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Edited Transcript of OMN.J earnings conference call or presentation 26-Nov-19 10:30am GMT

Half Year 2020 Omnia Holdings Ltd Earnings Call

Gauteng Dec 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Omnia Holdings Ltd earnings conference call or presentation Tuesday, November 26, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kavita Pema

Omnia Holdings Limited - Group Executive of Sustainability

* Ralph Havenstein

Omnia Holdings Limited - Independent Chairman

* Stephan Serfontein

Omnia Holdings Limited - Financial Director of Omnia Agriculture International

* Thanaseelan Gobalsamy

Omnia Holdings Limited - CEO & Executive Director

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Conference Call Participants

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* Bruce Williamson;Integral Asset Management;CIO

* Steph Erasmus

Avior Capital Markets (Pty) Ltd. - Research Analyst

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Presentation

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [1]

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Good afternoon, everybody. Welcome. We're going to start with a safety briefing. So I'm going to ask Kavita to come up and deal with that.

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Kavita Pema, Omnia Holdings Limited - Group Executive of Sustainability [2]

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Good afternoon, ladies and gentlemen. Welcome to our FY 2020 Half Year Results Announcement.

One of the priorities of Omnia Group is to make sure that all stakeholders, employees, contractors are all safe and protected. In light of that, I'd just like to inform you that in the event of an emergency and you hear a siren sound, there are 2 exits on the left and the right. Proceed calmly through those doors to the exterior and some emergency personnel will be available to guide you through the evacuation procedure.

For comfort, there's -- out the door here, there are ablution facilities, which we call [on our plot], but it's the -- the ladies and the gents are down the passage. So please remain safe and take care of yourself and enjoy the proceedings. Thank you.

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [3]

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Thanks. Thanks, Kavita. So a warm welcome to all of you here who have joined us on the webcast and in person. Welcome to all of our investors, our shareholders, our banks and various stakeholders. We've got a number of representatives from our Board. Welcome to all of you, and we've got quite a few of our executive managers. You'll have an opportunity to interact with all of them during the tea.

Today, I will present to you our half year results. It's a pleasing set of results. It demonstrates a level of stability in our company, and it demonstrates progress towards our turnaround plan. So I'm going to get straight into it.

When we stood up here previously, in June, we discussed a few changes to our Board. Since then, we've appointed a new independent Chairman, being Ralph Havenstein, who addressed you at that stage. And we've had 2 new Board members join our board: one, George Cavaleros; and two, Mr. Bernard Swanepoel. Bernard joins our SERC Committee, and George, our Audit Committee. We have a gap on our board for a new financial director, and a process is underway to close that. I hope to be able to make an announcement in that regard in the first 6 months of the next calendar year.

From a management perspective, my job is clearly to ensure that we have the right skills and people in our business to implement the change and the turnaround that we need. Also to ensure that our team is agile and nimble enough to deal with the macro changes that we're experiencing across our business. We've had stability throughout -- in our team through this process. You will meet Stephan Serfontein just now, who will share some of the presentation with me. He's our Financial Director from our international business, and he's stepped into the role of interim CFO to help us with our results and to manage our finance function. We've got one gap in our management team besides the CFO, and that's the permanent appointment of an HR Director for our business.

So the salient features of our results. We've made some really good progress under tough trading conditions. You will note that we went out to the market to do a rights offer, a ZAR 2 billion rights offer. That rights offer was 97% followed by existing shareholders, and we had an excess subscription of 84 million shares. The rights offer was successfully concluded, and the result in flow of funds from that was to pay down debt.

From a debt perspective, we reduced our net debt by ZAR 1.4 billion. In our statements, you'll see that we have accounted for IFRS 16. So in various places, you'll see asterisks where we show the ratio with and without the IFRS 16 adjustment. That's resulted in our net debt-to-EBITDA ratio dropping from 4.5 at year-end to 2.35 at half year.

In tough trading conditions in our Agriculture, Chemicals and Mining space, we've seen our revenue up 1%, and a large chunk of our divisions have returned to profitability. So there's an increase in operating profit of 137% to ZAR 294 million. And then we've -- obviously, that's resulted in a profit after tax increase as well.

That's all filtered down into our earnings per share and headline earnings. And I think the one red dot on the slide is that, unfortunately, there will be no interim dividend. And whilst our debt is where it is, we will use all of our cash to continue to pay down debt.

If I can then just move to the macro environment. All of you know, we report our company in 3 segments: Agriculture; Mining; and Chemicals. From an Agriculture perspective, first of all, let me just talk generally. From -- in all 3 sectors, we've been -- we've seen volatility in our home market. We've seen low business confidence. That's resulted in volatility in the rand, volatility in our farmers, in our agriculture sector and also certain volatility in our mining and manufacturing sector. So I think, broad brush, a tough trading environment for our business -- for our businesses in all of the different sectors that they operate in.

From an agricultural perspective, there's been low maize prices. Farmers have been switching in terms of the crops that they plant. And I think what you do know, is if farmers change, what they plant, that impacts on what fertilizer they buy. That impacts on our margins. We've seen climate change impact our business over the last few years. The rains have been late. When they've come, they've been harsher and tougher. We can just look around Johannesburg at the moment and within a 5-day radius, you get hail, rain and sunshine.

Omnia has made good progress to deal with those factors, and I'll speak about that a little bit later. But specifically, we've helped farmers think about soil moisture, think about the sustainability of planting, the sustainability of crop and yield production over a number of years. So whilst we are concerned about the droughts and the rains, what we are cautiously optimistic about is that the soil moisture content is high. Thankfully, the rains have come. A lot of our farmers have started planting, so we'll see in the second half of the year how our local Agriculture business performs.

We've seen increased use of this technology that I speak about. Whether it be in South Africa or in other parts of the world, our farmers have been using the technology and the different processes that Omnia has developed and sells. And we've been able to link cozily what Omnia does to increase yield.

We've seen a very strong demand for AgriBio products; that comes through our numbers. Our Oro Agri business has performed really well in the first half of the year. And then before I get to the hyperinflation, we are concerned about Zambia. We've got a large agriculture business and a mining business in Zambia. We've made some really good returns in that business, but we're concerned about the outlook in that country.

From an accounting perspective, there's a few different accounting things that hit our statements this year, and one of them is obviously the hyperinflation in Zimbabwe. We've been thinking hard about that for the last number of months, and we've been managing our business differently, so you'll see that our impact around hyperinflation is a bit -- it's still there, but it's slightly muted.

From a Mining perspective, we've seen a slight recovery, and that's filtered its way into our bulk mining explosives volumes. It's filtered its way into our revenue and our profitability in that business. And also, what we've seen is the continued increase in competition. So an oversupply of nitric acid, an oversupply of explosives and the continued competition from various parts of the world coming to our shores, which means that our Mining business has to be nimble, agile and obviously, respond to that.

From a Chemicals perspective, the macro environment remains tough. The manufacturing sector, taking a lot of straining in the markets that Protea operates in, continued increased competition, and I think the restructure plan is still being focused on and some really good delivery in terms of the restructure that the management team has done. You'll see that coming through our results.

So if I then move to what we spoke about in June. We spoke about a short-term strategy, a plan of immediate action to stabilize our balance sheet. We were overleveraged, so we needed to deal with that, and then a number of fixes focusing on costs, working capital, cash generation, our financial leverage and margins.

We then said later, we will look at a renewal strategy to look at which products, geographies and businesses we own and hold, and that's still to come. So I'm just going to -- this was the same slide I showed then. I'm just going to go through a little bit of a report card of what we've delivered, what we still have to deliver on and what we perhaps haven't started.

So let's talk through the stabilizing, the fixing and the renewal of our business. From a stabilization point of view, we needed to complete the capital restructure, and I think that's largely completed. The equity part of it, the rights issue is done. We've elicited some great support from our shareholders and our banks to put in place a bridge loan. And we are close to putting in place our sustainable debt package, which will term out the bridge loan for the next few years. That process is at legals, and hopefully, we will have pay away at the end of the month.

I've mentioned what our rights issue looked like, and I'm not going to go back into that, but a very successful rights issue in a very tough time, not only in our company but also in our country. I think what it reminds us of is that the support we've got from shareholders and banks tell us that Omnia has got a very strong business case. We've got some really great assets, some good people, we operate in primary markets that are important to the economies and the countries we operate in and a lot of hard work still has to be done to unlock all the value over the next few years.

We've also needed to focus heavily on our working capital. So all of you know, our working capital is an important KPI. It's an important factor to look at. And we've got a few slides that will come out later. But I think the management team have made really, really good progress on working capital management.

So from a fixing perspective, I think the working capital, I'd say, we've done well, but there's still more to do. We've focused heavily on cash generation. I'll talk about CapEx. We've done really well in terms of managing our CapEx. More work needs to be done on making sure that the investments we've made and the money we've spent CapEx on actually delivers the results we need.

We've had a number of our share schemes under water. The company has gone through a very tough time. We've been working on unwinding those and closing them out.

And I guess further focus needs to happen on our cost base. So I think we all know that if our business -- if our costs in our business increase by more than inflation over a large period of time, we then have to deal with that, so all the businesses are looking really hard at costs. You will see the benefits of the Protea restructure coming through in the current results. And you'll hear us talk about a restructure that has been implemented in our Explosives business, which will result in ZAR 80 million worth of cost savings next year out of that business.

We have got a lot more focus to put into our nitrophosphate plant. The plant started on time and well, and I've got a slide that will talk about that a little bit later.

And then clearly, all of our customers, all of the different spaces we operate in, transformation, our Black Economic Empowerment scorecard is critical, and we've got work to do on that. We've maintained our Level 3 score, and we would like to enhance that over future years.

In terms of renewal, we will be taking -- we're reviewing our products, our geographies and the businesses we own. And we hope to, at our year-end results, to be talking about how we will streamline and synergize those and that'll be part of what the new Omnia will look like going forward.

We intend to look at all of our geographies and our products based on a return on capital. And we have implemented a number of cross-divisional projects or processes where our business will start working together. We've run our business very separately over the last decade. And certainly, there's synergies to have, whether it be logistics, whether it be supply chain, whether it just be some basic finance functions working together in a collaborative nature.

We also need to deliver on the returns on the investments we've made. So I will put up a slide later talking about the investments we've made in Oro, Umongo, AX and the nitrophos plant. Those were the 4 big investments I spoke about at our year-end results. We need to deliver the returns on them. So we will go through a structured process to make sure that all those investments deliver the return on capital that we require.

Going forward, I think what the renewal process will lead to is a bit of a streamlining of our business, a bit of an operating model change, a review of our asset base, so there might be certain noncore assets that we don't need to own that we would dispose of. And I guess, if you just think about Omnia, a company been going for 66 years in a number of spaces we own, not only the land, but the warehouse that our fertilizer is stored in, so there might be certain assets that are noncore that we will probably think of getting rid of.

So if I step into a little bit more detail of our stabilize, fix and renew. The first thing we speak about is our debt structure. So broadly, we put in place a ZAR 6.8 billion bridge. We took ZAR 2 billion of that bridge out with the rights offer. And now we've termed out the next ZAR 4.8 billion into a sustainable debt package for Omnia going forward.

That results in ZAR 2 billion of core debt: ZAR 1 billion of a revolving credit facility that we speak about; and ZAR 1.8 billion of working capital. For those of you who follow our company and have followed our company for a long time, you know that we've got a very deep working capital cycle. In some instances, when rains are very late or miss, our working capital cycle could be longer than a year. But I'll talk a bit further about the working capital a little bit later.

So this was a chart we put up in June as well, which shows the different investments that I've already spoken about and how our gearing went out of sync. So in essence, at year-end last year, our net debt was ZAR 4.4 billion, and our net debt-to-EBITDA ratio was 4.5. It was critical for us to reduce that and to focus heavily on our cash generation, and that's what the rights issue has done.

So post the rights issue and excluding the impact of IFRS 16, our debt reduces to ZAR 2.78 billion and our debt -- net debt-to-EBITDA ratio to 2.3. I did state that we would be comfortable to be in a range of between 2 and 3x in the short term. And I guess in the medium to long term, we would like that ratio to reduce below 2. We've obviously got an IFRS 16 issue as well that we need to think about here.

I think what we -- what I also mentioned is we will be going back to all of our investments that have been made and ensure that we deliver the returns that were planned for them. And you will see that some of those investments have performed well. And in some instances, we need more performance out of those investments.

So then if I just move on to our EBITDA. Our balance sheet, our capital structure has been built on through-the-cycle sustainable EBITDA of about ZAR 1.5 billion, which is what we said at the year-end results. And in essence, our performance now, excluding the impact of all the accounting or IFRS changes, is ZAR 612 million. If you include some of those changes, it gets to where the cross is and that's ZAR 752 million.

I think the message I wanted to give to our investors is that what we're seeing, the blue line, is clearly how we performed last year, what we're seeing in a more normalized operational return from Omnia. All the grayed out lines are the prior years. And we've still got the most important half of our year to come. But for the first 6 months of trading in this year, the company has performed more normal than what it has to last year, and that's a pleasing -- it's a pleasing place to be.

That doesn't mean that we don't have a lot more work to do. And I think for all of you who know a company well, we're a very cyclical business, and a large chunk of what we do happens in the second half, in the second half of the year.

I'm going to move to the next indicator that we look at, which is CapEx. We've come off our intense capital investment cycle. Over the prior years, we've invested in nitric acid plants, AX and the nitrophosphate plant. And what you're seeing coming through in the half year 2020 is a more normalized CapEx spend. We're spending on maintenance capital. And we've still got a little bit of the nitrophosphate plant coming through in the current year. So I think what you can see is that our management team is managing our CapEx well. We don't want our CapEx to go out of sync and anything and be a massive drain on our cash.

The next indicator we speak about is our net working capital. Obviously, all of these are linked into our cash, and these are all the important indicators to watch very carefully.

Next one is the most complicated one, so I'm not going to ask you to try and interpret all this that's on this slide. I'm going to do it for you in a few very simple statements. So we know what Omnia does generally is it builds up its fertilizer stocks from March until October, November. We deliver all of that fertilizer very swiftly, which our MD of RSA business will tell us very swiftly in a few months, and we convert all of that fertilizer into cash. And I guess what you'll see is a profile for a number of years, our working capital goes up, stocks built, farmers -- the rain arrives, farmers plant, and our stock comes down and that all goes into cash.

A few things we need to make sure of: one is that over a long cycle, that stock level is not slowly creeping up. And if we look at the blue -- the green bars are the stock levels. If we look at the green bars, you can see in the prior 2, in fact, starkly in the prior year, the stock level crept up. So the first thing we promised our shareholders is we're going to rebase the stock level. We're going to look at all the stock across our business that doesn't deliver the return on capital. We're going to look at the business units that are taking perhaps trading positions on stock, and we're going to take firm action and deal with it.

So the first thing we did is we've reduced our net working capital year-on-year by ZAR 714 million, which is an absolute great achievement for the management team. We had a business called Innofert, which we might have mentioned previously. We said we will be closing that business, and we will be liquidating the stock positions in that business. We've successfully done that. We have repurposed the business to do something different, and that has resulted in an improvement in our working capital. In our Mining business, in our Chemicals business and in our Agriculture business, we've reduced and been more efficient and more effective around our working capital management.

The second thing to know, so the -- so firstly, what we've done is we've rebased it. The second thing is we know that the rain's been coming later. So our MD of RSA business, Jacques and his team had a long -- number of long late hours of arm wrestling, and we said we need to be more agile around how we build the stock position up.

So actually, what we did is we built the stock positions up a little bit later. Our sales team are always concerned, "What happens if the rain comes earlier? Will you have enough fertilizer?" So we've managed our working capital much more carefully. We've built our stock levels up later. And with the working capital coming down by ZAR 714 million, our actual fertilizer stock that's available for our farmers to plant has gone up by ZAR 1.5 billion, which shows you how well the team has done in terms of managing those 2 elements of net working capital. So whilst our overall net working capital has come down, our stock level around fertilizer has gone up; an absolute great achievement for the team. There's a few more stats there.

I think what that tells us, though, is that we are changing the profile of our Agriculture business a little bit to something different. So you will see us build the stocks up a little bit later. And perhaps what you'll see is a different mix of business in the first half and the second half of the year.

We are -- we have got sufficient stock for the planting season. Our Agriculture business is delivering. And I think we will continue to monitor this net working capital. We will continue to look at long lead times that it takes to build up stock positions. And I'm really, really pleased when we look at, whether it's the stock position in South Africa, in Zambia or in Indonesia, our team are looking at return on capital metrics. Our team are looking at weighted average cost of capital, and we're actually building and managing our net working capital a lot smarter. This is a really important metric for us, and we will keep looking at it because it's got a big impact on the amount of cash we utilize and generate in our business. So I think really great delivery there from the management team.

That then is all filtered in operating profit. I'm going to do the operating profit at a fairly high level and margins. And when Stephan speaks through the income statement, balance sheet and cash flow, he'll go into a little bit more detail around the specific business unit profitabilities.

So let's take them one at a time. I think, overall, our profit increased by 137% to ZAR 294 million. In our Agriculture business, we have implemented a number of cost-cutting initiatives.

Clearly, there's been difficult trading conditions in the South African business, but we've had really pleasing results out of our international business and out of our AgriBio business. Our AgriBio business has performed well.

And our international business has performed really well. And that's resulted in a margin improvement from half year last year of 0.4% to 2.8% in the current half year.

In our Mining business, we've seen a little bit of tailwind in the mining sector in South Africa. We had a number of restructures and cost initiatives and efficiency initiatives in our Mining business. That's resulted in the Mining margin improving from 4.2% in half year last year to 8.9% at the half year this year.

There's still more work we need to do in terms of our Mining margins. But what we have benefited from is higher bulk sales in the local market. We secured some new contracts in the international market. We're now delivering explosives and solutions in Indonesia, and we're doing the same in Canada. Our Mining business will continue to focus locally, continue to focus in sub-Saharan Africa and continue to grow selectively across the rest of the world.

Maybe just a point I wanted to make around our Agriculture business. We've seen some very strong growth in Brazil, which has also helped our Agriculture international business.

If I move to Chemicals, the chemical sector, it still faces a number of headwinds in the South African economy, largely a South African business. The management team restructured the business last year, focused on more profitable products, also took out a large chunk of cost. I think what you're seeing is some strong delivery coming through there, margin improvement from half year of 0.7% to 3.5% and overall profits being made in that business. Umongo also performing well: additional sales coming through and higher profitable product being sold, which is good for that cluster.

Our big CapEx investment over the last 2 years besides our acquisitions has been our nitrophosphate plant. Just to remind all of our investors on why we built this plant, the nitrophosphate plant, really, allows us to use phosphate rock, which is a cheaper source of P into our fertilizer and our Explosives business. We've commissioned the plant early this year. The plant commissioned well, and we're now in the ramp-up phase.

Unfortunately, the ramp-up has been slower than anticipated. We've experienced some technical difficulties. We've needed to have a team of our engineers and our experts being focused weekly on this project. We have made modifications. We've spent a little bit more money on it. And our instantaneous capacity is now up to 60%, probably a little bit more, maybe closer to 70%.

Just to give you a sense, it's normal for any big plant of this nature to start up and then have these sort of problems. It's important how we deal with them. And I'm confident that the team of experts we've got are well placed to get the ramp-up that's required. We clearly had certain benefits put in our targets, in our business plans for the plant. Those will probably be a little bit later than we anticipate. We are lucky to have our nitrophos 1 plant available, which we turned on to help us with the buildup and the ramp-up of our stock levels and that's worked well. So in the second half of the year, we will be able to conclude exactly how much benefit comes out of this plant and what the utilization and the benefit would be for the next net financial year.

Clearly, we fundamentally believe that Omnia has got a huge competitive advantage in owning such a big part of the agriculture value chain. You all know that we are involved in soil analysis, plant analysis. We provide granulized fertilizer, liquids and specialty across the world. We do the AgriBio stuff, and we fundamentally believe that this plant is important, so we will continue to treat it and get the required output out of it over the next financial year.

It was important to us not to lose the planting season. So this is the busiest time of the year as we're ramping the plant up. It's the busiest time of the year for our Sasolburg facility. So the management team had -- are weighing up all of those things so that we don't make some of the fixes or modifications we need at the expense of producing and selling the fertilizer. And I think we've got a team working on that and good progress being made.

So then if I start getting to a point of concluding. I think, overall, what you can see is that our plan, our turnaround plan will really have benefits for all stakeholders. So yes, we needed to work on stabilizing and fixing out our business. But going forward, we need to implement a few more strategic projects to increase and enhance our financial discipline to make sure that each of our businesses and our investments are managed on return on capital.

We've got a lot of work to do around our people and our people alignment. It has been a very difficult time for Omnia to go through what it's gone through, and you can -- you would understand that our people have been through a lot over the last 6 months. So there's a lot of work that I need to do there. We also need to relook at our operating model, our B-BBEE strategy and renew that.

And I guess going forward, we will focus on more capital-light businesses. We will ensure that our geographic expansion and the businesses we've got in the various geographies are all measured on return on capital and are capital light.

I also mentioned that we will look at noncore assets. So any asset that's not delivering the returns that we need, we will take a view on those, like we did on the Innofert business to change what we use that business for, and that's reduced our working capital substantially, reduced some of the bandwidth that it sucked up and actually created a lot more focus in our business.

I'm going to pause for a second there and hand over to Stephan. He's going to take you through the income statement, balance sheet and a few slides on the financial results, and I'll be back just now. Thank you.

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Stephan Serfontein, Omnia Holdings Limited - Financial Director of Omnia Agriculture International [4]

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Thank you, Seelan. Good afternoon, ladies and gentlemen.

Jumping into the consolidated numbers for the Omnia Group, so first of all, I'll quickly take you through the income statement. So you'll see revenue was up just by 1%. I'll unpack it later with the operational performance.

From a GP point of view, you will see we're up nice percent -- or 9%. That was a strong performance across all divisions throughout the Omnia Group. From a distribution expenses point of view, we were only up 3%. That was mostly due to the Protea Chemicals taking out a lot of the cost towards the end of the previous financial year. From an administration point of view, we were up 6% to ZAR 672 million. The expenses are still very closely managed by the whole group.

If you look at the other operating expenses there, the other big one, we're up 6%. There were 2 big contributors in there. The one was the big ForEx loss that was sitting in Zimbabwe, which was actually offset by the higher GPs made and the other one was the increase in the intangibles. If you cast your mind back, the recent acquisition of Oro Agri, is that the amortization for the previous year was only 5 months, it was in the Omnia account. This time around, it was 6 months. And there was also accelerated amortization on the intangibles for Oro Agri. That gives us operating profit of ZAR 294 million, which is more than 100% up compared to the previous comparable period.

From a finance expense point of view, we were up 29%. The biggest chunks there was the bridge loan that was put in place was what we said, a higher rate; and in the previous comparable period, we were still in the construction of the nitrophos plant, which some of those interest were capitalized.

That gives us a profit for the year -- for the half year of ZAR 35 million versus a loss in the previous comparable period, which is a nice increase in the operating margin across all divisions from 1.4% up to 3.4%.

So just from an EBITDA point of view, just linking on to the slide that Seelan has showed. So the EBITDA for the half year, sitting at ZAR 752 million. We've just adjusted it so that you can see what's the impact on the Zim hyperinflation as well as the new IFRS 16 on leases. So the adjusted EBITDA is the number that Seelan quoted, the ZAR 612 million comparable to previous periods.

As we jump into the balance sheet, if you look at the noncurrent assets, we're up 4%. The bulk of that was the first adoption of IFRS 16, the right-of-use assets that was added on to the balance sheet. And also down here, you can see there was lease liabilities added. If you look at the -- if you go down the balance sheet, if you look at the inventories, we're down 22%. This was fantastically managed throughout all divisions, specifically in the fertilizer side, but every one contributed to the reduction in inventories.

Trade and other receivables were in line compared to previous periods. And then if you look at the net cash in there, the ZAR 870 million, we're up 20% to the previous year. That's mostly the cash that we use for the international operations that we operate in.

If we move down the balance sheet to the deferred tax line, you'll see there was a reduction of 39%. That was the intangible of the deferred tax that was created during the recent acquisitions for Oro Agri and Umongo. That has actually started to unwind.

And if you move down to the debt side, you'll see that was nicely down by 33%, and that was after the successful completion of the rights issue. That gives us basically a net working capital reduction of 13% comparable periods to ZAR 4.6 billion and the net debt of ZAR 3.2 billion.

So if we unpack the net debt just a bit further, as Seelan mentioned, all of you are aware, the Omnia business is a cyclical business. So we're going into a deep working capital cycle towards the first 6 months, which we basically unwind towards the second half of our financial year. You will see the second half, there was also a big capital expenditure associated with the nitrophos plant.

So if I just focus on the 6 months under review, you will see the Omnia's coming, as Seelan mentioned, with the CapEx slide to the end of the high capital cycle, so there's a reduction in the capital expenditure. And you can see the big chunk, the ZAR 2 billion write-off for that was just successfully completed.

Also, I've just indicated so that you can see the impact, the net impact of the IFRS 16, getting the net debt to the ZAR 3.2 billion. So excluding that, we're sitting at a ZAR 2.8 billion level.

If you move down the cash flow statement, so if you look compared to previous period, you will see there's some nice increase in cash. There was a difference of about ZAR 800 million compared to the comparable period. That was mostly down to the unwinding of the working capital where the inventory played a big role.

If you go down to the financing expense, as I explained, that ZAR 300 million was up due to the bridge and the capital compared to the prior period. If you go down and if you look at the PP&E line, you'll see in previous period, there was quite a big expense due to the nitrophos plant, which is this year, only ZAR 200 million impact for the 6 months. And on the intangibles as well, in the comparable previous period, it was the AX development implementation that was capitalized.

If you move down, you will see the big chunk of the ForEx proceeds there, which actually, gives us a net effect of a positive cash flow inflow versus a big negative in prior periods.

So from an operational point of view, I'll just give you a bit more details specifically on the 3 business divisions. So if we can jump off with the Agriculture one, specifically starting off with South Africa. So the revenue were up 3%. But the pleasing side of it was the operating profit, up 40%. That was basically twofold. The margins were under pressure due to the [die] inventory, the cost of inventory that we're setting off over year-end, but the cost-cutting exercise, taking out additional costs, actually improved the margins.

From an international point of view, the revenue were down 8%. That was mostly down to Zimbabwe. But the Zim's bases was focused on to make sure we externalized the cash. And then the operating profit were up 13%. That was mostly due to Australia and our Brazil business, which they really focus on humates, as well as in Zambia. Zambia, there were early deliveries preseason on contract business, which was quite pleasing. And specifically on Zim, we've actually taken out a lot of cost in our retail footprint as well.

From a trading point of view, as Seelan mentioned, they were fairly flat year-on-year. But the biggest focus from a trading point of view was to unwind working capital, which the management team successfully did up to half year.

From a biological point of view, the revenue were up 43%, and the operating profit were up 100%. That was mostly due to the higher sales that we've done in Brazil, the U.S. as well as in South Africa. Also, the new product registrations and patents coming online, we can see adding to the bottom line.

If you go to the Mining side, South Africa, the revenues were up 10%, and the operating profits were up 67% as there was an increase in the bulk volumes, and there's also a big chunk of cost that was taken out of the mining sector that we will actually see the benefits start flowing through to the second half of the financial year.

From an international point of view, the revenues were up 4%. The operating profit were up 100%. That was also due to bulk volume sales into Zambia and West Africa. There was also a decrease in the cost in West Africa. The one thing that I just want to allude to, there were prior year once-off adjustments that were sitting in this base here. That was worth ZAR 60 million. So if I actually adjust this number, this number was 8%, which is still a pleasing sign from a mining point of view, jumping from 8% to 10%.

As we go into the Chemicals sector, Protea Chemicals, the revenue were down 2%. The operating profit were up 100%. So it was basic -- so it was due to lower revenue but higher-margin business. It was also the cutout of the EcoGypsum plant that was seen there.

From Umongo Petroleum point of view, the revenue was up 11%. Operating profit was up 100%. That was due to an increase in volumes as well as an increase in specialty sales.

I'll hand over now for Seelan for conclusion.

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [5]

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Thanks, Stephan. I think what you can see is a really strong performance from all of our business units. I think it's important to know that Omnia is a cyclical business. So we've still got a difficult half, one important half to come. So -- and that will impact our results at year-end.

I'm just going to start concluding. So I'm just going to talk a little bit about the way forward. So our 3 sectors: Agriculture, Mining and Chemicals, I think we know that commodity prices are low. That's been impacting our agribusiness. We are cautiously optimistic about the rainfall. But I think it's important to note that the rain hasn't arrived in some of our Free State areas. And in some of our districts, the rain has arrived and it's been fairly harsh. So we need that to settle, and we need to see what that looks like.

We've spoken a bit about hyperinflation in Zimbabwe. We need to focus heavily on that territory to make sure and the management has done a good job, but to make sure that we're not further exposed there. And we've obviously got big businesses in Zambia and other parts of the world that are also impacted by different macroeconomic factors.

We will continue to focus on our AgriBio business. So the strong demand humates, the strong demand for our Oro Agri products, we'll continue to invest in that and grow that business. Some of our core focuses in agriculture, clearly, is that we need to bed down the ramp-up of our nitrophosphate plant. We are busy integrating our agriculture sector and synergize the operating model there, which will hopefully have some of the cost benefits that we've promised. And we will continue to invest in AXIOTEQ, AgriBio and Oro Agri. All of those products have got huge value to add for our farmers and the agriculture sectors in the different countries we operate in.

We will leverage our distribution footprint to sell our products, and we will continue to invest in a strong pipeline of patents and labels we've got in Oro Agri that Stephan mentioned.

From a mining perspective, the global recovery -- we will wait for a global recovery in commodity prices. We're not there yet. In South Africa, there is a number of different tenders that are out, and we will position our business for those. And we will position our unique capabilities that we have in that sector to add the value that we add in -- to mines. I think most of you know that what BME does, it has some very unique competitive advantage that we've been very, very successful in leveraging that in the rest of the continent.

In terms of our core focus, we will further develop our AXXIS, that's our detonator technology. We will focus on the new business in the local South African market. We will continue to build out our JV in Canada. We have distribution partners in a number of American countries, Alaska, Texas, Mexico and Latin America, and we'll continue with those. They will be on a capital-light basis. And obviously, we're in execution and delivery phase in Indonesia and we'll continue to build that out.

On the Chemicals side, the management team -- well, clearly, the sector is muted. Manufacturing growth is not where we'd like it to be. I've mentioned the increased competitive activity that we've seen. We will -- we also will continue to move our business from more commodity-based products to specialty products, where the margins are higher. And we will further explore how we can reduce costs and how we can deliver more out of that business.

From an Umongo perspective, Stephan showed you that Umongo's had a pleasing result. The earnings are 50% up on last year. So we will continue to drive the sales and the margins in that business so that it continues to deliver.

I guess in closure, the business has been through a very difficult time over the first 6 months of the year with our debt restructure and rights issue. We've promised to focus on stability, to focus on clear management action to deliver results, to reduce working capital, to manage our CapEx better, to focus on our costs and to deliver on our core promises to customers. We will continue to do that. We committed to restore Omnia to be that proud company that it has been for the last 66 years, and hopefully, this is a first step in that direction.

I think there's a lot more we need to do in terms of fixing and renewing our business, being agile and being able to move and change as the macros and our markets change. And whilst we've made good progress, we know that more work lies ahead for Omnia to be positioned for this new normal that we see, both whether it be climatic conditions or whether it be the macro conditions that affect the different sectors we operate in. We need to become increasingly more agile to change our business, our cost structure and to deliver on our promises to customers.

So with that, I'm going to close and maybe open for some questions. Should we start on the webcast? Or should we start in the room? Are there any questions in the room, Steph?

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Questions and Answers

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Steph Erasmus, Avior Capital Markets (Pty) Ltd. - Research Analyst [1]

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Just in terms of your commentary around the precision agri. Have you been able to monetize any of those services compared to prior periods?

And then secondly, just in terms of the different business units. Are all 3 generating returns on capital above their respective WACCs?

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [2]

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Okay. So the first question, I think we don't disclose separately how we price for all of our different services. Clearly, we can monetize or generate more value out of the different services we offer. And our team is hard at work doing that. We obviously offer a lot of value to our farmers and our farmers recognize that. Whether -- how we monetize that and how much of that we can monetize is an ongoing challenge in our business that we will continue to focus on.

The second question around return on capital. I think from what you can see is we've got a long way to go to deliver more returns. So whilst our results is pleasing and it shows good progress, the management team, we know that we need to increase our return on capital. We've been hard at work looking at our weighted average cost of capital and looking at our returns and projecting where we think the different business units will get to and what the gaps are and how we will close that. So Steph, there's still work to be done there. But what I can tell you is that the team is aware where there are business units not meeting those returns, and we have put in place management action and deeper management plans to deal with that. That will be a journey. So I don't think we will get to a place overnight to all of our business units, all of our geographies, all of our products are exceeding the returns. It will be a journey.

Okay. Should we go -- shall we do [Christina] first?

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Unidentified Analyst, [3]

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It's [Myron] from Metal Industries. Can you give us some more color on your nitrophosphate plant, right? I mean you say it's running at 60 -- well, instantaneous capacity at 60%. What was your design plan to be at the end of 2020? And how insurmountable is this problem? I mean how can you fix this, whoever you've got looking at it, just a bit more color, please?

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [4]

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Yes. Sorry, we haven't met before, but pleased to meet you. Our nitrophosphate plant, in essence, we would have liked it in the financial year 2020 to operate at 50% capacity. And we had a chunk of benefits budgeted that we would have liked to put -- have delivered in this financial year. So that was our target.

There's a difference between instantaneous, which obviously, you're aware of and how the plant functions. And we have got different seasons in our business. So when we look at the nitrophosphate plant, the production output and the benefit, we will determine that at year-end. So if it's -- it will be different during the half year and the full year.

Let's talk specifically about the challenges we face. So the plant -- firstly, I can tell you the plant is there. So you can go and see the pictures, and we have all walked around the plant and the plant is there. The plant is functioning so the product is coming out. Whether it be the mother liquor or whether it be the calcium nitrate, you can see it all coming out and it's working.

I think what we've experienced is the normal ramp-up of a big complicated plant that takes time to work through what we've got, which is a big Sasolburg system. So my team warned me. They said, "Seelan, please don't go into all the technical jargon around the plant." So I'm going to stop there because Jan's going to come and pull me off the stage. But in essence, what we've experienced is the plant needs to fit into all of our other plants. So some of the output is used in our granulation plant. Some of the output is used in our explosives plant. And clearly, there's pumps, there's pipes. Someone, I think, told me how many pumps there are, and all of them need to work to specification. All of those need to come together in a way. And we said in the first year, we'll be happy with 50%, 50% capacity. We needed, obviously, more than what -- more than that. So we've started our old plant up to help us with that.

The issues we're facing I fundamentally believe are not insurmountable. So let me peg that in the ground. The issues we face just mean that we need to balance when we make the changes, how we make the changes and how we continue with the production. So our [Imglovac] business gave an instruction not to stop the plant whilst we needed the product coming out of it and said let's makes some of the changes in our low production season, which we will do in January and February. So it's about balancing a new plant being ramped up.

I don't think there's a concern that the issues are insurmountable. I think that's the wrong -- yes, I don't think we're concerned about that. But measure us and monitor us based on how we deal with all the issues we've found and where this plant is at year-end. I'm absolutely convinced by year-end, we would have worked through all the teething issues. The biggest teething issue we found, we've worked through it and it's been solved. But obviously, at the time of doing this, it was -- in our half year, it was a teething issue we were dealing with. It's now being solved, and some of those changes have been implemented and will be implemented in our lower production season.

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Unidentified Analyst, [5]

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So just to explain to everybody, is the output a purity quality kind of problem? Or is it more a capacity utilization kind of problem?

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [6]

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It's not a -- the quality...

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Unidentified Analyst, [7]

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It's not a Sasol kind of like Charles cracker kind of problem is it?

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [8]

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No, no. Well, firstly, let me -- to dispel any issues and links to Lake Charles. This is an initial investment of, call it, I think, ZAR 600-odd million, and then we disclosed in our results at year-end, probably ZAR 750 million. And what I said in the slide, we're probably going to spend another -- from what you see, which is in our results, we're probably going to spend another 5% on making a few changes. So this is not a Lake Charles issue. This is something very different.

The product's coming out and the product's being used. So the product that's come out of the plant is in our granulation plant. It's being used. It's worked away, and it's in our explosives, and those explosives have gone out already. So that's not something to worry about. This is a normal teething issues of having a big, very complex piece of kit being ramped up.

And what's also important, and we could have probably got the plant to deliver more quicker, but it's not important for me to deliver in year 1. It's important for me to deliver sustainability -- sustainably over a number of future years. So in talking to Jacques and Francois and others, I said, if you're going to forego something in year 1 and actually make it 100% right for the next 10 years, do that rather. Sacrifice a few million rand here and get it right for the next 10 to 20 years.

This plant has to deliver for us into the future. It changes our input costs. It allows us to use phosphate rock instead of phosphoric acid. It allows us to reduce our working capital a little bit. It allows us to be a bit smarter around how we -- some of our production efficiencies. It allows us to decommission some of our old equipment that we've got in Sasolburg. So the long-term benefits of this plant is much more important to me than the year 1 benefit. I mean quite frankly, a chunk of the year-1 benefit, the management team have can probably deliver differently.

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Unidentified Analyst, [9]

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As shareholders, our pension plan, we appreciate a bit more color as well in the disclosures. If you look at the 3 big divisions and the subdivisions, we can see there are some really underperforming divisions where you're making EBIT losses, right? Where do you see is the low-hanging fruits for a turnaround, say, in the next 2 years, given -- in the subdivisions, I'm talking about, given that you've given us some more color here?

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [10]

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Yes. So I think we've added a bit more disclosure than we have at year-end. So the last 3 slides that Stephan went through around margins, we've gone into a lot more detail around the margins per division.

I think the short-term value -- so there's an immense amount of long-term value that Omnia can generate. But the short-term value is for us to manage our working capital, our costs, our CapEx tighter. And that's what we refer to as a short-term fix, that -- those benefits will deliver returns in the short term.

If I then unpack that into divisions, I think there's more value we can get out of Protea. There's -- we've seen a 100% increase in the profit out of Umongo, but there's more value we can get out of Umongo. Our Mining business has performed better, but we talk about an ZAR 80 million cost-cutting exercise that we've already implemented in our Mining business that will come through in future years. And I guess our Agriculture business, which is the most busy business at the moment because of the planting season, the nitrophos plant, bringing together our different agri departments into 1 business, synergizing the operating model, will also result in some benefits.

What I did say is that we will reduce our head office costs. The management team have a target. And you'll see these costs, some of these costs are coming out of the head office. And some of them are coming out of the divisions. As we do the detailed work, we -- the costs come out, but they come out of different places. So I fundamentally believe our head office can also be a lot simpler, and it is simplifying already.

So I'm not sure if I'm answering your question at a granular level, but I think a large chunk of what we can do is just focus on these basics and synergize our organization. Our organization has evolved to be an acquirer of different businesses and different products. And now we're busy sorting those out and making it simple and simple to operate.

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Bruce Williamson;Integral Asset Management;CIO, [11]

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Bruce Williamson, Integral Asset Management. Could you just remind us on your exposure to the South African mining market, specifically the commodities? And also, maybe specifically, the operations? And then the ones that you don't sell into, what chance have you got now of gaining some new business in the mining operations that you're not busy selling in?

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [12]

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Yes. So we've got exposure to most commodities. There's a slide, Bruce, that we put up on -- it's not in the book. It's actually on our website, where we actually disclose exactly which commodities our Mining business is exposed to. The wins we've seen in our current half year is largely coming out of coal. Our Mining is -- our Mining business is very dominant in open-cast mines, and we will continue to win business in the area. And the other area where there's opportunities for us are in difficult mining conditions where the ground is not stable, where there's hot holes or unstable ground. Our product, we use a double salt technology in our emulsion, which is a lot more stable and can be pumped into -- in very difficult spaces. And we will continue to win in that space. Where we -- yes, maybe I'll pause there. I mean obviously, we've got a pipeline of contracts that we're working on, but I won't go into that.

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Bruce Williamson;Integral Asset Management;CIO, [13]

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And then with respect to Indonesia, are you targeting coal as well?

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [14]

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In Indonesia, we are just busy setting up our business there. Do we have -- do we have Ralph here?

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Ralph Havenstein, Omnia Holdings Limited - Independent Chairman [15]

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Yes. Mainly coal business.

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [16]

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Yes. So initially, coal, but there are other things that we can do in Indonesia.

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Unidentified Analyst, [17]

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Maybe just a follow-up from -- I've got 4 questions. Just to follow up on [Myron's] question on sort of initiatives, cost savings, et cetera. So in the FY '19 results, you noted ZAR 293 million cost savings, and that excludes the ZAR 200 million of the head office collapse. Where along the line are you on that ZAR 293 million? So how much materialized in the first half? And presumably, part of that would be Chemicals? And how much do you expect to materialize from second half? You've mentioned the ZAR 80 million in mining. But can you maybe just indicate where you are along the line?

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [18]

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Yes. [Christina], it's probably best we do a recon around that. What we've seen in the first half in these results is we've completed a restructuring in our Mining business and that's done. And that will realize ZAR 80 million worth of cost savings, some of it this year. But on an annualized basis, you'll see that coming through in future years.

From a head office perspective and an agricultural perspective and some of the deeper management actions we're taking, we haven't disclosed exactly where we are on that path. Some of that, we have implemented and we have banked, and some of that is still to come. We will reconcile that and probably at year-end show you where we are.

What I have said is when we look at our operating model, some of our costs are coming out of the head office, but some of our costs are coming out of the business units even though we're changing a head office operating model. So costs will come out of both spaces. I think what would we, Stephan and I, will at year-end put together a chart that actually shows you where we've taken out costs and how it links back to our target.

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Unidentified Analyst, [19]

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And then you mentioned in the results contract gains in South Africa, and you've mentioned coal. But could you just highlight which of it was new versus unsettling an existing incumbent?

And then also, the contract loss in Australia that you've spoken about, just to maybe quantify that potential impact for us.

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [20]

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Yes. So the Australia one is a bit more simple. Unfortunately, that means we will have to do something very different in Australia, so we're really looking at that.

In the local market, there's been 2 gains for us. The one is volumes increasing from our existing customers. And then some new contracts in the coal space. And clearly, I would prefer not to give the names right now, but there are a number of mines that are out on tender looking for new explosives providers.

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Unidentified Analyst, [21]

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Could you give us an indication of the Sakhile scheme, the potential cost when you repurchase the shares?

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [22]

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Yes. So the Sakhile scheme is our broad-based staff scheme. There's black employees in there and others. We made a provision for that at year-end. And we are working through a process with those schemes. And we will settle them based within those provisions that have been made.

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Unidentified Analyst, [23]

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And then just lastly on Chemicals. I found it quite intriguing. There's lots of restatements and you've explained why. But can you just explain what happened with Chemicals? Because last year, there was a ZAR 65 million EBIT, and this year, it's ZAR 19 million. And it seems like it was reallocated to Agriculture. Can you just clarify what happened there or...

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [24]

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Yes, it was a segmental restatement. We put those slides up on our website. So we can take that off-line. And a few of our investors might want to really look at reconciling our segmentals. We haven't changed our segmentals after we changed them at year-end. So Stephan and I were tempted to change them again. I said, "Stephan, no. Let's not change anything right now. Stick to the way they are." And what we did, [Christina], we updated those slides. I think Suzette did it, and we put it on the website. Have we put on the website this morning? So they're on the website. If you scan through them and you still -- and it's still an issue, we can discuss it. But you're 100% right. It's a segmental change.

Okay. Should we check if there are any questions on the web?

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Unidentified Company Representative, [25]

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Yes. So there are no questions on the conference call. We do have some questions on the webcast. The first is from Matthew Whitelaw at 36ONE. It's a 2-part question. The first is, could you give some guidance on where you see maintenance CapEx for the rest of the financial year and next year?

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [26]

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Okay. Give me a second question while I get that page up.

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Unidentified Company Representative, [27]

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Sure. With your share of the loss from the equity accounted associate in Zimbabwe, is a net monetary gain from that operation netted against a larger loss? Or is the monetary gain included in the line item on the income statement?

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [28]

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Okay. So the first question around our maintenance capital, in our current half year, we've got roughly ZAR 57 million of maintenance capital, Matthew. And our budget is around about ZAR 250 million. We've got a total CapEx budget of ZAR 560 million for the current year.

And then the second is our associate in Zimbabwe, so that's Acol. And how it accounted for, Stephan, do you want to help me with that?

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Stephan Serfontein, Omnia Holdings Limited - Financial Director of Omnia Agriculture International [29]

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Yes. Sure.

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [30]

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Or should we get back to Matthew? What will be best?

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Stephan Serfontein, Omnia Holdings Limited - Financial Director of Omnia Agriculture International [31]

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Yes. We can -- so everything is lying in the associate line because it's equity accounted. So it's all lying in that ZAR 7 million loss. So that the hyperinflation gain at the bottom, that's associated with our fertilizer business. But there is -- in the pack later on, there's a detailed explanation in the pack on the hyperinflation, so you can see all the different lines that it touches.

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [32]

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Yes. It's our -- we've got a slide on hyperinflation where we've reconciled exactly what's happened throughout our business and we've also put that on the website.

Okay. Is there another question?

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Unidentified Company Representative, [33]

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No, that's all we have from the webcast.

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Thanaseelan Gobalsamy, Omnia Holdings Limited - CEO & Executive Director [34]

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Okay. If there are no other questions, thank you all for making the time to come here. I think we've got some tea and coffee outside, and we've got a number of our management and our non-executive Board members here. So thank you to you as well for coming. And if any of our investors would like to chat or interact with them, please do so. Thank you.