Earnings Call Transcript - ICL Q2 2022

Operator, Operator

Ladies and gentlemen, thank you for being here, and welcome to the ICL Analyst Conference Call. Our presentation will be followed by a question-and-answer session. I would now like to turn the call over to our first speaker today, Peggy Reilly Tharp, Vice President of Global Investor Relations. Please proceed, 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 for the Q&A session. Raviv, please.

Raviv Zoller, CEO

Thank you, Peggy, and welcome, everyone. In the second quarter, our emphasis on long-term specialty solutions once again benefited the company, along with favorable movements in commodity prices. Our strong performance was backed by increased demand and higher prices across most markets, despite elevated raw material costs and ongoing global supply chain issues. To start with Slide 3, ICL achieved record sales and EBITDA, marking another quarter of profit and margin growth. We registered outstanding results across all our specialty businesses—Industrial Products, Phosphate Solutions, and Innovative Ag Solutions—as well as from our commodity sectors. We set multiple production records by focusing on efficiency and productivity. While we've recently gained from an upswing in commodity markets, these trends are cyclical. However, the investments and improvements we've made in production will benefit us in the long run. In the second quarter, ICL posted record sales of nearly $2.9 billion, which is an increase of over $1.2 billion and surpasses our expectations. Adjusted EBITDA was also a record at nearly $1.3 billion. Our commitment to long-term cash generation delivered strong free cash flow of $410 million, up more than 300%. We returned up to 50% of our annual adjusted net income to shareholders, resulting in a dividend of $0.2918 per share, an increase of more than 450% from $0.0526 in the same quarter last year. Overall, ICL will distribute a $375 million dividend for the quarter. Additionally, we resolved a significant tax dispute with the Israeli Tax Authority concerning the surplus profit levy on natural resources. This settlement allows us to close prior disputes and gain clarity for the future. While Aviram will provide more details later in the call, I believe this agreement enhances our risk management framework and public profile regarding regulatory and concession-related challenges. Now, please refer to Slide 4, where you'll notice significant improvement over the past five quarters. Sales increased nearly 80%, and adjusted EBITDA rose nearly 250%. The EBITDA margin for this quarter climbed to around 44%, up from approximately 22% in the same quarter last year. We also generated nearly $300 million in operating cash flow since the first quarter. On Slide 5, our second-quarter results are showcased, with triple-digit improvements in nearly all key financial metrics. Notably, our adjusted diluted earnings per share reached $0.58, up more than 450% year-over-year. I will now begin our segment review with Industrial Products on Slide 6. Quarterly sales amounted to $486 million, marking a 19% increase, while record quarterly EBITDA of $206 million rose over 60% year-over-year. This segment benefited from our strategic focus on long-term contracts, with over 70% of bromine compound sales tied to such agreements. Although bromine prices in China have slightly eased this year, they remain elevated compared to last year. End-market demand was mixed, but we anticipate continued strength into the third quarter. The oil and gas sector maintained momentum in the second quarter, resulting in strong sales of clear brine fluids. Consumer electronics moderated as consumer preferences shifted toward experiences rather than devices post-COVID. Automotive demand was also low as manufacturers faced production and supply challenges. Demand from the construction industry experienced a slight decline, with variable performance across different products. Demand for our specialty minerals was robust in the dietary supplements and pharmaceutical sectors during the quarter. We also saw higher sales in magnesium chloride and potassium chloride for industrial applications. Throughout the first half of the year, we invested in upgrading our supply chain capabilities by adding 34 ISO tanks. We expect to add 65 more tanks in the second half to maintain our logistics efficiency and flexibility. Moving on to Slide 7 and our potash business, where sales reached $951 million, up 150% year-over-year. EBITDA was $616 million, an increase of 670%, and we set quarterly profit records at both the Dead Sea in Spain and for our magnesium division. At Dead Sea Works, our teams established several production records. In Spain, we achieved production improvements at the Cabanasses mine, with more progress expected in the latter half of the year. We continue to enhance our operations and efficiencies at both sites, reinforcing our logistical advantage and reducing energy costs. Prices for both potash and metal magnesium increased during the quarter, with our average potash realized price per ton at $750, rising $469 year-over-year and $149 from the previous quarter. We expect our average potash price to moderate in the third quarter due to recent trends in price convergence globally and increased shipments scheduled to India and China. In the metal magnesium sector, second-quarter sales rose due to higher prices while a competitor faced ongoing production constraints. Turning to Slide 8 and our Phosphate Solutions division, we achieved record sales of $915 million, up nearly 60% year-over-year, with EBITDA at $315 million, an increase of over 130%. This business saw record results in both commodities and specialties while maintaining a strategic focus on driving profitability, despite rising commodity prices. Increased prices and stronger demand for food specialties and fertilizers mitigated the impacts of rising costs in raw materials, production, and logistics. Our Ludwigshafen site in Germany resumed full production after last year’s fire-related shutdown, and new equipment investments at our Ladenburg site improved quality and energy efficiency. In China, our YPH joint venture saw rising prices for specialty products and commodity fertilizers, alongside enhanced production efficiency. Demand for our specialty monoammonium phosphate solutions for LFP batteries used in electric vehicles and energy storage continued to grow. Moving on to Slide 9, our Innovative Ag Solutions division saw a sustained positive trend in fertilizers, achieving record sales of $700 million, an increase of 110%, with EBITDA of $155 million, also a record, rising by 356%. Organic sales rose nearly 60%, with EBITDA up over 230%, both making up about 75% of total IAS sales and EBITDA, respectively. Our Brazil expansion strategy yielded both synergies and substantial results, contributing $177 million in sales this quarter, exceeding expectations during a traditionally slower season. Overall demand in Brazil remains high as we approach the main planting season in the Southern Hemisphere. Our organic polysulphate product saw significant success in terms of pricing and market penetration. Our Fertilizerplus products gained recognition and became preferred by many farmers due to their added nutrients and organic composition. This growth has expanded to new markets in Europe, India, and China, as well as into Indonesia. ICL Boulby delivered a notable profit contribution this quarter, setting a new monthly production and hoisting record while targeting a 1 million-ton output for 2022. Our turf and ornamental business performed well, although these products, like all specialty fertilizers, faced challenges with rising raw material costs and availability. However, we have managed to offset these increases through higher pricing across IAS. Now, if you could turn to Slide 10, I want to highlight recent advancements in sustainability, innovation, and leadership. In sustainability, we received our fourth consecutive highest ESG Index Platinum Plus rating from MAALA and a double AA score, ranking first among industrial, chemical, and pharmaceutical companies for our sustainability initiatives. Our facility in Spain received the prestigious 2022 Green Leaf award for excellence in safety, health, and environment from the International Fertilizer Association, recognized for its efforts in reducing greenhouse gas emissions. In China, our YPH joint venture earned green mine certification for its contributions to the green circular economy. YPH also joined the exclusive list of 5A ranked companies in the country. On the innovation front, we’ve made strides in LFP battery production and are aiming to expand into the U.S. While we produce key materials for lithium-ion battery cathodes, we're also developing offerings for liquid and solid electrolytes. We are a leading provider of phosphorus chemicals for various applications, now focusing on producing lithium-ion battery electrolyte solutions in Europe and the U.S. Additionally, we've partnered with PlantArcBio to enhance crop yields through RNAi, improving yield while minimizing environmental impact without genetic modification. In India, through our digital Ag startup, Agmatix, we launched a unique solution for crop nutrition optimization, with ICL India's agronomists providing digital nutrition prescriptions to over 900 farmers, aiding in yield targets and carbon footprint optimization. We have solidified our leadership in India by signing a long-term supply agreement for organic polysulphate with India Potash Limited through 2026. Given polysulphate's natural state, it has the lowest carbon footprint globally, making it a sustainable option for crop nutrition that supports India's organic agriculture initiatives. In Israel, ICL was recognized as one of the best companies to work for by BDI, ranking first in the industrial sector and improving overall to 21st from 38th last year. We also received a top corporate governance rating from Entropy, enhancing our ranking in this category. In the U.S., ICL was acknowledged as a top workplace by the St. Louis Post-Dispatch based on employee feedback and was a finalist for corporate philanthropy awards. All of these achievements reflect ICL's global impact, as our employees are dedicated to improving conditions worldwide through sustainability efforts. Finally, I want to conclude my part of today's call with Slide 11. Although this year has been unusual, we remain focused on the future and our long-term specialty strategy, which allows ICL to strengthen its position against more commodity-focused competitors. Our quarterly performance reinforces our specialty strategy, and our solid balance sheet enables us to pursue expansion opportunities, including M&A and investments in R&D and new products. While uncertainty looms over the global macro environment for the rest of 2022, we anticipate leveraging our position as a global supplier of specialty chemical solutions and benefitting further from our Brazilian operations as the Southern Hemisphere enters its planting season. We also expect ongoing profitability from ventures like our YPH joint venture in China and our magnesium operations in the U.K., which previously had negative contributions. We will keep innovating in areas like LFP battery production and within food and agricultural markets. During this food crisis, it’s crucial for us to contribute to innovative solutions for worldwide challenges. While we are currently experiencing a strong performance in the commodity cycle, it is important to remember this peak is temporary, and we must continue to focus on long-term cash generation and shareholder value creation. I want to express my gratitude to the entire ICL team worldwide for their hard work and dedication in achieving record results once again. We're celebrating our company's 100-year history and are proud to have set new records in sales and profitability. With that, I will hand the call over to Aviram.

Aviram Lahav, CFO

Thank you, Raviv and to all of you for joining us today. While you've already seen slide 13, I would like to call out a few additional highlights. Second quarter adjusted operating income of $1.139 billion was up more than 380% and adjusted operating margin of 39.5% was up dramatically from 14.6% in the second quarter of last year. For the quarter, adjusted net income of $751 million was up more than 450% year-over-year. If you will turn to Slide 14, you will see that many of the macro trends we saw in the first quarter continued into the second. Global growth remained strong even as inflation continued to soar in most countries and both commodity and grain prices remained high. The situation in Ukraine has not been resolved and it seems as if each day brings changes and in some cases even greater uncertainty. There have been limited relief from the supply chain disruptions for ICL and others around the world. However, our supply chain procurement and logistics teams have worked tirelessly to overcome these challenges and we have continued to leverage our advantageous production locations and the global supply chain capabilities. In addition, currencies have continued to fluctuate with the U.S. dollar surging to its highest level in nearly two decades, at times hovering its parity with the euro. On slide 15, you can see prices for potash and sulfur continues to trend higher during the second quarter while phosphoric acid prices, paper and freight rates declined slightly. While we were able to offset the increase in prices for raw materials in the quarter, this is expected to become more uncertain in the second half of the year. Turning to Slide 16, where you can see the trends for crop economics also remained elevated throughout the first half of this year. Prices for rice and soy saw small increases in the beginning of the quarter with rice declining as the quarter progressed while soy moderated. Corn prices increases were higher but leveled off towards the end of the second quarter. Understandably, wheat prices were the most sharply elevated as Russia and Ukraine combined export nearly 30% of the world's wheat. However, prices declined beginning in June. And just last Friday, the two countries agreed to resume exports of millions of tons of Ukrainian grain via the Black Sea for the first time since the Russian invasion. On the left side of Slide 17, you can see the impact of higher prices on our year-over-year sales growth. For quantities, we saw positive contribution from recent Brazilian acquisitions and even during the traditionally slower season in Brazil, these acquisitions comprise 25% of Innovative Ag Solutions sales in the second quarter. For phosphate solutions even as prices for phosphate commodity soared, we maintained our long-term strategic focus on specialty sales, which represented 54% of total phosphate sales in the second quarter. On the right side of the slide, you can see improvement in sales from all four of our segments with the impact of higher prices continuing to flow through to our results. Turning to Slide 18, you can see the significant contribution that higher prices made to adjusted EBITDA. And once again on a segment basis, all four of our businesses contributed to the year-over-year improvement. For phosphate solutions, phosphate specialties made up 42% of EBITDA for this segment. I would now like to review a few highlights on Slide 19. For the second quarter, our net debt to EBITDA ratio improved 2.6 times from 2.1 times in the second quarter of last year. As Raviv mentioned, we have continued to drive growth in cash flow generation through cost controls and efficiencies. We also continue to deliver shareholder value and for the second quarter, our dividend yield is nearly 8% at the high end of our peer group. Before we move to Q&A, I would like to address our recent settlement with the Israeli Tax Authority. As previously discussed, we have settled a significant tax dispute regarding the Surplus Profit Levy on natural resources. This settlement provides final assessments for the tax year of 2016 through 2020 and also outlines the calculation of the levy for 2021 and onwards. In the second quarter, we reported total tax expenses of $540 million which included tax expenses for prior years in the amount of $188 million. Excluding this amount, our tax expense was $352 million reflecting an effective tax rate of 31%. For the second quarter of last year, our tax expense was $64 million and reflected an effective tax rate of 30%. The total tax rate for the first half of 2022 excluding the $188 million of prior-year tax expenses was 28% versus 23% for the first half of last year. The company's relatively higher tax rate was the result of tax expenses relating to the Surplus Profit Levy and represents an approximation of the impact of the above settlement on the current tax rate. Going forward, we expect our ongoing tax rate to be in the 30% range. Turning to Slide 20, I would like to call your attention to our updated guidance, which reflects our very strong results in the first half. We now expect to deliver an adjusted EBITDA range of between $3,800 million and $4 billion in 2022, an increase from previous guidance of $3,500 million to $3,750 million. Our specialty businesses are expected to contribute approximately $1,500 million to $1,600 million, up from previous expectations calling for contribution of $1,300 million to $1,400 million. One final note before we turn the call back over to operator, I would like to recognize that our CEO, Raviv Zoller has been named an Executive Board Member of the International Fertilizer Association. And this is in addition to his role as the Chair of the Sustainability Committee. This is a fantastic and well-deserved honor recognizing ICL as a sustainability leader among its fertilizer peers and on behalf of ICL, I congratulate him. And with that operator, we can begin the Q&A.

Operator, Operator

Thank you. Our first question today comes from the line of Mubasher Chaudhry. Please go ahead.

Mubasher Chaudhry, Analyst

Hi, can you hear me?

Operator, Operator

Yes, thank you.

Mubasher Chaudhry, Analyst

Okay, perfect. Hi guys. Thank you for taking my questions. Just a couple to start with on the potash market and then one on the industrial product. So on the potash side of things, we're hearing continued chatter around more tons coming out of Belarus. Can you provide your thoughts on how you see the market for the rest of the year and whether you see some of the supplier pressures coming off? And then more specifically to your pricing. The average selling price is still quite at a discount to the average spot price for the quarter. Should we expect this discount to remain given your contracted volumes to India and China? Or is there a potential to close the gap? So that's the first on potash. And then in Industrial Products, there was a comment around the Chinese phosphorus coming back to the market in the press release, can you provide some thoughts on the size and do you expect prices to be preserved for the remaining part of the year or do you see them softening into the rest of the year? Thank you.

Raviv Zoller, CEO

So first on potash prices. I'm not sure, I understood why you think that this is our market maybe explain the question.

Mubasher Chaudhry, Analyst

I'm sorry, I didn't quite catch that. Regarding the potash market, we are noticing an increase in Belarusian tons entering the market, and I was curious about the impact of this.

Raviv Zoller, CEO

From the very beginning, when sanctions were implemented, it was expected that without the Port of Klaipeda, the Belarusians would manage to bring a third of their product to market. While they haven't reached that level yet, reports indicate they are increasing from just over 100,000 tons a month to around 200,000 tons or more. We believe that about 250,000 tons could be achievable through various smaller ports and rail routes to China. Therefore, our expectation is that 6 to 7 million tons will remain off the market concerning Belarus. As for the average potash price, it reflects a combination of contracts and spot prices, and we report the realized price. In the second quarter, the average price in Brazil exceeded $1,000, with contract prices at $590. We anticipate that prices will decrease slightly in the second quarter but will remain significantly higher than in the first quarter. Our expectation for the third quarter is around $700. Regarding industries, we currently see some strength in areas like oil and gas, consumer electronics, while the automotive sector shows some weakness. This downturn is partly linked to the situation in China and temporary fluctuations in demand. However, we anticipate robust long-term automotive demand driven by electric vehicles and do not believe the current softness will last. Overall, the majority of our industrial products and bromine-related sectors are secured through long-term contracts, so we don't anticipate any major impacts. In the phosphorus-based sector, we've noticed some Chinese products entering the market, although not at the levels seen two years ago. The quantity sold is lower, but prices remain stable, resulting in very positive overall outcomes. Future policies in China remain uncertain. For phosphate, there are strict export restrictions in place. From the beginning of the year to mid-year, about 2 million tons were exported, with another 3 million expected in the second half. This amounts to a total of about 5 million tons compared to 11 million that entered the market in 2021. It is uncertain how the phosphorus market will develop. For phosphate, we expect approximately 6 million tons to be absent this year due to China. I hope that clarifies your question.

Mubasher Chaudhry, Analyst

That's very helpful. Thank you.

Aviram Lahav, CFO

Just one note, Raviv if I may.

Raviv Zoller, CEO

Go ahead, sure.

Aviram Lahav, CFO

That we are seeing Mubasher, that the leaders in the market actually are upping the prices with this, so and I think, there is quite a lot of volatility and position taking and most probably, the near future will sort that out. I think it's in a way, if I can say with this little amount, it's actually happening. I think, it's quite unsorted, does that make sense?

Mubasher Chaudhry, Analyst

Yes, maybe I'll sneak in a follow-up, just across industrial products and then across innovative Ag as well, the performance has been quite strong and I'm just wondering, as we head into the third quarter, and you've had a month of it so far, are you starting to see a little bit of a softening in demand and therefore your ability to pass on pricing is not quite as strong as it was in the 1Q and 2Q to offset the rules and just from a slightly softer demand perspective, any thoughts around that be helpful?

Raviv Zoller, CEO

It depends on what we mean by softer demand because two factors are involved. First, there's seasonality, which can cause a seasonal softness. Second, following the outbreak of the war, there was an urgency to stock up on supplies, leading distributors to purchase significantly. For example, Brazil, which typically requires about 12 million tons a year, took in 7 million tons in the first half of the year. This means there is not an immediate need for supply in June or July, but Brazil will still need 12 million tons because potash is essential for the soil and cannot be skipped for a year. This situation contrasts with certain regions in Europe, where we are observing about 20% demand reduction. Consequently, those 5 million tons will still be purchased. We are witnessing some price convergence due to significant price differences in various regions, and competition tends to balance prices out. In the first half of this year, we sold 85% more to Brazil compared to the same period last year, with nearly 750,000 tons sold versus 400,000 tons previously. Most of our allocation to Brazil—around 80%—was sold in the first half, driven by higher prices and our competitive instinct. However, it's natural for prices to stabilize. The market fundamentals indicate that 6 to 7 million tons are lacking, and the only way to reconcile supply and demand is through demand destruction, which occurs when prices rise. Current geopolitical factors complicate this further, as those without access to the product may be the ones that need it the most. Unfortunately, we don't have time to delve into that aspect today. I hope this clarifies things.

Mubasher Chaudhry, Analyst

Thank you.

Operator, Operator

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

Joel Jackson, Analyst

Hi, do you hear me?

Raviv Zoller, CEO

Yes go ahead.

Joel Jackson, Analyst

Hi, good morning or good afternoon, everyone. I wanted to start on a high level. Raviv, the guidance seems conservative for the year, and you've raised that. Looking at it from a different perspective, I have a couple of observations and would appreciate your insight. You're indicating that 42% of the EBITDA will be generated in the second half of the year, which is quite unusual for ICL. In the last decade, there has only been one instance where this occurred. We're looking at a potential decline of $600 million in EBITDA in the second half compared to the first half of the year. I understand the $7 per ton potash price you mentioned for Q3, but that doesn't fully clarify the situation. Are you being conservative here, or are you factoring in significantly lower commodity prices in the second half compared to the first half? Are there margin concerns? It seems like it would be challenging for you to fall below $4 billion. Thank you.

Raviv Zoller, CEO

Thank you for your question, Joel. I don’t believe we're being conservative. Our initial forecasts at the beginning of the year were cautious due to the lack of contracts in China and India, along with uncertainty regarding Belarussian sanctions. When we created our projections, the situation was different. Since then, our updated guidance does not indicate a shift in our outlook for commodities, except maybe a slight improvement in phosphates due to stronger than expected performance influenced by Chinese export restrictions. The majority of our upgraded projections are based on the specialties sector, which has seen pleasant surprises and strong performance in the first half of the year. Most of the changes in our forecasts stem from the specialties business. In terms of commodities, our perspective remains steady. We were cautious about the prices in Brazil exceeding 1,100 or even touching 1,200, and while we took advantage of those prices, we anticipated they wouldn’t be sustainable long-term. Regarding the 42% figure, the upcoming third quarter potash prices are expected to be a bit softer, and the variation between the first and second halves is primarily accounted for by the fourth quarter. Historically, two or three of our specialty divisions experience seasonal declines, particularly in December, although last year was an exception. Therefore, we anticipate a seasonal drop in the fourth quarter for industrial products. The only adjustment is that our innovative ad solutions are expected to perform better this year, driven by strong results from our newly acquired business in Brazil. Overall, potash prices are likely to be lower in the second half compared to the first, and we expect a decline in both industrial products and phosphates in the fourth quarter, which aligns with our original forecast. I hope this clarifies your concerns.

Joel Jackson, Analyst

Maybe I'll provide more details for each business segment. Regarding IP, in the last call, you mentioned that you expected full year margins to be similar to the Q1 margin, which is around 38%. Do you still believe you can maintain margins of 38% to 39% in Q3, considering you achieved about 39% in Q2? Perhaps you expect a seasonal drop in Q4. So, would it be fair to anticipate high 30s percent margins in IP for the entire year?

Raviv Zoller, CEO

It is fair but we will go down somewhat on revenue especially in the fourth quarter, a little in the third quarter, but more in the fourth quarter. The reason we can still maintain our margin is that because one of the growing components is the oil and gas clear brine fluids, which are very, very high margin. So we'll have less sales that are a little lower in margin and perhaps more sales in clear brine fluids. And that will even out and allow us to stay at the higher margin that we talked about.

Joel Jackson, Analyst

Do you think that revenue decline year-over-year comp, which of course you had really strong revenue growth for many quarters, do you think that revenue contraction trend will continue into the first half of '23?

Raviv Zoller, CEO

We're not seeing that at all. In fact, one area where we observe weakness is in the automotive sector, which is becoming increasingly important to us. We do not see a decline in global demand for electric vehicles. Currently, there are fewer deliveries than many realize, but we believe this situation will not last because the demand is enormous. Everyone is eager to switch to electric vehicles, and while supply is coming from China, these vehicles require components, including flame retardants. Therefore, we think we are not in a very favorable position.

Joel Jackson, Analyst

Okay. Regarding Innovative Ag Solutions, when you acquired Produquimica from Compass, it significantly impacted the financials for the third and fourth quarters of last year. Should we expect minimal or no contribution from that in the second half of this year? You mentioned some organic growth in that business, which is positive, but there doesn’t seem to be any growth from acquisitions in the second half, as that all occurred in the latter half of last year. Is that what you're implying?

Raviv Zoller, CEO

You're correct, it's organic, but consider that the organic pro forma growth was about 80% in those businesses in the first half of the year and we're realizing some synergies. So we expect to see growth.

Joel Jackson, Analyst

And any margin contraction in that business in the second half versus the first half margin IAS was really strong. Should you see a bit of contraction versus your hold?

Raviv Zoller, CEO

It's hard to say at this point. We're taking into account a little bit of a contraction because we see a little softness in the commodity market, not typically influences the specialties market as well. So we don't see any drama there, but we're taking into account a little bit of a contraction.

Joel Jackson, Analyst

My last question is about potash. You mentioned the Q3 average selling price of around $7 per ton. Given the $600 potash price in Q1 and $750 in Q2, will your Q3 margin for potash be significantly lower than Q2? Will it be similar to Q1, or somewhere in between the two, considering factors like freight costs? How do you expect your Q3 margins for potash to compare to those in Q1 and Q2 at the $7 per ton price?

Raviv Zoller, CEO

Great question. We kept everything stable and obviously not everything is stable because transportation prices are actually going down and our output is expected to be very, very good, which lowers cost per ton. But then again, there are some uncertainties here including energy cost and including shifting from some geographies to others that will have a lot of deliveries to India and China in the third quarter. So that requires a careful approach but net-net, we don't expect a big change in the components so your margin is lower.

Aviram Lahav, CFO

I would like to mention two points, Joel. First, if you compare our performance in the first half to the second half, the figures show around 4 billion, with delivery expected at 55% in the first half and 45% in the second. This indicates it's not actually 42% when you consider the 4 billion. Additionally, a significant portion of this comes from Q4, where we have less visibility due to seasonality and the fact that it is further out. Furthermore, there is considerable uncertainty regarding pricing. We took all these factors into account when establishing our guidance. Naturally, we will monitor it on a quarter-by-quarter basis and may adjust it based on the circumstances.

Raviv Zoller, CEO

It's a bottoms-up guidance.

Aviram Lahav, CFO

Yes.

Joel Jackson, Analyst

Okay. Thank you very much.

Raviv Zoller, CEO

Thanks.

Aviram Lahav, CFO

Welcome.

Operator, Operator

Thank you. Our next question will come from the line of Will Tang from Morgan Stanley. Please go ahead.

Will Tang, Analyst

Hi, guys. This is Will Tang on for Vincent here. I know you touched on Brazil, a little bit earlier, but I guess, can you comment on the state of potash inventory within the channel by geography elsewhere? So your competitors have kind of previously proposed some products, some refill offers in the U.S., which I think many would have considered improbable few months ago. So I'm wondering if you have a view on how backed up the system may be in the U.S. and elsewhere?

Raviv Zoller, CEO

I believe the trends indicate that while global inventories are decreasing, the supply chains remain under significant stress. Although there is some easing happening, improving the situation is a lengthy process. Moreover, the cost of capital and the expenses associated with holding inventories have risen sharply, as seen with Brazil's interest rates rising from 2% at the start of the year to 13%. The Brazilian real has also depreciated nearly 15% against the dollar. This change impacts distributors, who may feel pressured to hold inventory, but the current conditions might encourage them to take on more risk. There were no sanctions on Russian fertilizers, but uncertainty about their availability in markets like Brazil has affected decision-making. Fortunately, uncertainty is diminishing, yet high capital costs and increased labor expenses—reflecting an 8% inflation adjustment—contribute to ongoing stress in the supply chain. At some point, buying activity will surge beyond current levels. North American and Canadian leaders appear well-equipped to navigate these dynamics. We aren’t seeing inventory buildup; rather, we’re noticing tighter supplies, particularly in India and China, as the environment evolves rapidly due to interest rates, inflation, and the availability of Russian products. Ultimately, there are 6 million tons of potash missing from the market, and clearing this gap will require price increases and demand reduction. The key question is where that demand reduction will occur, but we do not anticipate it happening in Brazil, which is a positive development.

Will Tang, Analyst

Got it. Thank you. And then I guess, just given all the headlines around energy in Europe. I'm wondering how you characterize ICL, I guess reduction risk, particularly have been moving to the winter months for your phosphate facilities in Germany, there?

Raviv Zoller, CEO

Okay. So ICL is in relatively good shape. The reason is that most of our business has long-term, fixed-price and non-Russian dependent gas or renewable energy actually, most of our European and U.S. businesses are linked into renewable energy specifically and our Lautenberg site in Germany, we do have exposure. In that site, we produce some acid and many phosphorus salts product, but there for the food industry and fertilizers and food are getting prioritized. So we feel that whatever the rationing of gas could be, we would be in better shape than others. At the same time we have facilities in other countries, mainly in the U.S. where some of the product, we can replace with product coming from the U.S. So our main exposure we have is in our site in Germany, we have some exposure in the U.K., but overall a very small percentage of our revenues and EBITDA is that risk from gas disruption. And again, our main facilities are in Israel, where we have long-term fixed-price gas supply agreements.

Will Tang, Analyst

Got it. Thank you.

Raviv Zoller, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Alexander Jones from Bank of America. Please go ahead.

Alexander Jones, Analyst

Great, thanks for taking my questions. I've got two, if I may. The first is just on Innovative Ag Solutions. If you exclude the Brazilian M&A, then I think your EBITDA in the first half of the year is up about 3x compared to the first half of last year. How sustainable do you think that is, if and when fertilizer prices fall or is a lot of it sort of the pricing-related component? And then the second question on industrial products. You indicated that revenue will be down year-on-year in the third quarter. And just looking at the pricing that came through in the second quarter at 33%, does that imply that you expect quite a big deceleration in pricing such that revenue falls? Thank you.

Raviv Zoller, CEO

I didn't indicate that in IP we were going to come out at pricing lower than last year. So I don't know where that came from, but maybe there was a misunderstanding.

Alexander Jones, Analyst

So that was a sequential comment.

Raviv Zoller, CEO

Yes, it was a sequential comment.

Alexander Jones, Analyst

Understood.

Raviv Zoller, CEO

Regarding Innovative Ag Solutions, it is not feasible to triple your margins every year. However, we are currently benefiting from economies of scale and favorable pricing linked to new product lines, along with positive market conditions. As I mentioned earlier, we anticipate some margin contraction if the markets weaken, but it shouldn't be significant. Previously, we operated a smaller business and underwent major organizational changes, including merging our sales teams across commodities and specialties, and adapting our business practices with digital solutions and new incentives. Our business plan is effective, and we are achieving the margins we aim for. Long-term, we plan for a 15% margin under normal conditions, so the current 20% is quite high due to favorable market conditions.

Alexander Jones, Analyst

Great. Thank you.

Raviv Zoller, CEO

Thank you.

Operator, Operator

Great. Thank you for your questions. That does conclude our Q&A session for today. Peggy, please go ahead.

Peggy Reilly Tharp, Vice President of Global Investor Relations

Thank you. I'd like to thank you all for joining us today, and we look forward to speaking with you when we report our third quarter earnings in November. Have a good rest of your summer.