ADAMA Ltd. (000553) Earnings Call Transcript & Summary

So my name is Rivka Neufeld, I'm the Head of Investor Relations at ADAMA. With us here today, we have CEO and President, Mr. Gael Hili; with us also, we have CFO, Mrs. Efrat Nagar. And we will be presenting the financial results for the quarter followed by a Q&A session. You can see at the bottom you have a Q&A box that you can submit your questions in advance. And please feel free to use that. And with that, we will begin. No, I will give the legal notice, please. So before we begin, this presentation is for marketing and information purposes only. Neither ADAMA Ltd. nor ADAMA Agricultural Solutions Ltd. intend to give -- and this presentation does not constitute professional or business advice or any offer or recommendation to perform any transaction in the company's securities. It does not replace the need to review the company's reports as published to the public in its official filings. Any forecast and or assessment that will be provided, if provided in this presentation is based on the assessment of the company's management at its discretion and involves uncertainty. These estimates and or forecasts are forward-looking information as defined in the Securities Law 1968. These assessments and or forecasts may not materialize. Any content contained in this presentation shall not constitute or be constructed as any regulatory, valuation, legal tax, accounting or investment advice. So with that, thank you, Gael.

Thank you, Rivka. Good day, everyone. So it's a pleasure for me to give you this presentation today. First one from me as the President and CEO of ADAMA's, so great to have you all. I'll give you some information, some inputs about how the crop protection industry or market is moving according to our view. And then as Rivka was saying, I will share our result for the third quarter and the first 9 months of 2024. Now for those of you who've been attending previous calls or for those of you who are familiar with our industry, some of the things you're going to hear today are not new. I'll start by saying that, this is a market, the crop protection one, which is experiencing a significant price pressure in the market now for some time. And this price pressure is coming from 2 different sources -- angles. The first one is that we see the grower P&L's pressured. Crop commodities have been softening. And when you look at the P&L of the key crops in the key geographies, the profit that the growers are making for every hectare they're producing -- planting and producing, those profit has been going down and are -- so lower than previous year, and in some cases are going into negative. And that's obviously putting pressure on our industry because in cases like this, growers look for savings, look for better value for money, and are much more selective on the quantities they buy and what products at what price. That's the first source of the pressure we see in the market. It's been this way for a while, but it's not getting better because we see crop commodities, as I said before, softening -- the crop commodities prices softening. Now the other dynamic, which also has been there for a while, now for more than a year, is the overcapacity of active ingredient production in China, which is resulting on price levels out of China for those active ingredients at historical low levels. That has been the case for more than a year. It is still the case. This over overcapacity is still there, and it is impacting significantly the market because some -- the participant into the market are trying to find way for their volumes, which are, in many cases, more than what the market needs. And this is obviously through the normal supply and demand balance putting significant pressure on prices. You'll see in our result in a moment that pricing is one of the key drivers of our -- of the result we're presenting. Another couple of things that are happening in the market. The first one is that we see also behaviors of the channel of our customers changing, and this is true nearly across the globe toward more just in time supplies. So the time where those channel partners are supplying products and putting them in their inventory is getting more and more close to the actual users of the product on the ground by the growers. And this is also, affecting the dynamic of our sales, and when they are happening. So that's a phenomenon that we see across the board in the market. And last but not least, and this is more on the good news side, over the year -- we started 2024, our industry has started 2024 with very high level of inventories in the channel, abnormally high. This has been easing over as we were get progressing into the year to bring us to a situation today, end of Q3, where in most markets, not all of them yet, but in most markets, we can say we are back to what our industry would call what we would call normal, or level of inventories. There are a few exceptions, unfortunately to that, where the inventories are still higher than historical levels. But overall, we can say that this has been easing and this is good news for our industry. Next slide, please. So let's talk now about the Q3 and 9-month result financial highlights of the company of ADAMA. So we see -- there are a lot of good news in there, okay? And I'll go through them now. The first one -- and these are good news that are happening in the type of market I just mentioned. So the market didn't get better, but our performance on several elements got significantly better. So first of all, if we look at the EBITDA line for Q3, we're looking at an EBITDA that has more than triple versus Q3 2023. Okay. So we're seeing -- we're starting to see the result of our efforts on portfolio, on mix and on OpEx on the Q3 EBITDA result. This is also true for the 9-month, okay, where with an EBITDA 4% above the same period of 9-month of 2023, that's a significant achievement in a market like this one. And I'm pretty -- we haven't seen the results of all our competitors, but I'm hoping that this will put us in the forefront of the industry. The other thing which is, which we're very proud of is our performance on cash. So we've seen our 9-month -- for the 9 month of '24 versus 9-month of '23, we've seen our operating cash flow improving by $258 million and our free cash flow improved by more than $350 million. This is the result of very, very disciplined management of cash since the beginning of the year which is producing very, very tangible results. So we see EBITDA improving over the 9-month, we see cash flow improving, and we also see for the quality of our business improving. So this is the result of the management of our inventories over the last 9-month, where we've been successfully replacing very highly costly inventories by inventories which are much more competitive in the market at lower cost. This is the first driver. The other driver is the sales mix. We are in ADAMA, we have been embarking already for a while in a strategy of adjusting our mix to more profitable products. And this is showing up in our financials. And last but not least, our operational expenses. Our cost has been under very strict discipline over the last 9-month resulting in a performance of $45 million better than last year. So overall, you put all those factors together and we end up with a performance -- a financial performance of the company which is -- if you look at year-on-year, which is in our industry, the right apple to apple comparison is significantly better on many fronts. Next slide. Now if we look at the P&L for -- this is the one for Q3, it confirms in a way what I've been saying earlier, on the top-line we see a decrease. So we have a top-line in Q3 '24 which is 10% lower than Q3 '23. This is coming mostly from price impact. So 7% out of those 10% are coming from price. There is a bit of volume there which relates also to the dynamic I was mentioning before of just in time purchases from the channel. We see some purchases moving to Q4 from Q3 in some regions. And then you see right away if we start going down the P&L, whether it's gross profit or EBITDA, a significantly higher number than a year ago. And this is the reason behind that is what I was explaining earlier, the mix is better. We're focusing, we're getting out of some low profit commodities. We're focusing on higher margin products. The OpEx management is also contributing to that. And overall, we end up with an EBITDA significantly higher than the previous period. On the net loss and reported net loss, we see the loss reducing, despite higher financial expenses. And this is also something we are continuously working on. The 9 months say about the same story. You see the top-line reducing by 14% on the first 9-month of the year. This is a combination of what the market is bringing us in terms of price pressure and volume pressure. But also, there is in there some conscious decision of walking out of some low profit businesses. As I was saying before, strategically, we're refocusing our portfolio on higher margin products even if in sometimes it affects our top-line. This is a conscious effort to set the company for the future on a healthier financial basis. The gross profit on a 9-month basis went down. This is a result of the sales dynamic. But you see that despite that EBITDA is up 4%. Again, this is the result of the way we've been managing our inventories and the type of profit of product, sorry we had on our inventories versus a year ago their cost which was lower. And that allowed us to impact positively the EBITDA and the OpEx management that has been very strict and we've been reducing the size of our employee base and cutting on all other type of non-labor expenses. Now if we look at the regional picture, it tells also a story that is very homogeneous wherever we look at. Now if you look on the top-line and these are sales numbers, these are not profit numbers that we're showing for the regions. You see -- and allow me to exclude for a minute North America. You see that for whether it's Europe, Africa, Middle East, Latin America or Asia Pacific, sales on a comparison basis, whether it's the quarter or the 9-month are going down. Same reasons, as I was explaining before, for the overall company, we have a price dynamics that is happening all across the board and also a volume dynamic related to the fact that we started 2024 with very high channel inventories. Now the value of the market we play in those regions is going down and the drop of our sales in that respective market is very much reflecting what the market is doing. And we see for example, that in Latin America the drop is bigger, but the market drop is also bigger in Latin America than it is in EAME and APAC. So broadly we are following what the market is doing there and being affected by the market on the top-line. And once again, there is also an element, and this is true across our regions of portfolio mix where we've taken a conscious decision to walk out of commodity business that was not profitable enough. This is impacting more -- slightly more Latin America than it does in, especially, in Europe where we had as a starting point less of these low margin commodities in our portfolio. Now North America shows a surprisingly increase of, or is flat year-over-year on the 9-month. I would not focus too much on the Q3, which was a small quarter, but on the 9-month is flat where other geographies are dropping significantly. The reason there is that in North America our market share, which is both good news and bad news in a way, is much lower than anywhere else on the globe. In Europe, Latin America and APAC we have -- in our focus countries we have double digit market share in most cases, whereas in North America our market share is very low, is below 2% and that allowed us in North America in a way to be disconnected from the market. So in other geographies, in other regions where the market goes down, our presence is such and we're big enough in a way that we cannot disconnect ourselves our performance from the market or is very difficult, impossible in a situation like the one we're [ leaving ] in 2024. In North America it's not the case. So through some specific customer deals we are -- we were able to maintain our performance versus the previous -- the first 9-month of 2023. But I would not take it as a significant indicator that we are performing better than other regions in North America. We are also struggling with our pricing in North America. The pressure is there. We're doing better than the market, true, but I would -- it's not significant because our presence in North America unfortunately is not significant at this stage. Next slide, please. Efrat, I think you're taking this one.

I'm here. Okay. Thank you, Gael. Okay. So looking on the sales bridge for the last quarter Q3, we can see here that as explained by Gael, our sales reduced by 10% from $922 million to $833 million. We can see 7% reduction in prices due to the low-price environment in the market. Mainly because of the low prices from China. However, we can see here that our volumes increasing slightly, indeed only 2%. But it reflect what already explained by Gael, the easing of inventory in the market. And it is, although we took a decision of defocusing from selected low profit products and also, although, we see the just in time purchasing patterns in the market due to the high interest rate. If we will look on the next slide which is our gross margin, our gross profit bridge, we can see that our decision around the defocusing from a low profit product together with our [ slightly ] inventory management already reflected in the result of Q3. You can see here that our gross profit, although sales are lower $205 million versus $176 million, 17% increase. But not only that, also our gross margin, the quality of the business increased significantly from 19% in Q3 2023 to 24.6% in Q3 2024. And you can see here the high impact of the lower cost of inventory that we are selling in this quarter, which is significantly positive higher than the negative price impact. Looking at the EBITDA bridge analysis, together with the very disciplined OpEx management and with a [ $7 million ] OpEx reduction, our EBITDA increased by 241% versus Q3 2023 are reaching to $61 million which is 7.3% EBITDA to sales ratio versus only 1.9% in Q3 2023. If we look to the 9 months sales bridge, so the story is more or less the same, reduction of 14% in sales, 9% from prices, 2% in quantities from the same reason. And with our decision of defocusing from collected low profit, in the next slide we can see the improvement in our gross margin 26.1% versus 23.5%. We are succeeding also in the 9 months to generate positive mix and also the cost here as you can see $330 million better contribute to our decision already in Q2 2023 to focus on our inventory management. And with our OpEx discipline again, starting from already 2023, we see also in this period of the 9 months reduction in the OpEx which bring us to EBITDA of $264 million, 4% than last year and with significantly better quality of business 9.7% EBITDA ratio versus 8.1%. Next slide is my favorite slide, which I'm really proud to present. Our cash flow management. So although, our net loss has increase year-over-year by $132 million, we have succeeded in the 9 months to generate operating cash flow of $253 million which are higher by $258 million versus last year, and free cash flow $130 million positive free cash flow $256 million higher than last year. This is due to our very strict management of all our working capital elements. Inventory, that I will present in the next slide. Improved payable terms, a focus on collection and last but not least prioritization of CapEx and intangible asset investments. While we are investing only on must have and on a growth project with the lower ROI. Inventory achievement is presented here. We can see here that in Q3 2024, our inventory reduced by $421 million versus last year. But not only that, also versus the beginning of the year we see reduction in our inventory. If we are looking on the details, we will see that the reduction in the inventory is in our finished good. In the finished good, we have less flexibility on moving products from region-to-region. And via reduction in this finished good product, we will be able to supply very soon to our country's low-cost inventory at market price that will enable us to compete in the market. Looking on the days, you can see here that Q3 191 days significantly lower the last year also, demonstrate our good inventory management. And I think this is going to be my -- no, okay. Debt breakdown. So ADAMA has $2.3 million debt to the end of September. You can see here the 30% -- 44% from this debt is from our bond, our traded bond, 30% from the -- that is coming from Syngenta partially short-term and long-term. We also have short-term and long-term from the banks, and until as of September -- end of September we also have $459 million committed credit lines from the banks in Israel and also unused uncommitted credit lines from a Syngenta of approximately $200 million. Our covenant for this quarter is 4. We need to meet ratio of net debt to EBITDA of 4.8. This 4 ratio is excluding Syngenta loans and securitization. And again, in the last, as always, we are meeting our covenant. This is the last slide, correct? Yes.

Correct. Thank you very much. We will now open the session to questions and answers. Please send us your questions. As of now we didn't receive any questions and we really encourage you to take this opportunity to pose direct questions to the company's management and to receive answers from them. So we will take a few moments to poll for questions. Thank you. I see first question, do you expect to continue to lose and what will be your cash flow in 2025? Who wants to take this answer?

I can take it, Rivka. So we don't -- we obviously don't make forward-looking comments here. What we have been working on is an overall holistic plan to improve the financial of the company, including cash flow as we saw already. So the cash flow situation of the company through the plan, we call it Fight Forward plan. Those of you who were here in previous version of this call have heard this terminology, and this Fight Forward plan is a plan that is meant to turn around the company financially, which we've started to do. The cash flow performance as Efrat was mentioning in her favorite slide, is improving already significantly year-on-year. The plan is still on, continues. We're executing it. I came as a new President and CEO of ADAMA, but that doesn't change the fact that this plan is absolutely necessary. If anything, we're accelerating it. So -- and that is meant to improve, this plan is meant to improve all the lines of the -- of our financials, including obviously the cash situation, including our net income.

The next question, 2 questions. Is there any expectation for an increase in sales in 2025 in order to create more cash -- more operating cash flow?

So I can take that one. Again, it won't be a forward-looking statement on our sales, but maybe a couple of comments on the market. The situation of the market that I described in my first slide is current. We haven't seen any indication of that to give -- to change in 2025 yet. So the market assumption we're working on are the current -- are that the market will continue to see the type of price pressure we see right now in the market and the type of competition coming from China with this overcapacity of -- on the active ingredient side. So we don't -- long story short, at this stage we don't see the market easing much and helping us with tailwinds in 2025. Now it's just an assumption. You don't have to believe in it. It's just an assumption. I hope it's wrong, but it's our assumption today.

The second question repeats the first question really, do you have any expectation of moving from loss to profit in 2025?

I guess...

I think you answered that already.

Yes.

Next question. Can you please give a bit more insight into the positive cost development in the EBITDA bridge on the third quarter and 9 months? What are the different contributors to the $112 million and $312 million in the cost improvement? Efrat, do you want to take that?

Yes. There is 2 components to this cost reduction. One of them is our decision to manage our procurements in production during 2023 in a very tightly way. Which means that we join today from fresh low-cost inventory sold in market prices. So we see the cost benefit versus 2023 situation. This is one. The secondly is our -- part of our Fight Forward is to see more efficiencies and better ways of working in our operating area in order to manage and to reduce our cost efficiencies.

The next question. The cost of the bonds is much higher than bank debt for the long run, excuse me, higher than bank debt and debt from the related parties from Syngenta. Why don't you increase that debt more in comparison to your buyback plan? Meaning why don't you switch your more expensive debt for cheaper debt and increase your buyback plan?

ADAMA is in the last 9 months and I think in the last 2 years focusing on cash management, debt management, and it's already demonstrated in our financial expenses, significantly lower than the last 9 months. We keep evaluating the way of managing our debt and cash in order to minimize our financial expenses, including buyback, as we already done in the last 2 weeks ago -- 2 months.

So we don't have any more questions. I propose that we wait a little bit more. Perhaps anybody -- somebody else wants to send us a question, you can also send in...

There is a question on the -- in the chat, Rivka.

Thank you. Do you see any new installed capacity in the market in the near future? Is there an inherent subsidy in China?

So I'll take this one. What we see for sure, I'm not sure about new capacity is still coming in, but it's the tale of projects and decisions that have been made in the past. I don't think that anyone is crazy enough to build to start a new project now from scratch. But we're still seeing capacity coming online of previous decisions having been made in China. So that's one. The -- what we don't see is those capacity -- new capacities that have been put online in the last 24 months coming down. So nobody's closing. That's what we're seeing and that's what we're -- that's what is can be surprising to the normal economic principle of supply and demand, because on some of the AIs in which those new capacity have come online, the global production capacity is twofold, threefold, sometimes 10 or above times the demand. Despite that, those capacities are still producing, which can be surprising. I think it's the result maybe not direct subsidies to back -- coming back to the question that are happening in China, but more different strategic priorities of the Chinese government these days versus what has happened last time we saw something similar where the priorities of the Chinese government were very much around environment and in a way, "cleaning up the industry from its low-end participants." That's not clearly the strategy of the Chinese government today. Whether it's the central government or the provinces. They are actually trying to support those companies in order to survive. Okay? That's what we're seeing. Usually, not through direct subsidies, more indirect in most cases, but still that's one of the reason why all these overcapacity is holding for more time than what we all thought initially.

We have one more question. When do you expect that price pressure in the market will ease again?

Well, I don't have a crystal ball, but the -- it is related, not only, but very heavily related to what I just said is until we see the type of overcapacity, we see in China on all the main AIs that are produced and sold in the world, I don't see the pressure going away. Now, of course, the commodity prices I'm talking about, the agriculture commodities that our growers are selling can have an influence also can release some of that pressure if they start going up again. Right now, they're more softening than anything else. So these are the 2 big trends that will either make this price pressure stay or take it away. When? Impossible to say.

Well, we don't have any more questions as of now. Maybe would you like to give some closing remarks and.

Sure. So look, I think that the short summary of what is going on in ADAMA right now, is that we are starting to see the positive sign on our financials of our Fight Forward plan. This is an, as I said earlier, a holistic end-to-end improvement plan that was launched more than a -- a bit more than a year ago within the company and that we are as a leadership team committed to and actually committed to accelerate. So we are showing the first positive sign on our P&L, on the cash performance, on the EBITDA and on the quality of the business. So this is a great start. We're not done by any mean and we are evolving in a market that is not helping us. Still, I'm proud of what the team has achieved and is achieving in a market situation like this one. And our commitment is to continue to execute on our Fight Forward plan and turn around the company.

Thank you very much, Gael. We actually received one additional question. Would you like to take it?

Sure.

How much cash can still be generated by reducing the working capital? Efrat Maybe you want to take that?

I believe it's more about the quality of business and the focusing of high growth margin products with lower working capital demand. And this is our -- this part of our strategy and we will keep focusing on this direction also in 2025.

Okay, so thank you very much for everyone. I think that we will now close our earnings call and I will remind everyone that you can contact us at [email protected] for any questions you might have and we will be happy to continue to be in context. So thank you very much everyone. Goodbye and have a good day.