ICL Group Ltd (ICL) Q3 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Analyst Call, 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 U.S. and in Israel. The reports as well as the press release are available on our Web site. 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 Web site 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 will 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 presentations. Stefan, please.

Thank you, Limor. Good morning, good afternoon, good evening from London today. 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 this is making it through the system. Third quarter now shows a number that finally represents a good way how ICL will be or on which basis it will develop over the future. Let me lead you through the first half of that pack and then Kobi we will go through the second pack half with the numbers and then hopefully we will have the rest of the half an hour, another half an hour for Q&A. Now 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 reductions. 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 helped 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 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 reserves in this mine is just coming to the end. They are -- the cost competitive reserves in the mine will be finished more or less by the end of 2018, plus, minus six months is 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 the north 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 is nothing much we can do. We are with all our force trying to build up the polysulphate business so there we can preserve at least as jobs as possible and then as this polysulphate business builds add them step-by-step. We will invest into infrastructure in order to make this polysulphate work; I will get to that a little bit later. Let me give you some visibility on what’s going 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 is 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 the cost effect what the effect of cost reduction had. At the end of the year in the Dead Sea, we would 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 are going to lose in the UK eventually so this is the balance we have here so about 300,000 tons on an ongoing long-term average we would have to reduce more into Dead Sea. And off course the cost their 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 HSB facility impact of this could be compensated also by lower cost the facility will be backed up in operation again than with the first quarter so the reconstruction is going very-very well. The margin were about 100 basis points higher in the third quarter than in the third quarter of 2014 in our phosphate business that shows the continuity increase in health here price we did not contributed to this margin increase and so it's good because although they had been stable they haven’t increase very much. In our specialty fertilizer business we have really strong competitive environment especially because the markets in Russia and the Eastern Europe are very week 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 product segment our pricing strategy is very nicely implemented we have announced price increases in November 2014 this is sticking very well. We have lost some market share in the beginning of the third quarter we also had some ramp-up time off course also the strike their we are 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 are not willing to give up volumes significantly and we expect the market to follow us so much this has worked. If we go into parts of this business the mark over business is quite stable and increase is expected for next year in this business, we are very-very satisfied with the launch of our new polymeric 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 as switching to this product that's a mycological it is safer to use so customers are using even though the ban hasn’t been fully implemented. Looking at 2016 we are 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 are ordering months-by-months which that has never done before and that shows you how uncertain deliver market is so we have to be a little bit flexible on what is happening here but the rest of their business looks actually pretty stable and we had one highlights which make 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 startup companies and we set up this battery in one of our own production sites in California I'm very happy about this because now we can -- the industry can see how well bromine performs especially versus lithium it is just the superior material with much better properties. Last but not least in our performance products business also some lights and some shadow on the darker side lots of imports from China and phosphoric acid and also in the sales putting pressure on the commodity part of this business which is increased by the upcoming ban of STPP in Dishwasher tablets in Europe which will happen so again we will the market will lose about 50,000 tons over demand this was counter balanced in ICLs business with good performance of many of our specialty niche business it's specially the fire safety business in North America, United States but also in Canada so that the performance overall actually was quite good. In our food specialties business we've benefitted very nicely from the whey proteins that has been added to the portfolio under that are pulling through also the rest of the portfolio so this is quite nice double-digit growth in this business and if we eliminate the effect of the divested business is from last year than 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 are building this business right now. We are 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 serves very well. In the U.S. we are a little bit behind because we didn’t have volumes last year to test so we are only in the test phase there, and in Europe it starts to become established. It is a little bit CapEx to get into this business but not very much, mostly CapEx that needs to be invested on the sites into infrastructure and in the pot it is also improved infrastructure. We are 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 we will be able to offer these nutrients 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 any of cash constraint there, this mine made profit this year it will make profit next year. So this is not a disaster but we have to react early enough in order to avoid any kind of disaster happens. What is polysulphate? Just to remind you this is product from which we have ample supply in the ground. We have 200 million tons of resources we have even much more round in the ground which are not identified specifically, so if you want to produce 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 is no chemical processing involved in this. We take it up as a mine and basically ship it directly to farmers for some screening and seeding and crushing but no chemical processing. There is no waste that comes off of this. It has very low chlorine content so it was 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 crops -- their fertilization for these crops. For 2020 we are targeting sales of around 1 million tons, long-term the potential we think is more on 3 million tons, it’s very difficult to say at this point how fast this ramp up will be and it could easily ought to go faster. It depends a little bit on the next I would 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 we are able to add potash production in small increments in the Dead Sea, in Spain and some of this, in Ethiopia area. In Ethiopia the project with short-term negative outlook on potash that all of you are giving us, the Ethiopia project is much more focused now on SOP than on MOP we can play here with cocktail of products. So we will most likely in next five or six years not make significant amount 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 are going to develop this step-by-step. But if you look at this on average even if we execute all of the 200,000 tons 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 with global phosphate business unit. We have had concerns at the beginning are we going to be able to convince some of our experts and professionals 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 and the mountain of South China it’s about 1,800 meters high, about 6 million, 7 million people living there. It’s one of the cleanest places in China. We had many more people who wanted to go then again we couldn’t offer a job. So we held about 10 professionals, production professionals, procurement professionals, plan professionals move there from many of our international units but we hired some fresh blood also in China and of course some talent from our partners. So I am 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 partners are very collaborative. And I think this is going to be a good step for ICL in order to build a phosphate franchise into the future. The collaboration we received from the local authorities and from the national authorities was extremely professional, very, very detailed oriented, a lot of scrutiny but extremely predictable. So we could -- 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, this 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 in China next week and 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 supply reliability, for quality and also for better environmental management. Bromine is a sensitive product to handle and isotank in which this is shipped has special technologies, and here we are recognized to be significantly better to have lower leakage and less problems in handling this material. So we are quite satisfied with what happened here and now we are profiting of course from the cost reduction. This will generate -- this cost reduction will generate about $23 million in annual savings in 2016 and which will increase to about $30 million in 2017, it has step production 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 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 is -- it takes a little bit more time and as a 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 that Stefan already mentioned most of them. And those economic factors coupled with also the effect of the introduction on VAT on fertilizer in China and other factors were negative to the entire fertilizer market, especially on the potash market. The challenging market, external market conditions are the main reason why we were and we will continue to be extremely diligent in executing our cost saving 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 prior year quarter in 2014 impacted mainly by the non-core divestitures that we had the decrease in the potash bromine and phosphates volume and the devaluation of the euro against the dollar. Despite the lower volume and the non-core divestitures the adjusted the adjusted operating profit for the quarter was down by only 8% compared to last year and this is 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, provision for prior periods for new electricity tariff imposed by the Israel authorities active 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 payment 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 were over -- 100,000 tonne lower than in Q3 ’14 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 in India however lower prices in other markets specially Brazil, U.S. 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 lower volumes falls then lower prices had the 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 cost in the Dead Sea operation. ICL UK reached Stefan already mentioned that a transforming to a pure Polysulphate mine and this requires no immediate write-down we have though implemented and accelerated depreciation of the potash assets and it will add about $3 million of additional depreciation in third quarter for the next three years. Reduction in our cost per ton is an important measure in the existing business environment. The calculation here is very straight forward you can extract it from the reports which basically took the operating expenses and the divided by the total volume that we are sending and then 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 work in our favor currencies, shipping oil prices et cetera but it is also a contribution important contribution of the operational excellence and cost cutting initiatives which is finally reflected now and we are 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 facility in Rotem that crippled our fertilizer production this quarter and will still impact Q4 ’15 as well we continue to show very nice improved performance at Rotem resulting in refer by asset production and new record dial for our phosphate production. Apart from the lost volume caused by the fire the lowering euro and the shekel has negatively impacted the sales both in the commodities 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 phosphate following items the lower volumes falls about $5 million negative impact and the increasing prices of raw materials mainly the specialty fertilizer and increases from other operating expenses also negatively impacted. If we exclude the impact of the fire at Rotem from the sales as well we recorded the 70 basis point improvement in operating margin despite the lower settled down volume this was driven by the higher price and all production cost which is reflected in any of the chart in the following slide. This slide shows the continuing trend of reduction in cost to produce our product. The slide demonstrates the results 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 over a 90% and this help us to reduce the cost were out the value chain. Other cost reduction initiatives were implemented at our rock mining and production and we could also improve utilization there and we track hold production level. Industry product segments the performance here reflected the continuous trend of declining demand and as I said still a ramp-up to quarter from the strike. We witnessed a strong demand of clear brine fluid still this quarter although the future is yet to be seen and the sales of the bromine compounds of Prolactal GmbH. Just moving to the adjusted operating profit you see it's split 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 produce inflows and the product mix. Last but not least the performance product segments totaled sales in the segment this quarter we’re 7% lower than the last year 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 volume for mostly from the addition of the Prolactal portfolio to our specialty food offering, first been to our advance additive business and the sponsors of wildfire prevention products due to the historically high 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 for 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, so please.

Sophie Jourdier from Liberum, and first question I just wondered where you could just clarify exactly the situation now on the tax discussions or with the government if I concluded now and if it is what will be the implications on your taxes over next few years. And the second question just on polysulphate, can you just remind me the price you're selling that for? How do you set the price with customers, is there straight price or is it linked to the underlying near-term value? Thanks.

Okay. Let me ask Kobi to answer the tax question, before he does it, on polysulphate, the base principal is we press all the nutrients as in the replacement value for the particular farmer. To remind you the nutrients are sulphur, about half of the content, potash 12% and then magnesium and calcium. Not all farmers are able or willing to pay for all the nutrients, so sometimes the only price three, sometimes the only price two, sometimes you price all four of them. In some specialty crops you get additional synergetic effect from the yields. So we get a premium for those. There is a difference of cost 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 [indiscernible] producers and of course it is sold at lower cost because they need to put this into granular themselves. The total cost in the long run will be somewhere between £30 to £35 per ton, they are higher now of course because we are in the rent phase and prices we’re getting for the mix between granular and powder at the moment is around between £70 and £80 per ton. And I think as volumes will go up and we will move more into commodities you would be able to see prices going down so that this spread is not a long-term spread, but still it will be very good, very robust business going forward.

On the taxes, the finance committee of the Israeli Congress is voted, this is one step before the law is fast and 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 for the year, we’re now talking yet again the 2013 potash prices of around $100 million, $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 and -- but in future investment in Israel it will be made like we are doing any other investments based on merits and the -- we will factor all the factors into this and where it will work to make an investment we will do it. And if the new environment will not make the investments economically of course we will pass it on.

Maybe two other additional, this is now essentially potash tax, the taxation on phosphate and bromine and other minerals has been more or less eliminated, but the details important price and the second thing there is to say many other regulatory items in Israel are still open. So the environment having stable prices to make investment decision is still pretty shaky.

Thank you, any additional question from the room, Yulia please?

I have two questions from me. It’s Yulia Chekunaeva, Goldman Sachs. On the cost cutting, you made some impressive progress in cost optimization in recent years. 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, whether it’s 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 $240 million probably it will be a little bit higher but just about $240 million. To remind you our commitment was 350 run rate after the end of this year, so there is 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're not finished through the cost improvement in the Israeli sites and so there is more to come there. And we haven’t -- we are just about only starting in Spain and in our smaller sites. So the 350 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 roll out of our SAP system which happened in the October this year and two more roll outs happening in April and in October next year, then we will have about 75% of the company under new SAP system. This is the year in which we 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 for 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. It is making its way through the compounds. It’s making its way now also into certain number of compounds outside Asia. I remind you that this price increase was an Asian price increase because this is where prices were the lowest. It seems to stick pretty much everywhere. So that I don’t expect any declines here at least not in 2016. The challenge in bromine remains volumes and they can only be improved with new applications. We are quite encouraged with what’s going with environmental legislation especially on mercury, in Europe it’s pushing forward in China this is being introduced. We are building the first pilot project of Merquel with local partners there and all show the feasibility of this technology, that will be able to reduce mercury reduction in China by more than 90%, nine, zero. So this technology really works. And it’s just one example in addition to the battery that I gave before we are putting our emphasis on.

Yes, we will take another question from the room. Andrew.

Yes, hi, thanks a lot, Andrew Benson from Citi. You included your Ethiopian project within your projections for 2025 and/or 2020. When do you think you would start investing what sort of time lines giving yourselves and what sort of cost to develop? And then can you just also explain the changes as you see them in the performance products?

Did you -- hey say the second question please?

Sort of the first one was on the performance products, the impact, the phase out of phosphates in that, how see the phosphates additional, how you see the European market in total evolving?

Okay. The Ethiopia project, we have already deployed a team, we are in detail engineering and we are building some infrastructure to build this mine. So we are actually pretty determined to do that. This is small CapEx at the moment. It will not go into large CapEx next year either. But plan 2017 and ’18 will be to bring 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 5,000 tonnes of SOPs, all of this together, we will split this in two. So you can take that number, split it in to, 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 us focused on SOP. In the first half and then when we do the second half we have to decide later and this is not decided at the moment. The projects are not yet approved because we don’t have the detail engineering and we don’t have the detailed conditions yet initial there we have team that is negotiating or walking their self with the Ethiopian government so you can expect the final decision on this by March by let's say sometime in the second quarter of next year. But this is the go no go decision but if we want to do this we need to do some proprietary work so we moved to camp site into more sustainable area so down there and we are doing little things like that. On performance products the Dishwasher phase out doesn’t affect us directly so much because we have liberally sales in this area and this was the low-end of the commodities so it effects 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 commodities single phosphates. We are our cost position in phosphate has dramatically improved so we are not nervous was not being competitive but our strategy also is not to have this face on or to face this head on but more to go into specialized application in combination with the whey proteins for example our other type of proteins. You will see us moving into interest directions as we continue with small investments and expansion of the product portfolio.

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

Thank you. [Operator Instructions] Our first question comes from Chris Kapsch with BB&T Capital Markets. Please proceed with your question.

Good afternoon over there and just following up on the commentary between the industrial products segments there has been some discussion about the weakness late in the third quarter in the brominated flame retardants and presumably that's into the electronics and so just wondering if you experience that weakness and if so do you have a view as to whether it was attributable to just market weakness or possibly channel inventory destocking?

Okay, let’s test technical installation here we have with us Charlie on the line who Charlie Weidhas who is the on our retailers committee running this business Charlie can you answer this question please. Did we experience the weakness in late in the third quarter and if number turns?

Yes first let me confirm that you can hear me.

Great.

You can hear me okay. So in our team and both our team in [indiscernible] is a slowdown in the printed circuit board business which impacts one of our larger volume product so whether that is the backing in inventory or a slowdown my opinion is that more of a slowdown based on what I read coming from the PC producers and the Television producers nothing is like that.

Okay, thanks. And then just so there is also been some commentary about the effects on not just the bromine but the broader chemical industry owing to the tragic fire at the Ashdod Port and Eilat Port and just wondering if you saw any effects 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 are being influenced by the Chinese government in the wake of that tragedy? Thank you.

Okay we did [indiscernible] explosions what we saw was logistics getting slowed down having to be maybe moved to other port and so definitely we saw some short term issues there. The second part of the question is did we see some government election at some Chinese producers as compound and bromine. And the answer is yes but kind of a antidotal but I'm not aware of anything that's permanent look it's clear in China that there are standards of production especially in bromine very low and you could never operate that way out in China and we anticipate does that becomes 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 having a firm strong conclusion on that.

Our next question Joel Jackson with BMO, please proceed with your question.

The first question on probably Polysulphate, can you just remind us than the ramp out like how we get some whatever sales you are doing in 2016 to 2020 a million tons so maybe walk us through the different years and then also if you could talk about the current investments so £40 million gets you how much of Polysulphate is it a 600,000 tons or million tons? Then the extra 40 million get you I guess a million tons the remaining half of million tons are going to get a million of granular and just want to understand sort of how is that. And just want to understand sort of how the CapEx walked out to get you to 600 or million etcetera?

The £40 million that is part of what we announce originally will get us to polysulphate production capacity of 1 million tons. 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 is very much in the run of possibilities. If we wanted granulate the remaining 40% or 45% ourselves, we would have built a granulation plant which cost somewhere around £40 million, depending on where we built. But that’s not yet decided, this would be in order to make additional margins on that powder product. So we have to wait until we make the decision, until we grow this further in the sales. The ramp up of polysulphate, boy, this is maybe the biggest discussion I am having with the sales team probably once a month. It's extremely difficult to tell for totally new products. I will remind you that polysulphate as such doesn’t exist anywhere in the world this is a unique product because it is designed by the geology in this part of world. We have -- we’re selling between 120,000 and 150,000 ton this year and last year we were around 40. And we always -- so by 2020 we want to be at 1 million ton, 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 shall be able to double that’s what our target is compared to this year and then we should be able to grow again so then by ’17, ’18 we have reach the original 600,000 tons. We’ve accelerated that forecast. Originally we saw the 600,000 tons would be the 2020 number, this is now move forward because it's going pretty well and also because potash is running out faster. So we put a little bit more of the foot on the accelerator. But difficult to commit right now, how much we’re going to sell exactly every year.

That was helpful and my next question would be on kind of potash inventories and the Chinese contract and your shipment to China. So because of the Dead Sea strike obviously your shipments in China started late. Could you give an update on how much of your shipments have gone to China, how much is left, looks like the port inventory the potash in China are high, I know your customer makes it difficult some of the bigger players. But I mean I just want to get a sense your shipments are still coming which will probably lead to a later Chinese contract in the New Year as opposed to December or January? Thanks.

Our contracts are fully being honored. There is a little bit even above this from one or 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 are building up inventory in the fourth quarter to prepare for the season but also to prepare for the agriculture season and 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 high there. But it's not dramatically unusual from our perspective, but it's solidly moving forward.

And on your shipment, how much of your shipment to be in the 2015 contract?

I don’t know, do you know Limor?

As Stefan said, we have a contract of 1.1 million ton for the year. This is the contract of firm volume not including optional volumes which will probably not be utilized, but this 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. Thank you.

And Joel let me [indiscernible] we are running a little bit less is due to the price, but we are at the end of the year with all the contracts or even little bit more.

That was [indiscernible] who runs the business and was pretty bullish on the contract fulfillment as you heard.

Thank you. Our next question comes from Matthew Korn with Barclays. Please proceed with your question.

Some questions on the JV with YPH, congrats on getting that completed. As there ramps up and as you show it is going to add 850,000 ton fertilizer, 115,000 ton 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 doing in global prices, what’s the concern at the growth profiles of domestic Chinese market there and phosphates maybe more relatively soft and continue that way for some time to come and perhaps maybe the opt income contribution? Thank you.

The whole idea about this, the whole concept, the whole strategy of this joint venture is to build the 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 and then this is the first concept the second concept is to take this operation which makes around $50 million sales with about 5%, 6% EBITDA. And to move it from a commodity business which it is, now it’s 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 demand because we will get out of the commodities step-by-step as we build the specialty plants and we upgrade the existing plants to higher quality and better capability and more better stability. There is an R&D effort linked to this, we have an R&D center that we build together with our Chinese partners, with 80 scientists already working now and 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 as the 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 it by itself will be very, very stagnant when it comes to commodity phosphates because 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 dramatic even ammonia, nitrogen, not so much on potash because it’s still in utilization there. So there is huge demand, there is a huge hunger among Chinese distributors and agriculture players for these more sophisticated products because they utilize nutrients much more efficiently that’s why we did this because the market needs. 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.

Thank you. That’s very, very helpful. Let me switch here just ask on the industrial product side. I am interested you mentioned on the bio side competitors did not register there. Curious, is that window for them to do so now effectively shut to them, do you have several months, a year more as a like a head start to take share, just asking how that works and what’s the revenue opportunity there?

This question was on what bioscience?

Right, you mentioned that there is an opportunity, a business opportunity because you had several competitors who did not register with the European regulators and couldn’t participate in the market?

This is not on bioscience polymeric flame retardant for construction insulation foams. This is a product that we call FR-122. There is a regulation in Europe that forbids the previously used flame retardants, this will be outlawed and usually, originally this was supposed to happen at the beginning of 2016, this is now postponed until ’17. Still all the manufacturers of these insulation foams are switching already to the new technology because they have prepared this which is the more environmentally friendly product. Yes, this is a patented product but the IP belongs to Dow Chemical they have licensed this as far as I know, to three players until now. You need pretty sophisticated production chemistry for this and of course you need bromine for this so the completion field is going to be limited. The major difference here is going to be one-to-one 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, $4.50 per kilo and this product is sold over $10 per kilo and here you can see some of the value equation.

Thank you.

All right, next question please.

Our next question comes from Yonah Weisz with HSBC. Please proceed with your question.

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, in your initial remarks, Kobi mentioned that VAT…

Yonah?

…was also. Hello?

Are you on speaker or something because we hearing you very bad, it’s not clear at all, so if you can repeat and not from speaker? Thanks.

Okay, is this better?

I think so.

Let’s try again, a question on potash. In your printed MD&A where you talked about India reducing purchases and in the comments earlier on Kobi mentioned Chinese VAT also being to lower purchase during this third quarter. So I ask in terms of volumes over the fourth quarter and perhaps into next year assets as well would you be reducing your price to India in 4Q to reached that sharing's there and how do you see VAT essentially effecting Chinese demand in 2016?

Okay. 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 reduced VAT they have done this the new imports now are sold with the full VAT initially the pass on the pricing partially done these changed that now the pass on the pricing fully on the phosphate side the VAT was pass through to customers immediately so in China it seem like this VAT change is more or less through the system I don’t expect this to impact demand if you are 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 are as good as anybody else or as bad as anybody else so not a big effect here. In India I think we have the same trend than anywhere else Indian importers are asking for price confessions we talked to them we discussed with them we haven’t done anything yet it depends really on the large players I think you will read this as early as we will read this because as you know we are a price taker.

Okay. And second question if I may on the UK and probably stock-based, first of all would you have asset requirements cost in the switch over from potash to Polysulphate. And secondly if I'm not mistaken there is a competitor or at the cash competitor right next door to you affiliates minerals asset trying to pull out large Polysulphate reserves so I'm wondering how you are planning your production and with the potential for additional competition from affiliates and how that inter play works?

This a new market totally new markets and problem is not production the problem is marketing other challenge if there is a new player coming into this and would be two of us offering this product that would be fantastic that would be great so I would very much welcome a series to build this mine into and also help us to develop this product. The cannibalization with potash is relatively small there is going to be some but not very big because it doesn’t go into same applications there is a bit of that there is a little bit of cannibalization with SLP especially the higher cost SLPs there is but in principal this is a new product replacing cocktails of other ingredients.

And asset retirement obligation or asset retirement cost for changing over from potash to Polysulphate?

Asset retirement Kobi on 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 this $12 million per year additional depreciation cost.

And no write offs. What we did as we took all of the assets of this mine it's an old mine so it's anyway relatively lower asset base and we split them into those assets that are strictly dedicated to potash mostly the surface ponds. Those assets that are strictly dedicated to Polysulphate and those that are used by both and the fourth quarter 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 this $3 million per quarter or $12 million per year, until 2018.

Thank you. At this time I would like turn the call back over management for any additional or 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 happy to take it offline. Thank you again for joining us and see you next quarter.

Thank you very much.

Thank you.

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