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Edited Transcript of AFE.J earnings conference call or presentation 24-Jul-19 10:00am GMT

Half Year 2019 AECI Ltd Earnings Call

Sandton Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of AECI Ltd earnings conference call or presentation Wednesday, July 24, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dean J. Mulqueeny

AECI Ltd - Chemicals Executive

* Edwin E. Ludick

AECI Ltd - MD of AEL

* K. Mark Kathan

AECI Ltd - CFO, Financial Director & Executive Director

* Mark A. Dytor

AECI Ltd - Chief Executive & Executive Director

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Conference Call Participants

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* Gerhard G. Engelbrecht

Macquarie Research - Head of Resources

* Steph Erasmus

Avior Capital Markets (Pty) Ltd. - Research Analyst

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Presentation

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [1]

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Okay. Okay. Good afternoon. Welcome to our half yearly results presentation. We're also on a webcast, so welcome to you that have joined us on webcast.

Also, a special welcome to our Chairman, Dr. Khotso Mokhele. Thank you for joining us. And we also have other fellow non-execs, Godfrey Gomwe and Philisiwe Sibiya. Thank you for joining us. Also, we have auditors and also my colleagues and most importantly, our investors and shareholders. Welcome to the presentation.

So we are on a webcast. We are going to go through a number of slides and -- that has been put up on the web. And to start off, we've put the presentation in terms of the performance review, which is really the sports page of what we have put out in the media this morning and on SENS announcement. And what it's trying or it's doing is actually looking at the performance from the group and most importantly, looking at the adjustments that we've taken into account relative to the first 6 months of last year. And really, positioning around our financial performance is -- Mark will also come in and show you in terms of gearing, in terms of cash that we are in a healthy position. And that's one of the key messages I need to get to the market and to you all this afternoon.

We're going to a look at business drivers, what's there and most of those are out of our control that affects our business. And also, we're going to -- Mark will look at the earnings analyzed. I'll go into the performance summary, and Edwin will help me with the explosive business, and then we'll look at what objectives we set ourselves for the 6 months into this year and what is the outlook, really, in the short term for the next 6 months.

So to get started, revenue up, pleasingly, 14%. And that's on the back of a few things. It's really around exchange rates. It's also the effects of the acquisitions that have come in, in the 6 months that we didn't have all in the previous 6 months. So we've seen these first 6 months of full revenue. And the -- last year, we obviously saw 5 months of Schirm and 3 months of Much. And that is what's impacting the up of revenue of 14%. We've also seen foreign export is now 42% and foreign dollar earnings, 42% of our revenue, which is very pleasing. Obviously, there is rand exchange effects in that, but we are starting to see a lot more growth, especially in the mining sector outside of South Africa.

Profit from operations. As reported, the mine is 9%. And that has a couple of underlying effects. Obviously, the restructuring costs that we've just put through, and we'll go into those. And those are in 2 entities, which is really AEL and ImproChem. That restructuring cost was a once-off that has been taken in the first 6 months. We did start the process at the back end of last year, so there was some costs taken in that result. But in these 6 months, ZAR 156 million has been -- has come off the income statement, which is a once-off.

It is also important for me to add that in terms of our SENS announcement, we actually did say that we will recoup these costs in the next 6 months. So if you look at the year-on-year, it should be then normalized in terms of the once-off costs. However, looking forward, we are saying that, that debt restructuring and strategic alignment will probably next year bring us a minimum of ZAR 300 million in terms of the income statement. So we have taken it through 6 months, and we will see the benefit in the next 6 months and obviously, a full benefit in the new year.

EBITDA, up 7% and underlying, 11%. And Mark will have a look at those numbers. HEPS, as per our SENS announcement last week, we did give you a range, 18% to 22%. I could have predicted, you would have guessed it was 20%. And it is 20%, so we did narrow that range. But I think importantly, we did give you indication of what is causing that down in 20%. And [it is mainly] the restructuring costs, IFRS 16, which we are now brought to book and also the PPA adjustments that was not reflected in the first 6 months of the results of last year. Remember, we pulled that in the last 6 months. So you've now seen the progression effect of the PPA through the year, and Mark will give you indication of what he expects that to be for the full year.

And looking at the cash flow for the next 6 months and looking that -- well, usually, our second month really geared up in terms of revenue and profits, we do see the agriculture sector kicking in the second 6 months. And we also have seen in the past that the mining sector also improves volumes in the next 6 months. So I think we are confident enough to say with the restructuring costs and the underlying performance of the group, we were happy to inform you that we will give a dividend increase of 5% and ZAR 0.156 per share.

We also were -- achieved a favorable B-BBEE ratio rating of Level 2, which is very important and -- as Edwin will talk in terms of the mining charter and business with municipalities and government institutions, the importance there of us in terms of our business growth going forward.

Safety. We did see the improvement. One of these days, we are going to be moving and take the acquisitions out of this graph, but it is important for us to monitor in terms of the culture and the behavior of our business, being in explosives and chemicals, what the performance is of the company that we've managed for a few years now. And I'm happy to say that we really are at a global standard of 0.27, and that's improving all the time. We have been able to reduce the total recordable injury rate in our acquisitions, both Schirm and Much. However, we've still got quite a bit of work to do that. This is a priority for our organization in terms of keeping our people safe at work, and it's part of our culture.

So the business drivers, you would have seen these numbers. You've got them in front of you. And obviously, the rand/dollar. So looking at the first 6 month averages of 12 and 30 and obviously compared to 14 and 20. So we did see the effect of that probably though, beneficial to AEL. But what we did see in this economy in these first 6 months of this year, limited growth in the economy, which meant it was very difficult to push prices through. And the chemical company did battle to hold onto margins. And we can -- you will see that as we go through the different segments, it's an effect of obviously prices coming through due to exchange rate if you look 6 months on 6 months. And it's just the economy out there, a lot of suppliers, a lot of stock, limited customers. And therefore, in that environment, a lot of pressure on your pricing and a lot of pressure on your margins.

Okay. Also, pretty good in terms of the rest of Africa in terms of gold. But also, our local gold industry, probably in rand terms probably saw the best rand gold price in a long time. So good for them.

However, that industry, deep-level, underground gold mining is still under pressure. And Edwin will give you some statistics of the reduction in volumes in gold, which is obviously affecting his asset and his initiating systems business.

The other one, which is the PJMs, you've seen some of AngloPlat's results and you've seen the basket. The platinum industry is in a lot better shape in terms of the returns that they're getting relative to this basket of products. We are still hearing about cuts and job losses and of course, that is a concern moving forward in terms of shaft closures, et cetera.

The cobalt, copper and nickel. Central Africa is predominantly where we're benefiting from these. Still pretty robust. Volumes are still intact. We have seen cobalt prices coming off. But obviously, copper and nickel holding. And the business and the volumes looks -- we're still holding onto that in the Central Africa.

The coal and iron ore. Iron ore, you would see some of our customers will be benefiting from these prices. Coal, definitely coming off. Coal volume's obviously key to South African economy relative to power generation in the current environment.

Mining volumes. I think everybody has alerted us that the mining volumes, especially the first 6 months of this year, and those were obviously up to May, we did see volumes coming off. And I think in my outlook, I think we should start to see some turnabout very much at probably at Kumba. I think they announced that there was production problems in the first 6 months. But we are already starting to see volumes in open costs ticking up, and we've seen that effect in June and July. Underground is still very much under pressure, and we will probably see more closures.

Ammonia. And the reason I put this in, it affects our explosive business. It'll -- it -- obviously, if you look at the rand terms of ammonia, it's really a pass-through pricing on to customers. Therefore, you will see a higher rand. But it does have a impact on [Edwin's] margin. So -- because you don't hold onto margin of ammonia going through on to the market. So you will see, if the rand pricing of ammonia comes off, [his] actual percentage margin starts to climb. All right. So that's the effect of that graph there. So dollar price is coming off, but rand price is higher. And that's affecting the selling price.

The other graph, which I put up here, is really the crude oil, around $60. It's definitely off in dollar terms on the first 6 months of last year. So what we would expect is that commodity chemical prices, we've -- also [start] in dollar terms coming off. So -- but we haven't seen those reductions. We've seen probably increases because of the net effect of the rand/dollar. And as I said earlier, pretty difficult to pass on all these prices in the environment that we're currently in.

The SA manufacturing. I must admit, when we looked to this one and we looked at our company, we felt well, our customers are definitely not growing. And I think really, the customers that we are in the -- it's real industrial manufacturing. What is influencing this graph is obviously Food & Beverage volumes in the first half of this year. So that has affected this number. But definitely, I think the struggle that we see in the manufacturing and heavy manufacturing, industrial manufacturing, customers closing and customers reducing production. We definitely saw quite a dismal first 6 months in terms of customers. And then of course, added on to that, you saw the Schirm power outages, which does affect our customers directly. And on the mining side, we had the effect of the Sibanye's strikes in gold. So that had also a negative effect of mining volumes.

From that, as an introduction, I'm going to hand over to Mark now, who's going to really go into that result and the effects of the accounting.

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K. Mark Kathan, AECI Ltd - CFO, Financial Director & Executive Director [2]

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Thanks, Mark. Good morning -- good afternoon, everyone. I'm just going to take you through the results, but a little bit different in this presentation. Let's focus a little bit more -- because there are so many bankers here. Let me focus a little bit more on the cash side of things and to give you some level of comfort as to where we are across our covenants.

So if we just go through this slide. First, I'm going to jump forward, and I'll come back to this slide now just to analyze the headline earnings per share. So Mark spoke about the underlying effect of the headline earnings per share, and what I can tell you is that we reported today ZAR 0.365. And in the report, what we had was a ZAR 0.15 impact of the intangible asset, the PPA prices. And this was largely a churn. And then we had a strategic -- the strategic realignment cost, which was ZAR 0.100 per share. And then we had ZAR 0.12 related to IFRS 16. I'll also unpack the IFRS 16 cost and the impact that, that has had on both our balance sheet and income statement.

So what we are saying is, for the first half of the year, the underlying HEPS number is sitting at about ZAR 4.92 or ZAR 4.92.

So if I go back to this slide, and what you can see is I've demonstrated the ZAR 0.365, and then from a profit from operations, you -- what we can see is the actual rand values that we've taken through. So we took ZAR 156 million through on the strategic realignment costs, and that was split between AEL and ImproChem. And we had about ZAR 104 million at AEL, and Edwin will go through that, and another ZAR 52 million at ImproChem. All of those costs were actually spent just in the period. So there was an additional set of costs that we spent outside that we relate -- that we actually referred to in our SENS announcement at -- in the last quarter of 2018.

The introduction of the PPA. Now last year, this time, while we did have the 2 acquisitions, we did not take into account that PPA because the PPA process had not completed. We only completed that process in October. So on a like-for-like basis, we've added that back although that will be -- it'll wash itself out in the second half of the year. So that was ZAR 23 million or ZAR 0.15. And the IFRS 16 cost impact on profit was actually an income of ZAR 13 million, and I'll explain that to you how it was an income on operating profit but an expense on HEPS, okay? And the underlying profit impact was ZAR 992 million. So if we look at all of that, what we are saying is the underlying HEPS increase was 7.4% and the profitability increase was 8.9%. Okay.

So why are we positioning these slides? I'm not going to go through every line item on this. I'm positioning these slides so that the analysts that are reviewing AECI's results can take this away with them, and they can actually see what has impacted the income statement and the statement of financial position or the balance sheet as some of you may call it.

So just from an income statement point of view, here, you can see the ZAR 13 million that I've spoke about that positively impacted the income statement at a [trading profit] level. But at a lower level, at the finance cost level, that was a negative impact of ZAR 30 million. Okay.

So what is IFRS 16? What are we actually talking about? So IFRS 16 relates to leases, finance leases. It takes all the leases in the business and it converts it. If you had an operating lease before, it's accounted for as a finance lease. So it's really about the right in use of assets that you have on your balance sheet, okay? So if you -- let's say you had a transport contract for 5 years, effectively, what you do is you take the vehicles that are used by the transporter and you bring it on to your balance sheet because that asset is actually used for your business, okay? So you bring that into your property plant and equipment, you bring that into a lease liability and then it gets paid off over a period of time. Okay. So that's IFRS 16 in short and sweet terms. It's very technical. And we're actually doing a special education process for our Board that will go through this. Okay.

So I think what's important to realize -- so the key impacts of IFRS 16 has been the trading profit impact, which was positive in this case and negative on the finance cost line.

Now for ZAR 0.12 HEPS, why am I actually making a big thing out of it? Because it's ZAR 0.12 today. In 6 months' time or in a year's time, that number could be very different as we sign on other contracts. So we are one of the first companies to report on IFRS 16. And we're seeing some of our big mining customers that also report on it, but the impacts were much smaller [in their lives], especially on the balance sheet.

So what I want you to remember as I go -- as Mark and my colleagues go through the accounts is to remember the underlying numbers because all the numbers from now onwards will only refer to the underlying numbers. Okay.

So if we go through the statement of financial position, and this is where the big impact is coming. The big impact is coming on property, plant and equipment. We've increased it by ZAR 573 million. And at the same time, we've also increased the lease liabilities by ZAR 521 million. Now I don't want to go through all the nuts and bolts. For some of you that want to talk to me afterwards, I'll have my accountants around me, and then you can go -- I can give you all the technical who are about IFRS 16. But this is the impact.

So what IFRS 16 does? It impacts you in 3 different areas. So all your profitability ratios will be impacted. So even your asset ratios, equity ratios, that will be impacted. Your gearing ratios are impacted. So the banks will have a challenge with covenants going forward. And hence, what we have to do is we have to look -- we're actually discussing this issue with our bank -- our bankers right now. Okay. So I think what's important to realize is that IFRS 16 will impact us now. It will be there forever, but it will wash through from next year onwards. It'll just become part of the results.

If we just look at our HEPS, our reported -- our underlying HEPS is ZAR 492 million. Our profit from operations, as I said, was 9% up at ZAR 992 million. And if we look at our trading margin, slightly softer. Mark spoke about weaker margins in chemicals, and that has washed through, through the group's margin. Okay. And that's the impact that you're seeing right now.

If you look at RONA, RONA is slightly weaker. Now there are 2 reasons really why RONA is weaker, and it'll be weaker going forward. And the big issue is, we are now starting to take quite a big intangible asset amortization charge coming through. That's as a result of the PPA process. So our RONA targets will have to be shifted and understood what it would be like going forward, okay? The other part for the weakness in the RONA is obviously the performance of the acquisitions. And that, we're going to have to build up to bring that RONA value up. So those are the 2 areas that we have to look at.

The tax rate at 32%. Last year, it was at 34%. Remember, I said to you last year that we did go through some corporate restructuring processes that caused the higher tax rate. We're through with all of that now. The tax rate at 32% is more or less, as I gave you indication in February, that would be the tax rate that we will go forward to. Remember, our tax rate, if you compare it to the corporate tax rate of 28%, it's really impacted by foreign withholding taxes and foreign tax rates that are higher.

Now what's -- why is that? We -- what we normally do is, when we make or when we -- when our businesses deliver cash in our subsidiaries outside South Africa, we decide to repatriate that money back to our central treasuries, okay? So to date, we have repatriated, in dividends, $8 million worth of dividends. And obviously, that was just for the first 6 months of the year. We generally pick up the pace towards the second half of the year.

I think what's important to realize, we did publicize this on our website, is that our credit rating has gone up. It's now an A positive. And we've had extensive discussions with GCR, and I saw there were some articles in the paper about the weaker result with GCR change in rating. They've stuck to that rating. So I think that's important. And this is -- should give the bankers some level of confidence in us as a company.

If we just focus on -- and these are some of that cash slides that I'll go through. We did spend a gross amount of ZAR 358 million in CapEx. ZAR 121 million of that was for expansion CapExes. We spent some money on the continent as Edwin deploys at AEL, and we also spent money in Australia. We did talk about that in the report. And we also spent some money in North Carolina as we completed the SENS CapEx, and Mark refers to that later.

270 -- ZAR 237 million worth of maintenance CapEx, and that was largely for 2 big projects. The one is the No. 9 nitric acid plant that we did a statutory shut down on, and we do that every couple of years on both No. 9 and No. 11. And we also spent -- we're also spending money on the NOx Abatement CapExes, okay? And we have to have those CapExes ready. As we've picked up the pace, that will have to be ready by April 2020.

The net working capital. We're happy to say that net working capital has improved on a ratio basis. Yes. So our turnover has gone up therefore, the cash outflow has also increased. But that ratio has improved from last year. Last year was affected by the acquisitions. But if I went to the year before that, we were at 18.5%. So that's been a general improvement as to how we're managing working capital.

If we just look at date, our gearing is now sitting at about -- if you strip out the IFRS 16 impact, that's sitting at 47%. And the cash interest cover, a big part of our covenants, and I'll talk about that in my next slide, is sitting at 6x. What we need to understand from a gearing point of view is that if I were to give you a forecast as to where that would be, we're targeting gearing to be anything between 30% and 35% towards the end of last year. That's exactly the amount that -- I'm sorry, this year, sorry, 2019. I did say that in February that gearing towards end of this year would be at that level. So that's what we're working towards. That's the gear level that we're working.

Mark did speak about the dividends. I think it's important to remember that we did have a cover of 2.4x. We don't have a specific dividend policy in place. I think when the Board decides on dividends, it draws its view on as to what we're going to do in the next 6 to 12 months. Are we going to have the cash? And the confidence behind the Board in the business is delivering the savings for the next 6 months and also the annualized savings that we've put out, so the ZAR 300 million. We're feeling confident that we will at least deliver that going forward. So hence, the dividend's in place.

If we just try and understand how we utilize our cash. So we generated about ZAR 1.5 billion. And I just want to say this upfront, that ZAR 1.5 billion did include that ZAR 156 million cash outflow that we spent in that number. So -- and we also typically generate a lower level of cash in the first half of the year. So last year, we delivered ZAR 2 billion worth of cash, ZAR 1.8 billion last year was delivered in the second half of the year. So we are projecting to deliver a similar, if not a better, amount of cash in the second half of the year, okay? That's important to remember.

We did spend on interest. Tax paid, that's really based on the provisional tax calculations where we do a forecast on income. So it is a bit higher. And we've also now included the Much provisional tax payments in there that's why the -- you'll see the tax payment has moved up a little bit.

Dividends, we pay a higher dividend. That's the dividend that we paid in the second half of last year. And then there's the cash outflow and working capital, very much in line with last year, okay? And remember, last year, lower turnover. This year, we've got a higher turnover. So we're trying to control our cash out -- our working capital, okay?

If we look at net CapEx, that's also in line with a very disciplined approach. We did say that capital, we'll control that within depreciation and amortization. We've maintained that, and we'll continue doing that for the rest of this year and if we look out probably for the next 12 months.

Our debt now is sitting at about ZAR 4.8 billion. Last year, it was sitting at ZAR 4.2 billion. And what we do have on the balance sheet is ZAR 5.3 billion, and the other ZAR 538 million relates to the lease liabilities.

Coming back to the covenants, and this is something that our Board really focuses on, okay? So they would have a stress test, the covenants. Look at what the various roles could be around working capital. And if our profits dropped, et cetera, we look at downturns in mining cycles, how that will impact. So if we look at our covenants, these are the 3 covenants as we have it. We've got the net debt to EBITDA. We have to be less than 2.5, we're sitting at 1.8. The EBITDA to financing cost, we've [would have it be greater than] 3. We've doubled that to 6.3. And the consolidated tangible net worth has to be greater than ZAR 2.5 billion, we're at ZAR 11.8 billion. So we are very comfortable with these covenants right now. And we've run forecast and we're comfortable going forward on those. I did say too that we are engaging with bankers around IFRS 16.

This is our debt profile and this is the payment profile. I have presented this to you before, and I'll continue presenting this to you as we go on. Just that if you want to know what the differences are, remember, we do have foreign debt, so that gets translated at different rates at any point in time.

Okay. I'd like to call on Mark who'll take us through -- start the segment reporting.

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [3]

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Thank you, Mark.

Okay. So those that are reporting segments that we currently have. You will know there's an asset that is held for sale that we've -- and that is obviously the Crest business, which is a JV. So we're not consolidated in terms of revenue or EBIT or EBITDA. So that's -- comes further down. And we are in very close to -- or very close to finalizing that negotiation. I'm not saying [who will and I'm not saying what price it]. And hopefully in the next week, we'll be able to come to the market and announce that transaction. So we are well down the line with that. And as you can see, part of the reasons is, it is a 50-50. No one can consolidate and no one can really take management control. And I think going forward, part of our strategy, we need to take management control so that we can -- it can actually align with our strategy. So those are some of the reasons that we -- going forward, you will find we really want to have control of the entities that we manage or that is in our portfolio.

It's quite a lot of information. And I think what we are trying to do here, we've taken the IFRS 16 out. So you would obviously see a reduction in trading profit from that, as Mark has alluded to. And then you've seen the PPA, which would affect mainly the plant and animal health sector and also the chemical sector with Schirm and Much, respectively. Of course, a lot of the PPA is definitely in the agriculture sector.

The other area, what you need to look out for is obviously the restructuring or strategic restructuring costs. They are in the mining pillar and also in the water pillar. So there, the ZAR 156 million is obviously split as ZAR 104 million into mining and ZAR 52 million into the water side. So that's how it's all broken down. So underlying, in terms of our mining, pretty good result in terms of 13.5% up. And [chemical and] obviously, water also gave a very good result in the first 6 months of this year. Agri, yes, Mark will talk about Schirm. But remember, the agri also kicks in the second half of this year. And that will have an impact on the graphs that I will show you next.

Food & Beverage, still, it's a small pillar. We are -- obviously continuing reevaluating that pillar. We're trying to grow it. And one of the ways of growing it is by acquisitions. And of course, we're not really finding anything right now that -- obviously, when we take it over, it's still going to give us the same profitability because if the market is fragmented, a lot of family-owned businesses. And as soon as we walk in, usually the cost to serve customers in that (inaudible) company actually ends up being more. And that's because we come in, in terms of wages and obviously medical aids and all those good things that a group company like us give that we find that they don't have. So we're really battling to grow this. We are reevaluating strategy all the time around this. It's an interesting sector. And we would like to grow it, but we are reevaluating that strategy.

Chemicals obviously includes Much. And you've seen very much a sort of stable no -- not really down, but also not growing at the way we'd like. You've seen the net effect of Much that is probably above expectations. But you've seen the negative effect of the -- the balance of the chemical companies that are really battling this economy around margins and obviously profits. And that gives you an idea of how it's split up. What it's really saying is our largest contributors is still our mining and our mining pillar. And obviously, you've seen the growth of the chemical pillar and the -- we have Much coming in there. And what you should see going through the rest -- remainder of the year is that agri green gets also bigger, okay? Also, as the volumes go into agri, the margins and profitability also improve. So we do expect to see a better second half in terms of the agri.

Mining Solutions, Edwin is here to do that one. He's going to cover the whole of Mining Solutions, so that includes the chemical side and also the explosives side, which is now being consolidated.

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Edwin E. Ludick, AECI Ltd - MD of AEL [4]

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Thank you, Mark. Good afternoon, everybody.

So if we look at the Mining Solutions, to start off by -- I just want to first show again where our revenue comes from by mineral. And before I touch on it, I just want to show you that Mark spoke about the strong commodity prices overall and specifically that gold have the strongest rand value in a long, long time. The higher ammonia price, that was touched on. And just to quickly explain again that the ammonia prices are price pull-through, [but a] margin that we have. We have a rand value margin that pulls through. So you don't lose profit. You lose margin or you gain margin, depending on what happens. You don't lose absolute profit. So that's how it works there.

Volume decline continues in the SA mining sector, and I'll talk about some of the decline there. And then the benefit of the portfolio and geographic diversity, we'll see in the discussion around the explosives specifically. But if you look at our split by mineral, you can see how nicely it's split now, and we've seen the growth in gold. But you've got 22, 22, 20, 18 and these together, 18. So it's a really good split in what we do. So we've got nice diversity there. But we also, by going more and more outside of South Africa, have good diversity in several countries outside of South Africa. And I'll jump straight to we are now generating -- 59% of our revenue, we generate outside of South Africa. So I can't go into the Mining Solutions discussion without first saying to the Mining Solutions team, well done on a good safety performance. And our business safety is high on the agenda. And this year, we've done very well so far.

So if we look at the revenue, it's up 11%. So just to remind you again on the ammonia, so that has an effect on the revenue up. So if you look Mark's ammonia graph, it was about 15%, 16% up in rand terms. We -- in ammonia terms, it's about 40% of the AEL sales. So there, it's about a 6%. So if you look at the total [most probably] 3% effect is, I would guess, ammonia in that upliftment in our turnover. The rest is dollar and just higher revenue sales because the -- and you'll see later the -- some of the areas didn't support us from a volume point of view.

If we look at the profit, the profit relative to the revenue has really gone up well. And that's mainly due to good cost control. We see benefit from ForEx because if you have 59% in hard currency dollars mainly, you will see the benefit if the dollar strengthens relative to the rand. And then there was some customer mix benefit where we pulled back on some customers' sales where the margins were low, and we exchanged it for higher-margin customers, and I'll talk a little bit about that later.

Again on the CapEx spend, on the air emission abatement and environmental compliance projects. In line with our stated values in the group of going green and also stated value of being responsible, we have taken a decision that we will be compliant in 2020. So we are spending money on that. And the compliance process is underway. So very happy with that.

We have renewed our effort on working capital, and I can categorically state to you, every working capital we use in -- the increased working capital as a result of us going places, we get a very positive EVA return on our working capital. So we're doing very well. And you will see our working capital at the moment in terms of percentage is a lot better than last year.

I can't talk about our business without reminding us all that there is always social, political and currency challenges in some of the countries we do. We've seen Burkina Faso, we've seen in the DRC some political and social issues. We've seen currency issues in Zimbabwe. And before anybody asks me, our model to Zimbabwe is a model where we do mining sales out of South Africa. And we have a small service element in Zimbabwe to service our customers. So we're not at the risk like some of the other businesses who are selling into Zimbabwe. We've seen currency challenges also in Indonesia. So yes, we have our challenges in the business, but we manage the risk and we understand it.

If we look at explosives specifically, the underlying profit for explosives again, fantastic. And we've seen in Mining Solutions and explosives, we've had now for 7 reporting periods, really good performance. The overall bulk volumes are down by 3%. We've seen the South African mining activity is down for South Africa, but our activity in South Africa is down more than the South African activity, which is 7.6%, which is mainly -- in the past, I mentioned in Namibia, we record within the South Africa area. So we've reduced Namibia sales. And that's part of the profit mix I've spoken about, and we've also had nothing to Optimum. All of us understand the Optimum situation. And it was slightly down year-on-year to the areas of [secession]. So that's basically where we see that.

The rest of Africa, we've again seen a really good jump of 14.7%. And that is the new contracts that's coming in place. And as reported in the last 2 reporting periods about those new contracts, they are really delivering and they're delivering to expectation. So we see a nice growth there, and it's better quality growth in those areas.

Asia Pacific, down 7.7%. And that's mainly down as a result of the Australia opportunistic sales that we had. Now I've got these pictures of a MPU, mobile production unit. In South Africa, we refer to them as mobile manufacturing unit. And then this is a dewatering unit. Now we decided to spend capital and now put capital on the ground and then lease them out to our customers. In Australia, we get positive EVA return on capital that they take, but in return, also what we get is they now have to take the emulsion from us. So what we've seen is we don't have now pro-opportunistic sales we make really low margin on. We now have emulsion sales with a contract in place at a lot higher margin. So the mix in Australia has changed totally. Although Australia is down volume-wise quite a lot, profit-wise, they're not. So we're slowly getting the Australian approach done, and we have planned 2 more units like this to go in next year.

On the initiating systems, however, we're down 8.2%. But we're all aware of the gold strike that we had. And I've looked at June's -- after the gold strike, subsequently, we've increased. We're better than the June increase when it was above 10% better than what I saw for the rest of the year. So I am predicting we should most probably be catching up and maybe be flat for the year. Hopefully, that will then come through for us.

The strategic alignment project for the narrow reef business was executed. I mentioned it in last year's report that we're going to look at it. That was executed. Mark mentioned that we spent ZAR 104 million on the project, and I'll talk about it later.

Tender process for some of our customers, they're on the go. We don't know when the adjudications for those tenders will be but we are always [in tenders] and we will -- we believe we participate strong because we delivered a good service and we delivered a good package to our customers. So I can't report at the moment on any of the tender prices.

Dinacon acquisition, I reported the Dinacon acquisition that we've done. We haven't been successful in bringing it in. We were hoping to bring it in sooner. But our investments sits in an escrow account. So I've not taken any shareholder money yet and given it to anybody, it's still safely with us. So it's sitting in an escrow account.

We have AECI Latam, and below AECI Latam, we had to register 2 companies. Those companies are registered and that's where the explosive business will sit. And once that's registered, then you can start with the registrations, the different licenses. And the first license is your explosive license and the rest follows. And that way, we are in the process of those 8 licenses and it's taking longer than expected.

If we look at the explosives strategy to realign, and that was mainly, as Mark mentioned, in AEL although I mentioned later the Mining Solutions, where we're looking at the back office. But we would have been irresponsible as an executive of AEL if we did not address this. The South African business was not healthy. We have done a lot better outside of South Africa. South Africa's actually damaging us.

So we had to address the South African business and we focused on the problem areas and we engaged a company to help us with this. And the objective was to make sure that we are sustainable in South Africa long term and that we align ourselves also with the Mining Charter, and I'll speak to you later about that, because we are proudly a South African business and we would like to continue in South Africa and support our local customers.

So we went through a phase of get healthy, get strong as the next phase and get business, run through all phases during this process. But during the get healthy phase, that's where we spent the money. So we've reduced the organization to a leaner organization. We've got fewer executives in the business, fewer management in the business. We've streamlined our manufacturing complement of people in the business.

We've had an once-off engagement with our customers who really entertained us well. I think it's because those very customers, they understand the problem. Because in South Africa alone, we've seen in the last 5 years, 22 shaft closures, which is more than 50 million detonators that you lose out of the market. So I think our customers understand when you have problem areas, and this is a real problem area for us, so they've supported us well.

We also looked at higher plant utilization. We have plants available in our business which is not running at full capacity and we said, "Why do we buy product in if we're not running at full capacity? Let's go and do our own products." So we've reduced in buying in products and so also that's a big benefit to us in South Africa.

We looked at our distribution channels and we put a fit-for-purpose logistics and distribution in place. So we've reduced in trucks, we've reduced in magazines and so on. So we've done all of that.

And then we said, "Well, we also need to look at these Mining Solutions that we now put together." Everybody would be at the same head office together. But we need to put everybody together on set, which will most probably be done by the end of the first quarter next year. Only then I can do a proper back office restructuring of Mining Solutions because then we're all on the same platform.

So the project payback, as we said, will be in this year. We've got an internal target that is done in November. So we're challenging ourselves for that. And the annualized payback on this or the annualized profit we'll see is ZAR 200 million on this.

If we go to the Chemicals section of the business, the -- there was a good market improvement in specialty collectors. The specialty collectors are products that we really sell at better margins but they show a huge improvement for the customers while -- when they utilize it. So it's a benefit for both parties.

The flocculants also increased. Remember, last time, we said we're going to go direct to market with the flocculants. We've done that. We've seen good sales to Ghana and Zambia. And we also see in Madagascar, the Ambatovy sales returning. So we've really seen a good jump in sales there.

Local sales of liquid xanthate, that's reduced because of a little reduction from certain customers on liquid xanthate. But we also had the challenge in the first quarter of the electricity downtimes and so on. And those plants, processing plants, are affected by electricity downtime. So unfortunately, that also hampered our liquid xanthate sales.

But on the positive side, we have done this investment and these are some of the pellets we see here. Our xanthate expansion project, which I reported on last time, that enabled higher sales of solid xanthate and the plant is now running currently at 80% of capacity and our demand from our customers are actually higher than what we run it. So that's a positive thing for us.

And we are looking at debottlenecking this plant. I've seen it intermittently running at capacity, and sometimes higher capacity. But we can't control it there, so we're busy working on it to get better capacity out of it. So we are very positive about that project that we've done.

The surfactant business itself also had a very good start to the year, so from a profit point of view they've really contributed also to our profits. So Chemicals as a whole has done very well and Mining Solutions as a whole has really performed well.

I mentioned previously, we are proudly a South African business. So if you're proudly a South African business, if there's a Mining Charter that comes out, you do what the Mining Charter said. So we said, what is the target of the Mining Charter? Level 4 contributor. We're a level 2 contributor. This is our certificate.

If you look at historically, disadvantaged people or persons, the ownership, they want 51%. We're sitting at 53.95%. Look at local content of your business, 60%. We are in the process of verification and we believe we are more than 60%. So from the support to the mines from a Mining Charter point of view, we think as AECI in Mining Solutions business, we will do very well.

Thank you very much. That's the Mining Solutions section. I'll ask Mark Kathan to come and present plants.

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K. Mark Kathan, AECI Ltd - CFO, Financial Director & Executive Director [5]

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Thanks, Edwin.

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [6]

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At this time, we've changed it up.

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K. Mark Kathan, AECI Ltd - CFO, Financial Director & Executive Director [7]

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Yes. We've changed it a little bit, so we're going to go into the Plant & Animal Health and then Mark will do the other segments later. So on the Plant & Animal Health, there are 2 businesses in Plant & Animal Health, we include Nulandis and Schirm.

So if we just take a look at the revenue, the revenue is up 16%. But the biggest increase of that revenue was really coming from Schirm being reported for a full 6 months versus 5 months last year.

The Schirm numbers also had an impact because for the underlying number, what we are saying is, is that the underlying profits are actually up 3.5% to ZAR 119 million, but that's after adding back the intangible asset write-off, which was the PPA that I spoke about earlier.

Okay. So just setting the platform, what we are seeing is that underlying profits up 3.5%. And if we focus on Nulandis, we have seen quite a significant profit increase from last year.

Now if you recall last year, Nulandis' results were really drought impacted. This year, we've had some rain in the first quarter of the year. The summer rains were late, so that really improved the profitability.

The other part was that we have started -- as a stated strategy, we've started to manufacturer more products within Nulandis' own facilities. And when you make your own products, you're able to recover more costs. And hence, the profitability and margin start improving.

What was also important is that Nulandis, the agent population has also increased. So they're dealing with a lot more agents. So we're now all the way up to almost 200 agents, so that had a good 10% increase from the last reporting period to now, to where we are.

We've been speaking about innovation and that the innovation program, we spoke about it the last time, that we have partnered with SupPlant. And we have now started rolling out SupPlant, the technology, which is really technology that helps sustainable farming. And in that sustainable farming, it's really conserving water in that process. So we've already rolled it out to 2 farms. We're about -- next month, we'll roll it out to a further 4 farms. And the year after, our target is -- we've identified, 14 farms. So that we'll roll this out there. Okay, so that's Nulandis.

If I look at Schirm, Schirm's results were really impacted by lower demand for fungicides and herbicides. And what I would like to remind you, if you look at Nulandis and Schirm, Schirm makes most of its cash or earnings in the first half of the year, Nulandis makes its earnings in the second half of the year. Okay.

So we had also experienced higher costs in Schirm. And that what's really -- it's a similar issue that we had, which was under-recovery of the new synthesis plant that's been in place. And there, we were waiting for the registration of a product from a key customer. I'm glad to say that, that registration has now been approved.

An equivalence report has come out of the EU authority to the customer. And now we certainly are -- we're certainly starting to register or the customer is certainly starting to register that product in 20 different EU countries. In the past, I'd say that would take 18 months. We've now looked at the report, at a plan, and we believe that, that will all be completed by the first quarter next year. So we should really start seeing recovery of those costs during the latter part of this year.

Good progress has been made at Schirm in shifting from fine chemicals to -- we've signed some -- from fine chemicals to agriculture -- from agricultural chemicals to fine chemicals. And we have already signed some pretty big contracts that will be effective next year.

And from Schirm U.S.A., that's had a solid performance for the first 6 months and there's been good cash generation that's come out of it.

I'd like to call Mark on, who'll take us through the Water and the other pillars.

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [8]

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Okay. So in terms of water, a key pillar for us, lots of opportunity. The underlying result, 26% up. You would be -- we did report a bad debt in the second half of last year. So you can work out -- we are starting to see some of that debt coming in these numbers. Not a lot. I think there's still $1.3 million owed to us that was [fully provided] last year. So there is a little bit coming back, but really the performance, the underlying performance is very credible. Working capital coming nicely in control at 18.4%. And the margin increasing to 14.3%.

This type of business, a high-service business, you'd need to get to that 15%. And there's no reason if you do your numbers and you look at how -- we obviously spent 52 and we're going to pull that, you can obviously work out where we're expecting this business to perform at this year.

We've seen volume growth definitely into the rest of the continent. Definitely on the Water, in terms of drinking water and wastewater, and we see that as a great growth opportunity not just for Africa or the rest of Africa but for our own country. And I'll talk a little bit about that in terms my outlook for the remainder of the year. Good performance in South Africa and we've gained market share. So a pretty good story with this business.

They're also looking -- and I'm looking in terms of their project, to get ZAR 100 million back next year annualized. So it's going in the right direction. Exactly -- and I don't really want to repeat these, but exactly as Edwin has spoken about, the get healthy, get strong, get business is exactly the [similar consultants] that we use in this business, all right? And we went through exactly the same process, looking at our supply chain, looking at our [structures], looking at our customers, how do we serve them best and where is our cost?

But this process, where both the companies are on right now, is at get healthy. Next -- in the next 6 months, they're really going to be looking to get strong, and the year after that is really where they can grow their business a lot bigger. And that's the process that we're going to take.

It's not just a once-off -- yes, there's a once-off hitting costs, but the culture that we're trying to create in these companies, and we'll probably roll it out to the rest of the group, is to make sure we're continually looking on bettering ourselves and making sure our structures are correct for the markets and the areas that we serve. So this is quite a big strategy that we've put out there. And when I talk on the outlook about portfolio management, this is exactly what we're talking about.

In terms of Food & Beverage, I don't allude to it but not -- we have though, but probably is that we have been affected by exports into Zimbabwe. The margins are under pressure. We don't have some ForEx in the first half of last year, which didn't come out, but -- and it's such a small pillar, it has effects in terms of the profitability. And they were unrealized throughout the year.

So that if you -- year-on-year, the results as we compare them is -- and I know that everybody's questioning this and we're all questioning and looking at the strategy all the time because revenue is there, yes, but the profit from operations and the margin for this quality of business we are not quite getting there. So this is actually getting all management's attention right now.

If we go into the chemicals, obviously, you've got Much Asphalt in here. Obviously, per market conditions, it's not helping us on the balance of our chemical companies. And you can see -- what we see in those companies, volumes are pretty flat overall. We are -- and it's very hard to -- you've got a lot of product mix going on, different customers. So you would see asset sales and sulfur sales going up. Last year, you're trying to compare high-volume product movements relative to specialties as well. So volume is pretty flat, revenue was a little bit up, however, trading profit down by 11%.

So what has actually happened here, the Much business is obviously higher than expectations. If you look at what's the news on the infrastructure spend better -- much better than last year. We are seeing improvements in volumes in the Western Cape, also in KwaZulu-Natal. And in -- probably in the last month or so as build-up to half year, we started to see how things have been coming through.

SANRAL obviously is the one we're watching very closely. They're talking about lots of big contracts. However, we've not seen the momentum of that coming through yet. I expect that to start coming through the beginning of next year and the models and how we operated it. So there's -- this business has done well relative to the circumstances, above our expectation, and actually has grown market share. And that's pretty key for us in terms of the quality of the business.

Also Much, most importantly, has gotten actually Level 1 B-BBEE contributor, which actually puts them right in line to be able to supply, especially in terms of DOT and the Metros.

Trading working capital, 12.9%. This business generates cash, and of course that's why Mark has alluded to what his target is for the remainder of the year, is that we expect to continue to generate the cash. And there's still a lot of focus on that.

If I'm going back to where we ended off last year, we did set ourselves some objectives. And I think it's important for me to close off in the last few slides of where we see ourselves on those objectives.

We did look at the Zero Harm. We have made big improvements in our acquisitions and our underlying business is pretty -- is doing very well. I'm actually pleased about the performance in safety. It is key and part of the values within our business to have the safety culture because we deal with dangerous chemicals and explosives.

We have seen the delivery and -- of Much. I think it's above expectations, in our minds, where we set ourselves the targets. We've still got some work to do at Schirm, and Mark has given you feedback on the progress of those registrations. So we've definitely got customers that's given us feedback in that and it's definitely on the fast track. So I see that we'll continue to improve throughout the year and definitely carry the momentum into the new year.

The Dinacon, Edwin has -- but I think we really set ourselves a goal, by the end of this year those registrations need to be transferred and we need to be operating that entity. We are getting calls from customers in that Brazilian market all the time. The mining customers that we have here want us to actually do blasts in Brazil. So we are waiting for those registrations and I want to really fast track, Edwin.

The other one is obviously the CapEx. On the explosives one, we've got -- yes, the assets are old, however, they are well maintained. And we are continuing to put CapEx into upgrading and making sure the statutory shuts are done. That we are not compromising on.

So the plants are actually very good condition that we have at Modderfontein, but most importantly, that we will be compliant by the new 2020 laws in terms of emissions, which is key. You know that some of the other companies out there are getting a lot of stress and strain around emissions and CO2 taxes, et cetera. Fortunately, the CO2 tax does not have a material impact on our results, and projects like this actually enhances the reduction.

Mining chemicals, xanthate you've heard about. SANS, we were hoping for some pictures, [Mark,] but we'll get them to you, is that the plant has started up and is actually starting to supply to customers. So we do see that SANS business is actually part of the Chemicals. So we should see a little bit of an uptick in terms of Chemical results due to the SANS project.

The execution of the AEL and the ImproChem strategic align projects, I think we can give them a big tick and I'm happy with the progress there.

And key for us still is cash management. We are vigilant in [amount] of how we collect. Working capital is top of mind and so is CapEx. So that will continue to be focus for us the next 6 months as well.

If I looked at the different segments, and I've really tried to condense this to say, "Well, where do we think things are going to end up in the next 6 months?" I think you could hear from Edwin, who is sharing far more than he should have because he's so upbeat about his business, but he's -- I think the Mining Solutions pillar has got some real wind behind them right now, okay? And I think -- well, I know, Edwin, that they will give us a decent result in the next 6 months. There's no reason why not. Albeit, you've got to watch out for that rand-dollar exchange rate that could affect, all right, so I've just put in there.

Water & Process, a lot more positive. Government have announced the proposed ZAR 90 billion a year spend in water infrastructure and chemicals. Now that fits our space. So we're developing a strategy of how best can we assist government in solving this problem. Yes, they're ZAR 90 billion. I think they've announced that they are probably ZAR 30 billion short and they are looking for the private sector to co-invest. So I think there's some great opportunities in terms of South African water infrastructure for AECI. So we're going to be leveraging that.

Plant & Animal Health. Nulandis, yes, I believe it's still raining in the Western Cape. I think that gives us -- and the positivity of that, you remember the Western Cape is high valued in terms of crop protection, so we need that agricultural sector to start kicking back for us. So we don't think there's a reason why it shouldn't uplift, and farmers in the region are pretty upbeat right now. So I think it's a positive.

Schirm, registrations, we'll start seeing that volume start kicking up towards probably the last month or so of this year, but definitely, we will catch it in the first quarter of next year.

And Food & Beverage, still, obviously, retail sector under pressure. There is some volume increase. We have put the new warehouse in. We've also gained favorable supply contracts with a large customer. So we're expecting volumes to -- and of course, [futuristically], we have this warehousing facility that will enable us to grow. So we do see some uplift in volumes there.

Chemicals, I'm pretty cautious because it relies on GDP, it does rely on also the manufacturing sector. We don't see that uplifting in the next 6 months. And I think it's -- chemical companies will be very much -- we need to look at our cost base, we need to look how we come in with new innovation because I don't think the economy is going to assist us at all in this area.

But having said that, infrastructure, it does look like the spend -- there is money still to come through. And I think we'll be up on our expectation and budget for the Much Asphalt business.

Overall, historically, AECI is very much second half-loaded. Between 45% to 40% first, and then obviously the balance depending on the product mixes of the different sectors. But definitely, agri is stronger and also we see mining is really stronger in terms of volumes in the second half. So we need to leverage that.

Cash management is ongoing. And of course, in terms of all that we've discussed in our portfolio management is going to be key for us for the remainder of this year.

So with that, thank you. Can we now have questions?

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Questions and Answers

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [1]

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(foreign language) And my team is here, so if I can't answer the question, I'll divert it to the person who can.

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Steph Erasmus, Avior Capital Markets (Pty) Ltd. - Research Analyst [2]

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Mark, Steph Erasmus from Avior Capital. Just if I could -- I don't know if I missed it, but haven't seen numbers disclosed from Schirm and Much Asphalt in terms of their contribution to revenue and operating profits. And then just in terms of Much Asphalt, you say that it's meeting expectations. Can you give us an indication of sort of return on assets, and not return on net assets but return on assets on that business? And then lastly, perhaps if you could try and give us an indication of your country exposure in your mining and agri divisions. Because I think that's -- obviously, one of the things you alluded to is that there is a good geographic diversity, but can you give us an indication of where that lies, please?

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K. Mark Kathan, AECI Ltd - CFO, Financial Director & Executive Director [3]

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Yes, Steph, if I can just -- we did not present the acquisitions. I do have another slide for that which I can give you. But if we had to go through the accretiveness of Much Asphalt and Schirm in aggregate, those were really breakeven on HEPS accretiveness to the assets -- I mean, to the results. That's -- obviously, you're taking profits after interest and tax and your base -- your answer is [about] HEPS accretive -- I mean, breakeven. Okay? So if you want to know about the return on Much Asphalt, is while we -- while the returns are ahead of our expectations and also ahead of last year, the returns on net assets, and that's the only one that I look at, is in the region of about 11% right now. Okay?

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [4]

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Okay. And maybe, [Dean], why don't you -- I think there was a question about the water treatment business and geographic.

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Steph Erasmus, Avior Capital Markets (Pty) Ltd. - Research Analyst [5]

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Geographic in terms of agri and mining.

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [6]

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Okay. All right. So in terms of Agri, majority of that is South African. Very little in terms of Africa, probably about 10%. If we look at mining, [Edwin,] there is a growth there. I think maybe what you need to do is just put it in terms of South Africa, the balance of Africa, and then obviously Asia is probably the other segment.

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Edwin E. Ludick, AECI Ltd - MD of AEL [7]

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So as we report -- we report in South Africa, the rest of Africa and in Asia Pacific. But if you want to be more specific, South Africa is still big. Then you've got Central Africa, big, which includes Zambia and DRC. And now, West Africa is really growing big for us, which includes Burkina Faso, Senegal, Mali, countries like that. And then sort of a nice split between Indonesia and Australia happening at the moment, with Australia growing more on quality business. I hope that answers the question.

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [8]

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Yes. But I think if you look at -- we have disclosed the mining segment is 59% of the total revenue is outside of South Africa. So that sort of gives you an idea of which, I would say, of the 60% outside, 40% is probably the balance of Africa and the remaining 20% is Asia/Australia. That gives you some guidance.

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Steph Erasmus, Avior Capital Markets (Pty) Ltd. - Research Analyst [9]

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Within Africa, are there any countries that you have exposure to -- you have more than 10% of that 40%?

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [10]

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I would...

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K. Mark Kathan, AECI Ltd - CFO, Financial Director & Executive Director [11]

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No, we don't.

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [12]

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No. It's quite diversified amongst a number of countries [that are above]...

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Edwin E. Ludick, AECI Ltd - MD of AEL [13]

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It's more -- Steph, it's more African regions. So if you look at West Africa, Central Africa, those you'd -- that would go above 10%. Yes.

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [14]

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Yes.

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Steph Erasmus, Avior Capital Markets (Pty) Ltd. - Research Analyst [15]

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But if we look at [it more]?

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [16]

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No.

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K. Mark Kathan, AECI Ltd - CFO, Financial Director & Executive Director [17]

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No.

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [18]

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Okay. Any other questions?

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Unidentified Company Representative, [19]

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In the meantime, while we don't have questions from the venue, are there any questions on the conference call?

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Operator [20]

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We have a question from Gerhard Engelbrecht of Macquarie.

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Gerhard G. Engelbrecht, Macquarie Research - Head of Resources [21]

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I'm just wondering, Mark, you're saying that Much is delivering on your targets. I'm just wondering, given the current environment, have you adjusted your expectations for much lower since you've actually made the acquisition? Is Much delivering what you expected it to deliver when you made acquisition, I guess that's the first question.

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K. Mark Kathan, AECI Ltd - CFO, Financial Director & Executive Director [22]

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Can I answer that? We have not amended the target. And I just want to correct you, we did not say that Much is delivering to expectation, it's ahead of -- and when I talk about expectation, it's the expectations that we had in our budget. So it's delivering ahead of that. But the overall expectation that we are actually is the investment return that when we bought the business. It's not delivering to that return as yet.

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Gerhard G. Engelbrecht, Macquarie Research - Head of Resources [23]

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Okay. Okay. Exactly. That's -- so that answers that question. Do you have any kind of a volume kind of number in Much? Can you say whether this business had been selling more or less than the 6 months -- I think the prior -- the same 6 months in prior year?

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [24]

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Do you want to take it, Dean?

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K. Mark Kathan, AECI Ltd - CFO, Financial Director & Executive Director [25]

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Dean, you answer it.

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Dean J. Mulqueeny, AECI Ltd - Chemicals Executive [26]

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Dean Mulqueeny. Just to answer that, when we compare the 6 months volumes, 2019 versus '18, we are about 5% to 6% up.

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Gerhard G. Engelbrecht, Macquarie Research - Head of Resources [27]

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Okay. So that speaks to the market share gains.

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Dean J. Mulqueeny, AECI Ltd - Chemicals Executive [28]

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Yes.

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Gerhard G. Engelbrecht, Macquarie Research - Head of Resources [29]

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And then maybe just to clarify, just maybe on the housekeeping side. The covenants -- the debt covenants that you show, that you spoke about, I presume those are external debt covenants not self-imposed covenants. Am I correct in that?

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K. Mark Kathan, AECI Ltd - CFO, Financial Director & Executive Director [30]

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You're correct, Gerhard.

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Operator [31]

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There are no further questions in the conference.

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Unidentified Company Representative, [32]

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We do have questions that have come through from the webcast. And the first one comes from [Charl Gous at Bateleur Capital]. And he asks, "For FY '18, the PPA impact on HEPS was ZAR 0.57 per share. What is the expected FY '19 impact?

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K. Mark Kathan, AECI Ltd - CFO, Financial Director & Executive Director [33]

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About...

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Unidentified Company Representative, [34]

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It's lower.

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K. Mark Kathan, AECI Ltd - CFO, Financial Director & Executive Director [35]

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It's about ZAR 0.28.

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Unidentified Company Representative, [36]

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The second question from Warren Riley also from [Bateleur Capital.] And he asks, "What is Schirm's exposure to Bayer's glysophate -- sorry, glyphosate issues in terms of revenue and potential litigation?"

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K. Mark Kathan, AECI Ltd - CFO, Financial Director & Executive Director [37]

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Okay. So I can answer that in 2 parts. There's a limited exposure to glyphosate. We do manufacture glyphosate-type products in the U.S. And we have no -- we've referred this to a legal counsel in the U.S., we have no exposure on that.

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Unidentified Company Representative, [38]

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The last question from the webcast is from Franscois Mulock-Houwer at Rezco Collective Investments. And he asks, "In terms of Schirm, do you think there is a structural shift away from chemical herbicides and fungicides, especially in Europe towards bioproducts? How much of Schirm's revenue is glyphosate, if any?

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K. Mark Kathan, AECI Ltd - CFO, Financial Director & Executive Director [39]

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Yes. So there's no big shift to greener products that's out there. That will come over time, so I'm not saying it will never come. But right now, I think the European agriculture has not replaced any chemicals in that process and our exposure to glyphosate-type products is below 1%.

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [40]

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Yes. And maybe just for me to clarify on the herbicides and fungicides, the reduction is mainly around the climate change and the drought in Europe. Because if it rains more, you actually need -- the more need for fungicides and herbicides. So in a drought condition, you use less of those products. It's exactly similar to what we saw in the Western Cape. That condition, it actually reduces that market considerably.

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Unidentified Company Representative, [41]

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We have no further questions on the webcast.

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [42]

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Okay. Any more questions from the floor?

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Unidentified Analyst, [43]

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Yes, please. Just 3 questions, please. One is just the mining chemicals, if you can maybe disclose the contribution to the total Mining Solutions business. And the second one is just the cost to be compliant of the Air Quality Act, so how much you have to spend further. And then the last one is just around the outlet for Mining Solutions, which you seemed to have painted quite a positive picture. You've obviously undergone quite a bit of restructuring on the back of the underground mining space and the exposure is about 40-odd percent on your revenue basis within Mining Solutions with the graph on Page 14.

So if you take that positive outlook into account, I mean, can you give us an indication of maybe local versus African offshore in terms of growth, just to kind of tie together quite a big portion of your revenue that has been or is under pressure, and consequently the restructuring was in the back of that. So I'm just trying to pull 2 two things together, if you can maybe help with that, please.[

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [44]

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]

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Edwin E. Ludick, AECI Ltd - MD of AEL [45]

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So just on the first question on the Chemicals business. It's about ZAR 1.2 billion of the first half of what we've seen. The second part, I just want to -- on Page 14, you wanted me to look at the...

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Unidentified Analyst, [46]

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So just the exposure of underground mining to your total revenue pool, which is under pressure. You've given an overall positive outlook for the Mining Solution business as a whole. If you can maybe just unpack what your expectation is because, obviously, gold is in Africa as well [which mix the picture of it,] but this relative to the other markets.

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Edwin E. Ludick, AECI Ltd - MD of AEL [47]

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So the growth that we've seen was really the West African growth in -- specifically in gold. If you look at underground mining, there's lots of pressure on underground. And we must be careful when we talk about underground mining because [you get underground, you'd get underground.] I'm talking narrow reef specifically for South Africa. So narrow reef mining for South Africa is deep-level mining. And there's a challenge in South Africa for gold, specifically, that the cost of mining is becoming expensive. So I can't speak on behalf of the miners, but you've seen some of the mining groups mentioning that they're looking at further shaft closures in some. But it's a small -- very small exposure for us relative to our total.

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Unidentified Analyst, [48]

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And is that the main restructuring was around narrow reef.

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Edwin E. Ludick, AECI Ltd - MD of AEL [49]

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It was only around narrow reef.

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Unidentified Analyst, [50]

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So percentage-wise, less than 10% here?

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K. Mark Kathan, AECI Ltd - CFO, Financial Director & Executive Director [51]

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Less than 10%.

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Edwin E. Ludick, AECI Ltd - MD of AEL [52]

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So it's -- you can talk turnovers, it's less than 10%. But if you talk [exposures], it's zero at the moment. That's why we did the restructuring.

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [53]

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And maybe to answer your question on the capital on the NOx, we've allocated for compliance about ZAR [180 million]. And I guess, Rafael, we probably spend how much? About ZAR 100 million of those has been spent, which is actually Mark's figures relative to the maintenance and NOx abatement.

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Steph Erasmus, Avior Capital Markets (Pty) Ltd. - Research Analyst [54]

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Sorry, I got just one more question. Just coming back off [Christina's] question about the mining in the narrow reef and the restructuring. So I think if you look at the quantum of the expenditure, ZAR 156 million to save ZAR 250 million going forward or whatever it is, how confident are you that, that full cost savings will come through given that the restructuring is only 10% of your revenue?

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Edwin E. Ludick, AECI Ltd - MD of AEL [55]

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Well, we do a simple calculation on the different areas that we addressed and all those areas demonstrated that we will have a definite return on it. So for instance you -- an area which we addressed this where we reduced people cost, I can tell exactly what the return on people cost is. So for each of the areas, there were specific targets in terms of returns that we will see, and that's why we believe we will see that return. The risk is, of course, you don't know whether you keep volumes or not, that nobody can predict.

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [56]

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Yes. But what I can say, the commitment from the executive and from the Board, is there a relative number that we'd put out now, there's a lot of pressure. And in fact, we -- weekly meetings of executive, making sure that those costs in the run rate [do not have to come out].

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K. Mark Kathan, AECI Ltd - CFO, Financial Director & Executive Director [57]

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There's one more question.

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Unidentified Company Representative, [58]

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We've got a follow-up question from Franscois Mulock-Houwer at Rezco Collective Investments. It's a 2-part question, "The projects that helped Much Asphalt in this result, particularly in the Western Cape and KZN, how long will they last? If SANRAL does not come out with projects in the next 6 months, will Much keep running ahead of budget?"

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Dean J. Mulqueeny, AECI Ltd - Chemicals Executive [59]

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Yes. The SANRAL project -- it's Dean Mulqueeny again. The SANRAL projects are usually much bigger projects that are actually new developments. A large percentage -- a significant percentage of the Much business is actually maintenance. And for those who are living in the Western Cape, you'll see that the maintenance will continue and is structured already. So projects that are let, you've already got -- given more than 6 months notification. So once the work starts, the work does continue. It doesn't just abruptly end unless there is no cash. And we haven't got any indications in the Western Cape that there's any cash issues. So the projects are being let.

In terms of the Western Cape continuing, as we know, the other projects that are coming online is the city of Cape Town airport, which strategically Much has the best position there and that should also help with the 2020/2021 numbers going forward.

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [60]

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I think KwaZulu-Natal.

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Edwin E. Ludick, AECI Ltd - MD of AEL [61]

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In KwaZulu-Natal, if I just give an example. One of the things, which when we bought the acquisition, it was the strategic location of our various plants throughout the country. And if we look at what's happening in KZN, in the Pietermaritzburg region, within the first 4 months, we actually exceeded the last average 3 years 2-year volume demand. And there again, there has been announcement of the packages between Pietermaritzburg and Durban, which are coming through, which are significant volumes. If I tell you just in terms of that and the city of Cape Town, we are talking about 40% of Much's annual volumes.

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Mark A. Dytor, AECI Ltd - Chief Executive & Executive Director [62]

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All right. Good. Thank you. Thank you for your attendance. Thank you for the questions. Thank you for all your support. There is lunch served just outside, executives and non-execs are here. So if you want to ask then some questions to them, please feel free to. Thank you.

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K. Mark Kathan, AECI Ltd - CFO, Financial Director & Executive Director [63]

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Thank you.