Good afternoon, everyone. Welcome to the ICL Fireside Chat. With us today, we have Philip Brown. He is the President of the Food and Phosphate Specialty Solutions team at ICL. My name is Kevin Estock. I'm a member of the chemicals team here at Jefferies. And just before we jump into the prepared questions that we have, I just wanted to flag to any of you who are listening, if you have any questions, feel free to raise your hand at any point, and then, you know, when he's done answering the previous question, we'll call on you, of course.
Okay, so just to kick it off, I was wondering if you could provide some color on the opportunities around battery materials and, you know, just from, like, a generalist perspective, I mean, how does phosphate fit into that supply chain? And then maybe you could talk about some of the interesting things you're doing within the recycled battery materials space.
Absolutely. I think that's a good kickoff point. So, to talk specifically about battery materials, it's something that we've been very interested in as a company for a long time and been participating in actually quite a while. Our first, let's say, ventures and forays into it were in China as the LFP, lithium iron phosphate market started to develop in China 10 years ago, where we've been very close in selling precursor materials into battery material production there. We started our plans, especially as we saw lithium iron phosphate gaining acceptance as a cathode active material.
We actually initially started to look at investing in Europe, and then with the Infrastructure Act and also the follow-on IRA, it was clear that the priority for us should be to shift to North America. You may have seen public announcements about that. We actually had a groundbreaking in August on our first lithium iron phosphate manufacturing facility in St. Louis, Missouri, that we've begun construction on. That one's actually a joint project with the Department of Energy. So under the Infrastructure Act, they're covering about 50% of the capital for that investment, which is nice. It made it a no-brainer from a return standpoint compared to the other standalone ones that we're looking at separate from the grant, as well.
But beyond lithium iron phosphate, so your question about, you know, generally, how do phosphates play in battery materials? Actually, in a number of different ways. So one, in the case of lithium iron phosphate, is a direct cathode active material, and we see a lot of growing traction for LFP as a, as a cathode of choice compared to NMC, NCO, and other things. You know, affordability, safety, you know, plentifulness of, of raw materials compared to some of the others, I think are driving pretty significant growth demand there. But when you look at other materials that we already produce today, that are precursors also into a number of the battery materials, we're working to also grow beyond just LFP as, as a cathode active material in our total battery materials portfolio.
So when you think about electrolytes, LiPF6, those are commercially produced from two different routes, either from a PCl3, you know, chlorine, or PCl5, phosphorus chlorine-based products, and then also from polyphosphoric acid. And we're precursor producers of both of those material, which is a pretty limited number of suppliers around the world, especially in the Western world, for those products. And so similar to how we have entered LFP, we see entry into those other markets as well, where we're already selling precursor materials into those battery material producers today, moving further downstream ourselves. And then the third area that you mentioned, and we have made some recent investment as well in a startup in Israel, is on the recycle side.
We see a significant opportunity in the recycle, whether we're talking about, in this case, the new startup in Israel that we invested in is related to what we call black mass, which is really agnostic to whatever the battery was, and then taking the key minerals back out of it. So we're working on that side. So that's part of why we participated with this startup, is to be able to have that material to run through our R&D facilities around the world and start to look at how we could incorporate that into our battery material manufacturing plans as well, but then also specifically one-for-one recycle of, like, LFP directly back to LFP.
A lot of interesting things going on, and beyond LFP's exciting by itself, looking at the potential and size of growth in that in our phosphate business, but also these other adjacent battery materials as well. Not to mention, you know, even other smaller additive components as well. Within our business,
we produce a lot of other smaller additives that are applicable for the battery materials as well, like stabilizers that would go into a cathode paste, in the form of acrylates, lithium polyacrylate, and those types of materials as well.
Great. Thank you. So now within specialty ingredients, I guess, how would you describe your mix in that area? And, you know, if you're seeing any sort of demand pull.
Sure. So when you look at specifically the phosphate business, and I'll talk about some of the other specialty businesses of ICL, the phosphate specialty business for us today is made up of really three different business lines in total. One that's predominantly focused on food, one that's focused on what we call Advanced Additives, which are more industrial applications, and then we have another infant formula business that really has nothing to do with the other ones as well, in that phosphate specialty business. So food has been very interesting because I'm sure it's been a conversation in every topic today about destocking. And we saw the food industry go through that when we talked, you know, to all of our large consumer packaged goods companies that we supply.
But we've seen all that really come to an end. We've been able to see, which was difficult for probably six months, to see true demand side coming in because of the destocking activity going on. We believe we hit that in our conversations. Also, when we look at our own demand pattern in June, and we've seen sequentially since then, July, August, and also our September forecast, sequentially moving up in demand and really reflecting the actual customer's demand at this point.
So, food has continued to be a very solid, overall demand for us. It always has been really pretty much through all the, the, the general, economy cycles. It's always something that, it has a lot of stability to it. But when we look at our industrial application side of things, it's a little bit of a mixed bag, when you talk about the Phosphate Specialties business. Some of the markets that we serve are doing quite well. So when we talk about water treatment and, phosphates that go into water treatment, it's having a very strong year, in those areas, as well.
But other industrial applications like things that go into paints and coatings for industrial equipment, or even some of it that goes into the automotive industry, we're starting to see that also, you know, tail off a little bit. And it's more geographically focused. So, you know, the North American markets remain quite strong for us from a global business standpoint. Europe has been soft. China has been extremely soft from the industrial side of our business. Although parts of that, when you differentiate it out, have seen a pretty good recovery in the last quarter, because in the first quarter, we saw lower demand from the battery side in China because incentives were taken off of a lot of the EVs, and then put back on.
So there was a lull in the first quarter that's come back very strong there on the industrial side in China. And then South America is actually experiencing also. We're seeing a pretty strong demand pull from the industrial sector in South America-
Good.
as well.
Now, how about mix management? So, you know, overall, how do you expect specialty product sales to evolve, you know, as a percentage of your percentage of your sales, you know, in the next few years?
So specialties has been our strategy for a number of years. You know, if you look at ICL, we're a pretty unique company from the standpoint that we produce some commodity minerals, and we have, you know, core mineral chains, whether those be potassium, phosphate, magnesium, bromine. And our strategy has been to continue to move more and more of those metric tons further downstream. That continues to be our strategy. Actually, pre-2022 commodity run-up, we had actually crossed over in 2021, when greater than 50% of the revenue and profit of ICL was coming from our specialties businesses, which we're not typically recognized for. We're typically recognized more for the fertilizer side of the business, the commodity side of the business.
2022 kind of threw that out of whack because commodity prices got so high, but we see that trend continuing as we move forward. And so from an investment standpoint and growth standpoint, the specialties business, whether that be Industrial Products, Phosphate Specialties, or our Growing Solutions, which is our specialty agriculture division, is where we expect that growth to be, both organically and inorganically as well, as we move forward.
Okay, great. So now, just within Bromine, I guess I was wondering if you could share a little bit of maybe what your outlook is for the next few years, and yeah, I mean, there's been some resilience there, and just curious your, your thoughts.
Yeah, bromine's interesting. You know, you have to really look at the long-term trend of the bromine business and also the fundamentals as we move forward. This is I guess I've been with ICL 18 years. This is probably, I would consider, at least in 15 years, the lowest point of the business for the bromine business, and it's still a very, very good business. Many businesses in its bottom of its cycle, that's still, you know, 25%+, EBITDA is, I think, a pretty good, strong business. There were some interesting dynamics with bromine through COVID, through supply chain disruptions, where a lot of inventory was built up across the entire chain in bromine.
And simultaneously, because of this, historical trend, really of almost 15 years of price increases year-over-year in bromine and bromine compounds, some new players came into the market, as well. So you had this simultaneous effect of new capacity coming on, destocking, simultaneously. You know, initially, we took a view of continuing to push value over volume-
Hmm.
in our business. It was clear that the cycle was gonna last longer than we thought it was, because of some of the new entrants into the market. So we've gone back, changed that strategy from where we started at the beginning of the year. We've recovered our market share that we gave up during that period of time. Quite easy to do. We still have the lowest cost position in the world on bromine. You know, we think over the next two quarters, that demand starts to come back because when we look at the bromine in market segments, it's primarily consumer electronics there, and so the destocking has worked its way through. We think demand will start to come back. We see a little bit of that stronger in the fourth quarter into 2024.
And we also think, you know, prices continuing to stay in the region they are is beneficial to take out some of the marginal players, in the Bromine business, that were there before, not the new entrants, but, the bottom marginal players to come out, next year. So still fundamentally very solid, expectations for the Bromine business. You know, we think it's gonna take probably to the end of 2024 before we get back to pre, you know, 2021 type levels performance for the business, but, the fundamentals are there.
Great. And now just before I ask the next question, I just wanted to, you know, follow up and see if anyone in the audience had any questions. But if no further questions, I guess now just to shift over to the potash market .
You know, just curious to hear what your outlook is there. You know, expectations for the next selling year, but maybe some longer term views.
Sure. So it's my least favorite things to talk about our commodity business, but you have to do it in there. As long as I've been at ICL 18 years, I'm not unfamiliar with answering questions about our potash business and fertilizer businesses in general. You know, I think the good news, and we've all seen it, has been that potash has stabilized from a pricing standpoint. At this point, you know, it varies by region. At this point, in the $300s, from low to mid-$300s. When we look at the demand side, again, same thing, fundamentals still look very strong for application. Farmer affordability is still good overall for potash.
So, you know, as we look at this upcoming second season in South America, we have a very positive outlook for application and volume in South America for the second half of the year. From ICL's perspective, our capacity for the remainder of this year is already fully spoken for, so we're sold out on all of our potash capacity already. So it's the conversations we're starting to have about 2024 sales already at this point. So as usual, ICL, we will sell our full capacity, which will come back in 2024, closer to our historical levels of 4.8 million metric tons. We're a little bit below this year. We were a little bit slower in the first half of the year, running normal rates.
In the second half of the year, we expect to do that throughout 2024-
Okay
as we look forward to the future. So I think the short answer is stabilization to slight uptrend in price and relatively normal demand for the future for Potash.
Okay. And you actually answered my question about the South American growing season and what your, you know-
Yeah
sort of thoughts were there.
There's a little more. I mean, part of it is not only affordability, but also when you look at the weather-related part of it.
You know, when you look at weather forecasts, as good as they are, as bad as they are, the forecast for the growing season in the second half of the year in South America is very favorable, when we look at the macro part of the weather trends in South America. So they're expecting to have average to above average rainfall type levels that they, you know, have been slowly recovering from, let's say, the last couple of years, and getting back to normal there. So expectation from affordability and also that it could be a very good weather year also, we think is gonna have a good positive impact on demand.
Okay. Well, since you touched on South America, I was wondering maybe if you could talk a little bit about, you know, what you're seeing in, you know, different geographies and your expectations there, and maybe, you know, in different end markets?
Sure, yeah. It's pretty dependent upon businesses in South America in general. You know, when we talk about Phosphate Specialties business, I can talk in more detail about It's a little bit of a mixed bag as well. So we have certain countries in South America that are, let's say, more inclined to import product versus others that are more reliant on local production. In South America, Brazil is a strong country and region for us, not only in the Phosphate Specialties business, but also in our Growing Solutions business after the acquisition a few years ago of Fertilaqua and Proquímica, our Compass's specialty mineral specialty fertilizer business there. So Brazil, we have a very strong outlook of demand there.
As I said before, the industrial segments, even for, you know, I&I, and building and construction in South America, are stronger than they were last year for our businesses. Some of that's share gain, but some of it's overall market demand that's driving it. You know, some of the other countries like Argentina, Uruguay, and South America, as far as Colombia and those areas, they're being pretty significantly influenced right now by import material, predominantly from China, at the moment, just on the price side, but the, the demand looks relatively normal and strong.
Okay, well, now to shift gears a little bit to, you know, capital allocation. Just curious to hear what, you know, ICL's strategy is there, you know, and if there's maybe a difference between short- and long-term capital allocation strategy.
Yeah, so when we think about capital allocation, you know, if you look at ICL's balance sheet, it's very strong and solid at the moment. Net debt to EBITDA ratio, you know, below one. So, and we're still generating significant amounts of positive free cash flow within the business, and we have plans to grow those specialty businesses we talked about, both organically and inorganically. So some relatively large investments, CapEx investments, related to these battery materials that we're moving downstream into, but also, again, getting pretty active in the M&A space.
Again, we kind of, I wouldn't, I wouldn't say pushed pause, but we slowed down a little bit on some of that activity in 2021 and 2022 because valuations had gotten a little bit out of, out of control, in our opinion, a little high. We see that as a much more favorable environment today, you know, related to, to interest, private equity, and also some really good technology plays, startup companies, that are coming into, into cash flow issues, that are presenting some good opportunities to add technology, to our portfolio in the specialties business, whether they be in, in Industrial Products, in, in recycling or, or electrolytes, or in our, our specialty agriculture and our Growing Solutions business. So, we're, we're very active there. You know, we, we have a very strong balance sheet to support that growth.
That is where ICL, you know, after its dividend policy payment, that is where the cash is going inside in ICL at this moment, is towards growth. So while we expect maybe a slight uptick in that net debt to EBITDA ratio, we expect that it will stay in a very solid, you know, sub-2-to-1 range as we make those investments.
Okay, yeah. Now just, you know, just to shift gears a little bit, I guess, how would you sort of describe the operating culture at ICL and the talent pool, and, you know, maybe what you're seeing?
Yeah, sure. So the operating culture is very interesting in ICL. So, if you don't know a lot about ICL, we operate with four different business divisions inside the company. Each one of those businesses is responsible for their own strategy. So Phosphate is responsible for their own strategy, Growing Solutions, Potash, so on and so forth, and Industrial Products inside there. We operate essentially with the executive committee, the GEC, working as a steering group, and also ICL's board of directors on strategy approval as we move forward. So we do that typically at every five-year interval within the kind of a three-year refresh of that as well inside there. We just finished that last year inside the business, so all the things we've talked about were on that roadmap.
Our overall culture, you know, we continue to add and supplement our management around the world and grow our talent pool related to these downstream businesses that we are moving into, whether that's through acquisition of talent that comes with those businesses, and also our own additions to support those growth areas for the business as we move forward. ICL would, you know, like to say we're spending a lot of investment, people investment as well, on our management as well. We just actually concluded last month a very large, I would say, very ambitious internal leadership development program, I would call for our middle management, called Rise.
where we took, which is interesting, all the ones I've always previously been involved in, you kinda do sections or groups of the company at one time. We decided we were gonna take that on and do over 2,500 middle managers on a global program simultaneously, to really help with the interaction and globalization of the organizations around the world. So we built these home groups that had people from each region. They actually traveled face-to-face activity, but it was, in my opinion, a significant investment in the middle management of ICL as well, which is very good, and we think will pay dividends as we go, especially related to the organic growth of ICL's businesses.
My understanding is you've hopped around in, you know, a lot of different parts of the business yourself, so.
I have. I've been with ICL for 18 years or so, and have been fortunate to be in a number of different parts of the business, all on the specialty side
of the business, and also previously, running ICL's global operations and supply chain, prior to running the phosphate business for ICL. So, it's a good thing, and especially for things like this, to be able to have exposure to all the different parts.
Yeah.
It's also a key component of why we wanted to do the Rise program the way we did. Because while we run these divisions independently and they each set strategy, we see a lot of synergy and overlap between those businesses, and it was also a way for us to try to capture some of that value. Especially, you know, as a simple example, when we talk about the battery materials, where we are doing parts of it on the Industrial Products division, part of it in the Phosphate division, and making sure that those organizations are aligned and also have very transparent lines of communication and understanding, and just knowing one another across all levels and lines of that middle management, so that we can successfully execute on growth strategies that potentially cross over divisional lines inside ICL.
Now I think we have about 3.5 minutes left. Just before I ask my last question, if anyone in the audience has a question, please welcome to raise your hand. But if Sure, go ahead.
Can you help us just understand, kind of normalize profitability in Growing Solutions at this time? It's been all over the place. So, you know, what do you How do you answer that one?
Yeah, I think when you look at the Growing Solutions business, the answer in that is the long-term fundamentals of kinda what you saw in 2020, 2021 are what's there. You know, there was such a large run-up in the commodity side that also impacted input costs into the specialty side, and there's a lot more inventory in the specialty side of the business. So you've you know, we've seen, and y'all have seen, right, a significant impact, not only of destocking, but also us moving input raw materials into that specialty business, different than our commodity businesses, and getting that through the inventory cycle inside.
So, you know, still when we look at long-term, take out the run-up of 2022, the fundamentals and financial performance of that business, we are very confident in coming back to those 2021 levels. 2022, you know, was an exceptional business for anything commodity related, and specialty fertilizers, in the case of 2022, got highly linked to commodity. We don't see that as a long-term trend there, that there's still differentiation and value in specialty fertilizer, specialty agriculture, for nutrient use efficiency, for, you know, all kinds of sustainabilities. We're still launching new products related to those things. So I think you'll see that stabilization as this, we come out of this cycle, let's say, on the commodity side, and it standardize and normalize again, on the specialty agriculture side of things.
Overall, but the value proposition is still the same there. You know, we went through a very strange dynamic in 2022 that has made it look weird overall, and I think 2024 will start to bring that back to a normalized level. We're starting to see it already in the third and fourth quarter, and you should see that in the financial performance as well as those high input cost materials have worked their way out. So maybe where there's still a bit of influence from the market on the Growing Solutions side, the cost component of it will have been worked out in the third and fourth quarter.
Great. So, you know, with a minute left, I mean, anything else you'd like to touch on that we haven't today? You know, maybe any spaces that you're entering that are exciting?
We've talked about most of them. If there's not other questions, like I said, you know, probably would reiterate for people, you know, is ICL's really overall long-term strategy, which is to move from a commodity company. Like I said, we achieved our goals in 2021 related to that. We continue to move downstream, and we'll continue to move downstream, and build a stronger and stronger specialty business based on those core minerals that we have back integration into. That's really the fundamental future for us as a company. You know, when we look at those different end market segments, whether they're in industrial products, in, you know, consumer electronics, servers, you know, everything going into electrification, we see strong CAGR growth levels there.
You know, where our products go into pharmaceutical areas, industrial products, and phosphate on the specialty side, we see, again, similar, similar trends. The food business continues to be a very, very solid business for us. We expect that to be the case for the future. Not only the current products we sell and the demands for those, but also the new solutions and new products we're bringing for our consumer packaged goods customers to help them, you know, with cleaner label products that they sell, lower sodium, lower fat, healthier products. Overall, we see still a strong growth pull, demand there. So I think that's probably what I would say in conclusion is, you know, look forward to continuing to talk to you about ICL's transformation from a commodity fertilizer company to a specialty company.
Great. Well, thank you so much for coming today, and thank you, everyone, for attending.
Thank you.