Makhteshim Agan sales up in Q3 2010

Makhteshim Agan Group (TASE:  MAIN), the world leader in branded off-patent crop protection solutions, today reported financial results for the 2010 third quarter and nine months, ended September 30, 2010.

FINANCIAL HIGHLIGHTS

Below are key financial metrics for 3Q 10

*2010 as reported numbers reflect $33.5 million of extraordinary charges related to the Milenia restructuring ($28.4 million) and the Albaugh acquisition ($5.1 million).  
+ 2010 Non-GAAP numbers exclude aforementioned extraordinary charges.

Below are key financial metrics for the nine months ended 9/30/10:

*2010 as reported numbers reflect $33.5 million of extraordinary charges related to the Milenia restructuring ($28.4 million) and the Albaugh acquisition ($5.1 million).
**2009 as reported numbers reflect $34.6 million of extraordinary charges related to ANVISA investigation in Brazil ($11.4 million), inventory impairment ($8.2 million) and special dividend ($15.0)
+ +Non-GAAP numbers exclude aforementioned extraordinary charges.

Mr. Avraham Bigger, Makhteshim Agan’s Chairman of the Board, commented, “Despite an industry facing challenges, such as pricing pressures and increased competition, Makhteshim Agan posted continued top line growth mainly driven by solid business performance in our operations away from Brazil. The Company successfully leveraged its global leadership position in crop protection to continue and post growth. The restructuring of our Brazilian operation weighs on our business performance; however, we are confident that once it is completed we will be able to improve our competitive positioning in this important market while enhancing our profitability.”

Mr. Erez Vigodman, President and CEO of Makhteshim Agan, added, “The Company has grown and improved most of its profitability measures as a result of sales growth in emerging markets and Europe markets where we gained market share and improved our competitive positioning. Nevertheless, extraordinary charges related to the business performance of our Brazilian operation as well as restructuring efforts impacted our quarterly results. 

"In addition to managing our day-to day activities, we are completing a substantial restructuring of our operation in Brazil in an effort to improve our competitive positioning and return to profitability in our Milenia operation - as early as 2011. We are also advancing our initiatives to optimize our global manufacturing network with the goal of improving MAIs product cost structure. In October, we reached an important milestone in this optimization process when we signed new agreements with our unionized employees in Israel. In parallel, we are taking actions to strengthen the global layout and effectiveness of our supply chain.

In the third quarter we announced acquisition in Mexico and Korea and a strategic collaboration with Monsanto in the Americas region. These activities will allow us to further cement our global footprint and competitive position which we can translate into profitable growth,” Mr. Vigodman concluded.       

STRATEGIC UPDATE

During 3Q 2010, the Company undertook several strategic business initiatives to strengthen its operations in key markets around the world.  These included the business results and restructuring of its Brazilian subsidiary, Milenia, with attendant extraordinary charges taken this current and in the next quarter, and previously announced acquisitions in Korea and Mexico, both attractive growth markets.  In addition, and as part of a manufacturing optimization process, the Company reached agreement with its labor unions in Israel to allow for early retirement of approximately 250 employees. The Company also entered into a collaboration agreement with Monsanto in the North and Latin American markets.  On October 11, 2010, the Company announced that ChemChina had approached Koor Industries, Makhteshim Agan’s controlling shareholder, regarding a strategic business combination related to the Company.  On November 21, the Company announced that discussions continue regarding this transaction and may take several more weeks; it also reported that some changes in the terms and structure of the agreement are considered.  Further detail on these strategic initiatives follows below.

SALES

Third quarter 2010 sales were $533.1 million, compared with $435.9 million in the corresponding period of 2009, an increase of 22.3%. This strong growth in the sale of crop protection products was achieved despite a decline in the average sales price for the Company’s products, as compared to the prices in the corresponding quarter last year.   Sales for the first nine months ended September 30, 2010 were $1.9 billion, an 8.1% increase compared with $1.7 billion in the same period last year.

Below are sales for the 3Q 10 and the nine month period by geographic region:

On a geographic basis, the strongest sales increases were in the Company’s Asia Pacific & Africa region, which contributed $98.0 million in the third quarter of 2010, a 68.4% increase from $58.2 million in the same quarter last year. This improvement was due to an increase in sales volume, particularly in India and Australia.  For the first nine months of 2010, sales in this region amounted to $277.2 million, compared to $176.2 million in the same period last year, an increase of 57.3%.

Sales in Latin America for 3Q 2010 amounted to $149.5 million, compared with $101.8 million in the same quarter last year, a 46.9% increase.  The magnitude of this increase is due in part to the fact that Latin American sales in 3Q 2009 were negatively impacted by the Brazilian Ministry of Health investigations.  Apart from improved sales in Brazil, increased sales volume in Argentine and Colombia contributed to overall improvement when compared to 3Q 2009.  For the first nine months of 2010, sales in Latin America totaled $371.3 million, compared to $344.4 million in the same period of the previous year, a 7.8% increase.

North American sales for 3Q 2010 amounted to $74.5 million, compared with $77.0 million in the same quarter of the previous year, a decrease of 3.1%.  During the first nine months of 2010, sales in North America amounted to $320.6 million, compared to $321.3 million in the corresponding period of the previous year, a decrease of 0.2%.

European sales in 3Q 2010 were $191.4 million, compared with $177.1 million in the corresponding period of the previous year, an increase of 8.1%. The growth stemmed mainly from increased sales of crop protection products in Eastern Europe. During the first nine months of 2010, sales in Europe totaled $825.0 million, compared to $810.4 million in the same period last year, an increase of 1.8%.

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)

Excluding one-time extraordinary charges, EBITDA for 3Q 2010 was $37.1 million (7.0% of sales), compared to $20.1 million (4.6% of sales) in 3Q 2009, an increase of 84.5%.  Excluding one-time extraordinary charges taken in 3Q 2010, EBITDA for the first nine months was $241.1 million (13.0% of sales), compared to $209.0 million (12.5% of sales) in 3Q 2009, an increase of 15.3%.  Including one-time extraordinary charges, 3Q 2010 EBITDA was $23.5 million (4.4% of sales), an increase of 16.8% over 3Q 2009.  Including 3Q 2010 one-time extraordinary charges, EBITDA during the first 9 months was $227.5 million (12.2% of sales), an increase of 8.7% over the same period in the prior year. 

GROSS PROFIT  

Gross profit for 3Q 2010, excluding one-time extraordinary charges of $33.5 million related to the Milenia restructuring ($28.4 million) and the Albaugh acquisition ($5.1 million), totaled $143.7 million, compared to $108.8 million in the same period last year, an increase of 32%.  Excluding 3Q 10 one-time extraordinary charges, gross profit for the first nine months of the year was $552.7 million, compared to $481.0 million in the same period of 2010, an increase of 14.6%.

Including one-time extraordinary charges, gross profit in 3Q 2010 totaled $135.2 million (25.4% of sales), an increase of 24.3% over 3Q 2009.  For the nine months ending September 30, 2010, gross profit, including one-time extraordinary charges taken in 3Q 2010, was $543.2 million.  This was a 12.9% increase, compared to 3Q 2009.  Including one-time charges in 3Q 2010, nine month gross margin for 2010 was 29.2%, compared with 28.0% for the same period in 2009.

The growth in both gross profit and gross margin during the third quarter and first nine months of 2010 was due to an increase in sales volume as well as a decrease in raw material prices which led to reduced selling costs. This was partially offset by the decline in average sales price.

OPERATING PROFIT

Operating profit for the period totaled $8.9 million, excluding the aforementioned extraordinary charges, compared with operating loss of $6.1 million in the third quarter of 2009. Including the extraordinary items, third quarter 2010 operating loss totaled $4.6 million. Operating profit for the nine month period ended September 30, 2010 was $146.0 million (7.9% of sales) compared with $137.2 million (8.0% of sales) in the same quarter of last year.  The increase in operating profit in the quarter, less the one-time effects and events during the reporting period, derive from the increase in gross profits as aforesaid.

OPERATING EXPENSES

Operating expenses for the quarter totaled $139.9 million (26.2% of sales), compared with $114.9 million (26.4% of sales) during the second quarter of 2009. Operating expenses for the first nine months of 2010 were $397.2 million (21.4% of sales), compared with $343.8 million (20.0% of sales) during the first nine months of 2009. The increase in operating expenses in the quarter and in the nine month period is primarily attributable to: 1) an increase in sales costs and 2) an increase in administrative and general expenses that was mostly related to negotiations for the Albaugh acquisition.

NET INCOME

Net income for the quarter was $22.8 million, excluding the aforementioned one-time charges. This compares with $17.5 million for the same quarter last year. Including the one-time charges, the Company recorded a net loss of $56.2 million. Net income during the nine months ended September 30, 2010 totaled $27.0 million (1.5% of sales) compared with $62.4 million (3.6% of sales) during the same period last year.

CASH FLOW

The Company recorded negative cash flow from operating activities of $117.8 million during the third quarter of 2010, compared to positive cash flow from operating activities of $60.2 million in the third quarter of 2009.  During the first nine months of 2010, operating cash flow amounted to $168.2 million compared with $219.6 million during the corresponding period last year.  The decrease in the operating cash flows during the quarter and the first nine months of the year stemmed from an increase in working capital due to the sales growth and significant increase in the volume of the Companys operations compared with the corresponding period last year.

Free cash flow (less short-term investments) in the third quarter of 2010 amounted to negative cash flow of $154.8 million compared with a positive cash flow of $27.5 million in the same period last year. During the nine months ended September 30, 2010, free cash flow (less short-term investments) totaled $36.7 million compared with $111.9 million during the corresponding period last year. Declining cash flow during the quarter and the first nine months was attributable to the aforementioned negative operating cash flow.

FINANCING EXPENSES

Financing expenses totaled $35.6 million for the third quarter of 2010 compared with $28.8 million in the same quarter last year. The increase in financing expenses in the quarter is mainly attributable to non-cash financing costs incurred due to revaluation of employee funds related to the strengthening of the new Israeli shekel against the U.S. dollar as well as changes in actuary assessments.

Financing expenses during the nine months ended September 30, 2010 were $95.4 million compared with $70.6 million during the same period last year. The increase in financing expenses was due to the revaluation of employee funds and the change with respect to hedging transactions from Income (net) to Expenses (net).