ADAMA reports results of fourth quarter and full year of 2021

ADAMA Ltd. (the “Company”) (SZSE 000553), has reported its financial results for the fourth quarter and full year period ended December 31, 2021.

Commenting on the results, Ignacio Dominguez, President and CEO of ADAMA, said, “2021 was an outstanding year of exceptional growth. Nevertheless, it was a very difficult year with many challenges, including massive cost increases of raw materials and intermediates, as well as significantly higher shipping and logistics costs and container shortages. These factors were in addition to the ongoing and debilitating effects of the COVID-19 pandemic, including its intensification in December with the onset of the Omicron wave. It is in these times of challenge and uncertainty that the true strength of our business shines through, with not only strong sales growth, but also as we started to see in the fourth quarter, significant price increases to compensate for the higher cost environment. As we face yet another year of uncertainty, this time emanating from massive geopolitical volatility, we remain focused on supporting our people and our customers as they navigate through this difficult time. Indeed, I am deeply humbled by the great spirit and courage shown by our colleagues in Ukraine, as well as our other leaders across the region, who are supporting the team and their families in every way they can."

Table 1. Financial Performance Summary

The general crop protection market environment

During the fourth quarter of 2021, crop prices of most of the major commodity crops remained elevated, and even further increased, supporting strong crop protection demand in most regions. This demand was also further supported by higher planted area in South America as planting progressed there in the quarter.

On the whole, farmers continue to benefit from the high global crop prices. However, this benefit is somewhat dampened by broad inflationary pressures they are experiencing across most of their input costs, including seeds, fertilizers, crop protection, fuel and machinery.

During the quarter, availability of intermediates and active ingredients sourced from China improved somewhat as the “Dual Control” energy saving measures in the country were relaxed, and agrochemical production came back online. However, China agrochemical prices remained high and COVID-19 restrictions and lockdowns continued to negatively impact agrochemical production and logistics.

Global energy prices remained high during the fourth quarter of 2021. In addition, global freight and logistics costs remained significantly elevated during the quarter, and even further increased in December as COVID-19 continued to disrupt port activity, coupled with high stay-at-home demand brought on by the Omicron wave. Similarly, in-land logistics remained challenged as pandemic-related restrictions continued 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, the results of which were apparent in Q4, and are continuing to be seen into the beginning of this year.

As the world continues to watch in horror the unfolding tragic and traumatic events in Ukraine, the Company is doing everything possible to ensure the safety and security of its people, and stands strongly in support of its employees, partners and customers. Although the Company is continuing to support farmers in Ukraine, its business in the country is being impacted to a certain extent. At this stage, the Company anticipates that its overall results for the first quarter of 2022 will not be materially impacted, due to promising performance in other geographies. The Company is continuously reviewing the situation on the ground and assessing the potential risks involved, and will provide a further update in due course. At times like these, ADAMA is keenly aware of the important role it plays in helping farmers to continue to grow their crops, in order to ensure global food security.

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, progressively reducing the need for incurring additional procurement costs, and gradually reducing idleness charges as production and utilization levels steadily increase.

As a result of the institution during 2021 of China's "Dual Control" energy restrictions as well as certain regulatory inspections conducted at some industrial parks, 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. As the restrictions were loosened in the following weeks, operations at these sites resumed, albeit initially at a more limited capacity, reaching normal operations by December. This temporary suspension caused an increase in idleness costs during the quarter.

The energy restrictions and resulting widespread production suspensions contributed to a significant increase in procurement costs of raw materials and intermediates, on top of the already high costs seen in prior months in the face of strong underlying demand and relatively constrained supply. Although these industry-wide supply shortages have started to alleviate somewhat in recent weeks, the Company is expecting the high procurement costs seen in H2 2021 to continue to pose challenges for its margins in the coming months as these inventories progress through the Company's inventory cycle. 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, the Company is benefiting to some extent from the generally higher pricing environment in the sales of its raw materials and intermediates, where it is seeing robust demand, driving the strong performance in China in the fourth quarter.

Financial Highlights

Revenues in the fourth quarter grew by 17% (+13% in RMB terms) to $1,337 million, driven by a significant 14% increase in prices, a trend which started in the third quarter and accelerated into the fourth quarter. The markedly higher prices were complemented by continued volume growth (5%), including the contribution of newly acquired companies, and only slightly moderated by the adverse impact of exchange rate movements.

In the quarter, ADAMA delivered significant growth in Latin America, both in Brazil and across much of the rest of the region. In Brazil, the Company benefited from the good soybean planting season, as well as the strong farmer demand which supported higher prices, factors which are also supporting growth throughout South and Central America. The Company continues to grow strongly in Asia Pacific, led by a significant increase in sales in the quarter in China, with sales of its raw materials and intermediates in the country benefiting from higher prices resulting from strong demand in a generally supply-constrained environment. In North America, the Company saw a pleasing performance in the fourth quarter, enjoying robust pre-season demand in both US and Canadian agricultural markets as farmers order early in light of continued industry-wide concerns around availability later in the season. Sales in the India, Middle-East & Africa region grew in the quarter, led by a strong performance in India driven by new product launches in the country, as well as South Africa, where the Company continues to benefit from favorable cropping conditions and new product launches. The fourth quarter saw sales in Europe only slightly higher than the same period last year, as growth across most of the region was largely offset by supply challenges, felt mainly in France and Germany.

The continued robust growth in the quarter brought full year sales to a record-high of $4,813 million, an increase of 17% (+9% in RMB terms), driven by 12% volume growth alongside 4% higher prices, and further aided somewhat by stronger currencies.

Gross Profit reported in the fourth quarter increased 15% to $379 million (gross margin of 28.4%) compared to $330 million (gross margin of 28.9%) in the same quarter last year, and was up 12% to $1,311 million (gross margin of 27.2%) in the full year period compared to $1,173 million (gross margin of 28.4%) last year.

The Company recorded certain extraordinary charges within its reported cost of goods sold, totaling approximately $33 million in the fourth quarter (Q4 2020: $5 million) and $101 million in the full year period (FY 2020: $50 million). These charges were largely related to its continuing Relocation & Upgrade program, and include mainly (i) excess procurement costs, both in quantity and cost terms, incurred as the Company continued to fulfill demand for its products in order to protect its market position through replacement sourcing at significantly higher costs from third-party suppliers, and (ii) elevated idleness charges largely related to suspensions at the facilities being relocated and upgraded, as well as to the temporary suspension of the Jingzhou site in Q1 2020 at the outbreak of COVID-19 in Hubei Province. For further details on these extraordinary charges, please see the appendix to this release.

Excluding the impact of the abovementioned extraordinary items, adjusted gross profit in the fourth quarter increased 23% to $412 million (30.8% of sales) compared to $335 million (gross margin of 29.4%) in the same quarter last year, and was up 15% to $1,412 million (gross margin of 29.3%) in the full year period compared to $1,223 million (gross margin of 29.6%) last year.

In the quarter, the significantly higher gross profit and pleasing improvement in the adjusted gross margin were largely driven by the markedly higher prices, complemented by continued volume growth, which more than offset higher logistics, procurement and production costs as well as the effect of the strong RMB and ILS, the Company's main production currencies.

In the full year period, the increased gross profit was driven by the higher prices, a trend which started in the third quarter and accelerated into the fourth quarter, alongside the strong volume increases seen in each of the four quarters of the year, as well as a net positive impact from portfolio mix, and generally favorable currency movements. These combined to more than offset higher logistics, procurement and production costs, which nevertheless resulted in a somewhat lower adjusted gross margin over the full year period.

Operating expenses reported in the fourth quarter were $270 million (20.2% of sales) and $1,020 million (21.2% of sales) in the full year period, compared to $267 million (23.4% of sales) and $923 million (22.3% of sales) in the corresponding periods last year, respectively.

The Company recorded certain non-operational, mostly non-cash, charges within its reported operating expenses, totaling approximately $1 million in the fourth quarter (Q4 2020: $39 million) and $33 million in the full year period (FY 2020: $93 million). These charges include mainly (i) $4 million in Q4 2021 (Q4 2020: $8 million) and $23 million in FY 2021 (FY 2020: $31 million) in non-cash amortization charges in respect of Transfer assets received from Syngenta related to the 2017 ChemChina-Syngenta acquisition, (ii) $6 million benefit in Q4 2021 (Q4 2020: $5 million) and $4 million benefit in FY 2021 (FY 2020: benefit of $12 million) in non-cash impacts related to incentive plans, and (iii) $2 million in Q4 2021 (Q4 2020: $3 million) and $13 million in FY 2021 (FY 2020: $11 million) in charges related mainly to the non-cash amortization of intangible assets created as part of the Purchase Price Allocation (PPA) on acquisitions, with no impact on the ongoing performance of the companies acquired, as well as other M&A-related costs. The higher aggregate amount of non-operational charges in Q4 and FY 2020 then also included $10 million and $45 million, respectively, in non-cash amortization charges related to the legacy PPA of the 2011 acquisition of Adama Agricultural Solutions, which have now largely finished, and $1 million and $11 million, respectively, in early retirement expenses. For further details on these non-operational charges, please see the appendix to this release.

Excluding the impact of the abovementioned non-operational charges, adjusted operating expenses in the quarter and full year period were $269 million (20.1% of sales) and $986 million (20.5% of sales), compared to $228 million (20.0% of sales) and $829 million (20.1% of sales) in the corresponding periods last year, respectively.

The higher operating expenses in the quarter and the full year period largely reflect the strong growth of the business and the additional operating expenses of the newly acquired companies, together with significantly higher global logistics and shipping costs. In addition, in the full year, alongside the many benefits the Company enjoys from the collaboration with other companies in the Syngenta Group, most notably in commercial cross-sales as well as in the areas of procurement and operations, ADAMA recorded certain related expenses. The Company also saw the impact on its operating expenses of generally stronger global currencies against the US dollar, as well that of the generally inflationary environment being seen globally in recent quarters.

Operating income reported in the fourth quarter increased 73% to $110 million (8.2% of sales) compared to $63 million (5.5% of sales) in the same quarter last year, and was up 16% to $291 million (6.0% of sales) in the full year period compared to $251 million (6.1% of sales) last year.

Excluding the impact of the abovementioned non-operational, mostly non-cash items, adjusted operating income in the fourth quarter increased 33% to $143 million (10.7% of sales) compared to $107 million (9.4% of sales) in the same quarter last year, and was up 8% to $425 million (8.8% of sales) in the full year period compared to $394 million (9.6% of sales) last year.

EBITDA reported in the fourth quarter increased 22% to $188 million (14.1% of sales) compared to $154 million (13.5% of sales) in the same quarter last year, and reached $593 million (12.3% of sales) in the full year period, in line with the $592 million (14.4% of sales) recorded last year.

Excluding the impact of the abovementioned non-operational, mostly non-cash items, adjusted EBITDA in the fourth quarter increased 23% to $207 million (15.5% of sales) compared to $168 million (14.7% of sales) in the same quarter last year, and was up 7% to $671 million (13.9% of sales) in the full year period compared to $628 million (15.2% of sales) last year.

Portfolio Development Update

In the fourth quarter, ADAMA continued to advance the development of its differentiated product portfolio, launching multiple new products in markets across the globe. Of special note was the launch in Europe of TIMELINE^® FX, a unique three-way spring foliar herbicide mixture providing cross-spectrum protection for cereals against broadleaf and grass weeds. The Company continues to strengthen its presence in the biologic space with the launch in Europe of VIGNEXEL^®, a plant extract biostimulant for the treatment of abiotic stress in vines. In the Consumer & Professional space, ADAMA launched SUPRADOTM, a product developed uniquely by the Company to address Annual Bluegrass Weevil, a highly devastating pest affecting golf courses across the northeastern U.S., as well as Neem Max cold-pressed neem oil, an innovative natural insecticide in the U.S. consumer market.

Table 2. Regional Sales Performance

CER: Constant Exchange Rates

Europe: Sales were up by 3.4% in the fourth quarter and by 3.0% in the full year, in CER terms, compared with the corresponding periods last year.

In the fourth quarter, the Company saw moderate growth in Europe, achieved despite the impact of the COVID-19 Omicron wave hampering regular commercial activities, with growth across most of the region being partially offset by supply challenges, mainly felt in France and Germany.

In US dollar terms, sales were higher by 0.4% in the quarter and by 3.5% in the full year, compared to the corresponding periods last year, reflecting the net impact of the weaker currencies in the quarter, contrasted with the somewhat stronger currencies over the full year.

North America: Sales were up by 11.1% in the fourth quarter and by 17.4% in the full year, in CER terms, compared with the corresponding periods last year.

The pleasing performance in the fourth quarter reflects the robust pre-season demand seen in both US and Canadian agricultural markets as farmers order early in light of continued industry-wide concerns around availability later in the season.

In US dollar terms, sales in the region grew by 11.7% in the quarter and by 18.2% in the full year, compared to the corresponding periods last year, reflecting the strengthening of the Canadian Dollar.

Latin America: Sales grew by 25.8% in the fourth quarter and by 19.3% in the full year, in CER terms, compared to the corresponding periods last year.

Strong growth was seen in Brazil and across much of the rest of the region. In Brazil, the Company benefited from the good soybean planting season, as well as the strong farmer demand which supported higher prices. The Company commenced local production and commercialization in Brazil of ARMERO™, its new dual-mode fungicide containing the active ingredients Prothioconazole and Mancozeb, benefiting from its new in-house production of Prothioconazole, a leading broad-spectrum systemic fungicide. The Company also delivered pleasing growth in Paraguay following an acquisition in the country in the fourth quarter of 2020, as well as in Central America and many other countries in the wider region.

In US dollar terms, sales in the region grew by 21.9% in the quarter, and by 17.3% in the full year, compared to the corresponding periods last year, reflecting the generally weaker average currency levels that prevailed over the periods, in particular the BRL.

Asia-Pacific: Sales grew by 36.4% in the quarter and by 28.5% in the full year, in CER terms, compared to the corresponding periods last year.

The Company continues to grow strongly in Asia Pacific, led by a significant increase in sales in the quarter in China. In China, the Company's sales of raw materials and intermediates, where it continues to see strong demand, benefited from the higher pricing environment resulting from general supply constraints. In addition, ADAMA continues to grow sales of its branded, formulated portfolio, and was also bolstered by the acquisition of Huifeng during the year.

In the wider APAC region, the Company saw moderate growth in the quarter, with increases in the Pacific region being balanced by somewhat softer performances in some east Asian markets, where commercial activities continued to be hampered by COVID-related restrictions and supply constraints.

In US dollar terms, sales in the region grew by 38.6% in the fourth quarter and by 36.8% in the full 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 20.7% in the quarter and by 12.7% in the full year, in CER terms, compared to the corresponding periods last year.

Growth in the quarter was led by a strong performance in India, driven by new product launches in the country, including BARROZ^®, a leading tool for the control of stem borer in rice, as well as South Africa, where the Company continues to benefit from favorable cropping conditions and new product launches.

In US dollar terms, sales in the region grew by 20.4% in the quarter and by 13.7% in the full year, compared to the corresponding periods last year, reflecting the impact of the somewhat weaker currencies in the quarter contrasted with the strengthening of regional currencies over the full year period, most notably the Israeli Shekel.

Table 3. Revenues by operating segment

Fourth quarter sales by segment

Fourth quarter sales by product category

Note: the sales split by product category is provided for convenience purposes only and is not representative of the way the Company is managed or in which it makes its operational decisions.

Full year sales by segment

Full year sales by product category

Note: the sales split by product category is provided for convenience purposes only and is not representative of the way the Company is managed or in which it makes its operational decisions.

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