Earnings Call Transcript - ICL Q4 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the ICL Analyst’s Conference Call. Our presentation today will be followed by a question-and-answer session. I must advise you that this call is being recorded today. I’d like to hand the call over to your first speaker today, Peggy Reilly Tharp, Vice President of Global Investor Relations. Please go ahead, ma’am.

Peggy Reilly Tharp, Vice President of Global Investor Relations

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 the presentation by our CEO, Mr. Raviv Zoller; followed by Mr. Aviram Lahav, our CFO. Following the presentation, we will open the line to the Q&A session. Raviv, please.

Raviv Zoller, CEO

Thank you, Peggy, and welcome, everyone. In the fourth quarter, ICL delivered significant growth in both sales and EBITDA, as we benefited from our continued strategic focus on growing our long-term Specialty Solutions and from commodity upside momentum. In fact, all three of our specialty businesses delivered all-time record fourth quarter and annual results. Fourth quarter sales came in at more than $2 billion, up more than 50%, while adjusted EBITDA of $575 million increased by more than 100%, and was an all-time fourth quarter record. This was a remarkable end to 2021. And for the full year, we delivered $7 billion of sales, our second highest ever, as well as $1.6 billion of adjusted EBITDA. As you know, the fourth quarter is traditionally one of our slower quarters. However, we delivered our fifth consecutive quarter of bottom line improvement. All four of our businesses contributed with double-digit growth in sales and EBITDA, including Innovative Ag Solutions, which delivered both on an organic basis and via our recent Brazilian acquisitions. Performance in the quarter was supported by increased demand and higher prices in most markets, which helped us deliver a record free cash flow of $166 million in the fourth quarter, and a nine-year record in free cash flow of $465 million for 2021. For the fourth quarter, we also delivered a dividend distribution of $0.1318 per share, up more than $0.10 per share over the fourth quarter of last year. While we saw continued success in the quarter, we also faced many of the same challenges we encountered throughout 2021. Once again, the teams worked tirelessly to overcome higher overall costs and global supply chain challenges. Most importantly, the global relationships our supply chain procurement and logistics teams have built over the years served us well during the past 18 months. The teams recognized imbalances in prices and supplies well in advance, and worked to ensure consistent quality and quantity of supply. They strengthened partnerships across the supply chain, managed through the tough times, and helped keep ICL on track almost seamlessly for the benefit of our extensive global customer base. Now please turn to Slide 4 for a snapshot of our fourth quarter results. As you can see, we demonstrated an improvement in each key financial parameter. On Slide 5, you can see year-over-year sales were up more than 50%, while adjusted EBITDA was up more than 100% and margin increased by more than 780 basis points. We also added nearly $90 million of operating cash flow. I would now like to begin our segment review with industrial products on Slide 6. Quarterly sales were a record $422 million, while EBITDA was $129 million, and both were up approximately 25% year-over-year. This business benefited from strong product demand across key regions and from a continued strategic shift to long-term contracts. Our customers placed a premium on knowing they will consistently receive the quality and quantity of product they need to meet their requirements across all of our end markets. The electronics market remained undersupplied, and the construction industry also remained very healthy in the quarter as the market took advantage of unseasonal weather, which has since changed. Clear brine fluid sales returned to more normalized pre-COVID levels in the fourth quarter, as higher oil prices were maintained. We also saw significant contributions from our phosphorus-based flame retardants and our specialty minerals businesses as the latter benefited from the higher demand from the supplement, pharmaceutical, de-icing, and oil drilling end markets. Our ongoing capacity expansions remain on track and are expected to be operational in the second half of 2022. In addition, industrial products are about to launch a growth acceleration investment plan, which is expected to expand capacity and deliver additional improvements in sales and profit. We will provide more details on this initiative when we update you on our progress toward achieving 2025 targets later this year. For fiscal 2021, industrial products delivered record sales and profit for the division, with significant contributions from its growing and phosphorous-based flame retardants, as well as from its specialty minerals product, allowing us to achieve record cash flow for this business in 2021. Turning to Slide 7 and our products business where sales of $698 million were up more than 80% year-over-year and EBITDA of $288 million was up nearly 250%. For the quarter, our average realized price per ton of $487 was up nearly 115% year-over-year, driven by strong global crop demand and allocation optimization. Corn, soybean, wheat, and rice prices were all up double digits year-over-year, and supply remained tight as countries remained concerned about food security. For our potash production sites, work was completed on our P-9 pumping station in the Dead Sea during the fourth quarter, and operations commenced early this year. In both the Dead Sea and in Spain, we maximized our granular potash production through deep bottlenecking efforts, which resulted in higher realized prices. The shift not only meant granular comprised approximately 50% of our production, but it also added roughly $35 million to operating income in 2021. At ICL Boulby, we saw increases in both polysulphate production and sales volume in the fourth quarter, up 36% and 42% respectively. During the quarter, we also announced the approval of Boulby’s application to continue mining and production through 2048. Beginning in 2022, our Boulby operations will be moving from the potash segment to our Innovative Ag Solutions segment, and this change will better align Boulby’s specialty products as we continue to focus on targeting long-term growth through specialty solutions. Turning to Slide 8 and our Phosphate Solutions division where we reported fourth quarter sales of $609 million, up more than 20% year-over-year, while EBITDA of $146 million was up nearly 100%. Of note, December, traditionally one of our slower months, was our strongest for 2021, as we were able to supply new and existing customers at higher market prices. Phosphate specialties delivered record quarterly sales and profit as both food and industrial sales increased with higher demand across all regions. Also, as we mentioned last quarter, we inaugurated our new alternative protein plant in St. Louis in December. Our food specialties business saw a mixed impact from the resurgence of COVID, with food service weakening as it had during COVID peaks. However, retail was able to offset this decline once again. Industrial customers also provided strong demand, and this business saw continued improvement in volumes across all end markets at higher prices in the quarter. Our YPH subsidiary capped off record 2021 sales and profit with a great fourth quarter driven by higher volumes and prices, as well as improved efficiency. This business also continued to supply increasing demand from the lithium iron phosphate battery market, which drove higher specialty mono ammonium phosphate sales. Overall, we saw a significant increase in phosphate fertilizer sales and profitability driven by record production and continued healthy demand. Throughout the quarter, supply remained tight due to export restrictions in China and Russia, along with other shifting global dynamics. Just before the end of the year, we announced the extension of our phosphate mining concession in Rotem, which has been approved for an additional three years through the end of 2024. For fiscal 2021, our phosphate specialties business delivered record sales and profit, and also reported production records spanning multiple sites across three continents, as the team worked to meet new and existing global customer demand. This business saw strong volume increases and higher prices across food and industrial specialty phosphate and for specialty acids. Turning to Slide 9 and Innovative Ag Solutions. In total, fourth quarter innovative ag sales of $380 million were up more than 130%, while EBITDA of $48 million was up more than 330%. This segment saw record organic growth in addition to outstanding performances from both of our recent Brazilian acquisitions. For the quarter, organic sales and EBITDA were up 37% and 82% respectively. Positive momentum continued across IAS due to strong demand and higher volumes across most regions and product lines. Our turf and ornamental business saw robust growth as this business benefited from a global increase in sales volumes and higher prices as distributors stocked up in advance of the spring gardening season in the Northern Hemisphere. Specialty fertilizer sales reached record levels for both the fourth quarter and full year, with increases across all regions led by higher volumes of straits, liquid, and controlled release fertilizers, and strong performance in Brazil. For overall 2021, our innovative ag solutions business reported record organic and total sales and profit. Now, if you will turn to Slide 10, I would like to walk you through some of our recent impactful events before turning the call over to Aviram for a review of our financials. Throughout the year, we’ve targeted innovation, sustainability, and service excellence through valuable partnerships, and we expect this to continue into 2022. You’ve heard us discuss our internal innovation efforts. In 2021, these efforts delivered approximately $40 million in annual efficiencies. In addition, our internal accelerator continued to deliver and achieve a run rate of more than $100 million of additional annual operating income. This program succeeds by challenging employees to be creative and innovative in finding all types of solutions, from the everyday to the next big product. Our employees have really made a difference. While our American division is still very new to ICL, they’re already blazing a trail when it comes to innovation. The team in Brazil was ranked as one of the top five most innovative agribusiness companies in the country by Valor Econômico as part of its annual Valor innovation awards. We’re proud of their efforts, especially since innovation is such an integral part of our identity and our future growth. At ICL, innovation is happening every day. It’s part of our DNA. I would be remiss if I did not point out two other 2021 efforts. First, our expansion into the electric vehicle and energy storage space through our production of specialty MAP for the LFP battery market. And second, the launch of our ICL planet startup external innovation hub. I mentioned sustainability a great deal in the past couple of years, and you’ll be hearing more of the same in 2022, as we are beginning our year of sustainability within ICL. I’m looking forward to what is to come this year, and would like to mention a few fourth quarter milestones. At the end of this year, we launched what we are calling our Greenstone project. This is an innovative effort designed to leverage renewable energy for our largest production site. It will help us reach our goal of being carbon neutral by 2050, and we will be sharing more about this exciting initiative in the coming months. Also in the fourth quarter, we were awarded the prestigious gold medal rating by EcoVadis for the first time. This means ICL is ranked in the top 5% out of 75,000 rated suppliers. We are thrilled to be recognized as a global supplier that demonstrates sustainability standards aligned with our customers. As I discussed earlier, we opened our alternative protein plant in St. Louis in the fourth quarter. This investment represents just one part of our efforts to develop healthier and more sustainable food products. We’re excited about the consumer trend toward more sustainable lifestyle and diet choices, and look forward to offering additional sustainable, functional, and nutritional alternative food solutions going forward. We set in place measurable environment targets through a sustainability-linked loan, and we established a new climate and sustainability committee to help direct and guide our progress. In terms of partnership, once again, the positive developments in Israel’s foreign relations have opened up the opportunity for us to build new relationships and create new collaborations. As a result, for the first time, we shifted Israeli clear brine fluids to the United Arab Emirates this past December. We welcomed the opportunity to supply our product and are proud to be part of this historically significant moment. Earlier this year, we announced a number of other partnerships, including our collaborative efforts with Columbia University’s electrochemical energy center to jointly explore strategies to address energy storage and conversion via next-generation batteries. We are also teaming up with PlantArcBio, an Israeli Ag-Bio company, and have filed a joint patent to develop a novel biostimulant technology platform for improving crop yields while having a minimal impact on the environment. If you will turn to Slide 11, I would like to wrap up by reviewing some of the key takeaways from 2021. Our strategic long-term focus on specialty solutions, which continues as commodity upside persists, benefited us throughout the year as we delivered all-time record profitability from all of our specialty businesses, with a year-over-year increase of more than 50%. In 2021, we benefited from some of the additional production capacity we continued to bring online in our Industrial Products and Phosphate Solutions businesses. The agriculture portion of our business was strengthened by our strategic acquisitions in Brazil, which provided additional sales, profitability, and a seasonal balance between the Northern and Southern hemispheres. Our food strategy was executed according to plan as we added alternative protein capacity and invested in a food tech startup through our ICL Planet Hub, and you can expect to see more of these types of investments in 2022. Our industrial businesses, specifically our Industrial Products segment, benefited from its commitment to focusing on long-term customer partnerships and on delivering in a reliable fashion. We also added capacity to meet new commitments. From our financial perspective, there were many achievements, which Aviram will review. Still, I would like to highlight the significant acquisitions we made in 2021 while maintaining our net key cash position as we continue to strengthen our solid cash flow generation. On Slide 12, you can see our outlook for 2022. We expect commodity prices to remain firm through at least the first half of the year, supported by strong demand relating to food security concerns, higher food and crop prices, and supply constraints. For our specialty businesses, we will maintain our strategic focus, and we expect overall good visibility for the year due to our emphasis on long-term contracts and a very healthy demand pipeline. We will continue to invest in additional capacity to help support our continued growth with higher growth CapEx in 2022, focused on supplying our long-term contracts through additional infrastructure. We will also maintain our company-wide focus on innovation as we look to generate new opportunities and efficiencies. Our sustainability plan is on track, and we are gaining momentum as we continue to receive third-party accolades for our efforts. Finally, we expect to maintain our disciplined approach to cost management to support our strong cash flow and increase dividend payouts. And of course, we will continue to execute on our strategic leadership goals in the areas of sustainable agriculture, food and industrial solutions. As always, I want to thank the entire ICL family of employees spread out across the globe for all their hard work and contributions in 2021. We appreciate that our record of profitability is a result of your tremendous efforts. And with that, I will turn the call over to Aviram.

Aviram Lahav, CFO

Thank you, Raviv, and to all of you joining us today. I must tell you that I’m pleased to be a part of reporting this outstanding quarter. While you’ve already seen Slide 14, I would like to call out just a few additional highlights. Sales crossed $2 billion and were up more than 50% year-over-year. Our adjusted EBITDA, a fourth quarter record, was up more than 100% with a margin of 28%, up more than 780 basis points. Adjusted diluted earnings per share of $0.26 were up $0.21 or approximately 400%. Operating cash of $344 million was up nearly $90 million over the fourth quarter of last year and approximately $70 million from the third quarter of this year. As Raviv mentioned, we delivered free cash flow of $166 million in the fourth quarter, and while each of our business segments contributed, Industrial Products delivered record cash flow for the second consecutive quarter. In the fourth quarter, our results were driven by both our specialty solutions and commodity upside momentum, while our specialty business, including Industrial Products, phosphate specialties, and Innovative Ag Solutions had record quarters, we also saw significant year-over-year improvement in commodity prices. On Slide 15, you can see how potash, phosphoric acid, and sulphur prices have trended, with each reaching levels not seen over the past 10 years. So not only are commodity prices higher, but so are the prices for the raw materials that go into our specialty solutions. Also, as we have shown in previous quarters, you can see the acceleration of marine transportation costs over the past four quarters. While this cost appears to be stabilizing, we’re still seeing higher rates than at any time over the past decade. Nonetheless, our teams will continue to work to overcome supply chain challenges and higher overall costs. We will also continue to leverage our advantageous production locations and global supply chain capabilities to maintain our position as one of the world’s lowest cost producers and to continue to deliver the consistent supply our customers rely upon. On the left side of Slide 16, you can see the impact of higher prices on our year-over-year sales growth and also the positive contribution from slightly higher fourth quarter quantities and our recent Brazilian acquisitions. I would like to point out that the organic portion of our Innovative Ag Solutions business represented 59% of the segment sales in the quarter, and both our existing business and acquisitions helped drive fourth quarter growth. For phosphate solutions, we continued our strategic shift towards increasing specialty sales, which represented 61% of sales in the fourth quarter, an increase from 53% in the third quarter of this year. On the right side of the slide, you can see improvement from all four of our segments; the impact of higher potash prices over the past few months has clearly begun to flow through to our results. Turning to Slide 17, you can see the significant contribution that higher prices made to adjusted EBITDA, but once again, on a segment basis, all four of our businesses contributed to the year-over-year improvement. For phosphate solutions, the sharp increase in commodity prices drove this portion of the business to represent 60% of EBITDA. However, we also prioritize our phosphate specialties focus, which drove significant increases in sales volume. On the next slide, you can see the same sales and adjusted EBITDA charts for our full year. Slide 18 shows prices as a significant contributor to 2021 sales. However, our Brazilian expansion and increased quantities each contributed more than $300 million to sales. For IAS, organic sales represented 73% of total 2021 sales, while the phosphate solution specialty sales comprised 55%. On a segment basis, once again, all four segments contributed to the significant year-over-year growth in sales, bringing our total for 2021 to $7 billion, the second highest in company history. Turning to Slide 19, where prices had the biggest influence on more than 60% improvement in adjusted EBITDA. The organic contribution to IAS was more than 60%, while commodities came in at exactly 60% for our phosphate solutions. Again, as commodity prices increased over the course of the year. On a segment basis, each business contributed to our $1.6 billion of annual adjusted EBITDA, as all three of our specialty businesses delivered record quarterly and annual results. Before we turn the call over to the operator for Q&A, which I am looking forward to, I would like to review a few highlights on Slide 20 from both the fourth quarter and the full year. For the fourth quarter, our net debt-to-EBITDA ratio improved to 1.38 times from 2.3 times in the fourth quarter of last year. As we have already discussed, we have continued to drive growth in cash flow generation with cost controls and efficiencies. For the full year, we completed approximately $450 million in acquisitions, monetized our YYTH investment in China, and delivered strong operating cash flow, thereby maintaining our existing debt levels. For Industrial Products, we exited two non-core assets over the course of the year, including the divestment of our Zhapu site in the third quarter. We also took certain tax actions during the fourth quarter of this year, which caused our effective tax rate to increase to 30% versus 24% in the fourth quarter of last year. These actions took advantage of a temporary tax provision, which resulted in the release of trapped earnings, the related tax impact accounted for the majority of the difference between our reported and adjusted net income for the fourth quarter. The adoption of this temporary provision will result in lower tax payments on dividend distributions in the future. Our lower adjusted tax rate of 17% for the quarter versus 19% in the fourth quarter of 2020 also reflects the increase in profitability of our YPH subsidiary in China, following several years of losses in which a deferred tax asset was not created for these losses. As we begin 2022, we are pleased to be entering our second year of providing adjusted EBITDA guidance, which you can see on Slide 21. We expect to deliver a range of between $1,850 million and $2,050 million in 2022. Given our strategic focus on the growth of our specialties businesses, we are expanding our guidance to provide more clarity, and we anticipate our specialty business will provide approximately $875 million to $925 million of this annual EBITDA. Finally, as a reminder, we have adopted TCFD reporting for our 2021 annual report, and we appreciate all of the hard work our internal teams have done to help us take this giant step forward toward more transparent sustainability reporting. And with that, I would like to turn the call back over to the operator for Q&A.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question comes from the line of Joel Jackson. Please ask your question. Joel is from BMO Capital.

Bria Murphy, Analyst

Hi, this is Bria Murphy on for Joel. Thanks for taking my questions. So you’re guiding to $300 million of EBITDA growth in 2022. How much of this is expected to come from potash price increases and how much is from other drivers? I guess, can you please be as granular as possible in helping us bridge the different buckets of earnings growth next year?

Raviv Zoller, CEO

Okay. Can you hear me? Yes. Okay. So the potash price is based on existing Q4 average price. Actually, the realized price was $471, and our guidance for next year is based on about $425. The difference -- we are basing on Q4, but we’re basing Q4 prices and the distribution – geographical distribution of sales according to our adjusted plans for 2022. So we’re not taking into account the expected change in Chinese prices, and we’re still modeling Indian prices according to our Q4 price, which was $445. So you can do the math from there.

Bria Murphy, Analyst

Okay. Thanks. That’s helpful. And do know the magnesium byproduct earnings, there’s small negative product, what use to make for magnesium rings in 2022 your guidance between the first and second half.

Raviv Zoller, CEO

Okay. So there’s been a hike in magnesium prices; rather, magnesium prices are much higher than usual. They’re running around $8,000 a ton in China now, which is much higher than their average price. When magnesium prices spiked a couple of months ago, we closed most of the sales for next year. So we will see our magnesium business profitable for the first time ever. And basically, the projection is a relatively conservative projection, even though we have annual contracts, because we’re taking into account that if drastic change happens in price the other way, then we may not be able to actually execute the contract as they are today. At current prices, we would have a swing of over $50 million. We’re modeling less than that in order to be more conservative.

Bria Murphy, Analyst

Thank you.

Operator, Operator

Thank you. The next question comes from the line of Alex Jones of Bank of America. Please ask your question.

Alex Jones, Analyst

Good afternoon. Thanks very much for taking my questions. Two, if I may. The first on CapEx, you talk about higher growth CapEx to capture some of the opportunities you’re seeing. Could you give us some quantification of the CapEx spend in 2022 and the particular projects that you are accelerating spending on? That’ll be my first question, please.

Raviv Zoller, CEO

Thanks, Alex. Yes, we’re going to see about $100 million of additional CapEx next year for growth. Some of it is going to Industrial Products, additional capacity as we are signing additional long-term contracts and have to provide the capacity for that. We’re also building additional capacity for the MAP for the LFP industry. We’re doing that in China and we’re looking for investments in other regions, but specifically the plans are currently in China. We’re also building additional specialty fertilizer capacity in a few countries, including Europe for biodegradable coding – sorry, biodegradable coded fertilizer. We’re building new capacity in Brazil and in India. So between Brazil, India, and Europe, there’s a significant investment in our specialty fertilizer business. Those are the significant components. In phosphate, it’s MAP for LFP batteries, the three geographies I mentioned for specialty fertilizers, and the additional capacity needed for our expansion on the Industrial Products flame-retarded business that’s coming in. Hope that helps.

Alex Jones, Analyst

That’s great. Thank you. And just one other question on the EBITDA guidance and specifically the specialties guidance. If I’m correct in thinking that includes Industrial Products, Innovative Ag, and the Phosphate specialties, then I think at the midpoint it’s only implying 4% year-on-year growth in EBITDA in those divisions, which is a significant slowdown on the growth rate that you’ve been doing in the past couple of years. Could you comment on what might be driving slower growth in those divisions or that’s just a particularly conservative forecast to start the year? Thank you.

Raviv Zoller, CEO

The forecast implies about 10% growth, it’s inhibited a little bit by a change in the specialty fertilizer business, as we are shifting the polysulphate business from the potash division to the specialty fertilizer division as we recognize it, given that we are now able to demand a premium, and we’ve developed some specialty products based on poly. That makes sense to treat that business as a specialty business. Since we’re adding it this year and since it’s still not a profitable business, then the actual growth in the specialty fertilizer business will be inhibited by that component of the business. If you back that in, then we’ll have an average of about 10% growth in the specialty businesses. I agree that it’s a little conservative. One of the reasons for that is that some of the capacity that’s needed for growth. If we don’t build in additional price increases above what we already know, we need the additional capacity to come in. It’s not enough to start making the investment; the investment has to be built in order to be able to create the revenue. So some of the growth could have been captured if we could possibly build the capacity faster, but unfortunately, we’re building it as fast as we can. It’s conservative. It is a conservative forecast. In terms of pricing, because we don’t want to build in any additional pricing increases above and beyond what we already know.

Alex Jones, Analyst

Thank you. That’s very helpful.

Operator, Operator

Thank you. The next question comes from the line of Mubasher Chaudhry of Citi. Please ask your question.

Mubasher Chaudhry, Analyst

Hi. Thank you for taking my question. Just going back to the guidance, I think you talked – you said that the guidance for next year is based on $425 or average selling price for $425 a ton for potash, which is around $100 higher than what you did in 2021. So if I just – on a volume neutral basis, I get to kind of $400 million of incremental EBITDA assuming the price drops there, not change in costs. So which is quite conservative; your guidance compared to that is quite conservative. So just some comments around that as to, are you seeing a significant slowdown in other divisions or kind of what your assumptions are there, that would be helpful. And the volumes for potash in the fourth quarter were down quite strong. Can you provide some comment around what drove the lower sales to China and India, whether that you see that persisting into Q1 2022? I’m sorry, just finally, how sold are you when we go into kind of – are your volumes kind of confirmed for Q1 and 2, and do you have relatively good visibility on your price and volumes in potash? Thank you.

Raviv Zoller, CEO

Thanks for that. I’ll try to go through the more difficult part of the question, and that would be the product distribution in terms of sales. We typically sell between 1.2 million to 1.5 million tons to India and China. The current plan is around 1.3 million for the year, which is a little bit more than 25%. Those 25% are built into the model according to existing Q4 prices, which admittedly do not build in the expected new pricing for the new contracts in China. Of course, following that we expect new contracts in India. So that’s the component that gets affected once these contracts are done. In terms of your analysis on the additional EBITDA coming from potash, then our given the change in distribution and the relevant transportation and other costs, the additional EBITDA is a little lower than $400 million. And then again, there’s about $80 million coming from additional EBITDA on the specialty side. So that pretty much explains the additional EBITDA that we expect for next year. I hope that helps.

Mubasher Chaudhry, Analyst

That’s very helpful. Thank you.

Operator, Operator

Thank you. The next question comes from the line of Geoff Haire of UBS. Please ask your question.

Geoff Haire, Analyst

Actually, all my questions have been answered, sorry, asked and answered, so I don’t have any more.

Operator, Operator

Thank you. In that case, the next question comes from the line of Duffy Fischer of Barclays. Please ask your question.

Duffy Fischer, Analyst

Yes, good morning. Good afternoon. If you start with the $575 million of Q4 EBITDA and just do a bridge to Q1. Can you just talk about puts and takes, what gets better and what might be getting worse as we go from Q4 to Q1 with that number?

Raviv Zoller, CEO

Okay. Maybe I’ll add to the question that was asked before that I didn’t actually answer. We are pretty much close to sold out for Q1. Not beyond that, we’re holding on some of the sales until there’s more clarity on the Chinese contract, as well as the Byelorussian situation that you all know. In Q1, what changes is the distribution of sales. In Q4, we sold much less to China and to India. In fact, in our previous call, we expected about $100 to $110 of additional potash price average for the quarter. It ended up being over $150, I think close to $160 because we upgraded our India contract. As a result, we were able to better our intake. We’re talking about an additional $50 million for Q4 after the adjustment. So when you go from Q4 to Q1, obviously, pricing has not changed much from Q4 to Q1 at this time. The Chinese contract could affect Q1 only to a very small extent; it could be very meaningful for Q2 and afterwards.

Duffy Fischer, Analyst

I guess my question was the whole company, not just potash. I mean, that $575 million number. I don’t see anything in that number that really shrinks from Q4 to Q1. So kind of that level or above, I would assume is where most people coming out. Is that fair?

Raviv Zoller, CEO

It’s fair that there is nothing that’s going particularly down. The bromine business is not going down, and the phosphate business is not going down. The specialty fertilizer, Brazil is seasonal. So Q1 in the Brazilian part, which is rather significant could be lower than the fourth quarter. Potash, I already explained it’s a matter of distribution.

Duffy Fischer, Analyst

Sure. Okay. So that would get me, let’s round numbers, $0.6 billion of EBITDA for Q1 as a seasonally light quarter generally for you guys. It would seem logical that the year is $2.5 billion as it is your guide of $2 billion. Would you push back on that?

Raviv Zoller, CEO

Like I said, we could get closer to your number depending on Chinese contracts, because consider that we’re modeling for the china products, and I explain the quantities. We’re modeling $249 at this point. So keep in mind that 1.3 million tons China; the rumor in China is that prices are going to be between $500 million and $600 million, depending on who you ask. If you ask some of those folks that are close to the suppliers, they’ll tell you $600 million and above, but if you model somewhere between $500 million and $600 million, then we’re talking about more than doubling the price. Take 700,000 tons and add that in and then add the relative addition to the India portion, which would be also significant on another 600,000 or so. Then it gets you close to your number, still not there, but close.

Duffy Fischer, Analyst

Okay. Terrific. Thank you, guys.

Raviv Zoller, CEO

Thank you.

Operator, Operator

Thank you. The next question comes from the line of Laurence Alexander of Jefferies. Please ask your question.

Laurence Alexander, Analyst

Good morning. Given the environment that you’re sketching, can you give an update on your thoughts around your balance sheet management, how much you could flex the balance sheet for M&A? Secondly, with respect to the alternative protein and battery materials markets in particular, what do you see as the target for paybacks for investments in those areas given the longer-term growth potential?

Raviv Zoller, CEO

Okay. So batteries is easy. It’s a one-year payback. Alternative proteins, probably between 2.5 to 3 years, relatively good paybacks. On the balance sheet, I’ll turn it over to Aviram.

Aviram Lahav, CFO

Yes. The current debt that we have, if you benchmark it vis-à-vis the data that we have, it’s practically a non-issue because the theoretical capacity that we have would vastly exceed $1 billion amount. You do the math though and that’s not the limiting factor at this stage. You want more specifics? We can go through the maths, but I think that that should cut it.

Laurence Alexander, Analyst

Thank you.

Aviram Lahav, CFO

We’ve gone down all the way to 1.4 that all the EBITDA and think about this. We’ve got really significant free capacity, not theoretical by calculation, but real capacity that we can tap into as much as we need.

Raviv Zoller, CEO

And of course, given a strong balance sheet, given the right opportunity, we’re looking forward to increasing our earning power and taking advantage of the opportunities that make sense in the businesses that we’re focused on. Again, subject evaluation, we’re not in a rush to do anything; we want to get the right deal. We’re very, very happy with the Brazilian acquisitions that we did. Thanks.

Operator, Operator

Thank you. The next question comes from the line of Vincent Andrews of Morgan Stanley. Please ask your question.

Will Tang, Analyst

Hi guys, this is Will on for Vincent. I had one quick one. You guys had previously talked about the potential renewals of some long-term contracts in your industrial products business. I’m just wondering how much of that pricing momentum you guys saw this quarter was driven by those record elemental bromine prices that you guys called out versus those contract renewals and kind of, what does that mean for pricing within your industrial products, I meant for the first half of next year or this year, I guess?

Raviv Zoller, CEO

Okay. So the record spot prices didn’t really have any impact in Q4 other than a very small portion of our sales, which is sales of the elemental bromine, less than 10% of sales from the growing part of the business. There is an effect in Q1. Some of our contracts have pricing reviews that depend on spot prices, not necessarily just bromine, but also TBBA and other materials that have spot prices. The pricing environment is good. During the first quarter, we will see some price increases in existing contracts; all in all, positive. At the same time, there are also some raw material costs that increase. So the net effect is not going to be very significant, but still there is going to be a positive effect on earnings even before additional capacity comes in, which will happen sometime around July next year.

Will Tang, Analyst

Got it. And then, I guess, just a quick follow-up. How are you guys looking at some kind of EBITDA margins for the industrial cost as this in 2022, just given the elevated prices kind of offset products those higher raw material costs and logistic costs?

Raviv Zoller, CEO

We’re working very hard to get some additional margin expansion next year. It’s not going to be easy, but we’re targeting some margin expansion next year. It won’t be dramatic, but there is some room for margin expansion again, due to the updates in pricing, which will be incrementally positive relative to the raw material and transportation costs.

Will Tang, Analyst

Got it. Thank you.

Operator, Operator

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