ICL Group Ltd (ICL) 2018 Q1 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 the first speaker today, Ms. Limor Gruber, Head of IR. Please go ahead.

Thank you. Hello, everyone. Welcome and thank you for joining us today to our first quarter 2018 conference call. The event is being webcast live on our website at www.icl-group.com.

Earlier today, we filed our reports to the securities authorities and the stock exchanges in the U.S. and Israel. The reports as well as the press release are available on our website.

There will be a replay for the webcast available a few hours after the meeting and the transcript will be available within a few days. 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 the disclaimer on Slide #2.

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 the presentation by our acting CEO, Asher Grinbaum, followed by Kobi Altman, our CFO. Following the presentation, we will open the line for the Q&A session. Asher, please.

Thank you, Limor. Good afternoon or good morning to all of you, joining this call today.

Let's begin on Slide #3. 2018 started with a strong momentum, continuing the improvement trend we demonstrated in 2017. The main drivers were higher prices across all of our business lines with the highest contribution coming from potash and the bromine value chain.

In addition, we benefited from higher potash production and sales volumes as well as from the growth of our specialty agricultural business.

Another notable achievement this quarter is the closing of the sale of our Fire Safety and Oil Additives businesses. The net proceeds in the amount of $931 million reduced our net debt. This provides us the necessary financial flexibility for our strategic infrastructural investments and for our growth plan as outlined in the strategy we launched a couple of months ago.

Another major event in the quarter was the sale of the shares held by Nutrien to Israeli and foreign institutional investors. The fast and smooth process with relatively small discount is a vote of confidence in ICL by the capital markets.

Let's go over the performance of our business lines on Slide #4. Industrial Products continues to demonstrate the strong operating margin level achieved last year. Much of it following the value-oriented pricing approach, the business line adopted since 2015, and despite a significant reduction in the sales of clear brine fluids.

Prices also contributed to the strong performance of Advanced Additives, which also benefited from demand from new customers and higher market share for our YPH joint venture in China.

Our Food Specialty business benefited from a recovery in the sales volumes of dairy proteins and as well as from higher pricing in food phosphates, which compensated for higher raw material costs.

Improved condition in the potash market, which drove higher prices for potash as well as for polysulphate together with an increase of about 10% in sales and production volumes, were the main contributors to the growth in our Essential Minerals segment.

Specialty Fertilizers, a key driver of our strategic efforts, increased profit by 25% to a record level for a first quarter. Growth was driven by higher prices, volumes and favorable exchange rates. A few months ago, during the Q4 2017 presentation, I listed some of the challenging goals we have set for 2018. As you can see on Slide #5, we are on track to meet our ambitious goals for the year. The completion of the business divestments allowed us to both reduce our net debt-to-EBITDA ratio, thus securing our investment grade rating and to secure funds for potential future growth, whether it is through bolt-on M&A, joint ventures collaborations, or investing in organic growth.

Our operational excellence cost cutting and efficiency measures have successfully resulted in positive operating margins for ICL Iberia and YPH joint venture. Our focus on Specialty Agriculture is already bearing fruits with Specialty Fertilizers business line hitting a record first quarter profit.

We continue to grow our Specialty business with all 3 business lines performing favorably in the top and bottom lines and we are on track to complete the transition of our potash mine in the U.K. into a pure Polysulphate site with a significant reduction of the loss this quarter.

2017 was mostly about stabilizing the company and thinking about the strategic directions we aim to set. All the measures that we have taken and outlined on Slide #6 has provided us with a solid base to design our strategy, which we have started to implement.

Our strategy is focused on enhancing ICL's mineral chains, alongside accelerated growth in advanced crop nutrition solutions. We will continue to focus on innovation, strengthening and leveraging on our R&D capabilities, and we'll look to invest in new technologies and Ag-related startups.

I will leave you now with Slide #7, which summarizes the quantified targets we have set in our strategy. I have full confidence in ICL's future. Our excellent management team led by Mr. Johanan Locker, our Executive Chairman of the Board, and ICL's incoming CEO of Mr. Raviv Zoller, and our dedicated employees, will work hard to achieve these targets and even exceed them.

As I hand over the management of the company in the coming days, allow me to take the opportunity to express how proud I am of ICL's many accomplishments, despite market and other challenges during the past 2 years, in which I have served as acting CEO. I am deeply grateful for having had the opportunity to serve the company for 45 years in a variety of roles and to have worked with ICL's talented and dedicated management team and employees in Israel and throughout the world. They are the strength of this company. And I am confident that under Mr. Zoller's leadership, ICL will continue to grow and flourish.

Thank you all. And with that, I'll hand it over to Kobi to discuss the financials.

Thank you, Asher, and good day, everyone. Beyond the excellent results, Q1 '18 was characterized by 3 major events which will have a long-term impact. The first one is the launch of our strategy, which Asher just described. This is our path to ensure ICL's growth and sustainability. The second was the completion of the divestment of low synergy assets, which significantly reduced our net debt and provided us with the resources to implement our plans. And finally, the removal of a [series] offering from our share with the successful sale of the full Nutrien holding.

I will begin with our financial results on Slide 9. We opened 2018 with a strong first quarter. With overall sales up by 8% and gross profit, adjusted operating income and adjusted net income up by 20%, 30%, and 56%, respectively. Our potash, Specialty Fertilizer and Specialty Phosphates contributed to the growth.

Significant price contribution from all business lines, but mainly from the potash and bromine value chains, surpassed the negative impact from increased costs of marine transportation, energy and sulfur as well as exchange rate impacts, mainly due to the strengthening of the Israeli shekel against the dollar. Despite the negative effect lower [sales] quantities had on our sales, this was reversed in the operating income due to improved mix. Mainly as a result of, one, better site mixing potash; two, lower commodity phosphate fertilizer sales as we exited losing activities in our Chinese JV and continued the shift to specialty; and three, lower commodity phosphate fertilizer sales due to the prolonged winter in Europe.

As we already disclosed, the sale of our Fire, Safety and Oil Additives was completed at the end of the quarter and we recorded $841 million of capital gain. As we told you last quarter, the negative free cash flow in the quarter, derived mainly from increase in our working capital due to seasonal effect and from the growth in our businesses. I will elaborate on that shortly.

Turning to Slide 10. Here you can see the increased contribution of each business lines to adjusted operating income for the quarter compared to Q1 '17. This is the first time we are providing a breakdown of the business lines profit and additional data on a quarterly level, previously, this was only provided in our annual reporting. We believe this will give you a better understanding of our individual business lines and will help you to better evaluate ICL and analyze our results during the year.

As you can see, all business lines, except phosphate commodities, contributed to the positive results of the first quarter. The phosphate commodities benefited from insurance payments of $10 million last year. The operational improvement this year, mainly comes from the YPH joint venture in China.

In Q2, we are entering into a maintenance period in Rotem and in YPH, which will negatively impact results compared to this quarter. The review of our phosphate business will take into account the full chain, and here you can see the major contribution from the downstream part of the chain. Advanced Additives had a solid quarter with volume and price [costs in] our continuing Phosphate Specialty businesses and despite slightly lower profit from the businesses we divested at the end of the quarter.

The Food Specialties business had recovered toward its 2016 levels after a difficult year in 2017 in our daily protein sales, which suffered from destocking activity of the customer. In Q1 '18, we benefited from the return of these customer to healthy purchases and from the customer diversification measures we implemented during 2017.

Specialty Fertilizer had its best first quarter in profit ever, benefiting from strong growth in Europe, North America and Asia-Pacific, higher prices and the strengthening of the main transaction currencies against the dollar.

Finally, Industrial Products continued its strong and stable performance, maintaining its 25% margin level. The increase in G&A expenses is mainly due to timing of expenses and should not affect the annual trend.

The main reason for the negative free cash flow in the quarter was, as you can see on Slide 11, the increase in working capital. The main reason is the growth in our business activities. In addition, the first quarter is usually characterized by seasonal increase in inventories, in preparation for the main season, especially in the fire safety business, which was sold towards the end of the quarter, only after we replenished inventories. It is responsible for $30 million of the increase. The main increase of working capital was in trade receivables, due to higher sales. Nevertheless, cash flow generation will continue to be a priority for the company, and we expect it to return to positive in Q2 and continue to be positive for the remainder of the year, although at a lower level than 2017.

On Slide 12, we are presenting ICL's overall effective tax rate. Compared to 2017, the decrease in normalized tax rates from 26% to 23%, derived mainly from the tax reform in the U.S. and the reduction in the Israeli corporate tax rate. Improved performance of ICL U.K. and the YPH joint venture in China, which generate losses that are not recorded for tax purposes, further reduced our effective tax rate.

On Slide 13, you can see how the Specialty Solutions division sales and operating income has increased compared to Q1 '17. We are starting to reap the rewards from our value-oriented pricing approach, with an average increase of 4% across the segment, which resulted in an improvement of 60 basis points in the segment profit margins towards a 20% level. Despite a slight decrease in the margin of the businesses, we divested at the end of the quarter, as you can see from the chart.

$50 million from the price contribution is attributed to Industrial Products and $10 million to Advanced Additives and Food Specialties, as in both businesses, we have just recently started to implement our pricing approach. You can see that the price initiatives more than compensated for the increase in raw material and energy cost. The divested business and mainly the fire safety business are very seasonal and most of the profit is in the summer months. So please bear in mind that most of the contribution to the segment profit in 2017 in the amount of $127 million was generated in the second and the third quarters.

As shown on Slide 14, in our Essential Minerals segment, we benefited from higher prices across all 3 business lines. Average potash FOB price increased by 13%, while prices of our phosphate commodities, except for phosphate rock, increased by double-digit rate. Higher prices more than offset the increase in raw materials, transportation and energy cost. The increase in raw material cost is mainly due to higher sulfur cost as well as the increase in commodity fertilizer prices, which are used as raw materials for our specialty business. We expect a negative impact of sulfur cost in the second quarter as well and the reversal of the trend in the second half of the year.

Volumes were up by 10% in potash, but were down in phosphate commodities as we exited losing activities in our Chinese JV, due to the prolonged winter in Europe and due to unattractive phosphate rock prices.

Sales volume had a positive contribution to profit, due to improved site mix in potash and lower sales of unprofitable phosphate commodity products mainly in China.

The positive contribution of exchange rate on sales turned negative in the operating profit, as the revaluation of the shekel and euro against the dollar increased cost in dollar terms. In our potash stand-alone business, the reduction in cost, due to improved reduction in sales volumes in Spain and in Israel and efficiency measures in the U.K, were offset by an increase in transportation, energy, and the strengthening of the shekel and euro against the dollar.

For the year, we expect that our potash sales volume will be close to the sales level of 2017 as long as we will meet our production targets, since we don't have a lot of excess inventory. I should remind you that out of our total production, we also help to serve the [internal needs] of other ICL business lines in a total amount of 300,000 to 400,000 tonnes.

Turning to Slide 15. Our successful divestment has resulted in a significant reduction in our net debt levels with current net debt-to-EBITDA ratio of 2.3% based on the net debt calculation in our reports in last 12 months' EBITDA, excluding the divested businesses. We will continue to be committed to a responsible capital allocation approach driving growth, managing debt levels, and providing solid returns to our shareholders. This quarter, we announced the dividend of $0.04 per share.

And finally, on Slide 16. In the last couple of years, ICL has proven its ability to generate solid free cash flow due to a very strict capital management, reducing CapEx, expenses and working capital. Looking forward, we intend to continue with the same capital management approach.

The cash flow generation from our ongoing operation will enable us to fund even the strategic infrastructure projects we are currently executing, designed to ensure the continuation of the low-cost potash production in the Dead Sea and to significantly reduce cost per tonne in Spain.

As we reduce significantly our debt ratios, we have the financial flexibility to capture growth opportunities, while ensuring the competitiveness of our mineral assets. In the coming couple of years, we expect free cash flow to be lower as we fund our strategic CapEx projects, yet we still expect annual free cash flow to be positive.

Before we will move to the Q&A session, I would like to summarize the key highlights for this quarter, as presented on Slide 17.

Our robust performance this quarter was mainly driven by improved market conditions in our commercial excellence efforts, including our value-oriented pricing approach. It should be noted that we expect additional increase in raw material cost in our specialty businesses in Q2, which may negatively impact the quarter.

In Industrial Products, we still expect lower sales of clear brine fluids. And finally, I should remind you again that we will not have the contribution from the Fire Safety and Oil Additives businesses, which were divested.

The improvement in our financials, together with the divestment, resulted in a reduction in net debt and improved debt ratios. And therefore, during the quarter Fitch Ratings affirmed our international corporate credit rating at BBB- with stable outlook.

We have a clear strategic path, which we presented to you earlier this year, and we will continue to focus on the execution of our growth and efficiency plans. Thank you for your time, and we will be happy to take your questions now.

(Operator Instructions) Your first question comes from the line of Joel Jackson of BMO Capital Markets.

This is Fahad on for Joel. My first question is on bromine. You mentioned in your release that some of your customers are facing raw material shortages and production constraints. Interestingly, one of your competitors also mentioned similar raw material shortages. Can you give more color on what specific raw materials are being constrained?

Eli Glazer, the division manager, will answer this question.

Can you repeat the question, please?

Sure. So in your release you mentioned in bromine, under Industrial Products that some of your customers are facing raw material shortages and production constraints. Can you give more color on what specific raw materials are being constrained?

On caustic soda, NaOH, in the market due to high demand and this was affecting some customers for they were on production. Therefore you have seen also in worldwide market the cost goes up more and more in this product. In reality, from our perspective, it didn't affect us so much, since you've seen our results, we could fulfill our forecast, except some business in the clear brines, which was a different reason why we were selling less due to some reduction of one of our customers, which was losing some contract in some areas. But all in all, this was the issue.

Okay. That's helpful. My next question, you signed 1-year agreements for bromine and bromine derivatives at higher prices. What kind of higher prices are we talking about? Is it mid-single digit, high single digit? Any color on that would be very helpful.

If you look year-on-year, I would say, it's a double-digit difference.

Like -- sorry -- like high double-digit? I'm just trying to get a order of magnitude, if we're talking about 10%, 20%?

It's double-digit.

Okay. Thanks. Just switching away from bromine to potash. Can you talk a bit more about the higher potash costs in the quarter? It sounds like it was a mix of higher transportation costs, but also FX. How should we be thinking about costs through the rest of the year for potash?

Hi, this is Ofer Lifshitz, I'm the Essential Minerals Division President. What we saw in the first quarter regarding potash in prices is that the demand in the first quarter continued to be high as of last year. There's supposed to come additional material from Canada and Russia, didn't yet arrive to the market and it's [should present in the] prices, mainly of course in the spot market, like Brazil, United States and Europe, in which the prices went up. Of course, in China and India, we're under the current contracts. Now if I refer to the total costs of the product, so we saw increase in the transportation, relatively big increases in the transportation which of course, influenced this increase in the price and was part of it. And this increase also, we saw it last week, saw early last year, so it's continuing also this year. So overall, the price -- the increase in the price covered the increase of the transportation cost -- many of the transportation costs. So we see this price.

Joel, this is Kobi. I just want to add one more thing to give some more color on what Ofer just explain. Some of our -- or actually a large portion of our transportation costs are fixed expenses. Other facilities we have in the port. And as a result of that, it is really influencing our cost per tonne, the amounts that we are selling. So usually in the first quarter, when we sell less than the average of the year, we see higher cost per tonne. But then it is being changing in the second part of the year, as we start to shift the quantity mainly to the Asian market and then you can expect to see a reduction in the average cost per tonne. Again it's just a mix of fixed expenses that are allocated to different amount of quantities.

Okay. And my final question, you mentioned an operational breakdown at the U.K. potash mine. Can you talk a bit more about what the impact would be on volumes and cost and the transition to polysulphate? What's the fix to the problem? And what's the impact?

As we already mentioned, we are going to stop the production of the potash in the U.K. during the midyear, end of June. Our intention is to produce this year the level of between 170 -- around 170,000 to 180,000 metric tonnes. And once we stop the production of the potash, we will, of course, increase the production of the polysulphate. So total targets for the year is around the production of around the 500,000 and this is compared to the level of about 300,000 that we produced last year.

The next question comes from the line of Patrick Rafaisz from UBS.

Three questions please. The first one will be on the maintenance shutdowns you mentioned for Rotem and YPH, can you give us any [qualitative] guidance here? And then 2 questions on Specialty Solutions. First, the clear brine fluid. Would you say that has a impact on the margins from a mix perspective, having lower sales of clear brine fluids in the mix? And the second specialty solution question is on the Food Specialty, where you have a very strong quarter now with customer returning and is that also restocking and it's a one-off impact? Or would you say that will be a new run rate going forward?

I will start with the maintenance. The maintenance in Rotem and in China. This is a routine maintenance that we are doing in our plants. So nothing special in this regard.

Related to specialties, the clear brines. All in all, it's an interruption which we -- we are supplying to one of our customers which had some -- actually lost a contract and need to move to another [most probably] suppliers. But at the end of the day, we are recovering some of the business in other areas and in other places in the world, geographically, then it's not a significant change. Although, you see that we are mentioning it, that the clear brines had an impact on our business on that part. But as I said, it's not significant and we're getting it in other areas and in other products. Related to your question about the Food Specialties. Just to remind you, when we reported at that time about destocking and so on, the main problem was at that time the new regulations in China, which were imposed by the Chinese government about the proteins and the quotas. Now this was changed and the quotas is in place and we got the quotas and we returned to the market. And the market is now running back in normal. On the same time, we diversified our number of customers in order to create less dependency on one customer. Therefore, it gives us more stability. Then all in all, our business now, as it's reported, back in normal.

The next question comes from the line of Tom Wrigglesworth of Citi.

This is Charlie Greig on for Tom. You mentioned briefly there the cold winter in Northern hemisphere. I was just wondering if you saw any negative impact on volumes in the first quarter because of that? And if you could give any kind of sense of whether you think that might impact overall volumes for [all of your] fertilizer products in 2018?

This is Ofer, again. Yes, we saw the impact in the weather of the -- in the -- the impact of the weather in the first quarter, mainly in Europe and mainly on our, I would say, semi-specialties and the phosphate commodities. But we don't see a major impact -- not -- even not the major, we don't see actually an impact. And we would be able to recover those quantities in the second quarter and in other quarters. So it's influenced the first quarter, but no special impact.

(Operator Instructions) Your next question comes from Roni Biron from Excellence.

Most of my questions have been answered. Maybe just on CapEx, you mentioned strategic CapEx of $150 million to $200 million, any color on what kind of run rate should we expect for the overall CapEx in 2018 and then onwards?

Hi, Roni, this is Kobi. I will take it. We said that those strategic CapEx projects, and again just to remind all of you we are talking about the pumping station in the Dead Sea, the harvesting project, also in the Dead Sea. We are talking about our large project in Spain that comes to reduce significantly the cost per tonne there. And make sure that it will be a long-term competitive site. And a much lower scale of the transformation of the U.K. into a fully polysulphate site. All those strategic projects, we are going to spend the money more or less over the next 2 to 3 years. And so this gives us -- if our depreciation level is about $400 million and we should characterize more or less what we need to maintain our CapEx -- ongoing CapEx needs, the regular activities of the site, so you can see that this means that we will see the increase to the levels of, more or less, $650 million to $700 million -- sorry, $600 million to [$650 million] in the next 2 to 3 years, which is more or less the level of spending that we had in 2015 and 2016. Just also an opportunity for me to mention that the S&P just, I think, over an hour ago, issued a report on ICL following the divestments, when they reaffirmed our rating of BBB- with a stable outlook. And there they also talk about their assumptions around our CapEx. And the overall view of also the divestment that has reduced significantly our debt and it's a kind of a triggering event also for us to look at our debt overall structure and maybe thinking, if we can find ways to optimize the structure of our debt level.

And just following up on the potash profitability. How do you see this evolving over the years. Should we expect improved margin in the next coming quarters?

If you're talking about the margins of the potash, we expect, let's say, in the second half of the year, the price level of the market will be more or less the same as it is today. Although, in the past -- the second half was supposed to be lower than what it is now. But at least this is a situation that we see for the -- until the end of 2018. We're working, of course, on our costs all the time and more or less as we see the next 2 quarters -- the next 3 quarters will be more or less the same as it is in the first one.

We have no further questions at this time. Please continue.

Thank you, everyone. Thank you for joining us again this quarter. We will be happy to take any follow-ups, if you need. And hope to be in touch. Goodbye.

That concludes the conference for today. Thank you for participating. You may all disconnect. Speakers, please standby.