ICL Group Ltd

Hello, everyone. I'm Peggy Riley Tharp, Vice President of Global Investor Relations. I'd like to welcome you and thank you for joining us today for our quarterly earnings call. The event is being webcast live on our website at icl-group.com. Earlier today, we filed our reports with the securities authorities and the stock exchanges in the U.S. and in Israel. Those reports, as well as the press release, are available on our website. There will be a replay of the webcast available after the meeting and a transcript will be available shortly thereafter. The presentation, which will be reviewed today was also filed with the securities authorities and it's available on our website, please be sure to review the disclaimer on slide to. 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. The company undertakes no obligation to update any financial information discussed on this call at any time. We will begin with the presentation by our CEO, Mr. Raviv Zolder, followed by Mr. Aviyar Amlahav, our CFO. Following the presentation, we will open the line for the Q&A session. Raviv, please.

Thanks, Peggy, and welcome, everyone. Earlier today we announced our second quarter results, which are compared to an all time record quarter last year. As you can see on slide three second quarter sales of $1.83 billion were in line with revised expectations, but down as expected versus an extraordinary second quarter in 2022 when commodity prices peaked. While the year-over-year decline in prices impacted all of our businesses and we generally saw lower volumes, our put-out segment volumes increased in the second quarter as we sold more product to China, India, and the United States. Lower prices in the second quarter also significantly affected our adjusted EBITDA, which was $441 million. However, we did see some benefit from lower raw material and transportation costs. We continue the stocking throughout the second quarter and proactively adjusted production as needed. Also, we adapted our savings and efficiency plans to react to the challenging near term macro conditions. As a result, we were able to reduce costs, including through production improvements that are industrial products and growing solutions in Brazil and through additional gna cost reduction efforts. While the cyclical decline was more rapid than expected icl delivered a well executed quarter as we quickly adjusted to current market conditions, ensuring continued strong cash generation, while adhering to our long term strategy. We delivered operating cash flow of $391 million in the second quarter and free cash flow of $221 million, which was identical to the first quarter of this year. We continue to return value to our shareholders in the second quarter, as we reported diluted earnings per share of 13 cents and declared a quarterly dividend of 6 cents per share. We also remain committed to our long-term specialty strategy through our investment in lithium iron phosphate battery materials production. Just yesterday, our board of directors and executive leadership were joined by Jennifer Granholm, secretary of the Department of Energy, and Mike Parson, governor of the state of Missouri, To break ground for this exciting project at our manufacturing campus in St Louis. Our St Louis facility will be the first large scale battery materials manufacturing plant in the new in the United States. And it's expected to help meet growing demand from the energy storage electric vehicle and clean energy industries for us produced and sourced essential battery materials. In addition, we remain committed to introducing new technology and additional capacity to enhance this unique and timely opportunity. Let's turn to a three-year look at some of our key metrics on slide four. Again, while sales were down year over year as expected, they were up versus the second quarter of 2021. While we had anticipated the second half of this year to progress at a more normalized rate, we recognized some negative near-term developments and announced a change to our expected guidance in late June. At that time, we provided an update to the framework agreement with our put-out customers in China. We also cited the delayed recovery in flame retardants and it will speak more about these in our segment reviews. On slide five, you can see second quarter and year to date specialty sales which followed a trend similar to our consolidated results as expected earnings per share were down versus an extraordinary 2022 and up when compared to 2021. Also, as I just mentioned, we saw significant year-over-year growth in both operating and free cash flow versus the second quarter of 2021. I would now like to begin our segment review with industrial products on slide six. Second quarter sales were $300 million, while EBITDA was $74 million, or 25%. The recovery and demand for flame retardants, which was expected in the second half of the year, has not materialized. For the second quarter, lower demand resulted in increased competition and lower prices. In addition, elemental bromine prices hit lows not seen since 2008 and 2009, and low price flame retardant supply remained in the market. Once again, results vary significantly by end market. Weakness in electronics continued and was magnified by a slow return to growth in China than had been projected, while the building and construction end markets remained soft as well. Meanwhile, demand for clear brine fluids and for our specialty minerals was stable in the second quarter. As the recovery in flame retardants looks to be delayed until the end of this year, we expect the $200 million EBITDA reduction we estimated in June will negatively impact our 2023 results. During the first half of the year, we targeted cost savings and inventory reduction efforts, and we will continue to do so in the third and fourth quarters. City Council Chambers, Despite this temporary setback our industrial products business remains on track for the long term, we continue to work with our partners to improve our competitive position and to develop innovative flame retardants and other solutions. City Council Chambers, Our steps to create additional savings are also bearing fruit with more to come. City Council Chambers, We do not expect recent developments which are predominantly external to have a material impact on the execution of our five year plan. We also expect demand for flame retardants to keep in pace with the traditional electronics replacement cycle over the long term and to accelerate as the global conversion to electric vehicles continues as the artificial intelligence trend materializes. Turning to slide seven and our phosphate solutions division, where we reported sales and EBITDA of $605 million and $130 million, respectively. For the quarter, phosphate specialties represented 65% of sales and nearly 65% of EBITDA. Food demand remained resilient, with higher prices in North and South America as well as in Europe. For industrial end markets, prices were slightly higher in North and South America, but offset by generally lower volumes in most regions. Overall end market demand in the US remained stable, but competitive price pressures continued to impact other regions. And while conditions are below those we experienced in an exceptional 2022 the base phosphate specialties business remains very healthy. As I already discussed, we broke ground yesterday for our new battery materials manufacturing facility in St Louis in partnership with the Department of Energy which provided icl with a $197 million grant. On slide eight, you will see our potash results were sales were $556 million and EBITDA came in at $213 million. In late June, we agreed to supply our customers in China with an aggregate amount of 800,000 metric tons of potash during 2023 at an agreed upon price of $307 per ton, which was the prevailing rate. For the second quarter of this year, our potash price per ton was $403, down from $801 in the second quarter of last year, but nearly $115 higher than in the same quarter of 2021. Potash prices have recently stabilized. As mentioned earlier, our volumes increased over the past quarter, led by supply to China and India, and we benefited from decreases in energy and transportation costs. Turning to slide nine and our growing solutions business which delivered second quarter sales of $481 million and EBITDA of $22 million as prices in the specialty fertilizer market declined overall due in part to the stocking of high priced inventory. In addition to a later start to spring in some countries weather related issues caused farmers to maintain a wait and see strategy, even as affordability remained above average. Despite these challenges, Growing Solutions delivered record-free cash flow of about $100 million. The division remained focused on reducing working capital and destocking inventory, while executing against its saving and efficiency plan, with more to come in the second half of the year. Some products, like Fertilizer Plus, were impacted by the decline in potash prices, as well as the delayed start to the season, especially in Europe, where demand was weaker than expected. In other areas like India and China, the division made headway against its strategic plans and has been launching customized efforts to advance as a digital outreach and increase its share of wallet. We expect gradual improvement in the third quarter, as we work through these short term challenges and we remain focused on eminent opportunities and investments in innovative new product offerings targeting long term specialties growth. I would now like to draw your attention to slide 10 and a review of the key areas where we're focused. We are, of course, maintaining our commitment to our long-term strategy, notwithstanding the short-term highs of 2022 and some unexpected challenges in 2023. All of our businesses are committed to enhancing efficiencies and competitiveness, which helped us deliver strong cash flow in the second quarter. We remain dedicated to growing our specialties product portfolio while targeting M&A and strategic partnership opportunities. As I do every quarter, I want to thank the entire ICL family of employees all around the world for their hard work and significant contributions. I'm proud to lead this team of more than 12,500 global partners. And with that, I would now like to turn the call over to Aviram.

Thank you, Raviv, and to all of you for joining us today. Let us get started on slide 12, where you can see a review of the external macro pressures we have been discussing for several quarters now, with many of these remaining unchanged. Inflation rates started to decline year over year, but prices remain elevated for the end market consumers in the second quarter. As we've previously discussed, this forces families to make choices about their discretionary income. For example, home improvement and curb appeal projects are being delayed, while food demand remains resilient, as seen in our phosphate specialty results. In addition, these trends are further impacted by interest rates which remain elevated on a global basis. In general, global growth continues to be subdued, which is why it is important for companies like ICL to have a varied geographic footprint. We also benefit by participating in a wide array of end markets, not only across our four segments, but within each line of business as well. Being a global company means reacting swiftly to conditions around the world, which we did in the second quarter. Still, many geopolitical obstacles persisted as the situation in Ukraine remains unbalanced, the food insecurity crisis in Africa threatens to expand, and uncertainty regarding China's recoveries have increased. Just three months ago, China's economy appeared to be rebounding faster than anticipated. However, recent indicators suggest otherwise. Sluggish domestic demand in China, which represents the second largest economy in the world, is being compounded by ongoing concerns around the country's housing and construction markets. In terms of global agricultural demand, crop prices remain elevated above pre-COVID levels as farmer affordability continues to be resilient, especially in the US. While fertilizer prices have declined from the peaks we saw in 2022, they are beginning to show signs of stabilizing. On slide 13, you can see some of the trends I just discussed. While inflation rates generally trended down versus the second quarter of last year, they remain elevated on a historical basis. When this is combined with higher interest rates, it results in consumers being forced to prioritize their spending. In China, while the economy expanded by 6.3% in the second quarter, this was below expectations. Quarter of a quarter GDP growth in China slowed from 2.2% in the first quarter of this year to just 0.8% in the second quarter. Turning to slide 14, where we have a collection of key agricultural metrics, Commodity crop prices have stabilized in the second quarter, with the exception of rice, which is seeing prices moving even higher in recent days following India's recent export ban. In the U.S., farmer sentiment continued to improve, and the Purdue Ag Economy Barometer for July indicated that farmers remain cautiously optimistic about the agricultural economy. This improvement came after one month swoon in May, which was followed by an upswing in June as farmers took a more optimistic view of the future. On slide 15, you can see expected trends for electric vehicles over roughly the next decade. As Raviv already discussed, yesterday we broke ground at our battery material plant in St. Louis. As a reminder, this new facility will be able to support not only electrical vehicles, but also the infrastructure behind them, including energy storage. If you will now turn to slide 16, where on the left side you can see the sales bridge from the second quarter of last year to this year, for industrial products, sales of flame retardants remained weak. In potash, sales volume to China, India, and the US increased. However, prices were lower year over year. For phosphate solutions, higher prices for specialty food phosphates and lower raw material costs were unable to offset lower phosphate fertilizer volumes and prices. At Growing Solutions, we saw lower volumes and prices for our fertilizer plus and specialty agriculture products, while higher prices in our turf and ornamental business were unable to offset lower volumes. On the right side of the slide, you can see a year-over-year breakout of our second quarter sales by quantity and price. Turning to slide 17, for our adjusted EBITDA, which was $400,000, and $41 million and down year-over-year as expected, but up more than 20% versus the more normalized second quarter of 2021. The significant reduction in potash prices year-over-year had the biggest impact, which you can see on both the left and right-hand side of the slide. We have maintained our preferred cost position for our target potash markets and remain in an excellent location on the cost curve. As you can see on the left side of slide 18, we are in the first quartile. In addition to leading from a cost curve perspective, we are also leading from a price perspective, as you can see on the right side of this slide. I would now like to review a few highlights on slide 19. At quarter end, our net debt to EBITDA ratio was at 0.72 times. Each of our businesses tried to reduce working capital and inventory during the second quarter while executing against the savings and efficiency plans. We remain tightly focused on cost reduction and recorded a significant improvement in this area in the second quarter. Our prudent cash management resulted in strong cash conversion in the quarter, and we delivered operating and free cash flow of $391 million and $221 million, respectively. At quarter end, our available cash resources total $1.7 billion. For the second quarter, our dividend was approximately $81 million, or 6 cents per share. This brings our dividend yield for the past four quarters to 7.4%, an industry-leading rate. Also during the quarter, Fitch and S&P reaffirmed their ICL credit ratings, with both firms maintaining senior unsecured ratings of BBB-. Finally, on slide 20, you can see our 2023 guidance calling for adjusted EBITDA of between $1.6 to $1.8 billion in total and for our specialties businesses to contribute between $0.8 and $0.9 billion of that amount, which we indicated back on June 22nd. As a reminder, this guidance reflects the impact of the lower than anticipated potash price in China and the delay in the recovery of global demand for flame retardants. And with that, Peggy, we can begin the Q&A.

Thank you, Aviram. If you'd like to ask a question, please raise your hand using your mobile or desktop application or press star nine on your telephone keypad and wait for your name to be announced. Our first question will be from Alex Jones at B of A. Thanks.

Good afternoon, everyone. Thanks for taking my questions. The first one on... Rocket Dynamics, you talked about destocking and lower demand in growing solutions. Can you give us a little bit of color on how that's evolved into the third quarter? I guess some of the spot prices indicate that demand is improving. It would be good to hear your thoughts on that and how it differs by region. And then the second question, if I may, on industrial products. I know that pricing in the division has turned negative for the first time since 2020. And I think, Raviv, you cited lower elemental spot prices. Can you talk a little bit about how you expect that to evolve in the second half, whether that pricing will recover or turn more negative and maybe even into 2024, if you have any early thoughts? Thank you.

Thanks, Alex, for the questions. I'll start with growing solutions. We've been going through destocking now for almost three quarters, and the dynamics of the market are that farmers were in wait-and-see position given prices going down for such a long time. City Council Chambers, That has halted so now we're seeing prices stabilize and even go up, but at the same time we're still selling product with the raw materials from the past at least two quarters so still there is some. City Council Chambers, high cost inventory that's flowing through so we're not. City Council Chambers, Completely normalized in the third quarter, but at the same time we're in much better shape because. City Council Chambers, A price they're not going down anymore they're going up and the raw materials were in a downwards trend, so we expect to see an improvement already in in Q3, especially in in Brazil. Reza Azard, Please note that in terms of overall sales sales were actually pretty positive. Reza Azard, Be to be to see sales were very positive b2b sales we actually. Reza Azard, pulled a little bit because because of profitability reasons, so was a conscious decision so overall going forward we'll see better third and better fourth quarter also because of seasonality in Brazil as well. As far as our IP division is concerned, yes, prices have trended downward, and we're seeing the lowest prices in the last 15 years or so. We don't see the prices trending further down for a simple reason that they're below the cost levels of some of our Chinese competitors. We've actually seen a first bankruptcy of a small producer in China, and we expect that most of the Chinese producers are in bad shape at this point. uh so there could be some uh and we expect some supply balancing and some supply capacity coming out of the market uh which is uh as far as we're concerned it won't be too terrible if uh prices keep uh relatively low for a few more months uh because we have some unstable supply that uh that is good for us not to have in uh in the future of course we can't uh We can't control the direction of the wind. We can only adjust our sales. And unfortunately, our discipline was not enough in the first half of the year because there wasn't enough demand to exercise our value over volume strategy effectively enough. Now that we think that the market has gone through the downward So the downward process, we're actually keeping our market share in terms of actually exercising the volumes in our long-term contracts. In the first half of the year, we sent some of our customers to buy cheaper product on the market rather than take volume from us. And in fact, if you look at the overall ICL results, most of the volumes that we lost or most of the values of the volumes we lost in the value attributed to lower quantities comes from the IP division. Well, at the same time, had we insisted on selling those volumes, then the prices would have gone down faster or further. And so we would have seen the same kind of results, but more price effect and less volume effect. The short answer is we don't foresee prices going down further. We don't see them correcting very fast because the demand is still not back. The supply chain is not full of stock anymore, so there has been plenty of destocking, but there's not enough front-end demand to take prices up quickly. At the same time, supply is strained. Some of the suppliers are strained, so we think that we're reaching a new balance and expect that once demand picks up a little bit, prices will pick up as well and we'll return to a normalized situation. It is important to note that in this kind of business where in the worst times we can still achieve 25% EBITDA says a lot about how great this kind of business is. And we're sure that over the long term and over the cycle, we'll do a lot better, of course. Hope that answers. Thank you.

Thanks, Alex. Our next call is from the line of Joel Jackson with BMO. Joel?

Good morning or good afternoon. A few questions in the potash business. So can you give a bit of your expectation for what pricing might be in the third quarter? And then it looks like potash production is a little bit lower in Q1 and Q2 than it's been last year. Can you talk about what the production run rate would be like for the rest of the year in 2024?

City Council Chambers, So for us, the production and in the first quarter was lower than last year second quarter was. City Council Chambers, back to normal and even 100,000 more than originally planned because it was 100,000 tons deferred from the first quarter to the second quarter going into the year we expected that we'd be able to produce about 4.8 million. That's down a little bit because of some issues that we had in Spain. I won't go back into them, but the bottom line is that we're going to produce about 4.7. We expect that the sales volumes in Q3 and Q4 will be relatively similar to Q2. In terms of the average put-out price, that becomes easier for us now because we're completely sold out of granular product until the end of the year. Um, we still have some standard product to sell because, uh, the shipments to India were halted and we haven't supplied all of our India contract. Uh, there's ample demand. So, um, uh, if we need to sell outside of, uh, India, of course we will, but given that we have clarity, then we expect the average price for the second half of the year to be around 340, maybe a couple of bucks more. Uh, but, uh, that's, uh, pretty certain from our perspective. B. G. In terms of dynamics dynamics turned at the end of at the end of June, right now we're seeing in strong inland demand from in China, and the result is that prices are actually moving up inland in China, we see Brazil prices rebounding from 310 320 to over 350. Growth Team, Europe is relatively stable after somewhat of a downward spiral for a few months and the US looks relatively healthy, even though it's fluctuating so I can't say that prices have been established in the US a little bit longer term. We do see some buying interest for January and February in Brazil, which is very positive because that was not happening last year at all. There was no spot buying last year in July and August. Like I said, we're not selling anymore this year, but we're starting to sell for next year. So that's positive. So I'd say the overall dynamics in the potash market also given the new policy, it seems, of our Canadian competitors to curtail some of their production capacity, that also gives more stability from the supply side. So that's, in short, the potash dynamic at this point.

Maybe to add, sorry, that I think we're seeing the Russian Belarus side stabilizing and not continuing to close the gap. So there is some volume that is removed from the marketplace on that account as well. You put it all together, and we do not have a situation, I believe, anymore where supply is significantly higher than demand, which will lead to constructive surroundings for pricing. Put it all together, I think that's the picture that we see, that's the picture our peers see, and I think it makes a lot of sense.

That's it. Okay, just finally, when you think about your current opportunities at Bowlby or Cleveland Potash for propolis sulfide and the different variants that you have with the product, Um, now product prices globally back down to the three hundreds, um, sort of the higher end of the mid cycle range. What is that business like? Like you're, you're, you're doing great production of poly poly sulfate. Um, is that business now generating a significant return, a reasonable return to keep the business going? What do you need to, what, what kind of earnings are you making on it this year? What, what do you need to make it a, a viable long-term business?

Okay, so that's a great question, first of all it's a profitable business, but it's not. It's not a very profitable business like it was last year. The put ash price going down and the relatively weak demand all around for fertilizers in Europe has hurt that business. So yes, we're producing great, but we're not selling at the kind of global premium that we'd like. We're selling for a very nice premium in Europe because Europe appreciates The organic premium and the value of the product and has more experience with the product. Unfortunately, in Brazil and in China, customers still view this product or this family of products actually because we've developed a whole family of products. still is too close to commodity and tend to negotiate uh taking into account the effect of the putash price so the bottom line is uh we're getting uh we're getting uh good business in europe and not that great business in uh in China and in Brazil. And we need to continue to educate the market and to demonstrate the value that the products bring to the table. And that will help us get from a business that has relatively normalized profitability to higher profitability. It's not home run fertilizer with 30% EBITDA, but we believe that over time we could achieve 15% plus EBITDA this year. It'll barely be double digits, whereas last year we made very nice 20 plus percent EBITDA. I hope that answers. Thank you. Thank you.

Our next call is coming from the line of Rahi Parikh with Barclays. Rahi?

Perfect. You guys can hear me?

Yes.

Great. Well, I just have one question. So for IP, as we've seen, there's been some issues in the last quarter, though external. I'm just wondering, is there any game plan to kind of help the sector besides what's been happening? Is there any strategy to go around the lower demand, the electronic PB, Lupita D Montoya, slow down your thoughts on that, thank you. PB, Jorge Boone.:

: Thanks for the question look the flame returns for electronics and construction are very significant component of our offerings so it's not like we can circumvent that we're suffering from the cycle, like everybody else. It's a significant downturn because normally when there's a slowdown, we produce a little less. We take a disciplined approach. We demonstrate the value to our customers and are able usually to affect strong pricing. Currently, the drop in demand is so significant. There was so much stock built into the supply chain and it just has taken quite a while to get that stock out of the supply chain and the demand still has not built back up. I'm talking about the demand for TVs, laptops, uh cell phones uh still the demand is not back uh construction which is also a significant component there the cycle is longer so electronics is expected to come back quickly uh for refill of product uh on construction given the interest rates and overall activity globally it's going to take longer um put that together with abundant supply that as i said due to the dynamics that have caused the pricing to go down below the the cost of some of our competitors supply is going to Supply is going to come down somewhat in the coming months, and as supply normalizes a little bit, and as demand normalizes, we expect to go back to normal. In the first half of the year, we thought that if we didn't participate in the lower pricing game, uh we thought that we would get a better result unfortunately we didn't because the cycle was uh longer than we expected we are keeping our market share with our long-term customers now so we're going to lose less volume in the next few months and we're going to allow the market to take its course for a few more months until we get back to normal the the end game here is that we believe in the fundamental strength of the market we believe that we're going through the bottom side of a cycle uh bottom that hasn't happened for 15 years and we we're sure that the market is coming back and the only question is how many more months i will have to endure the current situation right now we're positive that we're not going to see uh significant return to normalized business in the third quarter. Fourth quarter, the jury is still out, but typically the fourth quarter is a weaker quarter and customers are not looking to build up stock towards the end of the year. So my guess is that we'll start seeing some more significant improvement in the beginning of 2024.

Just as a reminder in mid-June, When we came out with the new guidance, we did a pretty dramatic $200 million. We chopped off directly on the bromine business because already at that time, and that's what we guided, we did not see the recovery most certainly in Q3 and maybe not even Q4. So it's in a way it's covered by this, but again, it's a good question and we're waiting for the recovery. Please.

Yeah, makes total sense. Thanks for the clarification. And just so that we can get the clarity, the stock that's built up, it's all high cost stock that you're trying to get through, correct? Because it's made probably first half this year, last year. Sure, sure. Okay, perfect. Thank you so much.

Thank you.

City Council Chambers, Okay, so I understand that we don't have any more questions, so I want to thank you all for participating in this call and joining us as usual. City Council Chambers, We appreciate your questions and appreciate your following us and supporting us and with that thanks again to our employees at icl thanks to my colleague of your arm, thank you for helping me on this call and looking forward to coming back to you next quarter and reporting about our progress, thank you very much, thank you.