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ADAMA answers investors’ questions on performance growth and profit margins, which are lower than competitorsqrcode

Sep. 14, 2022

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Sep. 14, 2022

On August 31, 2022, ADAMA organized a virtual investor relations event to brief all its investors. Its attendees included Ignacio Dominguez (Chief Executive Officer of the Company), Shahar Florentz (Chief Financial Officer), Efrat Nagar (Vice President of Finance), Yoav Avidor (Vice President of Innovation R&D and Registration), Guo Zhi, (Secretary of the Board), and Rivka Neufeld (Head of Global Investor Relations).


During the briefing, ADAMA’s operating results for the second quarter and the first half of 2022 were presented, while Dominguez and Florentz answered questions of concerns raised from investors. Here are the excerpts from the question and answer session:


1. This year, the performance growth of many Chinese A-Share listed agrochemical companies, both technical and formulation manufacturers, exceeded ADAMA’s. Have you felt pressure?


A: There are many agrochemical manufacturers in China, but their business models are not as same as ADAMA in terms of globalization and complexity. Chinese domestic agrochemical enterprises are strong in the area of production while ADAMA possesses a wide range of global distribution channels connecting Chinese domestic enterprises with the world market. ADAMA does not feel any pressure, as we are focused on consolidating resources and establishing a stronger and more sustainable ADAMA for the future. Our global business footprint is safe and steady and China is a key part of our network, where Sanonda, Anpon and Huifeng are important to ADAMA’s global portfolio. On the other hand, ADAMA has invested in innovative and differentiated formulation development, to continue the buildup of our differentiated business advantage.


2. Why is ADAMA’s net profit margin lower than its competitors when the industry is booming, as well as compared to formulation or technical companies? What are ADAMA’s competitive advantages over competitors? What is the company’s smile curve in the industry? 


A: Now is our chance. ADAMA has launched a series of strategic initiatives that will be implemented very soon. The company’s product backward integration has an obvious advantage, as it allows for strengthened self-production via the utilization of the resources of the Syngenta Group, while our investment on formulation development enables us to provide global users with outstanding solutions, therefore, increasing the corporate value of the company. Compared with our competitors, ADAMA’s market position is unique, because not every competitor has the resources and projects we are promoting and developing, such as advantages in both production and operation. ADAMA’s global market operation capability is dependable, stable and sustainable, unlike a single regional market operation, which is highly volatile. Our stability and sustainability are a strong backup for the implementation of our strategic initiatives aimed t constantly enhancing the quality of our business operations. 


3. How do you foresee ADAMA’s sales performance and profits for the coming 2 months. How did the recent drought and the Russian-Ukrainian war affect the company? 


A: We have not forecasted for the next quarter, but we can provide a brief. Weather always affects farming and crop protection operations. China and southern Europe experienced dry weather and high temperatures, while some countries have experienced flooding. However, at the same time, the weather in South America has been favorable. Therefore, the company needs to adapt to local conditions and sell different products to adapt to various types of weather and different region. One of ADAMA’s business strengths is its capacity to provide the global market with customized solutions suitable for local conditions, to effectively support farmers and enable them to contribute to the global food security initiative. While demand from one market is low, another market may be oversupplied. For our next quarter performance, we have not seen any signs in any major markets of significant adverse effects to the company’s performance and results.


4. BASF and Bayer, similar international companies, announced production cuts due to the energy crisis. Will ADAMA take this opportunity to compete for market share?


A: ADAMA is investing and expanding production, with new projects being established in China, Israel and Brazil to reinforce Its market position, which are all our opportunities. ADAMA has accumulated adequate stocks in the Latin American market to prepare for future sales. In contrast, it may take five to six months for our European peers to get ready to deliver goods. 


5. What is the likelihood of a merger with Sinochem’s Yangnong Chemical? How do you plan to settle the issue of horizontal competition agreed with Syngenta?


A: It is a privilege that both Yangnong and ADAMA are receiving support from a same shareholder, but the two companies have different types of businesses. Yangnong is a production-oriented enterprise, and its designated task is to partly sell formulations in the Chinese market, while ADAMA has a business operation at a much larger scale than production. Both companies understand the business areas that allow them to benefit from and support each other. Both companies are aware that they must continue their operations independently. Our mother company is not planning a merger of the two. The scopes of business and objectives of the two are different and we are running independently, which is deemed by our mother company as the best way of operating. With regards to the small amount of overlapping businesses between the two companies, we are look carefully at opportunities for cooperation in the market. Subject to compliance with the corporate governance system, ADAMA makes purchases from Yangnong while Yangnong utilizes ADAMA’s business channels.


6. There is still a disparity between ADAMA’s formulation profit margin and previous profit margins, mainly attributable to the higher prices of technicals and intermediates. How does ADAMA view the future price trends of formulations and technicals? 


A:  The prices of technicals on the Chinese market have appeared to fall back, but moderately and not a sharp decline. The company’s management focuses on unit profit per ton for the products we sell and the opportunity for price decreases in technicals to reduce cost, while avoiding impacts on our selling prices that may cause harm to the sales revenue of the company.


7. What are the effects of electric power cuts and drought on ADAMA’s production activities? 


A:  So far, ADAMA’s production base has not been significantly affected, but we are closely watching energy supply and policy trends in China. Demand in the Chinese domestic market is returning to normal and we need to keep an eye of the situation, but we do not think that what happened last year will happen again. In addition, the company’s production and gas supply in Israel have not experienced an issues at all and are cost effective. Other production bases, such as in India and Brazil, are not as crucial as the bases in Israel and China. Even if a further energy restriction policy is effected in China, our ability to cope with the situation is better than last year.


8. Are ADAMA’s factories in Israel expected to be affected by the energy shortage? 


A: The factories in Israel are not affected. Israel’s natural gas supply is sufficient, with complete self-sufficiency at competitive supply prices up to date. ADAMA’s two factories in in Israel rely heavily on natural gas so we are looking at other energy options, such as solar energy.


9. Yangnong Chemical’s formulation business grew rapidly in the first half of the year. Has this impacted ADAMA’s formulation business? How do you collaborate to coordinate your business overlaps? 


A: There are clear differences between Yangnong and ADAMA on terms of our nature of business. ADAMA’s focus is on finished formulation products, which is different from Yangnong’s focus on technicals and formulations. Moreover, even if we are both engaged in formulation operations, the overlap is limited. As far as I know, Yangnong’s formulation performance growth is mainly due to burndown herbicides, which are also part of ADAMA’s formulation products. However, glyphosate and glufosinate are service-oriented products in ADAMA’s product line, which are supplied as a companion only in needed by customers. Therefore, the status and significance of the products from the two companies are hugely different. Yangnong’s business capacity is extraordinary, but we have a different natures of business and different territories of trade. Yangnong is deep rooted in the Chinese market, whie ADAMA is more of a global regional business player.


10. The investment environment in India is quite complicated. How do you invest and operate your business in India? ADAMA has signed a business agreement with Groundwork BioAg, a global bio-agricultural company. How would you hedge your risk?


A: India is similar to China in many ways, but nothing is universal. To be specific, ADAMA’s investment in India is not comparable to our investment in China. We do have a strong business operations capacity in India, where a revenue of more than $300 million is generated from direct sales. However, the investment approach is different from the approach in China. We do not make large investments in backward integration-based facility establishment, instead, we work mostly with local prime manufacturers that are compliant with first-class industry standards. Some of these manufacturers were previously engaged in manufacturing pharmaceuticals, but later expanded their businesses and become our strategic partners. ADAMA’s investment in India is primarily focused on expanding its capacity for intermediates, which is different from our investment direction in China. On the one hand, we need to consider the issues of HSE standards, economic indicators and product quality standards. On the other hand, we need to ensure the supply of technicals, which are the key to a successful business. Furthermore, we have invested in formulation development in India, which is a similar practice in China, Israel and Brazil, to develop formulations that fall in line with the needs of the local market.


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