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Incitec Pivot Limited Limited Pivot Incitec ABN 42 004 080 264 70 Southbank Boulevard, Southbank Victoria 3006, Australia Postal Address Incitec Pivot Limited GPO Box 1322, 2008 Report Annual Melbourne Victoria 3001, Australia Telephone: +61 3 8695 4400 Facsimile: +61 3 8695 4419 www.incitecpivot.com.au Annual Report 2008 For personal use only The paper used for this Annual Report 2008 is Harvest Recycled Silk. Harvest Recycled delivers Triple Green Environmental Performance: 60% Recycled Sugar Cane, ECF Bleaching and Sustainable Afforestation. 8634-02 cover.02.indd 2 21/11/08 10:02:27 PM For personal use only 8634-02 cover.02.indd 3 21/11/08 10:02:29 PM Contents Chairman’s Report 2 Managing Director’s Report 3 Board of Directors 4 Executive Team 5 Financial Report 6 For personal use only 8634-01 AR.17.indd 1 21/11/08 9:54:41 PM Chairman’s Report I am pleased to report the continued strong progress of Incitec It was with the release of this strong financial performance Pivot Limited during 2008. This year has seen the Company’s that Incitec Pivot went to its shareholders seeking to raise transformation into an international company through the capital through a pro rata entitlement offer. The entitlement acquisition of Dyno Nobel, as well as the delivery of outstanding offer was announced on 12 November 2008 and consists financial performance. The year also saw our inclusion in the of an underwritten institutional entitlement offer, which is S&P/ASX top 50 index of companies listed on the Australian now complete, and a retail entitlement offer which closes on Securities Exchange. These achievements were delivered by our 4 December 2008. The institutional entitlement offer received people executing to our well-defined business strategy. overwhelming support from Incitec Pivot’s institutional shareholders and raised approximately $819 million. The acquisition of Dyno Nobel was a strategic growth opportunity which substantially expanded our business, both geographically The decision to undertake the entitlement offer at this time into the international arena and also into the global resources continues our approach of prudent financial management, sector. Incitec Pivot is the number 1 supplier of fertilisers in which is particularly important given the uncertain global eastern Australia and, following the acquisition of Dyno Nobel, economic environment, and strengthens an already robust balance the second largest provider in the world of industrial explosives sheet. The funds raised by the entitlement offer will be used to and related services to the mining, quarrying, seismic and complete the refinancing of the bridge facility entered into in construction industries. In North America, the biggest market May 2008 in connection with the acquisition of Dyno Nobel, and in the world for industrial explosives, Incitec Pivot is the largest will provide flexibility to pursue planned growth projects, such manufacturer and supplier. as expansion of production at Gibson Island and Phosphate Hill. In 2008, Incitec Pivot delivered record financial results. Net Profit I am confident about the ability of the business to continue to After Tax (NPAT), Earnings Before Interest and Tax (EBIT) and deliver value for Incitec Pivot shareholders into the future. My operating cash flow all increased by three times on the previous confidence in the future stems from the belief that our enlarged financial year. In addition, we maintained our strong commitment business which services both the agricultural and mining industries to financial discipline, with our year-end trade working capital, will continue to benefit from the fundamentals underpinning those excluding Dyno Nobel, at a record low. Our focus on financial industries. We expect to see continuing demand for fertilisers discipline has underpinned our performance in recent years. based on world demand for food, fibre, feed and fuel. In relation Importantly, our shareholders have benefited from the outstanding to the mining industry, whom we serve, demand for explosives is result this year with a 98% increase in dividends per share underpinned by the volume of production of key bulk commodities, compared to the previous financial year. such as iron ore and coal. At the core of this lies the world’s population, which is still increasing at a net rate of over 200,000 More than 85% of the total earnings came from our manufacturing people a day. operations. This is a clear outcome of one of the key principles of our strategy, Own The Product. The result also shows the outcome Finally, I would like to take this opportunity to thank my fellow of another key principle of our strategy, Trade/Diversify, with profits directors for their diligent deliberation of the strategic issues and from our trading business, Southern Cross International, increasing to also thank Incitec Pivot management who lead an exceptional by over $40 million. Another highlight was Dyno Nobel which team, now extending through North America and the Asia-Pacific. contributed almost $110 million in Earnings Before Interest Tax It is through the efforts of the whole Incitec Pivot team that we Depreciation and Amortisation (EBITDA) in only the 3 ½ months have seen the strong growth of the Company and exceptional since we acquired the business. returns to shareholders. The contribution of Dyno Nobel demonstrates the success of our integration program and the commitment of our people. I was able to witness this personally during the Board’s tour of the explosives manufacturing operations and other sites in North America in September. At each of the sites, I was impressed with employees’ commitment to the Incitec Pivot way of “Getting Things Done” and our three “non-negotiables” of Zero Harm, Customer Focus and John C Watson, AM 18% Return On Net Assets, which were rolled out as part of the Chairman integrationFor personal use only program. 2 8634-01 AR.17.indd 2 21/11/08 9:54:42 PM Managing Director’s Report It is with pleasure that I report a record financial result for the if fully subscribed, $351 million from the retail entitlement financial year ended 30 September 2008 delivered by an outstanding offer, which opened on 17 November 2008. team focused on delivering outcomes based upon a sound business The capital raised will be used to cover the final portion of the $2.4 strategy. By any scorecard, this was a great result with key financial billion bridge loan facility taken to fund the cash component of the metrics three times higher than last year including Net Profit After Dyno Nobel acquisition and which is due to mature in May 2009. Tax (NPAT) at $657 million. The capital raising, together with other committed financings, Incitec Pivot’s business strategy, with its four key principles of Lowest also provides us with the flexibility to pursue planned growth Cost Base, Own the Product, Trade/Diversify, and Supply Chain, has opportunities such as the expansion of production at our been in place since 2005. Since then, profitability has increased by Queensland fertiliser plants at Gibson Island, near Brisbane, and about 14 times. In 2008, all elements of the strategy contributed to Phosphate Hill, near Mt Isa. The expansion at Phosphate Hill will the result. In this respect, the interaction of the four principles forms take production capacity from 970,000 tonnes a year, to 1.01 a perpetual cycle. Own The Product, our focus on manufacturing, million tonnes a year – an increase of 40,000 tonnes a year. At delivered some 89% of profit for the year. Our ability to deliver from Gibson Island, urea production will increase by 40,000 tonnes a manufacturing is underpinned by our continued focus on Lowest Cost year to 340,000 tonnes a year. Both of these projects are close to Base. Our strict financial discipline has seen some $150 million in the core growth opportunities and are expected to complete in 2010. sustainable cost savings through the Tardis I and Tardis II efficiency programs, commenced in 2005. A growing contributor to profit is the Our biggest development project is at Moranbah in Central focus on trading, through Southern Cross International, our trading Queensland involving the construction of a 330,000 tonnes-a-year business, which enables us to capitalise on our manufacturing fully-integrated ammonium nitrate complex comprising ammonia, excellence and low cost culture by diversifying our customer base. nitric acid and ammonium nitrate plants. I visited the project in October 2008, and observed that construction is on-track and I believe there is a strong future for our trading business which consistent with our expectations when we announced the project provides a number of benefits to Incitec Pivot as a whole. It in July 2008. The project, which is based in the heart of Australia’s enables us to “iron out” the seasonal demand “highs and lows” of largest metallurgical coal region and adjacent to some of the largest the eastern Australia fertiliser market taking some of the cyclicality coal mines in the world, is expected to commence production in out of the fertiliser business. As a consequence, this allows us to 2011. Our resource-industry customers are pleased about this new run our plants at capacity throughout the year, exporting in periods source of supply and we are looking forward to developing long of low domestic demand. Also, on the input side of the business, term mutually-beneficial relationships. In relation to our agricultural we are positioned to take supply from producers and suppliers of industry customers, we are looking at the potential to produce the materials vital to our production and which, if necessary, we can liquid fertiliser, urea ammonium nitrate, as local demand has been place in a number of markets external to the business.