ICL Group Ltd. Q3 FY2023 Earnings Call

Thank you for joining us for the ICL Analyst Conference Call. This call is being recorded. I will now turn it over to our first speaker, Peggy Reilly Tharp, Vice President of Global Investor Relations. Please proceed.

Thank you. Hello, everyone. I'm Peggy Reilly Tharp, Vice President of Global Investor Relations. I'd like to welcome you and thank you for joining us today for our quarterly earnings call. The event is being webcast live on our website at icl-group.com. Earlier today, we filed our reports with the securities authorities and the stock exchanges in the U.S. and in Israel. Those reports, as well as the press release are available on our website. There will be a replay of the webcast available after the meeting and a transcript will be available shortly thereafter. The presentation which will be reviewed today was also filed with the securities authorities and it's available on our website. Please be sure 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. The company undertakes no obligation to update any financial information discussed on this call at any time. We will begin with a presentation by our CEO, Mr. Raviv Zoller, followed by Mr. Aviram Lahav, our CFO. Following the presentation, we will open the line for the Q&A session. Raviv, please.

Thanks, Peggy, and welcome everyone. I'd like to begin by recognizing all the expressions of concern we've received since October 7. In addition to hearing from you, our investors, we've also heard from our customers, suppliers, competitors; there are so many others. These heartfelt messages are greatly appreciated as we navigate the current situation in Israel. While we’ll provide more detail later in this call, I would like to assure you that while there are some challenges, our operations in Israel continue without significant disruption. For the third quarter, you can see a quick overview of results on Slide 3. Sales of $1.86 billion were flat sequentially as we saw the beginning signs of stabilization in many of our end-markets. Adjusted EBITDA of $346 million was down versus the prior record year, as expected. During the quarter, we completed significant destocking efforts, which in part helped contribute to our strong cash generation. For the third quarter, we generated more than $400 million of operating cash flow and $217 million of free cash flow. We delivered $0.11 of earnings per share and distributed nearly $70 million in dividends to our shareholders as part of our longstanding policy to payout 50% of adjusted net income each quarter. While we'll discuss each of our businesses in detail, I would like to call out our strong output deliveries in the third quarter, and we are now sold out for the year. For our phosphate specialties, we had another solid quarter, and they are in the process of board approvals for the first off-take agreement for our new battery materials facility, which is now under construction in St. Louis. I would ask you to now turn to Slide 4, and the three-year look at our key financial metrics. While sales were down year-over-year, as expected, they were up versus 2021 on both a quarter and year-to-date basis. Adjusted EBITDA was down for the quarter due to lower pricing across all of our businesses. However, we saw some increases in volumes. During the quarter, we benefited from better raw material prices and transportation rates, and savings efficiencies overall. However, this was obviously not enough to offset the decline in prices from 2022. On Slide 5, you can see our specialty sales. While 2022 was an exceptional year, you can see that our year-to-date 2023 specialty sales remain ahead of our more normalized 2021 results. Overall, specialty sales were higher versus the first nine months of 2021. Similarly, while down year-over-year, our adjusted EPS for the first nine months of the year exceeded the same timeframe in 2021. In the center of this slide, you can see our third quarter operating cash flow which was up versus the second quarter of this year, and our free cash flow which was roughly flat for the same timeframe. When compared to 2021, you can see we experienced significant growth in both operating and free cash flow on both a quarterly and year-to-date basis. I would now like to begin our second review with industrial products on Slide 6. Third quarter sales were $267 million, while EBITDA was $42 million. As we indicated in June, the recovery and demand for flame retardants has been much lower than predicted. During the third quarter, bromine prices hit bottom and we also completed some additional de-stocking efforts. Demand is now slowly picking up in the fourth quarter and our unique cost position and focus on long-term customer partnerships is allowing us to gain market share. Demand for clear brine fluids has remained strong as oil drilling activity has increased. Our specialty minerals business unit targeting food, pharma and other end-markets performed in accordance with our expectations in the third quarter. Overall, our industrial products division started gaining market share towards the end of the quarter. As the leading global producer of bromine, we have been able to leverage our efficient cost position and remain profitable, despite unique challenges, which may have significant impact on small manufacturers. As I said last quarter, our industrial products business remains on track for the long-term, and we do not expect recent developments which are predominantly external to have a material impact on the execution of our five-year plan. We are beginning to see demand recovery becoming visible in some end-markets and expect to gain benefits from cost savings initiatives launched in recent months. Turning to Slide 7 and our Phosphate Solutions division, where we reported strong results relative to current global market conditions. Third quarter sales of $620 million were up sequentially, while EBITDA came in at $117 million and was substantially impacted by lower prices in the market, mainly on the commodity side of the business. For the quarter, our Phosphate Specialties business demonstrated resilience and represented approximately 60% of phosphate solution sales, and nearly 50% of EBITDA. Specialties EBITDA margin of 15% is in line with the third quarter of 2021. Free cash flow was very favorable in the third quarter as we improved our working capital position for Phosphate Solutions. We also benefited from lower raw material and transportation costs during the quarter as we leverage our supply chain capabilities. Sales and volumes varied by end-market and region, and our industrial specialties show strength in Asia Pacific due to resurging demand for battery materials. For specialty food phosphates, we experienced strong pricing in North America and overall, food prices continued to be elevated on a global basis. Europe remains challenging in general, as it has for the past four quarters with increased competition from Chinese suppliers, and we continue to defend our market share where necessary in this region. Chinese producers are also becoming more apparent in South America, as China continues to export its excess supply. In both Europe and South America, we implemented targeted efficiency efforts to optimize our logistics, raw material costs and energy costs. For our battery materials expansion in St. Louis, we are on track for this facility to be operational in late 2025. While there has been a lot of noise in the news about electric vehicles lately, we remain excited about the long-term potential of the overall energy storage and electric vehicle industries. We have always expected this to be a gradual ramp-up and are pleased to be the first mover for essential battery materials produced and sourced in the United States. As I mentioned earlier, we soon expect to announce our first long-term strategic partnership, which will help in creating the next generation of battery and energy storage solutions in North America. We are also seeing growing traction and engagement from additional potential off-take mark-ups. On Slide 8, you will see our potash results and note our supplier has sold out for the remainder of 2023. For the third quarter, sales were $526 million, as quantities increased to approximately 1.28 million metric tons with higher volumes to Europe, Brazil and China. EBITDA came in at $164 million, and prices began to stabilize. Our potash CIF price of $342 was down versus the same quarter in 2022, but up slightly versus the third quarter of 2021. In Spain, our production continued to face geological constraints in the third quarter as we continue to transition away from a lower grade mineral geography, which will carry on over the next few months. This shift is in concert with other efficiency efforts there as we strive to increase outputs and decrease costs in Spain. We also continue to proceed with cost savings across our entire potash portfolio and we’re on track with our plans. Turning to Slide 9 and our growing solutions business which delivered sequential improvement in both sales and EBITDA in the third quarter; sales were $550 million, while EBITDA was $37 million. During the quarter, significant de-stocking was almost fully completed, driving higher quantities across the division and contributed in part to all-time record quarterly cash flow and some gains in market share. In total, Growing Solutions has reduced its inventory by approximately $140 million since the beginning of the year, which is in line with our plans. Savings and efficiency efforts for 2023 also remain on track with improvement in the third quarter. Our destocking efforts also helped our Brazilian business where we saw record sales with strong volumes. We gained market share during the quarter and also broke an all-time sales record in our full year business as we remain focused on higher profit products. For other key geographies, we see demand returning in Europe, especially for our fertilizer plus products, and the pickup in demand is also becoming visible in China as well. I would now like to draw your attention to Slide 10 and a review of the key areas where we made focused efficiencies; have been a theme throughout 2023, and each of the divisions enhanced their efforts in the third quarter. Our Industrial Products team has leveraged its efficient cost position during a challenging industry recovery while Phosphate Solutions has focused on optimizing its logistics and raw material efficiencies, along with its energy usage on a global basis. In potash, we have benefited from ongoing efficiency efforts at the Dead Sea and are looking for advances in Spain to materialize. For Growing Solutions, efforts to efficiently de-stock high-priced inventory helped drive their third quarter cash flow and also leave the business well positioned for additional growth, as demand shows signs of beginning to improve. In total, all of these efforts helped drive our strong total operating cash flow of $1.18 billion year-to-date, and Aviram will discuss our efficiency efforts in more detail. Growing our specialties product portfolio remains a key long-term priority. Our investment in battery materials for energy storage and electric vehicles will help position the Phosphate Specialties business for the future and further diversify market exposure. Our Industrial Products business remains the leader in the global bromine market, which will continue to see long-term growth as electronics become even more firmly embedded in our AI-driven future. For Growing Solutions, we're excited about expanding our reach in growing markets such as Brazil and India, and as we continue to develop new, more sustainable products for the future of agriculture. Our innovation focus on sustainability has been rewarded by a robust high value new product portfolio, and improved ties with third-parties, as well as improved ratings, including our recent upgrade by MSCI to BBB. We expect to continue to improve our various rankings. In terms of M&A, new opportunities have recently surfaced and we have also recruited Yuri Perlman to join our management team. Yuri joins ICL as an Executive Vice President and as our Chief Business Development Officer. He will help accelerate our business development, M&A and strategic partnership efforts. Yuri has an impressive track record in business development, successfully leading growth processes in several companies, and we're very excited to have him join the team. Finally, I would like to provide an update on the situation in Israel. I'm deeply saddened to share that we lost several members of our ICL family due to the tragic events that took place on October 7 and in the aftermath. Our main focus has been on providing our employees impacted by the hostilities with their most immediate needs. At the same time, we've been working to keep our employees safe, both at work and home, and continue to adopt all the necessary measures, both at the sites and during transport to minimize any potential risks. From a business standpoint, we have faced various operational challenges caused by the war but have succeeded in minimizing disruption and maintaining good production levels, thus meeting all of our customer needs. As of last week, approximately 600 of our more than 4,500 Israel employees had been called to reserve duty, a situation that has required some adjustments which have been working effectively. As many of you have inquired, transportation of goods has become a unique challenge but our teams have been managing quite well. We're doing our best to get back to our normal business routine, and as you can imagine, we are monitoring the situation on a constant basis. We will continue to make all the necessary decisions and take the required actions to guarantee our business continuity while keeping our employees and communities safe. ICL has been actively reaching out to the impacted communities and offering them support, both material and emotional. And I cannot even put into words how proud I am of our employees who have been volunteering night and day to support the people and communities affected by the tragedy Israel has faced. While I always thank the entire ICL family of employees all around the world for their hard work and contributions each quarter, this is an especially heartfelt sentiment today. The tenacity of the team in Israel has been inspiring, and the unwavering support of our global colleagues has been heartwarming; we are resilient, and we will prevail, as before. Again, we thoroughly appreciate all of your kind words and prayers and hope the situation will improve by the time we'll record our fourth quarter results. And with that, I would now like to turn the call over to Aviram.

Thank you, Raviv, and all of you for joining us today. Let us get started on Slide 12, where you will see some very familiar external macro pressures. While many of these remain unchanged from the beginning of this year, as Raviv just discussed, the war in Israel, which began in the fourth quarter brings additional geopolitical issues. Both inflation rates and interest rates have moderated but remain mixed on a global basis. Overall, global growth remains subdued, and the economic recovery in China has been weaker than expected. From an agricultural perspective, grain prices are leveling off, and fertilizer prices have stabilized. On Slide 13, you can see some of the trends I just discussed. While inflation rates are generally trending down, they remain persistently elevated on a historical basis as do interest rates. And on Slide 14, you can see the trends in grains and fertilizer prices. On Slide 15, you can see the expected trend for electric vehicles over roughly the next decade. As Raviv mentioned, there has been a great deal of noise about EVs lately, but as you can see, the rate of growth has always been expected to be gradual. Electric vehicles sales are on track with 9% of all cars sold in the U.S. by the end of this year; that's a 50% year-over-year increase, and it is the second year in a row that EV sales have surged by that amount. The LFP battery materials we will be producing at our facility in St. Louis will be used not only in electric vehicles but also by the energy storage industry. It is important to remember that renewable energy needs to be captured and stored for use by EVs and in other applications, and the investments we are making today will help advance such efforts. If you now turn to Slide 16; on the left side, you can see the sales bridge from the third quarter of last year to sales of $1.86 billion this year, with each of our segments showing the year-over-year decline. Importantly, on the right side of the slide, you can see that while quantities were up, prices had an overwhelming impact as commodities were at all-time highs last year. Similarly, on Slide 17, you can see the impact prices had on our third quarter adjusted EBITDA of $346 million. Once again, quantities contributed positively in the quarter while low prices, especially product prices made a significant impact. We did benefit from lower raw material and transportation costs and also from the savings and efficiency programs we’ve put in place in each business, and on a corporate-wide basis earlier this year. We expect benefits from our cost reduction and efficiency efforts to be even greater going forward. As we showed you last quarter on Slide 18, you can see that not only is ICL a leader in terms of cost efficiency, we are also a leader in terms of pricing. While we're not as big as some of the hottest producers out there, this is actually a benefit to ICL as it gives us the flexibility to quickly shift in and out of the market based on profitability. I would now like to review a few highlights on Slide 19. As a result of our savings and efficiency activities, we're able to decrease SG&A by approximately 11% year-over-year in the third quarter. Each of our businesses also worked to reduce working capital and high-cost inventory. As Ravi mentioned, our aggressive de-stocking efforts are now essentially completed. These efforts were part of an orchestrated plan and while we did see some margin contracts, we're able to gain market share as we reduce inventory. Our de-stocking also helped, in part to drive a strong cash conversion. At quarter end, our available cash resources totaled $1.8 billion. For the third quarter, our net debt to adjusted EBITDA ratio was a healthy 0.9%. We also declared a dividend of $0.05 per share for the third quarter, resulting in a trailing 12-month yield of 5.5%. Taxes were $43 million, reflecting an effective tax rate of 23% for the third quarter of this year; this relatively low rate was mainly due to the devaluation of the shekel against the U.S. dollar, and deferred taxes for carry forward losses related to the taxation of profits from natural resources. Finally, you can see we reaffirmed our 2023 guidance, calling for adjusted EBITDA of between $1.6 billion to $1.8 billion; and as we stated in today's press release, we expect to be in the middle of that range. And with that, we can begin the Q&A.

Thank you. Our first question today comes from Alexandria Jones of Bank of America. Please go ahead.

Great. Thank you very much for taking my questions. Two, if I may, just to follow-up on a couple of comments you made, Raviv. The first one on battery materials; you talked about the first customer contract or partnership that's nearing completion. Could you give us a little bit of an idea, the sort of criteria you're looking for when signing contracts with customers in terms of volume commitments or returns or margin levels or technology commitments? That would be really helpful. And then the second one, just on industrial products; you made a comment that demand is slowly picking up in Q4 so far. Could you expand a little bit on that in terms of different end-markets you might be seeing that in or the magnitude of that so far? Thank you.

Thank you, Alex. Regarding battery materials, our plant has a capacity of 30,000 tons, and we expect to begin supplying in the second half of 2025. We are currently negotiating with several potential customers, which include automakers and battery manufacturers. Some negotiations are progressing more quickly than others, while some will take longer to finalize. We anticipate signing agreements for a few thousand tons each, and we expect to announce the first agreement soon, pending board approval from both parties. Overall, we plan to serve two or three customers with this capacity, and in the upcoming months, we aim to discuss multiple customer opportunities. As for industrial products, demand in the electronics sector is beginning to improve, though the construction sector remains sluggish. The current electronics demand is slightly below normal, but with the inventory and supply chain issues resolved, we are starting to see an increase in volumes, which we expect to continue in the coming months. Our long-term contracts allow us to increase production as needed, and we are actively doing that now. However, we believe the recovery will take some time, as we have not yet seen strong demand in electronics, with electric vehicle demand also slower than anticipated. Additionally, we have not yet felt the impact of growing demand in artificial intelligence or the construction-related flame retardants market is still quite distant. We do see some recovery in demand due to an improved supply chain, and further demand should emerge as interest rates decline. I hope this provides clarity.

Thank you. Our next question today comes from the line of Ben of Barclays. Please go ahead.

Good afternoon, everyone. Thank you for taking my question. I have two quick follow-ups. First, regarding the Growing Solutions segment, you've mentioned that de-stocking is largely complete. However, it seems there was still some impact in the third quarter. Can you provide insight into how we should anticipate the fourth quarter? Additionally, as we look ahead to the first quarter of 2024, how do you see the match between actual demand and supply? What are your thoughts on the expected profitability levels in that segment, especially given the volatility from Brazil? That's my first question.

All right. Thanks, Ben. In terms of what we're seeing in Growing Solutions, de-stocking is materially over. And what that means is that we're going to see normalized margin, which is more like 2021 margin, going into 2023; we're already growing volume. We grew volume in Q3, even versus last year. So we expect growth in volume and better margin given higher prices and no need for de-stocking. In Q3, we came in actually a little lower on EBITDA than we expected, and I think we'll see the same in Q4. Some of that has to do with internal planning, as some of the potash that we were going to supply internally to help promote some of our blends we're going to need for external customers which means that some of the profitability that we expected in Q3 and Q4, we're not going to lose, but we're going to see it can be potash sector. But coming for coming first quarter of 2024, we're going to see normalized profitability as we did in 2021. Of course, 2022 doesn't measure up to anything that we know. Hope that answers.

Ben, this is Aviram. One thing to keep in mind is that we are in agriculture, which has a seasonal aspect. Brazil will still have a strong quarter seasonally, but it will be less robust than Q1 and Q3. Additionally, the northern hemisphere has not yet begun its season. So when considering Q4, it's important to take this into account as it relates to basic level agricultural practices.

Okay, perfect. And then actually one follow-up for you, Aviram; just on like, capital allocation; how should we think about it? You’ve talked about the dividend, and obviously, what the CapEx. Cash flow was actually pretty strong still at roughly $1.2 billion on a year-to-date basis. So how should we think about the priorities; M&A versus CapEx, dividends/buybacks? What's like the kind of order and where would you like to do more?

That's a broad question. Raviv may want to add to this, particularly regarding M&A. I will say that we are generating significant operating cash flow, which translates into healthy free cash flow. This is partly due to de-stocking, a reduction in working capital, and our close management of the company. We have a savings plan in place, which contributes to our strong cash flow, a factor we are mindful of in the market. Essentially, cash is not an obstacle for any M&A transaction. Before addressing M&A, I want to emphasize that we are focused on maximizing performance on the P&L for optimal cash flow. While 2023 presents challenges, we hope to achieve a positive financial outlook for cash flow results in 2024. Regarding M&A, our ability to pursue it is contingent on identifying relevant strategic targets. We are not looking to acquire just for top-line revenue or EBITDA; our goal is to enhance the company’s horizons by focusing on opportunities within the specialty segments of our business. As Raviv mentioned earlier, we are strengthening our M&A team with exceptional leadership and actively seeking opportunities. When the time is right, finances will not impede our ability to pursue M&A transactions. Raviv, would you like to add anything?

Just to remind everyone, we have a dividend policy that has been effective for us, which involves distributing 50% of our adjusted earnings every quarter, resulting in favorable dividend returns for our investors. This approach also provides us with sufficient cash to pursue necessary transactions. Recently, we were close to an M&A deal that ultimately fell through due to valuation. We have exercised discipline because we want to ensure that we engage in the right transactions. We do not believe that share buybacks are the best use of cash for a company focused on growth. We’ve observed our competitors buying back shares at very high valuations. While we are closer than before to possibly approving a buyback program, we will only consider it if the M&A process takes significantly longer than anticipated. M&A remains our top priority. Additionally, I believe Aviram mentioned our expected capital expenditures. We anticipate that our CapEx will be roughly in line with 2023, with some additional funds needed for our LFP plant, which is crucial for the company's future growth. This will require approximately $100 million more next year, making our CapEx for next year about $100 million higher than this year, specifically focusing on LFP.

Thank you. Our next question today comes from the line of Joel Jackson of BMO. Please go ahead.

Hey everyone, this is Joseph on for Joel. So first of all, we just wanted to say we are shocked by all the events over the last month and hope that everyone at ICL is doing okay. So with that said, for my first question, could you guys just please rank the outlook for the different major potash markets? And how are those views compared to your thoughts, maybe three years ago? And also what are your initial thoughts on global demand for 2024 relative to 2023?

Thank you for your kind words; we appreciate your support. Regarding the potash market, we expect demand next year to be between 68 million and 69 million tons, up from 60 million to 61 million tons last year and about 64 million to 65 million tons this year. Generally, inventories are low in most regions, creating a need for replenishment. While Chinese inventory is not low, there is significant demand coming from China, fostering a positive environment for next year. Prices have stabilized and demand remains strong; we are sold out for the year, similar to others in the industry. Demand is robust in Brazil, and prices are rising in the U.S. Although Indian inventory is very low and we haven't sold to India recently, we anticipate demand will emerge. There are some subsidy issues in potash and phosphate that we will need to monitor. On the global supply side, Belarusian production is expected to be 3 million to 4 million tons below capacity, which aligns with current demand and suggests a healthy market for next year. In the long term, we do not foresee major disruptions until potentially BHP enters the market, which they suggest could be in 2026, although we find that timeline optimistic. Currently, the demand is driven by the need for replenishment, with higher than average affordability. The overall environment remains favorable. European potash prices are around $400 or more, and we anticipate fourth quarter prices will be close to those of the third quarter. There hasn't been much change in selling prices since early third quarter when we were still selling at higher rates in some regions. For our production, we project 4.7 million to 4.8 million tons next year as our initial expectation. I hope that answers your question. Joel, your line is unmuted; please unmute yourself as we can't hear you.

Yes, that's it guys. Thank you.

Thank you very much. You have no further questions, please proceed.

All right. So thanks very much for joining us. We appreciate it and hope for the safety of all, and looking forward to coming back and reporting to you at the end of the next quarter, reporting for the year and by then we'll be able to come out and give you our forecast for next year. Thank you very much.

Thank you very much.