ADAMA Ltd

SZSE:000553

Earnings Call Transcript 2021-Q1

[Unknown Executive]

Just now Karen has briefed the analysts that they have sent the Q1 performance presentation into the WeChat group. They will have 3 minutes to run through it. Then they will hear our presentation. Ignacio, I will also start in 2 minutes. Ignacio, please.

[Ignacio Dominguez, executive]

Thank you, Karen, and good evening to everybody in the call. A couple of weeks ago, we had the opportunity to share with you in our preannouncement, the results of the first quarter of 2021. We would like to go a bit more in detail, and to have a dialogue with you about the results of the company.

Overall, the agronomic situation, as you can see in Slide 4, it is a combination of 2 realities that are somehow conflicted. In one hand, there is a very strong demand, and it's a very positive environment in terms of agronomy and in terms of crop prices, and there are quite a lot of concerns about food security because of the [ pandemic-related ] issues. Also, we see a biofuel demand recovery, and there is a higher feed demand, especially coming from China. So overall, the atmosphere in agriculture is positive, and that is translated into a very strong demand of crop protection products.

On the other hand, the cost of our goods is under pressure because the active ingredients and intermediates, they have increased their price versus a year ago, and this growth is mainly coming from the recovery of the oil prices, from having higher raw material cost and certainly because of the strong demand. But there is a factor that has been a surprise for all of us, and it's that as all the global economy were starting to reopen after a very tough year related with the pandemic, the trade markets, the global trade markets are experiencing scarcity of transportation resources, leading to higher freight costs. And on top of that, the recent Suez Canal incident did not help, especially for moving of goods into the Mediterranean area.

This conflicting reality is very well reflected in the financial reports that you can see on Slide #5. In one hand, our business line, our sales were growing in a very solid and robust way, driven mainly by volumes, volumes that are coming from all the areas, and this is also enabling with a very strong growth that the company showed in sales as well in the last quarter of 2020.

On the other hand, we had the challenges of these additional expenses on the cost side that had an effect on our gross profit, as I'm saying, mainly because of the logistic. And also when we're looking into the comparison versus last year, we see that there is an increase on our operating expenses. But you have to remember that a year ago, our operations was paralyzed because of the eruption of this COVID, and specifically in China, we had to put on hold our activity in our 2 main sites of Jingzhou and Anpon.

And when we are comparing with last year, there are usual a growth in those expenses. But this is not because the company is not affected. We are even improving our OpEx to sale ratio is that the level of comparison versus last year was artificially low, the figures that we see last year.

And following the results of fourth quarter, once again, in quarter 1, we're showing an improve on our net income that it applies both on the adjusted terms but also on the reported terms. The last year, we reported a loss, and this year we're showing a positive outcome, which shows a tremendous turnaround in the quarter.

Before I invite Aviram to address with other important information on the financials, in Slide 6, you can see that the growth of the company is mostly driven by quantity variance. There is a small negative price variation. This is mostly [indiscernible] due to the highly competitive environment for many of the crop patent (sic) [protection] solutions.

We see that down the year, this tendency will probably change, and we will be probably able to manage -- to transfer some of our cost increasing into the business. But in the first quarter, it was still a very aggressive competitive landscape that force us to drop a little bit of price.

Aviram, could you please elaborate on other values?

[Aviram Lahav, executive]

Thank you, Ignacio, and good evening, China. The gross profit is the place where it all comes together what we explained. So if we analyze it, we can see that the gross profit, the absolute gross profit in Q1 of 2021 amounted to $322 million over $296 million in Q1 of 2020.

So then we can see that, of course, the very positive effect on gross profit of the quantity variance, which to some extent was offset -- adversely offset by the price variance coming directly from the sales line, the cost variance, which is basically the reality that we spoke about the rising costs from China but not only and some adverse effects of the FX. So in gross margin terms, we are seeing some decline from 30.5% to 29%, albeit the absolute gross profit has risen quite considerably. Please.

Next slide. The translation of the elevated gross profit into EBITDA, you have in front of you, basically, the similar effect of the gross profit minus the operating expenses. And they were, to some degree, higher than Q1 of last year. It is predominantly 2 components. One is the higher logistics costs that come on top of the bigger volume that is being sold. So the logistics [indiscernible], it is the consolidation of new companies in Greece and in Paraguay business for the first time and some other minor effect. There is still saving going on other elements. All in, we are seeing that we came in with an EBITDA of $157 million in Q1 of '21 over $153 million in the respective quarter last year. Please.

Next, we supply a clear analysis of the differential between the reported net income and the adjusted net income. So first of all, we can see that the reported net income in Q1 of '21 was a positive $23.3 million as compared to a loss of $2.4 million last year. Please translate, and I'll continue.

Then we can see that the adjusted net income also is higher than last year, coming in at $53 million of opposing to $41 million quarter 1 of 2020. And we supply the bridge analysis, which basically is something that is along the lines of previous year. As you can see, it is in absolute terms, the adjustments are lower than the respective quarter. And the primary reason for that is they pretty much the ending of the legacy PPA of the acquisition of ChemChina is ADAMA during the year of 2011. Please.

Beyond that, we still have and we continue to have a differentiated divestment and transfers coming from the noncash coming in the 2017 divestment and transfers that I think you all know about. And the -- there is some noncash incentive plans, but the main part is still the upgrade and relocation-related costs that pertain to Sanonda. Sanonda plant is the new plant. It's just now starting to be commissioned. It will take us some more time in 2021, and this item should go down over time and by the end of the year, early 2022, disappear. But so far, we still have this with us. Please.

Switching over to the balance sheet. On the right-hand side, you can see the strength of the balance sheet of ADAMA. The EBITDA, that is the latest 12 months EBITDA that we have, the net balance sheet debt that we have and one divided by another gives us a healthy ratio of 2.4. That would be net debt to EBITDA. Please.

With regards to the company. The company, obviously, is seasonal. We have -- at this time, you can see in the middle row, we have an elevated inventory, albeit that in inventory days, we are along the lines of last year, higher receivables, predominantly due to the strength of currencies vis-à-vis the dollar and the split between geographies and higher payables. Altogether, we have a higher net working capital that at the corresponding period of last year. Of course, as you can see, this supports higher -- significantly higher level of sales of more than $300 million.

Cash flow, this is always tricky. In the first quarter, the company is always cash flow negative because of the elevated receivables of [indiscernible] from the Southern hemisphere inventories that [indiscernible] quarter. We show here both the operating cash flow and the free cash flow. And in the next slide, we will walk you over through a clear bridge analysis of the cash flow itself. So please translate that, and I will continue.

Okay. This is a new slide that we added to try to really be able to pinpoint the bridge analysis of the cash flow in free cash flow terms. And I will not touch on every element here. But basically, you can see, again, beyond the seasonality that we are talking about 2 major items. The one is the increase in working capital to the tune of $80 million. And the other big one is the increase in the cash layout for investments in fixed assets. A reminder, we are now aiming both for the relocation and also the new differentiated project. Last would be the third one is acquisition, the payment in cash for acquisitions and other activities. And then all in, you can see the full bridge from 2020 to 2021. Please.

With that, I want to thank you and turn you back to Ignacio.

[Ignacio Dominguez, executive]

Thank you, Aviram. If you move to Slide #13, you can see that the growth that we are experiencing in quarter 1, it's coming from all the territories. There is a small decrease in Europe, but it's not really relevant because it's weather related. And we see that the demand in Europe in the second quarter, it is coming back to normal. But I think it is remarkable that all the areas are showing a very positive outcome versus the previous year.

And that I insist to remind you that this is the second quarter in a row that we're showing double-digit growth because we also have a very important growth in the fourth quarter. And it is remarkable that all the operations has shown a very healthy outcome. Remarkable, the numbers from China. But remember, we are comparing with an extremely unusually low business that did happen in the first quarter of 2020.

Moving on to the other regions, I say that we are very pleased with the growth that is coming in North America, mainly from the Consumer and Professional products. Very strong fundamental that the company has in all Latin America, not only Brazil, but the rest of the territories. And despite the tremendous situation on the personal side that we are watching today in India, the business is performing very nicely, and the company is investing also in capabilities for our Indian operation.

In many of our contacts with you, we've been talking about a very important investments that the company is actually accomplishing in China. But for us, India, [ adding ] formulation R&D plan in India is extremely important in order to provide diversity to our business.

In Slide 15, you see this reality. Together with the other area where the company shows also a very a strong competitive advantage, which is our portfolio and our capability to continue to launch new products and to continue to differentiate our portfolio in 6 of increasing the value of ours.

I want to finish this presentation with -- sharing with you a little bit of our perspective about the rest of the year. We are moderately optimistic about the performance of ADAMA. The challenges in terms of cost, in terms of currencies and in terms of the shipment costs are still there. But at the same time, crop prices are expected to remain high and the demand seems to continue to be strong at least valuable reality in April. So we are feeling that the company is in good shape in order to navigate through all the challenges that we're facing, including COVID issues and related circumstances.

I appreciate your patience coming with us through the presentation. I think that what we need to do now is to have a dialogue where we can listen to your questions and doubts and try to address them. So thank you.

[Unknown Executive]

I got a question. I collected through the WeChat group. It's from [indiscernible] Securities. Basically, there are 2 questions. The first one is about the exceptional weather around the world. Have you witnessed exceptional weather conditions occurring in a lot of places in Q1 such as drought or coldness, which will influence the sales of pesticide?

The second question is about India. Is everything going nicely in India right now, considering the seriousness of COVID pandemic there? How is your business going there? Do you have normal sales as the previous year?

[Ignacio Dominguez, executive]

Thank you for those questions. As related to weather, nothing really exceptional. I mean, we are seeing that it was bit cold and dry in North Europe and also we were missing some of the rains in West Australia at a certain point in time, bit dry in Brazil, but exceptional nothing out of that is exceptional. It comes really into what could be normal conditions in the cycle of weather events. In fact, the business is slightly affected in North Europe because of these delays, but nothing really worrisome or concern. Translate this one, and then I'll go to the second question about India.

As per the COVID in India that you're asking, we are putting quite a lot of focus on actions to protect our business both in India also in Brazil. Both businesses are very important for us. And I have to say that we are fortunate that so far, no major disruption has come to play. Specifically about India, please bear in mind that we have more than 700 employees in India and more than 2,000 contractors working for us.

And at this point, as I'm talking with you, we don't have more than 45 cases -- active cases in India. There's tremendous pressure of COVID there. And as a company, we'll try to do everything in order to support the country's situation. We are providing medical assistance for our employees [ for covering expenses ] of related diseases. We're sending from Israel and from China medical equipment and device in order to support.

Wherever possible, we are bearing the cost of vaccination. But not always, it is open to the private initiative in many of the states in India is under the state authority's supervision the activities on the vaccine. But we are very much insisting on education, social distance, safety measures, and we are tracking our production lines. We are giving -- insisting in education. We are very much supporting our people in order to protect as well the business, but also to protect themselves and their families.

[Eric Shen, analyst]

I'm Shen calling at HSBC. Thank you for your presentation. And I've got 2 question. The first one is about the progress in Jingzhou site. I noticed in Q1, there was still idleness from Jingzhou site. And I'm wondering, will the new site of Jingzhou site start operation in Q2. Will -- if it can, will it improve the idleness in your financial results? The second question is about the -- how do you see the business going on in Q2 and H2? Because I noticed that in Q1, you have improved -- improvement compared with the last quarter as well as the same period of time in last year.

[Ignacio Dominguez, executive]

Aviram, maybe you can talk about Jingzhou, and then I will elaborate on the forecast.

[Aviram Lahav, executive]

So Sanonda has been by now through a [ leveraging ] process, big investment and has taken us time. Some of the setbacks included, of course, COVID and also the flooding of the Yangtze River in 2020. As a result of this, March and April of 2021 finds us at the very end of the investment and the beginning of commissioning of the new site.

Our expectation is for the site to continue to increase gradually during 2021, the capacity, and reach, most probably by the end of Q1 of 2022, the full capacity that it should be operating at. And this, therefore, entails that over time, the idle capacity, for sure, will go down. But it will completely disappear, I would probably say early 2022.

At that time, also beyond the idleness, our economics will be much better because we will be able to rely solely for both [indiscernible] and acetate on our site, on our new site, and most probably completely stop buying from third parties, which was the reality for us during the transition in order to maintain rigorously our position in the marketplace.

[Ignacio Dominguez, executive]

The second question, as I said before, the company is in very good shape on the commercial -- from a commercial point of view. We are -- we have very strong capabilities all over the world. And as I said, on the sales side, I am optimistic about -- moderately optimistic about how sales are evolving.

Also, we're very pleased to see that during the second quarter, we will start with the production in Jingzhou, and the things in China are coming through the right place. So it says that we are in an positive -- in a moderately positive place. For the rest of the year, it is still a bit early but the overall atmosphere, it's good for agriculture. It's good for the farmers. It's good for food production. And we think that we are well positioned in order to cope with the challenges that are around us.

[Unknown Analyst]

I'm [indiscernible] Securities. I have a question about the forecast of the crop protection market in this year. I noticed many MNCs in this industry have seen the growth rate of 2021 will be lower than 5%. Even some have predicted the growth rate would be 2% to 3%. This figure is quite lower than what they had forecasted in 2019 for the year of 2020. In that time, most of them predicted the growth rate would be double digits, but clearly, the reality reversed because of the pandemic.

Most of them -- most of the MNCs in their annual financial results blame the reason onto the currency fluctuation as well as the pandemic. And I'm wondering, they have given quite low predicted growth rate for 2021 because also -- because of also the currency as well as the pandemic. What do you think of the reasons? Why they are so cautious to give such kind of growth rate in some kind of conformity?

And I also noticed for the crop protection industry in this year, if we look at the supply side, when the raw materials is expanding -- let's put aside the logistic influence aside, we see the raw material supply from Chinese market is growing. Do you think that will lead to a decline in the price? And when we look at the demand, basically, in last year, we see the plantation area in North America, Latin America and APAC stay quite stable.

So do you think there is any demand factors this year to lead to a negative result on to the industry. And if we further look at the inventory, I'm wondering if you have noticed the actuals of raw materials or active ingredient from Chinese market has been the highest in the past 10 years. So will that lead to a very high inventory and then transfer into some kind of decline? We -- almost all of the listed company in your industry have showed solid volume growth. Does that mean the channel inventory is building up?

[Ignacio Dominguez, executive]

Okay. So Wayne, would you like to answer or address at least some of the aspects?

[Wayne Rudolph, executive]

Sure. Sure. Thank you. And, right, it's basically [indiscernible] bottom of the P&L. That's the outline. First, let me try relate some of the aspects that were raised about forecasts from the multinationals. I think the multinationals hasn't yet come out with their first quarter results. We are one of the first to come out. I think, the rest should be coming up in the coming weeks.

I think that you will see across the board that all of the multinational companies that have presence in the global agricultural markets should be reporting quite strong sales figures. I think similar to the experience that we have this quarter. Many of the fundamental dynamics that Ignacio has described are common, of course, to all of the players in the industry. Crop prices are up. [ Farm ] economics are strong. The demand for crop protection products is high. Not only for us, but for the industry as a whole.

You also related to the impact of currency and the pandemic on the general industry and other competitors. I think that you saw last year also throughout the industry a negative impact from currencies. It started in Q1, of course, of 2020 with a massive and widespread devaluation of the currency as the pandemic first got up. And then successfully as the quarter progressed, you saw not only ADAMA, but also all the other companies of the industry report quite significant adverse currency impact, not only at the sales level, but also, of course, impacting their profits and profitability.

The question also touched on supply and demand dynamics with respect to raw material. I think that also goes fundamentally to the stake of agriculture globally and the demand for chemicals. And we see that despite the ongoing trade tension that may exist between the U.S. and China, we see that agricultural flows are still very strong between the 2 countries.

Also, they are impacting the relative waiting between the imports to China between those coming from U.S. and coming from Brazil, especially on things like soybean. So those kind of dynamics are obviously still strong, and that's underlying the strong demand for our products, which means that although as you point out supply -- the supply side of chemical materials -- raw materials and intermediates may be damping up, we still see that the positions -- the situation is still relatively bad.

And this also is, I would say, exacerbated by the return of many countries in the world from the pandemic lockdown situation. So as Ignacio mentioned, you also see the impact not only on procurement prices, but more so on logistics and freight costs because the international trade flows are extremely active after having been relatively slower during 2020. So we have the shortage of availability on shipping routes and on ports and terminals in many countries around the world.

I think I hopefully addressed all those points in the questions. So maybe we can move on.

[Unknown Analyst]

I've got another question. It's about the strategy of your company. I noticed that you have enhanced the self-supporting production when you're procuring the raw materials, intermediates and all the material you need to produce the formulation products of yours. So my question is, will you further adjust the proportion of internal and external production and supply? Will you keep enhancing the proportion of back integration production to change the previous layout where the external suppliers was the dominant source?

[Ignacio Dominguez, executive]

Maybe later on, if you want to, Aviram, to complement. I want to say that our strategy as a nonpatent player, it's a combination of speed to market and -- followed by achieving cost leadership. Speed to market, usually, it is critical to have your own facilities that help us to get very quickly into the registration and knowledge of the molecule. And it is extremely critical for our strategy to have our in-house capabilities that enhance that quick access to the market.

As we're moving into growing our volumes and going to cost leadership, for sure, backwards integration, it is one of the areas that we will explore but not only. We think that there are great opportunities in some of the assets that are within this [indiscernible] to allow us to check this cost leadership.

Also, the organization, the company is working with some strategic partners that would allow us also to be more efficient. So we do not plan certainly to explore our assets, but always in the service of getting the cost leadership for our molecules in the long term.

[Aviram Lahav, executive]

I would like to please say further -- say a few more things. First of all, investment dollars are not [ proven ] to us. So before we invest, we can fully examine the marketplace. And only in places where we can have land, as Ignacio said, leaves us by having superior cost position [ all have ] time to market or protecting our proprietary, let's say, know-how is when we step into it. To take it further, I want to say that in sites, once they exist, you have to use them the best possible ways. And sometimes, on top of existing infrastructure to reconsider adding more active ingredients to share the base facilities that we have.

So it is a complex decision. It is carefully analyzed. And once we step in, and it can be a molecule or some of the process in the molecule, it does not have to be total all the stages, once we decide that we go after it in a best possible way. But it is a careful decision and scrutiny that we've taken -- is taking place in every instance.

[Unknown Executive]

I got a question I collected through the WeChat group. It's from Mr. [indiscernible] of Goulian Securities. He is asking how crop protection industry or company can relate or balance the need of plants to absorb the carbon dioxide, while securing the food security or food demand of the population.

[Ignacio Dominguez, executive]

For a company, there are 2 fronts that we're extremely active. One is to help the farmers to fix carbon in the land. And in that, we are -- not only ADAMA, but the entire Syngenta Group, we're having right now a pilot in place in many forms, both in China and the United States, about the amount of carbon that the farmers they can fix to the land. But it would be only a partial view of our commitment towards environmental.

For the company, we're also reviewing our carbon footprint. And it's extremely important how we are upgrading our capabilities on manufacturing by changing the energy sources to more environmentally friendly energy in our plants, by reviewing our equipment in order to be more efficient in the use of this energy by reducing dramatically the level of emissions that we have on our -- on the air and on the water. And all these aspects, the company is extremely committed to measure and reduce dramatically in every place. And the new sites in China and certainly our Jingzhou site is the first-class place in terms of HSE standards.

[Unknown Executive]

Since there is no more question from our friends on the line. I think the brief -- performance briefing today concluded. Thank you for your participation in such evening. And if you have further questions, you can reach me or to Jim through WeChat or other media. Thank you very much.

[Ignacio Dominguez, executive]

Thank you very much, and good evening, China.