ADAMA Ltd

SZSE:000553

Earnings Call Analysis

Company Faces Declining Sales but Improves Margins and Cash Flow

In the first half of 2024, the company experienced a 15% decrease in sales to $1.9 billion and a drop in gross profit to $505 million due to lower demand and pricing pressures from China. Despite these challenges, it saw an improvement in gross margins from 25.3% to 26.8% by focusing on more profitable products and reducing operating expenses. The company also reported a positive operating cash flow of $180 million and an $8 million free cash flow, thanks to strict working capital management. However, it ended the period with a net loss of $154 million.

Navigating a Challenging Market Landscape

The earnings call started with a clear picture of the adverse market conditions faced by the company. Sales dropped by 15%, from $2.2 billion in H1 2023 to $1.9 billion in H1 2024. This decrease was attributed to 3% lower volumes and prices that fell 11%, heavily influenced by overcapacity in China and reduced demand. The management emphasized the importance of navigating these challenges while maintaining operational efficiency.

Resilient Gross Margins Despite Revenue Decline

Despite the downturn in sales, the company managed to improve its gross margin from 25.3% to 26.8%. The management attributed this improvement to a strategic shift towards more profitable products, indicating a deliberate focus on inventory management and cost reductions. This shift led to a significant cost benefit of $202 million from fresh, low-cost inventory, which was critical in maintaining profitability amid declining sales.

Operating Effectiveness and Expense Management

Notably, the company's EBIDTA margin improved from 8.7% to 10.5%, showcasing the effectiveness of its operating expense management initiatives. The reduction in operating expenses in both 2023 and 2024 was a crucial factor supporting the company’s overall profitability, highlighting an ongoing commitment to enhancing business quality under adverse conditions.

Cash Flow Generation Amidst Losses

Although the company recorded net losses of $154 million—$122 million worse than the previous year—it generated positive operating cash flow of $180 million, vastly improved from $10 million during the same timeframe in 2023. This exemplary cash flow performance, characterized by $8 million in free cash flow (a $202 million improvement), reflects stringent working capital management strategies and prioritization of investments that yield quicker returns.

Inventory and Cost Management Strategies

The company successfully reduced its inventory by $609 million compared to last year, indicating robust inventory management practices. Finished goods were also significantly reduced, allowing the firm to pivot towards lower-cost inventory. This careful inventory reduction reflects the operational strategy to balance supply with forthcoming demand, especially in a seasonal industry like agriculture.

Competitive Landscape and Market Readjustments

The call highlighted ongoing pressure from commodity prices and new competition, especially from China. The management understood that as farmers become more cost conscious amid profitability pressures, they may lean towards generic products, impacting sales of higher-margin products. The strategy to adjust product offerings aimed at increasing the differentiated product portfolio beyond 50%, increasing resilience against price volatility.

Positive Steps Towards Financial Stability

Despite tight bank covenants, the company expects its net debt-to-EBITDA ratio to improve with anticipated higher EBITDA and reduced net debt. The management has been proactive in addressing potential liquidity challenges through effective debt management strategies and strict adherence to its five-point cash flow plan, affirming its commitment to financial health in the medium term.

Glimmers of Hope in the Near Future

Looking ahead, there is cautious optimism regarding a market recovery, especially with upcoming seasons in Brazil being critical for future performance. The management indicated that while immediate recovery may not materialize until 2025, efforts towards enhancing product differentiation and operational efficiencies are pivotal to sustaining the business during challenging economic cycles.

Concluding Thoughts

Overall, while the company faces tangible challenges, mainly in market demand and pricing pressures, strategic shifts towards improving product quality, maintaining cost efficiencies, and robust cash management signal a proactive approach to navigating current industry turbulence. Investors should remain vigilant yet optimistic about the company’s forward strategy and its capacity to emerge stronger from the market’s fluctuations.

Earnings Call Transcript 2024-Q2

[Rivka Neufeld, executive]

We're very happy to have you join us today. This is the first time that we're having this earnings call following our conversations with you, our bondholders. So let's just get into it.

So for our presentation today, we're going to have CEO and President, Mr. Steve Hawkins will present; then our CFO, Efrat Nagar, will present the financial results; and then our EVP of Product and Innovation, Mr. Florian Wagner, will go through value innovation.

We will then open the call for questions. You can send us questions even now. [Operator Instructions]

So with that, I will share my screen. Legal notice before we begin. So this presentation is for marketing and information purposes only. The presentation does not constitute an offer or recommendation to perform any transaction in the company's securities. This presentation does not replace the need to review the company's reports published to the public. Any forecast and/or assessment that will be provided if provided in this presentation is based on the assessment of the company's management at its discretion and involves uncertainty.

These estimates and/or forecasts are forward-looking information as defined in the Securities Law 1968. The assessments and our forecast may not materialize, among others, due to factors beyond the company's control. All information included in this presentation relates only to the date which it refers to, and the company does not undertake to update such information afterwards.

So I forgot to mention that I am Mrs. Rivka Neufeld, Investor Relations Manager. And with that, I will turn the call over to Mr. Steve Hawkins. Thank you.

[Steve Hawkins, executive]

Thank you, Rivka. And I'm pleased you introduced yourself. Otherwise, I would need to do that. And our great pleasure with the team here to share with you our second quarter and first half results for 2024.

And the first slide here, we thought would be appropriate, is to begin with the industry context. And we understand and appreciate that the crop protection industry is quite specific, and there's probably varying understanding of our industry from our bondholders. And there's a few points here to run through.

The first is, like many industries, unfortunately, since COVID, there was supply and demand imbalance. And for us in agriculture inputs that has showed up as a channel stocking challenge that we have spent the last 18 months improving, and you'll see those in the financials. And we do see improvement in the channel stock. So those are the distributors that we sell to around the world.

At the same time, their new purchases are very much just in time. So that's something different we saw in response to COVID. And with that just in time and a strong supply situation, so manufacturing inventory in China, we have seen continuing price pressures since the imbalance of supply and demand at the COVID period. And that's on the top part.

I'll move to the bottom part, because it's important also in agriculture. I've been speaking about the sell into the channel. It's also on the demand side from farmers, ultimately who are the users of our products. And in parallel, we have seen some softening of commodity prices, and we speak of commodity prices for farmers. That's typically corn, soybeans and wheat, to a lesser degree, rice. Those are the globally traded commodities that we focus on.

And for sure, with again, many of the challenges we've seen weather-wise, farmers are pressured with their profitability, and that's a trend that we will continue to keep a close eye on going into the future. So that's the market context.

If we move to the next slide, Rivka. So how does that connect to our financials?

And as we go into Q2, specifically here on this slide, we do see our company turning around and our focus very much on improving the quality of our business as the demand side has continued to be challenging around the world is showing signs for sure, improvement in recovery. And no doubt Efrat will share. She's very excited about some of the progress as the management team.

So we get into some details or EBITDA. We talked about compared to last year, an improvement. We also see a huge improvement with very strong efforts from the company on cash flow, which Efrat will explain in detail. And then the next few points, again, are all related to the business quality agenda and focus that we've had in ADAMA since essentially the beginning of last year.

So more than 18 months. This is related to inventory management. You can see the inventory levels minus $609 million versus a year ago. We also see pricing as far as the cost of goods improving and that's also related to what -- the trend I mentioned in China.

And then we see an improved product mix, and that's in a way why we wanted to bring Mr. Wagner on today, because that's in many ways related to our portfolio management and new product launches. So we see that showing up in the P&L.

And finally, you can imagine with the challenges that we've seen in the market and our results, a very strict cost management, operational expenses is what we have minus $30 million versus the first half of last year. So those are some highlights. If we go a bit deeper on the next slide.

And we look at the H1 overall, and the title of the slide -- the title of the slide says Slow Market and Pricing Pressure. And that's very much what I said in the earlier slide. So if we start at the sales line, you can see a challenging minus 14% in H1. So again, we see a continued demand side market to the channel based on the inventories is slow, and I mentioned the delayed purchasing. On the gross profit, the EBITDA level, I mentioned already our business quality improvement. And these are relatively large improvements.

And again, Efrat will give you more details, but you talk about a gross margin shift in our type of business model from 25.3% to 26.8% from last year. Those are huge improvements, again, based on the mix of products and new product launch, also some choices about exiting some products that are low margin in markets like South America. And the EBITDA overall, a slight improvement in H1 and for sure, focusing on that going forward.

No doubt challenging is the overall net loss position. And of course, financing cost is one part of this beyond the operational side. The debt load we're carrying and the challenging top line. So all the improvements in the quality at this time are not yielding us a net gain, which is our focus.

So if we go to the next slide, now we have Q2. I think what you will see here is on the top line, a similar trend, but improving in the gross margin, the EBITDA quality from a quality perspective, if we look at Q2 compared to the overall half. So we see it similar and improving trends. Unfortunately, at the net loss level, the improvement is rather minimal.

So slight improvement in the quality of business in Q2 if we compare it to the overall first half. And if we move on from Q2, my final slide, and then I'll hand over to Efrat. We thought it is helpful to get a bit into the geographies, because they are very different as far as agricultural production, our footprint, our market share and the results themselves.

So if I focus on the top part of the slide, this is what we call the Northern Hemisphere markets, of course, North America and Europe. And you can see a difference between H1 and Q2. So as I mentioned in the previous slide, an overall improvement, slight improvement in Q2 compared to Q1. And at the same time remains challenging with the overall market demand in both these markets.

If I dig a bit deeper in North America, our consumer business remains broadly flat. It's the ag business that was challenged very, very highly in both Q2 and H1, and this is again related to not only the inventory point that I made earlier, but we did see a delayed wet spring in U.S., in particular, which has negatively impacted the purchasing habits beyond the shorter purchasing mindset just in time and similar in Europe.

We had a delayed late cold spring in Europe, which impacted the market size for some of our portfolio, for the industries portfolio, to be clear, and in particular, on fungicides, and we did see pressure on the pricing side, in particular, from China. At the same time, we did receive some registrations for a couple of our key fungicides, Folpet and Captan. And this, for sure, helps our portfolio as we build going forward.

So challenges in the North. If we shift quickly to the south, I'll actually start on the bottom right in APAC. So APAC for us is geographically dominated by India and Australia. We have seen, again, all the macro trends I've mentioned and including some challenges early on with the monsoon season. The Indian business is very much connected to the monsoon.

And for our Australia business, I mentioned earlier, phasing out lower-margin commodity products, and that was a focus of our Australian business. So that dropped on the sales line, but again, improved our overall quality of business. So for sure, a challenging performance, again, slightly improving if we look at first half versus Q2, although there's definitely market remaining in Southeast Asia and in particular in India. So I'll conclude on Latin America. For those maybe not familiar, very much the market that is happening now.

So this is a market that's very active. The first half of the year is not the major market. For Latin America, you can see the most challenging of the geographies. Many of the things we mentioned earlier about purchasing habits of grower at the demand level, declining profitability at the grower level and then the just-in-time purchasing and inventory challenges at the distribution level all those factors are really hitting the -- in particular, the Brazilian market, but also the Argentinian market just as we speak.

So it's early to tell. The season hasn't fully happened. Farmers start to plant soybeans in a few weeks and in some areas already. We do see probably the first decline in acres of soybeans that we've seen in many, many years in Brazil based on the farmer level profitability challenge. But in many ways, this is the major market remaining in the year. So it's too early to understand fully how our performance will show up for the rest of the year in LatAm. But for sure, a very, very challenging start. So with that in lots of detail, trying to onboard all of us on the situation of our company, I will gladly hand over to Efrat to get a bit deeper on the financials. Please, Efrat.

[Efrat Nagar, executive]

Yes. Thank you, Steve. Okay. So we will start with our sales. I think, Steve provided a very detailed explanation about the challenging market condition, which impacted significantly at the mass sales in H1. So you can see here that 15% lower sales from $2.2 billion in H1 2023 to $1.9 billion H1 2024. 3% lower volumes, this is based on -- this is because of the adjusting time approach in the market together with the pressure on the interest rates and direction of all the channel to manage working capital in order to sale financial expenses and prices 11% lower in prices versus H1 2023. This is due to the overcapacity in China and the expected lower cost of products from China that basically, together with the lower demand, pushed all the prices down.

In the next slide, we can see that the lower sales, the lower demand also impact our gross profit, a reduction from $564 million in 2023 to $505 million. However, it's very important to mention that our quality of business over gross margin increased from 25.3% to 26.8%. You can see here the cost very positive impact of our costing. We have started in end of Q1 2023 when we understood that we have a challenging market condition to manage our inventory procurement and production.

And this, of course, from one hand now, we are enjoying from fresh, low-cost inventory that here are demonstrated here in the cost of $202 million benefit. But also, we limit ourselves to focus only on our more profitable product. We limit our procurement and production to more profitable products and this also impact our gross margin with better mix.

We are selling more profitable products and less non-profitable products. Lower sales, lower gross profit and scores also impact lower EBIT from $237 million to $204 million. But in addition, we spoke about Q2, end of Q1 2023, we took to ourselves a mission to manage our operating expenses, our OpEx. So you can see here that after a huge reduction in OpEx in 2023, additional reduction in OpEx in 2024 in order to manage the situation and improve our gross margin -- or sorry, our EBIT to sales margin.

Looking on -- sorry, in Q2, more or less at same picture, 15% decrease in sales from $1.1 billion to $940 million, a 3% lower volume, 11% lower prices. But if we will see in the next slide, we can see that the improvement in our quality of business is well demonstrated in Q2 from 23% lower gross margin in Q2 2023, significantly increased to 26.2% in Q2 2024, although lower sales, better quality of business, again, significantly supported by positive cost impact $120 million and a better mix -- positive mix on ourselves selling more profitable products.

EBITDA margin, again, very nice increase in the quality of the business from 8.7% to 10.5%, 3% higher EBITDA dollars. So although lower sales -- lower demand, lower sales, lower gross profit, we succeeded to increase our EBITDA, mainly because we are focusing our operating expenses management.

Next slide. So this is my favorite slide, and I'm proud to present it. I think, in the third quarter in a row, that although we are facing some challenges in the P&L, as presented by Steve, we are finishing H1 with net losses of $154 million, which are $122 million worse than 2023. We succeeded to generate operating -- positive operating cash flow of $180 million in this quarter, which are $170 million better than H1 2023. Also in this free cash flow, which includes our CapEx investment, we see $8 million positive cash flow.

We are starting although very challenging market condition. We are succeeding to generate $8 million free cash flow, $202 million better than last year. This is mainly because of our strict working capital management. We will see next -- in the next slide on the inventory. But not only that, we are managing our accounts receivables very carefully.

We are working with our suppliers on better conditions. This is for supporting our working capital management, but also prioritizing our investment, our CapEx investment, we are investing on only must have investment and also on projects, on growth projects, which provide us a shorter ROI than previous year.

And in the next slide, we can see our level of inventory. This is a result of our inventory -- strict inventory management in the last few quarters. So we can see that our inventory declined by $609 million versus last year, but also versus the end of 2023. So we see a reduction also in H1 2024 in our inventory. What we cannot see here is that our finished goods are also reduced significantly, which means that our business units in the countries basically selling their existing and relatively high cost inventory, which will enable us to send them profitable -- sorry, low-cost inventory in the future which will enable us to compete in the market.

The low level of inventory is always demonstrated in the inventory days, which are 181 days. You can see that this is the latest -- sorry, the lowest in the last few quarters, and it's even lower versus the general inventory days in ADAMA.

Next. So this is our debt breakdown. You can see here that 44% from our debt is basically our bonds, 5.15% interest rates plus that is linked to the CPI. We have loans of 29% from Syngenta, short- and long-term loans and long-term bank loans of 70% and short term of 10%.

It's extremely important to mention that our long-term loan here, that you are seeing here, is with very favorable interest condition, 3.84%. We took them a few years ago, so we are enjoying from lower costs. And we have here long-term loans from Syngenta in RMB, in the Chinese currency, which also we are benefiting with it, and this is well demonstrated in our lower financial expenses in 2024. We also have, as of end of June 2024, we have $580 million committed credit lines with banks and additional $200 million facility unused from Syngenta.

Next slide. And this is net debt-to-EBITDA ratio. This is the covenant that we are having with the banks in Israel in the end of Q4 2023. We got it very well. We increased our covenant from 4 to 4.8. So we can see here that we are below the covenant, and we are addressing as the covenant needs with the bank.

And with that, Florian, the floor is yours. Thank you.

[Florian Wagner, executive]

Thank you very much, Efrat. Hello, good morning, everybody. Very happy to share with you what value innovation and action means for us in ADAMA and especially from my perspective of my department, which is the Global Marketing and Innovation Department.

If we go to the next slide. Starting first with the market segment that we are playing in. Just imagine the left side of the slide being the entire crop protection market, you see on the top, which is traditionally the new AI segment. At the bottom, you have the commodity generics. And in the middle, you have that off-patent segment with the right level of differentiation, which we call the Value Innovation segment, which is the fastest-growing segment in the market and which contains those customers that are looking for high-quality solutions that deliver them a strong return on investment.

So why is that the strongest growing market segment? If we go to the next slide, there are basically three trends for that. The first trend is that new active ingredients since long become more costly and more difficult to develop. And if you look at the rate of new AI introductions, it has been declining significantly over the several last decades. So this is one trend of allowing this Value Innovation segment go up into the blue.

The second one is around the farmers looking for strong return on investment, especially if you look at the market situations right now, where commodity prices have been softening and they have been softening stronger than the operating costs have been declining.

So there's an additional pressure on the farmers' P&Ls. And this additional pressure on the farmers P&Ls makes the drive for strong return on investment even stronger. So farmers are not ready to pay this really, really high, let's say, price for the last differentiation, but they are looking for the strong return on investment.

But they're also looking for high quality. This is why they are -- let's say, there's a caution as in going into these commodity generics, but really looking for high-return investment for high-quality products. So that's the second trend.

The third trend is the overcapacity in China that we're seeing, especially on the commodity generics. Now you could say this is increasing in that segment, but I believe on the midterm, this will be challenging, because this segment becomes less and less attractive from a margin perspective. So very important trends and also solid trends to make this Value Innovation segment being the strongest growing segment in the market.

If you go to the next slide, how do we address that Value Innovation segment? And I would like to highlight today two areas. The one is the portfolio. So how do we build our value optimized portfolio for that value innovation segment? And the second part is, how do we bring that value optimized portfolio into the markets, strong value-driven marketing and sales? And the important point here also, what you see on the slide is this concept. We started the market so we developed from the market for the market. So this is a market-driven company understanding what the grow and what the market needs are in delivering to this market.

And let me bring this a bit clearer to you when we go on the next slide talking about the portfolio. And please excuse the level of detail on the next slide. But I think it's important that you get a bit of a feeling of how do we develop our portfolio and when we talk about differentiation, what do we actually mean when we talk about differentiation.

And what you see here is, at the top, you see products that are already in our portfolio at the bottom, you see the products that are more in our pipeline. And as I said, it all starts with the grower need on the left side. So it's only when we understand what the grower need is, we start about thinking, okay, how can we develop products that are differentiated.

And when we talk about differentiation in ADAMA, we talk about three elements of differentiation. One is around the active ingredient inside. The second one is around how do these active ingredients are mixed and very importantly, the last element around formulation master or what formulation type we are using.

Let me give you just some examples of the slide that you're seeing here, maybe starting with ALMADA. So let's start on the Brazilian market. ALMADA is a key product for soybean rust and late season disease control in Brazil, and it's actually differentiated all three areas. It has an early access. So one of the three AIs we're using there, we've got an early access. It's a mixture of three AIs that give you that late season disease control, and it's based on a differentiated ADAMA proprietary formulation technology called TOV Technology which is an excellent formulation technology for oil-based formulations.

Let's then move from Brazil into India and talk about a blockbuster here, which is TRASSID, which is the fifth in the line here. This addresses chilli producers for improved thrips control. And what's the differentiation here? So this is a 2-way mixture. Also here, we have an early AI access, which is really important to be early in the market. And then it used Ayalon Technology, where TOV was for oil-based formulations, Ayalon Technology is for water-based formulations for better deep coverage, again, a proprietary technology by ADAMA.

And let's then maybe move back into Europe. Just let me stay on that slide for a second. And if we move back into Europe, we move into the herbicide space. I would like to briefly highlight EDAPTIS, to you. The third one from the bottom. It's addressing hard to control grass weeds in cereals. Again, here also, it's an early AI access to one of the AIs we are using here. And what's specific about this one is that this uses a dual mode of action in a post-emergence setup for cereals, which is quite novel in the market.

And the last one I would like to highlight, come back to fungicides, staying actually in Europe is GILBOA, which is a resistance breaker for cereal disease control, which we have in the pipeline, which has been submitted in here in the U.K. and we have a strong belief in that product as well.

So again, if you take this from a high-level point of view, you see that we are starting on the grower need, and then we are looking for different areas of differentiation to bring exactly that value innovation that gives the return on investment from pharma. If we go on the next slide, you see it a bit in pictures, that's sometimes a bit easier. If you go to the next slide, Rivka, please.

On the left, you see, Asorbital, I didn't talk actually about Asorbital. Asorbital is our formulation technology for our -- for fungicide based products in cereals. It has a faster penetration through the leaves, which leads then to higher yields. Ayalon in Trassid, I told you already, what you see here nicely on that slide is the greening effect that comes through the Ayalon Technology. On ALMADA, the TOV Technology, you see less clogging of the filter, quite obvious in that picture.

And at the bottom is another product from Brazil. It's a wheat control product called Araddo. The good thing about this, it gives you excellent wheat control and the best and the other differentiation is it allows the plant soybean right the day after. So there is no plant implanting interval that the farmer needs to address.

So you see every single product has that special differentiation that gives the return on investment for the farmer.

If we go to the next slide, Rivka. Now taking this all one step up and say, okay, how does our overall portfolio look like? Now I could tell you a lot about how we differentiate our portfolio that we have products in that we call it Value Classic, which are leased differentiated value -- sorry, the Value Basic, which are the least differentiated, the Value Classic in the middle and Value Innovation being the most differentiated one.

But I think if you want to take it simple, combine the green and the blue, so combine the Value Innovation and the Classic, call it differentiated. And you see that today, we have a portfolio share of around 40% in the differentiated segment, 60% in the non-differentiated segment.

In the future, we are targeting a portfolio that has a differentiated share beyond 50% and how we get there is by, a, prioritizing those products, I explained to you before. The right differentiation for the farmer at a good gross margin. And at the same time, we are also doing a tailor management and transitioning our selected load products to increase the share of low-profit products in our portfolio.

So this was all on the portfolio side. Before I told you, okay, we're also working on the value-driven marketing and sales. So just to give you some insights as to what we're doing here. On the one hand, we have a product that we internally call One Plan, but it's basically driving this value in our product positioning. So if you bring it in your portfolio, you need to bring it to the market as well, it needs to be part of your value, we're focusing here on the key markets. We're focusing on the key products that make a significant part of the future sales and working very closely with our countries to make sure that this is reflected in our marketing campaigns.

And at the same time, the value of ease of doing business of ADAMA with our customers is a value. We always get played back from the markets, which is really important. So we are working and we are helping the farmers -- sorry, we're helping our countries to become even better at this ease of doing business by giving them best practice support when it comes to account management, and also equipping them with novel ways to connect to our customers, for example, distributor portals that we're currently implementing in Europe.

If you go to the next slide, Rivka, just to summarize it up. Value Innovation, it's in action in ADAMA. It acts at the market. It is for the market. And when we look at it from the perspective of marketing innovation, two important elements. So developing this value-optimized portfolio was a differentiated portfolio beyond 50% in the future and value-driven marketing itself.

With that, thank you very much for your attention. And I think handing back to you, Rivka.

[Rivka Neufeld, executive]

Yes. So we'll now open the call and answer some of the questions that we already received. So the first question is for Efrat. What is the explanation for the difference between the adjusted and reported EBITDA in Q2 of USD 44 million. This seems to be an impairment of inventory. What is the reason for it?

[Efrat Nagar, executive]

So I will start from the impairment of inventory, so it's not, okay? When we had impairment of inventory last year, it was part of our adjusted numbers, we didn't adjust it. Basically, what we are doing, we are adjusting only one-offs or non-relevant cost to the existing period, which is the situation in Q2. In Q2, some last year's events ended up being figured out in Q2, which require accounting policy and guidance to record them in Q2 2024.

It's also very important to mention that we are speaking about non-cash activities. Some of them will be cashed during the next few years. But in 2024, no cash impact on those adjustments.

[Rivka Neufeld, executive]

So the next question goes to Steve. Did you have many incidents of customers that didn't pay despite receiving your product? How much of that is not yet shown in the financial reports? Maybe Efrat, do you want to take it?

[Efrat Nagar, executive]

No. So the way that we are managing our working capital, and I think it's well demonstrated in our cash flow performance in a very tightly way. We have a very strict approval process on new customers, extension of customers beyond coverage, et cetera.

So currently, we don't see any unusual challenging around collection. If every collection issue challenge is already reflected in our financial report, and it's not the case for 2024.

[Rivka Neufeld, executive]

So the next question, the first part goes to Steve, and the second to Efrat. The first part, when do you expect a change in the trend of sales which has to do more with the market actually? So that's the first question.

[Steve Hawkins, executive]

Okay. Well, thank you. And I see definitely some good questions coming in. Rivka, you also see there's questions both in the Q&A and the chat. So I'm sure you said that. Regarding the demand side, for sure, we're in a cycle change and -- and it's -- we expect it as an industry. And if you look at our competitors, also first half results, you'll see the same trends. We expected this would be a 2-season trend.

And to remind us all about agriculture is seasonal. So you really only have one chance per year when a farmer plants their crop to have the use of our products. And then it's a full year again before this demand comes back. So Obviously, our decisions in supply and inventory and pricing is very dependent on the single annual transaction. So that makes it quite challenging.

As that demand, we do not see a full recovery of the market demand in 2025 in particular, now based on what we see with grower profitability. At the same time, we see an improvement of the overall market. And for sure, we believe we've seen the bottom of the market.

I think the question for all of us is how fast will this recovery now take? And a lot of that question will be answered as we see the performance of Brazil in the second half.

[Rivka Neufeld, executive]

The second half of the question for Efrat. What is the representative level of inventory that the company can get to?

[Efrat Nagar, executive]

So I believe the main reduction in inventory already done, as I mentioned, from Q2 2023 until today, I also presented our inventory days, which are significantly lower than our usual inventory days in ADAMA. So I believe that we are getting to basically the lowest inventory that we can hold in order to address upside in the future.

What we are now focusing is basically on two direction. One is to make sure that the new procurement at the new production will be on product that will address demand in Q4 2024 and 2025, while when we will see, hopefully, the market demand increases and from the other end, as part of our transformation, we are working on some structural changes in the way that we are managing if it's active ingredients, procurement and production and supply chain, our policy and management in order to make sure that from one hand, we are holding the low-cost, high-quality products at the minimum. But on the other hand, we are able to supply to our markets, the inventory on time in a short time in order to address upside when it comes.

[Rivka Neufeld, executive]

So thank you, Efrat. Another additional financial question. What is the company's expectation for CapEx, capital expenditure, for the next year or 2 years?

[Efrat Nagar, executive]

We made a significant change in the way that we are managing CapEx in the -- already in 2023, and we see a significant reduction in our CapEx investment. As I mentioned, are focusing on masthead and only on projects, which are with a short ROI, which means that we will see the benefit in the short term. So I believe that -- and we see even slightly more reduction in 2024. Again, well demonstrated in our cash flow. I believe that the pace of our investment going forward will be more or less as we are having in 2024.

[Rivka Neufeld, executive]

And now a question about the market that maybe Steve, you already answered a little bit. Are there any indications right now of coming out of the negative cycle in Brazil?

[Steve Hawkins, executive]

It's too early to say. As I said that, the crop has not been planted yet. I mean, obviously, we're positioned as strongly as we can be at the moment to supply our customers. I personally was in Brazil in July, met with a number of our distributors and our commercial teams. So we're ready for the season. We have a good order book, and we have to see how the farmers react and how the weather unfolds. So it's all in front of us now.

[Rivka Neufeld, executive]

Efrat, the next question for you. Does the company expect that the net debt-to-EBITDA ratio will decrease by the end of 2024?

[Efrat Nagar, executive]

With our expectation for higher EBITDA and, let's say, lower net debt, we are expecting to see better ratio. And according to our estimation, there is not going to be any issue with covenants with the bank.

[Rivka Neufeld, executive]

Another question for Efrat. Is the Syngenta debt subordinate to the rest of the debt?

[Efrat Nagar, executive]

Yes, absolutely, yes. And this is why it's excluded when we are calculating the covenants with the bank.

[Rivka Neufeld, executive]

On Slide 7, when you comment new Chinese and Indian competition, are you suggesting competition has gotten more intense in the last 3 months? Have they only started flooding the market with supply? And how long do you think this dynamic will last? Steve, I think that is for you.

[Steve Hawkins, executive]

Yes. Fair enough. And -- some of these questions are in the same area. No, it's not an intense competition in the last 3 months. This is a change with the market cycle we saw with the jump up in demand from COVID times.

But it's also the longer-term trend that started with different legislation change around pollution and power supply in China a number of years ago. So this is a trend that's been building. And unfortunately, with the market demand that I mentioned, both sell into the channel, delayed purchases and also more conservative farmer purchasing. With the demand side lowering this supply side from China proves more difficult. But the supply from China was already there.

[Rivka Neufeld, executive]

The next question. On Slide 21 have a sense regarding the degree of capacity utilization by the Chinese in their production plans? And are there any plans by them to curtail capacity? So this is a market question about market production in China. I think, goes to you, Steve.

[Steve Hawkins, executive]

Okay. Well, Florian and myself or Efrat can answer as well. So I'll answer on behalf of the team. I mean, just to remind everyone here, we have a global manufacturing base. Obviously, a strong part of our supply chain and manufacturing is in Israel, and we are also strongly positioned in China as well.

So we are not only customers of China, we are also participating with ADAMA Ltd. in China supplying the rest of our global network. So we're very much active in China. We procure from China and manufacture in China. And we do see a lag effect where the industry in China continues to produce above the global demand. And this, this in some ways is -- this in some ways continues or has continued on, as I mentioned earlier, this imbalance of supply and demand.

So the short answer to the question is, we see continued production from China, higher than the global demand, and this continues, as we said, to challenge pricing globally, but also push more forward than we originally assumed on the trend itself about lower demand requirements on the selling.

[Rivka Neufeld, executive]

An additional question. As profit margins recover over time, will profit dollars return to levels in previous years? Or will it be structurally lower if the ag chem prices don't recover? So Efrat, I think that goes to you.

[Efrat Nagar, executive]

But maybe Florian can explain our strategy around differentiated products, innovative products. We are not going to be to sell, okay, with the same mix that we sold in the last few years.

[Florian Wagner, executive]

Thanks, Efrat. And I think, I mean, one of the reason -- or the major reason why we're going into this differentiated portfolio is because it actually gives us a stronger price insulation and therefore, also consistency of margins. And I think this is -- this is what we're looking for. This is the reason for us going into that growing segment. And it was exactly the impact on the gross margin, as Efrat just explained.

[Rivka Neufeld, executive]

So we received a follow-up question that also for you, Florian. When referring to more profitable products in the mix of sales, how much did those quantities, how much of the volumes and prices decrease quarter-to-quarter -- quarter-over-quarter and half over half? So we don't give the numbers, but you can give.

[Steve Hawkins, executive]

I mean, again, I think, Efrat has been talking about all the financial numbers in the past. I mean, again, what we are looking for in the future is to expand that portfolio of differentiated products that will give us that price insulation, that consistency of margin. And obviously, we are -- when we do the prioritization, we also look for those areas that give us scale.

So we are looking for those products that are differentiated with the consistency in margin, installation on price, but also give us the right scale. So we're think the big market areas where we'll also get the volumes and the price that we want. So that would be my response to that question.

[Rivka Neufeld, executive]

Additional question. In commoditized active ingredients, margins are obviously very low at the moment. Are you seeing any changes in the competitive landscape, including China, AI producers selling directly to channel partners or retailers as a way to maintain margins. So who would like to take that, Steve, maybe?

[Steve Hawkins, executive]

Sure. I can take that. And lots of interest and understandably so on the China part of this,, because China as a whole manufacturers more than well -- much more than 50% of the total supply for the agriculture crop protection market. So it's obviously a key variable for the whole of the industry. And I think to answer specifically the question, again, it's difficult to tell.

We have to see how Brazil goes. We have to see how individual companies. We have our own plan, a fight forward plan. You see how we've managed our quality of business. Other companies have different financial objectives that they have to agree with their boards and their owners.

So it's difficult to speculate. I think on where these companies, how they will manage their P&L is in this market situation. I think, the good news is we started early. We saw this trend beginning of last year 2023. We reacted with a very strong transformation program internally, which we continue to implement. And we're starting to see the benefits in our P&L. But of course, competition will have to decide how they react to the market.

[Rivka Neufeld, executive]

So the next question is if a continuation to the answer you just gave. You mentioned that your inventory is now at a low level and well maintained. A number of your peers also suggest that they are nearing lows in their inventory also. What do you think will need to occur for prices to begin to recover in the market as it seems that inventory has mostly been worked through? So the question is about the market already consuming its high-cost inventory and how that's going to impact market prices going forward.

[Steve Hawkins, executive]

Maybe, Efrat.

[Efrat Nagar, executive]

Yes. I think that we have the overcapacity in China, as mentioned by Steve, is here to stay in the next few years and this is going to be to have a significant impact on the level of prices in the market. Also, we don't see any logistics issue anymore that we face in 2022. Any capacity issue. So I believe that we will see more or less the same level of prices. And as Florian mentioned, this is exactly our strategy. This is going to address because we are going to have this Value Innovation segment when we are be able to suggest to the farmers premium product patented formulation but patented ways of working in order to -- from cost effective to be more competitors in the market and to price it accordingly and to enjoy from [ high axis ] versus commodities.

[Rivka Neufeld, executive]

Next question, given you are saying that farmer profitability is becoming challenged. Are you observing any trade down benefits into generics, into ag chem generics? Maybe Florian.

[Florian Wagner, executive]

I'm sorry. We just have a fire alarm here and it's really. Everybody is going out of it, so.

[Rivka Neufeld, executive]

No problem. Yes. So I'll repeat the question. Given that you are saying that the farmer profitability is becoming challenged, are you observing any trade-down benefit to going into ag chem generics?

[Steve Hawkins, executive]

So I can take that. I think, Florian had a siren to deal with. This is -- I mean, in Florian's presentation, when we talk about the Value Innovation market. That's partly driven, as he said by the type of technology. So the new active ingredients, the genericized active ingredients and then over time, those generic active ingredients become more commoditized.

And for sure, to answer specifically the question, I mean, in my 30-plus years in this market. When farmer profitability declines, we can all imagine farmers are very entrepreneurial and very cost conscious. And they will look harder at their choices for crop inputs, whether it's fertilizer, seed or crop protection. And so in general, we see an increase in these type of market situations, an increase in what we're calling more return on investment value for farmers. So that's exactly the market segment, and that's partly why we have shifted our portfolio focus and future innovation, because we can imagine future farmer profitability is more challenged. And so we want a portfolio to meet that market need.

[Rivka Neufeld, executive]

So the next question, can you give more information regarding the company's strategy, regarding the liquidity of the company in order to serve its debt in the next year, especially given that, that the bank covenants are pretty tight. So Efrat?

[Efrat Nagar, executive]

I will take it. So, as I mentioned, in end of Q1 2023, we launched, we call it, 5 Pack Plan to manage market situation, while the title of this, then was, Cash is a King, okay? So basically, for them and, of course, based on our transformation plan, as mentioned by Steve, the focus of this organization now is to improve the quality of business while focusing on our cash flow generation.

So -- and this is the direction that we are going is what we are aiming to do. This is what we did in the last few quarters. And again, this is well demonstrated in our cash flow performance in H1 2024. And I agree, it seems that in Q2, our covenants are very close to -- sorry, our performance are very close to the covenants. However, if we are taking the one-off, so we will -- our covenants is even lower than before, than the previous covenants.

And according to other estimation, and this is the way that we are building our work plan for 2025, we are about to go back to the normal covenants and to meet them going forward.

[Rivka Neufeld, executive]

So the next question is a little bit specific. The mussel 2,4-D herbicide. And if so, what are you observing with pricing and purchasing behavior given that there's litigation issue with China dumping?

[Steve Hawkins, executive]

Well, of course, we're very much understanding the issue itself. Also, I cannot comment on pricing, of course. But we -- although we do sell to 2,4-D, yes.

[Rivka Neufeld, executive]

Okay. And the final question that we have is more of a comment rather than a question. Can you please give us a guidance for full year 2024 in terms of sales growth, EBITDA growth and EBITDA margin target? So Efrat?

[Efrat Nagar, executive]

So we're not -- we cannot give you any guidance for the full year, but we can commit that we will keep doing our utmost in order to serve the world, feeding the world was with our product support in the world. And I think most importantly, continue with our transformation plan. In order to see improvement in both quality of business reflected into dollar and also resulted by a better cash flow. So this is a commitment that I can give now not more than that.

[Rivka Neufeld, executive]

So Steve, would you like to give some closing statements?

[Steve Hawkins, executive]

I can. And to build on Efrat's point, that's partly why we wanted to share with you the first half results. And you can see the history and you have the numbers. And as we said, we're seeing a turnaround in first half of this year. And as we described, we have refreshed strategy. We have a very strong transformation program, and we have our almost 9,000 people around the world, very focused in supporting the company turning around during what is a difficult market situation. So that's, as Efrat has said, our plan that we're implementing in our commitment.

I had just a few comments. First of all, thank you for those that joined many, many really, really good questions, and thank you for those, and thank you for taking the time to learn a bit more the ADAMA story. I wanted to also inform you that our employees around the world are safe. We, of course, have a whole health and safety program that we are very committed and focused to.

And of course, in particular, in Israel at the moment in Ukraine and other places, we're taking special attention for the -- not only the physical, but the mental, safety and health of our people and our teams. And related to Israel, I mean, it's -- as the leader of the company, very, very impressive that we have had no material disruptions in supply all the way back to October 7. This is really, really a testament to the unbelievable resilience of our teams in Israel. And so I wanted to make a special note of that. We got no question, but we do get these questions from the marketplace. So I wanted to share that with you.

And again, overall, thank you so much for joining, and thank you to the team. Unfortunately, I think we had a siren so Florian had to drop off. Maybe he's back now. And with that, I will hand back to Rivka, so we make sure we keep this connection going forward. Thanks, everyone.

[Rivka Neufeld, executive]

Thank you very much, Steve, and thank you, everybody. You have my details. I put them also in the chat box here, and I'm available for any questions you might have. So thank you very much, and have a great day.

[Steve Hawkins, executive]

Be Safe everyone.

[Efrat Nagar, executive]

Thank you. Bye-bye.