ADAMA reports second quarter and first half year 2023 results

Second Quarter 2023 Highlights:

• Sales down 17% to $1,233 million (-12% in RMB terms; -15% in CER^[1] terms), mainly reflecting 10% decrease in volume and 5% decrease in prices

• Adjusted EBITDA amounted to $112 million $240 million in Q2 2022

• Adjusted net loss of $41 million; Reported net loss of $46 million

First Half Year 2023 Highlights

• Sales down 14% to $2,492 million (-8% in RMB terms; -11% in CER terms), mainly reflecting 9% decrease in volume and 2% decrease in prices

• Adjusted EBITDA amounted to $277 million $441 million in H1 2022

• Adjusted net loss of $20 million; Reported net loss of $34 million

ADAMA Ltd. (the ″Company″) (SZSE 000553), has reported its financial results for the second quarter and six-month period ended June 30, 2023.

Steve Hawkins, President and CEO of ADAMA, said, "Agricultural markets are cyclical in nature and the market we are seeing in 2023 is an adjustment to the market overstocking in 2022, leading ADAMA's performance to be impacted in the quarter both by lower volumes as well as softer pricing. In response the Company has implemented a cross-company turnaround plan to improve cashflow and profit. In the second quarter the Company has already begun to clear out its high-cost inventory while being selective regarding new procurement, focusing on high margin products, in line with the Company's goal to improve the quality of business and its portfolio mix. Additional steps have also been taken to ensure OPEX is well managed. While the consumption of high-cost inventory impacts the results in the short term, we already see the positive impact of the reduction of procurement reaching positive cashflow in the quarter. We believe these steps will support ADAMA, positioning it better to capture opportunities in the current market cycle."

Table 1. Financial Performance Summary

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 Q2 & H1 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 environment^[2]

Over Q2 2023 the price trend of crop commodities was mixed, with corn, wheat and soybean prices continuing to decline while sugar and rice prices increased. Overall, crop commodity prices remain above the 10-yr average and global planted area remains high compared to previous years, supporting healthy input demand from farmers.

Despite relatively healthy farmer consumption, crop protection sales into the distribution channel have slowed down significantly due to high channel inventory levels, following channel loading in 2022. In addition, the distribution channel across all geographies is opting to buy crop inputs on a "just in time" basis and striving to carry minimal inventory given wide high interest rate environment outside China and abundant supply of CP products. This trend, coupled with the ongoing decline in Active Ingredients prices coming out of China, is putting pressure on crop protection prices.

Portfolio Development Update

Product Launches, Registrations & Formulation Mastery Update:

During the second quarter of 2023 ADAMA continued to register and launch multiple new products in markets across the globe, adding on to its differentiated product portfolio. New Product Introductions (NPI) percentage out of the full year sales of 2022 reached 22%, referring to products launched over the past 5 years. Differentiated products include products that are based on recently off-patented active ingredients (AI's) that have been classified as high commercial potential - "Core Leap" AI's, and products that are based on unique proprietary formulations, products with more than one mode of action, and biologicals.

Select launches of differentiated products during the second quarter of 2023 in select countries include:

• Launch in the USA of Fullscript™, a dual mode herbicide for rice, part of the FullPage^® rice cropping solution, in collaboration with Rice Tech.
  Fullscript™ is the first product to be launched based on Sesgama™ ADAMA's 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.
  

Select registrations of differentiated products during second quarter of 2023 in select countries include:

• Registration in Poland for Mastercop ACT^®, a natural copper-based fungicide, based on ADAMA’s proprietary Formulation Mastery technology for low dose products minimizing environmental load (enabling over 50% reduction in copper usage per hectare compared to conventional copper fungicides) and while maintaining its efficacy through optimization of delivery mechanisms Mastercop ACT^® is intended to control a range of fungal and bacterial diseases on a wide range of crops including grapes, pome fruits, stone fruits, fruiting vegetables and tuber crops. According to EU regulations, once a registration is achieved in one of the countries in a regulatory zone, registration can be expediated in other countries within the same regulatory zone. Poland is part of the Central Zone, which also includes Germany.

• In Q2 2023, the Company continued with the roll out of products based on the active ingredient Prothioconazole and ADAMA’s Asorbital^® formulation mastery technology platform, for optimized penetration and enhanced long-lasting protection. These include the registration of Avastel^® in Sweden and Turkey, Soratel^® in Lithuania and registration of Maganic^® in Sweden and Turkey.

• Registration in Greece of Timeline^® FX, a unique three-way spring foliar herbicide mixture providing cross-spectrum protection for cereals against broadleaf and grass weeds.

Select patents granted during second quarter of 2023 in select countries include:

• Patent granted in Australia for Sesgama™.

• First patent granted for Soratel^® in Morocco. Soratel^® is based on ADAMA’s proprietary Formulation Mastery technology platform Asorbital^®

• Patent granted for ADAMA’s proprietary O.V. formulation technology in China and Ukraine.

Financial Highlights

Revenues in the second quarter declined by approximately 17% (-12% in RMB terms; -15% in CER terms) to $1,233 million, reflecting a decrease of 10% in volumes and a decrease of 5% in prices.  The lower sales reflect market dynamics of channel destocking in light of high interest rates and a "wait and see" approach, given the market overstocking in 2022 and declining active ingredient and raw material costs impacting the crop protection market pricing. Additionally, sales were also impacted by negative weather conditions in certain geographies.

These results brought the revenues in the first half of 2023 to $2,492 million, a decline of approximately 14% (-8% in RMB terms; -11% in CER terms), reflecting a decrease of 9% in volumes and a decrease of 2% in prices. This is in comparison to the record sales the Company achieved in 2022, which reflected the high demand due to supply uncertainty in the market.

Table 2. Regional Sales Performance

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): Sales in EAME in constant exchange rates were lower in the quarter due to a decrease in volumes exacerbated by negative weather conditions and high inventory levels in the market, and higher in the half year period, reflecting generally higher prices in comparison to the same periods in 2022. While prices were higher on a year-to-year basis, market prices are currently presenting a downward trend. The fungicide Soratel^® based on ADAMA’s Asorbital^® formulation mastery technology, continues to be well received in the UK.

North America: Consumer & Professional Solutions – Sales were impacted by lower demand following inflationary pressures and high channel inventories.

In the US Ag market the channel is lowering inventory levels due to high interest rates with demand focusing on "just-in-time" supply from producers. Sales were also impacted by drought in the Mid-West and pressure on prices following channel destocking.

Sales in Canada increased as the Company expanded its product portfolio during 2022, while pricing in the market was more insulated with overall market inventories better controlled.

Latin America: Brazil – strong competition and channel destocking put pressure on prices led to a decline in sales, while the Company is successfully consuming the high-cost inventory accumulated.

In LATAM, sales are supported by the strong performance of the biologicals portfolio. Looking forward, El Niño is expected to have a positive effect on rainfall in the South of LATAM.

Asia-Pacific (APAC):

In China, the market is experiencing oversupply and pricing pressure impacting both the branded and industrial sales, while the branded portfolio was significantly supported by the sales of differentiated products.

Sales in the wider APAC & Pacific region were negatively impacted by strong competition from China and by the commencement and negative impact of El Niño.

In India sales were impacted by the delayed Monsoon season.

Gross Profit reported in the second quarter reached $253 million (gross margin of 20.6%) compared to $399 million (gross margin of 27.0%) in the same quarter last year and reached $563 million (gross margin of 22.6%) in the half year period compared to $767 million (gross margin of 26.4%) 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 adjusted items, adjusted gross profit in the second quarter reached $277 million (gross margin of 22.5%) compared to $437 million (gross margin of 29.6%) in the same quarter last year and reached $617 million (gross margin of 24.8%) in the half year period compared to $852 million (gross margin of 29.4%) last year.

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

Operating expenses reported in the second quarter and half year period of 2023 were $213 million (17.3% of sales) and $431 million (17.3% of sales), compared to $256 million (17.3% of sales) and $500 million (17.2% of sales) in the corresponding periods last year, respectively.

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 items within its reported operating expenses amounting to $6 million in Q2 2023 in comparison to $22 million in Q2 2022 and $15 in H1 2023 in comparison to $28 in H1 2022. These 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 items, please see the appendix to this release.

Excluding the impact of the abovementioned non-operational items, adjusted operating expenses in the second quarter and half year period were $231 million (18.7% of sales) and $469 million (18.8% of sales), compared to $268 million (18.1% of sales) and $549 million (18.9% of sales) in the corresponding periods last year, respectively.

The operating expenses were lower in the second quarter and half year period of 2023 mainly due to Company OPEX management measures, lower transportation and logistics costs, an adjustment of a provision for success-based compensation, and the positive impact of exchange rates. Additionally, in the first half year of 2023 the company did not increase the doubtful debt provision that was recorded for trade receivables in Ukraine during the first half year of 2022.

Operating income reported in the second quarter amounted to $40 million (3.3% of sales) compared to $143 million (9.6% of sales) in the same quarter last year and amounted to $132 million (5.3% of sales) in the half year period compared to $267 million (9.2% of sales) last year.

Excluding the impact of the abovementioned non-operational items, adjusted operating income in the second quarter amounted to $46 million (3.8% of sales) compared to $170 million (11.5% of sales) in the same quarter last year and amounted to $148 million (5.9% of sales) in the half year period compared to $303 million (10.4% of sales) in the same period last year.

EBITDA reported in the second quarter amounted to $115 million (9.3% of sales) compared to $224 million (15.1% of sales) in the same quarter last year and amounted to $281 million (11.3% of sales) in the half year period compared to $427 million (14.7% of sales) last year.

Excluding the impact of the abovementioned non-operational items, adjusted EBITDA in the second quarter amounted to $112 million (9.1% of sales) compared to $240 million (16.2% of sales) in the same quarter last year and amounted to $277 million (11.1% of sales) in the half year period compared to $441 million (15.2% of sales) last year.

Adjusted Financial expenses amounted to $96 million in the second quarter and $177 million in the half year period, compared to $82 million and $134 million in the corresponding periods last year, respectively. The higher financial expenses were mainly driven by higher bank interest expenses due to the sharp increase in interest rates and an increase in short-term loans as well as higher hedging costs on exchange rates. These financial expenses were moderated by the net effect of lower Israeli CPI on the ILS-denominated, CPI-linked bonds.

Adjusted taxes on income in the second quarter amounted to an income of $8 million and an income of $10 million in the half year period, compared to tax expenses of $12 million and $18 million in the corresponding periods last year. The tax income in the second quarter and half year period of 2023 was mainly due to losses before tax, in addition to a tax income due to the non-cash impact of the stronger BRL on the value of non-monetary tax assets and the method of calculation of tax assets related to unrealized profits.

Net loss attributable to the shareholders of the Company reported in the second quarter was $46 million and $34 million in the half-year period, compared to net income of $46 million (3.1% of sales) and $113 million (3.9% of sales) in the corresponding periods last year, respectively.

Excluding the impact of the abovementioned extraordinary and non-operational charges, adjusted net loss in the second quarter was $41 million, and $20 million in the half-year period, compared to net income of $76 million (5.1% of sales), and $151 million (5.2% of sales) in the corresponding periods last year, respectively.

Trade working capital as of June 30, 2023, was $2,844 million compared to $2,664 million as of June 2022, and compared to $2,634 million as of December 31, 2022. Following the Company's implementation of strict procurement practices, inventory held by the Company reached $2,307 million as of June 30, 2023, in comparison to $2,430 million as of December 31, 2022. The increase in working capital compared to the end of 2022 was following the Company's implementation of strict procurement practices, as mentioned, which led to lower trade payables and a decrease in the level of inventory held by the company.

Cash Flow: Operating cash flow of $405 million was generated in the second quarter and $19 million consumed in the half year period in 2023, compared to $71 million generated in the second quarter and $215 million consumed in the half year period in 2022. The higher cash flow generated in the quarter was primarily due to a decrease in the procurement of goods.   

Net cash used in investing activities was $69 million in the second quarter and $162 million in the first half period in 2023, compared to $107 million and $197 million in the corresponding periods last year, respectively. The cash used in investing activities in the second quarter and first half period of 2023 included 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 as well as the acquisition of AgriNova New Zealand in Q1 2023.

Free cash flow of $288 million was generated in the second quarter and $254 million consumed in the half-year period compared to $83 million consumed in the second quarter and $469 million consumed in the corresponding periods last year, respectively, reflecting the aforementioned operating and investing cash flow dynamics as well as the prioritization of investments.

Table 3. Revenues by operating segment

Sales by segment

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. Numbers may not sum due to rounding.

Further Information

All filings of the Company, together with a presentation of the key financial highlights of the period, can be accessed through the Company website at www.adama.com.

[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

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