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Edited Transcript of ICL.TA earnings conference call or presentation 7-Nov-19 1:15pm GMT

Q3 2019 Israel Chemicals Ltd Earnings Call

Tel-Aviv Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Israel Chemicals Ltd earnings conference call or presentation Thursday, November 7, 2019 at 1:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kobi Altman

Israel Chemicals Ltd. - CFO

* Limor Gruber

Israel Chemicals Ltd. - Head of IR

* Raviv Zoller

Israel Chemicals Ltd. - President & CEO

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Conference Call Participants

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* Joel Jackson

BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst

* K. Tong

Stephens Inc., Research Division - Research Associate

* Patrick Rafaisz

UBS Investment Bank, Research Division - Director and Chemical Research Analyst

* Thomas P Wrigglesworth

Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst

* Vincent Stephen Andrews

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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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.

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Limor Gruber, Israel Chemicals Ltd. - Head of IR [2]

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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 #2. 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.

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [3]

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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 our margins higher.

Slide 4 demonstrates our solid performance this quarter and more so during the first 9 months of the year would show impressive growth in all key financial measures. Most notable, apart from the significant growth in cash generation is the year-to-date increase in adjusted operating income, EBITDA and adjusted net income. The slight reduction in adjusted net income in the quarter is a result of higher financial expenses and an increase in noncontrolling interests resulting from the improved results of our YPH joint venture in China.

The following slides provide a review of the business performance in our divisions, starting with Industrial Products on Slide 5. Our Industrial Products division continued to increase its profit margins, benefiting from higher prices throughout the bromine value chain as well as in our phosphorus-based flame retardants business line. Moreover, the depletion of bromine resources in China, coupled with increasing environmental-related regulatory pressure, led to higher demand and sales of elementary bromine in China, while significant drilling activities in the coast of South America and in the North Sea contributed to higher sales volumes of clear brine fluids.

We are increasing our bromine production in order to capture demand gaps caused by lower Chinese production, and we anticipate 2019 to be a record year in sales of clear brine fluids. We also continue to implement our value-based pricing initiatives in phosphorus-based flame retardants and successfully increased sales in the U.S., more than offsetting a decrease in sales in European markets. This is due to the duties imposed on Chinese phosphorus-based flame retardants imported to the U.S., forcing Chinese producers to export more material into Europe. We recently announced the signing of major long-term strategic supply agreements of bromine and bromine compounds with customers in Asia. This strategic milestone lays the foundations for the division's future growth and further strengthens its leading position in the global bromine market.

In order to deliver on these agreements and the ones that are expected to follow, the division will invest about $50 million in expanding its compound production capacity and its isotank fleet. These agreements are expected to generate additional annual revenues estimated at $110 million beginning in 2021.

Let's turn to Slide 6 to discuss our potash division. The delay in supply contracts in China and India resulted in lower sales volumes and in a change in product mix shifting to higher production of granular over fine- and standard-grade potash, which is mostly shipped to these markets. These presented some operational and logistical challenges, resulting along with some mechanical failure in equipment and lower production of almost 80,000 tonnes at the Dead Sea compared to the same quarter last year.

Last week, we announced the signing of an updated supply agreement with IPL, the largest importer in India at a $10 per tonne price reduction through the end of March 2020. The volume in this 6-month supply agreement is in line with our 5-year supply contract with IPL.

Despite the reduction in sales, a decrease in energy cost due to the activation of our new power plant station in Sodom, lower production costs mainly due to the shift to Polysulphate in the U.K., a mild increase in Polysulphate and magnesium selling prices and a decrease in operating expenses led to a 6% increase in operating income, extending our quarterly operating margin to 22% compared to 19% in Q3 of 2018.

Production of Polysulphate at our Boulby mine in the U.K. continues to ramp up and has doubled compared to the same quarter in 2018, on track to achieving a production run rate of 1 million tonnes by the end of next year. The Dead Sea facility upgrade project we announced earlier this year is scheduled to take place during Q4. While resulting in a temporary production shutdown and an expected loss of about 200,000 tonnes in Q4, which is a onetime event, this plant upgrade will enable us to increase production by about 5% as early as in 2020.

Following the antidumping duties that were imposed on magnesium imports to the U.S., we continue to vigorously defend our position. We strongly believe that no material injury or threat with material injury has been caused, hence, such duties should not be applicable.

Our Phosphate Solutions division on Slide 7 continue to face very challenging market conditions with benchmark phosphate commodities dropping by 25% from the beginning of the year to a 10-year low. Nevertheless, the division's performance demonstrates the advantages of our strategic focus on specialty phosphates, our diverse portfolio and the resilience of the specialty businesses amid the weak commodity markets. Unlike the commodity markets, specialty businesses did not face major changes in the business environment. Furthermore, our phosphate commodity business experienced a relatively better pricing environment for TSP and SSP compared to DAP and MAP.

In addition to the negative impact of commodity pricing, the decrease in the division's sales was attributed to a significant decrease in the sales volumes of commodity fertilizer and lower customer demand for Dairy Proteins in China, together with the devaluation of the euro and Chinese yuan against the U.S. dollar.

Our YPH JV in China continued to deliver improved results with higher operating profit driven by operational efficiencies as well as lower rock and sulfur costs.

During the quarter, we withdrew from a potential sale of Prolactal, our Dairy Protein business. We believe the business carries a higher value than the offers we received and we'll, therefore, continue to enhance Prolactal's position as a leading producer of premium dairy ingredients for the major infant formula players globally.

The division's phosphate-based food business continued to show improved results, successfully implementing value-based pricing initiatives, mainly on tailor-made downstream solutions.

I'm also very pleased with strategic agreements we recently signed for the supply of solutions for the fast-growing meat alternative market, based on our proprietary ROVITARIS technology. Following these agreements, we expect to invest approximately $20 million in manufacturing capacity and R&D capabilities. Return on investment is expected to be very high with anticipated high operating margins.

Our Innovative Ag Solutions division on Slide 8 has entered into its off-season period, which will last through the fourth quarter as well. Unlike previous quarters, this quarter, we were able to match revenues to last year's level despite continued lower sales of low-margin third-party products. Negative impact of exchange rates and higher energy and raw material costs due to lower production of pure phosphoric acid, potash and phosphate rock were partially offset by continuous growth in sales of emerging markets.

Furthermore, promising investments in R&D and digital capabilities have weighed on the division's profit. We're focusing on increasing operating cash flow through reducing the sale of third-party products, which bear low margins and results were evident this quarter with free cash flow of $18 million.

As you can see on Slide 9, our solid performance continues to fuel the growth trend in most main operational parameters since the beginning of 2018. Indeed, operating profit and EBITDA margin this quarter were slightly lower consecutively on the back of increasing challenging commodity market conditions. However, as I mentioned earlier, operating cash flow has significantly increased to a 6-year quarterly record.

The growth trend in the graphs in front of you is evident, but our strong results are even more impressive in the year-to-date view on Slide 10. The consecutive growth in operating income and EBITDA, both in absolute terms and in margins as well as the impressive spike in cash generation this year after 2 years of decreasing cash flow, are a testament to our ability to execute our strategy, grow margins and generate cash even in challenging conditions with market and currency headwinds.

As always, I wish to conclude by recognizing and appreciating the hard work and dedication of our 11,000 employees around the world. I'm very confident that ICL is well positioned to overcome the challenges in our business environment and very well prepared to benefit from opportunities that are emerging in our businesses.

Thank you, all. And with that, I will hand it over to Kobi.

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Kobi Altman, Israel Chemicals Ltd. - CFO [4]

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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 due to changes in pension liabilities and from higher depreciation expenses.

Slide 14 demonstrate the impact of foreign exchange rates on our results this quarter and year-to-date with a $22 million impact on sales for Q3 and over $100 million year-to-date. It's noticeable from the graphs shown exchange rates of all major currencies worked against us, resulting in a negative impact of $15 million to net income in Q3 and a similar amount year-to-date.

Even with such a significant headwinds, our Q3 earnings are similar to last year and our 9 months adjusted net income is almost the same as the adjusted net income for the full year 2018.

Our finance expenses, as shown in the table on Slide 15, increased by $9 million versus last year. This comes mainly due to a $5 million increase in interest expenses attributed to the implementation of the new IFRS 16 accounting standard and changing interest relating to provisions for long-term employee benefits.

In addition, an increase of $7 million is attributed to the impact of exchange rates fluctuation on long-term employee benefits provision and liabilities related to the implementation of IFRS 16. The total negative impact of the IFRS 16 new accounting standard on our finance expenses year-to-date amounted to $18 million.

Slide 16 graphically demonstrates one of our major strategic achievements this year. Despite the increasingly challenging market condition, ICL was able to outperform last year's cash generation in each and every quarter, bringing year-to-date 2019 cash flow to a 6-year record.

As you can see, the year-to-date operating cash flow net of CapEx, which we sometimes call free cash flow, amounted to $360 million, significantly higher compared to 2018, even in a year of larger CapEx investments contributing to our healthy financial position.

By the way, also our tax payment this year more than doubled versus last year. And this also attest to the important cash flow generation achievements.

Moving on to Slide 17. Our net debt-to-EBITDA ratio continued its improving trend with the second consecutive decrease to a ratio of 1.8. That, along with our balanced capital allocation approach and our margin expansion, is adding to our solid financial position and our increasing financial flexibility to execute our strategy.

Before we end this part of the presentation and move on to your questions, I would like to summarize this quarter with some key takeaways on slide 18. Despite facing challenging market conditions, mostly commodity headwinds, we were able to solidify performance, executing our strategies throughout cost controls, value-based pricing initiatives and aided by our balanced business model and our increasing focus on specialty businesses. The successful execution of our working capital optimization plan is evident in a 6-year record quarterly cash flow, with year-to-date cash generation almost doubled versus last year.

Under the framework of our strategy, we continue to look ahead, building our future growth and market leadership. And during the quarter, we achieved important strategic milestones, as Raviv discussed earlier.

During Q4, we will execute our preannounced facility upgrade project at our Dead Sea potash operation. While this project will have significant negative impact on our potash production and sales volume in Q4, it will enable us to increase our potash production at lower cost going forward. These milestone achievements serve as the building blocks of our future growth, strengthening our financial and global leadership position and creating long-term value to our shareholders.

Three quarters into the year, we are pleased with our solid performance, especially in light of the performance of commodity markets. We expect a challenging Q4 due to the regular end-of-the-year seasonality, the continuous weakness of phosphate commodity markets and to lower potash production and sales volume as a result of the upgrade project at the Dead Sea.

Yet, we believe we are on track to achieving a strong 2019 and a good start to 2020.

Thank you, and we will be happy to take your questions now.

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Questions and Answers

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Operator [1]

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

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K. Tong, Stephens Inc., Research Division - Research Associate [2]

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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?

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [3]

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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.

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K. Tong, Stephens Inc., Research Division - Research Associate [4]

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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?

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Kobi Altman, Israel Chemicals Ltd. - CFO [5]

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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 3-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.

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Operator [6]

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

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [7]

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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.

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [8]

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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. We have -- 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. We actually -- we're considering -- we were 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.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [9]

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

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [10]

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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.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [11]

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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?

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [12]

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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%.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [13]

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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?

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [14]

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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 2/3, roughly 2/3 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.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [15]

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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?

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [16]

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No. Like I said, they were about 2/3 this year relative to last year because....

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [17]

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Okay. I didn't understand that. 2/3 in the third quarter. In the third quarter?

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [18]

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

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Operator [19]

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The next question today comes from the line of Vincent Andrews from Morgan Stanley.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [20]

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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.

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [21]

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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.

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Vincent Stephen Andrews, Morgan Stanley, Research Division - MD [22]

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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?

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [23]

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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.

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Operator [24]

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

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Thomas P Wrigglesworth, Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst [25]

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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?

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [26]

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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 it's a breakthrough -- 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.

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Thomas P Wrigglesworth, Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst [27]

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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.

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [28]

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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 trading -- the spot trading is yuan based.

No. We think that the dynamic is -- 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.

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Thomas P Wrigglesworth, Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst [29]

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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?

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [30]

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First of all, we're inaugurating the plant on -- 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.

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Thomas P Wrigglesworth, Citigroup Inc, Research Division - Director and Chemicals and Basic Materials Analyst [31]

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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?

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [32]

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

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Operator [33]

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The next question today comes from the line of Patrick Rafaisz from UBS.

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Patrick Rafaisz, UBS Investment Bank, Research Division - Director and Chemical Research Analyst [34]

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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?

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [35]

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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.

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Patrick Rafaisz, UBS Investment Bank, Research Division - Director and Chemical Research Analyst [36]

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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.

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [37]

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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.

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Operator [38]

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(Operator Instructions) The next question comes from the line of Laurence Alexander from Jefferies.

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Unidentified Analyst, [39]

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This is [Adam Beavis] 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?

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [40]

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I didn't get the last sentence.

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Unidentified Analyst, [41]

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

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [42]

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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.

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Unidentified Analyst, [43]

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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?

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Raviv Zoller, Israel Chemicals Ltd. - President & CEO [44]

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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.

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Operator [45]

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There are no further questions. Please continue.

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Limor Gruber, Israel Chemicals Ltd. - Head of IR [46]

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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.

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Operator [47]

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