ADAMA: promoting the R&D of 20+ new patents expiring products

On Oct 27, 2022, ADAMA held an investor relation activity in the form of teleconference. Ignacio Dominguez, President and CEO, Efrat Nagar, Vice President of Finance, Rivka Neufeld, Head of Global Investor Relations, and Wang, Representative of Securities Affairs attended the reception.

Ignacio Dominguez and Efrat Nagar began the activity by presenting the company's performance for the third quarter and the nine months of 2022, followed by questions from analysts.

Q: 1. The global agrochemical situation is good this year, then, regarding the inventory and supply and demand of the international plant protection market, what is the outlook of the company for next year.

2. Please introduce the resumption progress of Jingzhou base and Huifeng base

A: For the first question, we believe that there has been no significant change in the favorable underlying factors on the farmer side, including grain prices and farmers' planting demand, and we expect the industry trend in the first half of next year to be similar to the current situation. Market trends in the second half of next year depend on future supply. Export volumes are increasing on the back of recovering industry output, as demand for plant protection in China's domestic market has slowed and the RMB weakened against the US dollar. As a result, we expect that the technical prices will continuously decline in next year, but at a slower pace than we originally expected due to the uncertainties in industry supply overseas, including energy supply and costs. Overall, we believe the industry to continue its current trend in the first half of next year, and the second half will need to be monitored.

As for the second question, Jingzhou base is currently operating at a high level of production capacity. The output of Spermine have achieved the expectation, and the output of Acephate exceeded the original output in the old factory. In summary, the cost advantage we expected was achieved. In addition, the relocation project of the Anbang base is also progressing normally. Huifeng’s operation has basically recovered, and the production capacity of some technicals is still in the stage of climbing production. However, compared with the last year, it has significant improvement.

Q:1. Sales in Europe and North America were down in the third quarter, mainly because of the weather, the report said. In fact, the overall growth of the European market in the first three quarters was weak. In addition to the impact of weather, how much has the conflict affected the demand for local crops? Is the demand in Europe and North America expected to improve in the future?

2. At present, the integration of Sinochem has been basically completed. Is there any clear coordination or relevant cooperation in the group as a whole?

A:In addition to the weather, we should also emphasize the influence of the exchange rate and Russia-Ukraine conflict you mentioned. Sales in Europe rose 11% in local currency terms in the nine months. Last year, Ukraine's contribution to European sales was close to $70 million, so this year's European sales have really been affected by the conflict with Russia. But sales in Europe were up 11% in local currency terms, reflecting solid business fundamentals and solid sales results in this region. Currently, the European team is implementing several key projects to achieve better results for the business layout in the 2023.

For Syngenta, ADAMA is an unique business unit. Other brother companies also have different characteristics. Therefore, we have different market strategy, special product line, and different business model. Having the distinctive business models is an important factor for Syngenta’s success. It is precisely because they are different from each other, there are also many opportunities for brother companies to cooperate, which is not only to promote growth, and to reduce costs and increase efficiency.

Q1. What currency does the company use to do business around the world? Now the dollar is up, could you specifically analyze how these unfavorable factors will affect the company?

2. As we all know, the company is mainly engaged in the To C business, and the registration is quite important. May I ask how the company selects pesticide products for registration? and how to coordinate the registration of different products?

3. How does the company look forward to next year's formulation price trend?

A:1. We have direct business in many countries and mostly in local currency. Sales made in local currencies are negatively affected by the fact that they are converted into less dollars when the dollar appreciates. Similarly, exposure on the balance sheet translates into lower dollar amounts when the dollar appreciates. For the exposure, we use different arbitrage tools to hedge the risks brought by the fluctuations of the US dollar. Hedging itself has a cost, which increased year-on-year in the first three quarters of this year. In addition, for some specific currencies, we carry out hedging on some future sales to hedge against the risk of excessive appreciation of the US dollar to the dollar amount of sales.

The company has established a special mechanism to select products, which is in line with the company’s business operation strategy. At first, we divided the global market into many market segments, such as Brazilian soybean fungicides and European cereal fungicides. Combing through all the crops and product categories in the world, we identified 48 market segments where we can gain competitive advantages. According to the market segment planning, we will study the active ingredients, that were about to expire in 10 years, fit into our strategy. We're going to study the AI that are going to expire in the next 10 years and see which products fit into our strategy.

From 2018 to 2028, we have selected more than 20 technicals that meet our development strategy and market segmentation requirements from 90 products whose patents are about to expire. Then, the Marketing Department and R&D team will conduct the R&D of specific product portfolios for these 20 technicals and submit them to the Supply Committee for regular review and implementation.

Of course, the technical price is expected to decline, but the price of other raw materials and intermediates used for formulation’s production may not fall a lot, because the activities of other industries. However, in the current environment where energy and logistics costs show an inflationary trend, the price decline of other production factors of formulations will be moderate, so the overall decline of formulation price in the industry will be relatively slow. In addition, the focus is not on cost price. We expect the competition in the bulk formulations with low differentiation to become more intense next year, and that will eventually be reflected in price. But differentiated formulations, those that are more effective and create more value for farmers, will have more stable prices. This is the reason why ADAMA is focusing on strengthening R&D, especially formulation technology. ADAMA achieves success in formulations.