ICL Group Ltd

Ladies and gentlemen, thank you for standing by and welcome to the ICL Group Analysts and Investors Conference Call. Our presentation today will be followed by a question and answer session. If you'd like to ask a question at this time, please press star then 1 on your telephone keypad. I must advise you the call has been recorded today. Should you experience any technical difficulties today, please press star then 0 on your telephone keypad. I would now like to hand the call over to your first speaker today, Mr. Judy Musler, Investor Relations Manager. Please go ahead.

Thank you. Hi, everyone. Welcome and thank you for joining us today on our second quarter 2020 conference call. The event is being webcast live on our website at www.icl-group.com. Earlier today, we filed our reports to the securities authorities and the stock exchanges in the U.S. and in Israel. The report, as well as the press release, are available on our website. There will be a replay of the webcast available a few hours after the meeting, and a transcript will be available shortly after. The presentation that will be reviewed today was also filed to the securities authorities and is available on our website. Please don't forget to review the disclaimer on slide number two. Our comments today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. We will begin with a presentation by our CEO, Mr. Raviv Zoller, followed by Mr. Kobi Othman, our CFO. Following the presentation, we will open the line for the Q&A session. Raviv, please.

Thank you, Dudi, and hello, everyone. Before discussing ICL's highlights for the second quarter, I would like to once again acknowledge ICL's employees globally for their perseverance in light of the challenging conditions brought about by the COVID-19 pandemic that have affected all of us personally and professionally. Due to the efforts of our committed team, we have been able to maintain continuity of our business globally with zero disruptions to our customers while ensuring the health and safety of our employees. Turning to slide three of our earnings presentation. In the second quarter, we generated positive operating income in each of our segments, as well as positive free cash flow amid a very challenging operating and market environment. I'm pleased to report that these results were actually ahead of our internal forecasts. In fact, they were more or less in line with our results in the first quarter when our business was not materially impacted by COVID-19. Our results this quarter were also supported by record first half potash production at the Dead Sea, as output didn't suffer as a result of increased health and safety measures that remain in place today. I will discuss our operating performance in greater detail shortly, but I'd like to briefly discuss how our strategy drives our performance and provide context for some of the actions we took in the second quarter. As we have stated before, ICL is far from a pure play commodity company with performance tied to commodity and business cycles. While performance within some of our segments can certainly be impacted by these factors, our business is highly diverse and growing more so. Also, while certain of our end markets, like oil and gas, are cyclical, the vast majority of our revenue is derived from the very durable agriculture and food markets as well as from other various value-added specialty products that ICL produces. We are continuously emphasizing R&D and innovation to drive growth across our value chains and growth opportunities remain significant. In our more commoditized businesses, we are continuously focused on cost efficiency. If we can continue to be one of the lowest cost producers, we can generate operating cash flow even in weak commodity markets and maintain significant exposure to periods where prices are stronger. To that end, we continue to execute on our global efficiency plans and initiatives across all of our segments in the second quarter. Specifically, we reduced headcount in all of our segments, primarily through early retirement programs, and took important actions to optimize the footprint of our commodity businesses. We discontinued the production and sales of phosphate rock to third parties from Israel, which does not contribute to the phosphate solutions segment's downstream product value chain. We will continue to produce phosphate rock in order to deliver higher value products to our customers globally, but our cost base will be lower. We also accelerated the closure of potash production in the Vilafruense mine at ICL Iberia in Spain. This was originally scheduled to occur in 2021, but given the potash price environment, we decided not to wait since our cost per ton of production will decrease and the savings will drop right to the bottom line. These actions resulted in charges totaling $297 million in the second quarter, most of which are non-cash charges, and the balance will be spread over a number of reporting periods. Importantly, on an ongoing basis, the actions will ultimately result in annual cash savings and enhanced profitability of approximately $50 million commencing next year. Finally, as we announced in June, we have consolidated our crop nutrition sales and marketing infrastructures into a single commercial organization facing the agriculture market. We believe that this structural change, which will not impact our segment reporting, will allow ICL to better leverage region-specific knowledge, agronomic and R&D capabilities, logistical assets and customer relationships, as well as enhance the global operational scale of our crop nutrition business. Our strong financial position and balanced capital priorities provide us with the flexibility to make decisions that we think will maximize our cash flows and create the most value for our shareholders. Our capital allocation priorities remain unchanged, and our dividend for the second quarter amounts to about $36 million. The summary of our financial results, shown in the table on slide 4, clearly shows the decline across all financial metrics compared to the second quarter of 2019. This should come as no surprise. As I mentioned, our performance compared to the first quarter of this year was impressive even if our results were not materially different. On an adjusted basis, our results were close to flat quarter over quarter, and our operating cash flow and net income actually increased. Commodity prices didn't increase quarter over quarter, they went down, and COVID-19 brought about operational challenges and a severe disruption in demand from the oil and gas market. I think this is a pretty clear demonstration of the effectiveness of our strategy, our continuous focus on execution and innovation, and the diversity of our business. Like many other companies, ICL has been impacted by the COVID-19 pandemic, but the strengths of our business model and the critical role our products play in the food supply chain help us weather this storm better than others. Let's move on to the business performance of our divisions, starting from industrial products on slide five. Segment sales in EBITDA in the second quarter of 2020 decreased by 15% and 19% year-over-year respectively due to lower demand for flame retardants and clear brine fluids, resulting from the negative impact of the COVID-19 pandemic on global industrial activity and demand for oil and gas. Despite the large drop in sales volumes, the segment generated a healthy EBITDA margin of 31% due to an ongoing strategic shift to long-term contracts, a diverse product portfolio, and an increase in sales of specialty minerals to the resilient pharma and supplements markets. The impact of the COVID-19 pandemic on the segment is expected to continue through the third quarter of 2020 and result in lower demand for clearbrine fluids and brominated flame retardants. At the same time, a slight recovery in certain flame retardants for the electronics markets and the European building and construction industry could partly offset the overall negative impact on the segment. Turning to slide six, we achieved record first half put ash production at the Dead Sea following the three-week production shutdown in our facilities for capacity upgrades in the fourth quarter of 2019. Production gains were offset by lower production at ICL Iberia in Spain, caused by disruptions to operations due to the COVID-19 pandemic. Based on our prior production forecasts, we measure the negative impact of COVID-19 on the putash division to be about $23 million in the second quarter, mainly in ICL Iberia and ICL UK. Currently, our sites are operating as planned, and we do not see a very significant impact from the COVID-19 pandemic on the segment's results in the third quarter of 2020. The put ash segment sales in EBITDA decreased in the second quarter of 2020 by 21% and 43% respectively, compared to the same quarter in the prior year. Business performance was primarily impacted by a $63 decrease in the average put ash realized price per ton and higher operational costs resulting from COVID-19 pandemic, partly offset by a reduction in certain costs as a result of the segment's efficiency initiatives and increased production in Israel. COVID-19 also negatively impacted the global end market demand for magnesium, primarily in the automotive and aviation industries. As I mentioned earlier, we moved forward the consolidation process of activities of ICL Iberia into one site. As a result, production operations at the Villefons mine were discontinued towards the end of the second quarter. The decision allows us to speed up the Suria mine development and to improve our future cost per ton. Sales to our customers will not be affected due to the closure of Villefruens as the Suria mine is already stepping up production and with support from ICL Dead Sea will continue to meet the demand of our customers. Production of polysulfate increased by 38% to 184,000 tons and sales volumes increased by 27% to 131,000 tons compared to the second quarter of 2019. These increases were achieved despite some operational challenges presented by the COVID-19 pandemic. Nevertheless, we are still on target to reach our annual production capacity run rate goal of 1 million tons by the end of the year. Subsequent to the end of the quarter, we announced the expansion of our polysulfate distribution network with long-term distribution agreements. Following the signing of these agreements, we have contracted an aggregate of 1.1 million tons of polysulfate as part of our strategy to enable and expand the adoption of polysulfate globally. Turning to our phosphate solutions division on slide 7. The division once again demonstrated the strength of a diverse portfolio focused on growing specialties businesses. The segment sales and EBITDA decreased by 15% and 23% respectively year over year, mainly due to a sharp decrease in phosphate commodities market prices, partially offset by lower raw material prices. The continued positive operating income of the segment, despite the weak commodity price environment and market headwinds, reflects strong phosphate specialties performance and ongoing positive operating profit from the YPHJV in China. For the first time, we have broken out operating income for phosphate commodities and phosphate specialties in our earnings report. Phosphate specialties recorded an operating income of $30 million, 20% higher than the second quarter of 2019, driven mainly by lower raw material costs and strong sales volumes of food phosphates. sales of phosphate commodities were approximately 31% lower than in the second quarter of 2019, mostly due to a significant decline in market prices and lower sales volumes of phosphate fertilizers. This resulted in an operating loss of $22 million compared to operating income of $7 million in the second quarter of 2019. As I mentioned, Our focus on cost efficiency in our commodity businesses drove our decision to discontinue the unprofitable production and sales of phosphate rock from Israel, an activity that does not contribute to the segment's downstream value chain and is consistent with our ongoing focus on growing our value-add businesses. Overall, ICL's robust and diversified customer portfolio and wide geographic reach of its phosphate specialties businesses, coupled with the strong demand for food products, prevented a material impact of the pandemic on the segment's business performance. Currently, we do not see a very significant impact from the COVID-19 pandemic on the segment's results in the third quarter of 2020, although the full effect of the pandemic is still difficult to assess. Slide 8. The IAS segment sales decreased 3% year-over-year, driven mainly by unfavorable dollar-euro exchange rates. EBITDA increased by 29% year-over-year to $22 million, and EBITDA margin increased to 11% compared to 8% in Q2 of 2019. This was primarily due to lower cost of raw materials and the successful implementation of efficiency and cost reduction initiatives. Sales to the specialty agriculture market slightly decreased year over year, mainly as the negative impact of unfavorable exchange rates was partly offset by strong sales of straight fertilizers and higher sales to China. Sales to the turf and ornamental market were lower compared to the corresponding quarter last year, mainly due to the impacts of COVID-19 pandemic, as a decrease in sales in the turf business were only partly compensated by higher sales to the ornamental horticulture market. The reopening of sports fields and golf courses in Europe resulted in a slight recovery in sales towards the end of the quarter. Turning to slide 9. As previously noted, ICL announced that it has consolidated its crop nutrition sales and marketing infrastructure, creating a unified commercial platform facing the agricultural end markets in order to drive internal synergies and optimize distribution channels of commodity, specialty, and semi-specialty fertilizers. We previously had multiple internal sales organizations across dozens of locations selling portions of our product portfolio to their own base of customers. These organizations were siloed from one another, including with respect to their back office and reporting systems. This was both inefficient from a cost perspective and not optimal for marketing reasons. The company expects that this new operating model, which will be managed on a regional basis, will serve to achieve commercial excellence, increase the efficiency of its global operations, and better leverage its region-specific knowledge, agronomic and R&D capabilities, logistical assets, and customer relationships. To summarize on slide 10, I'm very happy to say that overall, we are fortunate to have suffered minimal operational impact as a result of COVID-19, and all of our production is back online and operating under all applicable health and safety regulations related to COVID-19. The pandemic was and continues to be disruptive to end markets. In particular, we expect to see continued weakness in demand for clear-brying fluids and, to a lesser degree, flame retardants, and the industrial product segment's performance will ultimately follow the recovery in industrial demand. By contrast, there is inherent stability in our agriculture and food end markets, where our performance has been impacted by commodity pricing rather than end market demand. Recently, commodity prices have stabilized, albeit at low levels, and we expect prices to continue firming over time. Overall, the diversity of our business provides stability, resilience, and continued cash generation amid a weak commodity and business environment. We firmly focused on executing our business strategy and increasing efficiency and cost savings across all our operating segments, which not only protects our performance against downside scenarios, but also positions ICL to generate significant cash flow when underlying demand and commodity prices are stronger. Finally, while our business is diversified and not excessively dependent on commodity prices, we manage our balance sheet as if our business had a higher level of commodity price exposure than it actually does. This affords us a significant degree of flexibility to execute on our strategic initiatives in order to innovate, bring new products and applications to the market, and manage the growth of our business safely and consistently over the long term. Before I hand it over to Kobi, I would like to briefly highlight recent recognitions we have received with respect to our ESG practices. First, ICL was recently included in the FTSE for Good Index Series, which is designed to measure the performance of companies demonstrating strong ESG practices. These indexes are used to create index tracking investment products focused on sustainable investment. Additionally, ICL was awarded the highest Platinum Plus ranking by Maala, a leading professional nonprofit corporate membership organization, comprised of over 110 of the highest impact companies in Israel. We try to display our commitment to the highest ESG standards in our strategy and everyday practices, and we are very grateful that third parties continue to validate our efforts. Thank you all. And with that, I would like to hand it over to Kobi.