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Edited Transcript of MWY.AX earnings conference call or presentation 28-Aug-19 4:00am GMT

Full Year 2019 Midway Ltd Earnings Call

Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Midway Ltd earnings conference call or presentation Wednesday, August 28, 2019 at 4:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony R. Price

Midway Limited - MD, CEO & Executive Director

* Ashley William Merrett

Midway Limited - CFO

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Conference Call Participants

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* Damien Williamson

Bell Potter Securities Limited, Research Division - Fixed Income and Hybrids Analyst

* Danny Younis

Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers

* John O'Shea

Ord Minnett Limited, Research Division - Senior Research Analyst

* Tim Warner;Totus Capital;Investment Analyst

* William Morgan

Intrinsic Investment Management - Portfolio Manager

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Midway Limited FY '19 Results Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Tony Price, Managing Director and Chief Executive Officer. Please go ahead.

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Anthony R. Price, Midway Limited - MD, CEO & Executive Director [2]

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Thank you very much. Firstly, thank you for calling in to our full year results briefing to Midway shareholders, investors and broking analysts. As has been the case previously, we'll -- I'll make some opening remarks, and then we'll open it up for questions, and Ashley and I'll be happy to answer any questions that you have.

So in terms of our FY '19 results, we're pleased to announce this morning that we generated a record statutory net profit, up 42% -- almost 42% on the previous year at $26.2 million. EBITDA before significant items also increased over 29% to $37.1 million, and that was driven by improved export prices, favorable currency, and we've had a positive dry fiber content results for the year.

This is the third consecutive year since our ASX listing, and Midway has recorded an increase in sales and profit that we've been able to share with our shareholders and timber suppliers. On the back of the strong profit, the Board of Directors yesterday agreed to pay a final dividend of fully -- final fully franked dividend of $0.09, which makes it $0.18 for the full financial year.

Earnings per share also increased to $0.31, and given the yield -- fully franked yield of -- is 5.2%. This is a good result for shareholders, who have supported Midway's plans through the placement that we made last year, which generated -- raised $33.7 million, and we also had a very positive result with our share purchase plan, raising $3.1 million.

As a result of the capital raising, Midway's been able to make some small bolt-on acquisitions, and one of them being made in October last year, which has given us a significant opportunity and footprint in that investment slope. The Softwood Logging Services business that we acquired now was renamed as Midway Logistics, required a fair bit of adjustment and then also integration into our business, and we're very positive about that investment and looking forward to it contributing to the FY '20 results.

The BioGrowth Partners business, which we acquired 40% of as part of the process as well, as we've reported previously, suffered a -- some issues in terms of offtake from South32 because that provides biomass to their power station. Those will subsequently come back onstream this year, but in the meantime also, we've been able to secure a number of other markets for that product as well, which have significantly derisked that business.

The capital raising also allowed Midway to restructure the PMP business on the Tiwi Islands, and that involved buying some additional equipment and really restructuring the whole business, setting up pretty much the same as most of our other operations around the country. And also, it also assists us with growing our business substantially in Tasmania.

We have the capacity to grow our woodfibre volume throughout the country from all the operating -- or regional areas that we operate. And this, in particular, is about diversifying our income and moving our reliance away from our particular side.

Importantly, the capital raising reduced our net debt from $32.4 million in FY '18 to $29.5 million in FY '19, and resulting in our lower debt-to-equity ratio down to 26% with an interest cover of -- has increased to about 18.7x or 19x.

At this point, Midway is now in a very strong financial position, and we continue to look for opportunities to grow the business, yes, throughout the 4 major areas that -- in which we operate.

Now I'd like to move on to the outlook. So just starting off that discussion. Firstly, it's very important to remind ourselves that the long-term prospects for continued growth and sales in this business are very, very positive in the Asia Pacific region, and that position has not changed at all. What's driving that largely is the fact that there's going to be a reduced availability of supply in the Asia Pacific region. And both Chinese and Japanese pulp mills continue to operate at full production. And even in China, we're still seeing new mills or expansions of existing mills in that country.

And also, what's evolved really only in the last year or so is Indonesia. So Indonesia was a net exporter, Sumatra in particular. And last year, they turned from an exporter to an importer, and they bought in about 200,000 bone dry kind of chip in the last quarter, I think, of 2018. And then in 2019, they're on track to do about 1.2 million bone dry tonne. So that's a significant change in terms of demand and supply.

However, as we've flagged, there have been some short-term issues approximately in July and August around pulp pricing. We've seen the pulp price has come up a record high and dropped quite substantially over 2- to 3-month period. And in line with that, we've also seen some capacity in -- or overproduction in South America with one of the major pulp producers there, which has increased their inventories. At the same time, as the price has come down, we've seen the buyers and traders in China reduced their inventories. So that was somewhat can't directly tell in the next little while, but while running the stocks down, they're looking to come in and start buying into the market very, very shortly.

Now if you look at the market, we follow a lot of analysts to deal with the pulp and paper sector. They're very much with a view that these guys will start restocking very shortly later on in this half, first half or early in the first -- the second half of the financial year. And in fact, I was reading an article on JPMorgan this morning saying that the softwood prices, which actually dropped sometime before the hardwood prices, have now rebounded from the bottom, and the demand for softwood pulp, in turn, is growing substantially over the last few weeks. And there are some signs that the hardwood price has also bottomed down, and we'll start seeing some increased demand as early as the next month or so.

Now this is a very difficult issue to explain because there is no real direct correlation between the price of the woodchips and pulp -- price of pulp. They do move around. Both of them move around a lot, but in our experience over the last 10 years, the key inflow from price has been supply. So if you take the post-MIS period, there was a surplus of wood in the market to supply, I'm talking about plantation hardwood. And so therefore, the customers drive the price down. We've seen that rebound substantially, as you all be aware, but now, we're seeing a tightening of supply and a strong demand. So we can only assume that based on those sort of fundamentals, we will see the prices for woodchips stay relatively stable. And in fact, despite those noise in the background in the pulp sector, we are still continuing to sell out woodchips at the same price that we were -- that we have been in the first half for the remainder of this calendar year. The -- we have seen some specific customers and 1 in particular, which is a large customer of ours, who build a new mill, and they have been running -- they filled up their yards to commence that project, and then they had some commissioning problems, which is cost and deferral of vessels. But once -- if they asked us whether we could find a sale for 1 particular vessel in August, and we're able to do that.

And the other suppliers in Australia have, like ourselves, had been carrying quite high inventory levels, and we've still got high inventory levels at the moment. But for example, in South West Fibre, who was looking to have a shutdown because the stockpiles were full, they've got a full -- some days were brought through until the end of the year. And in fact, we've got to increase our harvest production to meet this demand. So it's moving around a little bit, but at this stage, we're not seeing any downward pressure on price other than some of the lower-quality products like, for example, (inaudible) products, we've seen some downward pressure on price there, but that flows back to the yard for the first time.

So the other thing that we've sort of seen in the issues their losses is currency. And no doubt, we'll have some discussions about that when we go to Q&A. But obviously, we're seeing dollar relatively low at the moment, and that's a positive for us.

But in terms of the current financial year and beyond, Midway, as it always had, has taken a very conservative approach to our budget expansions, and we think that's a prudent thing to do. So we flag the fact that whilst this pulp issue is there, to what extent it's going to impact on us is very much unknown, and we'll just have to sort of take the market informed just to how that unfolds over the next few months.

So I think with that, I'll hand over, and Ashley and I are more than happy to answer any of the questions. And I'd suggest, if you've got any detailed financial questions, Ashley is the person to ask. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first questioner is Danny Younis from Shaw and Partners.

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Danny Younis, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers [2]

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A couple of questions, if I can. The first one is around your outlook statement. My understanding is, as you rightly said on the call, that there's very little correlation between pulp and woodfibre pricing and demand. I'm just interested in the pulp market. Can you talk a little bit more about the degree of overstocking? How long it's likely to clean out? And can you maybe give us some numbers around the pulp pricing? I know a couple of years back, it was at a record high of about $900 a tonne for BEK. But where's the price now? And what is the substitution equation in terms of those who would usually order woodfibre but going back to pulp?

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Anthony R. Price, Midway Limited - MD, CEO & Executive Director [3]

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Okay. Yes, I will just correct you. I don't think the BEK price has got to $800. I don't recall that, but certainly, the dissolving pulp price has. It was sitting at about USD 760 in air dry tonne back in April, I think it was, '09, and it's dropped down to about -- a bit over -- well, it was about around -- it's hard to say what the headline price, I guess, some traders discount from that, but it's around about the $500 mark. So that's quite a material drop. But we have actually sold chips at relatively high prices, at prices as low as that. So as you rightly pointed out, if you look at the graph of the 2, it's very difficult to see any correlation specifically. And as I said earlier, the pricing for woodchips tends to be very mobile demand and supply.

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Danny Younis, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers [4]

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Right. And how long -- just a follow-up, how long does it likely to take the clean out? If you assume the overstocking is, I don't know, 10%, 20%, 25% in the pulp market, how long would that take to amortize down?

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Anthony R. Price, Midway Limited - MD, CEO & Executive Director [5]

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Well, that's a tough question to answer. I think there's no doubt that the stockpiles are high, but I would make a point that whenever the commentators talk about inventories, they talk about producer inventories, and that's what they measure themselves often. If you have a look in the presentation, there's a graph in there that talks about how inventories have changed. So if you combine the producer inventories with the trader, buyer inventories in China, you add them together, the overall increase is on that graph. But what's happened is you're seeing the producers increase their inventory, and the traders in China holding back probably waiting for the timing and buying at a lower price.

So in terms of your question about timing, I'd really -- I can really only rely on what I read and others read that information as well. We've talked -- we've read a lot of stuff from JPMorgan, from RISI, Hawkins Wright, they're all commentators in the pulp and paper space. As I'm suggesting sort of we should start to see some -- which should wash through the system in the next -- yes, within this first half. And certainly, if the signs that they're already seeing that there's a bottom out in pricing and buying starting, and it could even be a little bit earlier than that, but I'm not really in a position to comment.

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Danny Younis, Shaw and Partners Limited, Research Division - Senior Analyst of Technology, Developers & Contractors and Retailers [6]

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Okay. And just regards to FX. I noticed in the first half it was $4 million contribution. It's gone up to $11 million for the full year, so a stronger second half on the weaker currency. Can you talk maybe about what you're budgeting for FY '20, sort of recover you have, if any, et cetera?

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Ashley William Merrett, Midway Limited - CFO [7]

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Yes. Yes. Look, at the moment -- Danny, it's Ashley here. We've basically got a forward book of about 50% of our anticipated U.S. dollar sales. And we're budgeting around AUD 0.71 to the U.S. dollar.

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Anthony R. Price, Midway Limited - MD, CEO & Executive Director [8]

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So I'll probably say, as far as there is -- obviously, we've got some headroom there to take advantage of any downside in terms of the dollar dropping that is.

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Operator [9]

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Your next question comes from Joshua Goodwill from Ord Minnett.

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John O'Shea, Ord Minnett Limited, Research Division - Senior Research Analyst [10]

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It's actually John O'Shea here. Just a couple of questions from us, I suppose. Look, the first one relates -- I noticed when you a gave a new -- the expected volumes when we take out Western Australia, obviously, just when we were comparing like-for-like on the previous guidance you gave us, they've come down a little bit. FY '20, it looks like down about 5% and '21 about 8% in terms of those expected volumes. Can you talk us through what's driven that? And why the change in -- what's happened in the last 6 months that kind of changed that?

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Anthony R. Price, Midway Limited - MD, CEO & Executive Director [11]

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Look, it really just comes back to the fact that as time goes on, we get a greater understanding of what's available out there because, yes, we're dealing with a large geographic area, and we don't know where all the wood is. But we also take a pretty conservative view of that as you might think. So we've just formed a view that's based on what we know or we believe we know it in terms of supply, those numbers more reasonably reflect the reality.

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John O'Shea, Ord Minnett Limited, Research Division - Senior Research Analyst [12]

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Sure. Okay. Second question, just in terms of the acquisitions, and you mentioned that obviously expecting those to any initiatives having to -- expecting to have an impact next year. Can you give us some sort of guidance -- obviously, you've given -- spoken about the FX. Can you give us some sort of guidance as to what you expect that kind of delta to look like as far as the acquisitions/initiatives are concerned?

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Ashley William Merrett, Midway Limited - CFO [13]

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So John, at the moment, in our budget, we've -- as the Tiwi Islands or the PMP project up there, we're really only, at this stage, talking $2 million or $3 million EBITDA and that also...

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John O'Shea, Ord Minnett Limited, Research Division - Senior Research Analyst [14]

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$2 million to $3 million?

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Ashley William Merrett, Midway Limited - CFO [15]

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Yes. That could translate to more, but it's a low-quality product out of there. And so we plan a little bit more conservative with regards to pricing because when things are a bit tighter there, that will push back on lower-quality resource. And as far as the -- what we now call Midway Logistics, again, we've been conservative because there are opportunities over there. And so we're looking around that $1.5 million mark for an EBITDA for that business.

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John O'Shea, Ord Minnett Limited, Research Division - Senior Research Analyst [16]

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$1.5 million for logistics.

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Ashley William Merrett, Midway Limited - CFO [17]

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Yes.

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Anthony R. Price, Midway Limited - MD, CEO & Executive Director [18]

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And probably, we've worked really hard in turning those around, John. But there's still lot of things that are really positive that have happened, for example, Tassie. Through this financial year, Tassie generated a couple of hundred thousand dollars. This year, it's probably about $2.5 million. The big success story -- sorry, a big turnaround that we've had is this year. Last financial year -- sorry, financial year for last FY '18, I think it generated an EBITDA of about $1 million. This year, it was, I suspect, $6 million. So that's been a really significant uplift for a good management and the team up there. So we've got some really good positives as well as the negatives that we had last financial year in terms of sort of integrating the Tiwi and the WA projects.

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John O'Shea, Ord Minnett Limited, Research Division - Senior Research Analyst [19]

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Yes. Anything else to report in terms of anything regarding effective tax rates or anything like that, that are likely to change? Anything significant there that we should be aware of?

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Ashley William Merrett, Midway Limited - CFO [20]

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Look, I think that the tax rate fell from 26% in '18 to 21% in '19. So it's probably as a result of the equity -- a greater equity contribution from South West Fibre, and we also had a reversal of the $3.3 million earn-out reversal relating to Midway Logistics or SLS and BGP, which are nontaxable. So we've provided for those earn-out, and they've been reversed back through the account for 30 June.

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John O'Shea, Ord Minnett Limited, Research Division - Senior Research Analyst [21]

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Sure. So what would you expect moving forward for the tax rate?

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Ashley William Merrett, Midway Limited - CFO [22]

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Well, I think that the rate in FY '18, the 26%, more what the rate is going to be the ongoing rate.

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John O'Shea, Ord Minnett Limited, Research Division - Senior Research Analyst [23]

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About 26% for the next couple of years.

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Ashley William Merrett, Midway Limited - CFO [24]

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Yes.

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Operator [25]

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(Operator Instructions) Your next question comes from William Morgan from Intrinsic Investment Management.

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William Morgan, Intrinsic Investment Management - Portfolio Manager [26]

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Tony, just in Slide 14, you've talked about supply -- regarding your supply agreements, et cetera. And I guess you sort of gave us an idea of volume growth in 15 -- on Page 15. Just -- and I appreciate you've given us very explicit slide on 2 inputs. Just wonder if you could please elaborate on how you're thinking about extending the maturity -- the duration of the supply agreements and in terms of the limitations on what you've got in your forecast from 15 -- on Page 15.

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Anthony R. Price, Midway Limited - MD, CEO & Executive Director [27]

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Okay. I can just really quickly go through each slide. So we've been working very, very hard on developing a long-term resource supply through Geelong. Obviously, that facility is not operating at its capacity. And we've -- we're well advanced in discussions with a range of parties about significant expansion in the plantation program in the South West Victoria. We're also -- this is more utilization of our capacity. I don't think it will ever get back up to $1.4 million, but it depends how many trees we can plant, but we're certainly looking at our long-term supply. We're also well advanced in discussions with an organization to look at putting some a few hundred thousand tonnes of grain through the facility as well to try and diversify our product through the facility. So that's really about maximizing the use of our infrastructure. Import and we've got an agreement with a company called ABP. We're in discussions with them about extending that agreement. We haven't come to a final landing on volumes, so we've tended to sort of try and be pretty conservative with that. But they were looking there at a potential 5-year extension to the current agreement, which runs out at the end of calendar year 2020.

Brisbane, we're actually potentially got a lot of that upside there in softwood. So the sawmill there that we buy with the residues, we've found another customer, and they're looking at double shifting their operations. So that's where that volume comes from. Melville Island. Melville Island was always -- based on doing nothing else, is always an exit strategy. So there's probably 5, 6, 7 years of wood there, but we are talking with parties as well about second rotation up on the island with a different species.

And in Tasmania, Tasmania is sort of a bit like a magic pudding. There's lots of opportunities there. We've done very well securing a lot of plantation wood there that we're handling. We're also exporting volume through a small joint venture we've got as well. And WA, a lot of that is -- there is a favorite of that that's domestic, but we're also looking at doing some export of woodchip and biomass in our own right. So I'm not sure whether that covers it off for you, but...

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William Morgan, Intrinsic Investment Management - Portfolio Manager [28]

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I have some -- sorry, go ahead.

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Anthony R. Price, Midway Limited - MD, CEO & Executive Director [29]

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Go ahead.

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William Morgan, Intrinsic Investment Management - Portfolio Manager [30]

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Just in the sense of -- I can't remember what your average -- weighted average duration of this program is. I guess I'm trying to think about how you extend those and also the -- you've given presumably in Page 15, the forecast, a base-case scenario. And I guess I'm trying to get an understanding of the distribution curve of the -- well, probabilities of higher or lower numbers than that and how that's affected by your supply agreements.

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Anthony R. Price, Midway Limited - MD, CEO & Executive Director [31]

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Well, when we got out so a lot of the stuff is -- I mean this -- we've got very (inaudible). We've got some supply agreements that go through 2024, for example, and some of this is an even -- we might have 2 years agreements or 1-year agreements. So this is our best estimate and as you rightly point out, a base case of what the volume profile with regard to the business. It's pretty forward that, that gets stable -- have raised -- has the Geelong situation, we're in a resort from such. We've tried to create as much transparency as possible but maintaining a conservative view. Is there upside for those? The answer to that is yes, I suspect so. But at this stage, we don't know exactly where that upside is. So we're not prepared to predict it. Well, (inaudible) that answered the question, but...

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William Morgan, Intrinsic Investment Management - Portfolio Manager [32]

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That's -- look, it's some -- it's fine. But I might have to take it up further with you later.

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Operator [33]

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Your next question comes from Tim Warner from Totus Capital.

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Tim Warner;Totus Capital;Investment Analyst, [34]

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Just got a couple of questions. The first one, can I just clarify with the PMP and the logistics business, will you -- did you say $2 million to $3 million and $1 million to $1.5 million EBITDA?

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Ashley William Merrett, Midway Limited - CFO [35]

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Yes. Correct, Tim.

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Tim Warner;Totus Capital;Investment Analyst, [36]

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So on the EBITDA bridge that you displayed, does that imply a negative unwind of the negative $4 million, negative $2 million and then additional $2 million to $3 million and $1 million to $1.5 million going forward?

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Ashley William Merrett, Midway Limited - CFO [37]

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Correct.

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Anthony R. Price, Midway Limited - MD, CEO & Executive Director [38]

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Yes, that's right.

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Tim Warner;Totus Capital;Investment Analyst, [39]

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Yes. Okay. And then secondly, just a question around the outstanding receivable that's gone over 90 days. Can you just explain exactly what that is?

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Anthony R. Price, Midway Limited - MD, CEO & Executive Director [40]

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Yes. So as part of the arrangement up in Tiwi Islands where we -- so there's Tiwi Plantation Corporation is the owner of the trees up there, land and tree. And when we did the restructure was an outstanding debt, and that's basically now getting amortized as we do vessels. So that's expected to be fully extinguished by December 2020.

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Tim Warner;Totus Capital;Investment Analyst, [41]

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And finally, just on the inventory build, is that mainly related to the Tiwi? Or is it related to delayed of shipments from your customers in Japan and China?

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Anthony R. Price, Midway Limited - MD, CEO & Executive Director [42]

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It's a combination of most probably both, Tim. Previous -- in the previous financial year, we didn't have any stockholdings on the Tiwis or in Tasmania, so that's a contributing factor. Queens -- QCE was a little bit -- had a higher stocks in the previous year. And yes, Geelong was a little bit -- there's lot slippage at the end of the financial year. So we had quite high stocks as well.

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Operator [43]

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(Operator Instructions) Your next question comes from Damien Williamson from Bell Potter.

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Damien Williamson, Bell Potter Securities Limited, Research Division - Fixed Income and Hybrids Analyst [44]

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Can I just get an explanation on the operating cash flow? If you look at the operating cash flow before interest and tax, so that $14.5 million with the EBITDA at around $37 million, do you see there's a chance it tends to get for that to normalize in the second -- sorry, in this December half? And also, can you give an explanation why the interest paid in the cash flow is only $1.5 million versus the interest expense in the profit and losses at $9.9 million?

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Ashley William Merrett, Midway Limited - CFO [45]

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Yes. Well, with regards to your first one, yes, we do see it normalizing, and high stock was a contributing factor there. And the interest question, as part of the -- having to bring the strategy trades back on, there's a finance liability there, so that's a noncash item. And that's the difference between the interest expense and the actual cash paid.

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Damien Williamson, Bell Potter Securities Limited, Research Division - Fixed Income and Hybrids Analyst [46]

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Okay. And just as another question. In your previous results, you were -- I think you outlined the strategy of planting trees as you harvested them on the land you owned. Is -- I didn't see any comment on that initiative. Now is there anything you want to add to that or?

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Anthony R. Price, Midway Limited - MD, CEO & Executive Director [47]

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We're continuing to plant, and we've got quite a big program for the planting season phase. Well, the planting of the trees starts to range long as this September. So we've got over 1,000 hectares being planted in this financial year in South West Victoria.

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Damien Williamson, Bell Potter Securities Limited, Research Division - Fixed Income and Hybrids Analyst [48]

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Yes. Okay. And just one final question. With the weakness caused by Brazil, are you seeing -- what type of an impact are you seeing with the Indonesian becoming a net importer now? Is that driving any support for your business? Do you see the potential for you the price would chip into Indonesia at all?

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Anthony R. Price, Midway Limited - MD, CEO & Executive Director [49]

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Yes. Look, there has -- last year, there were some cargoes that went into Indonesia. Logistically, it's a problem, was a problem. I think they've just robust. I think the main impact it will have is it will displace all the fiber out of the market. And they largely are driven by using acacia mangium, which is the predominant species that comes out of Vietnam. So I think that's more likely grab -- try -- safe to grab all that volume from Vietnam, which should mean that that's not available going to the market also.

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Operator [50]

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(Operator Instructions) There are no further questions at this time.

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Anthony R. Price, Midway Limited - MD, CEO & Executive Director [51]

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Okay. Look, there's a couple of points that I have missed that I'd like to just reiterate on. We found a lot about China and some issues in China. But it's really important to note that Japan is still a very, very strong customer buying the current prices. And at Midway Geelong, for example, we've reduced our exposure to China and significantly increased our exposure to Japan. So that -- we haven't really talked much about Japan, but that's still strong buyers and a very, very solid customers. That's the first point.

In terms of next year and our budgeting, we've -- as we've done in the past, we take a very modest view or conservative view as to where we're going. We sort of are forming a view that maybe price is going to be somewhat flat in the second half of the financial year. And therefore, we're sort of predicting a modest profit growth for FY '20. But at this stage, it's really difficult to determine what that would actually be. But there's certainly -- we're certainly seeing some activity in the market that might just want to take a more conservative view of our pricing certainly in the second half of this financial year.

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Operator [52]

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There are no further questions at this time. I'll now hand back to Mr. Price for any closing remarks.

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Anthony R. Price, Midway Limited - MD, CEO & Executive Director [53]

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Okay. That's about it. Thank you, and thanks very much for taking the time to join us, and we look forward to talking to most of you as we do our road show in September. Thanks.