אדמה פתרונות לחקלאות בע"מ ADAMA Agricultural Solutions Ltd. Quarterly Report for June 30, 2014

Transcription

1 אדמה פתרונות לחקלאות בע"מ ADAMA Agricultural Solutions Ltd. Quarterly Report for June 30, 2014

2 אדמה פתרונות לחקלאות בע"מ ADAMA Agricultural Solutions Ltd. Quarterly Report for June 30, 2014 Chapter A Board of Directors' Report on the state of the Company's Affairs Chapter B Financial Statements (Unaudited) for June 30, 2014 Chapter C Report Regarding the Effectiveness of the Internal Auditing of Financial Reporting and Disclosure The information contained herein constitutes an unofficial translation of the Quarterly Report for the second quarter of 2014 published by the Company in Hebrew. The Hebrew version is the binding version. This translation was prepared for convenience purposes only.

3 אדמה פתרונות לחקלאות בע"מ ADAMA Agricultural Solutions Ltd. Chapter A Board of Directors' Report on the state of the Company's Affairs

4 ADAMA Agricultural Solutions Ltd. Board of Directors' Report for the Quarter ended June 30, 2014 The Board of Directors of the Company is pleased to present the Directors' Report on the state of the Company s affairs as of June 30, 2014 and for the cumulative six-month period ending on that date ("the Reporting Period"). The Directors' Report for the Reporting Period is limited in scope and should be read together with the Periodic Report for 2013 published on March 9, 2014 (Ref: ) ("the Periodic Report for 2013"). A. Board of Directors' remarks on the state of the Company's affairs 1. Brief description of the corporation and its business environment ADAMA Agricultural Solutions Ltd. and its subsidiaries ("the Company") specialize in the chemical industry and, as of the reporting date, focus primarily on the agriculture-related chemical industry (agrochemicals). In this context, the Company develops, manufactures and markets crop protection products. In addition, the Company has other operations which are based on its core capabilities (in the agricultural and chemical industries), the scope of which, as of the reporting date, is insignificant. As of the reporting date, the Company is the leading global generic manufacturer of crop protection products, and sells its products in approximately 120 countries worldwide. The Company's key success factors are primarily wide global deployment, a broad portfolio of specialty products adapted to the farmer s needs, its goodwill, know-how, high level of experience and agronomic ability, excellent technological-chemical capabilities, first-rate research and development capacities and product registration expertise, adherence to stringent environmental standards, strict quality control, global marketing and distribution system, comprehensive operating infrastructure from R&D through manufacture, cooperation with multinational companies for the manufacture and marketing of the products, financial robustness and available cash resources. Steady and consistent investment in development facilitates the launching of new generic products, mixtures and formulations at opportune times. For a description of the corporation s affairs and material events during the Reporting Period, see Chapter A of the Periodic Report for For a description of the Company's business strategy and goals, including its plans following completion of the merger transaction with a company from the ChemChina group, see section 31 of Chapter A of the Periodic Report for Brief review of the changes in the industry and in the Company's operations 1

5 In the second quarter of 2014 and in the Reporting Period the Company presented a significant increase in sales and also an increase in gross profit, gross margin and net profit compared with the corresponding quarter and period last year. This increase stemmed mainly from an increase in quantities sold. In the second quarter of 2014, the plant protection market and the Company's operations were influenced by the following trends: a. Despite harsh weather conditions during the quarter in North America, mainly during the first half of the quarter, and the resulting accumulation of inventory in the distribution channel which reduced sales of crop protection products in the market during the quarter, the Company increased its sales in North America in the quarter. b. An early start to the season in Europe, which led to the shifting of sales to the first quarter, as well as unseasonably cold and wet weather in Europe in the first half of the second quarter, reduced sales in the crop protection market, including those of the Company. However, the Company increased its sales over the whole season (the first two quarters). c. Despite severe drought conditions in several countries in Asia, the Company increased its sales in this region in the quarter. 2. Results of Operations Condensed Statement of Income Accounting Statement of Income for Q (in USD millions): % 4-6/2014 % 4-6/2013 Change % of change Revenue %* Gross profit 31.9% % % Operating expenses 20.6% % % Operating profit (EBIT) 11.4% % % Finance expenses, net 3.3% % 34.7 (5.5) (15.9%) Pre-tax profit 8.5% % % Net profit after noncontrolling interest 6.8% % % EBITDA 16.1% % % * The Company's revenue in the second quarter of 2014, eliminating currency effects, increased by 10.1% compared to the corresponding quarter last year. Accounting statement of profit and loss for the Reporting Period (in USD millions) % 1-6/2014 % 1-6/2013 Change % of change Revenue 1, , %* Gross profit 33.2% % % Operating expenses 20.3% % % Operating profit (EBIT) 12.9% % % Finance expenses, net 3.0% % 64.0 (9.8) (15.3%) Pre-tax profit 10.1% % % Net profit after noncontrolling interest 8.9% % % EBITDA 17.5% % % * The Company's revenue in the Reporting Period, eliminating currency effects, increased by 6.9% compared to the corresponding period last year 2

6 3. Analysis of business results A. Geographical split of revenues The Company s sales in the second quarter of 2014 amounted to USD million, compared to USD million in the corresponding quarter last year, an increase of USD 72.6 million. The Company s sales in the Reporting Period amounted to USD 1,785.7 million, compared to USD 1,688.6 million in the corresponding period last year, an increase of USD 97.1 million. The increase in total sales stemmed mainly from an increase in quantities sold. See below for a specific description of trends relating to the principal regions of operation. Geographical split of quarterly sales (in USD millions): % 4-6/2014 % 4-6/2013 Change % of Change* Europe 38.4% % (4.5) (1.3%) Latin America 19.4% % % North America 20.0% % % Asia Pacific and Africa 18.9% % % Israel 3.4% % % Total 100% % % *The Company's revenues in the second quarter, split by geographical regions, eliminating currency effects, increased compared to the corresponding period last year, by the following rates: Europe (1.4%), Latin America 21.7%, North America 6.71%, Asia Pacific and Africa (including Israel) 6.%. Geographical split of sales in the Reporting Period (in USD millions) % 1-6/2014 % 1-6/2013 Change % of Change* Europe 45.0% % % Latin America 17.1% % % North America 17.6% % % Asia Pacific and Africa 17.2% % % Israel 3.1% % 54.9 (0.3) (0.5%) Total 100% 1, % 1, % *The Company's revenues in the Reporting Period, split by geographical regions, eliminating currency effects, increased compared to the corresponding period last year, by the following rates: Europe 2.9%, Latin America 14.7%, North America 7%, Asia Pacific and Africa (including Israel) 9.8%. Geographical split of quarterly sales by percentage: Asia Pacific and Africa 18.9% Israel 3.4% Q Asia Pacific and Africa 18.0% Israel 3.5% Q North America 20.0% Europe 38.4% North America 18.8% Europe 42.4% Latin America 19.4% Latin America 17.4% 3

7 Europe: Sales in the second quarter of 2014 amounted to USD million, compared to USD million in the corresponding quarter last year, a decrease of USD 4.5 million. The decrease in sales in the quarter stemmed primarily from a decrease in quantities sold, amongst other factors, resulting from an early start of the season that led to a shift of sales to the first quarter as well as from unseasonably cold and wet weather during the first half of the second quarter. The strengthening of the Euro was offset by the effect of currency hedging performed by the Company. In the Reporting Period, sales in Europe amounted to USD million compared to USD million in the corresponding period last year, an increase of USD 26.8 million. The increase in sales in the Reporting Period stemmed mainly from an increase in quantities sold in the first quarter of 2014 and raising of selling prices in the Reporting Period. The strengthening of the Euro was offset by the effect of currency hedging performed by the Company. Latin America: Sales in the second quarter of 2014 amounted to USD million, compared to USD million in the corresponding quarter last year, an increase of USD 29.8 million. In the Reporting Period, sales in Latin America amounted to USD million compared to USD million in the corresponding period last year, an increase of USD 37.7 million. The increase in sales in the second quarter and in the Reporting Period stemmed mainly from an increase in quantities sold, partially offset by lower selling prices. North America: Sales in the second quarter of 2014 amounted to USD million, compared to USD million in the corresponding quarter last year, an increase of USD 24.7 million. The increase in sales in the quarter stemmed mainly from an increase in quantities sold despite unusual drought conditions in the west coast of the USA during the first half of the quarter and inventory that accumulated in the marketing channels as a result of the hard winter and the previous season, that was partially offset by lower selling prices and by the weakening of the Canadian dollar. In the Reporting Period, sales in North America amounted to USD million compared to USD million in the corresponding period, an increase of USD 17.3 million. The increase in sales in the Reporting Period stemmed mainly from an increase in quantities sold, partially offset by lower selling prices and by the weakening of the Canadian dollar. Asia Pacific and Africa: Sales in the second quarter of 2014 amounted to USD million, compared to USD million in the corresponding quarter last year, an increase of USD 21.0 million. The increase in sales in the quarter stemmed primarily from an increase in quantities sold, despite unusual drought conditions in several countries in Asia, partially offset by the weakening of currencies in these regions. Sales in Asia Pacific and Africa in the Reporting Period amounted to million compared to USD million in the corresponding period last year, an increase of USD 15.6 million. 4

8 The increase in sales in the Reporting Period stemmed primarily from an increase in quantities sold in the second quarter that compensated for the decrease in quantities sold during the first quarter due to drought conditions in the first quarter (mainly in Australia) and the weakening of currencies in these regions. Israel: Sales in the second quarter of 2014 amounted to USD 29.5 million, compared to USD 27.9 million in the corresponding quarter, an increase of USD 1.6 million. Sales in Israel in the Reporting Period amounted to USD 54.6 million compared to USD 54.9 million in the corresponding period, a decrease of USD 0.3 million. B. Revenues split by operating segment Split of quarterly sales by operating segment (in USD millions) % 4-6/2014 % 4-6/2013 Change % of Change Crop protection (Agro) 94.3% % % Other (Non Agro) 5.7% % 55.0 (5.2) (9.5%) Split of sales in the Reporting Period by operating segment (in USD millions) % 1-6/2014 % 1-6/2013 Change % of Change Crop protection (Agro) 94.4% 1, % 1, % Other (Non Agro) 5.6% % (3.8) (3.6%) Sales of crop protection products in the second quarter of 2014 amounted to USD million, compared to USD..877 million in the corresponding quarter last year. Sales from the Company s other operations in the second quarter amounted to USD..78 million, compared to USD 55.0 million in the corresponding quarter last year. Sales of crop protection products in the Reporting Period amounted to USD 1,685.4 million, compared to USD 1,584.7 million in the corresponding period last year. Sales from the Company s other operations in the Reporting Period amounted to USD million, compared to USD million in the corresponding period last year. C. Gross profit Gross profit in the second quarter of 2014 amounted to USD million (31.9% of sales), compared to USD million (31.5% of sales) in the corresponding quarter last year. Gross profit in the Reporting Period amounted to USD million (33.2% of sales) compared to USD million (32.5% of sales) in the corresponding period last year. The increase in gross profit and gross margin in the quarter and in the Reporting Period stemmed mainly from an increase in quantities sold, an improvement in the Company's product mix, and a decline in manufacturing costs following the move to the use of natural gas at the production facilities in Israel, which were partially offset by the effect of currency hedging performed by the Company. 5

9 D. Operating income Operating income in the second quarter of 2014 amounted to USD 99.5 million (11.4% of sales) compared to USD 93.3 million (11.6% of sales) in the corresponding quarter last year. Operating income in the Reporting Period amounted to USD million (12.9% of sales) compared to USD million (13.3% of sales) in the corresponding period last year. Operating expenses in the second quarter of 2014 amounted to USD million (20.6% of sales), compared to USD million (19.9% of sales) in the corresponding quarter last year. Operating expenses in the Reporting Period amounted to USD million (20.3% of sales) compared to USD million (19.2% of sales) in the corresponding period last year. R&D expenses: In the second quarter of 2014, R&D expenses amounted to USD 7.7 million (0.9% of sales), compared to USD 8.0 million (1.0% of sales) in the corresponding quarter last year. R&D expenses in the Reporting Period amounted to USD 17.7 million (1.0% of sales) compared to USD 16.9 million (1.0% of sales) in the corresponding period last year. Selling expenses: In the first quarter of 2014, selling expenses amounted to USD million (16.7% of sales), compared to USD million (16.1% of sales) in the corresponding quarter last year. Selling expenses in the Reporting Period amounted to USD million (16.3% of sales) compared to USD million (15.2% of sales) in the corresponding period last year. The increase in selling expenses stemmed, inter alia, from an increase in marketing expenses due to the launching of the global brand as well as an increase in variable expenses resulting from an increase in quantities sold. General and administrative expenses: In the second quarter of 2014, general and administrative expenses amounted to USD 26.7 million (3.0% of sales), compared to USD 28.2 million (3.5% of sales) in the corresponding quarter last year. General and administrative expenses in the Reporting Period amounted to 54.2 million (3.0% of sales) compared to USD 55.0 million (3.3% of sales) in the corresponding period last year. E. Financing expenses Financing expenses (net) in the second quarter of 2014 amounted to USD 29.2 million, compared to USD 34.7 million in the corresponding quarter last year. Financing expenses (net) in the Reporting Period amounted to USD 54.2 million compared to USD 64.0 million in the corresponding period last year. The financing expenses in the Reporting Period decreased compared to the corresponding period last year due mainly to a decrease in the Consumer Price Index ( CPI ) compared to the corresponding period last year. F. Income tax Tax expenses in the second quarter of 2014 amounted to USD 15.4 million compared to USD 14.7 million in the corresponding quarter last year. Tax expenses in the Reporting Period amounted to USD 22.5 million compared to USD 27.4 million in the corresponding period last year. 6

10 G. Net profit Net profit in the second quarter of 2014 amounted to USD 59.5 million (6.8% of sales), compared to USD 48.2 million (6.0% of sales) in the corresponding quarter last year. Net profit in the Reporting Period amounted to USD million (8.9% of sales) compared to USD million (8.2% of sales) in the corresponding period last year. H. EBITDA EBITDA in the second quarter of 2014 amounted to USD million (16.1% of sales), compared to USD million (16.5% of sales) in the corresponding quarter last year. EBITDA in the Reporting Period amounted to USD million (17.5% of sales) compared to USD million (17.8% of sales) in the corresponding period last year. 4. Financial Condition and Liquidity A. Cash flow The Company's cash flow from operating activities in the second quarter of 2014 was positive at USD million, compared to a positive cash flow of USD million in the corresponding quarter last year. Cash flow from operating activities in the Reporting Period was negative at USD 58.8 million compared to a positive cash flow of USD 67.0 million in the corresponding period last year. The change in cash flow from operating activities in the quarter and the Reporting Period stemmed primarily from an increase in the Company's sales in geographic regions that generally have longer credit days than the average of the Company and from the timing of sales during the Reporting Period. The Company's investments in the second quarter of 2014 amounted to USD 60.7 million, compared to USD 50.3 million in the corresponding quarter last year. These investments included primarily investments in product registrations, intangible assets and fixed assets. The investments in fixed assets, which included investment in plant and equipment, including facilities for the maintenance and protection of environmental standards, amounted to USD 30.3 million, compared to USD 26.9 million in the corresponding quarter last year. Investments in the Reporting Period amounted to USD million compared to USD million in the corresponding period last year. These investments included primarily investments in product registrations, intangible assets and fixed assets. The investments in fixed assets, which included investment in plant and equipment, including facilities for the maintenance and protection of environmental standards, amounted to USD 57.3 million, compared to USD 49.1 million in the corresponding period last year. B. Current assets Total current assets as of June 30, 2014 amounted to USD 3,100.5 million compared to USD 2,841.6 million on June 30, 2013 and USD 2,740.6 million on December 31, C. Investments in fixed assets See the section on cash flow above. D. Cash, current liabilities and long-term loans The Company's total financial credit (bank loans and debentures) as of June 30, 2014 amounted to USD 1,962.3 million (of which 30.6% was short term), compared to USD 1,827.3 million (of which 32.5% was short term) on June 30, 2013 and USD 1,738.0 million (of which 26.6% was short term) on December 31,

11 The Company's balances of cash and short-term investments as of June 30, 2014 amounted to USD million, compared to USD million on June 30, 2013 and USD million on December 31, The Company's net debt (short term bank loans excluding the receivables financing facility in the amount of USD million, receivables financing facility in the amount of USD million, long term bank loans in the amount of USD million, short term debentures in the amount of USD million, long term debentures in the amount of USD 1,135.4 million, net of cash in the amount of USD million, short-term investments in the amount of USD 16.8 million, long term deposits in the amount of USD 52.5 million and the effects of hedging transactions attributed to debt in the amount of USD 13.4 million) as of June 30, 2014 amounted to USD 1,513.3 million, compared to USD 1,375.7 million on June 30, 2013 and USD 1,271.7 million on December 31, According to the bank finance documents for the long-term loans of the Company and its subsidiaries, the Company is required to comply with financial covenants towards certain banks ("the Finance Documents"), the principal of which at June 30, 2014 and at the date of publication of this report, are as follows: (1) The ratio between the Company's interest-bearing financial liabilities and its equity will not exceed At June 30, 2014, the actual ratio was 0.8. (2) The ratio between the Company's interest-bearing financial liabilities and its earnings before finance expenses, taxes, depreciation and amortization (EBITDA) for 12 months will not exceed 4. As of June 30, 2014, the ratio between the Company's interest-bearing financial liabilities and EBITDA for 12 months was 2.7. (3) The Company's equity will be no less than USD 1.22 billion. As of June 30, 2014, equity totaled USD 1.59 billion. (4) The Finance Documents of one of the banks further provide that the balance of Company's surpluses or of its retained earnings according to the financial statements for every date shall not be less than USD 700 million. As of June 30, 2013, the Company's surplus balance is USD 1,119.6 million. The receivables financing facility of the Company and its subsidiaries (as detailed in section 22.3 in Chapter A of the Periodic Report for 2013) ("the Receivables Financing Facility Agreement") includes undertakings by the Company to comply with financial covenants, of which the key covenants are: (1) The ratio between the Company's financial liabilities and its equity will not exceed At June 30, 2014, the ratio was 0.8. (2) The ratio between the Company's interest-bearing financial liabilities and EBITDA for 12 months will not exceed 4. As of June 30, 2013, the ratio was 2.7. (3) The Company's equity will be no less than USD 1 billion. As of June 30, 2013, the equity totaled USD 1.59 billion. As of June 30, 2014 and during the second quarter of 2014 and as of the date of this report, the Company was in compliance with the financial covenants applicable to it under the Finance Documents and the Receivables Financing Facility Agreement. For more information, see section 23.4 in Chapter A of the Periodic Report for 2013, and Note 20(c) and (d) to the financial statements as of December 31, According to the arrangement with the bank with which the Company signed the Receivables Financing Facility Agreement and with the banks towards which the Company is required to fulfill financial covenants 8

12 pursuant to the Finance Documents, the outstanding debt under the Receivables Financing Facility Agreement is not included as part of the financial liabilities for the purpose of reviewing the financial covenants, even though the Company changed its accounting treatment regarding the Receivables Financing Facility Agreement after having applied IFRS 10, and includes the outstanding debt under the Receivables Financing Facility Agreement within its balance sheet. E. Equity The Company's Equity as of June 30, 2014 amounted to USD 1,587.6 million, compared to USD 1,464.4 million on June 30, 2013 and USD 1,404.2 million on December 31, Equity as a proportion of the total assets was 32.7% as of June 30, 2014, 33.1% on June 30, 2013, and 31.5% on December 31, The Company's issued and paid-up share capital as of June 30, 2014 is 430,531,550 ordinary shares of NIS 1 par value each. F. Financial ratios Ratio of current assets to current liabilities (current ratio) Ratio of current assets, excluding inventory, to current liabilities (quick ratio) Ratio of financial liabilities to total assets Ratio of financial liabilities to total equity, gross December % 123.8% June % 40.4% 124.8% 123.1% G. Financing sources The Company finances its business operations from its equity and from non-bank credit (mainly debentures), bank loans (short- and long-term), customer debt securitization, and supplier credit. H. Warning Signs The Board of Directors of the Company reviewed the existence of Warning Signs in the Company, as these are defined in Article 10B(4) of the Securities regulations (Periodic and Immediate Reports), In view of the consolidated financial structure of the Company and its subsidiaries and based on the financial data appearing in the Company's consolidated financial statements as reviewed by the Company's management, the Board of Directors determined that the fact that the Company's separate reports indicate an ongoing negative cash flow from operating activities does not point to a liquidity problem, and accordingly, as of the date of the report, there are no Warning Signs in the Company. The main considerations behind the resolution of the Board of Directors include, inter alia, the following: 1. The Company's consolidated financial statements reflect a positive level of working capital. Furthermore, the consolidated annual financial statements reflect consistent positive cash flow from operating activities. This positive working capital, which includes, at the reporting date, a cash balance of USD 366 million, is the principal source for the repayment of the Company's liabilities. 2. Based on the structure of the operations of the Group, the manufacturing subsidiaries in Israel, Makhteshim and Agan ("the Manufacturing Companies") are the principal manufacturers of the Group's products that are sold by the Group's marketing companies all over the world, so that there is a current liability of the marketing companies towards the Manufacturing Companies. 9

13 3. The proceeds from the debentures issued by the Company were granted as loans to the manufacturing Companies on the same terms as the terms of the debentures, including the dates of payment. B. Summary of Key Developments See the chapter below on Material Changes and New Information in the Company's business. C. Market Risks Exposure and Risk Management 1. General The Company conducts its business in environments that operate in various currencies. Due to its activities, the Company is exposed to market risks, primarily exchange rate fluctuations, partial adjustment of the prices of products to reflect the prices of raw materials, change in the level of the CPI, and changes in the LIBOR interest rate. The Company's Board of Directors has approved the use of accepted financial instruments (such as options, forward contracts and swaps) for hedging against exposure to exchange rate fluctuations and a rise in the CPI stemming from the Company's operations. The Company effects these transactions only through banks and stock exchanges which must comply with capital adequacy requirements or maintain a level of collateral based on various scenarios. For details relating to credit risk and liquidity risk, see Note 29 to the consolidated financial statements of the Company as of December 31, Exchange rate data for the Company's principal functional currencies vis-à-vis the US dollar and LIBOR: 30 June 4-6 average 1-6 average EUR/USD Change 4.7% Change 5.0% Change 4.4% USD/BRL (0.6%) % % USD/PLN (8.1%) % (4.3%) USD/ZAR % (11.2%) % AUD/USD % (5.8%) (9.8%) GBP/USD % % % USD/ILS (5.0%) % (5.1%) USD L 3M 0.23% 0.28% (15.6%) 0.23% 0.28% (17.5%) 0.23% 0.28% (18.5%) The exchange rate fluctuations of these currencies during the Reporting Period impact various sections in the Company's financial statements. The net impact of the changes in currency exchange rates in the period after the date of the financial statements on the balance sheet exposure is not material, due to the high rate of balance sheet hedging carried out by the Company as noted above. 2. Risk Management Officer The Company s Chief Financial Officer ( CFO ), Mr. Aviram Lahav, is responsible for the Company's market risk management. For information about his education, qualifications and business experience, see section 26A in Chapter D of the Periodic Report for

14 3. Description of Market Risks For details of the Company's exposure to market risks and how they are managed, see the Directors' report of the Company as of December 31, 2013 and Note 29 to the Company's financial statements as of December 31, D. Corporate Governance 1. Approval process of the financial statements Since February 27, 2012, the Company has a Financial Statements Review Committee (the Committee ) whose members are members of the Audit Committee Messrs. Yehezkel Ofir (an independent external director with accounting and financial expertise) who acts as Chairman of the Committee, Shoshan Haran (independent external director who is able to read and understand financial statements), and Zhang Gong (independent director with accounting and financial expertise) ("the Committee Members"). All the Committee Members gave a declaration prior to their appointment, concerning their education and experience, as noted in section 26 of Chapter D of the Periodic Report for 2013, based on which the Company regards them as having accounting and financial expertise or as having the ability to read and understand financial statements, as the case may be. As part of the process for approval of the financial statements as of June 30, 2014, the CFO presented to the Committee a detailed presentation of the financial results, and the committee discussed them as reflected in the financial statements, as well as the assessments and estimates made in connection with them, the internal controls relating to the financial statements, the integrity and appropriateness of the disclosure in them, and the accounting policy adopted and the accounting treatment applied in matters that are material to the Company. The committee also discussed other material issues. The committee met on August 4, 2014 to review the financial statements for the period ended June 30, Other than the Committee Members, the meeting was attended by interested parties and senior officers Aviram Lahav (CFO), Michal Arlosoroff SVP and General Counsel, and Keren Yonayov (Controller). The Committee Members and the members of the Board of Directors received a draft of the financial statements several days prior to the meeting. Representatives of the Company's auditors, who are invited to the meetings of the Committee and of the Board of Directors at which the financial statements are discussed and approved, provided their comments and responded to questions from the Committee Members and members of the Board of Directors on material issues arising from the data presented in the financial statements under discussion,. The Company's Internal Auditor was notified of the Committee's and of the Board of Directors meetings and invited to attend. After discussing the financial statements, the Committee drafted its recommendations concerning their approval of the financial statements and submitted them in writing to the Board of Directors three business days prior to the date of the Board's discussions. On August 7, 2014, when presenting the financial statements to the Board of Directors, the Company's Chief Executive Officer ( CEO ), Mr. Chen Lichtenstein, presented the main results of the Company's operations during the period under review and referred to key initiatives and material events that occurred during the period. In addition, the CFO, Mr. Aviram Lahav, gave a detailed presentation of the Company's financial 11

15 results in the period under review, while comparing them with prior periods and highlighting material issues arising from them. During the reviews, the Company's management responded to questions from the members of the Board of Directors on all areas of the Company's operations. The Board of Directors of the Company discussed the Company's financial statements as of June 30, 2014 and resolved to approve them. E. Disclosure in financial reporting 1. Critical accounting estimates As of the reporting date, no material changes occurred during the second quarter of 2014 in the critical accounting estimates used by the Company for its financial statements. 2. Events after the date of the report on the state of the Company's affairs For events after the reporting date, see the chapter Material Changes and New Information in the Company's Business and Note 6 to the condensed interim consolidated financial statements as of June 30, 2014 concerning the issuance of options to an officer, senior management members and additional employees of the Company and its subsidiaries. F. Information pertaining to the Company s Debentures See the table attached hereto as an appendix. 12

16 Yang Xingqiang Chairman of the Board Chen Lichtenstein President & CEO Aviram Lahav CFO August 7,

17 Appendix Details of the Company's Debentures Series Date of issue Rating Total par value on date of issue (in NIS millions) Type of interest Nominal interest rate Effective interest rate at reporting date Market value on June 30, 2014 (NIS) Dates of interest payments Dates of principal payments Linkage basis Nominal par value at June 30, 2014 (in NIS millions) CPI-linked nominal par value at June 30, 2014 (in NIS millions) Carrying value of debenture balances at June 30, 2014 (in USD millions) Carrying value of interest payable on June 30, 2014 (in USD millions) Fair value at June 30, 2014 (in USD millions) Dec. 06 1,650 Series B ilaa- ) 8( (1)(3)(4)(5) Jan Jan CPI-linked annual interest 5.15% 3.6% 3,810.6 (9) Twice a year on May 31 and on Nov, 30 in each of the years Nov. 30 of each of the years CPI for October ,683.1(9) 3,232.3(9) 904.3(9) 4.0 1,108.4(9) Series D (2)(3)(5)(6)(7) Dec. 06 Mar. 09 Jan.12 Feb.14 -ilaa ) 8( Annual interest 6.50% 1.7%% 1,248.9 Twice a year on May 31 and Nov. 30 of each of the years Nov. 30 of each of the years Unlinked 1, ,

18 (1) The trustee for Debentures (Series B) is Aurora Fidelity Trust Company Ltd., 12 Menachem Begin Road, Ramat Gan (Tel: ; Fax: ). Contact person: Adv. Iris Shlevin, CEO. Series B is considered a material liability of the Company. (2) The trustee for Debentures (Series D) is Hermetic Trust (1975) Ltd., 113 Hayarkon Street, Tel Aviv, Israel; (Tel: , Fax: ). Contact person: Dan Avnon or Meirav Ofer. hermetic@hermetic.co.il. Series D is considered a material liability of the Company. (3) At the date of the report, the Company was in compliance with all the terms and undertakings under the Deed of Trust and no conditions existed giving rise to a cause of action for immediate repayment of the debentures. (4) On January 9, 2013 the Company issued, in a private placement by way of series expansion, NIS 600,000,000 par value of Debentures (Series B). For details, see the Company's immediate reports dated January 6 and 8, 2013 (Refs and ). (5) On January 16, 2012 the Company issued, by way of series expansion under a shelf prospectus published by the Company in May 2010, NIS 513,527,000 par value debentures (Series B) and NIS 540,570,000 par value of debentures (Series D). For more details, see the Company's immediate report dated January 17, 2012 (Ref: ) and the amending report of the same date (Ref: ). (6) On March 25, 2009 the Company issued, by way of series expansion under a shelf prospectus published by the Company in May 2008, NIS 472,000,000 par value of debentures (Series D). For more details, see the Company's immediate report dated March 26, 2009 (Ref: ). (7) On February 11, 2014 the Company issued, in a private placement by way of series expansion, NIS 487,795,000 par value of debentures (Series D). For more details, see the Company's immediate report dated February 12, 2014 (Ref: ). (8) On September 15, 7162 Maalot confirmed a rating of ila+ for the Company s Debentures (Ref ). On February 3, 2014, Maalot confirmed a rating of ila+ for the Company s Debentures (series D) issued upon a private placement of up to NIS 550 million (Ref ). On July 1, 2014, Maalot announced that it has raised the rating for the Company s Debentures (B and D series) from ila+ to a rating of ilaa- with stable outlook (ref ). (9) Net of debentures purchased by a wholly-owned subsidiary, which at the date of this report holds 67,909,858 debentures (Series B), accounting for 2.47% of total issued debentures (Series B). 15

19 Material changes or new information in the quarter relating to matters described in Chapter A Description of the Corporation's Business in the Periodic Report as of December 31, 2013 The information detailed hereunder includes changes or material new information relating to the chapter describing the corporation's business in the Company's Periodic Report as of December 31, 2013 (the "Annual Report"), taking into consideration also information included in the draft Registration Statement that the company intends to file with the U.S. Securities and Exchange Commission within the next few days, due to different disclosure requirements under U.S regulations and practice (see section 9 below) that were not included in the Company's previous reports. 1. Organizational structure changes On May 12, 2014 the Board of Directors approved an organizational structure change which will assist the Company in best implementing its strategy. The changes will become effective gradually over the course of the second half of 2014 and will be completed by January The organizational change will include, inter alia, division of the commercial regions into seven commercial clusters: North America, Brazil, Latin America, Asia Pacific, North Europe, South Europe and India, Middle East and Africa. The Company also predicts that as its operations in China will grow (including by means of the Acquisition Transaction as defined below), then China will be defined as the eighth cluster. In addition, the organizational change will include the expansion of the Company's management to include, inter alia, additional managers from within the organization who will manage the clusters and the establishment of a committee of management members which will oversee the company s performance. As part of the said organizational change, there have been, and there will be, changes to the number of senior officers or the responsibilities or roles of certain of the Company's senior officers, as the Company has reported or shall report, the most notable of which are as follows: 1. Mr. Shaul Friedland, current head of the Americas region, will act as CCO and will be responsible for several clusters. 2. Mr. Ignacio Dominguez, currently CCO and head of the Global Product and Marketing Division, will continue to hold his position and will be responsible for several clusters. 3. Mr. Dani Harari, currently Senior Vice President ( SVP ) Strategy, Innovation and Business Intelligence, will act as SVP Strategy and Resources and will be responsible for strategic planning, human resources, information and digital technologies. 4. Mr. Anders Harfstrand, current Head of Europe, will remain with the company until the end of the year. 5. Ms. Shiri Ailon, currently Head of Corporate Development, will be appointed as Vice President ( VP ) Corporate Development and Head of China Integration as of July 1, Ms. Rony Patishi-Chillim will be appointed as CEO of Lycored, leaving her position as SVP Business Development and Corporate Communications as of September 30, Mr. Amos Rabin will be appointed as Head of Organizational Processes in China, leaving his position as SVP Human Resources as of July 1,

20 8. Mr. Uri Shani and Mr. David Hebel will continue to hold their current positions but will cease to act as officers as of July 1, 2014 and December 31, 2014, respectively. 2. Section Structural Changes in the Group's Development, Material Mergers and Acquisitions + Section Shareholders Agreement Asset Injection As part of the Company s activities to maximize the potential of the Merger Transaction, and pursuant to the Merger Agreement and its related agreements, the Company continues to advance the negotiations with CNAC regarding the acquisition of all or part of the shares or assets of several companies and their subsidiaries which are directly and/or indirectly controlled by CNAC, among them the Class A shares of Hubei Sanonda Co., Ltd. (the "Acquisition Transaction"). Nevertheless, and although the negotiations are progressing, to this date there is still no certainty as to the signing of the purchase agreement and/or to the fulfillment of the conditions to its execution, to the identity of the assets to be acquired, to the final consideration in respect of the Acquisition Transaction, to the contribution embedded in the Acquisition Transaction to the Company s revenues and to the future anticipated impact of such Acquisition Transaction. The Company continues to evaluate business opportunities in China that will support the creating of a significant R&D, operational and commercial infrastructure in the country, in a way that will contribute to the Company s presence in the Chinese market, to strengthen its presence in the Asia-Pacific region and strengthen its global capabilities. However, during the Reporting Period, the negotiations held between the Company and Shenzhen Noposion Agrochemicals Co., Ltd, regarding the incorporation of a joint company, and regarding collaboration in distribution in China, has ended with no results. 3. Section 6.3 Trends and changes in the scope of activities in the field and Profitability Further to section 6.3 of Chapter A of the Company's Annual Report, the annual rate of increase in the Company's revenues in the past 20 years is an average annual rate of approximately 12%, which is roughly three times the industry's general growth rate. 4. Section 7.3 the Company's products Further to section 7.3 of Chapter A of the Company's Annual Report, with regard to the fact that, in recent years, the Company has been striving to transform its product portfolio to a more diversified one (hybrid), the Company offers to the farmers a product offering which is distinct and customized according to the specific demand of the region and the crop. The Company is striving to offer a hybrid product mix, comprised of, on one hand, high-volume offpatent branded crop protection products, and on the other hand,- an increasing number of more innovative products based on unique mixtures and formulations. In this regard, the Company is striving to change its sales mix so that it will include a higher proportion of more complex, more innovative, high-value, IP-protected products with relatively higher margins. 17

21 5. Section 7.4 Production Process; Section 15.1 Development Further to section 7.4 and 15.1 of Chapter A of the Company's Annual Report, as of the reporting date, the Company has begun the construction of a new R&D facility and of a new formulation facility in China. 6. Section 11 Distribution and Marketing Further to section 11 of Chapter A of the Company's Annual Report, with regard to countries where the Company has no subsidiaries, it operates networks of external distributors, the Company estimates that should external distributors choose to sell products that compete with the Company's products instead of distributing the Company's products, this may have an adverse effect on its business results in those countries in which most of the Company's marketing activities are performed by external distributors. 7. Section 21 Human capital On January 29, 2014, the Company issued 9,322,227 options exercisable to 9,322,227 ordinary NIS 1 par value shares of the Company, to officers and employees of the Company and its subsidiaries. The issuance was performed according to an outline dated December 25, For additional details regarding the outline and the conditions of the options grant, see the report dated December 25, 2013 (ref ). On April 24, 2014 and May 11, 2014, the Company's Remuneration Committee, Board of Directors and Shareholders approved the employment terms of Mr. Lichtenstein as the Company s President and CEO, effective as from the date of his employment (February 7, 2014), including the grant of additional options, all in accordance to the Company s Remuneration Policy. For additional details see the Company s immediate report and private placement report dated May 12, 2014 (ref and ) and also for the grant of options, see Note 6 to the condensed interim consolidated financial statements as of June 30, In addition, on August 7, 2014, after the date of the report, the Company issued 1,798,887 options exercisable to 1,798,887 ordinary NIS 1 par value shares of the Company, to an officer, senior management members and additional employees of the Company and its subsidiaries. For additional details, see a non-material private placement report dated August 10, 2014 along with this report (ref ) and also note 6 to the condensed interim consolidated financial statements as of June 30, At the report date, there are 11,600,510 options exercisable to 11,600,510 ordinary NIS 1 par value shares of the Company held by the Company's officers and employees. 8. Section 29 Corporate governance Following the appointment of Mr. Chen Lichtenstein as President and CEO of the Company, on March 7, 2014 Mr. Lichtenstein suspended himself from his position as President and CEO of CNAC and it was also agreed that Mr. Lichtenstein will not be entitled to any remuneration for his services to CNAC. Accordingly, the Audit Committee and the Board of Directors approved on April 27, 2014 and on May 11, 2014, respectively, an amendment to the Arrangement for Prevention of Conflict of Interest that was executed with regard to Mr. Lichtenstein s 18

22 appointment as President and CEO of CNAC. For additional details see the Company s immediate report dated May 12, 2014 (ref ). Further to section 29.6 of Chapter A of the Company's Annual Report, with regard to the Law for the Advancement of Competition and the Reduction of Concentration ("Concentration Law") and its non-applicability to the Company, the Company updates that it received a legal opinion from its external legal counsels, according to which the Company is not a "Third Layer Company" as this term is defined in the Concentration Law. The legal opinion was provided by the Company to the Ministry of Justice and to the Israeli Securities Authority during March It is to be noted that in June 2014, the Finance Committee of the Knesset (Israeli Parliament) approved the Regulations for the Advancement of Competition and the Reduction of Concentration (the classification of a company as a layer company)-2014, that relieves certain corporations that are considered to be "Third Layer Companies" from updating the composition of their Board of Directors in order to adjust it to the demands of the Concentration Law. According to the minutes of the meeting of the Knesset Finance Committee, the Ministry of Justice s first intention was that such relief would also be applicable to the Company; however, in practice such relief was not applied to the Company. The Company will continue to evaluate the application of the Concentration Law to the Company and the necessary actions required in relation thereto, including in connection with the Company becoming a public company. 9. Section 31.3 Business Objectives and Strategy Company's plans following closing of the Merger Transaction + Section 2.3 Shareholders Agreement Further to section 2.3 of Chapter A of the Company's Annual Report regarding the commitment of the parties of the shareholders agreement to act in order to complete an IPO of the Company within three years from closing date of the merger between the Company and its controlling shareholder,-china National Agrichemical Corporation, on August 7, 2014 the Board of Directors of the Company approved the filing with the U.S. Securities and Exchange Commission of a draft Registration Statement that includes a Preliminary Prospectus with regard to a possible offering of the Company's shares to the public and the listing for trade of such shares on the New York Stock Exchange or the NASDAQ. The Registration Statement has not yet been filed, and the Company intends to file the draft Registration Statement in the next few days. As of the date of the report, there is no certainty as to the execution of the offering, its timing, the amount to be raised, the price per share, the valuation according to which the offering shall take place or any of the other offering terms. The Company shall report regarding the filing of the draft Registration Statement as applicable by law. 10. Section 33.3 Specific Risk Factors Working Capital Requirements and Cash Flow of the Company Like other companies operating in the crop protection products industry, the Company has significant cash flow and working capital requirements in the ordinary course of its business. The Company's business requires significant financial resources and investments in light of its growth and considering its strategic geographic growth areas; broad product portfolio and investments in manufacturing infrastructure. The Company works consistently to improve its working capital management, and for the 19