ADAMA delivers first quarter business growth despite COVID-19 pandemic
−− USD sales and profits impacted by significant pandemic-related global currency weakness
Apr. 28, 2020
‒ Solid business growth seen in Latin America and the India, Middle East & Africa region, while Europe also grew in local currency terms despite softer pricing environment
‒ Constant currency sales constrained by an estimated $47 million due to COVID-19 pandemic
‒ In US dollar terms, sales were impacted by a further $50 million due to the widespread depreciation of currencies, most notably the Brazilian Real, Euro and the Australian dollar, resulting from the pandemic amongst other factors
Q1 EBITDA of $142 million; impacted by $34 million in currency headwinds
‒ Material global currency headwinds, together with pricing pressures, mainly in Europe and China, alongside continued supply-related pressure on procurement costs, posed significant challenge to margins
‒ COVID-19 pandemic constrained Q1 EBITDA by an estimated $20 million, in addition to currency headwinds
‒ Continued tight control of operating expenses delivered material savings, despite inclusion of recent acquisitions as well as idleness from temporary suspension of Jingzhou site due to coronavirus outbreak in Hubei province
Q1 Net Income of $27 million, reflecting $62 million impact of global currency weakness
‒ Significant global currency weakness against the US dollar, especially of the Brazilian Real, adding $29 million to tax expenses
‒ COVID-19 pandemic constrained Q1 Net Income by an estimated $17 million, in addition to the $62 million currency impact
ADAMA Ltd. (the “Company”) (SZSE 000553), recently reported its financial results for the first quarter ended March 31, 2020.
During the first quarter of 2020, the global agrochemical market, amongst many others, was impacted by the unprecedented coronavirus pandemic, COVID-19. The pandemic, which started early in the quarter and now continues to rage throughout the rest of the world, has had a number of adverse effects on ADAMA’s performance in the first quarter, the most significant of which were:
‒ In China, while operations at the Company’s Huai’An, Jiangsu site have continued without material interruption, operations at the Jingzhou site in Hubei province were temporarily suspended from late January until the end of February due to the coronavirus outbreak in the province. Although operations at the site recommenced at the beginning of March, restrictions on logistics remained, impacting the free transport of goods to and from the sites and to the ports;
‒ Renewed tightening in supply of raw materials and intermediates sourced from third parties in China and around the world;
‒ Restrictions on international trading and sales through the Company’s global channels, as well as increased costs of global shipping, airfreight and other logistics;
‒ Lower demand in the Company’s US Consumer & Professional (non-crop) businesses, as retailers slowed their restocking of products due to the coronavirus outbreak;
‒ Significant impacts on global currency markets, which have seen the rapid depreciation of many currencies against the US dollar, most notably the Brazilian Real, Australian dollar, Turkish Lira and Indian Rupee, as well as increased volatility in the Euro. These movements have negatively impacted the Company’s performance in the first quarter compared to the corresponding period last year.
The ongoing spread of the pandemic is expected to continue to negatively impact the performance of the Company in the second quarter, and potentially beyond. The Company is actively managing its response to the outbreak in order to ensure the safety of its employees and limit the impact on the Company’s performance. Actions being taken include extending and strengthening distribution channels, use of expedited transport options where possible, working collaboratively with supply chain partners, and raising prices wherever possible to accommodate the weaker currencies and increased logistics costs.
Ignacio Dominguez, President and CEO of ADAMA, said, “Our resilient performance and continued business growth in the quarter was achieved in the face of the unprecedented coronavirus pandemic, which is significantly changing the way we live our lives, while also causing major disruption to global trade, including the currency markets, amongst many others. During this troubling and uncertain period, I am very proud of the response of our teams across the globe to ensure the health and safety of our employees, and mitigate the impact of the pandemic on our business.”
Revenues in the first quarter were $973 million, up 2% at constant exchange rates, with continued business growth in the face of the COVID-19 pandemic. Constant currency sales were constrained by an estimated $47 million due to the COVID-19 pandemic. In addition, sales were heavily impacted by the depreciation of global currencies, resulting in sales in US dollar terms being 3% below those of the same period last year.
The Company delivered solid business growth in Europe, driven by a strong performance in Eastern European countries, as well as throughout the India, Middle East & Africa region supported by favorable weather conditions in key areas. In Latin America, the Company has grown its sales in constant currency terms, strengthened by its recent acquisition in Peru, but sales in US dollar terms were impacted by the depreciation of regional currencies, most notably the Brazilian Real. Sales in North America were lower largely due to the impact of the coronavirus on demand for the Company’s Consumer & Professional products. In Asia-Pacific (excluding China), a strong performance in Australia, which has begun to see a recovery from the extreme drought conditions of the past few years, largely compensated for a coronavirus-driven slowdown in East-Asian markets and the depreciation of local currencies.
In China, despite seeing continued growth in the sales of the Company’s branded, formulated products, overall sales in the country were impacted by lower sales of intermediates and unformulated products, mainly those produced at the Jingzhou site which was temporarily suspended during the quarter.
Gross profit in the first quarter was $289 million (gross margin of 29.7%), compared to $344 million (gross margin of 34.2%) in the corresponding period last year. The lower gross margin was mainly a result of the material depreciation of global currencies, alongside some pricing pressure, mainly in Europe and China, and sustained high procurement costs, all of which were only partially offset by the business growth achieved in the quarter.
Operating expenses. Total operating expenses in the first quarter were $207 million (21.2% of sales), compared to $218 million (21.6% of sales) in the corresponding period last year. The Company continues to exercise tight control of its operating expenses, assisted by the beneficial impact of the strengthening of the US dollar against global currencies, achieving significant savings even while including companies acquired during 2019. The first quarter this year also saw the recording of Jingzhou-related idleness costs resulting from the temporary suspension of operations there due to the coronavirus outbreak in an amount similar to those recorded also during Q1 2019 when the sites were similarly suspended, while the first quarter last year also benefited from income related to expropriation of land.
Operating income in the quarter was $82 million (8.4% of sales), compared to $127 million (12.6% of sales) in the corresponding period last year. The widespread currency depreciation, due to the coronavirus outbreak among other factors, constrained operating income by $34 million in the quarter.
EBITDA in the quarter was $142 million (14.6% of sales), compared to $187 million (18.6% of sales) recorded in the corresponding period last year. The lower EBITDA in the quarter was driven by the lower gross profit, which was partially offset by the reduction in operating expenses. The COVID-19 pandemic constrained Q1 EBITDA by an estimated $20 million, in addition to the $34 million in currency headwinds due, amongst other factors, to the coronavirus outbreak.
Financial expenses and investment income. Total net financial expenses and investment income were $31 million in the first quarter, compared to $37 million in the corresponding period last year. The lower financial expenses in the quarter reflect financial income earned due to the effect of the appreciation of the US dollar against the RMB on the value of US dollar-denominated monetary assets in China, while the higher expenses in the prior year resulted from the opposite. This financial income in the quarter more than offset the slightly increased interest costs on higher net debt levels.
Tax expenses. Net tax expenses were $24 million in the first quarter, compared to $9 million in the corresponding period last year. The higher expense was largely due to the impact of weakening of currencies against the US dollar, most notably that of the Brazilian Real, driving higher non-cash tax expenses due to differences between the functional (US dollar) and tax (local) currencies regarding the value of non-monetary assets.
Net income in the first quarter was $27 million (2.8% of sales) compared to $80 million (8.0% of sales) recorded in the corresponding period last year, reflecting the lower operating income and higher tax expenses. The COVID-19 pandemic constrained Q1 Net Income by an estimated $17 million, in addition to the $62 million impact of global currency movements.
Trade working capital at March 31, 2020 was $2,178 million, compared to $2,082 million at the same point last year. The slightly higher level reflects higher trade receivables and lower trade payables, which were partially offset by lower inventory levels. The higher trade receivables were driven largely by the Company’s strong growth over the last year in Latin America, especially Brazil, where customer credit terms are generally longer. Although trade payables were somewhat lower in comparison to their levels a year ago, they were significantly improved over the course of the quarter, contributing to the improvement in operating cash flow.
Cash Flow. Operating cash flow of $55 million was consumed in the first quarter, compared to $191 million consumed in the corresponding period last year. The improved operating cash flow in the quarter mainly reflects the improvement in working capital during the quarter compared to the parallel period last year.
Net cash used in investing activities was $53 million in the first quarter, compared to $159 million in the corresponding period last year which included the acquisition of Bonide.
Free cash flow of $116 million was consumed in the first quarter compared to $355 million consumed in the same period last year, reflecting the improvement in operating cash flow in the first quarter of this year, contrasted with the higher investment levels and acquisitions of the same period in 2019.
Leverage: Balance sheet net debt at March 31, 2020 stood at $1,189 million, compared to $875 million as at March 31, 2019, largely reflecting the 2019 acquisitions and the assumption of their debt, as well as capital investments in portfolio expansion and the Company’s other growth engines.
Regional Sales Performance
Europe: Sales increased by 2.7% in the first quarter at constant exchange rates, compared with the corresponding period last year, driven by continued business growth, partially offset by lower prices resulting from high inventory levels in the industry’s distribution channels.
In Northern Europe, ADAMA saw pleasing business growth in the quarter, partially recovering from supply constraints seen in 2019 that affected key products. The Company delivered robust growth in most Eastern European countries supported by favorable weather conditions, with noteworthy performances recorded in Russia and Ukraine, where the Company is seeing continued market share gains, as well as Hungary and Romania, which benefited from an early start to the 2020 season. In addition, the Company grew in the key western European markets of France and Italy.
In US dollar terms, sales in Europe were lower by 1.0% in the quarter, compared to the corresponding period last year, reflecting the net impact of weaker currencies, largely due to the coronavirus outbreak.
North America: Sales in the quarter were lower by 6.0%, at constant exchange rates, compared to the corresponding period last year, largely due to the impact of the coronavirus which reduced demand for the Company’s Consumer & Professional (non-crop) products.
The Company recorded strong business growth in Canada with solid demand for crop protection products, as well as favorable weather conditions. In the US, ADAMA obtained two new rice herbicide registrations in the quarter, enhancing its portfolio of solutions for conventional rice and complementing ADAMA’s Preface™ and Postscript™ herbicides for the FullPage™ Rice Cropping Solution, furthering the Company’s offering to rice farmers.
In US dollar terms, sales in North America were lower by 6.7% in the quarter, compared to the corresponding period last year, reflecting the coronavirus-related weakening of the Canadian Dollar.
Latin America: Sales grew by 12.5% in the first quarter, at constant exchange rates, compared to the corresponding period last year. The robust performance was driven by strong business growth, bolstered by the Company’s recent acquisition in Peru, alongside continued price increases.
The Company saw continued constant-currency business growth in Brazil in the quarter, despite drought conditions which delayed the planting season in key crops including soybean and reduced application of fungicides. Noteworthy performances were also recorded in the quarter in Mexico, benefiting from good weather conditions particularly in the Pacific region, as well as Colombia and Ecuador, driven by a good harvest season in key crops.
ADAMA continues to expand its differentiated product offering in the region with the launch during the quarter of EMINENT®, a dual mode broad-spectrum insecticide, in Argentina. The Company also obtained the registration of UBERTOP®, an insecticide used mainly for the control of a wide range of pests in tomato and cabbage, in Mexico.
In US dollar terms, sales in Latin America were lower by 0.3% in the quarter, compared to the corresponding period last year, reflecting the significant depreciation of regional currencies, most notably the Brazilian Real, as a result of the coronavirus outbreak.
Asia-Pacific: Sales were lower by 9.8% in the quarter, at constant exchange rates, compared to the corresponding period last year, due largely to the outbreak of the COVID-19 pandemic, which started early in the quarter.
In Asia-Pacific (excluding China), a strong performance in Australia, which has begun to see a recovery from the extreme drought conditions of the past few years, largely compensated for a coronavirus-driven slowdown in East-Asian markets. In China, despite seeing continued growth in the sales of the Company’s branded, formulated products, overall sales in the country were impacted by the coronavirus outbreak which resulted in logistics and supply challenges, and reduced sales of intermediates and unformulated products from the temporarily suspended Jingzhou site.
During the quarter, the Company launched new products including QUALIPRO ENCLAVE®, a quadruple-mode of action fungicide mixture for use in turf in Australia, and obtained multiple new product registrations in the region, including BALORIC® and SOLITO®, an early post-emergence rice herbicide, in Thailand and Indonesia.
In US dollar terms, sales in Asia-Pacific were lower by 14.9% in the quarter, compared to the corresponding period last year, reflecting the impact of weaker currencies following the coronavirus outbreak.
India, Middle East & Africa: Sales in the first quarter grew by 12.5%, at constant exchange rates, compared to the corresponding period last year. The Company recorded robust business growth in all major markets throughout the region, alongside increased prices, despite the impact of the missing sales of Jingzhou old site products resulting from the temporary suspension of operations there due to the coronavirus outbreak.
ADAMA delivered solid business growth in India combined with higher pricing, in spite of a countrywide lockdown enforced by the Indian government that commenced towards the end of the quarter. The Company also grew strongly in South Africa and Israel, benefiting from favorable weather conditions, and delivered pleasing results in Turkey from where the Company is also expanding its presence into surrounding countries in the region.
In US dollar terms, sales in the region grew by 8.3% in the quarter, compared to the corresponding period last year, reflecting the impact of softer currencies, which were adversely affected by the coronavirus outbreak, most notably the Turkish Lira and the Indian Rupee.
2017 ADAMA-Sanonda Combination: Value Adjustment Mechanism
Within the context of the 2017 combination between Hubei Sanonda Co. Ltd. (“Sanonda”, as it was then known) and Adama Agricultural Solutions Ltd. (“Solutions”), the Company entered into a Performance Compensation Agreement with CNAC, then the 100% owner of Solutions and the controlling shareholder of Sanonda. Under this agreement, CNAC made a commitment regarding Solutions’ aggregate net profit in 2017, 2018 and 2019. In case of failure to meet the commitment, CNAC is required to compensate the Company either through shares or cash according to a predetermined formula. The aggregate net profit commitment for the 2017-2019 period, as agreed to by CNAC, was an amount of $543.4 million. Despite Solutions’ strong performance during the three-year period, due to exogenous reasons, the calculated net profit of Solutions for this period has now been determined to be approximately $512.7 million, implying a shortfall of approximately $30.7 million. This shortfall was caused entirely by the impact of the Divestment & Transfer of several products that Solutions implemented to facilitate the approval by the EU Commission of the acquisition of Syngenta by ChemChina, which caused an aggregate of $66 million in incremental non-cash amortization charges related to the written-up value of the assets received from Syngenta. Absent these non-cash amortization charges, Solutions would have exceeded the profit commitment by approximately $35 million.
As a result, CNAC will be required to return to the Company 102,432,280 out of the 1,810,883,039 shares it received in the Company in exchange for the transfer of 100% of Solutions to the Company in 2017, and return the relevant portion of the dividends it received in respect of such shares. Following their receipt, these shares will be canceled by the Company. As a result, the total number of shares in issue will be reduced to 2,344,121,302, and CNAC’s aggregate ownership in the Company will reduce from 78.9% to 78.0%.
In addition to the profit commitment, and as required by the relevant regulation, an independent valuation of Solutions’ has been performed in order to assess any potential diminution in the value of Solutions. Following the performance of such valuation, it has been determined that no such diminution has occurred.
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