ADAMA overcomes headwinds to conclude another quarter with billion-dollar sales

ADAMA Ltd. reported its financial results for the second quarter and six-month period ended June 30, 2019.

Commenting on the results, Yang Xingqiang, Chairman of ADAMA’s Board of Directors, said, “In challenging times, the Company’s ability to successfully execute on its growth strategy anchors our strength. Our robust and expanding product portfolio, combined with our strong global market presence, has allowed us to overcome market and supply challenges and deliver a resilient performance.”
 

Chen Lichtenstein, President and CEO of ADAMA, added, “We now cross difficult market conditions, with adverse weather, industry-wide supply constraints and currency headwinds. In addition, as the gradual ramp-up of production at the Jingzhou old site is ongoing, we still lack sufficient supply of products in high demand. We drive our performance by capitalizing on growth markets, deepening our commercial presence and launching new and differentiated products, and continue to outgrow the market.”
 

Performance in Context of Market Environment
 

Significant precipitation in North America in the first quarter followed by unprecedented flooding in the second quarter, alongside extreme dry weather in Europe, India and parts of Asia-Pacific, delayed and reduced application of crop protection products in these regions. Latin America benefited from relatively strong demand in the southern hemisphere off-season. India’s monsoon season started late in the second quarter, delaying the sowing of several summer-planted crops.    
 

Crop prices have generally remained subdued in the first half of 2019, with the exception of corn, which continues to challenge farmer income in most regions, resulting in continued sluggish demand for crop protection products.
 

The sustained supply-constrained environment, mostly owing to increased environmental focus in China, has seen continued industry-wide shortages in certain raw materials and intermediates, and resulted in procurement costs remaining elevated compared to the first half of last year. The Company continues to raise its prices in all regions and contain its manufacturing and other operating costs to mitigate this impact.
 

Looking toward the second half of the year, the Company expects robust growth, as the southern hemisphere regions, which are performing strongly, move into their peak season, as the Monsoon season progresses in India, and as supply constraints start alleviating.
 

Financial Highlights
 

Revenues in the second quarter were $1,002 million, in-line with the same period last year in constant currency terms, and somewhat lower in US dollar terms (5% up in RMB terms). Half-year sales reached $2,008 million, slightly above last year in constant currency terms, and somewhat below in US dollar terms (5% up in RMB terms), reflecting the lack of high-demand products due to the Jingzhou old site disruption, which constrained H1 sales by approximately $100 million.
 

The extended cold and wet conditions in North America, alongside dry weather in Europe, India and parts of Asia-Pacific, delayed and reduced application of crop protection products, while continued tight supply conditions prevented the Company from taking advantage of demand for certain products.
 

Strong growth in Latin America, led by Brazil, as well as resilient performance in APAC, notably Australia, alongside the contribution of joiners Bonide and Anpon, partially offset these weather- and supply-related delays. The continued supportive pricing environment allowed for the passing on of some of the impact of the constrained supply and higher procurement costs, while mitigating the impact of generally softer currencies. ADAMA continues to drive growth with new launches of differentiated product throughout all regions.
 

In China, continued strong demand for the Company’s differentiated, formulated and branded products is supporting the shift towards sales through its own channels and away from sales of unformulated, technical active ingredients to intermediaries.
 

Gross profit in the second quarter was $327 million (gross margin of 32.6%) and $673 million (gross margin of 33.5%) in the half-year, compared to $342 million (gross margin of 33.4%) and $694 million (gross margin of 33.9%) in the corresponding periods last year, respectively (up by 2% and 3%, respectively, in RMB terms). The relatively modest decline in gross margin reflects the benefit of stronger pricing, which compensated for a large part of the impact of the lower available volumes, higher procurement costs and softer currencies. The Jingzhou old site disruption constrained H1 gross profit by approximately $35 million.

 

Operating income in the second quarter was $116 million (11.5% of sales) and $242 million (12.1% of sales) in the first half, compared to $137 million (13.4% of sales) and $273 million (13.3% of sales) in the corresponding periods last year, respectively.

EBITDA in the second quarter was $177 million (17.7% of sales) and $365 million (18.2% of sales) in the first half, compared to $189 million (18.5% of sales) and $379 million (18.5% of sales) in the corresponding periods last year, respectively (up by 0.2% and 2.5%, respectively in RMB terms). The Jingzhou old site disruption, including idleness costs, constrained H1 EBITDA by approximately $50 million.

 

Net income in the second quarter was $51 million (5.1% of sales) and $131 million (6.5% of sales) in the first half compared to $73 million (7.1% of sales) and $157 million (7.7% of sales) in the corresponding periods last year, respectively (lower by 26% and 11%, respectively, in RMB terms).    The Jingzhou old site disruption, including the expected lower resulting taxes, constrained H1 Net Income by approximately $40 million.

Jingzhou Old Site
 

Following resumption of operations at the Jingzhou old site in late March, the Company is advancing the gradual ramp-up of production. The new state-of-the-art wastewater treatment facility is operational, and the upgraded biological-decomposition systems are being acclimated to the improved wastewater quality. As this progresses, the Company is still experiencing constrained supply in key products manufactured at the site, especially impacting the Americas, Asia-Pacific, China, and India, Middle-East and Africa, constraining sales and gross profit by approximately $100 million and $35 million, respectively, in the half-year, and recorded approximately $20 million in related idleness costs during the period, bringing the impact from the disruption on EBITDA to approximately $50 million and on Net Income to approximately $40 million. In recent weeks, the Ecological Protection Supervision Team of the central government commenced on-site inspections at many ChemChina group companies, including the Company’s sites in China, as part of its strengthening ongoing environmental and safety focus. ADAMA is working in full cooperation, in the context of its 3-year relocation and upgrade process which is due to conclude next year, to identify and rectify any safety or environmental matter.

Europe: Sales in Europe were lower by 16.7% in the quarter and 13.6% in the first half, in constant currency terms, compared to the corresponding periods last year. This is primarily due to tight supply conditions as well as unseasonably hot weather towards the end of the second quarter, which constrained sales in key countries.
 

In Northern Europe, sales continued to be impacted by credit restraint in Ukraine, with the Company proactively restricting sales to only those customers with a proven ability to pay, as well as by adverse weather conditions in Germany, reducing crop protection application in all major crops, alongside the tight supply conditions.

In Southern Europe, weak disease pressure in key markets resulted in subdued demand for crop protection products, while supply-related constraints further impacted sales.
 

In the second quarter, ADAMA launched MERKUR® in France, a differentiated, broad-spectrum three-way herbicide mixture in an innovative formulation, combating weed seed germination and growth. In addition, the Company obtained several new product registrations, including MERPLUS®, a differentiated fungicide for pome fruits in Europe and FLUTEPRID®, a 3-way combination insecticide-fungicide seed dressing for control of diseases and pests in grain crops in Russia.
 

In US dollar terms, sales in Europe were lower by 13.6% in the quarter and 10.6% in the first half compared to the corresponding periods last year, reflecting positive hedging contribution.
 

North America: Sales increased by 3.7% in the quarter and were 1.3% lower in the first half, in constant currency terms, compared with the corresponding periods last year, with continued price increases partially offsetting adverse weather conditions.
 

Significant and extended precipitation in the first quarter, followed by unprecedented floodings in the second quarter, posed significant challenges for farmers, delaying the planting season and reducing planted acreage, impacting sales across key agricultural markets.
 

In Consumer and Professional Solutions, the Company saw a pleasing contribution from joiner Bonide, despite the challenging weather conditions which similarly impacted the non-crop market.
 

BRAZEN®, a selective herbicide for grass control in spring wheat and barley in Canada, delivered a strong performance in its first quarter following its recent launch.
 

In US dollar terms, sales in North America increased by 3.5% in the quarter and were 1.6% lower in the first half, compared to the corresponding periods last year.
 

Latin America: Latin America delivered exceptionally strong growth in both the second quarter and half year period, with sales up by 20.0% and 22.6%, in constant currency terms, compared to the corresponding periods last year, respectively. Business growth in key countries across the region, alongside continued price increases, more than offset the impact of constrained supply.
 

The Company continues to grow strongly in Brazil, where robust demand for its corn portfolio overcame supply shortages in certain products. The Company saw strong performance in the key soybean market, leveraging its distinctive product offering, including flagship CRONNOS®, the triple-action fungicide for rust, while benefiting from an increase in planted areas.
 

Noteworthy performance was recorded in the second quarter in Argentina, despite adverse weather conditions.
 

During the quarter, the Company launched several new products, including BREVIS®, a differentiated post-bloom fruit thinner in apples in Argentina, as well as KADABRA®, a broad-spectrum mixture insecticide for vegetables in Mexico, and UBERTOP® an insecticide used mainly for the control of a wide range of pests in tomato and cabbage in Central America, while the proprietary NIMITZ® suite of nematicide products was launched in Peru.
 

In US dollar terms, sales in Latin America increased by 14.2% in the quarter and 14.4% in the first half, compared to the corresponding periods last year, reflecting the impact of softer currencies.
 

Asia-Pacific: Sales in the region grew by 7.8% in the second quarter and 5.2% in the first half, in constant currency terms, compared to the corresponding periods last year, driven by business growth and continued price increases.
 

The second quarter saw a strong recovery in Australia, as long-awaited rain bolstered the winter crop season following the severe drought which significantly impacted sales in the country in the first quarter. However, drought conditions continued to impact the broader Asia-Pacific region in the second quarter, reducing crop protection application and constraining sales in many countries.
 

During the quarter, the Company obtained a number of new registrations for differentiated products, including LEGACY MA-X® for controlling a wide range of broadleaf weeds in Australian winter cereals and pasture, APROPO® fungicide for rice in Philippines, and TOPNOTCH® to control various diseases in Australian wheat and barley.
 

In China, ADAMA continues to see strong demand for its differentiated, formulated and branded products, and prioritizes the sale of these products through its own channels by rapidly shifting away from selling unformulated, technical product to intermediaries, and in so doing benefiting from the full product positioning as well as end-to-end margin. Sales of these formulated, branded products other than those from the Jingzhou old site, grew by more than 20% in both the quarter and first half.
 

ADAMA continues to make significant portfolio advances in China, with the launch in the second quarter of LEIWANG®, a combination insecticide to help combat the fall army worm outbreak.
 

Anpon delivered a solid performance in its first full quarter since joining, compensating for the interruption to supply resulting from the Jingzhou old site.
 

In US dollar terms, sales in Asia-Pacific grew by 3.1% in the second quarter and by 0.7% in the first half, compared to the corresponding periods last year, reflecting the impact of softer currencies.
 

India, Middle East & Africa: Sales were lower by 6.2% in the second quarter, yet up by 5.9% in the first half, in constant currency terms, compared to the corresponding periods last year.
 

Sales in India were impacted by the late Monsoon rains, reducing planting areas and delaying crop protection application, as well as supply constraints in China-sourced products. In the half-year, growth in the region benefited from a strong performance in Turkey.
 

In US dollar terms, sales were lower by 10.2% in the second quarter and 1.4% in the first half, compared to the corresponding periods last year, reflecting the impact of softer currencies.