The interview with Avraham Bigger, chairman and CEO of pesticide maker MA Industries (Makhteshim Agan) (TASE: MAIN), takes place at a time of turmoil on the capital markets, with the bonds of the top companies in Israel plummeting, and their yields soaring to double digit figures usually associated with junk bonds. Yet despite this, Bigger isn't worried. "Our 11-year notes are traded at a yield of 7.7%, and our short-term notes are traded at 5.5%, which, relative to the world of today, is OK. It is a vote of confidence by the capital market in the company and its ability to meet its commitments, and there is no reason why it shouldn't meet them," he stresses in an exclusive interview with "Globes."
Globes: But that trust hasn't extended to the company's share, which has more than halved in value since the beginning of the year.
Bigger:"When I look at the falls in prices of our colleagues worldwide, we're in good company. The sharp falls are out of step with the fundamental causes, and result mostly from considerations of liquidity. Investors want to increase liquidity and are therefore selling shares for which there is still a demand.
"It's true that we have fallen more than other Israeli companies, but we have a lot of investors, both local and foreign, in the form of mutual funds, ETFs and hedge funds, which want to increase liquidity and have to sell stock."
Makhteshim Agan is one of the few companies which, so far, have not been affected by the credit crunch. While many sectors, especially in real estate and finance, are clearly feeling the effects of the financial crisis, companies in lines of business connected to the agricultural industry, headed by Makhteshim Agan and Israel Chemicals Ltd. (TASE: ICL), have not only managed to sidestep the crisis but have even posted record results in the last few quarters.
Makhteshim Agan, for example, posted a record $160 million profit for the first half of 2008, 30% growth compared with the first half of 2007, despite the rise in oil prices and the strengthening of the shekel. The engine driving the strong figures is the agricultural commodities sector, which over the past two years has seen an unprecedented boom. Global seed inventories are at record lows, and demand for agricultural merchandise and inputs such as pesticides is on the rise. However, given the fear of a global recession that could send commodity prices plummeting, it is feared by some that the party could soon be over for agriculture as well.
Will the global crisis hit Makhteshim Agan as well?
"I am not indifferent to the current crisis, but I don’t see a serious problem in the form of low demand for Makhteshim Agan products. From what I can see at present, and I say at present deliberately, I don't see any change in demand. Company business is continuing as usual despite the financial crisis. That said, the current crisis is no trivial matter. There could quite definitely be an effect in the future. When there's a flood everyone gets wet."
So how come you haven't got wet so far?
"Our business model is quite simple: There are more people who want more food, and they are moving away from diets heavy in animal protein, which has triggered an increase in demand for seeds. In addition, the amount of land for crop growing is limited. The volume of cultivated land is seen growing at a rate of 0.2% a year, and the growth in consumption is more than ten times this. The result is that, while seed inventories lasted for 150 days at the beginning of the decade, today they will last for just 60 days. Even if the increase in demand comes to a total standstill, inventory levels will only return to normal levels within two to three years. Moreover, at the current inventory levels, one acute event at a certain location, such as a drought, is all it would take to deplete seed inventories.
"The only way to tackle the issue of inventory is modern agricultural technology: fertilizers, engineered seeds, pesticides, irrigation methods. We are part of this field."
Has the fall in commodity prices also eroded your prices?
"Farmers' profit margins are indeed lower than they were because of the fall in commodity prices, but compared with previous years they are still high. The world will not stop consuming seeds because of the economic crisis and farmers will not stop planting crops. I don't expect significant erosion in our prices, since in contrast to the fertilizer sector, our sale prices did not rocket in recent years, but rose moderately. Incidentally, I'm not sure that we'll see a dramatic fall in fertilizer prices either. There is also a positive side to the fall in commodity prices, since some of our costs, like oil, will be reduced, so ultimately, I believe our profit margins will be maintained."
Is the worst behind us?
"The crisis is serious, but the impact it is having will decrease and work its way out of the system, especially once the banking system gets back to financing real business activity such that of small and medium-sized companies. Once financing returns to normal worldwide, even at higher prices, the fear of global recession will recede. Will it happen tomorrow or the day after? It's hard to tell, but I believe that within a reasonable space of time we'll see a recovery."
And what will happen in Israel?
"Israel is remarkable, because there are no problems here when it comes to household financing. I cannot envisage a financial institution in Israel collapsing. The banks here are stable and cautious, and the banking system in Israel is conservatively managed."
Good time for business
It is now two years since Bigger joined Makhteshim Agan. He took over as chairman shortly after the company's parent, Koor Industries (TASE: KOR), was acquired by IDB Holding Corp. Ltd. (TASE:IDBH), controlled by Nochi Dankner. Upon taking up his post, Bigger wasted no time in moving forward with a massive streamlining program, which made quite a few waves. Among the measures introduced were the merger of Makhteshim and Agan, firings, and the replacement of a large part of the previous management team.
Despite the criticism the program drew, its results cannot be disputed. Makhteshim Agan's operating profit grew by 40% to $247 million in the first half of 2008, compared with the first half of 2007. "The program has moved forward quicker than we expected, but there are processes that we still have to complete," says Bigger.
Although the capital market is happy with the results of the program, the feeling is that Makhteshim, in its present format, has exhausted its potential and has now reached a strategic crossroads. There has been talk on more than one occasion that Dankner intends to sell Makhteshim Agan. A few months ago, IDB even announced that it was in preliminary talks on a sale, which fell through shortly after. Earlier this week it was reported in the Indian press that IDB was in talks to sell 39% of Makhteshim Agan to India's largest pesticide maker United Phosphorus Ltd. (BSE: 512070), but with prices at their current levels, the chances of a sale are slim, and the report in the Indian press was later denied by IDB.
A year ago, Bigger told "Globes" that Makhteshim Agan was not for sale, but today he is less unequivocal about this. "Theoretically it can always happen," he says. "I don't know and I don't sense that something like this is on the cards. Both the management team and I have been making decisions on programs and investments as if the current ownership structure will remain in place permanently, otherwise it would be impossible to initiate any long-term moves." As far as Bigger is concerned, there is a greater likelihood that Makhteshim Agan will be the one doing the buying rather than the reverse.
Judo tactics
Will competition from the East make activity in Israel unprofitable, as it did in the Israeli textile industry?
"Firstly, the field we operate in has high entry barriers in the form of infrastructure and licensing processes. Second, as to the so-called threat from the East, I adopt the concept used in Judo: see your opponent's characteristics as advantages, and that, in our case, means purchases of raw materials and joint ventures. It's true that Chinese production costs less because of the cheap labor there, but the work conditions there are easier due to environmental standards."
Are environmental standards in China less stringent than in Israel?
"In China and India, there is no free-for-all when it comes to the environment. They have the same high standards as in the rest of the world, but the authorities are consistent in their handling of the issue, and you can predict what will happen in these countries five years from today. We also produce in Brazil and in Europe, which are no less stringent, but you don't have the fuss there that the chemical industry in Israel has to cope with. There are people in Israel who say they won't invest in chemicals, and there are those who wake up one morning and decide to bring in laws against chemical companies. We have a constructive dialogue with regulators in the rest of the world, but in Israel we're constantly at loggerheads with them. In the next three years we will invest close to $100 million in the environment, and there are very few companies in industry which invest sums like these."
Published by Globes [online], Israel business news - www.globes-online.com - on October 22, 2008
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