ADAMA: it is still in process of digesting high-cost inventory

In early Nov.,2023, ADAMA Ltd. (ADAMA) held its results briefing via live stream. SteveHawkins, President and Chief Executive Officer, Efrat Nagar, Chief FinancialOfficer, and other senior representatives of the company attended the livestream and answered questions from investors.

Q1: In the first three quarters of 2023, ADAMA hasmade about USD27.9 million as provision for obsolete stock. How’s the currentdigestion of high-cost inventory?

ADAMA: Inventory in 2023 has been at a high level sincethe over-distribution of channels in 2022, resulting in more inventoryimpairment in the first nine months of the year than those in previous years,and the company has initiated a number of stringent inventory managementmeasures to this end. The company counts inventory costs on a quarterly basisand compares them with market prices in real time, and makes provision forimpairment when necessary.

Inventorymanagement is the company’s current focus. On the one hand, we require regionsto sell as many products as possible and deplete inventory in order to improvecash flow and minimize impairment. On the other hand, the company approved newpurchases on the condition of high-margin products, so as to hedge againstfuture market price fluctuations. In the case of less than expected recovery inmarket demand, the company’s inventory in the first nine months decreasedsignificantly.

Q2: What were the main reasons that the sales in theSouth American market in Q3 2023 were lower than expected?

ADAMA: The trends seen in Latin America, includingBrazil, are generally in line with those seen in the northern hemisphere, withhigh levels of channel inventories and delayed farmer demand but strongconsumer demand. Demand at the farmer level is still positive, but the channelswere not digesting inventory as fast as expected, and the replenishment processis slow. At times, we also feel that this convergence in different parts of theglobal market is a bit unbelievable, and this is also the result of the over-distributionof the market in 2022 after Covid19 disrupted supply.

Q3: What is the current demand expectation for cropprotection products in 2024?

ADAMA: Demand at the farmer level has been positive. Seeinga steady increase in demand for crop protection products, we believe that thesame trend will be shown in 2024 in terms of the amount and value of cropprotection products. While depending in part on the performance of Brazil andthe rest of Latin America in the fourth quarter of this year, we expect demandto improve somewhat in 2024 at both the producer and channel levels. Though itmay not return to historical normal levels in 2024, we believe the trend isupturning.

Q4:What is the current status of the company’semployees and business operations at the Israeli headquarter?

ADAMA: We care about our colleagues and employees inIsrael at all times. With a total of approximately 1,500 employees, ADAMAIsrael is doing everything it can to support and focus on the company’s employees.To date, no ADAMA employees have been directly affected by the situation on theground. The company’s local operations have not been significantly affected orstagnated, and this is what we continue to strive to maintain.

Q5: Tell us about the operations and profitability ofthe three sites in Jingzhou, Anbang and Huifeng in the first nine months, aswell as how ADAMA is doing in China.

ADAMA: We are pleased to see that the capacityutilization of the sites is increasing. The Jingzhou base has the highestoperating rate, exceeding 90%. However, I would like to emphasize that thethree sites in China are all part of ADAMA’s global supply chain, and we willnot look at the operation of each site in isolation as each of them will affectour overall operating costs. What we need to grasp is the overall operation costsand the overall demand. At present, the company’s sales are declining year-on-year,and the operating rate of related product at each base will also be affected.

Q6:The company continued to lose money in the thirdquarter, which region did the loss mainly come from?

ADAMA: ADAMA’s business is distinctly seasonal. In thesecond half of the year, the main business comes from Brazil and other LatinAmerican countries. In the first nine months of this year, the Brazilian marketcontracted by 33% year-on-year, which also affected ADAMA Brazil’s performance.Although the decline was smaller than the average market level, there was stilla significant decline in volumes and prices. This was also a major reason forthe loss in this quarter.

Q7: What is the current level of pesticide formulationprices? How do you think of the prices of TC and formulation in 2024?

ADAMA: Webelieve that the price of TC in China has stabilized, which has alsocontributed to the stabilization of global prices. Compared with this year, webelieve that prices will further stabilize and improve in 2024.

Q8: Of all ADAMA plants, what percentage do the 3plants in Israel account for in terms of production capacity?

ADAMA: In Israel, the company produces both TC andformulations, and the production capacity of the two should be considered separately.Overall, 25%~30% of ADAMA’s production capacity comes from its plants inIsrael.

Q9：What is thecompany’s expectation for the market prosperity of the pesticide industry in2024?

ADAMA: As mentioned in the Q3 presentation, demand fromfarmers is still strong, so the industry as a whole will be boosted byconsumption and demand. Besides, the implementation of technology promotion andinnovation will undoubtedly facilitate the decrease of the overall inventory atthe channel level. We need to analyze the actual situation in the fourthquarter, with a special focus on the Brazilian and South American markets. Meanwhile,as climatic conditions have an impact on the pesticide industry, unfavorableweather has indeed brought challenges to our business. With normal climate, itis expected that the pesticide market will stabilize and improve in 2024.

Q9：What is thecompany’s outlook for the progress of destocking plant protection products in2024?

ADAMA: It’s acritical and complex issue because it’s a different market. First of all,Brazil and South America have very large market sizes, and it is necessary topay attention to the specific performance of these markets in the fourthquarter of 2023. For now, inventories in all markets around the world willgenerally be above historical averages by the end of the year. As a result,global channel inventories are expected to remain above average by thebeginning of 2024, impacting the overall industry performance in 2024.

However, the improvingdemand of farmers, coupled with the slowdown in the production and sales ofpesticide enterprises, will further accelerate the digestion of inventory. As apersonal opinion, Steve Hawkins believes that the market will rebound in 2024,and will show more new normalization features by the end of 2024.