ICL Group Ltd (ICL) 2015 Q3 法說會逐字稿

Greetings, and welcome to the ICL analyst call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Limor Gruber, Head of Investor Relations. Thank you. You may begin.

Thank you. Hello, everyone in the room and on the line. Welcome. Thank you for joining ICL Q3 2015 conference call.

Earlier today we filed our reports to the securities authorities and the stock exchanges in the US and in Israel. The reports, as well as the press release, are available on our website. Please carefully review all relevant data and considerations.

For your reference, this meeting is being webcast live at www.icl-group.com. There will be a replay available a few hours after the call, and a transcript within 48 hours.

The presentation that you will be seeing today is also available on our website, and was also filed as an immediate report. And of course, don't forget to read the second slide with the disclaimer.

Our comments today contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations, and are no guarantees for future performance.

Today as usual, we'll start with our CEO, Mr. Stefan Borgas; followed by our CFO, Kobi Altman. In addition, ICL's executive committee members are on the line, and we will all be happy to answer your questions after the presentation. Stefan, please.

Thanks, Limor. Good afternoon, good morning, good evening from London today. I'm happy to give you an update on what happened in the third quarter at ICL. If you want one slogan, it's back to business.

We've had a lot of ups and downs over the course of the last year, and all of this is making it through the system. Third quarter now shows a number that finally represents a good way of how ICL will be, or from which basis we will develop over the future.

Let me lead you through the first half of that pack, and then Kobi will go through the second pack or half with the numbers. And then hopefully we'll have another half an hour for Q&A.

We were able to compensate for the negative impact of the lower potash prices and of the lower potash volumes, mainly because of pretty significant cost reduction. Our efficiency initiatives across all the major sites are beginning to show. The operating income, the adjusted operating income, declined only by 8% compared to last year. And mostly this is due to lower cost.

A lot of this is our own doing. Some of this is help also from freight cost, and a little bit also from currency. But the biggest part is really the cost reduction in the potash plants in Israel, and also of course in the phosphate and in the specialty operations.

Just at the end of the quarter, we decided to take a decisive step in the UK in our potash plant. This is not so much driven by the market volatility, but it is driven by the near-term end of the reserves. And this mine is just coming to the end. The cost-competitive reserves in the mine will be finished, more or less, by the end of 2018, plus-minus six months. It's more difficult to say.

So we have decided to take the first step towards the restructuring. We announced a reduction of one third of the labor unfortunately in Boulby in this country. It's nothing that we do with any kind of joy. Because it's a tough, beaten area of the country anyway. But we have no choice. There is no more potash in the ground. So there's nothing much we can do.

We are with all our force trying to build up the polysulphate business so that we can preserve at least as many jobs as possible. And then as this polysulphate business builds, add them step by step. We will invest into the infrastructure there in order to make this polysulphate work. I'll get to that a little bit later.

Let me give you some visibility on what's going on in our market. The potash market demand is somewhat weaker in 2015 than in 2014. That was pretty clear when we started the year. Because 2014 was so strong. In the meantime, this has translated in pretty much overall also lower prices, up to a point where there's now production curtailments popping up pretty much everywhere with almost every producer around the world.

The operating profit in ICL still grew by $4 million despite a $60 million reduction in sales. That shows you what effect the cost reduction had. At the end of the year in the Dead Sea we will be back at-- we will reach the targeted level of productions after the strike, which are going to be 10% higher from the levels that we've had on a sustainable basis before the strike. This has to do with the efficiency. And this will balance a part of what we're going to lose in the UK eventually.

So this is the balance we have here. So about 300,000 tonnes on an ongoing long-term average we will be able to produce more in the Dead Sea. And of course, the cost there, despite taxation are better than in the UK.

In Rotem, in our phosphates area, we had a fire in the middle of the year in our SSP facility. The impact of this could be compensated also by lower cost. The facility will be back up in operation at the end of the first quarter. So the reconstruction is going very, very well.

The margins were about 100 basis points higher in the third quarter than in the third quarter of 2014 in our phosphate business. This shows the continued increase in health here. Prices did not contribute to this margin increase in the third quarter. Because although they have been stable, they haven't increased very much.

In our specialty fertilizer business, we have pretty strong competitive environment, especially because the markets in Russia and Eastern Europe are very weak, mostly because of currency issues there, a lot of headwind in the specialty fertilizer business. So we've had very little growth here.

In the industrial products segment our pricing strategy is very nicely implemented. We have announced price increases in November 2014. This is sticking very well. We had lost some market share in the beginning of the third quarter. We also had some ramp-up time, of course, after the strike there. We're fully back in our regular production volumes. And also our sales volumes are back to the levels in which we had.

Although we will be-- continue to be extremely disciplined on prices in certain spot areas, we're not willing to give up volumes significantly. And we expect the market to follow us. So much this has worked.

If we go to [part] of this business, the MERQUEL business is quite stable, an increase is expected for next year in this business. We are very, very satisfied with the launch of our new polymer flame retardant for the construction industry in Europe, despite the fact that the ban has been postponed by two years. Customers are buying this product. They're switching to this product. It's a more ecological product. It's safer to use. So customers are using it, even though the ban hasn't been fully implemented.

Looking at 2016, we're looking at stable demand with the exception of the clear brine fluids, where really we have no visibility. Because our customers, the big oil service providers, also don't have any visibility. They're ordering month-by-month, which they have never done before. And that shows you how uncertain the oil market is. So we have to be a little bit flexible on what's happening here.

But the rest of the business looks actually pretty stable. And we had one highlight, which made us very proud in the third quarter. That was the first installation of a bromine-based, large-scale bromine-based battery for energy storage. We collaborated here with one of the start-up companies. And we set up this battery in one of our own production sites in California. Very happy about this, because now we can-- the industry can see how well bromine performs, especially versus lithium. It's just a superior material with much better properties.

Last but not least, in our performance products business, also some light and shadow. On the darker side, lots of imports from China in phosphoric acid, and also in the salts, putting pressure on the commodity part of this business. This is increased by the upcoming ban of STPP in dishwasher tablets in Europe, which will happen. So the market will lose about 50,000 tonnes of demand.

This was counterbalanced in ICL's business with good performance of many of our specialty niche business, especially the fire-safety business in North America, the United States, but also in Canada. So that the performance overall actually was quite good.

In our food specialties business, we benefitted very nicely from the whey proteins that have been added to the portfolio, and that are pulling through also the rest of the portfolio. So this is quite nice double-digit growth in this business. If we eliminate the effect of the divested businesses from last year, then we have very nice operating profit growth in the performance products business.

Let me spend a minute or two on our mine in the UK. This business is going to be transformed from a potash business to a polysulphate business. Going more towards a niche product, which is comparable with SOP, with MOP; with those kinds of niche markets. We're building this business right now. We're selling roughly three times the quantities that we sold last year. But the ramp-up of course is still going on.

We have very good trials and very good interest from customers in China, in Brazil, where this product fits the soils very well. In the US, we're a little bit behind because we didn't have volumes last year to test. So we're only in the test phase there. And in Europe it starts to become established. It needs a little bit of CapEx to get into this business, but not very much, mostly CapEx that needs to be invested on the site into infrastructure, and in the port, in (inaudible) also into infrastructure.

We're debating whether we should build a granulation plant in Boulby itself in order to be able to offer a higher percentage of granular products. This we will decide over the course of the next year, as we get feedback from customers. This will remain eventually quite an attractive asset for ICL. Because as a standalone polysulphate producer, it will have very low cost. And it will be able to offer this nutrient cocktail in this mineral at very competitive conditions for the farmers that buy this.

So in the long run, this is not a problem. We will not incur-- run into any kind of cash constraint here. This mine made a profit this year. It will make a profit next year. So this is not a disaster. But we have to react early enough in order to avoid any kind of disaster that happens.

What is polysulphate? Just to remind you, this is a product from which we have ample supply in the ground. We have 200 million tonnes of resources. We have even much more around in the ground which are not identified specifically. So if we want to product 1 million or 2 million or 3 million tonnes per year, the reserves here are not an issue.

It will be very low cost. It's environmentally friendly. There's no chemical processing involved in this. We take it out of the mine and basically ship it directly to farmers, with some screening and sieving and crushing, but no chemical processing. There's no waste that comes out of this. It has very low chlorine content. So it works very well for those crops that are sensitive to chlorine. That's why it addresses slightly different niche markets than potash.

It replaces costly existing products that farmers need to use in order to supplement their fertilization for these crops. For 2020, we're targeting sales of around 1 million tonnes. Long term, the potential we think is more around 3 million tonnes. It's very difficult to say at this point how fast this ramp-up will be. It could easily ought to grow faster. It depends a little bit on the next, I would say, 18-24 months. Quarter by quarter we will update you, of course, how this is going.

This translates into ICL's potash franchise to develop, as you can see it in this chart, we will add potash production where we're able add potash production in small increments in the Dead Sea, in Spain and some of this in the Ethiopia area. In Ethiopia the project with the short-term negative outlook on potash that all of you were giving us, the Ethiopia project is much more focused now on SOP than on MOP. We can play here with a cocktail of products. So we will most likely in the next five or six years, not make significant amounts of potash in Ethiopia, but start with SOP. Which gives us another niche market, another one of those semi-specialties that ICL is so good at developing and managing.

So the ratio here might change, and for sure we're going to develop this step-by-step. But if you look at this on average, even if we execute all of this 200,000 tonnes per year is not really a dramatic growth for that significant market.

Let me switch to phosphates. We have now closed the joint venture with Yunnan Yuntianhua. We have taken over this operation, and we have hired a management team. It's fully in place. It's totally integrated into ICL's global phosphates business unit. We have had concerns at the beginning. Are we going to be able to convince some of our experts and professional and executives to move there? Who the hell wants to move to Kunming, China?

We got completely surprised. As we showed people this beautiful city in the mountains of China, in this mountain of South China, it's about 1800 meters high, about 6-7 million people living there. It's one of the cleanest places in China. We had many more people who wanted to go than at the end we could offer jobs. So we have about 10 professionals, production professionals, procurement professionals, finance professionals that moved there from many of our international units. But we hired some fresh blood also in China, and of course some talent from our partner.

So I'm pretty excited about that management team that we have there. They are much more aggressive than the numbers that I show you here. We have to see how they execute. Our partner is very collaborative. And I think this is going to be a good step for ICL in order to build our phosphate franchise into the future.

That collaboration we received from the local authorities and from the national authorities was extremely professional, very, very detail-oriented, a lot of scrutiny, but extremely predictable. So with the team we set up, we could shorten the approval process.

The second part of this investment, which is an investment into our partner's company, 15% equity investment in our partner's company, has not yet been approved. But that is due to the blockage on IPOs that the Shanghai Stock Exchange had. This has been now listed. So we expect now this to move forward as well. I'll be in China next week, and I'll see how this goes.

Let me switch to bromine. The bromine compounds and the bromine business has been improving, especially on the price side. Our market share is pretty much the same that it has been in the past. Customers are willing to pay us even higher prices than most of our competitors for supplier reliability, for quality, and also for better environmental management. Bromine is a sensitive product to handle. And the isotank in which this is shipped have special technologies. And here we are recognized to be significantly better. We have lower leakage and less problems in handling this material.

So we're quite satisfied with what happened here. And now we're profiting of course from the cost reduction. This cost reduction will generate about $23 million in annual savings in 2016, which will increase to about $30 million in 2017. There's a step reduction because we need to do some things on the site before we can get to the $30 million. That we expect to hit completely in the bottom line, and of course this is in addition to the price reductions.

With this, I want to leave you with the numbers. Kobi, all yours.

Thank you, Stefan. Good afternoon to all of you. This quarter marked our first post-strike, as Stefan said, back-to-business quarter. We've successfully completed the quick ramp-up of our potash production in the Dead Sea, as well as also on our bromine compound facilities. Although you need to remember that a ramp-up of sensitive and complex chemical facilities takes a little bit more time. And as result of that, we can look at this quarter still as a ramp-up quarter in the bromine compound.

Business environment this quarter was quite turbulent, impacted by the macroeconomic factors which Stefan already mentioned, most of them. And those economic factors, coupled with also the effect of the reintroduction of VAT on fertilizer in China and the other factors were negative to the entire fertilizer market, especially on the potash market.

The challenging external market condition is the main reason why we were and we will continue to be extremely [diligent] in executing our cost-savings program. I think that it is now evident why we had to go through a painful exercise of adjusting our cost structure to the market reality.

Sales in the quarter were roughly 10% lower than the parallel quarter in 2014, impacted mainly by the non-core divestitures that we had, the decrease in the potash, bromine and phosphate volumes, and the devaluation of the euro against the dollar.

Despite the lower volumes and the non-core divestitures, the adjusted operating profit for the quarter was down by only 8% compared to last year. And this it attributed mainly to the reduced cost, fueled as Stefan said, from external, but mostly internal drivers.

You can find in the press release, a reconciliation between the reported and the adjusted operating income. The adjustment in the quarter still includes some strike-related impact, provisions for prior periods for new electricity tariffs imposed by the Israeli Authorities retroactive from June 13, and some other small provisions.

Cash flow for the quarter was impacted by large payments related to the royalty arbitration with the government. The provision for that was made last year. But this quarter we paid it. And severance payments to employees who left the Company as a result of our cost-reduction plan executed following the strike conclusion.

Moving now to our potash business, sales, though this quarter's production exceeded last year, the sales volume was over 100,000 tonnes lower than in Q3 2014, as market conditions dictated lower shipments. The devaluation of the euro and the pound versus the dollar, also negatively affected the sales.

Contract prices were higher in China and India. However, the lower prices in other markets, especially Brazil, US and Europe, resulted in the $7 million negative effect on the sales.

Moving to the adjusted operating profit, we are very pleased however that we were able to achieve higher adjusted operating profit versus last year. The low volumes sold and lower prices had a negative impact of $16 million on our operating profit. But this was more than offset, mainly by $12 million decrease in shipping expenses, decreasing energy cost and lower labor cost, as we started to benefit from the labor reduction at ICL Dead Sea.

Favorable exchange rate of the Israeli shekel versus the dollar positively affected costs in the Dead Sea operation. ICL UK, Stefan already mentioned that, is transforming to a pure polysulphate mine. And this requires no immediate write-down. We have though implemented an accelerated depreciation of the potash assets and it will add about $3 million of additional depreciation per quarter for the next three years.

Reduction in our cost per tonne is an important measure in the existing business environment. The calculation here is very straightforward. You can extract it from the reports. We basically took the operating expenses and divided that by the total volumes that we are selling. And the decrease is evident. And this is helping us to demonstrate improvement in margin of almost 600 basis points.

Some external factors, as we said, worked in our favor. Currencies, shipping, oil prices, et cetera. But it is also a contribution, important contribution of the operational excellence and cost-cutting initiative, which is finally reflected now. And as we are over the strike and back to full operation.

Moving now to specialty and phosphate businesses, despite the fire in one of our production facilities in Rotem that crippled our fertilizer production this quarter, and will still impact Q4 2015 as well, we continue to show very nice improved performance at Rotem, resulting in a record high acid production and near record high of phosphate production.

Apart from the lost volume caused by the fire, the lower euro and the shekel had negatively impacted the sales, both from the commodity fertilizer business and the specialty fertilizer, especially in Eastern part of Europe.

If we look at the operating profit, the higher prices contributed $16 million compared to the same quarter of 2014, and offset following items, the lower volumes sold, about $5 million negative impact; and the increase in prices of raw materials, mainly the specialty fertilizer and increasing some other operating expenses also negatively impacted.

If we exclude the impact of the fire at Rotem from the sales as well, we recorded a 70 basis point improvement in operating margin, despite the lower sales volume. This was driven by the higher price and lower production cost, which is reflected in the chart in the following slide.

This slide shows the continuing trend of reduction in cost to produce our products. The slide demonstrates the result of our cost reduction initiative taken in our phosphate facility at Rotem. Since 2014, we increased phosphoric acid production by 15%, despite a 10% reduction in labor force. Utilization improved to over 90%. And this helped us to reduce the costs throughout the value chain.

Other cost reduction initiatives were implemented at our rock-mining and production. And we could also improve utilization there and reach record production levels.

Industrial products segment, the performance here reflected the continuous trend of declining demand. And as I said, still a ramp-up quarter from the strike. We witnessed a strong demand of clear brine fluids still this quarter, although the future is yet to be seen. And the sales of the bromine compounds of [mercury emission] control.

Just moving on to the adjusted operating profit, you see it slid quarter over quarter. And the more positive price environment in China and our price increases coupled with the lower energy and raw materials, fully offset by the decline in quantities produced and sold, and the product mix.

Last but not least, the performance products segment, total sales in this segment this quarter were 7% lower than last year. The decrease is mainly coming from the divestment of our non-core businesses in the amount of approximately $84 million. Partially offsetting this is the $79 million increase in volumes sold, mostly from the addition of the Prolactal portfolio to our specialty food offerings, (inaudible) to our advanced additive business, and the strong sales of wildfire prevention products due to the historically wildfire activity in the Northern United States and Canada.

$11 million of operating income that was attributed to the divested non-core business is the key reason for the $7 million decline in operating income recorded this quarter.

By that, we conclude our opening remarks. And we will now open the call for Q&A.

Thank you, Kobi. We will start with some questions from the room, if we have. And I would just ask you to limit, the people on the line as well as the people in the room, limit yourself to two questions. Because we have a little bit of a line. Thank you. Sophie, please?

Sophie Jourdier from Liberum. First question, I just wondered whether you could just clarify exactly the situation now on the tax discussions or with the government. Is that concluded now and if it is, what will be the implications on your taxes over the next few years?

And the second question, just on polysulphate, can you just remind me the price you're selling that for, and how do you set the price with customers? Is it a straight price, or is it linked to the underlying nutrient value? Thanks.

Let me ask Kobi to answer the tax question. Before he does that, on polysulphate the base principle is we price all the nutrients as in their replacement value for the particular farmer. To remind you, the nutrients are sulfur, about half of the content; potash 12%, and then magnesium and calcium. Not all the farmers are able or willing to pay for all the nutrients. So sometimes you only price three. Sometimes you only price two. Sometimes you price all four of them.

In some specialty crops you get additional synergetic effect from yields. So we get a premium for those. There's a difference, of course, between granular and powder. We are producing about 55% granular. That's what comes out of the mine, and about 45% powder. So we need to balance both of those. The powder goes mostly to [MK] producers, and of course it's sold at lower cost because they need to put this into granules themselves.

The total cost in the long run will be somewhere between GBP30 and GBP35 per tonne. They're higher now of course, because we're in the ramp-up phase. And the prices we're getting for the mix between granular and powder at the moment is around between GBP70 and GBP80 per tonne.

I think as volumes will go up and we will move more into commodities, you would be able to see price go down so that this spread is not a long-term spread, but still it will be a very good, very robust business going forward.

On the taxes, the finance committee of the Israeli Congress has voted. This is one step before the law is passed. There were quite a few changes that were made to the final draft from the original committee recommendations. To give you a flavor of the reduction, if the initial committee recommendation at 2013 potash prices were around $160 million per year. We are now talking yet again by 2013 potash prices of around $100 million, or $90 million to $100 million impact.

Obviously at the current potash prices, the impact on the Company is going to be significantly lower. I would say in addition that we are proud to be already today under the existing tax environment, the biggest tax payer in Israel. But in future, investment in Israel will be made like we're doing in any other investments, based on merits. And we will factor all the factors into this. And where it works to make an investment we will do it. And if the new environment will not make the investments economically worth it, we will pass it on.

Maybe two other additions, this is now essentially a potash tax. The taxation on phosphate and bromine and other minerals has been more or less eliminated by the details that they put in place.

And the second thing there is to say, many other regulatory items in Israel are still open. So the environment, we're having a stable basis to make investment decisions is still pretty shaky.

Thank you. Any additional questions from the room? Nina, please?

Thank you. I have two questions from me. It's Nina Dergunova, Goldman Sachs. On the cost-cutting, you've made some impressive progress in the cost optimization recently. Very good progress recently, especially in fertilizers; so what's next? What are your expectations in terms of cost optimization going forward in 2016?

And the second question relates to bromine business. How do you see pricing evolving in the next 12 months? What do you think about competition? Do you see competition intensifying in some regions? And what do you plan to do in terms of volumes and sales mix? Thank you.

Okay. On the cost side, we are about two thirds through the delivery of our commitment this year. This year's run rate will be at least at $240 million. Probably it will be a little bit higher, but just write $240 million for now. To remind you, our commitment was $350 million run rate until the end of this year. So there's one more third to come next year. It will come from procurement with another step-up. That organization is doing very well. We are in good hope that they can over-deliver not only next year, but in further years as well.

We haven't-- we are not finished with the cost improvement in the Israeli sites. And so there's more to come there. And we haven't-- we're just about only starting in Spain and in our smaller sites. So the $350 million is very much reachable. And also it will not stop in 2016. It will continue after this.

We have also decided that now with the first rollout of our SAP system, which happened in October this year, and two more rollouts happening in April and in October next year, then we will have about 75% of the Company on the new SAP system. This is the year in which we will also tackle G&A cost reduction. We haven't quantified this yet. Kobi took this on himself to tackle this. So his team is at the moment running through the Company and looking for opportunities here. But that will add on top.

Bromine pricing, the environment is very stable. Chinese customers have accepted this. This is making its way through the compounds. It's making its way now also into a certain number of compounds outside of Asia. I remind you this price increase was an Asian price increase. Because is where prices were the lowest.

It seems to stick pretty much everywhere so that I don't expect any decline here, at least not in 2016. The challenge in Bromine remains volumes. And they can only be improved with new applications. We're quite encouraged with what's going on with environmental legislation, especially on mercury. Europe is pushing forward. In China this is being introduced. We are building the first pilot project of MERQUEL in China with local partners there, in order to show the feasibility of this technology. That will be able to reduce mercury, a reduction in China by more than 90%- 9-0. So this technology really works. And it's just one example in addition to the battery that I gave before, where we are putting our emphasis on.

Yes. We'll take another question from the room. Andrew?

Thanks, a lot. Andrew Benson from Citi. You appear to have included your Ethiopian project within your projections for 2025 but not 2020. When do you think you would start investing? What sort of time horizon are you giving yourself, and what's the sort of cost to develop? And then can you just also explain the changes as you see them in the performance products? Did you hear that?

Say the second question, please?

In the-- sort of the first one was the cost. The second one was on the performance products, so the impact of the phase-out of phosphates and how you see the-- the phosphates in dishwashers-- and how you see the European market in total evolving.

Okay. The Ethiopia project, we have already deployed the team. We're in detailed engineering. And we're building some infrastructure in order to build this mine. So we're actually pretty determined to do that. This is small CapEx at the moment. It will not go into large CapEx next year either. But then 2017 and 2018 will be the big CapEx deployment years, and then part of 2019 as well. So it takes about two and half years to build. And then the real volumes will come in 2020.

As I said before, we will split this total potential in two pieces. It's a total investment of around $1.5 billion, we estimate, for 1.5 million tonnes of potash, plus 500,000 tonnes of SOP, all of this together. We will split this in two. So you can more or less take the number, split it in two, and we will do the first part with a partner. So the ICL portion of this will be a piece, let's say 60% of half, focused on SOP in the first half. And then when we do the second half, we have to decide later. This is not decided at the moment.

The project is not yet approved, because we don't have the detailed engineering. And we don't have the detailed conditions yet in Ethiopia. We have a team that is negotiating or working this out with the Ethiopian government. So you can expect the final decision on this by let's say sometime in the second quarter of next year.

This is the goal, (inaudible) decision. But you need-- but if we want to do this, we need to do some preparatory work. So we move the campsite into a more sustainable area down there. And we're doing little things like that.

On performance products, the dishwasher phase-out doesn't affect us directly so much. Because we had little sales in this area. This was the low end of the commodities. So it affects us only indirectly as competitors who were supplying into this market are now trying to sell their products elsewhere. That's the price pressure I mentioned before in the commodity single phosphates.

Our cost position in phosphates has dramatically improved. So we're not nervous about not being competitive. But our strategy also is not to face this head on, more to go into specialized applications in combination with whey proteins, for example, or other types of proteins. You will see us moving into this direction as we continue with small investments and expansion of the product portfolio.

Okay. We will now take a few questions from the line, please.

(Operator Instructions) Chris Kapsch, BB&T Capital Markets

Hi. Yes, good afternoon over there. And just following up on the commentary in the industrial products segment, there's been some discussion about weakness late in the third quarter in the brominated flame retardant. And presumably that's into the electronics industry. I'm just wondering if you experienced that weakness. And if so, do you have a view as to whether that was attributable to just market weakness or possibly channel inventory destocking?

Okay. Let's test the technical installation here. We should have Charlie on the line, Charlie Weidhas, who is in a committee running this business. Charlie, can you answer this question, please? Did we experience weakness late in the third quarter in the flame retardants?

Yes. First let me confirm that you can hear me?

Great.

You can hear me okay? So in our opinion, what we're seeing in Asia is a slowdown in the (inaudible) business, which impacts one of our larger volume-products. So whether that is destocking of inventory or a slowdown, my opinion is it's more of a slowdown, based on what I read coming from the PC producer and the television producers and things like that.

Okay, thanks. And then just so there's also been some commentary about the effects on not just the bromine industry, but the broader chemical industry owing to the tragic fire at the port in Tenjin. And just wondering if you saw any effect from that, and also if you have a view or if you could share any intelligence on the residual effects of bromine competitors, local bromine competitors in China, being influenced by the Chinese government in the wake of that tragedy. Thank you.

As far as the port explosion, what we saw was logistics things getting slowed down, having to be maybe moved to other ports. And so definitely we saw some short-term issues there. The second part of the question is did we see some governmental action at some Chinese producers of compounds and bromine. And the answer is yes, [although a little bit] anecdotal, but I'm not aware of anything that's permanent.

Look, it's clear in China that their standards of production, especially in bromine are very low. You could never operate that way out of China. And we anticipate that that's becoming more of a problem in the future for them. But in terms of what I would call a structural change in Q3 or Q4, it's too early for me to have a firm conclusion on that.

Okay. Thank you.

Joel Jackson, BMO

Hi, it's Joel. I think I'm next, right? Okay. Sorry. Bad connection on the line. A couple questions-- so there's an echo too by the way. So the first question on polysulphate, can you just remind us then the ramp out, like how we get from whatever sales you're going to do in 2016 to 2020, a million tonnes. So maybe walk us through the different years.

And then also if you could talk about the investment. So GBP40 million gets you how much of polysulphate? Is it 600,000 tonnes or a million tonnes? And then the extra GBP40 million gets you, I guess, a million tonnes, the remaining half million tonnes, and get a million of granular? And I just want to understand sort of how the CapEx walks out to get you to 600,000 and a million, et cetera?

Okay. The GPR40 million that is part of what we announced originally, will get us to a polysulphate production capacity of a million tonnes, 1 million. And this will give us 55% granular, and 45% powder. Maybe we can improve the mining a little bit and go to 60/40, something like this. This is very much in the realm of possibility as well.

If we wanted to granulate the remaining 40% or 45% ourselves, we would have to build a granulation plant, which costs somewhere around GBP40 million, depending on where we build. But that's not yet decided. This would be in order to make additional margin on that powder product. So we have to wait until we make that decision, a little bit further in the sales.

The ramp-out of polysulphate, boy, this is maybe the biggest discussion I'm having with the sales team, probably once a month. It's extremely difficult to tell for a totally new product. I remind you that polysulphate as such, doesn't exist anywhere in the world. This is a unique product, because it's defined by the geology in this part of Britain.

We're selling between 120,000 and 150,000 tonnes this year. Last year we were around 40,000 tonnes. We always-- so by 2020, we want to be at 1 million tonnes. We can easily be at 800,000 in 2020. But we can also be at 1.5 million. It's really difficult to say.

For next year, we should be able to double. That's what our target is compared to this year. And then we should be able to grow again. So that by 2017-2018, we have reached the original 600,000 tonnes. We've accelerated that forecast. Originally we thought the 600,000 tonnes would be the 2020 number. This is now moved forward, because it's going relatively well, and also because potash is running out faster. So we've put a little bit more the foot on the accelerator. But don't-- it's difficult to commit right now how much we're going to sell exactly every year.

Okay. That was helpful. And then the next question would be on kind of potash inventories and the Chinese contract and your shipments to China. So because of the Dead Sea strike, obviously your shipments to China started late. Can you give an update on how much of your shipments have gone to China, how much has left?

It looks like the port inventories of potash in China are high. I know your customer mix is different than some of the bigger players. But I mean I just want to get a sense if your shipments are still coming, which would probably lead to a later Chinese contract in the New Year, as opposed to December or January. Thanks.

Yes. Our contracts are fully being honored. There's a little bit even above this from one of the other customers. So shipments to China are very, very solid. Our impression is from our customers that inventories are not dramatically higher than usually they are during this time of the year.

Yes, the Chinese are always building up inventory in the fourth quarter to prepare for the season, but also to prepare for the agricultural season but also the negotiation season. So this is always what's going on every year. And of course as this happens, the inventory first goes into the port. That's why the inventories are higher there. But it's not dramatically unusual from our perspective. But it's solidly moving forward.

And on your shipments, how much of shipments remain on the 2015 contract?

I don't know. Do you know, Limor?

As Stefan said, we have a contract of 1.1 million tonnes for the year. This is the contract of firm volumes, not including optional volumes, which will probably not be utilized. But the contract of the firm volume will be fully utilized by the end of the year. Sometimes a little bit is spilled over to January, but it will be fully utilized.

(Inaudible), we were a little bit less due to the strike. But we are (inaudible) end of the year, all the contracts or even a little bit more.

That was Nissim Adar who runs the business, who's pretty bullish on the contract fulfillment, as you heard.

Matthew Korn, Barclays

Hello, everyone. Good day to you. Some questions on the JV with YPH. Congrats on getting that completed. And as that ramps up, and as you show that's going to add 850,000 tonnes fertilizer, 115,000 tonnes of specialty fertilizer. I guess first, how much of all this production is presumed to be consumed domestically there in China? And then when we do look at the market today, we see the increased exports out of China, enough to weigh on global prices. What's the concern that the growth profile for the domestic Chinese market there in phosphates may be more relatively soft and continue that way for some to come, and perhaps limit the (inaudible) income contribution? Thank you.

Okay. The whole idea about this, the whole concept, the whole strategy of this joint venture is to build a phosphate business in China for Southeast Asia, including China, of course. So more or less you can assume that 60% to 70% of the sales of this operation will be in China. And the rest will be in Southeast Asia.

But this is the first concept. The second concept is to take this operation, which make about $450 million sales, with about 5-6% EBITDA, and to move it from a commodity business which it is now, it's an almost 100% commodity MAP, VAP and byproducts business; and to transform it to at least 40% specialties over the course of the next few years.

And that's why we don't expect any softness of demands. Because we will get out of the commodities step by step, as we've built these specialty plants and we upgrade the existing plants to hire quality and better capability and more better stability. There's an R&D effort linked to this. We have an R&D center that we've built together with our Chinese partners with 80 scientists already working now, with the first 10-12 projects already in development in order to support this transition from commodities to specialties.

That will improve sales to something like $650 million in five years from now, with margins which will be high single digits, probably higher than this. But that's the forecast at this point in time.

The Chinese market in and by itself, will be very, very stagnant when it comes to commodity phosphates. Because the agricultural policy in China is limiting the growth of nutrients overall in agriculture. And that will have a dampening effect on single-nutrient usage, especially phosphates, much more dramatic even ammonia, nitrogen; not so much on potash. Because there's still an (inaudible) there.

So there's a huge demand. There's a huge hunger among Chinese distributors and agricultural players for these more sophisticated products, because they utilize nutrients much more efficiently. That's why we did this. Because the market needs this. So we don't expect any issue here. If there's a challenge, then it will be pricing of commodities, because of the Chinese exports.

All right. Thank you. That's very, very helpful. And let me switch over and just ask on the industrial products side. I'm interested. You mentioned on the bio sides, and the competitors who did not register there. I'm curious. Is that window for them to do so now effectively shut for them? Do you have several months, a year or more as like a head start to take share? Just asking how that works and what's the revenue opportunity there?

This question was on what? On bio side?

Right. You mentioned that there's an opportunity, a business opportunity because you've had several competitors who did not register with the European regulators and can't participate in that market.

Oh, this is not on bio side. This is on polymeric flame retardant for construction insulation foams. This is a product that we call FR122. There's a regulation in Europe that forbids that previously flame retardant, this will be outlawed. And originally this was supposed to happen at the beginning of 2016. This is now postponed until 2017. Still all the manufactures of these insulation foams are switching already to the new technology. Because they have prepared this, and it's just a more environmentally friendly product.

Yes, this is a patented product. But the IP belongs to Dow Chemicals. They have licensed this, [as far as I know], to three player up to now. You need pretty sophisticated production chemistry for this. And of course you need bromine for this. So the competition field is going to be limited. The major difference here is going to be a 1-to-1 replacement on the volume side, more or less. But this product of course has much higher value.

The old product was sold at somewhere between $4 and $4.50 per kilo. And this product is sold over $10 per kilo. And here you can see some of the value creation.

All right. Thank you.

Yonah Weisz, HSBC

Hi there. Good afternoon. Hi Stefan. May I ask a question on potash volume? In the third quarter in your printed MD&A you talked about India demand being weak. I believe on the call that in your initial remarks Kobi mentioned that-- in

Yonah?

Hello?

Are you on speaker or something? Because we hear you very bad. It's not clear at all. So if you can repeat and not from a speaker, thanks.

All right. Is this better?

I think so.

Okay. Let's try again. Question on potash. In your printed MD&A you talked about India reducing purchases and in your comments earlier on Kobi mentioned Chinese VAT also leading to lower purchases in the third quarter. So I ask in terms of volumes over the fourth quarter, and perhaps into next year, and as well would you be reducing your price to India in 4Q to restart (inaudible) and how do you see VAT essentially affecting Chinese demand in 2016?

Okay. The VAT introduction in China, we don't expect this to influence demand very much at all. This has more or less gone through the system. The potash importers have been able to sell the old volumes with a reduced VAT. They have done this. The new imports now are sold with the full VAT. Initially they passed on the pricing partially. Then they changed that. Now they passed on the pricing fully.

On the phosphate side, the VAT was passed through to customers immediately. So in China it seems like this VAT change is more or less through the system. I don't expect this to impact demand. If you're a local producer, with a long local value chain, it will actually make you more competitive. So on the phosphate side for us, this is more an advantage rather than a disadvantage. And on the importer side, we're as good as anybody else or as bad as anybody else off. So not a big impact here.

In India we have the same trend than anywhere else. Indian importers are asking for price concessions. We talk to them. We discuss with them. We haven't done anything yet. It depends really on the large players. I think you'll read this as early as we will read this. Because as you know, we're a price taker.

Okay. And next question if I may on the UK and polysulphate. So will you have any asset retirement cost in the switchover from potash to polysulphate? And secondly, if I'm not mistaken, there is a competitor or a potash competitor right next door to you, Sirius Minerals also trying to develop a large polysulphate reserves. So I'm wondering how you're planning your production with the potential for additional competition from Sirius and how that interplay works.

Look, this is a new market, totally new market. The problem is not production. The problem is marketing, or the challenge. If there's a new player coming into this and will be two of us offering this product that would be fantastic. That would be great. So I would very much welcome Sirius to build this mine and to also help us to develop this product.

The cannibalization with potash is relatively small. There will be some, but not very big, because it doesn't go into the same applications. There's a bit of lap. There's a little bit of cannibalization with SOP, especially the higher-cost SOP. There is-- but in principle, this is a new product replacing cocktails of other ingredients.

And asset retirement costs?

I didn't hear you. Can you repeat please?

Asset retirement obligation or asset retirement costs for changing over from potash into polysulphate.

Oh, asset retirement, Kobi-- because of polysulphate.

So it's not very significant because we are moving to polysulphate. It's only the depreciation will be faster in the next three years. And it's $12 million per year additional depreciation costs.

And no write-offs. What we did is we took all of the assets of this mine. You know, it's an old mine, so it's anyway relatively low asset base, and we split them into those assets that are strictly dedicated to potash, mostly the surface plant; those assets that are strictly to polysulphate; and those that are used by both. And the fourth category is those that are dedicated to potash, but can be reconfigured to be used by polysulphate. And if we do this and if you do this reclassification, you end up with a faster depreciation of the potash-only assets, which gives you these $3 million per quarter or $12 million per year, until 2018.

Thank you very much.

Thank you. At this time I would like to turn the call back to management for closing remarks.

Thank you very much. Sorry that we didn't have time to take all of your questions. But please contact me or somebody from our team directly. And of course we will be able to take it offline. Thank you again for joining us. And see you next quarter.

Thank you very much.

This does conclude today's teleconference. You may disconnect your lines at this time, and have a great day.