ADAMA Reports First Quarter 2023 Results

First Quarter 2023 Highlights:

• Sales down 11% to $1,259 million (-4% in RMB terms; -7% in CER¹ terms), 1% higher prices and 8% decrease in volume
  

• Adjusted EBITDA amounted to $165 million vs. $201 million in Q1 2022
  

• Adjusted net income of $22 million; Reported net income of $12 million
  

ADAMA Ltd. (the ″Company″) (SZSE 000553), today reported its financial results for the first quarter ended March 31, 2023.

Ignacio Dominguez, President and CEO of ADAMA, said, "In 2022, supply challenges and rising crop protection prices led to inventory buildup throughout the supply chain. While market demand is being supplied by the stockpiles of product in the channel, the high inventory levels and declining raw material pricing are also supporting a "wait and see" approach. We believe that as the year progresses and the agricultural season in Latin America and India begins, this inventory will begin to deplete and the demand ADAMA sees for its products will be invigorated.

"On a personal note, as recently announced, I requested to retire from ADAMA after 22 years with the Company. Steve Hawkins, who currently serves as Senior Vice President of the Americas, will be replacing me as President & CEO. I would like to assure all that I will remain at the disposal of the Company in order to ensure a seamless transition and I am confident that under Steve's leadership ADAMA will reach new heights."

Notes:
•″As Reported″ denotes the Company’s financial statements according to the Accounting Standards for Business Enterprises and the implementation guidance, interpretations and other relevant provisions issued or revised subsequently by the Chinese Ministry of Finance (the ″MoF) (collectively referred to as ″ASBE″). Note that in the reported financial statements, according to the ASBE guidelines [IAS 37], certain items (specifically certain transportation costs and certain idleness charges) are classified under COGS. Please see the appendix to this release for further information.
•Relevant income statement items contained in this release are also presented on an ″Adjusted″ basis, which exclude items that are of a transitory or non-cash/non-operational nature that do not impact the ongoing performance of the business, and reflect the way the Company’s management and the Board of Directors view the performance of the Company internally. The Company believes that excluding the effects of these items from its operating results allows management and investors to effectively compare the true underlying financial performance of its business from period to period and against its global peers. A detailed summary of these adjustments appears in the appendix below.
•The number of shares used to calculate both basic and diluted earnings per share in both Q1 2023 and 2022 is 2,329.8 million shares.
•In this table and all tables in this release numbers may not sum due to rounding.

The general crop protection market environment²

In Q1 2023 commodity crop prices continued to decline as the result of a slowing global economy and better than expected production in some regions. However, crop prices remain elevated above the 10-yr average as crop inventories remain low, supporting positive grower margins.

While Q1 2022 was characterized by early purchases as a result of concerns about product availability and supply shortages, in Q1 2023 the channel and farmers were much more cautious regarding input purchases. An improved supply and logistics situation, relatively high channel inventories as well as the deflationary environment of AI prices in China have led customers to adopt a ″wait-and-see″³ approach regarding some crop protection purchases.

 
Portfolio Development Update 

Formulation Mastery Update:

• In Q1 2023, the Company continued with the roll out of its formulation mastery products with 16 registrations, including of Prothioconazole mixtures based on ADAMA's Asorbital® formulation mastery technology platform, for optimized penetration and enhanced long-lasting protection.
  

• Patent granted in Europe for a formulation mastery technology used to stabilize AI's that otherwise cannot be formulated together. Expected to be included in ADAMA products in the coming years.
  

• Patent granted in additional geographies during the first quarter for Sesgama™ a proprietary formulation technology platform for high-load and other challenging formulations, enabling less use of co-formulants, transport and packaging materials per acre treated with a resulting improved product sustainability profile. First products expected to be launched in the coming year. 

Product Launches & Registrations: 

During the first quarter of 2023 ADAMA continued to register and launch multiple new products in markets across the globe, adding on to its differentiated product portfolio. Differentiated products may also be based on recently off-patented active ingredients (AI's) that have been classified as high commercial potential - "Core Leap" AI's and include a variety of product characteristics such as (i) unique proprietary formulations, (ii) products with more than one mode of action, and (iii) biologicals. Among these were:

Launch of differentiated products during the first quarter of 2023 in select countries including:

• Launch in India of two insecticides Cosayr^® and Lapidos^®, based on "Core Leap" AI, Chlorantraniliprole (CTPR), focusing on rice and sugar cane targeting stem borer and grubs. Executing on its "Core Leap" strategy, these products are based on backward integration (in-house) production of ADAMA.  

Registration of differentiated products during first quarter of 2023 in select countries including:

• Registration in Australia for "Core Leap" herbicide AI, Saflufenacil.
  

• Registration in Australia for Sierra^®, targeting arable land, pulses, orchards and non-crop uses, based on "Core Leap" herbicide AI Saflufenacil and ADAMA's formulation mastery technology for improved consumer traits including ease of use and a better efficacy on certain weed species. The registration of Sierra^® in Australia is the first global approval of an ADAMA Saflufenacil based solution.

Financial Highlights

Revenues in the first quarter declined by approximately 11% (-4% in RMB terms; -7% in CER terms) to $1,259 million, reflecting an increase of 1% in prices and a decrease of 8% in volumes mainly due to high channel inventory in the market and declining raw material prices supporting a "wait and see" approach across the board that impacted volumes and prices in the first quarter in 2023.

CER: Constant Exchange Rates

* 2022 denote proforma sales. As of 2023, the India, Middle East & Africa (IMA) region has been reorganized such that the countries formerly included in this region are now included in the Europe region (renamed EAME) or in the Asia Pacific region.

Europe, Africa & Middle East (EAME): The sales in EAME increased in the first quarter in constant exchange rates, most notably in UK and Germany, despite delayed rainfall, high channel inventories and continued drought in Southern Europe. 

North America: The Consumer & Professional Solutions sales decreased in the first quarter, impacted by weather conditions as well inflationary pressure on consumer demand and a slowdown in the professional market mostly due high levels of inventory in the channel and expectation for price decreases. 

Sales in the US Ag market decreased in the first quarter as the market is in a state of "wait and see" due to high channel inventory and in anticipation of the spring season. 

Sales in Canada increased in the first quarter as the Company expanded its product portfolio during 2022 and while the Company's products' pricing held. This was achieved despite cold weather delaying spring product movement, creating a backing up of inventory in the channel.

 
Latin America: Sales in Brazil increased slightly in the first quarter, reflecting a "wait and see" approach in the market in light of declining selling prices and competition to sell the high, expensive inventory accumulated throughout the channel.

 
In other LATAM countries slightly lower sales were achieved due to the negative impact of the weather in Argentina and Ecuador as well as lower sales in Peru. 

Asia-Pacific (APAC): During the first quarter the Company's sales decreased in the Asia Pacific region following a decline in the Company's sales in China of raw material, intermediates and fine chemicals due to softening of demand, strong competition and an overall decline in market prices. 

The Company's sales of its branded portfolio in China increased in local currency following strong sales of differentiated products and despite the decrease in market selling prices and high channel inventory.  

Sales in Pacific region in the first quarter were negatively impacted as the positive La Niña effect begins to pass, while declining prices of AI from China and India encourage a "wait and see" approach. In India, the sales were impacted by exchange rates and by reduced market demand following high Q4 2022 market sales. In the rest of Asia, Thailand and South Korea presented strong performance in the first quarter.

Gross Profit reported in the first quarter reached $310 million (gross margin of 24.6%) compared to $368 million (gross margin of 25.9%) in the same quarter last year.

Adjustments to reported results: The adjusted gross profit includes reclassification of all inventory impairment, taxes and surcharge and excludes certain transportation costs (classified under operating expenses). 

Excluding the impact of the abovementioned extraordinary items, adjusted gross profit in the first quarter reached $340 million (gross margin of 27.0%) compared to $414 million (gross margin of 29.2%) in the same quarter last year.

The decline in gross profit in the first quarter was due to the decline in sales, as described above, exchange rates and high-cost inventory. These impacts were slightly moderated by the improvement in the Company's sales mix of higher margin products. 

Operating expenses reported in the first quarter were $218 million (17.3% of sales) compared to $243 million (17.1% of sales) in the corresponding period last year. 

Adjustments to reported results: please refer to the explanation regarding adjustments to the gross profit in respect to certain transportation costs, taxes and surcharges and inventory impairment.

Additionally, the Company recorded certain non-operational charges within its reported operating expenses amounting to $10 million in Q1 2023 in comparison to $6 million in Q1 2022. These charges include mainly (i) non-cash amortization charges in respect of Transfer Assets received from Syngenta related to the 2017 ChemChina-Syngenta acquisition, (ii) charges related 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, and (iii) incentive plans - share-based compensation. 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 first quarter of 2023 were $238 million (18.9% of sales), compared to $281 million (19.8% of sales) in the corresponding period last year. 

The operating expenses were lower in the first quarter of 2023 mainly due to the Company recording a doubtful debt provision for trade receivables in Ukraine in the first quarter of 2022. Additionally, in the first quarter of 2023 these expenses decreased, among others, due to lower transportation and logistics costs and the positive impact of exchange rates. 

Operating income reported in the first quarter amounted to $92 million (7.3% of sales) compared to $124 million (8.8% of sales) in the same quarter last year.

Excluding the impact of the abovementioned non-operational items, adjusted operating income in the first quarter amounted to $102 million (8.1% of sales) compared to $133 million (9.4% of sales) in the same quarter last year.

EBITDA reported in the first quarter amounted to $166 million (13.2% of sales) compared to $203 million (14.3% of sales) in the same quarter last year.

Excluding the impact of the abovementioned non-operational items, adjusted EBITDA in the first quarter amounted to $165 million (13.1% of sales) compared to $201 million (14.2% of sales) in the same quarter last year.

Adjusted Financial expenses amounted to $81 million in the first quarter, compared to $53 million in the corresponding period last year. The higher financial expenses were mainly driven by (i) higher bank interest expenses due an increase in short-term loans as well as the sharp increase in interest rates, (ii) higher hedging costs on exchange rates mainly due to volatility in the ILS/Dollar exchange rate and (iii) the net effect of the high Israeli CPI on the ILS-denominated, CPI-linked bonds.

Adjusted taxes on income in the first quarter amounted to an income of $1 million, compared to tax expenses of $5 million in the corresponding period last year. The tax income in the first quarter of 2023 was mainly due to the non-cash impact of the stronger BRL on the value of non-monetary tax assets, the method of calculation of tax assets related to unrealized profits and low profit before tax.

The low effective tax rate in first quarter of 2022 was mainly due to the generation of profits by subsidiaries whose tax rates are lower relative to the Company’s aggregate effective tax rate, as well as to the method of calculation of tax assets related to unrealized profits and a tax income from the strengthening of the BRL.

Net income attributable to the shareholders of the Company in the first quarter reached $12 million (1.0% of the sales), compared to $67 million (4.7% of sales) in the corresponding period last year. 

Excluding the impact of the abovementioned extraordinary and non-operational charges, adjusted net income in the first quarter was $22 million (1.7% of the sales), compared to $75 million (5.3% of sales) in the corresponding period last year. 

Trade working capital as of March 31, 2023, was $3,148 million compared to $2,695 million at the same point last year. The increase in working capital was due to an increase in the value and levels of inventory procured to support the sales in light of supply shortages, logistic challenges and inventory costs increases seen in 2022. In the first quarter the procurement of inventory continued to decline in comparison to the fourth quarter of 2022, also resulting in lower trade payables. Trade receivables decreased reflecting good collections across the board. 

Cash Flow: Operating cash flow of $423 million was consumed in the first quarter, compared to $286 million consumed in the corresponding period last year. The negative operating cash flow, which is seasonally typical for ADAMA in the first quarter also reflected higher payments to suppliers to support the procurement of inventory in 2022. 

Net cash used in investing activities was $95 million in the first quarter, compared to $90 million in the corresponding period last year. The cash used in investing activities in the first quarter of 2023 included the acquisition of AgriNova New Zealand, investments in new production facilities in ADAMA Anpon, investments in manufacturing capabilities in Israel and investments in intangible assets relating to ADAMA's global registrations. 

Free cash flow of $542 million was consumed in the first quarter compared to $386 million consumed in the corresponding period last year, reflecting the aforementioned operating and investing cash flow dynamics.

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. Numbers may not sum due to rounding.

¹ CER – Constant Exchange Rates
² Sources: Rabobank, Agri Commodity Markets Research, March 2023; AgbioInvestor-Quarterly-Briefing-Service-PLUS_Q1-2023;
JPM: Agricultural Markets Weekly, March 2023
³ "wait & see" refers to customers delaying purchases, while waiting to see if the market price declines further.