ICL Group Ltd (ICL) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the ICL analyst conference call. [Operator Instructions]. I must advise you that this call is being recorded today. I'd like to hand the call over to our first speaker today, Peggy Reilly Tharp, Vice President of Global Investor Relations. Please go ahead.

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.

Thanks, Peggy, and welcome, everyone. As I have in the past few quarters, I would like to provide a brief update on the situation in Israel. Although we still face challenges caused by the war, we once again executed against our plan in the second quarter and delivered solid results. While the geopolitical situation remains tense, our teams have done an excellent job of managing existing risks while planning and preparing for different potential scenarios. Now if you will please turn to Slide 3 for a brief overview of second-quarter results, which were down versus the prior year as expected. However, sales of $1,752 million were up for the second consecutive quarter, while adjusted EBITDA of $377 million was up for the third consecutive quarter with EBITDA margin increasing to 22%. For the second quarter, adjusted earnings per share were $0.10, up 11% on a sequential basis. Next month, we will distribute a dividend of about $0.05 per share as we continue to return value to our shareholders. All 3 of our specialty-driven business divisions, industrial products, phosphate solutions, and growing solutions delivered consecutive quarterly and year-over-year growth in EBITDA. For potash, we saw fertilizer prices stabilize during the second quarter. We continue to drive efficiency efforts and cash generation in the second quarter, and Aviram will provide some more detail later in the call. We also continued to gain market share across our specialty-driven business divisions, both organically and by acquisition. I would ask you to turn now to Slide 4 and look at both year-over-year and quarter-over-quarter trends for some key financial metrics. As you can see, we delivered quarter-over-quarter improvement across the board. Our specialties-driven business divisions also achieved year-over-year improvement in margin expansion versus both prior periods. In the second quarter, we delivered quarterly sequential improvement in operating cash flow of $316 million and free cash flow of $175 million, up 8% and 19%, respectively. Let's start with the review of our divisions and begin with our Industrial Products business on Slide 5. For the second quarter of 2024, sales were $315 million with EBITDA of $74 million. While sales were up 5% year-over-year, they declined slightly as expected versus a seasonally strong first quarter. Industrial Products EBITDA improved sequentially for the third consecutive quarter. During the quarter, we continue to prioritize cost savings and efficiency efforts. We achieved higher capacity utilization and were able to increase market share despite end market demand remaining mixed with softness in electronics and building and construction lingering. Sales of clear brine fluids for use in the oil and gas industry declined year-over-year due to weather and a shift in oil rig schedules. We maintained our focus on expanding customer relationships and long-term partnerships, and we are now introducing new phosphorus-based solutions in North America and Europe. We are also expanding customer trials for FruitMag, our specialty mineral solution for post-harvest citrus fruit treatment into China, one of the world's top citrus producers. On Slide 6, you will see our Potash division results for the second quarter of 2024, with sales of $422 million and EBITDA of $118 million, both relatively in line with the first quarter. Total sales volume was down 108,000 tons year-over-year, but up sequentially due to annual maintenance in the Dead Sea in the first quarter of this year. We also experienced some shipping-related issues as the events in the Red Sea presented a challenge for ICL as well as for other global companies. Regardless, we have been able to deliver our quantities by adjusting delivery destinations to some extent, and when necessary, our shipping routes. In Spain, we saw continued improvement and remain on track to meet our 2024 production and cost savings goals. Cost per ton has improved, and we are also seeing benefits from shifting our efforts to a higher-grade mineral location. In total, the average potash price declined in the second quarter to $300 CIF per ton, down approximately 26% year-over-year and 7% sequentially. Turning to Slide 7 in our phosphate solutions division where second-quarter sales of $572 million and EBITDA of $146 million, both increased on a year-over-year and quarter-over-quarter basis. EBITDA margin increased 26% and improved versus both prior periods. Our phosphate specialties are ahead of plan for 2024 with sequential quarterly improvement as our food strategy continues to deliver strong results. With the second quarter, we saw exciting double-digit year-over-year growth in our alternative dairy-based beverages. We also expanded our capacity in China to meet growing customer demand for our food specialty solutions with our new food ingredients plant. Also in China, we continue to reach new production records and to improve efficiencies as we strive to meet customer demand. Our growth trend in that country continued with higher battery materials volumes in the second quarter. For our North American battery materials expansion, we expect our customer innovation and qualification center to be operational in St. Louis by year-end. We already have customer interest in recent R&D advancements we have made, including the use of rapidly developing process technology with improved pellet density and high-performance electrochemical properties, and we will be able to qualify new products at our customer innovation and qualification center by the end of the year. For our commercial LFP plant in North America, we are evaluating alternative incentive opportunities and also more actively and conservatively managing our construction schedule and capital expenditures to match anticipated customer demand timelines. This is expected to push commercial production to a later start, more in line with most of our customers' requirements. Turning to Slide 8 in our growing Solutions business division, where second quarter 2024 sales of $494 million were up both sequentially and year-over-year. EBITDA of $45 million also improved versus both prior periods. We continue to target the very specific needs that growers have in different regions, and we spun with innovative new products, which were designed for each individual market. On a regional basis, we were able to increase market share in the key and growing markets of Brazil, China, and India by expanding specialty fertilizer distribution. In North America, we continued growing our specialty plant nutrition footprint with the acquisition of Custom Ag Formulators, a provider of liquid adjuvants and enhanced nutrients, as well as various other specialty products. This latest acquisition advances our goal of targeting opportunities to expand our growing solutions product offerings and to position the business for further growth in new and adjacent end markets. I would like to wrap up with a few highlights on Slide 9. I'm pleased we were able to deliver our third quarter sequential EBITDA improvement as we continue to build momentum by focusing on the areas under our control and achieving against our strategy. To that end, we were able to increase market share for our specialty-driven business divisions in key regions as we remain committed to growing our leadership position for these 3 businesses. One way of achieving this goal is the acquisition as we did with growing solutions this quarter. The acquisition of Custom Ag Formulators was our second for 2024, and we look forward to additional opportunities. For our Phosphate Solutions business division, we already discussed the expansion of our food phosphate capacity in China, and we are eager to further advance our food strategy in China for China. We're also looking at new global battery materials partnerships and phosphate solutions as we seek to leverage the proficiency we have built in China and expand to other parts of our global footprint. We expect to harness our phosphate expertise and work with our global partners and customers to introduce new products as we look to become a global leader in battery materials, and we expect to begin qualifying some of this technology by year-end in North America. Along with our investments in innovation for battery materials and other areas, we continue to drive cash generation in the quarter and to target efficiency efforts. Our pipeline of innovative new products and solutions is robust, and AI is allowing us to both accelerate new product development for future growth and to achieve industrial efficiencies in the areas of cost, safety, and quality optimization. Finally, I would like to call out that ICL has once again been voted one of the best places to work in Israel, Brazil, and St. Louis by our employees. It's an honor to work with the entire ICL family of employees around the world and to experience their outstanding work, dedication, and support firsthand. 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 and take a look at some key macro indicators. We are seeing signs of stabilization in terms of inflation and interest rates. Industrial production continues to gradually improve, and this trend is expected to continue into the second half of the year. In the U.S., housing starts moderated in the second quarter, small uptick in June after a weak May. Turning to Slide 12 and key fertilizer market metrics, grain prices stabilized in quarter 2 versus quarter 1 and farmer sentiment moderated. Concerns about higher interest rates and expectations of farm income to continue to fall this year after reaching record highs in 2022, weighed on farmer sentiment. While prices for potash and phosphate declined year-over-year, fertilizer prices in general have stabilized. Freight rates remain elevated as global container operators have been forced to send vessels around Southern Africa's Cape of Good Hope to avoid the Red Sea, creating a shortage of vessels and port bottlenecks. On Slide 13, you can see key energy storage market metrics. There has been no fundamental change from past quarters as more rapid growth is still expected in the outer years with more gradual growth in the near-term. As Raviv mentioned, we are being conservative in our capital spend to achieve higher certainty, aligning with our customers' product qualification and commercial production timelines. If you will now turn to Slide 14 and our second quarter sales bridges. On the left side, you can see year-over-year improvement for each of our specialties-driven business divisions, resulting in the second quarter of 2024 sales of $1.8 billion on a quarterly sequential basis, specialty sales also increased. 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 Slide 15, you can see the impact lower potash prices had on our second quarter 2024 EBITDA of $377 million, and this is evident on both sides of the slide. On a quarterly sequential basis, EBITDA was up 4% with a roughly 65 basis points improvement in margin. I would like to note that while the year-over-year impact from transportation costs looks roughly flat on the slide, this excludes amounts related to the war in Israel. Even as potash prices continued to decline in the second quarter, ICL remained the leader in terms of average realized price. As you can see on Slide 16, we continue to maintain the flexibility that allows us to rapidly shift in and out of markets based on profitability and to maximize our cost-efficient resources. Once again, I would like to point out ICL's position in the global bromine market, which you can see on Slide 17. The Dead Sea is the premier and most cost-competitive source of bromine and accounts for approximately 2/3 of global supply capacity. If you turn to Slide 18, you can get an idea of how global ICL is as a company, and we are diversified on a regional basis and continue to grow market share in high-growth countries like China and Brazil. We are also diversified in terms of our business divisions and end markets. Some say this makes the ICL story more complicated. And it might, but it also means ICL is not as dramatically impacted by swings in commodity prices. Our specialties-driven businesses are even global leaders are well underway to becoming one, which is the case for our growing solutions business. Across our specialties-driven business divisions, we have been benefiting from increasing market share, and this is just one of the highlights on Slide 19. We have also maintained our focus on cost savings and efficiencies, both across our business divisions and on a corporate-wide basis. And our year-to-date results in this area are in line with our 2024 plans. We continue to prioritize cash generation, and we ended the quarter with available resources of approximately $1.7 billion. Our net debt to adjusted EBITDA rate at the quarter end was 1.3x. We also maintained our commitment to distributing up to 50% of adjusted net income to our shareholders. And in September, we will pay out $63 million of the dividend to our shareholders, bringing our trailing 12-month dividend yield to 4.6%. Finally, if you turn to Slide 20, I would like to update you on our 2024 guidance. For our specialties-driven business divisions, which include industrial products, growing solutions, and all of phosphate solutions, we now expect EBITDA to be between $800 million to $1 billion in 2024. This is up from previous guidance of $700 million to $900 million. There is no change to our previous quarter's guidance. Our effective tax rate for 2024 is now expected to be approximately 28%. For the second quarter, our effective tax rate was 27%, which declined versus the prior year and reflected a lower surplus profit level, mainly due to a decrease in potted prices. And with that, we can begin the Q&A.

Thank you. [Operator Instructions]. Our first question today will come from the line of Benjamin Theurer of Barclays.

Congrats on those very strong results. Two quick ones. So, number one, I just wanted to understand and maybe help us frame a little bit what you're seeing in terms of demand, particularly in the Industrial Products segment. Clearly, I guess the improvement and also the profitability, the sequential improvement here is clearly a good sign. Just wanted to see if you could talk a little bit about just general economic activity and what your expectations are within Industrial Products for the second half and then into 2025, as we move maybe into a little less easier comps than what we're having now in the short-term. So that would be my first question, and I have a quick follow-up.

Sure. So, in terms of demand, what we're seeing is that electronics are coming back, but slower than we expected at this point. There's a lot of room for improvement. And of course, we're waiting for the effect of the new AI boom and Microsoft pilot success and Microsoft copilot success, et cetera. And of course, EVs, which are moving slower than expected this year, but ultimately, are going to move as fast as anybody expected. And construction, of course, also not really any change in these months, but that was expected. The construction cycle is always longer. So, I would say that in most other industries, demand is very healthy. Electronics is still below normal, but improving. Construction is below normal and not improving yet. Otherwise, there's nothing to report. First quarter, clear brine fluids were a little higher than expected, and second quarter a little lower than expected. It has to do among other things with weather issues and rig schedules, but nothing important there.

Ben, just a moment before you move on to your next question. With regards to IP profitability or profits, I also want to suggest that the fact that we are pursuing aggressively sales of quantities to our customers and are running at the next 2 full yields means that we are collecting on the way, a much better absorption of our cost, which translates into tens of millions of improvement in dollars. And this is something that -- the decision that we've taken and we are pursuing it to the maximum. So, you can imagine what will happen when the demand picks up, and we can basically translate also a positive price variance, it will be very, very good. But in the meantime, we're not waiting and it's quarter after quarter, and you are seeing the results of the IP division being very similar in Q2 to Q1, and that is inter alia, because of what I just described. Thank you.

Okay. And then just on phosphate solutions, there was obviously a very strong result here on the growth with, let's call it, stable sales, but EBITDA actually improving. So, first of all, on the top line, could you help us understand how much was volume related? How much was price related? And then in order to understand a little bit that margin expansion and that strong EBITDA growth, if you could give us a couple of examples where like the more specialty piece of phosphate solutions really comes in and kicks in from a margin potential, driving that EBITDA growth to that 13% level year-over-year?

So on commodities is the easy part. There's a little bit of price appreciation in the second quarter. It's also continuing in the third quarter. So, we see a little bit of price appreciation on the commodities phosphate in the third quarter as well. On specialties, it's really all about volume. It's an introduction of new products and increase of sales in certain markets, including additional capacity that we added in China on the food business, and also strong sales in North America and South America. The tailwinds here are from the fact that when commodity prices are not under pressure and WPA is not coming in from China to Europe and Brazil, then there's less pressure on price and prices are relatively stable as we increase volume. So, on specialties, it's mostly volume and on commodity, it's mostly price.

Our next question comes from the line of Joel Jackson from BMO Capital.

Okay, a few questions. I'll do one by one. I thought maybe a high-level question to start, if you don't mind, LFP materials. It feels like when looking at some of the industry data lately that LFP inventories are extremely high in China, certainly more than what electric vehicle demand would suggest is required right now. You're delaying your plant in St. Louis. Would you comment on the LFP kind of dynamic right now and how that affects your business with high-purity asset and things you're thinking about that business to adjust to the tougher dynamic lately?

Sure. So, LFP is increasing in market share in China. So, while the EV market is not exactly moving as fast as anybody expected, LFP is gaining market share significantly this year. So, it's going up from less than 40% to expected about 70% within the next year. And as a result, our sales of raw material for LFP are actually at an all-time high in terms of volume. And we expect that although EVs are moving slowly globally, what is moving very fast, both in China and globally is LFP for storage. And since there's very little capacity for LFP in the Western world. It's just a matter of time that the demand turns into actual deliveries, but it will take time because the infrastructure for the production does not exist in the Western world as of yet. So, on the one hand, if we look globally, EVs are moving much slower than expected. Stationary storage is moving faster than expected. LFP is penetrating and increasing its market share much faster than expected.

So Raviv, you're not worried about an oversupply of LFP cathodes right now in China, that would require some sort of rationalization over the short-term to write as inventories and maybe require you to sell less in the end terms to the markets more balanced?

We're not worried because in China, we're not producing LFP cathode. We're producing raw material for LFP cathodes. So, we have excess demand for MAP and other fertilizer type products in China. So, if we had to sell less cathode for battery raw materials, we would just sell more specialty fertilizers in China. It's not a concern for us in the short-term. In the long-term, if you look at the western part of the world, it's really not relevant for us for '24, '25 or even the first half of '26. We need to look at what's going to happen in the market, '26 and '27 vis-a-vis what our customers in North America and hopefully, Europe because we have other ideas for Europe, what they need and when they need it because we're not going to put the capital to build capacity for customers that are not going to be ready to produce their batteries before '27 or '28. So, what we're doing is we're building an innovation qualification center in St. Louis that will be up and running by the end of the year. And we are going to qualify products with multiple customers. By the way, many of them in the stationery part of the business. And we expect that we will optimize whatever production capacity that we can create with long-term agreements with these qualified customers. And so, most of the news is going to be coming out next year.

Okay. Turning to IP. Aviram, you talked about how Q1 earnings were similar to Q2 is clearly showing in the results. How do you think second half IP operating results earnings-wise, will look versus the first half, again, for IP?