ICL Group Ltd (ICL) Earnings Call Transcript & Summary

Thanks very much for joining. I'm Alex Jones from the European Chemicals team, and I'm delighted here to host ICL and Limor Gruber, who's the Head of Investor Relations there. So I'll hand it over to you, go through a couple of slides, and then we'll go into Q&A from there.

Yes. I'll start with a quick introduction to put us all more or less on the same page and then we'll go to the Q&A. So ICL, what is the company or how would we describe the company? We have 3 value chains: bromine, potash and phosphate. Of course, based on our natural resources in the Dead Sea, in the Negev Desert in Israel and in the Yunnan province in China. In each of these value chain, we have some sort of leadership position. And let me just go through it. So in the bromine, we are the clear leader of the market. We have 40% of capacity, about 1/3 of production. We have most of the excess capacity in the market. And as a responsible leader, I should say, in this market. We managed our production in order to match it with supply. We also benefited from a significant decrease in the resources in China. And the result was significant price increases in the last few years. Going forward, we are focusing on shifting customers from buying elemental bromine from us and from others to buying flame retardant or other bromine compounds from us. About 75% of the elemental bromine that we produce at the Dead Sea is used for the bromine compounds. Only 25% we sell externally. And this will decrease as well. The leadership in the bromine market is coming basically from the resources. The Dead Sea is the best resource for bromine in the world in terms of unlimited amount, in terms of very high concentration and as a result, low production cost. The second value chain that we have is the potash. Potash, we produce just below 5 million tonnes per year, 80% of it at the Dead Sea, the rest in conventional mining in Spain. Again, here, the leadership position is not based on volume. It's based on our cost leadership. The Dead Sea is one of the 3 most competitive potash production site in the world. And we are in the process of improving our cost position also in Spain. Spain is a relatively high-cost operation. What we're doing there today, we're working in 2 different sites. We're consolidating these sites in order to significantly reduce the fixed cost to make this site more competitive. And of course, at the Dead Sea, the goal is to maintain our robust competitive position. Finally, the phosphate, we have a $2 billion phosphate business. However, 55% of this business is specialty phosphate, completely uncorrelated to what's happening in the commodity phosphate market. These are mostly value added, some of them very high-end solutions based on phosphoric acid and phosphate salt for the food industry and different industrial application. The last, I would say, division that we have is the Innovative Ag Solution. What you see here as IAS. This is our Specialty Fertilizers business. This is the only business where we don't have leadership position. And in this business, this is what we're doing. We're building our leadership position. Of course, we have the raw material because these are based on potash and phosphate, but we need to expand our geographical footprint and to fill gaps in our product portfolio. Specialty fertilizers, in general, are a fast-growing market. The market grows between 5% to 10% per year. And of course, much faster than commodity fertilizer because the changes in the agricultural market. You can see here the breakdown of the sales of our different businesses. Let me just stop for a second on the Phosphate Solutions division. As I said, $2 billion business, 5% operating margin. So sales, as I said, 55% specialty, where we have leadership position. We're the biggest in the markets of Europe, U.S. and South America, but the profit is basically 100% from the specialty. Our strategy here going forward is to increase the share of the specialty from 55% to 75%. One of the ways that we're doing this, of course, building the market, introducing new solutions. But also, we've just launched a pure phosphoric acid plant in our joint venture in China, in Yunnan. And this is a 70,000 tonnes plant in order to shift these specific operations from commodity, which today it is mostly commodity, to mostly specialty. And as I said, our goal is to increase the Innovative Ag Solutions part of the business, not just through growing the Specialty Fertilizer business, but also by developing digital solutions for agricultural productivity. And I'll say a short sentence about this. Today, there is a lot of activity in terms of precision agriculture on the data collection side of the business. Meaning, there is a lot of hardware being developed in order to collect information from the field. However, we are still not there in terms of analyzing this data. And based on this analysis, provide in time recommendations for farmer. And this is what we're doing. We're developing a content solution, which will allow the analysis. And based on the analysis, recommendation based on these data and information. And the goal is really to give recommendation that farmers will be able to use when they need to use it. For now, this is still a challenge. And of course, this is more of a long-term, I would say, process for ICL. I think that we can dig in into each of the businesses, but I think it's a good time to move to a few questions. I do want to get to the last slide of the presentation for you guys that are here because later in March, we have an Investor Day, well, a couple of them, one in London and one in New York. There would be a webcast of the New York City Investor Day. Of course, whoever from you guys who are based in New York or adjacent to New York or London, of course, we will be happy to see you there.

Awesome. Thanks very much for that introduction and maybe we can go through the business lines and focusing a little bit on some of those issues. So starting with bromine maybe. You talked about the environmental closures in China and how that shifted production elsewhere. Is that something that's largely over now or is that something you expect to continue?

Well, it's not just due to environmental pressure in terms of regulation, it's also just depletion of resources. China, 5 or 6 years ago, produced 150,000 tonnes of elemental bromine. In 2019, they produced 50,000 tonnes of bromine. Probably most of the decrease already happened. But at some point, this will go out of the market as well. We expect that in the next 2, 3 years, they will probably go even below 30,000 tonnes. Added to that was the environmental regulatory which the Chinese government, in a way, focused on industries that are not strategic to the people in terms of employment. And the elemental bromine industry and the flame retardant industry was such industry. And this also impacted the production and was one of the reasons for the price increases.

Yes. And I suppose on that price point, Albemarle has come out publicly and said, prices don't look that they've rallied in the winter as much as you might have usually expected and they've kind of alluded to maybe this is a sort of peak at least relative to history?

So in a way, I'll explain it. It's true that in 2019, after the summer, prices did not further increase. The reason is that the Chinese industry in general or I mean, production of flame retardant and other bromine compound is basically not really dependent anymore on the local elemental bromine production. So the price in China now is much less of an indicator to the market or to the prices that the company sees compared to what it was a few years ago. For ICL, for example, as we shift, we are shifting our customers to long-term agreement, where price are settled once a year, and of course, of the value-added product and not just elemental bromine, we still see that we can sign agreement or update the agreement with higher prices. The increase is much more moderate compared to what it was in the last 3 years. But the market is very robust. Prices are very robust, and we feel confident that we do not expect any change in the trend going forward.

And I suppose part of that you announced recently was an increase in capacity in Israel because of some Asian contracts you signed.

Yes. Yes. In order to, of course, fulfill these agreement, we are expanding the capacity of the flame retardant in our plants in Israel. For the elemental bromine, we don't need to expand our capacity. We have, as I said, excess capacity of about 100,000 tonnes. Of course, we will use more of the elemental bromine because we're increasing the capacity of the flame retardant plant.

Great. And maybe we can come back to bromine with questions from the audience later, but shifting gears to potash for a second. In the fourth quarter, you had a kind of downtime of the plant to increase capacity by about 5%. What was the thinking behind that given the short-term market backdrop that we see?

Yes. It's more of being able to fully utilize the capacity at the Dead Sea. We needed to do some upgrades to different facilities in the plant. And it's not a capacity expansion, it's more of like improving the capability to utilize this capacity. Of course, it has implication on the cost per tonne because on the same basis of fixed cost we have more production and it should reduce our cost per tonne and help our margin.

Yes. And I suppose, similarly, you've had a strategy in Spain over a number of years to change the infrastructure, reduce the cost?

Yes. I mentioned this in my opening remarks. In Spain, maybe I'll elaborate a little bit. In Spain, we are today producing in 2 different sites, 2 mining sites, 2 processing facilities, each of them produce just below 500,000 tonnes. And this is a high-cost operation because the economies of scale are not optimized. And what we're doing in one of the mines where we have the better ore grade and bigger reserve, we're building an access ramp instead of the traditional shaft that we all know from potash mining and with a conveyor belt. And the goal is to basically significantly increase the hoisting capacity from the mine. This project is expected to be completed in the fourth quarter of this year. And then gradually, we will ramp up this operation. And gradually, we will close the other mine. This will allow us a significant decrease in the fixed cost per tonne we think at least a few tens of millions of dollars. Initially, it will improve our production by about 100,000, 150,000 tonnes. And after the completion and beyond 2021, we do plan to do some debottlenecking, again, to improve the margin, to lower the cost per tonne of about 200,000 to 300,000 tonnes.

Okay. And then in that context, I guess, looking a bit longer term, what's your view on the outlook for potash market? I mean, we've seen a substantial price decrease, do you think there's enough demand coming through this year to reverse that quite quickly?

Well, not everything is in our hands. Nature needs to take its course because weather, of course, is an important factor in this coming spring in North America and in Europe. Hopefully, even if it's slightly better than the terrible weather that we had last spring, in 2019, it will contribute to the demand of potash. Still remains to be seen how China kind of organizes itself towards the planting season, which is also within a month from now. We know the Chinese government clearly stated that they're giving priority to the agricultural production in terms of infrastructure, transportation, making sure inputs are going into the field and farmers are going into the field. Obviously, they don't need food insecurity to be added to whatever issues they're dealing with this year. So we'll have to see how this works. On the supply side, there are, as you probably know, there are 2 mines that came online a couple of years ago and are ramping up. One in Saskatchewan that was developed by K+S. And basically 2 in Russia, but only one is really operating by EuroChem. And we do expect to see about 1 million tonne increased supply in 2020 from these 2 mines. However, if the season will work well, the demand should absorb this additional supply as long as the curtailed volume from the North American producers will not return at least for the first half of the year. Now it will help to stabilize the prices. And now the question is whether it will be enough and the inventory reduction would be enough to kind of shift the trend towards recovery in prices in the second half of the year.

And even longer term, I guess, beyond those things, do you worry about BHP entering the market or is that something you're quite relaxed about?

Well, if you look at what would be the range of potash prices which, on one side, provide good margins to the existing players and on the other side do not encourage new capacity, it's a rather limited range between $250 to $350 per tonne on average. Now for BHP, recently, their remarks recently indicated that, of course, we know in 2021, they're supposed to have some sort of resolution in their Board. But even from that point onward, they will only be able to start producing in 2026 and reach the 4 million tonnes initial capacity a few years later. So basically, we're talking towards the end of the decade where there will really be sales in the market. As long as we don't see other significant projects, which we don't expect as long as prices are in the range that I've talked about, then this is something that growth in demand is about 2% per year, about 1 million tonnes per year, this can be absorbed.

Okay. I mean, again, we can return to potash a bit later, but maybe shifting to phosphates for a second. You've talked about the kind of meatless food market and a recent breakthrough you made there. What's the potential runway for that product? Is that something you see as significant?

Well, we don't like to give numbers on this because it can be very significant, but we're still in a point where estimating anything can be really not even scratching the potential. What we developed, we developed 2 different solution. One is based on fava beans. One is based on phosphate. We have a couple of long-term agreements with the big food producers in the U.S. and in Brazil. And basically, the alternative meat, these are food producers that are traditional processed meat and beef and chicken poultry producers. But of course, they need to enhance their footprint in the alternative meats because, in a way, this is a solution or a development that is building upon the trends that we see in the food consumption in the world and the consumer taste. And we provide them with this solution. So it's very interesting. This market is growing very rapidly, more than 10% per year. And we will continue to build the market for ourselves, sign new agreement with additional suppliers. We'll see.

And maybe broadly speaking on phosphate specialties, I guess, in the fertilizer commodity bit, there's been a lot of downward pressure on prices last year. Is that something that's transferred to customers in specialty?

Very limited. Only, I would say, on the less sophisticated or less value-added specialty phosphates, like just the common pure phosphoric acid product. On the other hand, we actually were able, during 2019, to increase prices on our specialty phosphate, especially on the part of the food phosphate sold. So the correlation is very, very low and this is still the case in early 2020.

Okay. And then moving on maybe swiftly to Innovative Ag Solutions. Clearly, those are niche markets you're trying to penetrate and grow out. What are the hurdles in some of those areas to doing so or is this something where you're actually encountering little resistance and it's just about scaling it up?

It's mostly building the agronomic and the marketing capabilities for the company in the Southern Hemisphere of the world. Also, we need to fill gaps, as I said, in our portfolio. We have a couple of products that are still missing because in this business, at least currently, customers expect you to provide a full portfolio. Now ICL actually has the largest portfolio among its peers, but we do think that we need to fill some areas there as well. This is where you can also expect M&A because for geographical footprint, for product portfolio, we are actively looking for a candidate. And again, the next few years, of course, it means that there is pressure on the cost because this building of the market obviously will require resources. But as we grow the revenues, this will also be -- it's like building a platform, which will allow much larger revenues in the future.

Absolutely. I mean, maybe at that kind of point, we can open up to the audience for questions if there are any out there. But otherwise, we can keep going. Over there?

On potash, just out of interest, what percentage of your product you sell is soluble potash?

What percentage of what?

Is soluble?

In the Specialty Fertilizers, you mean?