ICL Group Ltd. Q1 FY2024 Earnings Call

Thank you all for joining us today for the ICL Analyst Conference Call. We will start with a presentation and then move into a question-and-answer session. Now, I would like to introduce 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 is 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. Similar to the recent quarter, I would like to provide a brief update on the situation in Israel. While there are still challenges caused by the war, we have continued to minimize disruptions to our business operations and for our employees. While various operational challenges related to the war have persisted, including higher logistics costs, we have been able to maintain good production levels, thanks in part to the return of most of our employees who had been called up for reserve duty. Despite the unique challenges, we were able to execute according to plan in the first quarter, resulting in a good start to 2024. For the first quarter, ICL delivered solid sequential improvement as global demand appears to have stabilized, as most of the multiple end-markets we serve have begun to show signs of recovery. While there are some exceptions based on locations and other factors, gradual improvement should start becoming apparent in the various channels we serve. So, as we have said in the past, we will be agile and work to effectively manage the areas under our control and react with appropriate swiftness when necessary. Now, if you will, please turn to Slide 3 for a brief overview of the first quarter. Sales of $1,735 million and adjusted EBITDA of $362 million, both showed quarter-over-quarter improvement, although down versus the prior year, as expected. For the first quarter, we delivered $0.09 of adjusted earnings per share and will distribute a dividend of about $0.05 per share. Our longstanding policy is to pay out up to 50% of adjusted net income each quarter. We continued to focus on cash flow and generate an operating cash flow of nearly $280 million in the first quarter, with free cash flow of more than $130 million. We continued to carry out efficiency efforts in the first quarter and manage through some logistics challenges. Aviram will discuss our efficiency and cost-savings initiatives in more detail later in the call, but our commitment to these efforts has not dimmed our focus on innovation. We continue to expand our specialties product portfolio, both through the launch of innovative new products and via an acquisition in the first quarter. I would ask you to turn now to Slide 4 and to look at recent trends for some key financial metrics. While first quarter sales were down as expected, they were up 3% sequentially. Adjusted EBITDA also improved on a sequential basis, while earnings per share were slightly down for the same timeframe Our consistent focus on increasing the contribution from our specialty-driven businesses resulted in a sequential improvement based on volume growth. First quarter specialties-driven sales were up 6% versus the fourth quarter of 2023, while EBITDA improved approximately 17% quarter-over-quarter. Our specialties-driven divisions also delivered quarterly sequential improvement in gross margin, a trend that began in the third quarter of 2023. Let's start with a review of our divisions and begin with Industrial Products on Slide 5. For the first quarter of 2024, sales were $335 million with EBITDA of $72 million. As expected, sales and EBITDA have improved sequentially since the third quarter of last year. For the first quarter 2024, sales were up approximately 12% sequentially, while EBITDA was up nearly 30% on higher volumes. Overall, we were able to gain market share and maintain key customer accounts while continuing to drive contribution from cost savings and efficiency efforts. For our key end markets, demand was mixed, as softness continued in electronics and in building and construction. Flame retardant sales increased versus the prior year as higher volumes for our brominated solutions were partly offset by a decline in volumes for phosphorus-based products and lower prices overall. In early April, we received news that the EU Commission had imposed anti-dumping measures on phosphorus-based imports from China, and in late April a similar petition was filed in the U.S. Global demand for clear brine fluids, which are used by the oil and gas industry, was stable in the first quarter and ICL remained a preferred supplier for the industry. On a year-over-year basis, sales were lower due to a peak market in the beginning of 2023. Our Specialty minerals business, which targets food, pharma and other end markets, continued to perform well with sequential quarterly improvement. On Slide 6, you will see our Potash results for the first quarter of 2024, with sales of $423 million and EBITDA of $124 million. In the first quarter, we completed the annual maintenance of the Dead Sea. And in Spain, we delivered record production at our Suria mine and remained on track to meet our full year target. One key commonality in both locations was the use of technology to optimize operations and improve production and safety, as both facilities continue to focus on efficiency and cost savings efforts. Total sales volume for the quarter was nearly 1.1 million tons, up more than 120,000 tons year-over-year, but down approximately 100,000 tons sequentially, as expected, due to the annual maintenance. The average potash price declined in the first quarter to $324 CIF per ton, down approximately 40% year-over-year and 6% sequentially. Additionally, freight costs increased as global shipping remained under pressure. The global demand for potash is currently robust and prices have stabilized since the beginning of 2024. The outlook is generally positive with farmer affordability still healthy, as high levels of potassium deficiency in soil have become a clear threat to yields for growers in most regions. Turning to Slide 7 and our Phosphate Solutions division, where first quarter sales of $559 million improved sequentially, while EBITDA was down slightly for the same timeframe. Volumes were higher in the first quarter and prices remained relatively stable, both on a sequential basis. In the first quarter, phosphate prices were at a cross-road and supply dynamics are expected to influence future quarters. For our phosphate specialties business, lower raw material costs were offset by lower sales prices and mixed demand across end markets and regions. In the first quarter, our YPH joint venture in China continued to deliver strong results and set production records for both food-grade WPA and for MAP 73, which is used for cathode material production. Turning to Slide 8 and our Growing Solutions business, where first quarter 2024 sales of $479 million were roughly flat sequentially. EBITDA of $42 million improved significantly on a sequential basis, with an improved product mix. The efficiency efforts have continued to advance in the first quarter, even as the team navigated logistics and weather challenges. Regionally, North American sales improved year-over-year on higher volumes, while sales in Asia improved sequentially on higher prices. For Brazil and Europe, the start of the year was a little slower than expected in both markets. First quarter sales in Brazil decreased versus the prior year, but product optimization helped deliver higher gross margin. For Europe, a significant increase in volumes was offset by lower prices and higher logistics costs, as weather conditions on the continent were less than ideal across key growing regions. Changing legislation and farmer protests were additional obstacles during the quarter. Before we move on from Growing Solutions, I would like to highlight a recent change in leadership. Gustavo Vasques, who has ably helmed our Brazilian business since 2021, has been nominated as the Head of our European business. This move attests to the successful integration of our Brazilian acquisitions and the ongoing potential for additional synergies to continue to drive growth. Speaking of Brazil, if you will turn to Slide 9, I would like to review a few quarterly highlights, including the accreditation of our third plant nutrition innovation center in that country. This endorsement by the Ministry of Agriculture, Livestock and Supply will benefit ICL, as we develop, register and launch innovative technologies for the national and international agricultural markets. It will also be used to obtain registrations for new fertilizers, biofertilizers and inoculants among others. Also in Brazil, we announced the acquisition of Nitro 1000 in late February. And the acquisition of this manufacturer, developer, and provider of biologicals marks another meaningful step into the biologicals market. It also helps expand our product offerings and to position us for further expansions into new and adjacent end markets. In North America, our battery materials expansion is gaining momentum. We recently signed three new MOUs and our customer innovation and qualification center in St. Louis is expected to be commissioned by year-end. The acceleration of the Customer Innovation and Qualification Center is our first priority, as it will allow us to take advantage of technological innovations with our business partners. This will influence both future costs and product performance for our overall business plan, including for our first commercial-scale plant. While this will extend the project timeframe, it will also result in long-term benefits to our competitive position which is aimed at achieving LSP leadership in North America. On the sustainability front, we improved our Sustainalytics ESG risk rating. We also received an upgrade from CDP with our climate change rating improving to A-minus. Additionally, we repositioned our Prolactal dairy protein business. As we focused on efficiency efforts, it clearly made sense to carve Prolactal, a non-phosphate-related business out of the Phosphate Solutions division, especially as our battery materials aspirations continue to advance. This will allow the division to focus on building its battery materials business, which is core to the phosphate value chain, while also allowing Prolactal to get the attention it deserves. I would also like to point out that the ICL innovation accelerate that is creating significant value for our shareholders, was recently featured in a Harvard Business School case published earlier this week. Finally, as I do every quarter, I want to thank the entire ICL family of employees, all around the world, for their hard work, dedication, and support. And with that, I would now like to turn the call over to Aviram.

Thank you, Raviv, and to all of you for joining us today. Let us get started on Slide 11, with the external macro environment. While some of these metrics have moderated slightly and others are unchanged, there has been a steady uptick in geopolitical tensions. Regardless, experts and pundits still anticipate the global outlook to begin improving in the second half of 2024. As Raviv mentioned earlier, global demand appears to have stabilized and most of the end markets we serve have begun to show signs of recovery. Turning to Slide 12, inflation remained stable, as did interest rates. While housing starts in the U.S. declined in the first quarter, global industrial production is expected to improve as the year progresses. On Slide 13, you can see a slight decline in most grain prices, with the exception once again of rice. Farmer sentiment is generally stable and prices for potash and phosphate appear to have stabilized. Freight rates have also stabilized, albeit at an elevated level. On Slide 14, you can see the expected trend over roughly the next decade, for not only electric vehicles but also for energy storage. In North America, the demand for cathode-active materials used in both of these products is expected to become nearly equivalent by 2030. This trend is expected to result in gradually increasing demand for white phosphoric acid, technical MAP and for global LFP. If you will now turn to Slide 15 and our first quarter sales bridges. On the left side, you can see the decline for each of our segments versus the first quarter of 2023, resulting in first quarter of 2024 sales of $1.7 billion. Turning to the right side of the slide, you can see a year-over-year increase in quantities, which was offset by lower prices, especially for potash. On a quarterly sequential basis, sales increased, as higher quantities offset lower prices. For the first quarter, we saw general improvement in our inventory position, in line with internal targets. On Slide 16, you can see the impact potash had on our first quarter 2024 EBITDA of $362 million, and this is evident on both the left and right-hand side of the slide. Conversely, we benefited from higher quantities, lower raw material and energy costs, and also from our cost savings and efficiency programs. While the year-over-year impact from transportation costs look roughly flat on the slide, this amount excludes approximately $8 million related to the war in Israel. Once again, even as potash prices declined during the first quarter, ICL remained a leader in terms of average realized price, as you can see on Slide 17. We continue to maintain the flexibility that allows us to rapidly shift into in and out of markets based on profitability and to maximize our cost-efficient resources. I would also like to remind everyone where ICL is positioned in the global bromine market, which you can see on Slide 18. The Dead Sea is the premier and most cost-competitive source of bromine and accounts for approximately two-thirds of global supply capacity. For the first quarter, we reduced SG&A by approximately 5% quarter-over-quarter, as you can see on Slide 19. We also remained focused on our savings and efficiency efforts, and these actions included supply chain and production initiatives in the Industrial Products division, mining optimization and technology efforts in our Potash division, and labor cost, as well as supply chain optimization in the Phosphate Solutions and Growing Solutions divisions. The cost-efficiency efforts helped in part to drive our effective cash conversion and we ended the quarter with available resources of approximately $1.7 billion. Our net debt to adjusted EBITDA rate at quarter end was 1.3 times. In March, we repaid approximately $108 million of our Series E bonds as scheduled, which resulted in an increase in cash used for financing activities. In June, we will pay out $59 million as a dividend to our shareholders, bringing our trailing 12-month dividend yield to approximately 4%. For the first quarter, our effective tax rate was 25%. This was lower year-over-year due to a lower surplus profit levy, and as we had increased profits in regions with lower effective tax rates. Additionally, as Raviv mentioned, in the first quarter, we carved the Prolactal dairy protein business out of the Phosphate Solution business. Financials for Prolactal can now be found in other activities. And we have restated the historical results to reflect this change. Finally, if you will turn to Slide 20, I would like to reiterate our 2024 guidance. As we discussed on our fourth quarter call, we will be providing EBITDA guidance for all of our businesses, other than Potash, which we call our specialties-driven business segments. This includes Industrial Products, Growing Solutions and all of Phosphate Solutions, as our PS business is now predominantly specialties-focused. For 2024, we continue to expect adjusted EBITDA for these three businesses to be between $0.7 billion to $0.9 billion. For our Potash business, we reiterate sales volume guidance for 2024, and we expect this to be between 4.6 million metric tons and 4.9 million metric tons. For 2024, we expect our effective tax rate to be approximately 30%. And with that, we can begin the Q&A.

Our first question today will come from Ben Theurer of Barclays. Please go ahead.

Yes. Good afternoon, good morning, and thank you very much for taking my question. So two questions, actually. So the first is, you had a very good start within your specialties-driven businesses. Right? If we take a look just at these three, and you've just reiterated that Potash not being part of that, it was almost $250 million in EBITDA just in the first quarter, which sometimes seasonality-wise shouldn't be the strongest one. So just wanted to understand, within your expectations of the $700 million to $900 million for that segment, having had such a good start, what are the risks you're seeing of that sequentially throughout the year to kind of slow down, because otherwise we wouldn't even get to the $700 million to $900 million, would actually be a run rate-wise higher. So wanted to understand that. That would be my first question. And I have a quick follow-up.

Hi Ben. Thanks for your question. Basically, yes, we started the year in good fashion, and obviously, the probability that we end up at the lower end looks quite low at this time. But at the same time, as you know, our country is currently at war and the world is sort of turbulent. So I think we want to take a conservative position. I think the general direction now in our Industrial Products division is positive moving forward, and we expect a price increase and accretion in the near future. Potash, you probably know as well as we do. So there's uncertainty there. But that has nothing to do with your question. Just, in general, turbulence in the world. We want to take a conservative view and that's where we are. Want to add anything, Aviram?

Yes, I'd like to add a point regarding the phosphate market this year. We began the year positively on both the specialty and overall phosphate business. However, we've noticed a slight decrease in commodity prices. Surprisingly, the specialty segment performed better than expected, with price attrition being significantly lower than we anticipated. While the commodity prices had a strong performance late last year and in the first quarter, we are uncertain about their future behavior. As Raviv mentioned, we are likely to remain within an acceptable range, but we want to approach this cautiously and wait at least another quarter to get a clearer picture of the direction.

Okay, perfect. Just to revisit the innovation pipeline and investments, particularly in battery technology and the emerging opportunities there, how should we consider your commitment to research and development expenses, which I believe are included in the broader SG&A? You've mentioned some cost savings, so is it reasonable to expect that research and development will remain unaffected by this?

That's a great question. Our goal regarding battery materials is to become a major technology player and capture a significant portion of the market. Consequently, our business plan focuses on establishing ourselves as a leading technology provider rather than merely building a plant with the Department of Energy's assistance. To achieve this, we are developing our innovation and qualification center to collaborate with future customers on product qualification. There is a clear long-term demand for our offerings, and this center will serve as a foundation for much of our research and development activity, which has already begun. As I have mentioned previously, 80% of the physical part of the LFP material is phosphate, and we have expertise in that area. We are making considerable progress in our labs. However, to position ourselves as a technology-driven growth business in North America, we must expedite the establishment of the qualification center. The overall investment for this initiative is between $20 million and $30 million, with the higher end encompassing operating costs, and we aim to complete this effort in a timely manner, ideally by the end of this year.

If I may expand on that, Raviv, I believe Ben was speaking about R&D not just in relation to LFP, but more broadly. I want to emphasize that we are fully committed to our R&D initiatives. Our identity as a specialty-driven company heavily relies on our efforts in the IP division, the PS division, and the GS division, where we focus significantly on differentiation in agriculture. Therefore, our dedication to bringing applicable innovation has remained steadfast, and we consistently pursue that goal.

Perfect. Thank you very much, Raviv and Aviram.

Our next question today comes from Alexander Jones at Bank of America. Please go ahead.

Great. Thanks very much for taking my questions. Two, if I can. The first, following up on EVs, you talked about three new MOUs for the battery materials expansion. Could you expand a bit on those and also give us more detail on when you would expect to convert those into sort of firm contracts or what are the key hurdles to doing so? And then the second question, just a quick follow-up on the guidance commentary on the phosphate pricing side. Are you seeing any erosion so far in Q2? Or is this more of a concern about what could happen in future quarters, but nothing you're seeing in the books so far? Thank you.

Thank you. On the commodity front, in the eastern part of the world, we are witnessing some price declines related to Chinese exports that did not occur in the first quarter. Currently, the decline has been quite limited, but there is a possibility of further decreases. We observed a slight decrease in the U.S. market, but it appears to have stabilized due to a new tax ruling. As it stands, we don't see any major declines, although there has been some decrease in the second quarter compared to the first quarter. If the situation remains unchanged, it will have a minimal impact, but there is potential for it to worsen.

And the first question was about the MOUs.

Sorry. To address your initial question about MOUs, the distinction between an offtake agreement and an MOU lies in reaching product qualification for the customer. As we pursue technological innovation, we are collaborating with customers to fulfill future qualifications. This means that some agreements may be postponed until we can produce living samples from the qualification center. We have already signed one offtake agreement, and we are cautious about signing more, as most of the output from the first plant is already allocated. We need to maintain flexibility and avoid overcommitting, because once we have a qualified product, it will cater to more than just one plant. I hope that clarifies things. This also indicates that we are not overly concerned about the timing of our first sale; rather, our focus is on building a client list and developing technological capabilities that allow us to meet various customer specifications while utilizing the most advanced technology available.

Thank you.

Thank you.

Thank you. Our next question today comes from the line of Dan Rizzo from Jefferies. Please go ahead.

Sorry. You can hear me?

Yes, I can, clearly.

Hi. Sorry. Thanks. And thanks for taking my question. You mentioned the ruling in EU for anti-dumping, and I was wondering in the past how effective rulings like these have been and when you might see a benefit from that within the region.

These kinds of things are very effective. They, basically, immediately cause the market price to go up. And so it makes us much more competitive. It also allows to pass a hurdle of introducing new solutions that, for example, are more environment-friendly or more sustainable for the long run that if they are priced at a certain level, it may not be sufficiently economic to introduce into the market. But once you know that the average price in the market goes up, then suddenly you can actually replace the old product, and then the effectiveness of such a move can be very, very long-term.

Okay. And then you mentioned sorry.

A similar petition was also initiated in the U.S. So we expect that within a year or so the same thing could happen in the U.S.

That's really helpful, and I appreciate it. Regarding potash demand, things are generally improving. However, I'm curious if customers are still keeping their inventories very tight or if there are signs of a restock cycle, or at least early signs of one.

I think it differs in different parts of the world. If you take China, then China has a lot of current inventory. It's managed centrally. India is also managed relatively central, but there the inventory is not high enough at the moment. And then in other regions, we're not seeing the same heavy stock loads that we saw in the U.S. and in Brazil in the recent couple of years. So the demand is robust. There's nutrient deficiency, deficiency of potassium for sure. So we see very healthy demand this year.

With the current interest rates, particularly high in Brazil and unexpectedly elevated in many regions worldwide, carrying costs have become a more significant concern than before. This may lead to consumers, especially retailers, purchasing closer to the time they need products. Holding excess inventory comes with increased costs. Demand for 2024 is anticipated to be much higher than in 2023, which itself saw greater demand than 2022, but purchases may be more closely aligned with usage rather than general stocking at high levels. In contrast, China presents a different situation; interest rates there have fallen to their lowest levels in many years due to stimulus issues, which is a shift from the past when Western countries had low rates while China had higher ones.

Alright. Thank you very much.

Welcome.

Thank you.

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

This is Joel Jackson, BMO. You hear me?

Yes, Anthony, go ahead.

Okay, a few questions. Can you talk about whether you anticipate IP earnings will be higher in the second quarter compared to the first quarter? Maybe discuss some of the factors affecting Q1?

Yes, for IP, the first quarter usually sees higher seasonal performance, so there isn't a significant difference between Q1 and Q2 this year. However, we anticipate ongoing sequential growth, leading to higher prices and improved results in the second half of the year.

That's helpful, thank you. In Potash, it's pretty stable for you. A couple of things. Do you think pricing will be similar in the second quarter compared to the first quarter? We had previously discussed China and India during this call, but if we're not securing seaborne contracts in either country due to a high volume of rail shipments to China and more spot deals in India, as a company that sells a lot to both regions, do you believe the markets are shifting in how potash will be sold to those countries? Are we moving away from seaborne contracts towards more spot cargoes? What are your thoughts?

We don't observe a significant shift in market dynamics. Railway deliveries peaked last year and don't seem economically viable anymore, so we don't anticipate growth in that area. There are always regions with higher prices that influence delivery patterns. As a price taker in the market, we leverage the best price opportunities available, and there is strong demand this year. Therefore, we don't see any significant changes at this time. Europe remains a smaller market with fewer active suppliers, and it's clear that the long-term trend indicates China is growing more reliant on Laos, which means there will be less Western product going to China. Apart from that, we don't foresee any immediate shifts.

Can you clarify if the potash prices in Q2 will be similar to those in Q1?

So, yes, at this moment, we are nearly sold out for Q2, and we're priced about $6 to $7 lower than the first quarter. It's not finalized, but it shouldn't vary by more than 1% or 2%.

But it's - dependent on the mix of things, Joel. The mix of sales can have a significant impact.

Yes. Keep in mind that in the second quarter, our mix to Europe is a little lower, so that sort of ticked prices up in the first quarter, our mix of sales.

Okay. My final question is about polysulphate, which we've pursued for over a decade. It's something you've made a significant effort to promote, and there may be reasons not to close the mine, such as avoiding reclamation costs or wanting to see the developments with Sirius Minerals and Woodsmith. My questions are: Is polysulphate losing money again this year? If it is, when will you decide that the experiment is over and that you've made enough of an effort? Also, considering the current news regarding Anglo and Woodsmith, how would Anglo's decisions, whether they involve being acquired or shutting down Woodsmith, affect your decision regarding Boulby and Cleveland Potash in relation to whether Woodsmith gets developed?

First of all, our assumption is that it doesn't get built, to be honest, in the long run. Just the demand for the product is not enough to justify that kind of an investment. As far as we're concerned, we're looking at shorter term. We're looking a few years down the road. And right now, as the product is about breakeven, which is disappointing. But it was very profitable in 2022, and it was marginally profitable in 2023. So we're looking for ways to further go downstream and turn it into a viable, sustainable business. But to tell you that we're 100% sure that it's going to be part of ICL 10 years from now, I can't say that yet.

I'm being greedy. To follow up on that, yes, they made a profit in 2022, but that was when potash prices were three times higher and not sustainable. So isn't that somewhat of an answer to the question about whether it makes sense to pursue this investment after 10 years? An alternative perspective could be to consider how much cash could be liberated, how the balance sheet could be improved, or how the company could simplify itself if you decided to divest it or shut it down.

The answer is both yes and no. In some regions, the product is viewed as a commodity, particularly regarding some commodity part prices. However, in many parts of Europe, it commands a premium due to its organic nature and specific attributes that contribute to higher yields and profitability. Overall, the product is well-received in Europe and some other areas, but it remains largely a commodity outside of Europe and North America. The market opportunity in Europe is limited, while North America presents a larger opportunity, likely in the hundreds of thousands of tons but not in millions. The price of potash is certainly significant during exceptional periods like 2022, when commodity buyers are willing to pay a lot. In typical years, the key question is the premium the product can achieve. ICL has successfully penetrated the European market, but less so in the U.S., based on our accomplishments. The product is performing well, and customers are satisfied, which indicates a promising future. However, we haven't made a final decision yet, and the impact on cash flow is relatively minor, so it doesn't significantly affect ICL.

Thank you very much.

Thank you.

Thank you.

Thank you. You have no further questions. Please proceed.

Okay. So with that, thank you very much for participating in our call this quarter. We're happy to report to you on our progress and looking forward to reporting again next quarter. Thanks again to all of ICL employees for their great contribution. And we appreciate our shareholders and their trust in us. Thank you very much and take care.

Thank you.