ICL Group Ltd (ICL) Earnings Call Transcript & Summary

Good morning or good afternoon to all of those of you who are joining us. And thanks very much for doing so. I'm delighted this afternoon to host, Kobi Altman, who is ICL's CFO, and has been in that role since 2015. Prior to that, he had senior positions at Teva Pharmaceuticals in both the U.S. and Israel as many -- as well as many other roles before that. So very excited to hear your thoughts, Kobi, on the agricultural space and of course, on ICL's development as a company. Just as an introduction for how we're going to structure this session today, we've got about 45 minutes in which we'll run through sort of a fireside chat format with questions that I've prepared. But also, feel free, there's a box somewhere on your screen to send questions through the portal to me, which I can put to Kobi, or equally send those over through e-mail or a Bloomberg message and I'm happy to put them to Kobi through that format, too.

But with that, thank you very much, Kobi, for joining us. Now we can start with sort of the ICL strategy overall and start very big picture. Last year, in September, you talked about how you're going to increase EBITDA by 50% by 2025. Could you give us a sense of the moving parts behind that? And how are you are going to get to that significant growth potential over the next -- over that 6-year period that you talked about?

Sure. Thank you, Alex. Good day, everyone. As you mentioned, as we discussed during our Investor Day last September, we are targeting 5 key and innovative areas to drive the double-digit growth that we have outlined for 2025. The first one is the next-generation fertilization. The second one is alternative proteins and the whole food technology, the food tech area. The third one is sustainability applications using our bromine resources and bromine value chain. The next one is digital farming in ag tech and the new materials targeting skin care, hygiene and pharmaceutical applications. We will continue to maximize our strategic advantages that includes our unique assets, such as the Dead Sea and our Polysulphate resources in the U.K.; our strategic locations, including the competitive logistic advantages; and our proximity to ports and to customers mainly in Europe and in Asia; our well-established know-how, covering our decades of agronomy, chemistry and related experience; and our access to what we call the Israeli startup nation status, providing us proximity to the high-tech and agri tech ecosystems that we have.

Excellent. That gives us a lot to dive into over the course of this conversation. Perhaps we can start with not any of those end markets, but mainly on that last point, the innovation point and sort of the internal changes you have to make to get to this target. Is there a structural way that you want to change how the company is working to some extent to get towards those targets? Or is that structure already in place and it's about leveraging that to move forward?

Yes. Well, I think that the way to look at that is I kind of see the year of '21 -- 2021 as the inflection point of view for us here. Since 2018, we have been working on shaping the leadership strategy of the company, developing our internal understanding of where ICL can bring a significant impact. I think, by now, we have a very clear vision for each of our businesses, which align with our leadership model. In parallel, many of our internal initiatives are starting this year to bear fruit. Just to list a few of them: the big infrastructure projects that we did at the Dead Sea, we are now ready for the long-term operation of the Dead Sea after kind of finalizing this year all the needed infrastructure; the expansion of our bromine facility in Israel that helps to serve our growth strategy and initiatives in the bromine value chain; the addition of a purified phosphoric acid facility in China to our specialty phosphate business that we are growing as part of the growth strategy; the ramp-up of our Spanish mine consolidation that will happen this year; and lastly is the increase in scale of our Polysulphate mine in the U.K., in addition to many other initiatives. So in general, I believe that we have good visibility and we are on track to achieve our 2025 goals. We are now also planting the seeds which will help to contribute to our success in the second half of the decade. And many of the things that we are now doing around the business development, our R&D, our innovation, will only start to significantly contribute to the bottom line beyond 2025, more into the second half of the decade.

Great. I guess I think some of those topics, we can come back to. Maybe we can start now diving into some of the segments. And perhaps with potash. First of all, you mentioned the Dead Sea improvements, the Spanish improvement. So could you, I suppose, remind us what your volume ambitions are near term? And also, talk about how you see the market developing in 2021 from a price perspective.

Yes, sure. So in general, the way we look at that is for the full market we assume that demand will continue to be healthy and fundamentals remain positive, and the demand will continue to grow. This is obviously very important for us. Pricing, we do expect to see much better prices this year in the stock market. We have already seen this, currently, nice increases, in the U.S., in Brazil versus the first half of 2020, where I think we marked kind of a 15 years' bottom for pricing. We did see, earlier this year, better prices' environment also in the contract market, the annual one, the Chinese that moved up $27, India moved up $17. Very interestingly, early signature of contracts that we saw this year, but not a lot of follow-ups following the Belarusians contract signatures, means that suppliers are kind of waiting and see not a lot of inventory in the channels. We, for example, we ended up last year with almost no inventory. We are selling what we produce. It looks like this is the situation with other suppliers, so we don't see also a rush to go and finalize contracts in the Asian market as well. So in general, the outlook for 2021 is definitely positive, with prices as I see is around mid-cycle level. We gave, for the first time, guidance at the beginning of the year. When we kind of set the guidance for us, we looked at around $270 per tonne on the granular and about $250 for the standard. That was more or less the January pricing environment. Since then, we did see some improvement in this overall prices' environment. If we go to the ICL capacity and into the future, this year, as we are ramping up our Spanish operation towards the 1 million-tonne capacity, we will land towards the end of this year at around 5 million, maybe 5-plus million tonnes of capacity that we believe will well position ICL as a player in the potash market. We are not looking to increase our exposure to this market. Our managerial focus is around expanding into the specialty businesses, but we are happy with the 5 million-tonne capacity that we will have toward the end of this year and into the future. And the focus of this division will continue to be on cost leadership as we are, for us, we are kind of the price takers. We cannot influence the world prices' environment. So our strategy is to be the leaders in terms of the cost structure of how much does it cost to us to bring a tonne of potash to a customer, whether it is a customer in Asia or a customer in Europe and even the Americas.

Just to follow up on 2 of those points, I thought they were very interesting. One was the India, China contract point. Is that an ICL specific comment as well, that you're now going to wait a little while and see how things play out? And the second one was on your inventory levels that you said were very low, is the plan to keep those at the low level? Or despite the strong demand, are you hoping to replenish those a little bit as we go through 2021?

Well, the way we look at that, we, as price takers, the way for us to optimize our business result is to optimize the average realized price of where we sell in the various markets. And obviously, there is the granular market and the standard market. But we look at that from a long-term perspective, which means that we also would like to maintain relationships with customers that are long-term customers of ours. So the way to look at that, in general, we hardly have any inventory. So we are now starting to discuss shipments in -- for the second quarter because in the first quarter, we are almost sold out. And prices are the market prices, and we believe that the situation we are facing, with not a lot of inventory, is more or less what we see in -- for other players as well. And this is helping the good momentum and the price environment that we currently see in the market.

One last one on potash then, and you mentioned it in your opening remarks, was around Polysulphate. And that's an asset that you've been ramping up slowly over time in the U.K. Could you talk a little bit about the customer reaction to that and how easy or hard you found it to place the volumes that you're producing in the U.K.? And a little bit longer-term, how you think about that asset given Anglo-American seem to be going ahead with their project nearby, too?

Sure. So just to kind of finalize the potash discussion and then moving to the Polysulphate, I think, in general, the price environment that we saw for potash in the first part of 2020 was below an economical viable range, didn't reflect sufficient return on investment for the existing potash players. And the current price environment is around mid-cycle level. So I believe a worldwide average price of around $300 per tonne is the longer-term average that we can expect. And these prices provide reasonable return to existing players. Now if you look at additional capacity and rumors in the market, whether there will be newcomers, obviously, we cannot refer to specific player plans or what is their view of the market. But in general, we believe that existing potash capacity that is available today is enough to satisfy the world demand for the next decade, at least. We also don't believe that an average price of $300 per tonne can justify the big investment that is required for greenfield projects. And I think that with the same way of looking at that, we can turn into the Polysulphate area because, in general, I see the same dynamic here. The -- in general, Polysulphate is a great fertilizer, a great mineral. It's an organic mineral. We mine it from the ground. We crush it, we pack it, and we sell it to customers. So product results in the field have been very good. However, as obviously can be understood, it was a difficult year, the year of 2020, to promote kind of running kind of a new product during the year. With the pandemic, we had to stop the technical support to customers, and we were unable to visit them. But despite this challenge, we sold in 2020 50% more than we sold in 2019. So good progress that was made on this product with all the challenges of 2020, and we remain excited about that. And we will continue to promote the fertilizer-plus product family on a global basis. Fertilizer-plus is a kind of a product family of products that are on the basis of Polysulphate, but has additional ingredients into them and various other offerings. We expect to reach a sales target of around 1.3 million tonnes in just a few years. Now you mentioned our neighbor that has a concession there. We understand their interest as the market for Polysulphate is growing. We are clearly monitoring the progress. However, we believe it will still take years until we will really start to see if they are coming with products into the market. Also worth to mention that their basic cost structure of their operation is going to be very significant because of the challenges they have with their locations, underground tunnels and things like that, so their overall cost basis is going to be much higher than what we have, which will also create for us a significant competitive advantage.

Okay. Excellent. Perhaps we can move from potash on to bromine, which is another important product for ICL. And in the fourth quarter, the Industrial Products division, where that sits, was reporting impressive volume growth numbers, almost back up to 2019 levels. Can you talk a little bit about the demand recovery you've seen in that segment of the market and how you think about that evolving now that we're hopefully coming out of the pandemic?

Sure. So yes, as we discussed in our fourth quarter earnings call, the majority of our markets are getting back to the pre-COVID levels, with the only exception of the clear brine fluid. We do not currently expect clear brine fluid to fully recover this year. So we are -- we planned into the guidance that we gave and into our plans for this year that it will be a slower recovery on this one. But the other end markets are behaving really differently and are coming back. Construction is very good. Electronics end market also doing very, very well. Automotive continued to show gradual signs of our recovery. And in general, for 2021, we are almost sold out on several bromine compounds products as demand continues to outpace supply. This includes the new TBBA plant, the flame retardant plant, which will represent the new market share for us as we have convinced elemental bromine customers to shift to bromine compounds. So they now buy from us the bromine compounds rather than the elemental bromine. We expect to gain share as we continue to solidify our global leadership position and explore new market opportunities. Just as an example, we are developing new bromine applications. And this area of innovation is expected to deliver double-digit growth by 2025.

On the price side then, I suppose that demand recovery is the reason that we've seen Chinese bromine prices not just recover but actually exceed where they were 2 years ago now. How should we think about that going forward? How do you think about the price outlook? And are you ever concerned that we're reaching a level either that harms the demand or that starts to incentivize some of those marginal suppliers to try and bring tonnes back into the market?

Yes. So yes, the strong fourth quarter of 2020, bromine prices trends carried into the first quarter of 2021. This is what we see in the market now, January, February. And while we expect positive momentum to continue, prices will likely start to normalize as the year progresses. For ICL, bromine is not a commodity or a cyclical business. We will continue to focus on our value-over-volume strategy and build the business for the long term as we deliver a stable supply of high-quality products to our customers. As a reminder also, we are traditionally not sensitive too much to spot bromine prices as we have continued to shift to longer-term contracts, which now makes up the majority of our customer agreements. For China, resource depletion continues. And every year, we see to bring more regulatory and environmental scrutiny, leaving Chinese bromine suppliers in an uneconomical and uncompetitive position. And as a result of that, higher pricing is unlikely to lead to more bromine production in China. For India, the issue there is that uncertain whether as historically impacted bromine production, which makes it difficult for a producer to confidently increase production. So at the end, we are the leaders in this market. We are there for the long term. We will continue to adjust our production and the supply according to the world demand. We saw a great experience -- a great example of that in 2020. During the summer, our customers were forced to shut down their facilities, so they reduced orders from us. We simply reduced the production, and so we didn't produce to inventory. We didn't reduce market prices that we saw. We simply balanced the demand with our supply, and this is the long-term play that we will continue to -- in leading this market.

Excellent. One of your peers in bromine, LANXESS, have talked about trying to produce lithium as a byproduct of their production in the U.S., which has got a few investors excited given the demand growth that there is in the lithium market. Is that something that ICL has considered in Israel, something that would be possible, or even something that you want to do?

Well, the simple answer is no. I think we will continue to drive our strategy and focus on enhancing our market leadership position in the 3 core mineral value chains, the bromine, the potash and the phosphate, while realizing the growth potential of our Innovative Ag Solutions division, the more specialty products. And yes, there is a little bit of lithium in the Dead Sea water, but so far, it's not a focus for us.

Understood. Perhaps we can leave bromine behind then and move on to phosphate, which is one of those more core parts of the business. And obviously, we've seen tremendous increase in phosphate prices so far this year. So I would be very interested to hear your thoughts on that outlook for phosphate pricing and if not just at the market level, but how impactful that is for ICL in terms of does that feed through to the bottom line, or are the raw materials that are ultimately going to offset some of that, at least?

Sure. So for the short-term, 2021 outlook looks very positive as all the main markets, India, China, Brazil, U.S. are accepting the change in prices compared to last year. Demand is healthy. Also very important, no real negative impact on quantities related to the higher prices. I think it's important to note that the very low export rates from China, which we assume will come into balance after the end of the COVID. So now very low export rates are helping also this general environment. Longer term is yet to be seen. We will be monitoring, obviously, the Mosaic antidumping claim against OCP and the Russian producer, which will be important to pricing in the future. ICL will continue to focus on our strategy to promote specialty businesses and contain our exposure to the phosphate commodity play. So the bottom line, we do see a nice improvement in the commodity businesses from a very significant loss-making prices for all the market participants, maybe with the exception of OCP because of their very cheap product and ICL because of our specialty businesses last year. So this year, we do see the recovery. I still believe that prices now are not inflated. They are now starting to generate, I think, a reasonable return on investment. So I do believe that prices can continue to go even slightly higher and maintain the same pricing environment for the future.