ICL Group Ltd (ICL) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the ICL Analyst Conference Call. (Operator Instructions) I must advise you that this call is being recorded today. (Operator Instructions) I'd like to hand the call over to your first speaker today, Mr. Dudi Musler. Please go ahead, sir.

Thank you. Hello everyone. Welcome, and thank you for joining our Second Quarter 2017 Conference Call. Earlier today, we filed our reports to the securities authorities and the stock exchanges in the U.S. and in Israel. The reports as well as the press release are available on our website. For your reference, this meeting is being webcast live at www.icl-group.com. There will be a replay available a few hours after the meeting, and a transcript will be available within 48 hours. The presentation that will be reviewed today was also filed to the securities authorities and is available on our website. Please don't forget to review Slide #2 with the disclaimer. Our comments today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. We will begin with a presentation by our acting CEO, Asher Grinbaum, followed by Kobi Altman, our CFO. In addition, ICL executives are either here or on the line and will be available for questions following the presentation. Thank you all for joining us today. Looking forward to talk to you and see you soon. Asher, please?

Thank you, Dudi. Good morning, or good afternoon to all of you joining this call today. Let's turn to the summary of the quarter on Slide 3. As in the first quarter of 2017, this quarter we continued to deliver on our operational capabilities as well as on our ability to reduce G&A expenses, and to generate strong positive free cash flow, despite the challenging business environment we face in some of our businesses. Our Specialty Solutions division performed solidly, mainly the bromine, acid and fire safety businesses, while the business environment in commodity fertilizers and specialty in phosphate fertilizers remains challenging. Nevertheless, our continued efficiency and operational excellence efforts combined with our reduced exposure to commodity phosphate fertilizers resulted in a significant operational improvement at our YPH joint venture in China. Our financial results were impacted by an increased tax burden in Israel, and as a result of increased financial expenses, mainly due to early payment of the long-term debt. Kobi will elaborate on those shortly. During the quarter, we signed a contract to divest our 50% holding in IDE, another step in our plan to divest low synergy business, to further strengthen our balance sheet, reduce debt [ratio] and support our strategic plans, primarily in our specialty business.

Turning to Slide 4. As I just mentioned, the business environment under which we operate continues to present multiple challenges. This quarter was negatively impacted by the delay in signing potash contracts in China, declining commodity fertilizers prices, especially phosphates, the strength in Israel shekel, rising seaborne transportation costs and the ammonia shortage in Israel. Nevertheless, I would like to highlight the positive developments, which occurred during the quarter.

Our specialty business continued to demonstrate solid performance. We continuously and successfully executed on our efficiency and cost control measures, and we demonstrated further significant operational improvement at our YPH joint venture in China. We are also pleased with the resolution of the Catalan Supreme Court, which approved our suggested roadmap for their continued operation or of the [Sallent] [portal] site, allowing us to operate at the site for one more year, with an option for a second year, until we complete the expansion of our Suria site and consolidate both operations. While it did not affect the second quarter, we are currently dealing with the unfortunate phosphogypsum event at our Rotem phosphate operations in Israel, about which, I will elaborate later.

Moving to Slide 5. Despite lower sales, our Specialty Solutions' operating income remained stable. ICL Advanced Additives demonstrated another strong quarter, which was driven by higher acid and fire safety sales, and our bromine business continued its positive trend, presenting yet another quarter of strong operating profit. The division's decrease in [sales] is mostly a result of our food business being negatively impacted by dairy protein customers' destocking activity. Nevertheless, the business unit's profitability was almost flat compared to Q2 2016, and partially offset the reduced sales to the customer with increased sales to new and other existing customers. We expect that trend to continue in the second half of the year. Our Essential Minerals division showed lower sales and operating income on the back of lower commodity fertilizers' market prices. The delayed signing of potash contracts in China and $26 million in insurance income recorded in the second quarter of last year. Following the recent signing of new contracts to supply 925,000 metric tonnes of potash to our Chinese customers at a higher price than last year, we expect our second half potash sales and operating income to significantly increase over the first half.

Slide #6. Before I conclude and pass the presentation over to Kobi, to discuss our financial results, I would like to elaborate on the Rotem incident. As you all know, on June 30, there was a partial collapse of a dyke in Pond #3, which is used for accumulation of phosphogypsum water that is created as a by-product of production process at our ICL Rotem Plant. We immediately ceased our use of the active phosphogypsum ponds and took immediate steps to stop the flow of phosphogypsum water from leaking out of the accumulation pond. I would like to emphasize that we have history of environmental responsibility, and we are committed to taking all measures necessary to rehabilitate the Ashalim dry riverbed. During the time that has passed since the event, we have worked diligently and in full cooperation with the authorities, in order to minimize damage to the Ashalim riverbed. As part of the actions that we have taken, we sent a professional team, using helicopters, carrying generators, pumps and equipment to pump out the phosphogypsum remnants from cisterns, to which access is difficult or limited. Teams from ICL Rotem and ICL Dead Sea, together with the Ministry of Environmental Protection and the Nature and Parks Authority have laid 3 kilometers of new pipes to flow portable water to the area. This water is intended to irrigate the vegetation near the dry riverbed and supply water for animals and (inaudible). I'm glad to say that our efforts have proven effective, and we have begun to observe animals in the region drinking water from the [floats] that were placed alongside the stream. We will continue our restoration efforts and our work with the authorities to find solutions to restore full activities at the plant and the pools.

With that, I would like to turn the call over to Kobi to review our finances.

Thank you, Asher, and good day, everyone. Let's take a look at our financial results on Slide 8. Q2 presented yet another quarter of solid operational performance, mostly hampered by continuous challenging business environment in our commodities businesses. Below the operating profit line, we had higher financial expenses and a high effective tax rate. Sales growth and operating profit were slightly lower than last year, and slightly better than the first quarter. We continued to demonstrate our ability to reduce costs and expenses, and generate strong positive free cash flow. Our results continue to be affected by the declining market price environment in the commodity markets, especially in the commodity phosphate fertilizer market as well as by the strong Israeli shekel compared to the dollar and Euro. Our bromine business, as Asher noted, continued its strong performance and along with Advanced Additives margin expansion, contributed to ICL's solid performance this quarter. Potash prices remained stable in the second quarter, and volumes were only slightly higher due to the late signing of the annual contract in China. Similar to what we have experienced in 2016, we believe that our potash business will perform much better in the second half of the year, as our shipments into China are expected to ramp up now. Our net income was affected by both higher-than-normal finance expenses, and increased tax expense this quarter, which I will elaborate on, shortly. Our disciplined approach to reduction of cost and CapEx made it possible to work out another strong quarter of positive free cash flow. Cash flow generation will remain a priority for the company with actions taken to reduce our debt ratios and enable us to further invest in growth projects.

In Slide 9, we drill down to the main components of our financial expenses. As you can see, our net interest expenses are relatively stable, as the decrease in our financial debt was offset by an increase in the average interest rate we pay. The increase this quarter came mostly from a long-term loan [error] repayment fee of $30 million, that we paid as part of our overall refinancing activities. The hedging transactions we make, are contributing to the volatility of our financial expenses, as the underlying exposure is booked in other line items.

As we turn to Slide 10, I would like to walk you through the reasons for the increased tax expenses. ICL's tax burden in Israel has increased in 2017. This is due to the Israeli natural resources tax on potash and bromine, and the exclusion of some of our Israeli operations from the encouragement tax law. The tax expenses further increased this quarter, due to the strengthening of the new Israeli shekel versus the dollar. We estimated that the tax rate for ICL in the next few quarters to be around 35% with volatility between quarters. On a longer term, we expect to slightly go down toward the 30% range.

Turning to Slide 11. We saw reduction in the Specialty Solutions sales, which was almost entirely related to a destocking activity of a customer in the dairy protein business, as we discussed in Q1. However, operating income remained stable in line with our strategy to focus on value-added products and services and to increase profitability. The solid performance demonstrated by the division was highlighted by profitability in our bromine business line and continued strong performance in our acid and fire safety businesses.

On Slide 12, as we already mentioned, our Essential Minerals division continued to operate under a challenging business environment of low commodity prices. It has also been impacted by the strengthening of the shekel against the dollar and euro. The division has managed, however, to significantly improve the performance in the YPH joint venture by successfully executing efficiency and cost-reduction measures, and by reducing sales of loss-making commodity products, while shifting to increase sales of specialties. Bear in mind, that in the second quarter of 2016, we had a $26 million in income from an insurance payment. Removing that out of the equation, operating profit remained fairly stable. We believe the second half of the year will look even better on the back of higher potash shipments, due to the signing of the contract in China and hopefully in India as well.

And finally, on Slide 13. We continue with our disciplined balance sheet management, which is reflected in another quarter of stronger free cash flow. For the first half of the year, we generated free cash flow of $190 million versus $123 million in the first half of 2016. We intend to maintain the positive improvements we made in managing our working capital and generating solid cash flow for the remainder of 2017. This, along with lower CapEx and our divestment plan, will serve to further strengthen our balance sheet and support our goal of reducing our debt ratios, while still committed to providing solid returns to our shareholders. Thank you for your time, and we will be happy to take your questions now.

(Operator Instructions) Our first question comes from the line of Lisa De Neve.

So yourselves, as far as other potash players have flagged higher seaborne shipping rate, so how should we see in light of high year-on-year signed Indian and Chinese potash contracts, while Chinese by you, and Indian by -- last week by your colleague. Could you sort of quantify what the high year-on-year net price retention is? That's my first question and secondly, on a similar note, so last Friday, your colleague signed the Indian potash contract for 2017, starting from June to next June 2018, and I wondered if you could provide me some color if you have already started negotiations as well? And if yes, if you expect these to be concluded sort of in a short term? Thank you.

Hello, this is Ofer Lifshitz, I'm the President of the Essential Minerals division. Regarding the first question, the negotiation in China actually took into consideration that the higher rate of the marine logistic cost, and this was part of the negotiation as far as we know, because as you know, we were not part of this negotiation. We can say that from our point of view, the $11 increase that was concluded, and we concluded it as well. If -- we are looking on the net increase, we are saying it's between $3 to $5, and the rest is for the logistics. Important to say that if we compare our logistic cost compared to other companies, our logistic cost to China, we have an advantage of course compared to, if the [ship should appear] from the United States or other places, so this is regarding the first question. Kobi, do you want to add something? For the second question regarding India, as you know, the Russian just concluded their agreements week ago, we are starting our negotiation as well, and we believe we will conclude it in the coming few weeks.

Maybe just to clarify, because I'm not sure if we missed this point. In China, we did sign contracts 2 days ago for 925,000 tonnes and we are commencing shipping now, and we will push it for the next 5 months until the end of the year.

Your next question comes from the line of Jeffrey Schnell.

Could you provide a little detail on how you're thinking about capital allocation? And as a related question, ICL has committed to divesting non-core assets, could you elaborate on what you define as non-core? Is it anything not related to the Dead Sea, and downstream of that? Or would you consider any of your assets existing elsewhere in Europe? And second question is just on the China potash contract, you've agreed for 925,000 this year, you sold under a million in 2016, is there an escalation in year 3 to get to the terms originally defined under the original framework?

I will start with the first question. On the capital allocation, as we mentioned earlier, we are trying to balance all the time between securing enough funds to create and continue to grow our growth engines for the longer time prosperity of the company. On the second part, to manage our balance sheet and our debt ratios, and the third then being is to provide the shareholders return. We have done a significant reduction in our capital expenditure this year versus last year and versus the years before. This is, obviously, helping us to manage our debt ratio down as well, and we will continue to do that. I will just mention that we are still investing in CapEx, in a range that is more than our depreciation level. So I'm just emphasizing that because we are still continuing on our investment to ensure that we are improving our existing assets, and beyond just maintaining them, and looking into growth project as well. In terms of the divestitures. As Asher mentioned, earlier we signed, this quarter, a deal to sell our 50% stake in the IDE company, and we are working toward closing this deal, and we still hope, as we announced, when we signed the deal, to close it within 2017. So far, the approval process is in line with our expectations. Further divestitures, as we announced in June, we are looking few assets with the less synergistic value to ICL to our core mineral [chains] and mineral [legs]. We are looking at few assets, and we did not decide it yet what of those few assets we will sell at the end. Obviously, we are trying to find the most attractive price for those assets, and once we will see the proposal, we will decide what to do with that. The next question on the contracts?

I will answer (inaudible) the quantities to China, actually, the agreements that we have this year is part of the framework agreements that we have for 3 years starting last year. And the quantities that we have signed is similar to the quantities that we sold in China last year, 2016. This is the quantities that if we find ourselves at the end of the year that we can send some more material and (inaudible) able to do it, but currently we assume this is the quantities we can ship to China in 2017.

Next question comes from the line of Fahad Tariq.

My first question is on the YPH Chinese phosphate JV. What was the actual loss in the quarter, if you can quantify that? And what improvements, if any are left, in terms of operational improvements or cost reduction?

Asher speaking. Debt to loss in the second quarter was more or less in the line of $2 million or $3 million dollars. About the improvements that should be done, what already we did in the joint venture, if you remember, when we entered into this joint venture, intention was to convert the joint venture from commodity joint venture to specialty product. The plan was to do it in 3 or 4 years, because of the very competitive situation that we are facing in China, mostly in the by-products, we decided to cut these 3 or 4 years immediately, and (inaudible) our plan was to convert the joint venture from commodities to specialties. We did it in the beginning of this year, and of course there are also other complementary activities that we did in the efficiency area, operational excellence and so on. At the end of the day, we came to the conclusion and we got possible results, and if you compare the results to what has happened last year, we can see the major step which was done and hopefully we should keep it, and we shall approve it -- or improve it during the coming quarters.

My second question was, the focus for ICL on (inaudible) has been growing to Specialty Solutions business and including selling non-core assets and really investing in that business, the sales and operational earnings have been flat year-over-year. What's the major catalyst in that business? What will cause it to grow going forward? Thank you.

Good afternoon. It's Eli Glazer speaking, the head of the Specialty Solutions division. The growth path, which we are looking, is going mainly on our innovation part of the core business, which is the bromine, and the bromine derivatives and the phosphate, and the phosphate derivatives, by going into more and more sophisticated products and to get unique products. We're also thinking that if we have some opportunities for small, medium acquisition, this will be also part of our growth path.

Next question comes from the line of Patrick Rafaisz.

Three or maybe 4 questions. One is on the Rotem incident, will that have any implications from a CapEx perspective maybe in 2018 when you have to fix that or invest otherwise to restore production? Then the second question is a follow up on the low synergy businesses, do you have a timeline for the other businesses, you're looking for divestment or is that the firm commitment to divest these assets? Or will it also depend on the price you will get, i.e., is there a risk factor in there that you might end up not divesting some of them. Then, 2 short ones, maybe on guidance, net financial expenses -- with that early repayment of the long-term debt, now where would you guide the net financial expenses for the full year '17? And the similar question for volumes in potash, assuming you sign the Indian contract as planned now, where would you guide us for total shipments in 2017?

This is Asher. I will answer the Rotem questions. As we see it right now and regard the future, CapEx has been made as part of this event. First of all, we have to take into consideration that we are -- the insurance covers in such cases? And of course, if it will be an event, we will ask the insurance for this issue. As we see it right now, for the future operation and it was not concluded yet, of course, how much we need to invest and when. But right now, we don't see it as a major issue that will affect us. And we can see that even this year and in 2018, we will be able to operate with not big CapEx, that was not already for future CapEx investment that we have already took, and as I said, if it will be needed as part of this event, we will activate the insurance that we have.

I will take the next 2 questions. First with regards to the divestitures. We do not have a definitive timetable, and this is why, I also -- I mentioned earlier that we are looking at few assets, potential assets, potentially worth more than $500 million, because we want to add to value at the auctions, and to choose what to divest at the end after we see proposals regarding few assets and taking the more attractive ones from our perspective. We are looking diligently at those divestments. We do want to do the divestment of around $500 million, including the one we already did the IDE in order to reduce our debt ratios and to secure (inaudible) for future growth. But there is no time limit that is very, very strict here. In terms of the finance expenses, I would say by and large, if you take out the $13 million of the prepayment fee, you get to around $35 million of finance expenses for this quarter. I think, that this represents, more or less, a kind of a good average to try to think of our finance expenses on a quarterly basis. However, I must mention, that we expect this amount to be relatively volatile on a quarterly basis because of all the various components that are impacting our finance expenses, mainly the currency ones that are relatively volatile, but $35 million, I think, is a good average for the quarter.

Just one more comment on the first question, we are wanting to make sure that it's clear. That the production plant that was stopped for few days because of the event, this is the sulfuric acid plant, is now of course working. Rotem is working in the full capacity -- phosphoric, sorry, the phosphoric acid plant that was stopped for a few days because of the event, and it went back to operation, in full operation after few days. So now that Rotem plant is fully working.

And the volumes for 2017 potash?

I can say that the potash volumes that we sold during the last few years, and we expect to sell are more of less the same. This year it's around 5 million tonnes. This quantity resume if all the agreements including India, will materialize, so more or less, this is the quantities that we will sell also this year.

(Operator Instructions) Our next question comes from the line of [Ronnie Barone] .

Kobi, could you provide some more color on the profitability on your non-potash agricultural units, mainly phosphates and specialty fertilizers. It seems that in aggregate it was -- if I get it right, it was lower than in the first quarter despite the reduced losses in China. Is that correct? And if so, was it driven by the Israeli phosphate business, Specialty Fertilizers, magnesium, et cetera? And as a related question, should we expect some expansion in this non-potash unit? And to what extent the situation with Haifa Chemicals could impact margins?

I will take the first part and maybe Ofer will elaborate. On the non-potash businesses in our agro division. Asher mentioned in the opening remarks, that last year we had a $26 million income from insurance during this quarter, and this is why if you compare it to that taking out of the equation this amount, it was doing relatively well. We also mentioned that the commodity prices in the phosphate are still going down. So we still see if we are comparing to the second quarter of 2016, a price reduction in terms of the main commodity products (inaudible) the basic fertilizers reduction of price by more than 10%. Again versus the second quarter of '16, over the last 2 to 3 quarters, we do see more stability, but still when -- while comparing year-over-year, we see this impact. So this is in terms of the non-potash agro businesses and Ofer, you want to elaborate more?

So I want to elaborate a little bit more about the Specialty Fertilizers business unit. Well, we saw also price decrease also in this business unit, not as much as the phosphate, but also some price decrease over there as well, but the quantities went up quite nicely. And I assume that the overall performance of this business unit is doing quite good in the second quarter. One of the issues that we did see is the no ammonia in Israel, and we had to stop the production of (inaudible) MAP, one of the products of the Specialty Fertilizers unit. We produce it now in China and we can compensate all the licensure by producing it in China. So overall, the Specialty Fertilizers is part of the agriculture -- the other agricultural division -- Business unit, which is not the potash, is doing quite well in second quarter.

And one more question regarding CapEx. First half of the year reflects a run rate of less than $450 million, which appears lower than your full year guidance. How sustainable this is? And should we assume higher levels in the second half?

I will answer that. We do believe that there will be a slight ramp up in the second half. So we continue with our guidance of around $500 million to $550 million of CapEx. We believe that this is the range that you should pick.

I would like to answer the question about ammonia. The bottom line, it will be very marginal impact on ICL production and ICL results.

We have no for the question at this time. Please continue.

Well, if there are no further questions, with that we will conclude our Q2 2017 conference call. Is there any other question?

We've just had one additional question come through from the line of Lisa De Neve.

This is small question on Food Specialties. If you could provide with a little bit of outlook on Food Specialties in general for the second half of 2017? As well as particularly for dairy proteins, how we should look at in the light of the changing Chinese regulations, and if you expect sort of sales to recover in the second half of 2017? Or even further and more -- should we look in more (inaudible) for that that?

It's Eli. Related to the food proteins, especially to -- with regards to China, the new regulation will come into effect in next year in January 2018. In the meantime, there are some restrictions, which all the suppliers in this market, are doing all the preparation, which is necessary in the market. Therefore, we expect that in June next year, we'll see some improvement. And all in all, the Chinese market for infant proteins is going to be better, at least from what we know and what we predict in this market. In the other business, which we have, we are in line of what our plans, and we continue to innovate new products, especially related to our phosphate and phosphate plants, and this part is going according to our plans.

Okay, then if there are no more questions. We can now conclude the Q2 2017 conference call. Thank you very much everybody for joining us, and we look forward to seeing you in Q3 2017.

Thank you very much. That does conclude our call for today. Thank you all for participating. You may now disconnect.