ICL Group Ltd (ICL) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the ICL 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, Miss Limor Gruber, Head of Investor Relations. Please go ahead.

Thank you. Hello, everyone. Welcome and thank you for joining us today for our third 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 in Israel.

The reports as well as the press release are available on our website. There will be a replay of the webcast available a few hours after the meeting, and a transcript will be available early next week. The presentation that will be reviewed today was also filed with 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 a presentation by our President and CEO Raviv Zoller; followed by Kobi Altman, our CFO. Following the presentation, we will open the line for the Q&A session.

Raviv, please.

Good morning, or good afternoon, everyone. I'm pleased to present you ICL's third quarter results. This is the first quarter in which we present our results according to our newly aligned organizational structure. In line with our strategic plans, the organizational alignment is around our 3 core mineral value chains: bromine, potash and phosphates and Innovative Ag Solutions, which we intend to develop into a future growth engine by creating new solutions for our customers. We believe that this structure will serve you well, as it serves us, by providing clear visibility into our business drivers and our performance. Q3 was another quarter of strong results supported by continuously improving business momentum, consisting of both positive external market conditions and more importantly, as far as I'm concerned, our continuous focus on cost controls, value chain optimization and value-over-volume initiatives. I'm pleased to share with you that our business performance was not interrupted by the organizational change we executed in our August with impressive immediate impact achieved already within 2 months.

Late signing of supply contracts in India and China resulted in lower potash sales volumes versus last year, yet we managed to show flat sequential sales. The new supply contracts represent a $50 and $60 increase, respectively, and provide for us with good visibility into our business performance all the way through mid-2019. Our reported operating income grew by 9%, reported net income by over 50% and operating cash flow by 11% compared to Q3 of 2017. It's important to note that the strong results were achieved despite the notable contribution from the strong cash generating divested Fire Safety and Oil Additive businesses in Q3 of 2017 and are highlighted in the pro forma figures that show significant improvements in both top and bottom lines, including a stunning 43% increase in pro forma operating income. The quarter's strong results also gave rise to our growing dividend payout, which will increase by 20% to just over $0.05 per share. Our dividend yield of approximately 3.5% is among the highest in our industry. Another achievement we are proud of is on the sustainability and corporate responsibility front. We attained a silver ranking in the EcoVadis sustainability assessment. EcoVadis monitors the sustainability and CSR activities of companies with global supply chains, ranking ICL in the top 7% of over 33,000 suppliers.

We also recently announced that we joined the TfS, Together for Sustainability global supplier initiatives, an organization that assesses and improves sustainability practices within supply chains in the chemical industry. These are all steps that prove our commitment to remain dedicated to sustainability and corporate responsibility.

Let's go to Slide 4. The change on Slide 4 demonstrates the key financial metrics. I would like to emphasize the sequential growth we see this quarter in all parameters highlighting our positive business momentum. I already noted in the previous slide that our operating cash flow grew by 11%, exceeding the 9% increase in operating income, and our net debt continues to decrease, enabling us more financial flexibility for future growth.

Moving on to Slide 5 to discuss the business performance of the bromine business. Last quarter, we said it was an exceptional quarter for Industrial Products, yet the segment was able to achieve another very strong quarter that was driven by higher prices and sales volumes. Clear brine fluid sales, which were among the major drivers behind last quarter's results, continued to be positively affected by strong demand into July and August, before settling back to normal levels in September and October. Regulatory pressures stemming from environmental-related issues in China continue, resulting in lower local production and higher demand for our high-quality bromine and phosphorous-based flame retardants coupled with higher prices.

Moving on to Slide 6 and our potash segment. Our potash segment enjoyed favorable market conditions, which were reflected in higher-than-expected contract prices and firming spot prices. As a result, our average realized price per tonne increased by 22% compared to Q3 of 2017 from $235 to $287 per tonne this quarter. Sales volumes decreased by 145,000 tonnes to 1.2 million tonnes due to the late signings of contracts with our customers in India and China. The segment recorded a 10% increase in sales and an impressive 50% increase in operating income compared to Q3 2017. The strong results are despite the volume headwind and the negative impact of the discontinuation of potash mining and transition to exclusively mining polysulphate in the U.K. Potash prices in the market are driven by stronger demand than initially expected, mainly in Brazil, but in other spot markets as well, while supply continues to be tight due to slower-than-expected ramp-up of new projects together with the usual logistic bottlenecks. Our competitive advantage was also supported by the appreciation of the ruble versus the dollar and by an increase in transportation costs. The continuing trend of increasing transportation cost is highlighting ICL's logistic advantages and increases our competitiveness in our strategic markets. According to the latest cost report by CRU, which I assume many of you are familiar with, ICL, which was already the most competitive potash supplier in India, is now seen to be the most competitive importer to China.

Let's move now to Slide 7 to discuss phosphate solutions. I'm pleased with the successful consolidation of our phosphate commodities and specialties business. The process was smooth with no interruption of the day-to-day activities. We're focusing on optimizing our value chain and executing on our strategy to be a leading provider of value-added Specialty Solutions. This strategy will drive the performance of this segment going forward based on the higher growth rates and margins of specialty phosphate. The segment's performance demonstrates significant improvement with operating income growing sequentially by 11% and by 19%, year-over-year excluding the Rovita business which was sold in late Q2 2018. This improvement was driven by favorable market conditions in both commodities and specialties, further enhanced by our global footprint, supply chain capabilities and solid competitive position in the specialty phosphates market segments in Europe and the Americas. Sulphur prices continued to increase during the quarter, also contributing to the end-products price increases. That, coupled with our strategic shift towards specialties, supported the increase in segment profitability. It is important to note that sulphur prices continue their upward trend, while commodity phosphate prices are stabilizing and, according to market researchers may even moderate possibly eroding margins further down the road.

Let's go to Slide 8. The performance of our Innovative Ag Solutions segment on Slide 8 is impacted not only by seasonality, but also by the realignment of the business, preparing it for future long-term growth. We are setting the foundations by streamlining sales and marketing, logistics and digital capabilities in our strategic end-markets, while at the same time, adjusting presence in smaller markets. We have a very solid foundation with our well-established specialty fertilizer business, our vast agronomic experience, R&D capabilities, strong brand, global footprint, backward integration as well as chemistry know-how. However, we still have a long way to go to become a global leader. The building process will take time, but we expect this segment to become an important future growth engine. The business is still characterized by very clear seasonality with the first half of the year, the high season of the North American and European ag markets, significantly stronger than the second half, which is mainly dedicated to preparing the ground for the Northern Hemisphere application season. Increase in raw materials prices and transportation costs as well as developments in the NOP market further impacted profitability for the quarter. Our sales increased by 5% but were impacted by an intentional reduction in sales to Turkish customers in Q3 due to the currency risks. On the year-to-date basis, our performance is on track with sales growth of 11% and operating income growth of 15%.

If you look at Slide 9, prices throughout our value chains continue to be trending higher, as you can see here. Potash prices, shown on the top left, continue to increase. However, a 3-year view reveals that the recent increases are merely bringing prices back to the levels of Q4 2015, which implies the potash market is not overheating. We already discussed bromine prices in China, and the graph here demonstrates the continuing upward trend during the third quarter and during October as well, despite the usual seasonal fluctuations. Green phosphoric acid prices are also on the rise as major commodity players recently signed fourth quarter phosphoric acid contracts with Indian customers at an increase of $10 per tonne, following an increase of $28 per tonne agreed in the third quarter. The price trend of green phosphoric acid also drives prices of purified phosphoric acid. Here also, you can see the prices are still not at the level of 2015. ICL's backward integration to green phosphoric acid is a major advantage in such market environments. We benefit from these higher prices while our backward integration results in a more moderate increase in production cost, mainly of raw materials. Higher prices are also supported by decreased attractiveness of Chinese imports to the U.S. due to tariffs imposed on imports from China and due to the increase in transportation cost from China. Additional tariffs are actually expected to come into effect in January 2019, which could further increase ICL's competitiveness due to our backward integration. I think that these graphs, all showing clear upward trends of ICLs backward-integrated minerals, and main raw material building blocks, are a perfect illustration of the drivers behind the continuous improvement of market conditions. At this point, I would like to thank our devoted ICL employees as well as the rest of our stakeholders for the continued support that allows us to achieve these results and to continue to get better. Thank you, all.

And with that, I'll hand it over to Kobi.

Thank you, Raviv and good day to you all. Indeed, as Raviv stated, we are happy to announce another quarter with strong financial results. I would like to start by showing you some of the key indicators of our performance since the beginning of the year. Margin expansion, cost discipline and focus on cash flow generation and value creation for shareholders resulted in a sequential increase in earnings per share, operating cash flow and dividends during this year.

Similar to the previous quarter, and as you can see on Slide 12, all our segments positively contributed to the top line. To better understand the performance of the quarter, and facilitate to you a better apples-to-apples comparison of our remaining businesses, we also show pro forma figures. The pro forma figures exclude $160 million of top line contribution from the Fire Safety and Oil Additive businesses and the Rovita business we divested this year. On a pro forma basis, our sales grew by 7% to $1.37 billion as a result of higher prices across all segments that contributed $130 million, partially offset by the negative impact of $33 million from lower sales volumes and a $6 million negative impact from exchange rate, mainly due to the devaluation of the euro against the dollar. The decrease in volumes originated from 14% decrease in potash volume sold in the quarter and is solely a timing issue caused by the late signing of supply contracts in India and China and from lower sales volume of green phosphoric acids due to our strategy to focus on specialties and phosphate based food additives as a result of value focus strategy.

A similar picture is revealed with performance of operating income on Slide 13. Almost all segments had a positive contribution to the corporate operating income. Excluding the significant contribution from the divested businesses in Q3 '17, $75 million, operating income increased by over 40%. Here as well, prices contributed the most, $130 million, with the potash and phosphate solutions segments leading the way. Higher cost only partially offset the increase in operating income. Raw material costs were mostly impacted by higher sulfur prices, which increased the cost throughout the phosphate value chain as well as higher raw material prices used for bromine and phosphorous-based flame retardants. An increase in marine transportation prices drove higher transportation costs. Higher prices in all our segments resulted in an increase in royalties and sales commissions, driving higher operating and other expenses. Adding to that, in the corresponding quarter, we recorded a $9 million income from an insurance claim settlement.

Turning to Slide 14. Let's review our cash flow generation this quarter. Our depreciation remains around $100 million per quarter, while our strategic infrastructure projects in the Dead Sea and Spain led to an increase in close to 50% in CapEx versus last year. We are pleased with the results of our strategic focus on cash flow generation. Despite an increase in working capital, operating cash flow increased both sequentially by $32 million and compared to the corresponding quarter in 2017, by $20 million. Going forward, one of our goals is to return to a downward trend in working capital. It is very important to note that the year-over-year increase was achieved despite the divestiture of the Fire Safety and Oil Additives that were high cash-generating businesses. Slide 15 summarizes this quarter results. We see yet another quarter with strong fundamentals and financial improvements driven by the positive business environment and market conditions by our disciplined focus on operational excellence and by the successful and consistent implementation of our value focus strategy. Thank you for your time.

And we will be happy to take your questions now.

(Operator Instructions) We will now take our first question from BMO, the line of Joel Jackson.

I have a couple of questions. I thought, maybe, first, I'd start on industrial products or bromine. It looks like you've had a second quarter in a row of maybe above average earnings. What do you expect? Do you expect these tailwinds in bromine to continue into the fourth quarter or do we step down to more normalized earnings? What's the outlook for that?

Joe, thanks for your question. We think that the trend is going to be back to normal in terms of quantities produced. But at the same time, the trend is clearly an increase in price. So as of September and October, we had a little bit less sales of clear brine fluids, but we should trend lower in Q4 than Q2 and Q3 in terms of quantities, but at the same time, some of that will come back through price trends.

Turning to potash, what is sort of now your quarterly run rate for production? And then, should we -- we should expect, I imagine, a sales increase in Q4 as you're now selling again to China and India for the year. And then I guess, it's a 3 parter. And then, is this the right potash inventory level you're comfortable with? You've been around the same level now and in Q2 and Q3?

In terms of production we're at $3.8 million at Sodom Dead Sea production and about $920,000 or $930,000 in Spain. The total production for next year is going to be around the same, which means we're going to see similar amounts of production with no additional potash coming out of ICL Boulby in the U.K. as we shifted towards polysulphate. In terms of the -- in terms of sales in the fourth quarter, obviously, since our shipments were a little lower in Q3 waiting for the new contracts and the shipments in Q4 should be higher. In terms of levels of inventory, the inventory is a little higher than steady state because of the delays in the shipment towards the end of the quarter.

We will now take our next question from Citi, the line of Thomas Wrigglesworth.

Couple of questions if I may -- or 3. Firstly, just regards to bromine polymers, there's obviously concerns of consumer durables trailing off in the fourth quarter. Would you see any impact from that, or do you expect there to be no deterioration in the order books that you've seen thus far? Second question, more strategically focused, there was a Wall Street Journal article talking about a potential deal with Haifa. Maybe you can't talk about that explicitly, but could you give us a sense for what you're looking for in M&A? What's the maximum scale you think your balance sheet can currently allow you to go to? Can you give us a bit of color on the opportunity set? It'd be interesting to hear your thoughts about inorganic growth. And thirdly, I just wondered, as you switch the Boulby mine as potash, to polysulphate, whether there's actually a -- not only a loss of revenue, but actually a negative cost, i.e. ex-Boulby potash profits would have been higher in the quarter. Could you help us understand what the negative cost might be as Boulby performs its switch.

Okay. On bromine and polymers all I can say at this point is that our order book is full. So we can't even supply the existing orders at this point. Going forward, I don't have an outlook on polymers 2 years -- 2 years down the road. So that's about as much as I can say at this point. In terms of U.K. Boulby, sure, there is some negative cost, but the bulk of it is that we're simply not finished ramping up. And also, we're still not done in terms of marketing the infrastructure and sales on a steady-state basis. We're going to -- we're investing in field trials and licensing in various countries. We are using samples. So it should take more than a year until we reach the point that Boulby will actually have positive contribution to the business. This year, the total investment in the change made in Boulby has added up to taking into account an additional quarter close to $50 million, and the additional cost next year will probably be at least half of that, at least. But that's the schedule. We're not going to see profitability from Boulby in the next year for sure. In terms of M&A and the way we see the world at this point is that our 3 mineral chains are very strong, meaning that we have everything we need in order to meet our prospective markets. And the only business that we have that is not a world leader at this point in time is Innovative Ag business or our Specialty Fertilizers business. And so probably, any significant M&A will have to come from that division. We are looking to grow scale and grow the diversity of our product line. At the same time, we want to be disciplined and be careful about the kind of M&A we take on. We're looking only for potentially accretive transactions. In regards to the deal that you mentioned, I can tell you that in the past, there have been all kinds of discussions between the 2 companies, between ICL and Haifa. They are both a client and a supplier, and they have gone through certain challenges in the past 1.5 years. And once in a while, there could be a discussion. And there is potential synergies, but there is nothing going on at present. There is no deal on the table at this point, and anything that came out in the press is strictly rumors.

Okay. And just in terms of how you see balance sheet capacity for deals in the Innovative Ag, do you think you could do a $300 million deal maximum today? Or $0.5 billion? Can you give us some kind of -- could you try to quantify that for us, just scope and scale as to what you think you could do?

Maybe I'll let Kobi take that and talk about how we look in terms of our credit rating, in terms of our bank facilities. I think that we have a lot more flexibility than we need at this point. Go ahead Kobi.

Tom, I think the way to look at that is not the capacity for a specific deal but a general capacity for an organic move. And since it is very important for us to maintain our investment grades, we follow the kind of guidance that the rating agencies are looking at. And the ratio between our debt and net debt-to-EBITDA will obviously also, as our EBITDA is growing, this can give us further flexibility. And so this would give you the range where are we today and you can build your projection around the future. The minimum that the rating agency would like us to show is something between 3 to 4 net-debt-to-EBITDA. Currently we are much lower than that. Obviously, some significant information although, this we can always do also including the equity portion and not only in cash, but this is something that is too early at this point.

(Operator Instructions) We will now take our next question from UBS, the line of Patrick Rafaisz.

The first one will be on Innovative Ag Solutions. You talked about the streamlining ongoing there with the operations, but you also mentioned the Turkey impact. Can you quantify these effects first? How much did the Turkey situation cost? And secondly, streamlining these operations, how much cost do you think you can take out in the course of the next 1 to 2 years in this business?

Okay, first of all, in Turkey, we decided to cease sales in Turkey because of the currency risk. So we lost about $5 million of sales in Turkey. We also had a little bit of collection issues in Turkey, which cost us a few hundred thousand dollars, not because we didn't collect it correctly, but we couldn't hedge ourselves on the Turkish currency, and therefore it wasn't a good quarter for us from a Turkish perspective. In terms of the adjustments we're making to our organization, we're talking about just a few million dollars a year. But at the same time, we won't see too much of that coming into our bottom line, at least not in the next year or so, because we're actually using some of that to make investments into our future digital platforms. So you won't see any significant impact of that on the bottom line in the next few quarters. This is I think a business that is affected by seasonality and the second half is weaker than the first half of the year. But the business is growing and on target in terms of our long-term plans.

Okay, very clear. And then a question for Kobi. You talked about the networking capital increase and that the goal must be to return to a downward trend. Can you add a bit more color about when you think the trend will reverse? And what kind of levels are you targeting? And within what time frame?

I think the way to look at that is maybe working capital as a percentage of sales or as a percentage of some operating parameter because as the business is ramping up, obviously, it's coming also with some kind of working capital. But if you look specifically at this quarter in our cash flow statement, you see that working capital has increased by $100 million in this quarter. Or if you take the first 9 months by $350 million and obviously, we want to start to see the collection and the realization of the inventories that we gathered throughout this quarter. As an example, the preparation for our sales into the Asian market of potash caused us to increase somewhat the inventory levels of this quarter but we will start to sell in Q4 and then, into the next year. So towards next year, we would like to start to see this level of working capital going down. But again, maybe, less so in dollar terms and more in line with number of days to make sure that they are current and we don't see them going up.

Okay. And then, the last question just a follow-up on the Chinese contract. As in the past, and there is also an option, right, for additional volumes in 2019, I know this is very early days, but what are -- what is your thinking around those additional volumes? Do have a sense whether they will be used or is it too early to say?

We think that at this point, if they are used it actually does not benefit us given the current alternatives and the given demand, but at the same time when we look at China we look at our long-term view and we want to have a strong relationship and we want our customers in China to be able to rely on us. So we give them a priority with the option, the option is good for both sides and if the decision is made by them not to utilize the option, then that actually does us some good this year.

Because you can then sell for a higher price, for example, to Brazil? Is that the correct?

That's correct.

(Operator Instructions) We appear to have no questions coming through at this time. So we'd like to thank you all for participating and you may now disconnect.