ADAMA reports results of third quarter and first nine months of 2021
−− Strong Q3 and 9M sales growth driven by continued robust volume increase; profits impacted by continued margin pressure
Oct. 28, 2021
On October 27, ADAMA Ltd. (the “Company”) (SZSE 000553) reported its financial results for the third quarter and nine-month period ended September 30, 2021.
Ignacio Dominguez, President and CEO of ADAMA, said, “The third quarter was a challenging one for the global crop protection industry, including our company. While our sales continue to grow strongly, supported by continued high crop prices and robust farmer demand for our products, we are facing significant challenges on the cost and supply side. Global logistics and supply lines remain severely constrained, exacerbating the already stretched supply situation in many key products, further driving up raw material and intermediate procurement costs. These market imbalances continue to weigh on our profit margins, as the ever-competitive global market is proving slow to pass on the increased costs through price rises. Despite the challenges, our company is continuing to grow, raise prices, improve our portfolio and the quality of our business, and keep a tight rein on expenses, as we navigate through this volatile and uncertain time."
The general crop protection market environment
During the third quarter of 2021, crop prices of most of the major commodity crops remained elevated, supporting strong crop protection demand in most regions. Demand was further aided by positive weather conditions in various regions, including Australia, Europe and most of China. Dry conditions in the US, Brazil and Canada restrained production of some crops and posed challenges for farmers in those regions.
Farmer incomes are generally expected to continue to improve as a result of high crop prices. However, farmers are experiencing broad inflationary pressures across most of their inputs, including seeds, fertilizers, crop protection, fuel and machinery.
During the quarter, availability of intermediates and active ingredients sourced from China was more constrained, contributing further to the already high procurement prices amid strong global demand. Beginning in mid-September, production of active ingredients and intermediates in China was further disrupted as a result of production suspensions due to power rationing for industrial customers due to a power shortage in the country, as well as the "Dual Control" policy measures to ensure the country’s energy reduction targets are met. Energy prices have been increasing outside of China as well, with prices of natural gas, coal and oil all rising considerably.
Global freight and logistics costs remained significantly elevated during the third quarter of 2021, as COVID-19 continues to disrupt port activity, resulting in container shortages, while demand for container shipping remains high. Similarly, in-land logistics remain challenged as pandemic-related restrictions continue to create frictions in domestic supply lines. Taken together, these constraints have impacted both availability of shipping and transportation resources, as well as significantly increased their costs, a dynamic widely observed across all international trade-related industries.
The Company continues to actively manage its procurement and supply chain activities in order to mitigate these higher procurement and logistics costs. It also endeavors to adjust its pricing wherever market conditions allow, to compensate for these increased costs. Although intense competition in certain key markets continues to restrain the Company's ability to do so in an effective and timely manner, the Company is starting to see positive price movements in certain regions, most notably in China, as well as in North America and Latin America.
China Operations Update
The Company's manufacturing site in Jingzhou, Hubei (ADAMA Sanonda) continues on its path of gradually ramping up production following the completion of the Relocation & Upgrade program at the site. This return to production at Sanonda will progressively reduce the need for incurring additional procurement costs which the Company had endured while the plant was previously suspended, and is expected to gradually reduce idleness charges as production and utilization levels steadily rise over the coming months.
As a result of the recent institution of China's "Dual Control" energy restrictions, the Company's manufacturing facilities in Huai'An (ADAMA Anpon) and in Dafeng (ADAMA Huifeng), both in Jiangsu province, were suspended for a number of weeks in September and October 2021 in advance of the Chinese Golden Week festival. As the restrictions have started to be loosened in recent weeks, operations at these sites have since resumed, albeit at a more limited capacity. This temporary suspension caused an increase in idleness costs during the quarter, and is expected to contribute to further idleness charges in the coming quarters, until the power restrictions are lifted and production is able to resume fully.
The energy restrictions and resulting widespread production suspensions have contributed to a significant increase in procurement costs of raw materials and intermediates, on top of the already high costs seen in recent months in the face of strong underlying demand and relatively constrained supply. These costs are expected to remain elevated, and will continue to impact the Company's profitability in the coming months. The Company endeavors, wherever possible and supported by market conditions, to increase prices in order to mitigate the impact of the higher costs. In China, although industry-wide supply shortages are causing increased procurement costs and posing challenges for the Company's margins, the Company is also benefiting to some extent from the generally higher pricing environment in the sales of its raw materials and intermediates, where it is seeing strong demand.
Revenues in the third quarter grew by 17% (+10% in RMB terms) to $1,147 million, driven by a combination of continued robust 14% volume growth, including the contribution of newly acquired companies, as well as moderately higher prices and favorable exchange rate movements.
In the quarter, ADAMA delivered significant growth in Europe, with strong demand driven by high crop prices being aided by supportive weather conditions in certain areas. The Company continues to grow strongly in China, where sales of its branded, formulated portfolio were supported by new product launches and further bolstered by the contribution of newly acquired companies. The Company also benefited from strong demand and higher prices for the sales of its raw materials and intermediates in the country. ADAMA delivered a strong performance in North America, driven by a combination of significant volume growth and higher prices, as well as in Latin America, led by Brazil, which saw robust demand and higher prices.
The accelerated growth in the quarter brought nine-month sales to a record-high of $3,476 million, an increase of 16% (+8% in RMB terms).
Gross Profit reported in the third quarter was up 8% to $287 million (gross margin of 25.0%), and up 10% to $932 million (gross margin of 26.8%) in the nine-month period, compared to $266 million (gross margin of 27.2%) and $844 million (gross margin of 28.2%) in the corresponding periods last year, respectively.
Operating expenses reported in the third quarter were $261 million (22.7% of sales) and $750 million (21.6% of sales) in the nine-month period, compared to $217 million (22.2% of sales) and $656 million (22.0% of sales) in the corresponding periods last year, respectively.
Operating income reported in the third quarter was $26 million (2.3% of sales), and $182 million (5.2% of sales) in the nine-month period, compared to $49 million (5.0% of sales) and $188 million (6.3% of sales) in the corresponding periods last year, respectively.
EBITDA reported in the third quarter was $103 million (9.0% of sales) and $405 million (11.6% of sales) in the nine-month period, compared to $137 million (14.0% of sales) and $438 million (14.7% of sales) recorded in the corresponding periods last year, respectively.
Portfolio Development Update
In the third quarter, ADAMA continued to advance the development of its differentiated product portfolio. The Company obtained multiple new product registrations in the quarter, including ARMERO®, ADAMA's unique, self-produced prothioconazole-based mixture for the control of Asian soybean rust in Brazil, as well as GALIL®, a mixture insecticide in Cambodia and SKOPE®, a mixture insecticide in Korea. In addition, the Company launched many new products in the quarter, including SUPRADO®, an insecticide with a unique mode of action targeting the US golf market, EXCEL AMINO PLUS®, a biostimulant for the reduction of stress in cereals in France, BARROZ®, a unique granular mixture formulation for rice crops which is enjoying a strong launch in India, and XUAN CHU®, a mixture herbicide for wheat in China.
Europe: Sales were up by 20.3% in the third quarter and by 2.9% in the first nine months of the year, in CER terms, compared with the corresponding periods last year.
In the third quarter, the Company saw significant growth across most of Europe, with strong demand driven by continued high crop prices. Noteworthy performances were delivered in most markets of Central, Eastern and Northern Europe, where supportive weather later in the quarter ensured a positive start to the autumn season, especially in oilseed rape, winter cereals and sunflower.
In US dollar terms, sales were higher by 21.8% in the quarter and by 4.5% in the first nine months, compared to the corresponding periods last year, reflecting the net impact of the strengthening of regional currencies.
North America: Sales were up by 26.0% in the third quarter and by 20.6% in the first nine months of the year, in CER terms, compared with the corresponding periods last year.
The especially strong performance in the third quarter was driven by a combination of significant volume growth and higher prices, as the Company sees robust demand in both the Agriculture as well as Consumer & Professional arms. This pleasing result was achieved despite supply concerns in certain products. In Canada, the Company delivered a pleasing performance, as higher insecticide applications compensated for reduced fungicide usage as a result of drought in the prairies.
In US dollar terms, sales were higher by 26.3% in the quarter and by 21.4% in the first nine months, compared to the corresponding periods last year, reflecting the strengthening of the Canadian Dollar.
Latin America: Sales grew by 9.2% in the third quarter and by 15.8% in the first nine months of the year, in CER terms, compared to the corresponding periods last year.
The pleasing performance in the quarter was led by strong growth in Brazil, driven by robust demand and higher prices, and benefiting from strong performance of newly launched products, as the country starts to reopen after the recent improvement in the COVID situation in the country, allowing resumption of normal commercial activities.
In US dollar terms, sales in the region grew by 11.1% in the quarter, reflecting a strengthening in regional currencies during the quarter compared to the parallel quarter in 2020. In the nine-month period, sales in the region grew by 14.8% in US dollar terms, compared to the corresponding period last year, reflecting the somewhat weaker average currency levels that prevailed during the first quarter of 2021 compared to the parallel quarter in 2020, which saw currency weakness against the USD only late in the quarter at the outbreak of COVID-19.
Asia-Pacific: Sales grew by 26.7% in the quarter and by 26.0% in the first nine months of the year, in CER terms, compared to the corresponding periods last year.
The Company is growing strongly in Asia Pacific, led by China where the Company continues to grow sales of its branded, formulated portfolio, supported by new product launches and bolstered by the acquisition of Huifeng’s domestic commercial arm at the end of 2020. In China, although industry-wide supply shortages are causing increased procurement costs and posing challenges for the Company's margins, the Company is also benefiting to some extent from the generally higher pricing environment in the sales of its raw materials and intermediates where it is seeing strong demand.
In the rest of APAC, the Company delivered a noteworthy performance in the Pacific region, enjoying positive seasonal conditions and healthy demand as farmers benefit from the high crop prices. This more than offset somewhat softer performance in South East Asian countries, where ongoing COVID restrictions continued to impact commercial activities, and were further exacerbated by poor seasonal conditions in many countries, including floods in parts of Thailand.
In US dollar terms, sales in the region grew by 31.6% in the third quarter and by 36.3% in the first nine months of the year, compared to the corresponding periods last year, reflecting the impact of the strengthening of regional currencies, most notably the Australian Dollar and Chinese Renminbi.
India, Middle East & Africa: Sales grew by 2.9% in the quarter and by 10.9% in the first nine months of the year, in CER terms, compared to the corresponding periods last year.
The moderate growth in the region in the quarter was led by a noteworthy performance in South Africa, where the Company is benefiting from favorable cropping conditions and new product launches. However, growth in India is slowing as farmers missed some applications due to volatile weather conditions following a previously strong start to the monsoon season.
In US dollar terms, sales in the region grew by 4.6% in the quarter and by 12.2% in the first nine months of the year, compared to the corresponding periods last year, reflecting the impact of the strengthening of regional currencies compared to the USD, most notably the Israeli Shekel.
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