Ladies and gentlemen, thank you for standing by and welcome to the ICL Analyst Conference Call. Our presentation today will be followed by a question-and-answer session. [Operator Instructions] I'd like to hand the call over to our first speaker today, Peggy Reilly Tharp, Vice President of Global Investor Relations. Please go ahead, ma'am.

Thank you. Hello, everyone. I'm Peggy Reilly 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 is available on our website. Please be sure to review the disclaimer on Slide 2. 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 Zoller; followed by Mr. Aviram Lahav, our CFO. Following the presentation, we will open the line for the Q&A session. Raviv, please.

Thank you, Peggy and welcome, everyone. In the second quarter, our focus on long-term specialty solutions benefited the company once again along with additional upside from commodity prices. The company's strong performance was supported by increased demand and higher prices in most markets and was achieved even as raw material costs remained inflated and as global supply chain challenges continued. To begin with Slide 3, ICL delivered all-time record sales and EBITDA and another consecutive quarter of profit and margin growth. We saw record results from all our specialties of businesses Industrial Products, Phosphate Solutions and Innovative Ag Solutions, as well as from our commodity businesses. We also achieved multiple production records as we focused on efficiency and productivity. While we have recently benefited from commodity market upside, these cycles come and go. However, the investments and improvements we have made in our production will benefit us over the long term. In the second quarter, ICL delivered record sales of nearly $2.9 billion, an increase of more than $1.2 billion and ahead of our expectations. Adjusted EBITDA of nearly $1.3 billion was also an all-time record. Once again, our focus on long-term cash generation helped deliver strong free cash flow of $410 million, which was up more than 300%. Our policy to return to our shareholders up to 50% of annual adjusted net income, resulted in a dividend of $0.2918 per share, up more than 450% versus $0.0526 in the second quarter of last year. In total ICL will pay out a $375 million dividend for the quarter. And last but certainly not least, we settled a significant tax dispute with the Israeli Tax Authority regarding the surplus profit levy on natural resources. By settling, we've finalized all disputes regarding previous years and gained certainty regarding the future. While Aviram…

Thank you, Raviv and to all of you for joining us today. While you've already seen slide 13, I would like to call out a few additional highlights. Second quarter adjusted operating income of $1.139 billion was up more than 380% and adjusted operating margin of 39.5% was up dramatically from 14.6% in the second quarter of last year. For the quarter, adjusted net income of $751 million was up more than 450% year-over-year. If you will turn to Slide 14, you will see that many of the macro trends we saw in the first quarter continued into the second. Global growth remained strong even as inflation continued to soar in most countries and both commodity and grain prices remained high. The situation in Ukraine has not been resolved and it seems as if each day brings changes and in some cases even greater uncertainty. There have been limited relief from the supply chain disruptions for ICL and others around the world. However, our supply chain procurement and logistics teams have worked tirelessly to overcome these challenges and we have continued to leverage our advantageous production locations and the global supply chain capabilities. In addition, currencies have continued to fluctuate with the U.S. dollar surging to its highest level in nearly two decades, at times hovering its parity with the euro. On slide 15, you can see prices for potash and sulfur continues to trend higher during the second quarter while phosphoric acid prices, paper and freight rates declined slightly. While we were able to offset the increase in prices for raw materials in the quarter, this is expected to become more uncertain in the second half of the year. Turning to Slide 16, where you can see the trends for crop economics also remained elevated throughout the first half…

Thank you. [Operator Instructions] Our first question today comes from the line of Mubasher Chaudhry. Please go ahead.

Hi, can you hear me?

Yes, thank you.

Okay, Perfect. Hi guys. Thank you for taking my questions. Just a couple to start with on the potash market and then one on the industrial product. So on the potash side of things, we're hearing continued chatter around more tons coming out of Belarus. Can you provide your thoughts on how you see the market for the rest of the year and whether you see some of the supplier pressures coming off. And then more specifically to your pricing. The [ASP] is still quite at a discount to the average spot price for the quarter. Should we expect this discount to remain given your contracted volumes to India and China? Or is there a potential to close the gap? So that's the first on potash. And then in Industrial Products. There was a comment around the Chinese phosphorus coming back to the market in the press release, can you provide some thoughts on the size and do you expect prices to be preserved for the remaining part of the year or do you see them softening into the rest of the year? Thank you.

So first on potash prices. I'm not sure, I understood why you think that this is our market maybe explain the question.

I'm sorry, you broke up a little bit. So on the potash market. So we are seeing a lot more Belarusian tons coming out of the market -- Belarusian tons coming into the market and I was wondering whether that's having an impact on -- okay.

From the very beginning when sanctions were put in place, the expectation was that without the Port of [Klaipeda], the Belarusians would be able to get about a third of their product to the market and I think that they are not there yet, but according to what we're hearing, they're going up from about a little over 100,000 tons a month to 200,000 tons or better. According to the information that we have about 250,000 is achievable through various small ports and rail to China. So our expectation is that 6 million to 7 million tons will stay absent from the market. So that's regarding Belarus -- Belorussia. That's the existing information. In terms of average price on potash, our average price is a mix of contracts and spot prices and we present the realized price. So in the second quarter, the average price in Brazil was over $1,000. Contract prices, as you know, $590. In the second quarter, we expect prices will soften a bit. So they will still be higher than the first quarter, significantly but lower than in the second quarter. So our expectation for third quarter is around $700 for the third quarter. Regarding your last question on Industrial Products, currently we see relative strength in some sectors such as oil and gas, in consumer electronics and also in automotive, we see a certain softness. Part of that has to do with the situation in China and lockage's and temporary change in demand. We think that the long term automotive demand coming from electric vehicle is very strong in the face of the long term. So we don't think that softness will hold. All in all, most of our industrial products business and bromine related business is contracted in long-term contracts. So we don't see any significant effect. On the phosphorus-based business, yes, there is Chinese product coming out, not like two years ago, but quite a bit of product is coming out. We see less quantities being sold but the prices are holding. So the overall results are still very, very good. We don't know what the policy in China will be going forward. On phosphate, we know that there are quite strict restrictions now on export, so on phosphate from the beginning of the year until mid-year about 2 million tons have come out and in the second half of the year, it's expected about another 3 million. So overall about 5 million compared to 11 million came into the market in 2021, so on phosphorus, it's not clear where we're going to be. On phosphate, it looks like, something like 6 million tons will be missing this year coming out of China. Hope that answers.

That's very helpful. Thank you.

Just one note, Raviv if I may.

Go ahead, sure.

That we are seeing Mubasher, that the leaders in the market actually are upping the prices with this, so and I think, there is quite a lot of volatility and position taking and most probably, the near future will sort that out. I think it's in a way, if I can say with this little amount, it's actually happening. I think, it's quite unsorted, does that make sense?

Yes, maybe I'll sneak in a follow-up, just across industrial products and then across innovative Ag as well, the performance has been quite strong and I'm just wondering, as we head into the third quarter, and you've had a month of it so far, are you starting to see a little bit of a softening in demand and therefore your ability to pass on pricing is not quite as strong as it was in the 1Q and 2Q to offset the rules and just from a slightly softer demand perspective, any thoughts around that be helpful?

It depends what softer demand means because there are two things that come into play here. First of all that the seasonality. So there is seasonal softness, if you will. And second, remember that once the war started, there was a rush to stock and to make sure that supply was -- would be available, so distributors stocked up and Brazil that takes about 12 million tons a year took 7 million tons in the first half of the year. So there is still no need for immediate supply in June or July, but at the same time, Brazil is going to be taking 12 million tons because the potash is needed for the soil, they can't skip a year which is different than different soil types and in Europe, for example, where we see about 20% demand destruction in Europe, so those 5 million tons are going to be acquired. There is some convergence of price, because of price levels in different parts of the world have been -- have been quite at a significant difference and what competition does is it makes prices even out. In our case, we sold to Brazil in the first half 85% more than we did in the first half of last year. We sold almost 750,000 tons versus 400,000 tons last year, so it means that about 80% of our allocation to Brazil were sold in the first half, because we were opportunistic that prices were higher and we did what we do in competition. But that's very natural that prices converge. The fundamentals of the market is that 6 million or 7 million tons are missing, and the only way to balance supply and demand is demand destruction through prices going higher. Unfortunately in today's world, there are geopolitical implications because those that are not getting the product are maybe the ones that needed the most, but that's a secondary issue that we don't have enough time to discuss today. Hope that answers.

Thank you.

Thank you. Our next question comes from the line of Joel Jackson from BMO Capital. Please go ahead.

Hi, do you hear me?

Yes go ahead.

Hi, Good morning or good afternoon, everybody. I wanted to start high level. Raviv, the guidance looks conservative for the year, you know, you've raised that, when you look at it from a different perspective, some, maybe I'll give a couple of observations, and then, I'd appreciate your insight. So you're describing a full year where 42% of the EBITDA will come in the second half of the year. That's not at all typical for Israeli Chemical. Excuse me, excuse me for ICL, I apologize. There's one here in the last 10 years that may have a capping. We're describing a $600 million of lower EBITDA in the second half of the year than the first half of the year. I appreciate the $7 ton potash price that you're saying will happen in Q3, but that doesn't really explain it all. So -- are you being conservative here? Or you're modeling in a lot lower commodity prices in the second half and the first half of the year? Are there margin issues? I got are you being conservative? Because it seems -- it doesn't seem like -- it seems like it would be hard for you to get below $4 billion. Thank you.

Okay. Well, thanks for the question, Joel. You know what, I don't think that we're being conservative. I think that we were conservative in the beginning of the year because there were no contracts in place in China and India. And at the same time, Belarussian sanctions that were just being talked about. So when we prepared our model for this year, we were in a different reality. But since we updated our projections, I don't think that much has changed -- the new guidance does not reflect any change in the view of how we see commodities, maybe a tiny bit in phosphates because it looks a little stronger than we expected, again, because of the Chinese export limitations. Almost all of our upgrade of projection has to do with specialties. In our specialties business, we've had some positive surprises and very good execution in the first half of the year. So we've been positively surprised by our prospects for this year. And you can see that most of the change in the projection has to do with specialties. In commodities, I think we're very much where we were. We didn't get too excited about prices in Brazil going over 1,100 or even reaching 1,200 at one point in Brazil. We were opportunistic, so we took advantage of those prices, but we didn't think they would hold for the long term concerns. So that [technical difficulty] on the 42%, it's pretty simple. I think that the third quarter on potash prices, like I said, are going to be a little softer. And most of the difference between the first half and the second half has to do with the fourth quarter. And if you check again on those 10 years, you'll see that two of our business divisions, actually three of them, all specialty businesses for seasonal reasons and industrial products because of very soft December that we usually have. It was one year last year, it didn't behave that way. But every year, we have a soft December. So since last, we have a seasonal weakness in the fourth quarter and an industrial product in December, which hits the fourth quarter. The only change there is that innovative ad solution is going to be a little stronger this year because our newly acquired business in Brazil is performing very, very well, and it's actually expected to do better than last year. So potash prices in the second half lower than in the first half, but in addition to that fourth quarter will be softer in Industrial Products and phosphate in our Phosphate division and that's not an unusual thing and it was factored into our original forecast, hope that helps.

Kind of. Maybe I'll drill down little bit more into details in each business. So if I go to IP. And I think you mentioned in the last call, you thought that full year margins could be similar to the Q1 margin, I think about 38%. Do you still see -- and you did about 39%, Q2, do you still see, be able to hold 38%, 39% in Q3. Maybe dropping down seasonally in Q4. So you can end up really high 30s percent margins in IP for the full year, is that fair so?

It is fair but we will go down somewhat on revenue especially in the fourth quarter, a little in the third quarter, but more in the fourth quarter. The reason we can still maintain our margin is that because one of the growing components is the oil and gas clear brine fluids, which are very, very high margin. So we'll have less sales that are a little lower in margin and perhaps more sales in clear brine fluids. And that will even out and allow us to stay at the higher margin that we talked about.

Do you think that revenue decline year-over-year comp, which of course you had really strong revenue growth for many quarters, do you think that revenue contraction trend will continue into the first half of '23?

We're not seeing that at all. In fact, one of the places where we see softness is automotive, which is becoming more and more significant for us. We don't see global demand for electric vehicles going down. We think there is a current situation where there are less deliveries than anybody understands but we don't think that's going to stay the case because the demand is enormous. Everybody wants to change to electric vehicles and the demand -- and the supply is coming out of China and the electric vehicles need components, they need flame retardants. So we think, we're not in a very good position.

Okay. And then Innovative Ag Solutions, when you brought Produquimica from Compass. I think it hit the books for Q3 and Q4 of last year, a lot of it. So should we see in the second half of this year, little to none, little no -- you said there is some growth organically in that business. That's great, but there's little. There's no acquisition growth increase in second half -- either that all happened in second half of last year, you know, what I am getting at it?

You're correct, it's organic, but consider that the organic pro forma growth was about 80% in those businesses in the first half of the year and we're realizing some synergies. So we expect to see growth.

And any margin contraction in that business in the second half versus the first half margin IAS was really strong. Should you see a bit of contraction versus your hold?

It's hard to say at this point. We're taking into account a little bit of a contraction because we -- again we see a little softness in the commodity market, not typically influences the specialties market as well. So we don't see any drama there, but we're taking into account little bit of a contraction.

And my last question is -- I'm asking a lot. In potash, you given the $7 ton or so Q3 ASP. So would your margins -- and so if I look at $600 potash price Q1, $750 Q2, would your Q3 margin in potash be a lot lower than Q2? Would it be the same as Q1? Somewhere in the middle as in Q1 and Q2 because a lot of things going with cost of freight, so how would your margin in Q3 for potash compare to Q1 and Q2 at the $7 ton price?

Great question. We kept everything stable and obviously not everything is stable because transportation prices are actually going down and our output is expected to be very, very good, which lowers cost per ton. But then again there is some uncertainties here including energy cost and including shifting from some geographies to others that will have a lot of deliveries to India and China in the third quarter. So that requires [technical difficulty] but net-net, we don't expect a big change in the components [technical difficulty] so your margin is lower.

I may just add two things, Joel. One, if you look at our first half vis-à-vis the second half. If you take the upper part by point, which is about 4 billion, we're actually delivering 55%, 45%. It's not 42%, if you look at the 4 billion. And if you sum it up, it comes from a significant part in Q4. Well, we have obviously a much less visibility part of it seasonal, part of it because it is further out. Part of it is because there is a lot of uncertainty about prices. And we took all these things into account when we came out with this guidance. So of course we follow it up quarter-by-quarter, we might -- we may change that. It depends on the circumstances.

It's a bottoms up guidance.

Yes.

Okay. Thank you very much.

Thanks.

Welcome.

Thank you. Our next question will come from the line of Will Tang from Morgan Stanley. Please go ahead.

Hi, guys. This is Will Tang on for Vincent here. I know you touched on Brazil, a little bit earlier, but I guess, can you comment on like the state of potash inventory within the channel by geography elsewhere? So your competitors have kind of previously proposed some products, some refill offers in the U.S., which I think many would have considered improbable few months ago. So I'm wondering if you have a view on how backed up the system may be in the U.S. and elsewhere?

I think all the trends show, I mean stock to use and actual inventories that you can view, basically the global situation is that inventories are going down, but at the same time, keep in mind that there is a real change in that global supply chains we're very, stressed. They're easing up a little bit, but it's a long process and also consider that the cost of capital, the cost of holding inventories increased significantly because you have in Brazil for example, in the beginning of the year, the interest rate was 2%, now you're at 13%. The real has lost almost 15% to the dollar. So in terms of affordability and in terms of the risk taking that if you are a distributor and you have to hold inventory, you want to -- you're willing to stretch yourself more and the conditions allow you to stress yourself more because there were never any sanctions on Russian fertilizers, but there were some uncertainty in markets such as Brazil, whether the Russian product will get there this year. And now there is less uncertainty and the cost of capital is high and other costs such as labor cost. There was an inflation adjustment in labor cost of over 8%. So I think, the supply chain is going to be more stressed. And at one point, buying is going to become more massive than it currently is. I think that the North American or the Canadian leaders are probably in a better position to understand the full dynamics in North America and I guess, they know what they're doing. We don't see any inventory build-up, we see inventory starting to get tight, it's very tight in India and even in China and it's getting tighter where the world is changing quickly in terms of interest rates, inflation and uncertainty created by the availability of Russian product. At the end of the day, like I said before there is -- in potash, there is 6 million tons missing in the market. The only way for that to -- the only way for the market to clear is for prices to go up and demand destruction to happen. And the only question is where demand destruction is going to happen? We don't think, there is going to be demand destruction in Brazil. That helps.

Got it. Thank you. And then I guess, just given, all the headlines around energy in Europe. I'm wondering how you characterize ICL, I guess reduction risk, particularly have been moving to the winter months for your phosphate facilities in Germany, there?

Okay. So ICL is in relatively good shape. The reason is that most of our business has long-term, fixed price and non-Russian dependent gas or renewable energy actually, most of our European and U.S. businesses are linked into renewable energy specifically and our Lautenberg site in Germany, we do have exposure. In that site, we produce some acid and many phosphorus salts product, but there for the food industry and fertilizers and food are getting prioritized. So we feel that whatever the rationing of gas could be, we would be in better shape than others. At the same time we have facilities in other countries, mainly in the U.S. where some of the product, we can, we can replace with product coming from the U.S. So our, the main exposure we have is in our site in Germany, we have some exposure in the U.K., but overall a very small percentage of our revenues and EBITDA is that risk from gas disruption. And again, our main facilities are in Israel, where we have long-term fixed price gas supply agreements.

Got it. Thank you.

Thank you.

Thank you. Our next question comes from the line of Alexander Jones from Bank of America. Please go ahead.

Great, thanks for taking my questions. I've got two, if I may. The first is just on Innovative Ag Solutions. If you exclude the Brazilian M&A, then I think your EBITDA in the first half of the year is up about 3x compared to the first half of last year. How sustainable do you think that is, if and when fertilizer prices fall or is a lot of it sort of the pricing-related component? And then the second question on industrial products. You indicated that revenue will be down year-on-year in the third quarter. And just looking at the pricing that came through in the second quarter 33%, does that imply that you expect quite a big deceleration in pricing such that revenue falls? Thank you.

I didn't indicate that in IP we were going to come out at pricing lower than last year. So I don't know where that came from, but maybe there was a misunderstanding.

So that was a sequential comment.

Yes, it was a sequential comment.

Understood.

And regarding Innovative Ag Solutions, it's not sustainable to triple your margin every year by no means. But I think what's happening here is that we're enjoying economies to scale and good pricing related to new product lines. And of course, the tailwind is coming from the market. So like I mentioned earlier, we think that there would be some margin contraction if markets soften. But I don't think it's going to be dramatic. In the past, we had relatively -- first of all, smaller business, and we've gone through significant organizational changes, including consolidating our sales teams with commodities and specialties and changing some of the way we do business, using digital means and other incentive-related issues that we put into place. And so I think that -- our business plan is working, and we're achieving the kind of margins that we look for. But our long-term business plan talks about 15% in normal time. So 20% is relatively high and it has to do with the tailwinds in the market.

Great. Thank you.

Thank you.

[Operator Instructions] Our next question comes from the line of Rahi Parikh from Barclays. Please go ahead.

Great. Can you all hear me?

Yes. Thank you.

Great. I guess just following up on the energy cost. Is there any way to give the concrete number, percent of energy costs that are not fixed or contracts or related to renewable energy or renewable sources for your energy needs?

I don't have exact numbers with me. I think the amount of energy costs or the portion of energy costs that we're exposed to are less than 15% overall, but we'd be happy to -- we'd be happy to try to get you that information. I just don't want to give inaccurate information.

Pleasure, thank you. And then also, thanks for the ESG updates you provided earlier. We were also wondering how your progress is going on a 30% decrease in greenhouse gases by 2030. How is that going on? And you also mentioned great results in the Dead Sea area. How are you keeping these Dead Sea workers safe? Are there any additions to protocol or just any updates for that?

Yes. So first of all, on how we're doing on our target to 30%, we're well below our targets for the year. Some of the main efforts that were made this year have to do with the ultra-renewable energy. We moved 70% of our U.S. sites into renewable energy this year. We also replaced shale oil power generator with natural gas and a large site in Israel. We're finishing that in September. So those are two big blocks for this year, but we have many, many other initiatives. And if you're interested, they're on our corporate responsibility report in great detail. We're also developing new measurement capabilities that allow us to track each and every one of our sites in terms of progress, and we have KPIs for each of our sites. We have an internal system where every site gets a monthly reports of how it's doing towards its carbon emission targets. So we are making a lot of progress. On safety in the Dead Sea, we're very much on track this year and in general, in recent years. We've had better and better safety results in the Dead Sea due to a lot of hard work of site management and culture that is very much religious about safety. We have some sites that are not -- are not on their KPIs, but they're a minority in ICL. And of course, we're putting the proper focus to make them all like the Dead Sea -- like the Dead Sea site, which is doing very well. That helps.

Yes. That's it for us. Thanks so much.

That does conclude our Q&A session for today. Peggy, please go ahead.

Thank you. I'd like to thank you all for joining us today, and we look forward to speaking with you when we report our third quarter earnings in November. Have a good rest of your summer.