ADAMA Ltd. (000553) Earnings Call Transcript & Summary

[Interpreted] Dear investors, dear friends, Good Afternoon. This is Guo Zhi, the Board Secretary from ADAMA, and welcome to this roadshow for Q2 and the first half of 2025. Today, we will provide simultaneous interpretation in both Chinese and English. [Operator Instructions] From the screen, you can also see all of our invited guests including Mr. Gaël Hili, the President and CEO; Efrat, the CFO; Eric, our CCO; as well as Joshua Phillipson, our Global Head of Investor Relations. They are joining us from outside China. So we'd like to thank them for their participation. And today, they will present to us our financial performance for the first half of this year and Q2 and also answer your questions. [Operator Instructions] Since there will also be a slide presentation, we will share our screen. And on the first slide, you will also see the legal notice for your information. And next, I'd like to invite our President and CEO; Mr. Gaël Hili, for his part of the presentation. Gaël, over to you.

Thank you. Thank you very much. Good day to everyone. It's my pleasure to be here and to share the results of ADAMA for Q2 and for the first half. Before doing that, I will start, as usual, in this call by giving you a quick summary and update on how the markets that we evolve in, the crop protection market is doing. Not very different to what I've been saying in the last 2 or 3 quarters. We have a market that continues to be in an oversupply situation mostly from China, which is putting the prices that our industry is dealing with under pressure. This is not new. It has been the case for at least a year now, actually, even more than a year but it's not changing, okay? We haven't seen any change in the last quarter -- in the last 2 quarters actually since the beginning of the year, and we're not seeing any change -- actually foreseeing any change ahead of us, at least for this year. So that's the reality we have to deal with. And all the efforts we have been doing as the leadership team of this company to improve the financials are meant to make this company financially sustainable in the current market conditions. So if the market improves, it will be an upside, but we're not planning on a market improvement to improve or to set the financial of the company in the right place. Another couple of things that are happening in the market now, also that are not new to this quarter, the P&L of the growers globally, so the financial, the economics of the farms are under pressure. They're squeezed between the input prices and the commodity prices, which are lower than averages of the past few years. So generally speaking, this is true in all the big markets in the world, whether it's Brazil, whether it's Argentina, whether it's most of Europe or U.S., it's a bit the same everywhere. We see the economics of the farmers that are under pressure, which is also putting pressure on prices in our industry because farmers have a tendency to go to cheaper products than they would normally go if their economic situation was better. The last thing I want to mention is that inventory over the last 4 quarters have been normalizing in most markets. This is good news. We had a inventory -- channel inventory problem as an industry a year ago. We can relatively safely say that we are past this and that the situation of channel inventory is healthy in most important markets. We also see that the channel players have taken an attitude -- a purchasing attitude, much more careful and just in time than before. I've been also saying that in the past few quarters, this remains true. Next slide, please. So in that context, I'm very happy to report strong results for ADAMA in Q2 2025. We posted an EBITDA which is up 25% versus same quarter last year and which brings our first half EBITDA, H1 2025, 23% above last year. So this is the first key message. We are -- we continue to -- on our trend of improving the EBITDA for the company. Now this performance on the EBITDA in dollars comes from very strong cost management that has been continued over the last quarters, that was also true for Q2 2025. Whether it's cost of our products or cost of our operation, we have been, as you know, embarked into our Fight Forward transformation, which has resulted and continues to result in significant cost benefits, which are helping our bottom line. We also cleaned our portfolio from low profit products over the last 18 months. All this results in a better profitability and we see -- also the inventory management has been helping this trend. So all in all, we continue the same trend of improving our profitability. The good news for Q2 2025 is that it's the first -- on top of the profitability improvement, we see now sales improvement. So for the first time in Q2 '25, since Q3 2022, so it's a long time, we've posted a quarter-on-quarter top line sales increase of 5%. So this is also giving us confidence that we are on the right track, that our transformation is working and that we are delivering on our objectives. If we look at the profit in percent, they're also up 18% above Q2 '24. And H1 gross profit was up 11%. Last but not least, we also posted a very strong quarter on the cash flow front with an improvement of $39 million. We posted a free cash flow of $90 million for the quarter versus $51 million -- sorry, for the first half versus $51 million in the first half of '24. So all these metrics I've mentioned, sales, EBITDA, cash flow are going in the right direction, show an improvement quarter after quarter after quarter, which is giving us confidence that our strategy, the Fight Forward transformation where we are embarked on as a company is working. Next slide. I think this is for Efrat.

Thank you, Gaël. So how it looks like from P&L perspective. So the sales, as mentioned by Gaël, we see, firstly, after 10 quarters that our sales are increasing by 5%, reaching to $1.1 billion, 5% higher. This supported by 8% of volume growth due to the channel inventory easing and they are more than offsetting the 3% lower prices versus last year because of the price pressure on the market. However, with 5% increase in sales, we see 18% in gross profit represent the quality of our business, 29.1% gross margin versus 25.8% only in 2024. This is mainly due to the higher volume sold, but also because of our cost management, our improved operational efficiencies following our Fight Forward Plan that's mentioned by Gaël and lower costs of the inventory sold. This is more than compensating our -- the lower prices. And with better gross profit, better gross margin, our EBITDA for Q2 2025 increased by 25%, reaching to $150 million, 13.7% gross margin, so EBITDA to sales ratio better than last year. This is although we faced some challenges in collection in Latin America, which forced us to have a provision for bad debt in Q2. And with those great business development, we are finishing Q2 with profit of $6 million versus $61 million losses in Q2 2024, and our reported net income narrowed by 66% from $94 million to only $32 million in Q2. If we are looking on H1, so with the higher sales in Q2 and although we lost some sales from Turkey in Q1, we see flat sales reaching to $2.1 billion sales, 4% volume growth more than compensating 3% decrease in prices. And with flat sales increase, we see 11% increase in gross profit reaching to $620 million, almost 30% gross margin significantly higher than last year for the same reason that I mentioned regarding Q2, same trend. We see higher volume sales and lower costs due to our operational efficiency due to Fight Forward Plan and the cost of sold and with more -- we've continued OpEx discipline starting from 2024 as part of our Fight Forward and although we faced some challenges on the collection in Brazil, we succeeded to manage our OpEx and to reach to EBITDA of $310 million, 23% more than 2024, 14.8% EBITDA to sales ratio. And together with the profit that we presented in Q1, in H1, we have presented $49 million adjusted profit versus losses in 2024 and our reported net loss narrowed by 91% to $11 million only versus $126 million in 2024. Next slide, Gaël?

Yes. This shows how our sales by region have been evolving quarter to -- sorry, between H1 2024 and H1 2025. You see that in the 2 -- in H1 in our industry, the 2 regions who are in active season are Europe, Africa & Middle East and North America. And Asia Pacific is a bit of a mix, but the message here is Latin America is off season. The season of Latin America is H2. So if we start by the 2 regions, which were in season in H1, we see that in Europe, the actual number in terms of sales is a drop by 4%. But if we correct this by excluding Turkey, why excluding Turkey? Because in 2025, we are not allowed, as a company, to sell in Turkey anymore because we are an Israeli based company. And due to geopolitical reasons, the Turkish government has -- is not allowing us to sell in Turkey anymore. And as a result, we lost those sales. If we exclude those losses, we're actually up 3% in Europe, which is a great result in a big market and strategic market and profitable market like Europe for us. The other market where H1 was very good in North America. So the sales grew by 20%. And this is across our 3 businesses in North America, whether it's our non-crop business, which is a big part of our North American business or our Agricultural business in the U.S. or our Agriculture business in Canada. This is -- these 3 businesses have performed very well and building on the rebound of the market related to the cleaning of inventory channels, but also we've been successful at making some deals with the channel this year in the U.S. that we didn't do last year. And in Canada, we're building on our innovation portfolio to increase our sales. So very strong performance in North America. In Latin America, as I said, down 4% in CR and 9% in dollar. I wouldn't get carried away by this. This is the start of the very low part of the season, not fully relevant for Brazil and LatAm. So the Brazil and LatAm season is H2. This is where we will measure the success or not of our season in that part of the world. Asia Pacific, down 5% on the sales side. This is, in a way, mostly coming from India. China is doing very well. China is up 13% in CR and 12% in dollars. But India is down and the reason why India is down is that we decided to take a different approach to our go-to-market strategy in India, a more healthy approach with taking less risk of product returns. We had too many product returns in the past. We want to be closer to the market and receive less product back, but that has required to first stop working with some distributors who are returning too many of our products and also make strategic choices of when we sell to whom. And this resulted in this drop in sales, which in a way is a conscious and voluntary one to clean up our go-to-market. Next slide.

Okay. Thank you, Gaël. So we spoke about the sales of H1. So we can see here that our sales are more or less the same, 4% increase in volume due to the recovery market demand in the most regions. And this is despite declines in Turkey, mainly in Q1 and despite our decision to exit from a low-profit product and from some businesses that are not generating profit. This is more than compensating the lower price due to the overcapacity in the market, which put a lot of pressure on the prices together with the high interest rate and some negative impact from exchange rates, mainly coming in Q1 from the Brazilian currency, which depreciated versus the dollar. And with that, if we go to the next slide, we can see in the bottom slide -- the bottom bridge, our EBITDA bridge starting from $252 million, 12% EBITDA to sales ratio. We are increasing our EBITDA by 23% to $310 million, 14.8% EBITDA to sales ratio. This is supported by, as we mentioned, higher quantity contributed $12 million, the prices which declined in H1, but the prices are lower than the increase -- or the better cost that we sell in H1 mainly to our operational efficiencies and the lower cost of inventory sold. And with slightly OpEx increase mainly due to the collection issue in LatAm, we are reaching to the $310 million, as I mentioned, better quality of business at 14.8% gross margin. In the next slide, we can see another parameter that we are seeing development improvement in our numbers. So our cash flow for H1, so of course, the first line is our losses, which now significantly contributed to our cash flow performance. Our operating cash flow is more or less the same as last year and this is because we took now a decision as to slightly increase our inventory in order to be able to address demand in the market. Increase in inventory somehow offset by the great focus of collection of the account receivables. And with better prioritization around CapEx investment, both in the global operations side and in our P&I, we are investing only on the short ROI project that will bring us value in the next short future. We are reaching to $90 million free cash flow versus $51 million last year. And this is I think about the financials. Gaël?

Great. Yes. We'll move to another topic now, which is the topic of commercial excellence. For that, I'm very pleased to introduce Eric Dereudre, who has joined ADAMA as the Chief Commercial Officer on April 1, and we're very pleased to have somebody like Eric onboard. You can go to next slide. Eric is a very seasoned and experienced leader from our industry. He's been -- he's coming from Corteva, where he held various roles, strategy, P&L ownership, and he's coming to us with the mission to raise the bar of our commercial sales and marketing organization, okay? I'm convinced that he is the right person for that. That's why I'm so happy to have him. He is leading now our regions, our commercial organization in the region and he is strengthening the leadership team of ADAMA by bringing this very impressive experience from our industry. Eric, I'll leave you the ground now to tell us about what you've seen as a newcomer to ADAMA.

Thank you, Gaël for this warm introduction. And good day, everyone. Very happy to be here with you today. As Gaël mentioned, I've been now spending 4 months in ADAMA. So what -- I've spent a lot of time over these 4 months to -- with an intensive connection with our people in the core countries. So traveled a lot to meet our people, but most importantly, also to meet our customers. So it was a very intense 4 months of onboarding to get to know the team and the market environment in which we operate now and the mood of our team and customers. So maybe what I wanted to do today is give you a little bit of a flavor of what I've seen, my observation with my fresh eyes, if I may say, from my 30 years of experience in the industry, but looking from inside of ADAMA. The first thing that I can probably spot is the strong belief in the portfolio and the pipeline. Everywhere I've been in the core countries, core regions from both internal and strong confidence in our portfolio. The product quality is what comes first always in conversation we had with external stakeholders, the reliability of our products as well when I talk internally about the confidence of the team about our pipeline. It looks like there's a strong confidence and hope that this pipeline is really meeting the customer needs. And that's quite really, really pleasant and refreshing to see from the many interactions I had with the market. So that's the first component I wanted to highlight. And this is despite a significant portfolio optimization and reduction that we did over the last 2, 3 years as part of the Fight Forward initiative and any kind of optimization of our -- and rationalization of our portfolio. Despite that, I see a pretty strong confidence in our portfolio, which remains strong. The second element, which was really outstanding, too, is the strong relationship, genuine, deep, long-standing relationship that we have with our customers, the channels, the distributors in the different markets. This is kind of very much a big asset for ADAMA to have this relationship with the main distributors in the region. This relationship is based on the long history. It's based on trust and confidence, open, easy to do business with ADAMA and that was also very refreshing to see. This is combined with a very high level of knowledge of the market, of the ways to do business, customized by region from our own team. So this trust and relationship with customers and channels has been, for me, over this first 4 months, a significant asset that I've been able to witness. The other element, which I wanted and was really my objective for having and visiting our teams is -- where do we stand internally in terms of accepting the changes of the market, in terms of embracing the many transformations that have been going so far in the company as part of the Fight Forward. And what I can tell you is the mindset of our people, the ownership, the business ownership of our people is extremely strong. I realized that there was a very strong self-awareness of what has to improve, what has to change. So the self-awareness is there. But most importantly, they are also already engaging in the deep transformation genuinely and with a very strong mindset of ownership and an entrepreneurial mindset for making those changes, embracing those changes and moving forward. So that was extremely refreshing for me to see. Makes me extremely confident in our ability to move forward and continue growing and developing and transforming the company. The biggest opportunities I have seen, of course, in my space, is the commercial capabilities that we continue to develop really to meet the -- to match basically this portfolio and the demand from the market. So if we move to the next slide, something that I want to mention before we go to the -- what would be the commercial excellence activities and things that we can move. Maybe a few words on the market condition. I don't want to repeat what Gaël Hili has mentioned before, he did a pretty good picture of what the market looks like. But what I can testify witness today from my interaction with the customer is the tone and the level of conversation with the channels nowadays has shifted a little bit from where it was a year or 2 ago where it was extremely intense. There was a high level of inventories. That was extremely challenging conversation. I think the tone now has changed a little bit as we get through normalization of the channel inventories. This is really, really real. We see it. The conversation is changing, moving to more strategic conversation. The level of inventories in the channels have normalized, as I said, and Gaël mentioned it as well. The destocking has happened, and now we are starting again to have kind of normal, if I may say, business conversation with the channels. I want to put a little bit of warning there, of course, the farmers' profitability all around the place in most of the cropping system remains extremely tight. The geopolitics is not helping. The trade of commodities is not helping. So there's still some anxiety behind the profitability of the farmers, which still put a lot of pressure on pricing. But from a volume perspective, the things are normalizing, the pressure on prices remain completely there because of the farmers' profitability. And we also know that the overall capacity of crop protection from production from China remains high. So that's also putting some pressure on the volumes. But I can really witness that the signs of market stabilization are there. This is the right moment. The transformation that ADAMA did a few months and a year ago is now starting to pay off because we are now completely aligned with the new dynamics of the marketplace. So that's for a little bit the outside. Now if you go to the commercial activities, as Gaël mentioned, after I made this observation, we know in which market environment we now operate, which is slightly changing. For me, the investment that the company is doing in commercial capabilities to differentiate ourselves from the competition is just amazing. We continued that journey from account management planning to market engagement with data-driven approaches, and all of that is really to ensure that we capture the most value from our innovations. I believe a few quarters ago, for those of you who were there, I believe that one of my colleagues presented the value innovation and the pipeline we develop and how we want to extract value and create new products and solutions for the farmer. That's from the product development side. On the commercial side, the main activities that we are ongoing now is really to make sure that we capture the most value from this pipeline and this innovation. And it comes from a few elements. First is the value-based pricing, moving slightly from a cost pricing kind of approach to a more value pricing strategies. This is going on. We are putting in place the tools. We are putting in place the processes, the KPIs to make sure that we extract the value from the pricing approach, and this is starting to pay off as we've seen in some of our product launches. The second element to accompany this movement to value innovation is the demand generation. And here again, ADAMA staying a very strong channel-focused and channel-centric distribution-centric company. We are also helping our distributors to generate the demand. And here again, we are developing tools to track the sell-out of the products to the farmer. We are developing tools to help the positioning and to sell the value proposition of our new product pipeline. So all of that is starting to be extremely visible in the way we do. We have some good success of launches of new products. I've been witnessing that with a long list of customers in Brazil, for instance, where we launched new products recently, and this is to be -- that's going to be the success that we hope for the pipeline that we are developing. So demand generation and launch excellence have been really the key component that we want to continue to develop. And the journey is going on. The second element -- the third element actually is the resilience and the execution of those plans. I mean once you have good marketing plan, you have the value proposition, you have your right price setting, you have your right account management plan in place to launch those technologies and manage the season, then the question comes about the execution. And here, again, I'm very pleased to see the tools that the Fight Forward has given the company with and equipped our teams with where they can track now the execution of an account management plan almost on a month-by-month level and frequency to really make sure that we constantly adjust our strategies and our activities, commercial activities. This is done across the board with very strong cross-functional approach. That's also a nice transformation that is going on now. So very confident that from an execution standpoint, we are also now equipped with much better tools to capture the value and most importantly, to execute the plan as part of our -- along with our strategy. So in a nutshell, this is what we've been focusing for the 4 months. A very important journey, makes me extremely confident, Gaël and the team on where we are going. The tools are there. The mindset is there. The portfolio is there and the customer base is there. So this is, as a commercial leader like me, it's really refreshing and pleasing to see. Now we need to move to the execution and the robustness of this execution. Gaël and Efrat, that's what I wanted to share with the team today.

Thanks a lot, Eric, and thanks for joining from the U.S. in the middle of the night. I mean it's 3:00 or something like this for you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]