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Edited Transcript of IPL.AX earnings conference call or presentation 12-Nov-18 11:00pm GMT

Full Year 2018 Incitec Pivot Ltd Earnings Presentation

Melbourne, VIC Jan 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Incitec Pivot Ltd earnings conference call or presentation Monday, November 12, 2018 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Opperman

Incitec Pivot Limited - General Manager of Group Finance & IR

* Frank Micallef

Incitec Pivot Limited - CFO

* Jeanne M. Johns

Incitec Pivot Limited - MD, CEO & Director

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Conference Call Participants

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* Daniel Kang

Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research

* Grant Saligari

Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director

* John Purtell

Macquarie Research - Analyst

* Mark Wilson

Deutsche Bank AG, Research Division - MD, Co-Head of Company Research Australia and NZ, and Analyst

* Richard Johnson

CLSA Limited, Research Division - Research Analyst

* Sophie Spartalis

BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst

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Presentation

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Chris Opperman, Incitec Pivot Limited - General Manager of Group Finance & IR [1]

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Good morning, ladies and gentlemen, and welcome to Incitec Pivot Limited results presentation for the year ended 30 September, 2018. My name is Chris Opperman, and I would like to thank everyone joining the call from Australia, Asia, Europe and the United States.

The materials we will be discussing today have been lodged with the Australian Stock Exchange, and can also be found on the ASX and Incitec Pivot's website. An audio recording of this meeting will also be available on the company's website after we conclude today. And at the end of the presentation, we will have time for questions from the audience.

Before I hand over to Jeanne Johns, Managing Director and Chief Executive Officer, and Frank Micallef, Chief Financial Officer, who will be taking you through the results, I'd like to draw your attention to the disclaimer on Page 2 of this presentation. Thank you. And I will now hand over to Jeanne Johns to take you through the business overview.

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Jeanne M. Johns, Incitec Pivot Limited - MD, CEO & Director [2]

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Thank you, Chris, and welcome to everyone who's on the call today. I am going to start by giving a brief overview of the result and the progress that we have made this year. Frank will then run through our financial results and balance sheet. I will then talk about the performance of each of our businesses before making some concluding remarks about our priorities for the year ahead and the outlook.

So I'd like now to start by talking about safety. As I said when I joined IPL last year, safety is a nonnegotiable, and it sits at the heart of everything we do. While we do safety well at IPL, our safety improvements in recent years have lost a bit of momentum. And it's important that we continue to challenge ourselves to keep improving. During the year, our TRIFR rate was 0.96, consistent with our target of less than 1. As I talked about at the half year, we have broaden our scope of our Zero Harm value and put in place some important targets. We have committed to a 30% improvement in our recordable rate over the next 3 years and have also set targets for environmental care and process safety. All of our metrics are now included in our Zero Harm balance scorecard, and accountability for delivery of this has been cascaded throughout the business. While performance on these metrics were mixed during the year, I am confident that we have the right strategy, processes and leadership in place to underpin our objective of Zero Harm for Everyone, Everywhere.

I will now talk to the financial highlights of our results. On a pre-IMI basis, NPAT increased 9% to $347 million and EBIT increased 11% to $557 million. The results benefited from higher fertilizer prices, volume and margin growth in Explosives and an excellent manufacturing performance at Waggaman. These benefits were partly offset by the impact of the drought on our Fertiliser businesses and the manufacturing turnaround and outages.

Strong volume growth in our Explosives business led to a 9.8% EBIT lift -- uplift year-on-year.

Our FY '17 Fertiliser result benefited from a $20 million EBIT from a one-off property sale last year. If we strip this from our Fertiliser result last year, the EBIT in our Fertiliser business increased 24% year-on-year.

Our strong results and good cash flow generation provided us the ability to return capital to our shareholders through our dividends and the share buyback.

Frank will talk to our balance sheet in more detail shortly. But it's important to note that our balance sheet's in good shape, even after spending $210 million on our share buyback.

During the year, we made good progress on our strategic agenda. A new leadership structure has been established to deliver our One IPL agenda. One IPL is about bringing the best of the group to all of our business and embedding a customer-focused, solutions mindset across the portfolio. As I have talked about in the past, this has included the elevation of technology to the leadership team. And you all heard from Rob at the Investor Day a couple of months ago. Tim Wall joined at the beginning of the month as President of Global Manufacturing with a clear agenda to drive manufacturing excellence, including turnaround performances across the group.

We have also appointed Stephan Titze as our new President of the Fertiliser business. Stephan has a proven track record of developing new technologies and markets and growing propped market share through partnerships with customers in the agricultural sector.

Jamie Crough, who has done a terrific job as interim President, will become COO of Fertilisers. They have highly complementary skill sets, and I'm looking forward to working with both of them to drive further value in our Fertiliser business. We have also made good progress on our technology agenda. In the U.S., our premium technology is already playing out in the Quarry & Construction sector, and customers in Australia are enthusiastic about our Delta E and DigiShot solutions.

Our technology center of excellence in the U.S. has been established, and this will ensure that we stay at the leading edge of premium digital technology solutions for our customers well into the future.

We delivered an excellent manufacturing performance at Waggaman and Moranbah and delivered on our $25 million BEx target. Under Jamie's leadership, the Fertilisers team has made some real improvements in value chain management with better integration of logistics, operations, trading and commodity price management. In our Explosives business, we resolved our supply contract issue in Western Australia, and I will cover Gibson Island a bit later.

Now I'd like to hand over to Frank, who's going to run through some of the financials.

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Frank Micallef, Incitec Pivot Limited - CFO [3]

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Thanks, Jeanne, and good morning, everyone. Today, I'll briefly run through a performance overview for the year and then cover the major highlights relating to the balance sheet, capital management and corporate and group items.

Turning to Slide 9, I'm going to talk to the waterfall on that slide. And at just under $557 million, group EBIT was up over 11% on last year. In Explosives, across both geographies, strong customer demand across all segments resulted in a $22 million benefit from profitable market share growth and mix impact in the U.S., and volume growth in the Asia Pacific region, particularly in Met Coal. This was partly offset by the $7 million impact of lost business in Western Australia, announced earlier this year.

In Fertilisers, higher average realized global fertilizer prices resulted in a $98 million benefit over FY '17. The realized DAP price for the year was USD 400, up from USD 332 the previous year.

Similarly, the realized urea price was up by the 20% for the 2018 financial year at USD 259. The impact of dry weather, particularly in New South Wales and Southern Queensland, on sales volumes and mix negatively impacted the result of our Fertiliser business by about $20 million. Overall, sales volumes for the distribution business were down just over 2% to just over 3 million tonnes. However, in that total, volumes were down significantly more in Northern New South Wales and Southern Queensland, particularly volumes of Anhydrous Ammonia into the cotton crop, while volumes of lower-margin products, such as single superphosphate, were up in the southern states.

It's also worth noting that the FY '17 results included a benefit from one-off property sales and the FY '18 result included a $3.3 million negative impact from a bad debt, a rare occurrence in our Fertiliser business. Overall, the Fertiliser distribution business performed very well in the year with some challenging weather conditions. And this illustrates the benefit of geographic diversity on the East Coast as well as good operational execution by our team.

The results at Waggaman, Louisiana were very pleasing indeed, up USD 26 million for the year or 51%. USD 48 million came from higher ammonia prices and lower gas prices as well as increased sales volumes, while USD 13 million came from improved plant operations. These positives more than offset the nonrepeat of the construction delay damages of USD 35 million booked in FY '17.

I would feel remiss if I do not take the opportunity to commend all of those associated with the plant construction and its operations team since commissioning. At 103% of nameplate capacity, this performance in the first full year of operations is indeed exceptional.

FY '18 was a difficult year for our manufacturing operations, with scheduled turnarounds having a net impact of $34 million. The turnarounds at Phosphate Hill, Cheyenne and St. Helens were all extended to repair emergent work, but importantly, we addressed all issues that we found.

In the case of Moranbah, we benefited from a full year of production subsequent to the FY '17 turnaround, which gave a $16 million benefit for the year. $5 million of that benefit has come from increased plant efficiencies, reflecting the investment made during the turnaround to improve the plant's output. Moranbah is a great success story, again, producing a record volume in FY '18.

Looking now at Slide 10 and the balance sheet and capital management. The balance sheet remains robust, reflecting IPL's ongoing commitment to financial discipline and effective cash management.

Net debt to EBITDA improved to 1.6x from 1.7x in FY '17, and interest cover remains comfortably over 7x. This outcome was achieved after completing $210 million of the share buyback, $261 million of cash spent on sustenance and $65 million of spend on minor growth.

Trade working capital performance continued to be very strong, despite higher global fertilizer prices having some impact on inventory values.

Our 2 investment-grade credit ratings were maintained during the year, and these will be put to good use refinancing long-term bonds maturing in the 2019 financial year.

In terms of shareholder returns, we've increased our dividend in line with our increased profitability, and we will complete the buyback by the middle of calendar 2019.

Finally, let's now deal with some corporate and group items. Net borrowing costs are up $19 million to $128 million. This is the result of the full year impact of the higher interest rate of the long-term bond completed late in financial year '17, which replaced cheaper bank facilities and also a result of the cessation of interest capitalization relating to Waggaman.

Corporate costs are up $11 million to $31 million, reflecting our additional investment in the commercial and technology functions and the technology development pipeline.

Increased tax expense was in line with increased earnings for the period, and the effective tax rate is almost flat at 18.3%. The average realized Australian dollar/U. S. dollar exchange rate for the year was almost flat on the previous year at $0.76.

In terms of forward cover, we currently have 50% of the estimated exposure for first half FY '19 Fertiliser sales hedged at $0.75 with full participation at rates below $0.75.

I'd now like to pass back to Jeanne, who'll take you through a more detailed operational review.

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Jeanne M. Johns, Incitec Pivot Limited - MD, CEO & Director [4]

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Thanks, Frank. I will now run through the performance of each of our businesses.

Turning to Dyno Nobel Americas, EBIT increased 22% to USD 211.6 million. This was a strong performance in which we outperformed the market. We grew volumes across all sectors, with sales volumes up 7% in Quarry & Construction, 5% in Base & Precious Metals and 16% in Coal. The uplift in coal reflects a full year impact of our FY '17 contract wins as well as a result of having the right assets in the right locations. The team is doing a good job of selling well into these challenging markets.

The growth in Q&C is pleasing with strong volumes and good margins, reflecting our quality technology platform of Delta E emulsion delivery systems, coupled with our market-leading electronic detonators. We are now successfully introducing this premium offer into different end markets, such as iron ore and gold. The performance of Waggaman with a USD 25.7 million uplift reflects benefits from higher ammonia prices as well as full year volumes with an exceptionally strong manufacturing performance. Ag&IC was pretty flat with the upside from fertilizer prices largely offset by the large turnaround year at St. Helens and the outage at Cheyenne. Our Dyno Nobel Americas business is a high-quality business with strong positions in key markets, strategically located assets and is well known with our customers for our superior technology offer.

Before I move on to the Explosives business in Asia Pacific, I just want to spend a minute talking about our Waggaman plant in Louisiana. WALA has certainly proved itself to be a world-class asset, operating at 103% nameplate in its second full year of operation, and by any measure, this is an exceptional performance. The step-up in performance from 74% nameplate in FY '17 to this year's 103% delivered a USD 61 million uplift in operational earnings for our U.S. business. I've been very impressed with the quality of the plant and the manufacturing operation the team has established at WALA, a project that has delivered on time and under budget.

Looking at the graphic, what is interesting is that as we enter FY '19, we are seeing the ammonia price spread firm up. And while we expect to have seasonal conditions play out, most industry analysts think that there will be better overall demand and supply balance going forward.

Moving to our Dyno Nobel business in Asia Pacific, it delivered an 8.7% increase in EBIT to $205 million. We saw a $6.9 million benefit from increased sales volumes and mix across the Australian business, in particular, the Met Coal customers in Bowen Basin. This was largely offset by the $5 million impact of the lost contracts in Western Australia that we communicated earlier in the year. The business delivered a $16.5 million uplift from manufacturing, which reflects a strong performance at Moranbah with record production up over 15% on last year.

Pleasingly, the plant has been operating at record level since the major turnaround and the investment that was completed in April of last year. The reliable performance at Moranbah provides a unique value proposition, offering security and flexibility of supply in the Bowen Basin.

During the year, we also successfully mitigated our take-or-pay supply commitment in Western Australia with a major new contract win in the Base & Precious Metals sector. This is a full-service contract and reflects the strength of our technology offering that is on the ground and available to customers today. We are making good progress with our strategic agenda in Asia Pacific, increasing awareness of our premium technology offer with customers across the region. We successfully trialed and launched Delta E with customers in the Asia Pacific, and we've had very positive feedback. We now have these sophisticated delivery systems in service in Australia and have strong interest from customers for new trials. Technology is continuing to grow as a share of sales, and we see significant upside from the continued rollouts of our premium technology.

Moving to our Asia Pacific Fertiliser business. EBIT increased marginally to $104.6 million. Stripping out the one-off $20 million benefit from profit sales in FY '17, the underlying EBIT was up 25% with business in FY '18 benefiting from firmed prices. While volumes were down slightly, the impacts of the drought were largely offset by gains in nondrought-impacted areas, a real credit to the team and the improvements being made in our go-to-market position. While we saw strong distribution margins, overall, earnings were impacted by manufacturing performance with extended turnarounds at Phosphate Hill and Mount Isa. Full year production at Phosphate Hill was 850,000 metric tonnes, in line with the guidance that we gave at Investor Day. We are starting to see evidence that our heightened focus on value chain management is working with better coordination of the trading side of the business with the rest of the value chain.

Jamie and the team have done a very good job, and he will continue to drive that agenda as COO of the Fertiliser business. As I mentioned, Stephan Titze is joining the leadership team as President in January, and I look forward to introducing Stephan to you in the new year.

We now have real depth of capability in our Fertiliser business across operational execution as well as customer and marketing focus in the agribusiness sector.

Of course, one of the challenges during the year was the conclusion of our gas supply contract at Gibson Island. We were able to secure gas for that plant in 2019 as well as a tenement for potential long-term solution. We are continuing to explore economic bridging gas supply for 2020 and 2021, but we are unlikely to have further clarity on the outcome until early next year.

Overall, the business is well placed to benefit from firmed prices, and there is more upside to be realized from improved consistency in manufacturing performance as well as a more coordinated approach to value chain and trading management.

I would now like to spend a little bit of time talking about our technology offering and how we see technology playing out over the next couple years. Over -- our premium technology platform is about practical innovation that our customers can use today to improve their mining operation from safety to efficiency to environmental impact. Delta E has been in operation across the U.S. over the last 3 years and is well established in the Quarry & Construction as well as Hard Rock segments, where we have seen significant penetration based on the quality of the blasting outcomes for our customers. A real point of difference is our ability to deliver precision blasting, not just for each hole, but for different layers of rock down the hole. And we do this through a programmed truck delivering faster loading more efficiently and more precision than anyone in the market.

This technology is now being adopted in Australia with a number of customers already signed up and a diverse group of miners in Australia and Indonesia conducting trials. One of our customers in Australia recently called Delta E a game changer for their business. This reaction is pretty common. Earlier in the year, a customer in the iron ore ranges of Minnesota said he was absolutely gobsmacked with the difference of the blast that we are now getting. And this reaction I get quite regularly from customers in the trials as well as the team on the ground when they first see the difference in the blast results.

We now have 50 Delta E delivery systems in the field, and we actually manufacturing -- manufacture these in Salt Lake City. These -- this gives us complete control of our value chain and more importantly, our patented technology. The factory is running 2 shifts now, and we have the ability to ramp up to 3 in time, if need be.

On our detonator systems, we already have 4G electronic premium offering. And this year, we're going to bring in our new easy shot hybrid detonator system. It brings some of the benefits of the precision blasting technology associated with the electronic offering, but is more affordable and can be applied in a broader market. This is an ideal tool for underground development, significantly reducing the costs and impacts of overblasting. It's a great example of a new product, leveraging off our technology platform, successfully being adapted for different applications and sectors.

So what does the future of our technology offer? We have a superior optimized blasting technology and delivery system, which is a very good place to start. What will come next is more automation, underpinned by our digital platform. And that's what this graphic outlines, a fully automated drill and blast offer from a computer-generated blast design, individual blast analysis and sophisticated productivity analysis and a feedback loop to improve the design. This is about tying in this upstream and downstream and using data and analytics to drive more productivity enhancements.

I often get asked where are we on wireless. And we look at wireless as one of the number of components in the initiating system. It's a small piece of the puzzle applicable today to only a small part of the mining sector. While we have a product in development, we think the secret to true commercialization of wireless technology will be about making the device smaller and including 2-way, not just 1-way communication, and that will take some time. We believe the technology just isn't there yet. So more importantly, what our customers are telling us is that they want whatever we do to be adaptable to their needs, to their mine, to their mining conditions. What this means is that we are building a plug-and-play suite of technologies so that we can customize for each customer.

I would now like to talk about our sustainability agenda. On climate change, we are applying the task force for financial disclosures methodology for identifying and reporting risk. The outcome of this work is now included in our material risk disclosure in our annual report. We have also put in place some important targets to improve our gender diversity throughout the business. And we continue to work hard to outperform the broader chemical sector on key ESG metrics.

Moving on to outlook, Incitec Pivot is well positioned in our key markets, and we have momentum going into FY '19.

Looking at our biggest business, Dyno Nobel Americas, we are well positioned across all 3 of our markets. And we continue to focus on opportunities in the Quarry & Construction sector, which is forecast to grow in mid- to single digits. Our Base & Precious Metals industry is forecast to grow in low single digits, and while Coal is forecast to be slightly down, we are fortunate to have well-located assets serving that market.

We have no major turnarounds planned in the U.S. for FY '19, and we are confident that Waggaman will continue its strong performance.

In our Explosives business in Asia Pacific, strong demand is expected to continue from the Met Coal sector, and we are confident that we can deliver another good year at Moranbah.

Technology-driven sales growth is expected to gain momentum during the year. The AN market in Australia is expected to stay competitive, keeping pressure on pricing and margins. And as we've already disclosed, we expect a negative $14 million EBIT impact from the contract losses in Western Australia.

On Fertilisers, as we've said before, we expect Phosphate Hill to produce around 1 million metric tonnes of ammonium phosphate. And as we previously flagged, production at GI will be down as a result of the planned 9-week shutdown that started last month.

We will have a net $24 million increase in our gas pricing. And as previously disclosed, there will be the $49 million impact negative from -- at Gibson Island, partially offset by the $25 million benefit of Phosphate Hill, as our new gas contract starts in January.

As I said earlier, we are turning over every leaf in trying to find economic gas, starting from December 2019 and beyond for Gibson Island. However, if we are unable to do that, we will have to cease op -- manufacturing at GI and the previous guidance on that scenario stands. While there is more upside from value chain optimization in Fertilisers, as you all well know, our results will continue to be dependent on global fertilizer prices, ForEx and weather conditions.

Frank will now talk to the corporate components of our outlook.

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Frank Micallef, Incitec Pivot Limited - CFO [5]

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Thanks, Jeanne. As previously mentioned, we will complete the buyback by mid-calendar 2019. Corporate costs will remain roughly flat, reflecting ongoing investment in technology and strategic functional capability. Borrowing costs are expected to be in the area of $135 million for FY '19, which includes the impact of interest rates and foreign exchange as well as the anticipated negative carry impact of our early refinancing plans.

In terms of shareholder returns -- sorry, we expect the tax rate to edge slightly higher to between 19% and 21%. We retain our commitment to generate $25 million of net BEx benefits next year.

We expect sustenance CapEx to come in roughly flat at $250 million, with an additional outlay of $45 million to reflect one-off long-term lease buyouts.

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Jeanne M. Johns, Incitec Pivot Limited - MD, CEO & Director [6]

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Thanks, Frank. And as we look forward to FY '19, our priorities for the year ahead are consistent with the key pillars of our strategic agenda that we talked about in some detail at Investor Day. Our safety agenda remains an absolute priority. And this year, we are embedding our new metrics in our KPIs and have plans in place to ensure accountability across the organization. We have good momentum with our premium technology, and we will continue to prioritize building a culture of partnership and solutions with our customers as part of our One IPL agenda. Manufacturing excellence is an important area of focus in the year ahead. As I spoke about at the Investor Day, we need to drive more consistency across the performance of our assets.

Tim will be leading this agenda to recalibrate our planned maintenance to ensure optimal turnaround cycles and better, more reliable performance.

In our Asia Pacific Explosives business, we will continue to roll out our premium technology offering as well as progressing recontracting discussions on the East Coast.

We see good opportunity in our Fertiliser business to capture the benefits of firmer pricing and to optimize value through the value chain management and more coordination with our trading position.

We will, of course, continue to work hard to find an affordable gas solution for GI. In the U.S., we will continue to leverage our strong platform, market position and premium technology. And of course, we will maintain an unwavering focus on cost discipline across the group.

And we remain absolutely committed to completing our previously announced $300 million share buyback. On that note, I would like to thank you all for listening and hand back to Chris.

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Chris Opperman, Incitec Pivot Limited - General Manager of Group Finance & IR [7]

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Thank you, Jeanne. This now concludes the presentation, and we will open for questions. (Operator Instructions) Operator, can you please introduce the first question.

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Questions and Answers

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Operator [1]

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Your first question comes from Mark Wilson with Deutsche Bank.

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Mark Wilson, Deutsche Bank AG, Research Division - MD, Co-Head of Company Research Australia and NZ, and Analyst [2]

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It was -- look, a big year in terms of plant turnarounds, so can you just refresh what went on with the turnarounds? Some were clearly extended. There's also that $18 million impact from the unplanned outages, where that was much concentrated. And just how the plants are performing early on in fiscal '19?

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Jeanne M. Johns, Incitec Pivot Limited - MD, CEO & Director [3]

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Yes. Thanks for that, Mark. The biggest financial impact came from the Phosphate Hill. And that, as I mentioned at Investor Day, had extended because of some discovery work, emergent work that was discovered upon the inspections. Subsequent to the turnaround, the rubber lining of one of those key vessels gave us some trouble that led to some downtime. And then that vessel was replaced in September with a new vessel that does not require this tricky lining, which should be a permanent fix for that solution. And so Phosphate Hill is running well. The other outages that we had, Cheyenne had an outage that spanned between FY '17 and FY '18, but also had an unexpected outage a bit later associated with a new piece of rotating equipment that was put in place at that time. And St. Helens had a planned turnaround as well. So those were the major pieces. I think if you sort of step back from the overall portfolio, when you look at reliability, our reliability, outside of Phosphate Hill, was in line with what we've done previously. And in general, our plants were between 80% and 100% of uptime. So I would say, decent performance, good performance, but actually not that we're happy with it. That's why manufacturing excellence is one of our strategic value drivers is to get to that next level of performance.

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Operator [4]

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Your next question comes from Daniel Kang with Citigroup.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [5]

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Just on your outlook statement, you mentioned that you continue to expect Australian ammonium nitrate supply to keep pressure on pricing and margins. Just wondering, if you can comment on your expectations following the recent decision by the Anti-Dumping Commission to put on duties. Do you think this may help the situation in terms of pricing and margin?

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Jeanne M. Johns, Incitec Pivot Limited - MD, CEO & Director [6]

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Thanks for that, Daniel. I mean, I think that as we think about the East Coast contracting season, I mean, first of all, we're blessed that Moranbah is an excellent and unique value proposition. Not only is it a hugely reliable plant, but it also provides customers in the Northern Bowen Basin with both security of supply and flexibility. When we think about the overall marketplace, I mean, it's a combination of domestic and imported. As you say, the antidumping measure in itself would be slightly supportive of market structure. But we really see the outcome being driven by the competitive environment inside of Australia, and the outcome will be determined by that.

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Operator [7]

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Your next question comes from Grant Saligari with Crédit Suisse.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [8]

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I was wondering whether you could just elaborate on the performance of Waggaman in the second half. I noticed that you've stopped disclosing the internal revenue from Waggaman, which makes it a little hard to interpret. But, I guess, a couple of things. It looked first like the discount that you received to the tamper price might have changed a little in the second half compared with the first half. So if you could elaborate on that. And then second, within that, it looks like the costs in the second half were higher for some reason. So again, which was out of step with the production volume. So again, wondering, whether you could elaborate on that, please?

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Jeanne M. Johns, Incitec Pivot Limited - MD, CEO & Director [9]

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Okay. I mean, I'll frame that up and then hand it over to Frank. I mean, I think that as we look at the Waggaman performance, it's important to take the full year perspective and at 103% nameplate. I haven't seen a single other plant that performed as well. So I think that it truly is a world-class performance. I think some of the points that you made, Frank can perhaps shed a bit more light on that.

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Frank Micallef, Incitec Pivot Limited - CFO [10]

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Yes, yes, thanks, Jeanne. Yes, Grant, clearly, that outperformance in terms of production in the first half has an impact on the first half -- second half split. So the average is around about 103% of nameplate, or 824,000 tonnes for the year. 441,000 of those tonnes representing 110% production, this is nameplate in the first half, dropping to about 96% in the second half. So the first thing I'd say is, when you get to that level, when in fact, with all these plants with such high fixed costs, every marginal tonne of production has a disproportionately high value. In terms of other factors, Grant, the ammonia tampering pick index for the year was about $292 million. In fact, in the second half, it's down almost $20, perversely given the spot price of ammonia sitting at $355 today but actually in the second half, the spot price was down. The gas cost was down very fractionally, so it's almost flat. So when you put all that together, that's why you get that split. So the plant's running very well at the moment, and we've got gas prices remain in a good place and the spot price of ammonia is mid $350. So that all goes well for the first half.

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Operator [11]

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Your next question comes from Richard Johnson with CLSA.

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Richard Johnson, CLSA Limited, Research Division - Research Analyst [12]

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This actually wasn't my question, but just following on from Grant's, I think there may be a lot of confusion around the Waggaman numbers, particularly around the revenue and the average realized price, particularly in the second half that the plant appeared to generate, but this is a huge delta between that price and the index price and it would be helpful if you could just step through the reasons for that difference, particularly in the second half. I'm sure the 2 things are linked, but for forecasting purposes, this is obviously quite important to understand what the difference is.

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Frank Micallef, Incitec Pivot Limited - CFO [13]

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Yes. Richard, it's Frank here. I mean, take it offline and delve into more detail. But the basics are that the index price in the first half was about 300, the second half, it was 280. The discount is roughly the same in both periods at about 5%. So some of it relates to -- just relates to timing. And the way the price index moved during those 2 respective halves.

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Operator [14]

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Your next question comes from Sophie Spartalis with Merrill Lynch.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [15]

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Just in terms of Moranbah, they recorded record tonnes in FY '18. You've got the all-important contract renewals coming up in 2019. Can you maybe just talk through the strategy there, like the Plan B strategy, if you are unable to fully roll over all the contractual tonnages whether you would still keep that plant operating at 100%? Or whether you would pull back given the location of the plant?

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Jeanne M. Johns, Incitec Pivot Limited - MD, CEO & Director [16]

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Yes, thanks, Sophie, for that question. I mean, as I said before, I mean, our Moranbah plant is ideally located to serve the Northern Bowen Basin. Demand in the Bowen Basin is very strong. And we have no reason to expect that we're not able to place those tonnes in the Bowen Basin. Like I say, demand is very strong in that region and our plant is ideally situated as well as provides some very reliable tonnes for our customers.

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Operator [17]

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Your next question comes from John Purtell with Macquarie Group.

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John Purtell, Macquarie Research - Analyst [18]

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Just had -- just a couple of questions. Just in relation to Phosphate Hill, can you just comment on production in recent months?

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Jeanne M. Johns, Incitec Pivot Limited - MD, CEO & Director [19]

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Yes. Yes, thanks, John. I mean -- like I said, I don't have those numbers in front of me. I think our guidance remains that we're targeting 1 million tonnes of production this year and that's in line with the capability of that plant. And so we have no reason to give any other guidance at this point.

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Frank Micallef, Incitec Pivot Limited - CFO [20]

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What I do know, John, is that the plants currently producing at the right levels that would equate to that kind of production.

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Operator [21]

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Your next question comes from Grant Saligari with Crédit Suisse.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [22]

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Sorry to circle back to this revenue question again for Waggaman. But the first half benchmarked tamper price and your first half report was $285 a tonne. And you're saying $292 for the full year. So implying in second half, reference price of $300. Now it looks like what you realized in the first half based on the total revenue compared with the modeled revenue would be close to 100%. It looks like you achieved substantially less than that in terms of realized revenue in the second half, so that's what we're trying to clarify, please.

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Frank Micallef, Incitec Pivot Limited - CFO [23]

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Yes. Thanks, Grant. It'd be good to clear it up. In the first half, we disclosed the average realized price. For the full year, we've disclosed the index price. So the pricing for the plant basically is the index price minus 5% on average, which is the same. It's been the same all year. So -- but I think there's some of the anomalies, the factor we're disclosing realized price in the first half and the index price in the second.

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Operator [24]

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Your next question comes from Richard Johnson with CLSA.

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Richard Johnson, CLSA Limited, Research Division - Research Analyst [25]

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Frank, just reverting back to Moranbah, can you remind me whether the incremental tonnes that you're producing over and above nameplate are actually based off your legacy gas contracts or do you pay spot for that gas?

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Frank Micallef, Incitec Pivot Limited - CFO [26]

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No, they're all -- that gas is all coming through the same cost. Essentially, what we have done with the plant is run it more reliably and more efficiently. So there's no differential in the gas cost going into the plant.

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Operator [27]

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Your next question comes from John Purtell with Macquarie Group.

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John Purtell, Macquarie Research - Analyst [28]

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Just a question on Dyno Americas and your guidance for moderate earnings growth this year. Does that take account of improved Cheyenne production? Or the benefits from that more relevant to the ag business?

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Jeanne M. Johns, Incitec Pivot Limited - MD, CEO & Director [29]

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Yes. It's good question, John. I mean, the Cheyenne production applies to both. So some of Cheyenne will -- improved performance there will flow partially into the Explosives business and partially into the Ag&IC business.

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Operator [30]

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Your next question comes from Sophie Spartalis with Merrill Lynch.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [31]

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Just wanted to get some clarity as to the increase in the GI closure costs. They've gone from $50 million to $70 million. What's driving that $20 million increase, please?

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Jeanne M. Johns, Incitec Pivot Limited - MD, CEO & Director [32]

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I believe the slide on GI is -- I'm looking at Chris, I believe that's the same one we used at midyear. So we have not updated that slide.

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Chris Opperman, Incitec Pivot Limited - General Manager of Group Finance & IR [33]

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No change.

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Frank Micallef, Incitec Pivot Limited - CFO [34]

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No change at all.

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Jeanne M. Johns, Incitec Pivot Limited - MD, CEO & Director [35]

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Yes. So there isn't any change from midyear.

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Operator [36]

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Your next question comes from Grant Saligari with Crédit Suisse.

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Grant Saligari, Crédit Suisse AG, Research Division - Head of the Consumer Staples, Discretionary Retail & Agriculture and Director [37]

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Sorry, I feel like I'm on a speed dating. But anyway, the drought impacts that you incurred in fiscal '18, just how would you expect that to play out through FY '19? Do you think you'll get all of the $20 million back in fiscal '19 as it stands at the moment? Or could it be bit more spread into fiscal '20?

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Jeanne M. Johns, Incitec Pivot Limited - MD, CEO & Director [38]

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Yes. I mean, it's always difficult to predict the weather. I am reluctant to do so. I mean, obviously, the recent rains are welcome. But it's way too early to decide about how this overall year will be. I think the important thing to keep in mind is our Fertiliser business is quite diverse and throughout the East Coast. And that does give us some resiliency to any weather impact in a certain piece of it. And I think that's an important part of the portfolio.

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Frank Micallef, Incitec Pivot Limited - CFO [39]

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Yes. If I can just add to that, Jeanne. So, Grant, the impact, the $20 million impact this year, whilst volumes were only down just over 2%, they were down, obviously, a lot more than that in the Southern Queensland and New South Wales, and particularly, Northern New South Wales regions, that is, where we place Anhydrous Ammonia tonnes from Gibson Island into that particular footprint. And those tonnes -- higher distribution margin is obviously a lot more involved in distributing Anhydrous Ammonia than dry Fertiliser. And so there is concomitantly higher distribution margin involved. So the mix impact is significant. How that plays out into next year is going to depend on kind of where it rains and how much it rains. You could have -- I guess, the worst case outcome is that the drought continues in the same areas and you'll have at least a continuation of that impact. If you get a recovery in the weather pattern and that mix moves favorably, then you start to recover. But like Jeanne, I've left my weather forecasting hat at home today.

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Operator [40]

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Your next question comes from Daniel Kang with Citigroup.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [41]

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Just another question I have on Gibson Island. In terms of the exploration spend, when do you expect results to come through? You've also mentioned that you're expecting to contribute about $20 million to the exercise. Is that still the case? And will that spend be through FY '19?

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Jeanne M. Johns, Incitec Pivot Limited - MD, CEO & Director [42]

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Yes. Yes, very good, Daniel. Thanks for the question. We do expect that the spend will be within that $20 million. So nothing new or updated on that. There's different phases of the drilling. We expect some very preliminary results in the first half of next year. But obviously, we are able to get more precise as the calendar year progresses.

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Operator [43]

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The final questioner in the queue is Richard Johnson with CLSA.

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Richard Johnson, CLSA Limited, Research Division - Research Analyst [44]

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Jeanne, I'd be interested just to hear your thoughts around what you feel are the sort of key risks to your outlook for the North American business, and particularly, as it relates to the Q&C market. There is a lot of debate at the moment around the direction of the cycle and what may occur over the next 12 to 18 months. Just be interested to get your view that you think the risks are.

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Jeanne M. Johns, Incitec Pivot Limited - MD, CEO & Director [45]

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Yes. Thanks for that, Richard. I mean, I think as we sit here today, yes, the market in the U.S. is very strong. We are not seeing on the ground today any indications of weakening or softening. So I think that that's how it occurs to us during the day. I mean, certainly the people are forecasting different scenarios for the U.S. economy. But we think we're well positioned to weather out whichever scenario comes into fruition. Some of the upside people talk about just to temper that is the additional infrastructure spending that's some have talked about. Even if that was to happen, that's not likely to flow through until 2020 or 2021. But nonetheless, there's actually a lot of activity at the state and local level that's continuing as it has been for the last couple years. And so we haven't seen any indication of a slowdown. As a matter of fact, the economy is quite hot. And like I say, there isn't any evidence on the ground of a slowdown at this point.

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Chris Opperman, Incitec Pivot Limited - General Manager of Group Finance & IR [46]

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Okay. Thank you, operator. And on behalf of Jeanne, Frank and myself, thank you for joining us today. You can -- we can also be contacted via our Contact Us page on our website. And with that, I -- we conclude the meeting today. Thanks.

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Operator [47]

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That does conclude our conference for today. Thank you for participating. You may now disconnect.