We're having this earnings call following our conversations with you, our bondholders. So let's just get into it. So for our presentation today, we're going to have our CEO and President, Mr. Steve Hawkins, present. Then our CFO, Efrat Nagar, will present the financial results. And then our EVP of Product and Innovation, Mr. Florian Wagner, will go through our Value Innovation. We will then open the call for questions. You can send us questions even now. If you see at the bottom of your screen, there's a Q&A button, so you can submit your questions, and we will be happy to address them. So with that, I will share my screen. So just a legal notice before we begin.
This presentation is for marketing and information purposes only. The presentation does not constitute an offer or recommendation to perform any transaction in the company's securities. This presentation does not replace the need to review the company's reports published to the public. Any forecast and/or assessment that will be provided, if provided, in this presentation, is based on the assessment of the company's management at its discretion and involves uncertainty. These estimates and/or forecasts are forward-looking information, as defined in the Securities Law 1968 . These assessments and/or forecasts may not materialize, among others, due to factors beyond the company's control. All information included in this presentation relates only to the date to which it refers to, and the company does not undertake to update such information afterwards. I forgot to mention that I am Mrs. Rivka Neufeld, the Investor Relations Manager.
With that, I will turn the call over to Mr. Steve Hawkins. Thank you.
Thank you, Rivka, and I'm pleased you introduced yourself. Otherwise, I would need to do that, and our great pleasure with the team here to share with you our second quarter and first half results for 2024 , and first slide here we thought would be appropriate is to begin with the industry context, and we understand and appreciate that the crop protection industry is quite specific, and there's probably varying understanding of our industry from our bondholders, and there's a few points here to run through. The first is, like many industries, unfortunately, since COVID, there was a supply and demand imbalance, and for us in agriculture inputs, that has showed up as a channel stocking challenge that we have spent the last eighteen months improving, and you'll see those in the financials.
And we do see improvement in the channel stocks, so those are the distributors that we sell to around the world. At the same time, their new purchases are very much just in time, so that's something different we saw in response to COVID. And with that, just in time and a strong supply situation, so manufacturing inventory in China, we have seen continuing price pressures since the imbalance of supply and demand at the COVID period. And that's on the top part. I'll move to the bottom part because it's important also in agriculture. You know, I've been speaking about the sell-in to the channel. It's also on the demand side from farmers, ultimately, who are the users of our products.
In parallel, we have seen some softening of commodity prices, and we speak of commodity prices for farmers. That's typically corn, soybeans, and wheat, to a lesser degree, rice. Those are the globally traded commodities that we focus on. And for sure, with again, many of the challenges we've seen weather-wise, farmers are pressured with their profitability, and that's a trend that we will continue to keep a close eye on going into the future. That's the market context. If we move to the next slide, Rivka. How does that connect to our financials?
As we go into Q2, specifically here in this slide, we do see our company turning around, and our focus very much on improving the quality of our business as the demand side has continued to be challenging around the world is showing signs of, for sure, improvement and recovery. No doubt, Efrat will share. She's very excited about some of the progress, as am I, and as the management team. We get into some details here. EBITDA, we talked about compared to last year, an improvement. We also see a huge improvement with very strong efforts from the company on cash flow, which Efrat will explain in detail.
And then the next few points, again, are all related to the business quality agenda and focus that we've had in ADAMA since essentially the beginning of last year, so more than 18 months. This is related to inventory management. You can see the inventory levels, -$609 million versus a year ago. We also see pricing as far as the cost of goods improving, and that's also related to the trend I mentioned in China. And then we see an improved product mix, and that's in a way why we wanted to bring Mr. Wagner on today, because that's, in many ways, related to our portfolio management and new product launches, so we see that showing up in the P&L.
Finally, you can imagine with the challenges that we've seen in the market and our results, a very strict cost management operational expenses is what we have -$30 million versus the first half of last year. Those are some highlights. If we go a bit deeper on the next slide, and we look at the H1 overall, and the title of the slide says: Slow Market Pricing Pressure. That's very much what I said in the earlier slide. If we start at the sales line, you can see a challenging minus 14% in H1. Again, we see a continued demand side market to the channel based on the inventories is slow, and I mentioned the delayed purchasing.
On the gross profit, the EBITDA level, I mentioned already our business quality improvement. And these are relatively large improvements. And again, Efrat will give you more details, but you talk about a gross margin shift in our type of business model from 25.3% to 26.8% from last year. Those are huge improvements, again, based on the mix of products and new product launches. Also some choices about exiting certain products that are low margin in markets like South America. And the EBITDA overall, a slight improvement in H1, and for sure, focusing on that going forward. No doubt, challenging is the overall net loss position.
And of course, financing costs is one part of this beyond the operational side, the debt load we're carrying and the challenging top line. So, all the improvements in the quality, at this time, are not yielding us, a net gain, which is our focus. So if we go to the next slide. Now we have Q2. I think what you will see here is on the top line, a similar trend, but, improving in the gross margin, the EBITDA quality. From a quality perspective, if we look at Q2 compared to the overall half, so we see it, similar and improving trends. Unfortunately, at the net loss level, the improvement is rather minimal.
So, slight improvement in the quality of business in Q2 if we compare it to the overall first half. And if we move on from Q2, my final slide, and then I'll hand over to Efrat. We thought it helpful to get a bit into the geographies because they are very different as far as agricultural production, our footprint, our market share, and the results themselves. So if I focus on the top part of the slide, this is what we call the Northern Hemisphere markets, of course, North America and Europe. And you can see a difference between H1 and Q2. So as I mentioned in the previous slide, an overall improvement, slight improvement in Q2 compared to Q1.
At the same time, remains challenging with the overall market demand in both these markets. If I dig a bit deeper in North America, our consumer business remains broadly flat. It's the ag business that was challenged very, very highly in both Q2 and H1, and this is again related to not only the inventory point that I made earlier, but we did see a delayed wet spring in the U.S., in particular, which has negatively impacted the purchasing habits beyond the shorter purchasing mindset just in time. Similar in Europe, we had a delayed, late cold spring in Europe, which impacted the market size for some of our portfolio, for the industry's portfolio, to be clear, and in particular, on fungicides.
And we did see pressure on the pricing side, in particular from China. At the same time, we did receive some registrations for a couple of our key fungicides, Folpet and Captan, and this for sure helps our portfolio as we build going forward. So challenges in the North. If we shift quickly to the South, I'll actually start on the bottom right in APAC. So APAC, for us, is geographically dominated by India and Australia. We have seen, again, all the macro trends I've mentioned, and including some challenges early on with the monsoon season. The Indian business is very much connected to the monsoon. And for our Australia business, I mentioned earlier, phasing out lower margin commodity products, and that was a focus of our Australian business.
So that dropped on the sales line, but again, improved our overall quality of business. So, for sure, a challenging performance. Again, slightly improving if we looked at first half versus Q2, although there's definitely market remaining in Southeast Asia and in particular in India. So I'll conclude on Latin America. For those maybe not familiar, very much the market that is happening now, so this is a market that's very active. The first half of the year is not the major market. For Latin America, you can see the most challenging of the geographies. Many of the things we mentioned earlier about purchasing habits of grower at the demand level, declining profitability at the grower level, and then the just-in-time purchasing and inventory challenges at the distribution level. All those factors...
really hitting the, in particular, the Brazilian market, but also the Argentinian market, just as we speak. So it's early to tell. The season hasn't fully happened. Farmers start to plant soybeans here in a few weeks, and in some areas already. We do see probably the first decline in acres of soybeans that we've seen in many, many years in Brazil, based on the farmer-level profitability challenge. But in many ways, this is the major market remaining in the year, so it's too early to you know to understand fully how our performance will show up for the rest of the year in Latam. But for sure, a very challenging start.
So with that, and lots of detail, trying to onboard all of us on the situation of our company, I will gladly hand over to Efrat to get a bit deeper on the financials. Please, Efrat.
Thank you, Steve. Okay, so we will start with ourselves. I think Steve provided a very detailed explanation about the challenging market condition, which impacted significantly ADAMA's sales in H1. So you can see here that 15% lower sales from $2.2 billion in H1 2023 to $1.9 billion in H1 2024. 3% lower volumes. This is because of the just-in-time approach in the market, together with the pressure on the interest rates and direction of all the channel to manage working capital in order to save financial expenses. And prices, 11% lower in prices versus H1 2023.
This is due to the overcapacity in China and the expected lower cost of the product from China, that basically, together with the lower demands, pushed all, the prices down. In the next slide, we can see that, the lower sales, the lower demand also, impact our gross profit, a reduction from $564 million in 2023 to $505 million. However, it's very important to mention that our quality of business, our gross margin increased from 25.3% to 26.8%. You can see here the cost, very positive impact of our costing. We've started in end of Q1 2023, when we understood that we have a challenging market condition to manage our inventory, procurement and production.
And this support from one hand, now we are enjoying from fresh, low-cost inventory that are demonstrated here in the cost value of $202 million benefit. But also, we limit ourselves to focus only on a more profitable product. We limit our procurement of production to more profitable product, and it is also impact our gross margin with better mix. We are selling more profitable product and less non-profitable product. Lower sales, lower gross profit, of course, also impact lower EBIT from $237 million to $204 million. But in addition, we spoke about Q2 end of Q1 2023, we took to ourselves a mission to manage our operating expenses, our OpEx.
So you can see here that after a huge reduction in OpEx in 2023, additional reduction in OpEx in 2024, in order to manage the situation. And this improve our gross margin, sorry, our EBIT to sales margin. Looking in Q2, more or less same picture, 15% decrease in sales from $1.1 billion to $940 million, a 3% lower volume, 11% lower prices. But if we will see in the next slide, we can see that the improvement in our quality of business is well demonstrated in Q2, from 23% lower gross margin in Q2 2023, significantly increased to 26.2% in Q2 2024.
Although lower sales, better quality of business, again, significantly supported by positive cost impact, $120 million, and better mix, positive mix on our sales, selling more profitable product. EBITDA margin, again, very nice increase in the quality of the business, from 8.7% to 10.5%, 3% higher EBITDA in dollars. Although lower sales, lower demand, lower gross profit, we succeeded to increase our EBITDA, mainly because we are focusing on our operating expenses management. Next slide. This is my favorite slide, and I'm proud to present it, I think, in the third quarter in a row.
That, although we are facing some challenges in the P&L, as presented by Steve, we are finishing H1 with net losses of $154 million, which are $122 million worse than 2023. We succeeded to generate positive operating cash flow of $180 million in this quarter, which are $170 million better than H1 2023. Also, in the free cash flow, which includes our CapEx investment, we see $8 million positive cash flow. We are starting, although very challenging market condition, we are succeeding to generate $8 million free cash flow, $202 million better than last year.... This is mainly because of our strict working capital management.
We will see it next, in the next slide on the inventory. But not only that, we are managing our account receivables very carefully. We are working with our suppliers on better conditions. This is for supporting our working capital management, but also prioritizing our investment, our CapEx investment. We are investing on only must-have investment and also on project, on growth project, which provide us shorter ROI than previous year. And in the next slide, we can see our level of inventory. This is a result of our inventory, strict inventory management in the last few quarters. So we can see that our inventory declined by $609 million versus last year, but also versus the end of 2023. So we see reduction also in H1 2024 in our inventory.
What we cannot see here is that our finished goods are also reduced significantly, which means that our business units in the countries basically selling their existing and relatively high-cost inventory, which will enable us to send them profitable, sorry, low-cost inventory in the future, which will enable us to compete in the market. The low level of inventory is also demonstrated in the inventory days, which are 181 days. You can see that this is the latest, sorry, the lowest in the last few quarters, and it's even lower versus the general inventory days in ADAMA. Next. So this is our debt breakdown.
You can see here that 44% from our net debt is basically our bonds, 5.15% interest rate plus linked to the CPI. We have loans of 29% from Syngenta, short- and long-term loans, and long-term bank loan of 17% and short-term of 10%. It's extremely important to mention that our long-term loan here that you are seeing here with very favorable interest condition, a 3.84%, we took them a few years ago, so we enjoying from lower cost. And we have a long-term loan from Syngenta in RMB in the Chinese currency, which also we are benefiting with it.
This is well demonstrated in our lower financial expenses in 2024. We also have, as of the end of June 2024, $580 million committed credit lines with banks and an additional $200 million facility, unused from Syngenta. Next, Rivka. This is net debt EBITDA ratio. This is a covenant that we are having with the banks in Israel. In the end of Q4 2023, we got very well. We increased our covenant from 4 to 4.8. We can see here that we are below the covenant and we are addressing the covenant needs with the banks. With that, I Florian, the floor is yours. Thank you.
Thank you very much, Efrat. Hello, good morning, everybody. Very happy to share with you what value, innovation, and action means for us in ADAMA, and especially from my perspective of my department, which is the Global Marketing and Innovation department. If we go to the next slide. Starting first with the market segment that we are playing in. Just imagine the left side of the slide being the entire crop protection market. You see on the top, which is traditionally the new AI segment. At the bottom, you have the commodity generics, and in the middle, you have that off-patent segment with that right level of differentiation, which we call the Value Innovation segment.
Which is the fastest growing segment in the market, and which contains those customers that are looking for high quality solutions that deliver them a strong return on investment. So why is that the strongest growing market segment? If we go to the next slide, there are basically three trends for that. The first trend is that new active ingredients, since long, become more costly and more difficult to develop. And if you look at the rate of new AI introductions, it has been declining significantly over the several last decades. So this is one trend of allowing this Value Innovation segment go up into the blue.
The second one is around the farmers looking for strong return on investment, especially if you look at the market situations right now, where commodity prices are, have been softening, and they have been softening stronger than the operating costs have been declining. So there's an additional pressure on the farmers' P&Ls. And this additional pressure on the farmer P&Ls makes the drive for strong return on investment even stronger. So farmers are not ready to pay this really, really high, let's say, price for the last differentiation, but they are looking for the strong return on investment. But they're also looking for high quality. This is why they are. Let's say there's a cautiousness in going into these commodity generics, but they're really looking for high return on investment for high quality products. So that's the second trend.
The third trend is the overcapacity in China that we're seeing, especially on the commodity generics. Now, you could say this is increasing that segment, but I believe on the midterm, this will be challenging, because this segment becomes less and less attractive from a margin perspective. So very important trends, and also solid trends to make this Value Innovation segment being the strongest growing segment in the market. If you go to the next slide, how do we address that Value Innovation segment? And I would like to highlight today two areas. The one is the portfolio. So how do we build our value optimized portfolio for that Value Innovation segment? And the second part is: how do we bring that value optimized portfolio into the markets with strong value-driven marketing and sales?
The important point here, also, what you see on the side, is this concept. We start at the market, so we develop from the market for the market. This is a market-driven company, understanding what the grower, what the market needs are in delivering to this market. Let me bring this a bit clearer to you when we go on the next slide, talking about the portfolio. Please excuse the level of detail on the next slide, but I think it's important that you get a bit of a feeling of how do we develop our portfolio, and when we talk about differentiation, what do we actually mean when we talk about differentiation? What you see here is at the top, you see products that are already in our portfolio.
At the bottom, you see the products that are more in our pipeline. And as I said, it all starts with the grower need on the left side. So it's only when we understand what the grower need is, we start about thinking, "Okay, how can we develop products that are differentiated?" And when we talk about differentiation, in ADAMA, we talk about three elements of differentiation. One is around the active ingredient inside. The second one is around how do these active ingredients are mixed, and very importantly, the last element around formulation mastery or what formulation type we are using. Let me give you just some examples of the slide that you're seeing here, maybe starting with Almada. So let's start on the Brazilian market.
Almada is a key product for soybean rust and late-season disease control in Brazil, and it's actually differentiated in all three areas. It has an early AI access, so one of the three AIs we're using there, we got an early access. It's a mixture of three AIs that give exactly that late-season disease control, and it's based on a differentiated ADAMA proprietary formulation technology called TOV technology, which is an excellent formulation technology for oil-based formulations. Let's then move from Brazil into India and talk about a blockbuster here, which is Trassid, which is the fifth in the line here. This addresses chili producers for thrips, improved thrips control. And what's the differentiation here? So this is a two-way mixture. Also here, we have an early AI access, which is really important to be early in the market.
And then it uses Ion Technology, where TOV was for oil-based formulations. Ion Technology is for water-based formulations, so for better leaf coverage. Again, a proprietary technology by ADAMA. And let's then maybe move back into Europe. No, just let me stay on that slide for a second. If we move back into Europe and move into the herbicide space, I would like to briefly highlight ADAPT is to you, the third one from the bottom. It's addressing how to control grass weeds in cereals. Again, here, also, it's an early AI access to one of the two AIs we are using here. And what's specific about this one is that this uses a dual mode of action in a post-emergent setup for cereals, which is quite novel in the market.
And the last one I would like to highlight, come back to fungicides. Staying actually in Europe is Gilboa, which is a resistance breaker for cereal disease control, which we have in the pipeline, which has been submitted in Europe and the U.K., and we have a strong belief in that product as well. So again, if you take this from a high-level point of view, you see that we are starting on the grower need, and then we are looking for different areas of differentiation to bring exactly that Value Innovation that gives the return on investment for the farmer. If we go on the next slide, you see it a bit in pictures. That's sometimes a bit easier. If you go to the next slide, Rivka, please. On the left, you see Asorbital.
I didn't talk actually about Asorbital. Asorbital is our formulation technology for our fungicide-based products in cereals. It has faster penetration through the leaves, which leads then to higher yields. Ion in Tresit, I told you already. What you see here nicely on that slide is the greening effect that comes through the I on technology. On Almada, the TOV technology, you see less clogging of the filter, quite obvious in that picture. And at the bottom is another product from Brazil. It's a weed control product called Araddo. The good thing about this, it gives you excellent weed control and the best. And the other differentiation is it allows the farmer to plant soybean right the day after, so there's no plant in planting interval that the farmer needs to address.
So you see every single product has that special differentiation that gives the return on investment for the farmer. If we go to the next slide, Rivka. Now, taking this all one step up and say, "Okay, how does our overall portfolio look like?" Now, I could tell you a lot about how we differentiate our portfolio, that we have products in that we call Value Classic, which are the least differentiated. Sorry, the Value Basic, which are the least differentiated, the Value Classic in the middle, and Value Innovation being the most differentiated one. But I think-...
If you want to take it simple, combine the green and the blue, so combine the Value Innovation and the classic, call it differentiated, and you see that today we have a portfolio share of around 40% in the differentiated segment, 60% in the non-differentiated segment. In the future, we are targeting a portfolio that has a differentiated share beyond fifty percent, and how we get there is by, A, prioritizing those products I explained to you before, that give the right differentiation for the farmer at a good gross margin. And at the same time, we are also doing a tail management and transitioning out selected low profit products to decrease the share of low profit products in our portfolio. This was all on the portfolio side. Before I told you, okay, we're also working on the value-driven marketing and sales.
So just give you some insights as to what we're doing here. On the one hand, we have a product that we internally call One Plan, but it's basically driving this value in our product positioning. So if you bring it into your portfolio, you need to bring it to the market as well. It needs to be part of your value proposition. We're focusing here on the key markets. We're focusing on the key products that make up a significant part of the future sales and working very closely with our countries to make sure that this is reflected in our marketing campaigns. And at the same time, the value of ease of doing business of ADAMA with our customers is a value we always get played back from the markets, which is really important.
So we are working and we are helping our countries to become even better at this ease of doing business by giving them best practice support when it comes to account management, and also equipping them with novel ways to connect to our customers, for example, distributor portals that we're currently implementing in Europe. If you go to the next slide, Rivka, just to summarize it up. Value Innovation, it's in action in ADAMA. It starts at the market, it is for the market, and when we look at it from the perspective of marketing innovation, two important elements: developing this value-optimized portfolio with a differentiated portfolio beyond 50% in the future, and value-driven marketing and sales. With that, thank you very much for your attention.
And I think, handing back to you, Rivka.
Thank you. Yes. So we'll now open the call and answer some of the questions that we already received. So the first question is for Efrat: What is the explanation for the difference between the adjusted and reported EBITDA in Q2 of $44 million? This seems to be an impairment of inventory. What is the reason for it?
I will start from the impairment of inventory, so it's not okay? When we had impairment of inventory last year, it was part of our adjusted numbers. We didn't adjust it. Basically, what we are doing, we are adjusting only one-offs or non-relevant costs to the existing period, which is the situation in Q2. In Q2, some last year's events ended up being figured out in Q2, which require, according to accounting policy and guidelines, to record them in Q2 2024. It's also very important to mention that we are speaking about non-cash activities.
Some of them will be cashed during the next few years, but in 2024, no cash impact on those in adjusted adjustments.
Thank you, Efrat. So the next question goes to Steve. Did you have many incidents of customers that didn't pay despite receiving your product? How much of that is not yet shown in the financial reports? Maybe, Efrat, you wanna take it?
No, I will take it.
Okay.
Okay.
Okay, okay.
So, first, the way that we are managing our working capital, and I think it's well demonstrated in our cash flow performance in a very tightly way. We have a very strict approval process on new customers, extension of customers beyond our coverage, et cetera. So currently, we don't see any unusual challenging around collection. If every collection issue or challenge is already reflected in our financial report, and it's not the case for 2024.
So, for the next question, the first part goes to Steve, the second to Efrat. The first part: When do you expect a change in the trend of sales, which has to do more with the market, actually? So that's the first question.
Okay. Thank you. I see definitely some good questions coming in. Rivka, you also see there's questions both in the Q&A and the chat, so I'm sure-
I've noticed.
I see. Yeah, so, I'm sure you saw that. Regarding the demand side, for sure, we're in a cycle change, and it's expected. We expect it as an industry. And if you look at our competitors, also first half results, you'll see the same trends. We expected this would be a two-season trend. And to remind us all about agriculture is seasonal. So you really only have one chance per year when a farmer plants their crop to have the use of our products. And then it's a full year again before this demand comes back. So you know, obviously, our decisions and supply and inventory and pricing is very dependent on this single annual transaction. So that makes it quite challenging.
As you know, as ADAMA, we do not see a full recovery of the market demand in 2025, in particular now based on what we see with grower profitability. At the same time, we see you know, we see an improvement of the overall market, and for sure, we believe we've seen the bottom of the market. I think the question for all of us is how fast will this recovery now take? And a lot of that question will be answered as we see the performance of Brazil in the second half.
So thank you. The second half of the question, for Efrat, what is the level, a representative level of inventory that the company can get to?
So, I believe the main reduction in inventory already done, as I mentioned, from Q2, 2023 until today. I also presented our inventory days, which are significantly lower than our usual inventory days in ADAMA. So I believe that we are getting to basically the lowest inventory that we can hold in order to address upsides in the future. What we are now focusing in is basically on two direction. One is to make sure that the new procurement, that the new production will be on product that will address demand in Q4, 2024 and 2025 , while when we will see, hopefully, the market demand increasing.
And from the other end, as part of our transformation, we are working on some structural changes in the way that we are managing, if it's active ingredients, procurements and production, and supply chain, policy and management, in order to make sure that from one hand, we are holding the low cost, high quality product at the minimum, but on the other hand, we are able to supply to our markets the inventory on time, in a short time, in order to address upside when it come.
Thank you, Efrat. Another additional financial question. What is the company's expectation for CapEx, capital expenditure for the next year or two years?
We made a significant change in the way that we are managing CapEx in ADAMA already in 2023, and we see a significant reduction in our CapEx investment. As I mentioned, we are focusing on must-have and only on projects which are with a short ROI, which means that we will see the benefit in the short term. So I believe that we see even slightly more reduction in 2024, again, well demonstrated in our cash flow. I believe that the pace of our investment, going forward, will be more or less as we are having in 2024.
Now a question about the market that maybe, Steve, you already answered a little bit. Are there any indications right now of coming out of the negative cycle in Brazil?
It's too early to say. As I said, the crop's not been planted yet. I mean, obviously, we're positioned as strongly as we can be at the moment to supply our customers. I personally was in Brazil in July, met with a number of our distributors and our commercial teams. So we're ready for the season. We have a good order book, and we have to see, you know, how the farmers react and how the weather unfolds. So it's all in front of us now.
Thank you, Steve. Efrat, the next question for you: Does the company expect that the net debt to EBITDA ratio will decrease by the end of 2024 ?
Yeah. With our expectation for higher EBITDA and, let's say, lower net debt, we are expecting to see better ratio. According to our estimation, there is not going to be any issue with covenants with the bank.
Thank you. Another question for Efrat: Is the Syngenta debt subordinate to the rest of the debt?
Yes. Absolutely, yes, and this is why it's excluded when we are calculating the covenants with the bank.
Thank you. On slide seven, when you comment, "New Chinese and Indian competition," are you suggesting competition has gotten more intense in the last three months? Have they only started flooding the market with supply, and how long do you think this dynamic will last? Steve, I think that can be for you.
Yeah, fair enough, and some of these questions are in the same area. No, it's not an intense competition in the last three months. This is a change with the market cycle we saw with the jump up in demand from COVID times, but it's also a longer-term trend that started with different legislation change around pollution and power supply in China a number of years ago, so this is a trend that's been building, and unfortunately, with the market demand that I mentioned, both sell into the channel, delayed purchases and also more conservative farmer purchasing, with the demand side lowering, this supply side from China proves more difficult, but the supply from China was already there.
Thank you. The next question. On slide 21, do you have a sense regarding the degree of capacity utilization by the Chinese in their production plans? And are there any plans by them to curtail capacity? This is a market question about market production in China. I think goes to you, Steve.
Okay, well, Florian or myself or Efrat could answer as well. So I'll answer on behalf of the team. I mean, just to remind everyone here, we have a global manufacturing base. Obviously, a strong part of our supply chain and manufacturing is in Israel, and we are also strongly positioned in China as well. So we are not only customers of China, we are also participating with ADAMA Limited in China, supplying the rest of our global network. So we're very much active in China. We procure from China and manufacture in China. And we do see a lag effect where the industry in China continues to produce above the global demand.
And this in some ways is, you know, this in some ways continues, or has continued on, as I mentioned earlier, this imbalance of supply and demand. So the short answer to the question is, we see continued production from China, higher than the global demand, and this continues, as we said, to challenge pricing globally, but also push more forward than we originally assumed, on the trend itself about lower demand requirements on the sell end.
Thank you, Steve. An additional question: As profit margins recover over time, will profit dollars return to levels in previous years, or will it be structurally lower if the ag chem prices don't recover? So, Efrat, I think that goes to you.
But maybe Florian can, you know, explain-
Okay.
Our strategy around differentiated product, innovative product. We are not going to sell, okay, the same mix that we sold in the last few years.
Yeah, thanks. Thanks, Efrat. And I think, I mean, one of the major reasons why we're going into this differentiated portfolio is because it actually gives us a stronger price insulation, and therefore, also consistency of margins. And I think this is what we're looking for. This is the reason for us going into that growing segment. And, yeah, with exactly the impact on the gross margin, as I just explained.
So, we received a follow-up question that, also for you, Florian. When referring to more profitable products in the mix of sales, how much did the volumes and prices decrease quarter over quarter and half over half? So we don't give the numbers, but you can give-
Yeah. Look, I mean, again, I think Efrat has been talking about all the financial numbers in the past. I mean, again, what we are looking for in the future is to expand that portfolio of differentiated products that will give us that price insulation, that consistency of margin. And, obviously, we are, when we do the prioritization, we also look for those areas that give us scale. So, we are looking for those products that are differentiated with the consistency in margin, insulation on price, but also give us the right scale, so we're addressing the big market areas where we can also get the volumes and the price that we want. So, that would be my response to that question.
Thank you. Additional question. In commoditized active ingredients, margins are obviously very low at the moment. Are you seeing any changes in the competitive landscape, including China, AI producers selling directly to channel partners or retailers as a way to maintain margins? Who would like to take that, Steve, maybe?
Sure, I can take that, and lots of interest, and understandably so on the China part of this, because China as a whole manufactures more than, well, much more than 50% of the total supply for the agriculture crop protection market. So it's obviously a key variable for the whole of the industry. I think to answer specifically the question, again, it's difficult to tell. We have to see how Brazil goes. We have to see how individual companies. We have our own plan, a Fight Forward plan. You see how we've managed our quality of business. Other companies have different financial objectives that they have to agree with their boards and their owners.
So it's difficult to speculate, I think, on where these, you know, companies, how they will manage their P&Ls is in this market situation. I think the good news is we started early. We saw this trend beginning of last year, 2023 . We reacted with a very strong transformation program internally, which we continue to implement, and we're starting to see the benefits in our P&L. But of course, the competition will have to decide how they react to the market.
The next question is a continuation to the answer you just gave. You mentioned that your inventory is now at a low level and well-maintained. A number of your peers also suggest that they are nearing lows in their inventory also. What do you think will need to occur for prices to begin to recover in the market, as it seems that inventory has mostly been worked through? The question is about that, about the market already consuming its high cost inventory and how that's going to impact market prices going forward.
Maybe, Efrat?
Yeah, I think that we have with the overcapacity in China, as mentioned by Steve, is here to stay in the next few years, and then this is going to have a significant impact on the level of prices in the market. Also, you know, we don't see any logistics issue anymore that we face in 2022, any capacity issues. So I believe that we will see more or less the same level of prices. And as Florian mentioned, this is exactly our strategy.
This is going to address because we are going to have this Value Innovation segment when we are be able to suggest to the farmers a premium product, patented formulation, patented ways of working, in order to form cost effective, to be more competitors in the market and to price it accordingly, and then to enjoy from higher prices versus commodities.
Thank you, Efrat. Next question: Given you are saying that farmer profitability is becoming challenged, are you observing any trade-down benefits into generics, into ag chem generics? Maybe Florian? No.
I'm sorry. We just have fire alarm here, and it's really -
No problem.
Sorry, everybody's going out of, so...
Yeah. So, I'll repeat the question. Given that you are saying that the farmer profitability is becoming challenged, are you observing any trade-down benefits to going into ag chem generics?
So I can, I can take that. I think Florian had a siren to deal with. This is, I mean, in Florian's presentation, when we talk about the Value Innovation market, that's partly driven, as he said, by the type of technology, so the new active ingredients, the genericized active ingredients. And then over time, those generic active ingredients become more commoditized. And for sure, for sure, to answer specifically the question, I mean, in my thirty-plus years in this market, when farmer profitability declines, we can all imagine farmers are very entrepreneurial and very cost-conscious, and they will look harder at their choices for crop inputs, whether it's fertilizer, seed, or crop protection.
And so, in general, we see an increase in these type of market situations, an increase in what we're calling more return on investment value for farmers. So that's exactly the market segment, and that's partly why we have shifted our portfolio focus and future innovation, because we can imagine future farmer profitability is more challenged, and so we want a portfolio to meet that market need.
Thank you, Steve. So the next question: Can you give more information regarding the company's strategy regarding the liquidity of the company in order to serve its debt in the next year, especially given that the bank covenants are pretty tight? So, Efrat.
I will take it. So, as I mentioned, at the end of Q1 2023, we launched what we call the Fight Forward plan to manage the market situation, while the title of this plan was Cash is King. Okay? So, basically from then, and of course, based on our transformation plan, as mentioned by Steve, the focus of this organization now is to improve the quality of business while focusing on our cash flow generation. So, this is the direction that we are going. This is what we are aiming to do. This is what we did in the last few quarters, and again, this is well demonstrated in our cash flow performance in H1 2024.
And agreed, it seems that in Q2, our covenants are very close to the covenants. Sorry, our performance are very close to the covenants. However, if we are taking the one off, so we will, our covenants is even lower than before, than the previous covenants. And according to our estimation, and this is the way that we are building our work plan for 2025 , we are about to go back to the normal covenants and to meet them going forward.
Thank you, Efrat. The next question is a little bit specific: Does ADAMA sell 2,4-D herbicide? And if so, what are you observing with pricing and purchasing behavior, given that there's litigation issue with China dumping?
Of course, we're very much understanding the issue itself. Also, I cannot comment on pricing, of course, but although we do sell 2,4-D, yes.
... Okay, and the final question that we have is more of a comment rather than a question. Can you please give us a guidance for full year 2024 in terms of sales growth, EBITDA growth, and EBITDA margin target? So, Efrat?
So we are not, we cannot give you any guidance for the full year, but we can commit that we will keep doing our utmost in order to serve the world, feeding the world with our product, supporting the world. And I think most importantly, continue with our transformation plan in order to see improvement in both quality of business reflected into dollar and also resulted by better cash flow. So this is a commitment that I can give now, not more than that.
So Steve, would you like to give some closing statements?
I can, and to build on Efrat's point, that's partly why we wanted to share with you the first half results, and you can see the history and you have the numbers, and as we said, we're seeing a turnaround in first half of this year, and as we described, we have a refreshed strategy. We have a very strong transformation program, and we have our almost nine thousand people around the world, very focused in supporting the company, turning around during what is a difficult market situation. That's, as Efrat has said, our plan that we're implementing in our commitment. I had just a few comments. First of all, thank you for those that joined. Many, many, really, really good questions, and thank you for those.
Thank you for taking the time to learn a bit more of the ADAMA story. I wanted to also inform you that our employees around the world are safe. We of course have a whole health and safety program that we're very committed and focused to. And of course in particular in Israel at the moment, and Ukraine and other places, we're taking special attention for the... Not only the physical, but the mental safety and health of our people and our teams. And related to Israel, I mean, it's you know, as the leader of the company, very impressive that we have had no material disruptions in supply all the way back to October seventh.
This is really, really a testament to the unbelievable resilience of our teams in Israel, and so I wanted to make a special note of that. We got no question, but we do get these questions from the marketplace, so I wanted to share that with you. Again, overall, thank you so much for joining and thank you to the team. Unfortunately, I think we had a siren, so Florian had to drop off. Maybe he's back now. With that, I will hand back to Rivka, so we make sure we keep this connection going forward. Thanks, everyone.
Thank you very much, Steve, and thank you, everybody. You have my details. I put them also in the chat box here, and I'm available for any questions you might have. So thank you very much, and have a great day.