Israel Chemicals Limited (OTCPK:ISCHY) Credit Suisse 26th Annual Chemical and Ag Science Conference Call September 18, 2013 8:40 AM ET
Stefan Borgas – President and Chief Executive Officer
Good morning ladies and gentlemen, we’ll have ICL to present here. ICL is a major potash producer globally and this is half of the company and the other half is the company is the major producer of elemental bromine and its derivatives as well as specialty chemicals and specialty fertilizers. So please let me welcome our CEO of the company, Stefan Borgas. Thank you.
Good morning ladies and gentlemen and thank you for coming. I want to spend about 20 minutes going of our strategy which will explain our way into the future. We have worked on this for the past year; we’ve published this with our half year results in August. But I think it's worthwhile to spend a little bit on time – because this little bit time on this because this will explain the way of ICL into the future and hopefully present its framework for your questions after the presentation and during the day.
I'll just spend two minutes for those who haven't seen it, on the half year numbers a history, really history because things have changed just about when these numbers were finished, we had a reasonably good half share, stable sales, good, very good volumes, good demand especially in the agricultural market, problems from the demand side in the electronics sector which continues I'll get into that little bit later as well. Everything else we’re relatively carefully optimistic. Margins are okay with the exception of potash and phosphate margins in the first half year which is a trend that of course as all of you who are dealing with the agricultural markets know quite well potash market is not what it was when these numbers were made.
ICL traditionally has been very focused on delivering strong ongoing cash flow from which a large portion we issue as dividends quarter-by-quarter, our dividend yield is up to 70%, we’ve been relatively close to that number in the past something that we don't intend to change in the long-term either. How does it look like of course in the fertilizer market very large uncertainty, we know that we don't know exactly what's going on, so we get prepared for the worst, and then are happy when the worst doesn't really happen altogether this is especially true for potash, but some concerns also in phosphate fertilizers where there is not so much talk about.
Industrial products, the outlook for the second half of the year, we expect very little recovery in the large electronic segment fields, we see some positive indicators but we don't really see it in the business and we expect continuous good business in the energy sector where the other half of our bromine franchise in the industry products goes to. The performance products business has a stable outlook, good demand from the end customers, margins are stable up to maybe a little bit improving even so this is the most positive part of our businesses.
With this I'll leave out, I finished the numbers for the half year due for all season and I want to concentrate the rest of my 20 minutes on the strategy of the company for the next five years, six years, seven years, eight years. So where do we come from? ICL is a company that has traditionally looked at its minerals position and thought about how can we build our business in potash and phosphate into bromine and in the past five years we’ve said in potash, we cannot really grow anymore and in phospate we cannot really grow anymore, in bromine we already have 40% market share, so we cannot grow anymore. And in Israel where our base, home base is most of our mines are we cannot grow anymore either. So growth in ICL has to come from other regions and new businesses.
That was the lease in the company in the last five years, we ask the question about who we are in a slightly different way at the end of last year. We asked the question not so much how can we grow in our base minerals but what are the markets that we sell into and where we answer the questions what markets do we sell into then we see the three – the 90% of our sales roughly 90% of our sales goes in agriculture, in food ingredients, processed foods and in engineered materials.
And then we ask the question, how do we add value into these three markets for customers here, while we have these minerals, these three big minerals, where we have strong good positions. And then we have the very sophisticated value chain of plants and technologies to that product for these end markets.
And we looked at these value chains and we said where do we have hold in this value chains and surprisingly we’ve found a lot of them. We also asked the questions, where do we have competitive weaknesses and also here we found a few. And if we put it altogether, we actually realized that in this core business of ICL from specialty minerals, mined minerals towards these three end markets, there is a lot of growth potential. And this is the essence of the recognition of what led to what at present now as our strategy going forward into the next few years.
We want to be a leading global specialty minerals player that fulfilled essential needs in agriculture, in food ingredients and in engineered materials. And we will do this on the basis of very strong mineral backward integration and a balance of commodity and specialty businesses that bring value to customers in these three markets. We want to do this globally and we want to do this with a strong focus on innovation and development.
In these three markets, which make up 90% of the Company, so 10% of the Company are not in these markets. If you are interested what we do with this please ask the question later. But these three markets are supported by very strong underlying mega-trends, two billion more people are coming into the world in the next 30 years. We will have a significant increase in calories per capita, especially in the developing world and we don’t have anymore available arable land. So that creates continuous pressure on productivity in agriculture.
We have a huge growth of the global middle class, which will double from 1.8 billion to almost 3.5 billion people, over the next 10 years with a total buying power of US$35 trillion and they want these kinds of products. We have scarcity in mineral reserve, especially in potash, phosphate and bromine, the three in which we are specifically focused on.
And all over the world, we have a very strongly growing concern about the environment, not judged by politicians, but increasingly by this big growing middle class, people are just nervous about it. And in an increasing amount of events, this environmental concern is not determined anymore just by scientific fact. We might not like that very much, but it will affect. So, emotional feelings about the environment and about the ecology is something that we’re going to have to deal with in an increasing way in the next years.
So what are we going to do with these three end markets? Well, it’s relatively simple actually now that I’ve told you the three story and how our thinking started. We have three areas, big areas of activities; two of the pillars that you see on the slide and the enabling platform.
And let me go through these one by one. Pillar I is focused on operational excellence on competitiveness, inside our existing businesses and in the new businesses that we’re going to build. Pillar II is focused on growth inside this core value chain from specialty minerals to these three end markets, agriculture, food ingredients and engineered materials.
And Pillar III is there, because there is always an optionality for larger acquisitions of mergers, and where shareholders might have an interest in, but nothing that as a management team we can manage very actively. But the third area of activity is the enabling platform that we need in order to make Pillars I and II work, specifically the implementation of global processes and global systems in order to be able to run a global company more efficiently than we do now.
So let me go through these now one by one. The operational excellence and the efficient improvement that we see has short to mid-term potential. We are convinced that until 2016 we can deliver a few $100 million of additional EBITDA to the bottom line in our existing business franchise. Where does this come from? It comes from these six vessels that you see outlined here on this slide.
We are purchasing in 60 different units, not coordinated in a very large way. But we are purchasing $4 billion worth of stuff, raw materials, services, equipment. And we think there is an efficiency improvement opportunity here, which delivers quite an interesting amount over the course of the next two to three years.
The energy consumption in the Company can be optimized. This is our short-term opportunity. This is a quick win that also energizes our teams a little bit, but still it’s in the tens of millions of dollars of opportunity. We are spending between $800 million and $900 million worth of CapEx every year over the next few years. We think there is a optimization opportunity here in order to reduce this amount and still deliver the same amount of products.
We’re doing pricing especially in our specialty businesses in a not always very organized and very disciplined way, so we see certain pricing improvements here, 0.2%, 0.3%, 0.4% of sales, not very dramatic, but it’s optimization of the small things. If you add it all up, it’s again several tens of millions of dollars of contribution here over the next two to three years.
Our R&D processes are very scattered. They are not coordinated on the global platform. If we do this in a little bit more systematic way and disciplined way, we think we can bring more innovation into the markets out of the existing R&D spend.
And finally the last part here, the efficiency program there is a focus on cost of goods reduction, especially in potash and phosphate, not just in our high cost mines, but all of our mines again contributing a triple-digit million dollar amounts until 2016. So this is a big stream of work with about 50 people now full-time focused on these activities in the different work streams working pretty much globally in all of the businesses.
The second part of the strategy, the second Pillar is growth, in this core business from Specialty minerals, potash, phosphate and bromine to the markets agriculture, food ingredients and engineered materials.
Let’s start with agriculture. In all of our three business segments, we have the opportunity to grow. Potash has been 50% to 60% of our ICL’s profits in the past. We started when we started the work in the strategy with the scenario, what happens if potash profits evaporates? When we presented the scenario to our Board, we were held that sustained business is great contributor of potash will be a strong in the very long-term.
When these events in Russia happens about three or four week ago, we were completely and fully prepared because we had designed a strategy exactly to this scenario that we have coming now potash profits going down significantly. Still we have capacity debottlenecking opportunity in the Dead Sea, where we can increase capacity by around output about by 20% through debottlenecking project that is very attractive CapEx to outputs and ratios and we have a very competitive and very large opportunity of expansion in our mine in Spain, where we’re only today mining 10% to 15% of the existing reserves.
Cost of goods in Spain are coming down to a level that is almost close to the Dead Sea internationally very, very competitive and investment environment in Spain also is very, very attractive. So that here we have possibly one of the world’s most attractive Greenfield capacity expansion opportunities both of those we are moving forward. We’re preparing for decisions sometimes over the course of the next two years.
In phosphate, we have a different challenge. We are not as competitive as the average of our competitors in terms of profitability and we are much too small. In phosphate fertilizers, we have 2% global market share and we only participate in one-third of the global market if we look at the market from a product perspective. So we have to grow in scale and we have to improve the technology inside our production platform in order to gain cost competitiveness through these two elements technology improvement and scale increase.
Also in phosphate, we are not participating enough in the emerging markets fertilizer growth. We are relying on just one sole source of rock – phosphate rock which is in The Negev desert in Israel. This is not enough in the long-term. We have just published three weeks ago a letter of intent with Vietnamese company to build a phosphate end-to-end platform in Vietnam from Rock all the way to fertilizers focused then on the Southeast Asian market.
In specialty fertilizers, we have about $700 million business today, focused on liquids, applications in local markets. But this is a very local business focused on coating technology, especially in horticulture and focused on few of the specialty commodities like MKP and potassium nitrate, which are more global products, but still kind of fit into the specialty applications.
This is a business that is too small to survive and too large to die. So we have to do something with it. We’re working on the details of the strategy here, but we see a very good opportunity for this to become the front-end of our commodity business and there with secure the market access for commodity business in the long-term especially important of course when this gets under pressure from competitors.
Second segments before I go on let me spend just one word on phosphates because it’s so strategic as a network for us here. The phosphate business touches – the phosphate value chain touches all of the three markets that we are talking about, if you see this here and there far to bring this platform up to a level of competitiveness where we are really robust dependable against the rest of the world is crucially important for all of its businesses.
Let me talk about food ingredients now, and food ingredients we have mostly a food phosphate business, which is $0.5 billion business today quite nice margins, very strong position. We’re the only globally active player that is playing in all of the regions of this world and we’re focused on processed meats, processed dairy and processed bakery.
What are we doing there? We’re developing and selling products and formulations. They are focused on the texture of foods [indiscernible] and on the stability of foods. How a stability in terms of longevity of course, shelf life, but also in the terms of stability in the processing of the foods temperature stability and so on and so forth.
And the real knowledge here in this business are not the products, but the know-how base. The big food companies are coming to us. If they have real challenging problems in reformulating a cake mix for example or making roasts, more juicy for example or the fast food chains making their fried foods, more sustainable under the heat lamp stick to solve these problems they come to us.
Once we realize that our knowledge here are not a products, but in technical base, their way forward in food ingredient also became clear for us. We need to build, continue to build this technical capability by building it out in China, in Brazil and in Southeast Asia that’s what we’re doing.
Right now we’re building labs and we’re hiring technicians and we’re training them with this know-how, and then we have a global platform that is focused on texture, improvement and stability improvement in processed food that we can leverage for other ingredients as well, which opens the opportunity for acquisitions in food. This is the way forward and that gives then the chance for ourselves to build a $1 billion plus business over the course of the next year. Of course it depends on the success of acquisitions.
The third market area are our engineered materials and here the most attractive part is the bromine franchise. We’re sitting on the most competitive bromine stores in the world. This is the only bromine source that has long-term viability, all of the bromine sources in the world are shrinking. They are depleting. The cost of production is going up in the Dead Sea. This is the other way around. There is enough bromine for the next few hundred years available there.
We’re also managing and operating the most competitive plants and production infrastructure in bromine. While we are not world champion and we have the largest world market share in elemental bromine, where we’re not world champion is an innovation in developing new applications for this fantastic molecule, and this is the step up that we have to do here of course it's very risky and we’re not going to be able to do it alone. This is the spur towards global partnerships with universities with start up companies and so on and so forth.
If we put it altogether, we need a platform on which we need we can, we need to deliver this, we need to bring our people together and order to manage this on a global basis. We need to put an ERP platform in place that can manage the company today we have about 20 ERP systems in the company very scattered. So we have a big one ERP project that is fully kicking, fully staffed, running but this will take three years to four years to deliver. And the third area here is to connect ICL to the external innovators around the world as part of this enabling platform work.
So what our financial aspirations coming out of this strategy, we want to grow faster in the market in these three end market agricultural, processed food and engineered materials. We want to maintain the profitability margin now what is the potash effect of course we have to calculate that out but in the rest of the company we want to keep the profitability margins, we will replace the large portion of infrastructure CapEx that we are carrying right now step-by-step over the next few years with growth CapEx. So our CapEx doesn't need to grow dramatically, if we add M&A of course this is a little bit of different story.
We want to maintain our investment grade level, we’re going to pursue a secondary listing either in New York or at London or deciding this right now. But this will happen next year for various reasons but also to finance the strategy and depending on the execution of the project and the timing our dividend policy will stay up to 70%, it might go down to 60% one or the other year it depends on project.
And we might do some shorter term activities, special dividends or share repurchases depending on cash availability because cash flow continues to be very strong. To summarize our case, we will be a leading global specialty minerals company focused on essential needs fulfillment of our clients in agriculture, in food ingredients and in engineered material, we will deliver this by an operational efficiency program by a growth program inside this value chain and by an enabling platform that will put us in the position to deliver this long-term over the next few years.
With this, I am at the end of the 20 minutes, and very happy to enter into any kind of discussions.
Thank you. Thank you very much for such competitive presentation just one question for me, before I leave the question from the potash markets to the audience, a little bit technical question from the share placement program can you little bit update more on the timing whether it’s going to be beginning or the end half of the year for 2014, the size of the potential placement and what are the key milestones you have to go through in order to be sure that you will be placing the shares next year?
I don't recall that I have talked about share placement, I've talked about do listing, it is slightly different although one has that needs the other, what we want to do very quickly now is to list in on the second stock market, in order to be ready for equity issues and there is really three reasons why we want to issue equity, one is because we have acquisition opportunities which require us to pay partially with new equity.
The second one is to create potentially a platform for large shareholders, who might want to divest parts or all of their shares. We have two of course very large shareholders that could wanted to do that, and we need to provide them a platform and then there is a defense used as well for this, this has to do with the regulatory environment in our home market in Israel which is tightening to a rather crazy level, in certain areas if this continues we need to have a backup in order to be able to manage the company properly on international standards into the future. So this is the background of this secondary listing, we estimate that we will do the listing in the first half of next year and toward the end of the first half of next year, and the issuant of equity will then happen within 12 months after that, but it depends very much on events.
Okay, thank you very much. Any other question? It seems like there is something of a waiting game with the Chinese and Indian buyers of potash, you’re kind of waiting for some kind of level to settle out before, they established pricing in this new environment. Can you just talk about that a little bit? How you see it playing out and how there will be changes following the Russian, Belarusian situation in your business from that?
Yeah, I mean the potash price negotiation isn’t really any dramatically different now that it was over the course of the last two or three years. The Indians are mostly preoccupied with can farmers afford product that is imported in large quantities and paid for an US dollars and farmers have to pay in rupees. Demeanors this is quite a message for them, especially this year when the rupee has come through this dramatic devaluation, so they’re really struggling with this.
We’re trying to help them here or there, where we can also by relieving them from obligations and pieces of contracts they’ve signed six months ago and try to help them in order to buy. So this is more coming from this nature. And China, the negotiation is more strategic, because it’s in the hands of centralized government owned negotiation group and they are playing the growing overcapacity in the potash market quite intelligently or over the course of the last few years by usually buying a lot in the first half and then telling the market, we might buy again in the second half and then they don’t and everybody get nervous and then at the end of the phase, there is a price concession that has happened. This happened now three times in a row.
Now they try to begin this year. They did begin this year and everybody thought they had a great deal of $400 of ton in potash as soon as they’ve bought huge amounts in the beginning of the year. They’ve about 3.5 tons of stock now. It doesn’t look like that was such a great deal for 2013 now.
So I’m not so sure, how this will change the negotiation tactics of the Chinese importers. They might become more spot oriented and therefore this is much more of a short-term optimization, which goes as well actually as I feel, we’re little player. We have 9% global markets of share, anywhere we adapt to the pricing of the large guys or the big guys when it comes to potash.
What we are doing differently maybe than some others. We have much more involved in the details of our customers. So we don’t just sell to traders into volume deals we worry very much about what happens to that material afterwards. So in China for example, we don’t sell to the national big importers. We sell to the prudential importers.
As a result, we don’t have two or three customers, we have 12 and together with them, we do a lot of other business activities using our specialty fertilizer know-how for example and this gives us more of a stable off-take. It doesn’t give us any pricing advantage, but it gives us the stable off-take. And in these days it proves to be quite clever.
In India, we’re doing similar things just with different tools, more focused on economics, education, where we invest together with our partners and educating the farmer to actually understand what is potash. And in Brazil, again we have a different way of going a little bit deeper into the value chain. This we can do because we’re smaller and we have the specialty business that comes to top.
Thanks. I guess you mentioned that you were – maybe unlike from your competitors, you were already planning before the latest developments in Russia that this actually you might occur. So I guess in some ways may be you have a better view or at least more accurate in some of your competitors. So based on hearing, what you are thinking going forward as your plan in your base case, you’re sort of early on touching the trend before, where are you now or you thinking that price comes along this low cost producer or that it somewhat higher on some return on capital metric. How do you seeing forward now, given what’s happened over the last five or six weeks? What’s your sort of planning going forward as far as potash price?
So a couple of things to this; first to the assumptions that we make on potash price changes every two weeks, because the environment changes every two weeks and we’ll learn new things. So after having gone through this iteration three times, we now understand that we don’t really understand. Okay I think we’re humble enough to admit this first. When you look at all the things that are announced none of this really makes any economic sense at all to increase your volumes by 30% and reduce your price by 25%, it still leave $500 million profit on the table every year.
So it can be just a pure economic decision making, if you assume that you can increase your volumes by 30% which in a commodity market seems utterly strange it could have this assumption. So this volume before price game personally I think is something to restructure the sales marketing activities around the world but it won’t be there for long because it’s very unprofitable for everybody who is involved.
Now what is the consequence for us, we have to make sure that our three mines that we have in potash in the Dead Sea, in Spain and in England are more competitive than the mines who delivers the last of the 56 million tons of the world needs is very simple and as long as this is the case we are there to stay and that’s what we are very focused on, we don’t have a problem in the Dead Sea, we have opportunity in there but we don’t have a problem from that perspective, we have no problem in Spain especially after our project in 2015 is finished, there we will be very, very competitive.
We will be on Dead Sea levels, we have a little bit more of a challenge in the UK but thankfully we started in September of last year, so we’re way ahead of where we wanted to be and we’re completely out of the danger zone judging from the perspective of prices that have been talked about today. We spent about six months trying to analyze for ourselves which mine in the world has rich cash cost, because that’s the determining factor if it comes to a pricing war where by the way we’re far away from. There is pretty good discipline in the market still despite all the things that happened.
Prices go down but they don’t crash. So from that perspective, I think we’re prepared, I already explained what we are doing on the customer side and this secures our franchise. I don’t think we lose 1 million ton and we won’t lose one ton of sales, if we don’t want to give it up. We might want to do this from time to time by using our storage capability in the Dead Sea where we can easily store a couple of million of tons because it’s such a good environment for storage but this is for the market not for giving up market share structurally.
So from that perspective, we understand that our profit contribution from potash in the next year or two, three, five will go down, compared to what it was in the past. We know that we will continue to have good profits from potash in the future. Therefore we have two interesting expansion opportunities. And then we have to wait what the big players are doing and maybe economic rationale will come back eventually to this market.
Thanks. Your two great commodity; low cost commodity franchises and you’re trying to grow the specialty area, which I understand, you’re spending a lot of CapEx relative to your cash flow over the next few years. So of that it’s about $2.5 billion to $3 billion if you said about $800 to $900, how much of that are things that you have to do, whether it’s regulatory environmental plus the plans to right size and get the cost of your Potash assets down? So something sort of the market is forcing you to do versus how much of that is pure discretionary and then how do you expect the discretionary piece like growth CapEx to trend over that period?
Okay. So from this say $900 million that we’re spending this year and next year about $800 million is infrastructure unfortunately. The normalized infrastructure spending that we have maintenance CapEx level that we have is more between $400 million and $500 million.
And this extra $300 million that we’re spending right now is linked to a couple of projects around the Dead Sea. You have them in the slide handout somewhere around Page 30 I think. I’ll give you the page number in a second. And they have listed there. They will be finished in two to three years. And then these $300 million to $400 million can be transformed later in to growth projects, into growth CapEx and of course we will only do them, if the IRR in a way that we can keep our financial guidelines that I talked about that we can keep our margins and very simple. But we think we have these projects. So therefore I said we want to keep the level, but we will replace up around $400 million step-by-step with growth prospects all the time.
Thank you very much.
Page 32, you’ll find this projects listed that make up most of this form.
Thank you very much, very helpful.
Thank you. Thanks for listening.
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