Adama reports best ever results for combined company

Adama Agricultural Solutions Ltd. (“Solutions”), together with Hubei Sanonda Co., Ltd. (the “Listed Entity”), to be named ADAMA (together, “ADAMA” or “the Combined Company”), reported their combined consolidated financial results for the fourth quarter and the full year ended December 31, 2017.

 

Commenting on the results, Yang Xingqiang, Chairman of ADAMA, said, “Our continued growth across the globe and robust performance in the fourth quarter capped off our strongest year to date. During 2017, we achieved the milestone of becoming the only publically traded, integrated, Global-China crop protection leader. Our recent successful private placement, in which we raised $240m in new equity from key institutional investors, reflects the warm welcome we received from the capital markets, and will be used to support our strategic growth initiatives in the coming years. Our business momentum in recent years, together with our strong foundations and unique positioning in the global and Chinese crop protection markets, provide confidence that we will be able to capitalize on the exciting opportunities that lie ahead.”
 

Chen Lichtenstein, President and CEO of ADAMA, added, “We are pleased to conclude another record year for ADAMA. With strong market share gains in all key markets worldwide, we delivered robust top-line, bottom-line and EBITDA growth. This performance has been accompanied by continued improvement in working capital, where we now reach industry-leading metrics, driving the generation of significant cash flow, which leads to our lowest debt and leverage levels ever. We continue to make significant investments in all areas of our business, moving along our strategic direction, engaging with our customers, enhancing our portfolio, leveraging our integrated commercial and operational platforms, and propelling our business forward.”

Financial Highlights
 

Revenues grew by 13.0% in the quarter and by 5.8% in the full year, compared to the corresponding periods last year. This robust growth was driven by an increase in volumes of an increasingly differentiated product portfolio of 11.3% in the quarter and 8.0% in the full year, despite generally subdued agricultural market conditions. The strong volume growth was offset to a certain extent in the quarter and in the full year by a softer pricing environment.
 

Over the full year, the net impact of currency movements was relatively muted, with the strengthening of certain currencies against the US dollar in a number of key regions such as Brazil and India being balanced out by the weakening of other currencies, most notably the British Pound, as well as the lower contribution of currency hedging. In the quarter, sales benefited somewhat from the strengthening of local currencies against the dollar, mainly in Europe and China, compared to the corresponding quarter last year.
 

Gross profit increased by a significant 20.2% in the quarter to $265.4 million, with gross margin up by 1.9 percentage points to 32.3%, compared to the corresponding period last year. In the full year, gross profit increased by 14.8% to $1,236.6 million, with gross margin up by 2.8 percentage points to 35.1%. The strong increase in profitability, both in the quarter and in the full year, resulted from a combination of the robust volume growth, a continued improvement in portfolio mix towards a more differentiated offering, as well as the continued reduction of costs. These trends were somewhat aided by the strengthening of local currencies against the US dollar, and partially offset by the softer pricing environment.
 

Operating expenses. Total operating expenses were $220.2 million (26.8% of sales) in the quarter and $800.5 million (22.7% of sales) in the full year, compared to $189.8 million (26.1% of sales) and $730.1 million (21.9% of sales) in the corresponding periods last year.
 

Within the total operating expenses, Sales and Marketing expenses in the quarter and in the full year were $163.2 million (19.9% of sales) and $595.3 million (16.9% of sales), respectively, compared to $147.2 million (20.3% of sales) and $565.5 million (17.0% of sales) in the corresponding periods last year. The increase in this component in the quarter and the full year compared to the corresponding periods last year resulted primarily from an increase in sales-related personnel in growing geographies and an increase in other variable expenses as a result of the increase in sales volumes.
 

R&D, General and Administrative expenses in the quarter and in the full year were $46.5 million (5.7% of sales) and $186.3 million (5.3% of sales), respectively, compared to $36.7 million (5.0% of sales) and $155.1 million (4.7% of sales) in the corresponding periods last year. The increases in this component in the quarter and the full year resulted primarily from increased spend on strategic research and development projects, reclassification of certain expenses from Cost of Sales to R&D expenses, and an increase in labor related expenses, partially offset by an improvement in capacity utilization.
 

In addition to the abovementioned factors, part of the increase in operating expenses stemmed from the impact of the strengthening of most currencies against the US dollar.
 

Operating income increased by 45.9% in the quarter to $45.2 million, with an increase of 1.2 percentage points in operating margin to 5.5%, compared to the corresponding period last year. In the full year, operating income rose by 25.7% to $436.1 million, with an increase of 2.0 percentage points in operating margin to 12.4%.
 

EBITDA increased by 19.2% in the quarter to $99.8 million, with an increase of 0.7 percentage points in EBITDA margin to 12.2%, compared to the corresponding period last year. In the full year, EBITDA rose by 15.0% to $645.6 million, with an increase of 1.4 percentage points in EBITDA margin to 18.3%.

Business Update

* Marketing and Product Strategy

To further enhance marketing capabilities, a tailor-made advanced marketing program based on ADAMA’s distinctive commercial approach, developed together with a leading academic institution, was rolled out globally.

ADAMA continues to implement its go-to-market approach in key markets, including Europe and Asia Pacific, facilitating more direct contact with end customers and increasing proximity to farmers.

As part of the build-up and integration of its commercial layout in China, ADAMA implemented a unified and comprehensive distribution network for its products and brands, driving significant growth.

Global sales of key products containing backward-integrated active ingredients, such as Acephate and Paraquat, are being performed through ADAMA’s sales teams worldwide, especially in North America, India, Australia and South Africa, achieving significant growth and increased profitability.

* Innovation, Development, Research and Registration (IDR)

ADAMA continues to strengthen its capabilities across all IDR functions to drive continued product innovation and development. Substantial resources are being allocated to R&D capabilities, with the recruitment of dozens of scientists, development professionals, and other experts – globally, as well as in China.

ADAMA’s state-of the-art R&D Center in Nanjing became fully operational and will form a key pillar in supporting the Combined Company’s commercial and operational activities. Together with the upcoming launch of the advanced global R&D Center in Neot Hovav and the enhancement of pilot, process scale-up and technology transfer capabilities, the development of ADAMA’s future product pipeline will be bolstered.

During 2017, the Combined Company obtained 223 new product registrations, including 22 new product launches worldwide. Regulatory approval for NIMITZ®, ADAMA’s novel non-fumigant nematicide, was granted in additional markets including Canada and Japan, and most recently in Chile and Brazil, the product’s largest expected market.

* AgTech

ADAMA has engaged in key partnerships with innovative AgTech developers, to provide farmers with a range of solutions aimed at allowing agronomic decision-making with quantifiable data, reducing operating costs and uncertainty, minimizing potential negative environmental impact and agronomic risks, as well as increasing the efficiency of the Combined Company’s products.

With more than 20 AgTech solutions already deployed in key markets across the globe, technologies include sensors, software, robotics and drones, and are directed towards different fields of application, including irrigation, spray monitoring, early detection, disease and weather forecasting, and monitoring of planting gaps.

* Operations

ADAMA continues to improve its supply chain and inventory management, bringing inventory metrics down to industry leading levels. An advanced planning approach across the organization has driven improved utilization and plant loading.

The Combined Company completed plans for its global operations layout, including the consolidation of activities in the advanced sites of Neot Hovav and Jingzhou City. In China, ADAMA finalized the establishment of its operations, with the build-up of combined supply chain, quality, procurement and manufacturing teams, integrated with Global Operations.

Joe Krkoska joined as Executive Vice President of Global Operations.

* Adama-Sanonda combination and flotation

The combination of Solutions and the Listed Entity was successfully completed in July 2017. On September 29, 2017, the board of directors and management of the Combined Company were appointed. The Combined Company will operate under the ADAMA name and brand, following required approvals.

ADAMA completed a capital raise of approximately RMB 1.5 billion ($240 million) from equity investors. The Combined Company will utilize the funds for the further development of its global products portfolio, as well as the establishment and expansion of advanced operational capabilities.

* Transfers and divestments relating to ChemChina’s acquisition of Syngenta

In the context of developing its business and to facilitate the obtaining by ChemChina of the regulatory approvals for the acquisition of Syngenta AG, ADAMA agreed with ChemChina and Syngenta to effect the divestment of a number of its products, while receiving products of similar nature and economic value from Syngenta.

The receipt of the transferred products from Syngenta and concurrent divestment of ADAMA’s products in the US were concluded in 2017, whereas the receipt and divestment of the relevant products in Europe were concluded in the first quarter of 2018.
 

Regional Highlights
 

Regional Sales Performance

Europe : Sales in Europe were higher by 12.9% in the fourth quarter and by 0.9% over the full year, in constant currency terms, compared with the corresponding periods last year. The strong increase in the quarter was driven by significant volume growth of an increasingly differentiated portfolio. Adverse weather conditions impacted the overall level of demand in Europe, keeping pressure on prices, somewhat moderating the strong volume growth. Over the full year, the Combined Company saw moderate volume growth, which was mostly offset by the passing on to customers of a portion of the reduction in product costs.
 

In Northern Europe, exceptionally wet weather conditions in Scandinavia, the Baltic countries, Poland and Germany caused a reduction in planted areas of winter crops, particularly in cereals, which led to reduced demand for cereal and oilseed rape herbicides and for aphid insecticides in cereals. These adverse conditions led to high channel inventories, maintaining pressure on pricing . However, the Combined Company continues to perform well, increasing its market share in almost all markets of Northern Europe. Ukraine and Russia saw a strong performance resulting from the combination of a differentiated product offering and tailor-made services to local farmers.
 

In Southern Europe, dry conditions in many countries in the fourth quarter resulted in late planting for cereals, and therefore a reduced autumn cereals herbicide campaign. These conditions were most notable in Spain, which saw drought conditions for most of the second half of the year.
 

In France, the dry start to the season was followed by particularly cold and wet conditions, further challenging farmers. Despite these adverse conditions, the Combined Company continued to increase its market share and improve its offering with two successful product launches in France in the fourth quarter – ELYSIUM®, a differentiated mixture herbicide for orchards and grapes, and KANTIK®, a new 3-way fungicide for powdery mildew and eyespot in cereals.
 

The Combined Company saw strong performances from certain countries in Central and Eastern Europe, most notably Romania and Hungary, where increasing proximity to farmers and the provision of more differentiated, tailored solutions has led to a strengthening in the quality of the business. In the Czech Republic and Slovakia, the three-way herbicide TRINITY ® performed well and markedly increased its market share.
 

In US dollar terms, sales in Europe in the fourth quarter grew by a significant 18.9% compared with the corresponding period last year, reflecting also the strengthening of the Euro and the GBP. Over the full year, sales in Europe were flat in US dollar terms, reflecting also the impact of lower contribution of currency hedging compared with last year.
 

Latin America : Notwithstanding a strong performance in Brazil and most countries in the Andean region and Central America in both the fourth quarter and the full year, due to difficult market conditions and performance in Argentina, s ales in Latin America were lower by 0.4% in the fourth quarter and by 2.5% over the full year, in constant currency terms, compared with the corresponding periods last year.
 

In the fourth quarter, although the Combined Company saw its business continue to grow in volume terms in most markets, this moderate volume growth was offset by pricing pressure as a result of constrained demand due to drought conditions in Argentina and Central America, as well as reduced insect pressure in Brazil, alongside still elevated channel inventories across the region.
 

In Brazil, the fourth quarter saw good performances from a number of key products, among them the unique mixture insecticide GALIL®, as well as POQUER®, a systemic, highly selective graminicide herbicide for the post-emergence control of a wide range of annual and perennial grasses in a wide range of crops, and ARREIO®, a selective and systemic mixture herbicide for the control of a variety of weeds in pastures. The Combined Company continues to enhance its offering of innovative tools and services to distributors and farmers, also assisting them with gaining access to credit and improving their collection. These initiatives, alongside a continually improving product offering, drove a significant increase of share in this key market over the quarter and the full year.
 

The Combined Company performed well in most countries in the Andean region and Central America, most notably in Colombia, Mexico, Chile and Peru, with good performances from a number of key products, including NIMITZ®, the Combined Company’s novel, non-fumigant nematicide with higher user safety and sustainability, MASTERCOP®, a preventative fungicide for use in a wide range of fruit and vegetables, and ACADIA-BIO®, an innovative fungicide with anti-stress technology. Tough market and weather conditions in Argentina weighed down on the performance of the entire region.
 

In US dollar terms, sales in the region were up by 1.1% in the quarter and by 0.5% in the full year , compared with the corresponding periods last year, reflecting also the impact of the appreciation of local currencies, primarily the Brazilian Real over the full year, against the US dollar.
 

North America : Sales in North America increased by 6.4% in the fourth quarter and by 6.2% over the full year, in constant currency terms, compared with the corresponding periods last year, driven by strong volume growth, including of backward integrated products such as ACEPHATE 97® and ETHEPHON, which was partially offset by a somewhat softer pricing environment.
 

The hurricanes experienced in the southern US in the third quarter significantly impacted growers in the region. In addition, manufacturing facilities of certain local suppliers were disrupted, exacerbating an already tight global intermediate supply environment.
 

The Combined Company continues to perform well in Canada, where it is focused on enhancing brand awareness and deepening its relationships with retailers and farmers.
 

In US dollar terms, sales in North America increased by 6.6% in the fourth quarter and by 6.3% over the full year, compared with the corresponding periods last year.

Asia-Pacific : Sales increased by a significant 31.6% in the quarter and by 21.5% in the full year, in constant currency terms, compared with the corresponding periods last year.
 

The robust growth in the quarter was driven by a significant increase in differentiated product volumes, with strong performances in China, Vietnam, Indonesia, Australia and Korea, which were partially offset by record dry conditions in New Zealand and Indonesia, as well as low insect pressure affecting cotton insecticides in Australia.
 

During the quarter, the Combined Company obtained registrations for a number of new and differentiated products, including CORMORAN® for insect control in coffee in Vietnam, the herbicide IMPOSE® for peanut, sugarcane and fallow in Australia and the ready-mix herbicide KRAGAN® for pineapple in Thailand. New marketing initiatives in Thailand, focusing on fostering farmer engagement, successfully led to an increase in brand awareness and demand creation.
 

In China, ADAMA is growing its distinctive portfolio with dozens of new product registrations achieved over the past year, including BANG CHAO®, a mixture fungicide for late blight in potatoes, APROPO®, a broad-spectrum systemic fungicide for rice, and JICHU™, a differentiated herbicide for wheat, with multiple additional product launches underway. It is already seeing strong demand for its wheat herbicides as well as for other key backward-integrated products, and a significant increase in sales and profitability. This strong performance was driven by an increase in both volumes and prices, partly due to the tightened supply environment as a result of the increasingly stringent regulatory requirements.
 

In US dollar terms, sales increased by 36.8% in the quarter and by 22.2% in the full year, compared to the corresponding periods last year, reflecting also the appreciation of the local currencies, primarily the Australian dollar, against the US dollar.
 

India, Middle East & Africa : Sales in the region increased by a robust 15.9% in the fourth quarter and by 7.6% over the full year, in constant currency terms, compared with the corresponding periods last year. These strong performances in both the quarter and the full year were achieved despite a change in the domestic tax regime in India, in terms of which general sales tax is no longer added to sales prices, thereby reducing top-line while not impacting profit. Adjusting for this change in the Indian tax regime, sales in the region increased by 20.8% in the quarter and by 12.8% in the full year, in constant currency terms.
 

The strong performance in the quarter was driven by significant volume growth, with good performances in India from ACEMAIN® , a broad spectrum systemic insecticide benefiting from the Combined Company’s end-to-end value chain , as well as from South Africa, where better rains in the corn areas in the north of the country compensated for the ongoing severe drought in the Western Cape.
 

Over the full year, the increase in volumes was achieved despite largely unfavorable weather conditions, with an unstable monsoon season in India and drought in South Africa which impacted wheat and vine products.
 

In US dollar terms, sales increased by 20.9% in the quarter and by 10.0% in the full year, and by 25.8% and 15.3%, respectively, adjusting for the effect of the change in the tax regime in India. This reflects also the impact of the strengthening of several currencies, including the Indian Rupee, the South African Rand, and the Israeli Shekel, both in the quarter and in the full year, compared to the corresponding periods last year.

Revenues by operating segment
 

Fourth quarter sales