Ladies and gentlemen, thank you for standing by, and welcome to the ICL Analysts and Investors Conference Call. [Operator Instructions] I must also advise you the call is being recorded today. [Operator Instructions] I'd now like to hand the conference over to your first speaker today, Ms. Limor Gruber, Head of Investor Relations. Please go ahead.

Thank you. Hello, everyone. Welcome, and thank you for joining us today to our third quarter 2019 conference Call. The event is being webcast live on our website at www.icl-group.com. 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 website. The presentation that will be reviewed today was also filed with the securities authorities and is available on our website as well. Please don't forget to review the disclaimer on Slide number two. There will be a replay for the webcast available a few hours after the meeting, and the transcript will be available within a few days. Please note that our comments today will 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 not guarantees of future performance. And now we are ready to begin with the presentation by our President and CEO, Raviv Zoller, followed by Kobi Altman, our CFO. Following the presentation, we will open the line for the Q&A session. Raviv, please?

Thank you, Limor, and hello, everyone. I'd like to open with a review of this quarter's highlights on Slide 3. Our solid third quarter and year-to-date results with strong quarterly cash flow were achieved despite headwinds in the commodity markets. The 3% reduction in sales is attributed to the delay in signing of potash supply contracts to Asia and phosphate commodity headwinds as well as to the negative impact from exchange rates following the devaluation of the Chinese yuan and the euro against the dollar. Nevertheless, our operating income and EBITDA, as well as our profit margins, demonstrated resilience to market headwinds and increased quarter-over-quarter, owing to our diverse and balanced business model, our increased focus on specialty businesses that benefit from higher margins in a stable business environment and our focus on cost controls and cash generation. The year-to-date comparison is even more impressive as adjusted operating income increased by 25% and EBITDA by 18%. Operating cash flow for the quarter reached a 6-year record of $368 million. Year-to-date cash flow nearly doubled compared to the same period last year. The increase in operating and free cash flow will more than support our CapEx needs as well as a dividend of $0.05 per share for the quarter, implying a solid dividend yield of over 4%. I'm also very pleased with the strategic milestones achieved during this quarter. Our Industrial Products division signed several long-term agreements with customers in Asia for the sale of bromine compounds and our Phosphate Solutions division signed agreements for the supply of solutions for the alternative meat market, and I will elaborate on these agreements shortly. Furthermore, we're on track to complete the construction of our new pure phosphoric acid plant in China, which will further boost our specialty products operations in Asia and drive…

Thank you, Raviv, and good day, everyone. This was a very solid quarter in an increasingly challenging market condition. ICL is continuously proving its resilient and ability to deliver strong performance throughout commodity cycles. This quarter, it was demonstrated in higher gross and operating margins and the highest cash flow generation since 2013. The contribution of our specialty businesses is demonstrated on Slide 12. We see it in pricing, where higher specialty product prices surpassed the negative impact of lower commodity prices. We also see it in sales volumes where the decrease is attributed to commodity, while specialty volumes remained stable. This quarter, our sales were impacted by significant exchange rate headwinds, mainly from the devaluation of the euro against the U.S. dollar, which also resulted in a 1% reduction in our average realized potash price. As you can see on Slide 13, despite the mild reduction in sales, operating income in the quarter slightly increased compared to Q3 2018. We benefited from lower raw material costs with lower sulfur and phosphate rock prices, contributing $9 million and $4 million, respectively. This achievement was partially offset by higher cost of pure phosphoric acid we buy from third parties. The significant increase in marine transportation prices was almost fully offset by lower energy costs owing to the activation of the new power plant at Sodom. I would like to draw your attention to the fact that the $22 million negative impact of quantities to sales was translated to only $6 million reduction in the operating income. We strategically focus on higher-margin products on the account of less profitable ones, especially in specialty phosphate as well as in the bromine and phosphorus FR businesses. The increase in operating and other expenses is mainly a result of income we recorded in Q3 2018…

[Operator Instructions] The first question today comes from the line of Mark Connelly from Stephens Inc.

This is actually Joan Tong on for Mark. A couple of questions. First off, I want to ask you about the phosphates business. What is the commodity phosphate producers calling the bottom of the phosphate prices, at least on, in the debt prices? So I'm just wondering like how you see this market. It looks like you have realized prices have been, like, has not been falling as much compared to others. So obviously, you have a different mix year more in SSP and TSP. I'm just wondering, are your prices just lagging? Or the market has been holding up a lot better than that and that?

Joan, thanks for your question. We really can't say at this point where the bottom is in terms of phosphate. I think what you're seeing in our results is not just SSP and TSP, it's the fact that we had significant improvement in our YPH joint venture and a lot of it has to do with the realized price. So some of the negative effect of our other commodity business is not, does not reflect because of the YPH joint venture. So it's not that we're seeing a very different environment, it's just that part of our business is commodity. And of that part of the business, we have the joint venture in China, which has significant improvement quarter-over-quarter and year-over-year.

Okay. Got it. And in terms of cash flow, obviously, you have a very strong quarter for cash flow. Working capital is positive during the quarter after a pretty normal first half. Are there any big timing issues that caused that or to reverse in the fourth quarter, which is something else that will keep the working capital from ending this year quite higher than 2018? And also, how should we think about next year, assuming this year is a normal year in terms of cash flow?

Okay. We are running a significant initiative in the past year on working capital and changing some of our processes and the net result of that initiative has been about $70 million in the first 9 months, and we actually expect some more of that in the next couple of quarters. So cash flow has gone to a new level in the company. We're just a lot more focused. And we're very disciplined, and we expect the good cash flow creations to continue going forward. Having said that, like I said, $70 million, you can view it as a onetime improvement, if you will. And in terms of the actual working capital at the end of the year, typically, there's a little bit of a rise at the end of the year because of seasonality. So on our phosphate specialty fertilizer business, we tend to accumulate more inventory towards the end of the year. At the same time, because we're going through a three-week facility shutdown of potash, we will have less potash inventory at the end of the year because of the sales we need to achieve by the end of December. So there will be probably a slight uptick in net working capital, not significant.

The next question today comes from the line of Joel Jackson from BMO.

I have a few questions. I'll go through them one by one. Can you give us some more color on ROVITARIS? Maybe you can outline what the opportunity is here, the time lines, the peak sales opportunity, how it's going to play out, when will we see an inflection point? Anything you can would be really helpful here.

Sure. It's a set of 3 types of technologies that have to do with texture, combination of taste and texture and process of turning plant protein into components of alternative meat. Between those technologies, we have solutions for chicken products, fish products and poultry product and beef products. So there's a nice diversity capability. It's a proprietary technology. And basically, the way to view it is that we take our technology, put it into a powder and that powder is processed. And that gives texture, flavor and some other specific attributes that are unique. We think we have very, very good products. Actually, we're actually considering getting out of the business about a year back. And we saw tremendously good reaction from potential clients and our first real significant contracts came in Q3. There's a lot of hype around the alternative meat market. So nobody has a crystal ball and knows how far this can go. I can't say that we don't recognize better, more worthy products than what we have now. But at the same time, relatively new to the business. We're trying to be careful to go the right route, not to give anybody exclusivity and try to move up the value chain because at current, in order to be able to supply some of our products, we're doing quite a lot of tolling. So we're going to look to invest in our own production capabilities and try to see how far we can go with these products. So it looks like oil. There are a lot of signs of oil, but we don't know how much oil we're going to find. That's the way to look at it at this point.

Order of magnitude, base case is if in 5 years, a $20 million revenue opportunity or a $200 million revenue opportunity or something else?

I'm not sure, I mean, I can tell you that it's not a $20 million opportunity, because otherwise, we wouldn't be deciding to invest $20 million almost immediately. So, it's more than $20 million, but it's a little difficult at this point to give a responsible forecast. I don't want to create hype. I'd rather come back to you and report about the actual results.

Maybe another way to ask it is, what's your ROIC right now, hurdle rate -- excuse me, what's your hurdle rate now for investments that $20 million would have been invested under? Does that make sense?

It's a difficult question because formally, it's 15%, but the last investments that we made were over 25%. So in terms of our internal procedure, investments that are over 15% can be approved, but investments like this one and also in the bromine compound facility are over 25%.

Thank you. On potash, obviously, you're going for your turnaround now. But can you just give me some color? So what were your China and India potash sales in the third quarter of '18? And what were your sales in the third quarter of '19? And then as part of that, as the potential of the potash contract stretches out in China to maybe February or later, what will your strategy be here? Or are you, I guess, we'll call it lucky because of the turnaround, you don't really have a problem with inventory?

Yes. I mean, first of all, we don't have a problem with inventory. But the way to look at it is that in September, we didn't supply it all to east. So we supplied two thirds, roughly 2two thirds of what we supplied last year. And probably, if there wasn't stoppage in September, we would have supplied an additional 80,000 or 90,000 tonnes of products to India and to China. In terms of the rest of the year, given that we're shut down for 3 weeks, we basically have to optimize the product we have. We have enough or a little too much clients waiting for our products. So the fact that we're not supplying to China is sort of timely this year because this year, we're a little more constrained on the product.

I guess I'm asking also is because the Chinese and Indian contracts were signed in the late summer, early fall last year, were your Q3 China and India potash have been similar, both years?

No. Like I said, they were about two thirds this year relative to last year because....

Okay. I didn't understand that. Two thirds in the third quarter. In the third quarter?

From September 1, we didn't supply any potash to India or China, and we only resumed supply to India towards late October.

Very clear. Thank you very much.

Thank you.

Thank you very much. The next question today comes from the line of Vincent Andrews from Morgan Stanley. Please go ahead.

Thank you and good morning everyone. Just a follow-up on the Indian contract. A couple of things. One, you referenced the price being down $10 versus the prior contract. But can you clarify whether there's any change in the rebates that you might provide? There's trade press indicating that the rebate might be larger in this contract than in the past contract. Thanks.

No. There's absolutely no change in the rebate. In fact, there's no change in the contract because, in our case, it's a 5-year contract. So the only thing that changed was the update of the price for the next 6 months. We update price. We don't really update quantities.

Okay. And then comments about the phosphate feed market being weak because of ASF. What's your sense of where that phosphate backs up to because that market is obviously going to be weak for a while until China can rebuild that herd? So where will that product go to? Is it going into another market? Or will the producers shift into a different downstream product? Or what's going to happen there?

There are a lot of moving parts here because there are producer curtailments and there are announcements in China that Chinese producers are going to cut production. And some of the major suppliers are saying this and that. The bottom line is that we don't have enough clarity at this point to really predict what's going to happen in the coming months. It seems that like, from the production side, there are all kinds of explanations why we're close to the bottom. My best explanation to our being close to the bottom is that some of the suppliers have negative gross margin and Chinese supply is leaving China at a loss. So I don't think that can be endured over time. So that's the only strong indication that I have. At the end of the day, there's one very, very dominant supplier in the phosphate market and probably between that supplier and the Chinese suppliers and the way they address the current market condition, that's what's going to cause the price to either stabilize or move down or move up.

The next question comes from the line of Tom Wrigglesworth from Citi.

First question, I'll go one at a time. Obviously, with the brominated polymers facility that you are building for 2021, how much of your total Chinese customer base will now be serviced through that facility? And I guess I'm really trying to point out is do you expect more of your Chinese customers to outsource supply to you beyond, is this just a startup project? Or should we think, should we be thinking about more in the medium term being added to this?

We expect that there will be additions because this is sort of, I would say, no less than a strategic breakthrough. We targeted basically to convince our Chinese customers, or actually a couple of them, that it makes a lot of sense to go ahead and produce compounds with us in Israel instead of purchasing bromine from Israel and producing the compounds in China. Given the depletion of resource in China and given the importance of safeguarding future raw material and also saving logistic costs and enjoying economies of scale. And we knew that psychologically, it would be very difficult for the first customer to take the plunge, but now there's more than 1 customer. And it seems like more are talking to us, looking at options. Of course, it all depends on production capacity. But we feel that the door is open. We feel that it makes sense for everybody, given the dynamics of the market. And we're hopeful that this trend will continue. What it does for us basically is that it increases our market because some of the competition in the market is actually our customers producing for themselves. And when they decided to make some more sense to produce with us, then basically, the market as a whole grows. And as a result, our market share grows. So we think these are breakthrough times, and we think there's more on the way. We're going to be very careful because it's critical that we deliver perfectly, and we show everybody that they made the right decision. And so we're very optimistic about this.

Just one on the short-term dynamics of bromine markets in October. Chinese, sorry, in renminbi prices look to be down around just over 5% year-on-year. Is that a valid index I'm looking at that's showing that price? So do you agree with that? And b, what are the dynamics in the market for bromine at the moment? We've seen obviously very resilient prices over the last couple of years. And just when you probably think that, actually, things could get better from a demand perspective into next year, prices look a bit softer. So any insights there would be very helpful.

There's a positive dynamic. There's usually a drop during the summer because of the production dynamics of local Chinese producers. And also, the yuan weakened against the dollar. So some of the drop you're seeing has to do with that because the spot trading is yuan based. No. We think that the dynamic, I mean that the trend is pretty solid. And in fact, that's part of what is causing some of the customers in China to look for other strategic options in buying spot.

And just a final one from me. The WPA plant in the YPH JV that's starting next year, what's the kind of sales that, that facility could achieve? And over what kind of time frame should we be thinking about?

First of all, we're inaugurating the plant in the first week of December, and we will ramp it up during the next 6 months. The production for next year, I apologize that I don't remember the exact number, but it's about 10% of total production for next year because it's coming from the second half of the year. So it reflects about 20% of the production of the joint venture. The way to look at it is we're not adding a lot of production. We're mostly converting commodity product to specialty product. Very much intended to go into the food business in China. And so as time goes by, you'll see the plant ramping up and have production moving towards specialties. For the current investment, I think the potential is to reach about $100 million a year.

Okay. But we won't see that necessarily in the top line per se because it will just be some of it will be a switch from commodity sales and specialty sales, but the margin will improve. Is that how we should think about it?

That's correct. More than half of it will be conversion of commodity into specialty.

Okay. Thanks again.

Thank you,

Thank you very much. The next question today comes from the line of Patrick Rafaisz from UBS. Please go ahead.

Thank you and good afternoon, everyone. Three questions from me, please. The first 2 are around the facility upgrades in potash. And is the mechanical failure, you mentioned you saw in Q3, related to this upgrade? Or is that something that will be addressed? And can you get -- give us a bit more color on, like, what actually happened? And the second question around the facility upgrade is can you remind us of your anticipated benefit on the cost per tonne for the facility?

Sure. The mechanical failures we had are things that can happen in natural course of business. There were a few different things that happened. The most notable has to do with a malfunction of an oven. And some of that may have to do with the fact that we actually changed our production plan because we stopped production and shipments to China and India, and we needed more granulated product. We probably shifted our plan too quickly and took some chances. And that's the kind of thing that is going to be addressed in the stoppage because we're going to reduce the risk factor in cases of change in production. In terms of what we're going to get out of the stoppage of the facility upgrade, we're not really going to get too much cost-per-tonne value. It's very marginal because just of improving maintenance because this is planned maintenance versus other types of maintenance. So there is some improvement, but the real improvement is that for the same fixed cost, we will be able to ramp up from a potential 3.8 million tonnes to 4 million tonnes a year in our Dead Sea facility. And actually, we're currently planning -- and it's not final, but we're currently already planning to do 3.95 million next year. So if everything goes well, and we still have to execute, then we will have almost a full return of investment next year. And of course, this will be every year because we're creating this capacity for good, not just one time. So it's a lot of debottlenecking.

Okay thanks. Very helpful.

A lot of debottlenecking. Thank you.

Yes. And then a final question, actually a follow-up on what you've discussed earlier around cash flow and inventories. You mentioned that potash inventories will be very low towards year-end due to the upgrade. Inventories were already low now in Q3 or actually throughout the year. And what kind of inventory level in potash you think is a sustainable level for you in the normal course of business? How much inventories will we have to add next year, so that you're back in the normal occasion.

I think we're pretty much at the rock bottom that we've ever been. So I think you're not going to see the inventory any lower. It will be pretty similar at the end of the year. And next year, I foresee a little bit of growth in inventory, just to give us more flexibility.

[Operator Instructions] The next question comes from the line of Laurence Alexander from Jefferies.

This is Adam Bubes on for Laurence today. I was wondering, can you touch on a little further the long-term bromine agreements in Asia and what the lengths are? And how does pricing work with these agreements?

I didn't get the last sentence.

I was wondering about the length of the agreements and how pricing works?

Okay. The current agreements are 5 to 6 years. The price has guaranteed maximum and formulation for a minimum. And so it's basically a fixed-price contract or contracts, one for 5 years, one for 6 years.

Okay. Great. That's very helpful. And then my last question. I was just wondering, when we think about the 10% decrease in potash sales volumes, can you help me understand better how much of this decline was due to end market headwinds versus the delay in signing of supply contracts in China and India?

There was, the fact that production was lower didn't impact the sales. They're 2 separate things. We had, we produced all that we wanted. We would have had more inventory at the end of the period. That would be the only difference. We would have had up to 80,000 or 90,000 more tonnes of inventory. It wouldn't have affected sales.

There are no further questions. Please continue.

Okay. Thank you. Thank you, everyone, again, for participating in our call during this busy earnings day. We're looking forward to touch base soon. Goodbye.

Thank you very much. That does conclude the conference for today. Thank you for participating. You may all disconnect.