ICL Group Ltd (ICL) Earnings Call Transcript & Summary

Hi. Welcome back. Our next fireside chat is with ICL, and we're very fortunate today to have Raviv Zoller with us. He's the firm's President and CEO. But before we get started, I need to do 2 housekeeping items. The first is to remind you that for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. The second piece would be that we are equipped to take your questions. And you'll see the question box in the web browser that you're watching me on right now, and we would like you to put those questions in that box and submit them the minute you have them so that we get them right away, so there's no delay in transfer and also so that we have the opportunity to feather them into the overall chat, as practicable. We find that often enriches the chat versus waiting to ask them at the end. And with that, we can get started. So just, Raviv, welcome, and thank you for joining us today.

Thanks, Vincent. Thanks for having me.

Okay. Well, look, I thought what kind of an interesting place to start our discussion today would be in your Innovative Ag portfolio. You've done 2 recent acquisitions: Fertilaqua and Compass Minerals. So maybe you could talk a little bit to us about sort of strategic rationale of those acquisitions and then how the integration is going so far, what you're achieving, what you're learning and so forth.

Sure. First of all, it's a $15 billion addressable market, and it's growing above 5% a year. The rationale is that this business -- in this business, the 2 geographies that we're seeing the highest growth are in Brazil and in China. In fact, Brazil and China are seeing 70% of global growth. And other than India that's growing at just as high a pace, those are the highest-growing geographies. In China, M&A strategy is less appropriate for us. We have a successful joint venture around phosphate in China, and we're leveraging that in order to build an organic organization in China. So our plan is based on organic growth in China. In Brazil, it became evident to us that, given a lack of size, it would be the right thing to enter the market in a meaningful way through an acquisition. And we're fortunate enough to acquire 2 very, very good companies, one of them being the leader in the plant nutrition business in Brazil. So that happened during COVID-19 when there wasn't a lot of competition on the acquisition side, and we're very fortunate. In terms of how that's working so far, Fertilaqua has been consolidated into ICL results since the beginning of this year, and they're doing very, very well. In fact, their strongest season is the fourth quarter, so they're seeing very good results during the past couple of months. And the former Compass Minerals, now we call it ADS, which is ICL América do Sul, they are doing phenomenal this year. We're seeing a 50% growth versus last year on revenue and the same on EBITDA. And the third quarter was the first quarter of consolidation into ICL results, and we're very, very pleased with the performance. Performance is looking very good in the fourth quarter as well. We love the management team. We think they're doing a fabulous job, and we see them as the basis of our future management team in Brazil, where we intend to keep on growing, both organically and non-organically. I hope that answers it.

Yes. No, that does. And so maybe if we could build on that. If we look out 3, 5, 10 years from now, how would you like the portfolio and the overall offering to evolve? And which pieces of it are you -- feel well equipped to do organically versus where it might be an accelerant to go inorganic?

Okay. So in terms of geographies, I already mentioned we were very much biased in the Northern Hemisphere side, and we were lacking revenues in the Southern Hemisphere, namely in Brazil, which is such an important market. So geographically, we want to grow organically and non-organically in Brazil, organically in China. And we could also be looking at M&A in other territories, namely in Europe and the U.S. In Europe, we're already pretty significant. And we want to grow our portfolio also from the product offering side, product offering, we're very much focused on biostimulants and organic fertilizers, where we have other unique offerings in Europe. And in the U.S., we're always looking to the U.S., and we could be opportunistic. It's not our main target, but we can be opportunistic in the U.S. And our ultimate goal is to be leaders in global specialty fertilizers with focus on sustainability, biostimulants, organic. And of course, in the coming years, there'll be significant focus on carbon treatment, which I think the whole industry will be going through.

Okay. And is there any sort of particular areas of focus within production or distribution or retail or just other parts of the chain that you want to reinforce?

Okay. So in terms of production, now that we have significant production capacity, both in Brazil and in China, we're going to be adding some production capacity in India, where the market for specialty fertilizers is still small or relatively small but growing very, very quickly. So we intend to add production capacity in India. In terms of distribution, the beauty of the ex-Compass Minerals business is that 50% of their sales are direct to customers, which means that we skipped the whole distribution chain, and we have access, proximity to the ultimate customer. And that's -- that, we feel, is a very, very unique advantage. So in terms of distribution, this is the way we're going in Brazil to get as close as possible to the customer. In Europe, we already have a very strong distribution system, both for specialties and for commodities. We consolidated our distribution systems of commodities and specialties in order to strengthen our positioning in terms of our distribution chain with partners. And in China, we're building our distribution as we are in India. So we're building those distribution systems organically.

Okay. Great. Maybe if we transition to Industrial Products. Maybe just to set the table, you could talk to us a little bit about some of the strategic changes you've made to ICL's bromine business in terms of what your strategy is, what it is and how you've seen the competitive landscape and particularly the Chinese production and so forth evolve and how you've adjusted for that.

Sure. So a couple of years back, we sort of looked at the market and tried to figure out how we're going to get to build double-digit growth in a market that was barely growing. And we identified a significant opportunity coming out of China, and this is because the bromine resource is depleting in China. And at the same time, there's a growing government scrutiny over bromine as hazardous material and pollution in general. And the producers in China have been suffering and we thought that will continue to suffer. And the idea was that we have a tremendous value proposition for some of our Chinese customers that were buying elemental bromine from us or from local producers, and we're producing the compounds themselves. And the value proposition was, instead of being dependent on bromine, which is getting scarce and more expensive, and producing yourselves, being exposed to government scrutiny, why don't you produce at our facilities, and then you have guaranteed bromine capacity? You have, hopefully, guaranteed long-term prices if you strike contracts with us for the long term. And at first, it was very difficult to convince the first customer and then the second customer to take on such an approach of giving up their own production or most of their own production and transferring it over to us, but it worked so well that many followed suit. And effectively, what that did is it increased our target market, and it increased also our market share. And ever since, we've been running after capacity in order to serve the new long-term contracts that we have. We had a disruption from COVID-19. And as COVID-19 hit the world, the first thing that happened was everything sort of halted. So people stopped buying cars, stopped buying televisions, stopped buying new PCs. But then after about 3 months, things went back to normal. And actually, they didn't go back to the state before COVID-19 but rather through some kind of inflection point, where when people stopped using public transportation and bought new cars, specifically electric cars that have the need for more electronic components, then the demand for electronic circuit boards, for chips, the components that need flame retardants suddenly went through the roof. And currently, there's a significant shortage of ECBs and of chips, and we see that continuing through the next couple of years. Unfortunately, we can't build capacity fast enough in order to meet all the demand of our customers, but the demand has grown significantly. The inflection point in electric vehicles is meaningful. And that means that, for the next few years, at least for the next 3 years, we will be building capacity to try to catch up with demand. Unfortunately, we didn't foresee such a development because, otherwise, we would have been ready when customers knocked on our door, and customers did knock on our door, not just because of what happened in the market, but also because of some issues that the competition had last year -- and this year, sorry. So all in all, bromine quantity sales are growing now at double digit in terms of the demand that we're facing. Some of the spot price increases have not been realized in our business because most of our contracts are annual contracts, 4 long-term contracts that get updated annually on price. So looking forward, we're looking at increasing capacity and meeting some of the new demand that's out there, and the dynamics are looking much better than we expected when we set out on our strategic plan. The end result is that we will kick the 2025 targets that we presented to the -- to our investors a year ago. We will be hitting those targets in 2022.

Can you maybe talk a little bit about, from a capacity perspective, what are the bottlenecks for you in terms of increasing your capacity? You obviously have a program in place, but what are the -- at what point would you look to get more aggressive with capacity? And how long does it take? And what's the capital intensity of it?

Okay. So first of all, in terms of constraints, we have to build additional lines for compounds, and we have to build additional elemental bromine capacity. For elemental bromine, the thing that we need is additional chlorine. So we are building additional chlorine capacity. And at the same time, we're adding additional lines of compounds. The next line that's going to be added will come into production in July of next year. And then there are additional capacity increases over the next 3 years that are being planned as we speak. And all in all, we're talking about quite significant increase in capacity. We haven't made that public yet, and some of the investments haven't even been finalized internally. So the only thing I can say is that we're entering a new capacity increase plan, which is above and beyond our original plan for 2025. And we have everything we need in place in order to add that capacity. What we don't -- the only thing that we can control is the time that it takes to add that capacity. So the next addition, which is on the way, will come in, in July. The next addition will come in at the end of next year, and there will be further additions that are now being designed as we speak. And of course, we will update on the specific plans at a later date.

Okay. And then you talked about sort of the contract nature of the business. Is it -- what is your strategy to have a certain high percentage on long-term contracts and then to have a subset that's maybe more spot-oriented, just so that you're a little bit towards the market, but you get to sort of smooth out the cycle, if you will?

The dynamics in the market are such that, right now, most of our business is contracted. Currently, only about 10% -- actually, even less than 10% of our sales is elemental bromine, and all the rest is compound business. And the compound business is almost all contracted. So we're not exposed to the spot price, but that goes both ways. So this year, we didn't enjoy part of the increase in the spot price. But of course, next year, as the contracts are being updated, then next year, some of that will flow into the contracts.