some of the statistics out, there are more large actives coming off patent. So we will continue to investigate whether they would fit into our core lead strategy for commercialization. So we're very excited that with greater focus in this top market, first of all, it's a market that's growing. And secondly, it's a market that connects very much to the core of our strategy and our capabilities. So if we go to the next slide, at the same time, of course, Crop Protection, as we saw in '23, but going forward, we'll continue to be a very competitive space. Of course, we're speaking on a global basis, and it's somehow different by countries. And we have the core areas of competition, in particular for us in those market segments that I just showed you. The first one is the research-based companies that are focused on the development of new active ingredients. And in particular, in this case, I'm speaking of the global active ingredient research companies. In the middle space, we have many companies you would be familiar with that are our manufacturing active ingredients in China and India primarily focused on really this middle gray part of the last chart, pure generic products, not so much value add, low technology. And the far right-hand side, is at the customer level in certain markets like the U.S. or Western Europe. Some large distributors are also purchasing direct from China. So we are making sure we have clear strategies to position ourselves with our innovation to compete with all of those competitive forces. If we go to the next slide, how we're competing with those 3 different competitive areas. Again, is our Core Leap strategy on the left-hand side. This is fundamentally the choices that we have made and will continue to make on active ingredients that are -- their patents are falling and that we believe we can add significant value to with our technology and create products across the globe that are seen as unique and differentiated by farmers. This is our value add. The middle part, which builds on that value add, and you've heard this before, is our Formulation Mastery. So this is the magic between the active ingredients. This also has seen as features and benefits for farmers, things like rainfastness, things like the leaf penetration and efficacy. So we have a large part of our strategy focused on that. On the right-hand side then is linking those innovations to the right customers. And that's the chart I showed you, this growing segment of farmers that are interested in the -- what the product delivers to them at a fair price. So that's our focus going forward on how we're going to grow the business. A couple of slides on just examples to give you a sense of how far we are already in implementing this strategy. This is a 2023 product launches here. You can see Apresa, Almada, both launched in the Brazilian market. I had a chance to visit in third quarter last year in Brazil. I saw the excitement around these product launches with farmers in the very large and important Brazilian market for fungicides in this case. We have a herbicide, Sierra, on the right-hand side that we are launching in Canada and Australia. So these are really terrific active ingredients that the patents have fallen, and we've created unique mixtures and formulations to deliver value innovation to farmers. And if we go to the next slide, I thought it would be really helpful to share, in particular with the very difficult European regulatory market where our strategy of Core Leap and Formulation Mastery, we're able to put together a portfolio for the largest market in Western Europe, which is the Cereal Fungicides market. So I attended our launch in Q4 last year with our team in Europe, lots of energy and excitement. These 4 products are launched just now just this year ahead of the spring season. These are fungicide products for, as I said, the largest market in Western Europe in Crop Protection, which is cereal fungicides. And we can cover all the crop stages, the timings of the year, the major diseases and the different price points in the market for farmers, depending on the seasonality. So we're very, very excited about this new portfolio in Europe, where very little active -- new active ingredient technology is entering the market, because of the regulatory challenges, and that's where our strategy enables us to now move into the market and offer technology and innovation to farmers very uniquely. So very exciting portfolio. And if we go to the next slide, just to step back on where we've been. As an example of what I just showed you is in 2017, we had a very weak position in fungicide cereal in Europe, in particular, you can see less than 10% market share. We were having to divest products because of the regulatory challenges. There was a hyper competition with not so many new products in the market, and that's where the products I just showed you. Now we come in, in 2023, if you go to the next slide, and we fast forward, what I showed you is how those products and that strategy now start to come in the market because, of course, it takes a number of years to not only build the product concepts, but also get the registrations across the multiple markets to prove to farmers through demonstrations and field trials that the products are effective and also work through the commercial strategy and creating demand. So this is really, for us, proof point that the strategy we've had in place, but not implemented yet now is being implemented. And in many ways, it's a really important time, which is somehow fortunate because of the difficult market of '23. Now our timing, which we always had planned to enter the market in '24 in this key segment is really an important time as we bring new technology into the market. And it's taken, as I said, many years, we had to have access to the products. We had to apply patents to our technology overall. And then, of course, we had to ensure that we had the supply chain. I gave you more of the marketing and the products that needed the supply chain, so we had a competitive cost on our products to bring them to market and commercialize them. And if you go to the next slide, one of those key building block products that we have invested in over the last 4 or 5 years is Prothioconazole. You can see the pictures of the sites. Here in Israel, I was there a couple of weeks ago; India, where I'll be next week visiting with the team, and then we have a manufacturing site, an active ingredient site in Brazil. Taquari, for this very important fungicide portfolio in Brazil. So we're investing end-to-end to bring this technology to farmers. And if you go to the next slide, it gives you a sense going forward on how the strategy shows up in the market for our customers. So on the left hand, vertical access is the price per hectare. And on the right-hand side is the value delivered for farmers, for ourselves and for shareholders. And you can see we're moving up the ladder from left to right. So we're moving into the higher technology, higher innovation space, which commands higher prices in the market. And then obviously, higher prices with the right cost of goods delivers more value to the whole chain. So this is our strategy in action. You can see the brands, I showed you those on the earlier slides. And we can project this strategy implementation going forward for sure for our 5-year plan and beyond. So we're really, really excited. And if we go to the next slide, this shows you in some ways, and this is a dynamic of our industry, the length of time, as I said, it takes for this strategy to be implemented. You can see 2017, the market share in the example, fungicides Europe, and you can see our plans here, '26, '27, so for sure, unfortunately, with the challenging market in '23, our portfolio was also declining. The good news is now with the market coming back, we also are bringing this new technology. So that's where we are very confident in the timing as we look into the future marketing -- market of implementing our Value Innovation strategy. And if you go to the next slide, more or less in summary, really, we, as you can see by the examples that I gave you, I gave you product-specific and market examples. I gave you a sense of this strategy has -- we've been working on for a few years, but now the timing is for implementation, and we want to be positioned and ready for that in the future market. So we very much are focused not only on the fight back that Efrat shared with you on driving cash flow and managing procurement in the short term, but also bringing technologies to farmers in the long term. And you can see again, and I'll emphasize those operational efficiency, margin improvement and cash flow generation. Those will be the financial benefits of implementing this innovation strategy. And again, just to reconfirm, really the market positioning is important for all of us in ADAMA, that we're very clear who our customers are that we want to target with this new technology. And then secondly, as we bring all of these new products with a certain capability to deliver in the market, there's other older less value-adding parts, more commodity parts of our portfolio that we plan to exit so that we can create the space for our teams to focus on the new innovations. But it's a very, very exciting future as we see going forward. And just to go to the next slide on a couple of changes that we made in the management to help bring this to life. And these started last November and we have some more changes in the leadership team. But for sure, having the right structure of the company and the right capability in place is obviously hugely important to drive and implement this strategy. And I'll point out just 2 major changes, in particular, to bring the strategy to life. One is Elad and Bruce on the manufacturing side. So we have taken a layer out on our global operations to focus on production and downstream manufacturing of these new products in our portfolio. And Elad, who led our global operations before will focus more on bringing the new production to the markets, the new portfolio, including for sure, the responsiveness and the length of our supply chain, improving that in logistics and planning and working with the local market. So Elad will focus more on that. And Mr. Bruce Morris will focus on our active ingredient cost of goods production and procurement. So we wanted greater focus on these key areas of our cost of goods and also our customer responsiveness. And then Mr. Florian Wagner joined us recently, where we integrated the development and the R&D department with the product management department so that we had a much more end-to-end process as we bring bottom-up ideas on what farmer pain points are in the market, delivering all the way through the new products and portfolio that you saw in the examples I gave you. So that, we believe, can enable us to bring in a much more fast, efficient, and meet customer needs targeted on the Value Innovation segment. So we're very excited with these 2 major structural changes with the leaders now in place that we can deliver more efficiently and effectively the strategy of Value Innovation. And with that, I believe if we go to the next slide, the formal part of the presentation will come to an end. Thank you for listening. And I believe now we would move to any comments and questions, please.

Thanks, Steve, for your presentation. Now let's move on to Q&A. [Operator Instructions] The first one is about the organizational changes in 2023. So Mr. Steve Hawkins has been in office for almost a year now. And what kind of new requirements has Steve proposed regarding to the strategy, operations during his current tenure? And in addition, the company elected a new Chairman of the BOD at the end of this 2023 and the previous Chairman of Yangnong Chemical is also the current Chairman of Winall Hi-tech. How will this help the company's synergy with SG Group?

Great. Well, thank you for the questions. If I answer the first question, and yes, obviously, the correct information. I officially started in this role May 1, 2023. And Efrat joined in her role as CFO a few months before -- in January 1, 2023. So the 2 of us joined in the early part of last year as our results were starting to show deterioration in decline. And we very quickly together took action along with the management team in what principally Efrat shared with you, we called that the fight back plan. So really taking care of the operations, things like procurement to drive cash flow and overall cost management. And you saw that in what Efrat shared. So that was our first key activity. The second key activity is what I shared with you of the repositioning of the company and the Value Innovation area. So taking advantage of strategically what we had been working on and driving more now towards the implementation of that in a very specific targeted market area. So that repositioning of the company as a value innovator as opposed to a generic only company. And the third thing that we've implemented together since my start was what we call now the Fight Forward plan. So this is really taking the implementation plan that I shared with you and driving that in a more efficient way into the future. And we have a number of initiatives that would be great to share in the future some more details on that plan. So 3 major initiatives since myself and Efrat joined. The second question regarding the relatively new Chairman of the Board. Our Chairman, as a reminder, is also the CFO of the Syngenta Group. So that's another key feature of what he can bring to help us as ADAMA Ltd. And I think the main benefit, if I connect to his CFO role and his Chairman role, he's able to support very strongly the group's commitment for our plans and also for our financial requirements. So I see that, he's a real benefit for a sustainable future for us. Thank you.

Question number 2, as a subsidiary of Sinochem, which is SEO. And the SOE is always in the stage of ongoing reform. And does the company face the same KPI requirements related to the SOE reform since you are a subsidiary of Sinochem. Is there any requirement in market capitalization management?

Well, our requirement is to meet our shareholder needs including those in the audience. And it's very clear, your requirements has been and continues to be cash flow and net income. So that's very much what we're focused on. And we made a major shift, as you heard from Efrat, early last year when her and I joined away from an EBITDA only focus to a much more sustainable approach with net income and cash. So the good news is those same KPIs meet as we believe the needs of all of our shareholders for the future.

Question number three. How does the company see the current market situation, industry situation? And how do you see the destocking progress in China and South America? And how do you -- what do you think the price trend related to Crop Protection products in these markets?

Well, those are obviously very important questions. And -- we have our perspective, although, of course, it's early in the season, and we need to see how these markets play out. In our industry, agriculture, weather always plays a role. So it's early in the season, we have a lot to see what happens with the season itself. At the same time, I think it's clear that 2024 will be a year of transition for the market. So the disruption of '22, '23 is still finding some kind of equilibrium in '24 and it's somehow different by geography, depending on the local market dynamics. And we would expect '25 -- 2025 to show us much more what the future market will look like as far as price volume by geography. So we're still very, very close to the market dynamics. We see more stabilization than last year but we have a lot of the season ahead of us. And that would include price and volume both. We know that prices in China continued to be low from an active ingredient perspective, and that does put pressure on the global market. And overall, we would say that Brazil would be our biggest concern as far as stabilization of the new market trend. And at the same time, Brazil is -- the core part of the market is towards the end of the year. So it's less known and less clear to us as well in Brazil. But for sure, the market continues to be dynamic, and we would expect a more stabilization to a normal trend in 2025.

Next question. The United States government started to reduce the interest rate, and we expect the declining interest rates in many oversea countries, will such a trend have a positive impact on your global purchase of Crop Protection products at the channel level?

So as you probably know, there is like many variables that impact the level of channel inventory. One of them, of course, is interest rate, but not only. We see weather conditions, we see shortages or expected shortages. So interest rates is only one of the very significant impact. Specifically on the interest rate, yes, it seems that there is expectation for lower interest rates in the U.S., but it is something that we could say in the last few months that currently we don't see this trend in the market. We don't really -- we know that currently because of the interest trend, probably we see more working capital management in all the channels, of course, including ADAMA. And although we believe the interest rate might be -- might have a positive impact of the level of inventory because still interest rate is expected to be higher than historical rate, it's very difficult to forecast what is going to be the impact on the level of the inventory.

Next question is comparison with 2022 and the sales and the corresponding demand in Russian and Ukraine. Has these changed in 2023 compared to the previous years? Will the overall situation improve or deteriorate?

Okay. I can answer that. There's no material change to either to our business in Russia or Ukraine since the last couple of years. So it's stable.

Next question. What is the current resumption of production progress at Anpon and Huifeng sites?

Very important question. Thank you. Both sites are for sure in production mode. At the same time, Anpon in particular, is still in relocation mode. So there's still elements of the relocation that we're working on, but the site is up and running and active. So both sites are active and supplying us with products around the world.

The previous European zone, European cluster has changed into EAME. What is the background consideration for such change?

Yes. Well, for sure, as I spoke about the implementation and bringing the value innovation strategy to life and focusing on certain customers, it's also important for us to focus on key markets. So as part of making sure that operationally, we're focused in an efficient way on key markets, we made a change in the countries that were in scope for what we call the European region. So based on the type of customers and crops, we want to organize around those, and therefore, we bring efficiency and focus to implement our strategy. That's why we made those changes.

Next question. I have seen in your business outlook, it is said that the -- you have seen the channel inventory is normalizing. Can you introduce current level of channel inventory in the various regions?

Well, as I said earlier, 2024 is a year of transition. So overall, overall global inventory at the channel level remains higher than historical averages. And there's quite a lot of difference between markets based on the seasonality. So I would say that in the Northern Hemisphere markets, inventories, again, higher than historical, but for sure, lower than 2023. And the Southern Hemisphere, because of, in particular, a drought in Brazil at the end of the year, and therefore, a slightly lower consumption. They're higher than historical average as well, but at a higher level than Northern Europe. So that's why we need to see how the season goes for the rest of the year in the southern hemisphere. Overall, though, again, I would expect as we move into 2025, coming out of '24, we would see a more normal level of inventory more like historical averages.

You have mentioned the company is reducing third-party procurement. What are the main products you have cut? And where do the suppliers come from?

Well, those -- I mean, for sure, it's all across procurement, so it's active ingredient. It's intermediates and it's also finished products. So all the areas of procurement, if you like, and you heard originally in the fight back plan that Efrat described, this is a key learning for us early in 2023 when we joined that we want to continue to take those learnings into how we run the company overall so that we can drive more, in particular, more cash flow. So that's a different approach for us, but it's across all the components of procurement. And at the same time, because, of course, China is the dominant supplier of all of those products to the world, China and India would be the main geographies that we've had reduction in those purchases.

Next question. What is the current trend of CP formulation prices compared with last quarter?

Well, again, it's early in the season. And until in particular, in the Northern Hemisphere, where farmers start to use products, then pricing becomes more stable. But we know and many of our shareholders would know the active ingredient prices in China continue to decline in general. So we see that those declines translate across the world. So there is -- for sure, pricing pressure remains high based on the current situation. And that to us is very much why our implementation are very strong implementation of our strategy, of Value Innovation, is important because that gives us added value for farmers and it's less price sensitive to the active ingredient prices coming in particular from China and India. But continued price pressure, we imagine in 2024 overall.

Does the shortage of U.S. dollars in Argentina affect the company's business there?

In Argentina, like in all other mass companies, we are operating in local currency, as I said, Argentina peso. So locally, we don't have any impact on this shortage in dollars.

Okay. So in 2023, ADAMA made quite a lot of provisions. Do you still have inventory provision pressure this year? Does ADAMA have an inventory adjustment strategy to avoid such risk as much as possible?

So ADAMA adhering to accounting policy, why every quarter, not specifically in 2023, we are checking end of each quarter. We are doing comparison between market prices and our cost of goods in our balance sheet. And if there is any issue of we are holding inventory which is lower than -- sorry, that the cost is higher than the market price, then we need a provision, okay? So they did in general. In 2023 due to the really specific environment when we procured during 2022, a relatively high cost inventory and the situation from the level of cost of inventory in 2023, this causes these provisions. So currently, this is a level of provision that is needed in order to reflect our balance sheet in the right position. And we spoke about our inventory and procurement management that we took or we made during 2023. And we are, of course, going to continue with that in 2024. Those measures -- this is also for us to manage the level of inventory in order to avoid any additional provision or other impairments in our books and to make sure that we are buying the required inventory to be discrete, to be sold in a shortfall.

Last year, ADAMA introduced quite many new products. So what are the profitabilities of those new products now?

Well, that's a terrific question. Thank you, because that's, of course, very much our strategy that I reviewed with the examples of the numbers of new products and the new fungicide portfolio range in Europe. We see the profitability. So the gross margin, if you will, of those products are substantially higher than the average of our overall margin. And so that's -- not only the Value Innovation and creating more value for farmers is the focus of that strategy. But financially, we would expect substantially higher margins. And part of the margins, though, is related to the new introduction. So as the product is longer in the market, we have more capability on the manufacturing side, those margins also increase over time, of course, depending on the market pricing. So the best I could give you at this time is substantially higher margins than the average.

ADAMA is adjusting its organizational structure to optimize its operation and also to reduce operational expense. So during this process, will the peer competitors take your advantage and impact your business?

Yes. That's obviously a very important question as well. And unfortunately, I cannot comment on our competitors. I would direct our shareholders to have a look on the social media about what's happening with our competitors. Actually, the industry, as we've discussed in '23, the whole of the industry and all the players have had quite a challenging situation. And therefore, similar to us, everyone has had to react with their own plan. So we're very confident in our plan and why we're confident in particular, 2 things. The plan we have, which we shared, the fight back plan, the management of procurement costs, operational expenses and then at the same time, implementation of our new portfolio focused on value and innovation. And the second reason is timing because as I mentioned earlier, myself and Efrat came in early last year, ADAMA had in Q1, the poorest -- one of the poorest performances in the industry. So our business model was quickly impacted by the market changes and then as we described to you today, we believe we reacted more quickly than our competitors. So we see ourselves positioning ahead of our competitors as the market is stabilizing and changing for the future. So our competitors will have to find their own way, but we're very confident in the timing of the implementation of our strategy.

How do you forecast the performance of North America in the year of 2024 since it has been recovering from 2023?

Well, as I said earlier, every market is somehow recovering at a different level. We would see the North American market, again, if -- I just mentioned how we were one of the earliest companies impacted with the market change. And I would say the North America market was the earliest market impacted by the market changes after the pandemic. And so we would expect also similar to ourselves that, that market would recover earlier or get more stabilized earlier than the average across the globe. So a lot of it, it's early, as we said, depends on the weather. And it's, of course, in spring time in North America. So, let's see what happens, but we would expect the North American market to recover sooner than other markets and in particular, Brazil, sooner than Brazil.

The sales expense or OpEx actually versus sales, normally, that threshold is above 10%. So how can ADAMA be profitable if it's like this?

So ADAMA in 2023, as I explained, while our sales reduced by 16%. Our OpEx in dollar and in RMB reduced by 17%, which means that we are becoming more efficient. And I believe that with more actions that we are about to take during the next years, we will see more efficiencies in the level of our ability.

So the competition in the market is very fierce and sometimes the gross margin is 20% or actually even lower than 20%. And ADAMA's COGS actually is more expensive than your peer competitors. You were in net loss last year. So and how will you be eliminated or phased out by other peer companies?

Well, the best way I can respond is to restate what we spoke about earlier on our strategy, our approach. You saw the restructuring that we did towards the end of last year, focusing on cost of goods through the 2 departments, active ingredient cost of goods with some products we make, of course, ourselves, others we buy directly and procure from partners in China and India and other partners, by the way. And then I described the downstream production focus on efficiency. So on the cost of goods side, we've reorganized to refocus on that and improve that, and we have a plan for that going forward. And then we talked about the Value Innovation strategy with the new portfolio built on the core Core Leap active ingredients which have a significantly higher margin than our average. So lower cost, higher prices to customers in the market improving our overall profitability. We believe we have the right plan. All companies, as we've said, have had to find their own way to react in the difficult market of 2023. So we have to look forward and see how the different competitors are successful in their own strategies.

What are the specific strategic plans and goals in terms of sustainable development for ADAMA?

For sustainability, we actually -- I didn't share in the presentation, but -- also as part of the changes at the end of last year, I appointed a Sustainability Officer. It's not on the management team, but we have a senior level role. Mariela is her name, and she's support being working with the new marketing department that I showed you, so that we ensure we incorporate sustainability more in our future product development. And then also, she partners in the area of manufacturing, where we have some really good examples, and I would guide you to have a look at our ESG report that will be out shortly for 2023 and/or you can look at our report from last year from 2022, where we have many exciting initiatives around solar power, access to natural gas here in our production in Israel, the types of formulations we have with higher -- sorry, lower loads of products, so less volume of products. So we have many exciting initiatives and with our positive outlook on how to incorporate more sustainability, I've created and appointed a new role at the end of last year. So we'll have more news on sustainability, we believe, going forward. Thank you for the important question.

What is ADAMA's R&D investment in environmental protection? Is there any research and development on more environmentally friendly and less polluting products or technologies?

Well, I would suggest that the question I just answered is quite similar. So as I said, we have 2 new departments, one focused on manufacturing, one on marketing and product development. And then as I said, we have a new sustainability officer role that will partner with those 2 departments to bring a greater focus on the environment. And at the same time, to remind us all, we are in a regulated industry. So we remain an international company, fully compliant with all the local requirements of registrations of products, which, of course, country-by-country have their own requirements. So by nature of our industry, we are already compliant with many of the increasingly important requirements for Crop Protection products.

What can we know in terms of ADAMA's financial highlights and challenges this quarter?

So thank you for the question. I think for me, Q4 basically from a financial point of view is a highlight of the year. Basically, we see the results of all our fight back efforts and measures to support of the focus on the cash flow in Q4. In Q4, our financial expenses -- this was following Q3, we see lower financial expenses in Q4 versus 2022. And we succeeded to generate a positive free cash flow of $130 million. So for me, and this is a highlight and demonstrate that basically our plan succeeded in 2023.

How do you expect the turning point for inventory depletion in Crop Protection market in 2024? When will be the turning point?

Sorry, can you restate the question?

When will be the turning point for inventory depletion in Crop Protection market channel in 2024?

Right. So -- as we said, we -- I would see 2024 as a year of transition. And there was an earlier question about the U.S., and I mentioned Brazil. So it's different by market, but overall, it's a year of transition. And we expect that 2025 would see a more historical normal inventory level across the global market. So in 2024, will continue to be dynamic and continue to see, in most cases, higher inventory in the channel than historical levels.

Our next question is about the price of active ingredient and these prices have dropped to a historical low level. How do you see the trend afterwards?

Well, of course, that's a very predictive question, which I'm sure many people in the industry wish they had the answer. It's not clear. It's not clear. We know we have at the active ingredient manufacturer level, in particular, those that are not downstream, we are an integrated company, and therefore, we have the ability through our own production to add value through launching of new technologies. But it's hard to predict how long this active ingredient price trend will take. It's -- for sure, this year, it's not obvious things will turn around, as I mentioned, overall. And at the same time, there's large inventories in China of active ingredient products. So unfortunately, it's such a dynamic environment, it's difficult to predict. But for sure, it's quite a unique situation. I don't think we ever saw this in the industry [ with low currency. ]

The next question is like this. It is seeing that the proportion of China and Brazil, in Brazil's agriculture and chemical product imports is continuously increasing. And do you think it will -- such trend will continue and what are the reasons in your mind?

Well, I think it's natural, yes. As we've seen Brazil as an overall market has grown as a percentage of the global market. So for example, in 2022 at the peak, we saw a Brazilian market of USD 21-plus billion, and we saw a very sharp decline of USD 15.5 million in '23. So we saw the up and the down, but it is the largest single market globally. And all the major companies are participating in Brazil. And as we know, China is a supply chain behind not only direct to Brazil, but for example, our own business, having a very large proportion of China produced products. So it's natural as the biggest market to have Brazil as a key focus area for all the suppliers of the industry.

How do you see -- how do you predict the trend of Crop Protection products about consumption and price trend? And do you have any prediction?

Well, I did mention earlier that we continue to see, based on positive commodity prices and grow our profitability, we see a stable demand from growers around the world. Of course, that is dependent on commodity prices, which is dependent on the growing season. But our assumption is continued strong profitability and therefore, strong demand and stable demand for crop protection from the grower side. And as we spoke about earlier on the supply side, on the supply side, with the overproduction and low prices in China, even with our Value Innovation portfolio focus, there is continued price pressure in the global market, in particular, in 2024 until the inventory levels at the channel stabilize in 2025.

Does the company have any guidance or planning related to dividends and buy out of your shares?

ADAMA currently, as explained by Steve, we are now focusing on our transformation plan, our fight forward plan in order to bring more value to ADAMA and to our shareholders. And then once we will see this value embedded in our financial results, and in our leverage and cash situation then we can consider any capital transactions to support our shareholders.

ADAMA is bearing a huge amount of liabilities as well as the inventory. Can you get overseas financing to meet your cash demand to overcome the tightness?

So we are managing our cash situation, our debt situation in a daily basis. As we explained in 2023, the focus is cash flow management, and we are of course going to continue with that in 2024, focusing on our cash flow generation, aiming to a positive cash generation in 2024. We currently do not consider capital -- any capital activities around it. We have enough committed facilities with the local banks here in Israel to support us, in case things will not move as we focus -- as we've spoken.

The gross margin of Crop Protection industry is dropping. What kind of activities are you taking to reduce cost?

So I will divide it into more tactical activities and more strategic activities. Around the tactical activities we already took, and we are about to continue taking measurements in 2023 around cost management, about mix. We explained already that our mix in 2023 was positive and it is a trend into 2024. And of course, the value innovation as explained by Steve, will support selling more profitable products with higher prices in specific markets that we can position our product in a way that we can capture more value, more pricing in the market. All this will be included and be reflected in our better gross margin going forward.

As for the following quarters, what is your estimation for the performance?

Well, unfortunately, we're unable to give guidance on the next quarters. As I mentioned, I'll be traveling in India next week. I was in China a couple of weeks ago. I plan to be in Brazil. So for sure, the whole of the company is focused on driving forward with our new plan and our new strategy and delighting customers. So we're very much focused on delivery and hope to share with you those results after the next quarter.

Is there any change to your market share in both domestic and oversea markets?

So we also unfortunately don't -- aren't giving market share guidance. At the same time, if I connect to what I showed is the plan for our fungicide portfolio launch in Europe, you would remember I showed the number 9%, and then showed a strong escalation in the market share. So that's one example. And for sure, both with the new product launches and also those products with more innovation at a higher price point in the market, we would imagine from a value perspective, we clearly have a market share growth strategy. So again, let's see how the results look in the coming quarters.

That concludes the Q&A session. And surprisingly, we have answered 30-plus questions. So to summarize today's session, I will give the floor again to our CEO.

Great. Thank you, Zhi. This is well, thank you so much for the questions. I can get a sense of the questions, not only the interest in the company, also understand the concerns of 2023 and very understandably wanting to know better or get more detail on the way forward, what does '24 look like, what does the future look? So together with Efrat and myself, and the Investor Relations team, we hope you heard today that we have made material changes not only to our leadership team but the effectiveness of our organization, and we have taken what we believe are a number of bold moves in 2023 and already in '24 to position the company much more strongly in the market to bring our technology to our targeted customers. And at the same time, on our cost of goods and our operational efficiency, those reorganizations and our overall transformation plan over the coming months and years will come to life and deliver not only a better customer experience and employee experience, but also better financial delivery, in particular, with our focus on delivering cash and delivering net income. So thank you for your time, your interest in the company, your confidence, your patience with a very difficult 2023 and look forward to speaking to you again soon. [Foreign Language]

Dear investor friends and that's the end of our online roadshow. Same as Steve, we are expecting more communication with you. Thank you very much.