Fertilizers Merger Telecast

Orica staff present:

Chair: Mr Malcolm Broomhead, CEO and Managing Director
Mr James Fazzino, Group Investor Relations Manager

Genesys:
Welcome to the Orica Presentation held on Thursday 29th August 2002 at 2 pm EST. During this presentation your lines will be muted, however you will have an opportunity to ask questions immediately afterward and instructions will be given on how to do this at that time.

In accordance with the Telecommunications Act I must advise you that this conference is being recorded as requested. I will now hand over to Mr Malcolm Broomhead, Chief Executive Officer for Orica.

Chair:
Thank you, it’s Malcolm Broomhead here and joining me in Melbourne is James Fazzino. I will make a few opening remarks and then throw the discussion open for questions and as with normal practice we will put a full transcript of this teleconference on our web site once we’ve finished.

Yesterday and today we have really announced three deals: firstly the sale of Crop Care to Nufarm for $75M; secondly the purchase of the minorities in Incitec’s industrial chemicals business for a net $73M; and then finally the merger of Incitec Fertilisers with Pivot to form Incitec Pivot Ltd. These transactions of course are subject to various regulatory shareholder and court approvals which includes ACCC clearance and votes by Pivot and Incitec shareholders.

To run you through the rationale for the transactions, for a long long time people have been talking about the rationalisation of the fertiliser industry. To date no one has been successful because the deals have inevitably involved one company trying to take over another company. The premiums that are needed to do a take over and the prices that have been asked from the target companies have been unrealistic given the synergies available.

I guess the formula that we have really found here that’s worked has involved firstly taking out the non fertiliser assets out of Incitec so they’ve gone off to their natural owners - with Nufarm buying Crop Care and Orica taking full control of the ammonium nitrate and specialty chemicals businesses of Incitec. That leaves Incitec a pure fertiliser company which is of a size which then can be merged with Pivot in order to give Pivot shareholders a meaningful stake in the merged company. That’s important berceuse Pivot shareholders are primarily farmers who not only value their shareholding but also security of supply of fertilisers going forward. So they’re keen to be participants, to have liquidity if they want to get in and out of the stock, but also have an influence going forward.

These steps have enabled the merger to occur and the synergies that flow can be shared between the two original shareholding groups.

I will now go through the industrial chemicals business and then the Incitec Pivot business.

Starting with industrial chemicals. As I said the transaction is a necessary precursor to allow fertiliser rationalisation to occur. It doesn’t fit into the new fertiliser business and Orica is natural owner. Over 60% of the sales are internal to Orica and the balance is sold to markets that are already served by Orica’s chemical group. So this really simplifies the Orica structure and allows for flexibility for future usage of AN assets both Kooragang Island and Yarwun. The business meets our RONA targets.

Turning to the Incitec Pivot merger, the transaction will create what will be a significant publicly listed Australian company. It will have sales of over a billion dollars and supplies over 3 million tonnes of fertiliser per annum. Synergies or effici encies will be about $30M pa mainly in the upstream logistics end and in overheads - things like shipping, warehouses, trucks, business systems and so on.

What will be retained from a farmer prospective is the current sales networks and the channels that go to them - Incitec and Pivot’s channels as well as of course Landmark and Elders and the other independents. It will maintain both companies manufacturing operations and importantly it will maintain both Incitec's and Pivot’s brands. Incitec tends to be in mainly nitrogen fert ilisers, Pivot is mainly a phosphate company so the merger will give farmers more choice. Also the new company should experience less volatile earnings than in either of the existing companies because of the increased geographical spread - this reduces the exposure to local seasonal fluctuations. Importantly there will be increased reliability of fertiliser supply because the company will be a stronger financially.

From Orica’s perspective strategically the deal makes a lot of sense for us. Australian farming is an internationally competitive business, it’s a business that we are happy to still be involved with. There is growing demand for fertiliser, the cumulative annual growth rate (CAGR) in the last 10 years has been greater than 7%, so it’s above GDP growth looking forward. We’ll have a smaller share but of a much stronger business and we will retain over 50% and therefore consolidation.

Financially it makes sense for us, it is earnings per share positive, it meets our minimum RONA targets, there’s the efficiencies of $30 million we mentioned earlier and it just continues the theme of “low risk controllable value creation”.

So that really I think sums up the points that I was trying to make and we’ll take questions from those on line.

Genesys:
If you would like to raise a question now please press 14 on your telephone. If you are in the question queue and wish to remove yourself press 15. We do have a few questions already.

Brendan Lyons, JB Were:
I just had a question in regards to the $90M payment that will go to non Orica shareholders. I just wondered if you could break that down into its components please?

Chair:
This is the capital return. Essentially that comes from the payments that flow into Incitec, there is $73M which flows from our purchase of the bits of the industrial chemicals business that we don’t already own, 3%. And then there’s Incitec’s share of the sale of Crop Care and also Incitec’s share of this Syngenta payment which is still due at the end of this financial year.

Brendan Lyons, JB Were:
What figure is that, the Syngenta that’s due to Incitec?

Chair:
It’s a payment of round about $70M and of course half of that goes through Incitec and the minorities share in that half. The only offset is that the shareholders incur their share of stamp duty on the transaction.

Brendan Lyons, JB Were:
There is a comment in the release saying there is a proposed capital payment to Newco by Incitec

Chair:
Yes, that’s right. You will see that Pivot are making a dividend payment to their shareholders and in order to get the final settlement balance sheets to line up we are going to make a payment out of Incitec to compensate for that.

Brendan Lyons, JB Were:
The size of that?

James Fazz i no:
$29M.

Brendan Lyons, JB Were:
Okay, maybe if I could just ask a different question. The $30 million that you’ve highlighted in terms of restructuring benefits if you are able to provide some split on that figure and over what timeframe, whether that goes into goodwill or you will be taking a provision etc over that?

James Fazzino:
In terms of that $30 million restructuring payment:
1. there are a few assets which we will need to write down, round about $6M.
2. there’s some capital we’ve got to spend in order to optimise the plants and that would be in the order of around $8M and
3. there are the normal restructuring payments, which is the balance.

Brendan Lyons, JB Were:
Okay, so you would obviously still consolidate it, so you will make, would that be in the second half you would make a provision there or you will wait until later in the year until perhaps the first half of next year?

James Fazzino:
It really does depend on when the transaction completes

Brendan Lyons, JB Were:
All right, thanks very much.

Frances Loo UBS Warburg:
Yes, I was wondering if you could provide some indication as to the geographical sales split b y state pre the acquisition and then post the acquisition?

Chair:
Essentially Incitec has a good position in Queensland, northern New South Wales and Pivot in southern New South Wales and Victoria, so there’s not a lot of overlap I guess. Nationally we would have about 50% of the market in the merged entity, anything from 60 to 65% depending on whether there’s any dilution in the eastern and southern Australian markets.

Frances Loo, UBS Warburg:
Within that sort of Queensland New South Wales South Australia, that Eastern Seaboard, do you have any idea how the sales breakdown between those various states for the merged entities?

Chair:
I don’t Frances at the moment.

James Fazzino:
It would be roughly about half and half if you split Eastern Australia in two.

Chair:
Yes, if you split it through the middle of New South Wales it would be about half and half.

Frances Loo, UBS Warburg:
Half the northern region and half the southern region?

Chair:
Yes, but there’s slightly different products because Incitec tends to be a nitrogen based fertiliser and Pivot tends to be super phosphate.

Frances Loo, UBS Warburg:
Okay. And then can you talk about the process of obtaining regulatory approval and whether there could be a little bit of leakage I guess in terms of the combined operations and whether you have taken those into account?

Chair:
Yes, we have taken those into account. But I really don’t know on the regulatory issues. We have just made some assumptions and that was in that number I gave you, but we just don’t know until they’ve been through the process.

Frances Loo, UBS Warburg:
What would be the timetable if we should find o ut if they are going to object?

Chair
Well the ACCC will now start their public market soundings. I think the minimum length of time you can expect is six weeks but I don’t know that there is a maximum. We need to get through that process and then we need to get into the shareholder meetings for the de merger and scheme of arrangement in Incitec so that the IC assets can come out, and if all goes according to plan it will be sort of early December that we would get the transaction complete but things sometimes drift out a bit longer than that.

Mark Wilson and/or Troy Waddell, JP Morgan:
Just a quick question looking at that 18% RONA target what are the net assets of the new fertilisers or the enlarged entity and when do you expect to attain that target?

James Fazzino:
The net assets are around about 500 million or maybe a little bit more than that.

Chair:
Our targets say that we have to hit 18% RONA by the second year, that’s our sort of public target and it will certainly do it by then.

Mark Wilson and/or Troy Waddell, JP Morgan
So your second full year of operation? 04?

Chair:
Yes, we’ll certainly do it by then.

David Greer, Macquarie Equities:
Just a quick question regarding capex, if you look through Pivot’s financial results for the last four or five years it seems like they have really wound back their capital expenditure down to almost not much at all in 2001. How badly is the need in that business to spend money now?

Chair:
There is a need for a bit of capex. Some of the plants are old and we’ve taken that into account in our projections. There will be a need for some maintenance capital.

David Greer, Macquarie Equities:
Just one more question, the EBIT lift coming through from Pivot this year is substantial, how much, are you confident that’s sustainable and what are the main drivers between that uplift and profitability?

Chair:
Yes, we think that the trend is sustainable. I think that what’s driven their EBIT has been a similar sort of exercise to what’s driven Orica’s. With Chris Leon they’ve been through a substantial cost reduction campaign and getting some of the basics of their business right, better purchasing and better costs and so on. And they’ve had a relatively good y ear compared with Incitec from the weather perspective.

Nathan Field, ABN Amro:
Now that this Pivot Incitec will have about a 75% share of the east coast should we see margins approach the sort of 12-13% that Wesfarmers achieved on the west coast with a similar market share, and do you think you will get a greater degree of pricing power with the greater market share?

Chair:
Nathan, I don’t think we will get any pricing power. I really do believe that this is a market where imports determine the price. I mean it’s an import parity market. Incitec has always had a fairly large share of the Queensland market and their price has always been set by the international urea price and I don’t see that that would change in any way. Margins will improve hopefully through getting some of these synergies and sorting of the inefficiencies in the chain, so it will be on the cost side not on the revenue side.

Nathan Field, ABN Amro:
Just on that 30 million, is that like a first hit or do you think there are more costs to come out further down the track?

Chair:
I couldn’t really comment on it. I think it’s better just to assume the $30 million at this stage. My experience of mergers and acquisitions is that you get good surprises and you also find a few things there that you hadn’t thought of. So I think the $30 million is a pretty robust number.

Nathan Field, ABN Amro:
Just finally you talk about the new company having a billion dollars in annual sales, if you add up the two you get 1.2 billion, is there any reason for the two hundred million shortfall or do you expect to lose a bit of market share post the merger.

Chair:
No, just rounded it and being a bit conservative.

Graeme Cartwright, Independent Asset Management:
Yes, it’s actually Graeme Cartwright Malcolm. I’m not sure whether this has been covered but you’ve obviously got some SSP plants you can rationalise now. One of them’s obviously sitting at Cockle Creek and with the Pasminco restructure that whole plant must be looking suspect in your asset supply. Can you comment on the cost of rationalising that plant or what you would be required to spend there and moving your production further south?

Chair:
No, we think our current view Graeme is that we would continue to operate that. I think with Pasminco Cockle Creek is still set to continue for a few years yet and we don’t plan to be rationalising that particular plant yet.

Graham Cartwright, Independent Asset Management:
Do you own the land that the plant sits on or do you lease it from Pasminco?

Chair:
I couldn’t answer that for you I’m sorry.

Brendan Lyons, JB Were:
Yes I just have a couple of other questions I wanted to ask. Pivot looked like they have given an EBIT forecast for their fertiliser business and I am just wondering if you are prepared to do the same for your fertiliser business?

Chair:
No, we’re not at this stage Brendan, but you can look at the sort of the merger percentages and you’ve got to take the debt into account of course.

Brendan Lyons, JB Were:
I assume, I guess can we safely assume that the EBIT from your business would be better than figure that they’ve given on that basis?

Chair:
Yes, I think that’s a fair assumption.

Brendan Lyons, JB Were:
Okay, and I just wanted to ask also about something on the industrial chemical side, you talked in the past about an ammonium nitrate upgrade, at one of your plants, whether that’s still on the agenda and just sort of an update on the timing, the capex and that sort of thing on that project?

Chair:
Yes, we are really looking to see what happens in the coal market in New South Wales. We’re looking also at uprating (debottlenecking) Yarwin which is in Gladstone in Queensland. But we will be adding some capacity to our ammonium nitrate production one way or another over the next twelve months.

Brendan Lyons, JB Were:
Okay, and can you just run through now, I mean these businesses are always fairly inter wound in terms of sales and also even production sites, can you just run through I guess your inter company sales as they now sit for things like ammonium nitrate which is sold as a fertiliser as well, ammonia and just the sites themselves?

James Fazzino
Effectively Kooragang Island goes to Orica in terms of industrial chemicals and Gibson Island goes to the new fertiliser company. You are right, there will still be some transfer of sales between the two entities, for example depending on where the BIG N season pans out it makes sense sometimes to swap ammonium between Kooragang Island and Gibson Island. I think a good guide for where the business will be at in terms of its profitability is the kind of profit the business made last year.


Brendan Lyons, JB Were:
I am just thinking of inter company sales between the new fertiliser company and an industrial chemicals once it’s split off and put into Orica.

Chair:
It’s pretty small, it’s mainly seasonal adjustments Brendan.

James Fazzino:
It will be swaps more than anything else of course, you will swap ammonia between the two locations.

Brendan Lyons, JB Were:
Okay you mentioned the net assets for fertiliser would be 500 million plus, can you give the figure for the industrial business that’s going across into Orica?

James Fazzino:
The current net asset number which we have published is about $90 million and we’ve also said there is good will of $50 million so you will end up with net assets of $140 million on our balance sheet.

Brendan Lyons, JB Were:
Okay, and just in terms of the position of Futuris and if you also discussed the percentage of approvals that are required for the process, are they all sort of normal resolutions, do you see approvals required by Pivot and Incitec in terms of shareholders?

Chair:
No, some of the transactions will require approvals, 50% of shareholders, but 75% of equity, so I think Futuris needs to support these resolutions for it all to occur. I would hope that they would given the value that’s going to be created.

Brendan Lyons, JB Were:
Just one last question, the price you’ve come up with for the industrial chemicals business of $315 million can you just sort of give us an indication of how you’ve come up with that number. Looking at the first half profit it looks about 12 times EBIT, I assume the second half would be better and the next year perhaps better again but how have you come up with that valuation?

Chair:
Well it’s I guess it was a negotiation that occurred. There was an independent expert’s report done by Incitec and we paid what I think is a pretty fair price for those assets in order to enable this to occur and it’s also, there’s a little bit of the growth potential that you would expect in that business as we referred to earlier in that price.

Rohan Gallagher, Credit Suisse First Boston:
Just interested in first of all the roles of management and the respective management teams in the merged fertiliser entity is the first point. The second point is in regards to are there any financial penalties and so on if Pivot doesn’t realise that $45M forecast EBIT and the third point is just in regards to the urea consumption. I understand that you guys produce around 1.8 million tonnes in total for your total fertilisers, how much of that is urea and how much of urea do you actually import pleas e.< /FONT>

Chair:
As far as management’s concerned Rohan, Greg Witcombe will be CEO, the board will comprise members from both companies roughly representing the split but there will be some Pivot board members. The other management positions haven’t been decided at this time because this is still subject to a number of approvals and it would be inappropriate to do so, but we will be endeavouring to make it reflect a merger rather than a takeover and so there will be some managers from both sides.

James Fazzino:
Rohan in terms of your question about what we manufact ure, we sell bout 1.8 million tonnes of fertilizer and about half is imported, half is manufactured. Of the 900,000 tonnes which is manufactured urea is about 250,000 tonnes. This is urea that is manufactured for the fertiliser market, and of course you’ve got to add on to that BIG N which is essentially urea which is 120,000 tonnes. The imports of urea are about 200,000 tonnes.

Rohan Gallagher, Credit Suisse First Boston:
And in regards to are there any penalties or anything associated with Pivot hitting the 45M target?

Chair:
Clearly there’s final account adjustments to be made and that’s where some of those dividends and things can be adjusted to reflect the amount of money that is still in the two entities.

George Marias, BBY:
Malcolm you’ve freed yourself up from the Incitec structure, I was just wanting to ask about Kooragang Island and a few other things as well, can you expand on apart from cost savings what strategic advantages of what you’ve just done in freeing yourself up and also talk a little bit about potential growth opportunities going forward to those divisions?

Chair:
I think it puts the assets into a much more logical ownership structure. And then there’s always been a fair bit of tension around the structure of ammonium nitrate with the ownership being in Incitec but really the sales being out of the 100% owned Orica vehicle so that will then enable much better management, that and potential growth of those assets through expanding up in Queensland or indeed in New South Wales as the coal industry picks up in the future. It is much easier to do that now. In terms of the new business, the new fertiliser business we have got to go hunting for all these synergies, I think that will create quite a lot of value and then beyond that you’ve then got a vehicle which is a pure fertiliser vehicle. It’s got a good strong financial structure and should there be then any developments where new urea plants or whatever are being contemplated then that's something this vehicle can look at. So I think there’s pretty good growth over and above the organic growth that we talked about in both those vehicles.

Frances Loo, UBS Warburg:
Just a couple of follow up questions. We have talked about the synergies in the Incitec Pivot business, could we talk about the synergies that will be achieved in terms of full ownership of industrial chemicals in terms of quantum and over what time frame they will be achievable in the composition?

Chair:
Frances rather not get into that at this point. They will mainly be in the overhead and administrative areas, that’s really where the main synergies lie.


Frances Loo, UBS Warburg:
Right. You’ve talked about the goodwill that will happen in the industrial chemicals part of the transaction, is there any goodwill arising from the other aspect of the transaction or does that not oc cur given that it’s been done through a scheme of arrangement?

Chair:
Sorry I am just seeing if James can answer that because I’m not too sure Frances. I think we would need to get back to you on whether there is any goodwill on that side of the equation.

Frances Loo, UBS Warburg:
And is the EPS increase taking into account goodwill amortisation?

Chair:
Yes it does.

Frances Loo, UBS Warburg:
And then on the board composition of Incitec Pivot have there been any preliminary discussions as to how many members would be on the board and then sort of what entitlements the various shareholders would get for their proportion of stakes because I guess I am thinking of your position and I guess of Futuris’?

Chair:
No, there’s been discussions but there hasn’t been any finality yet of the board and we will wait and see once we get a bit closer to the final new company being listed that we’d finalise the board at that stage.

Frances Loo, UBS Warburg:
The last question is just on the Incitec Pivot I am assuming there might be some valuation adjustments done as you put the whole t hing together but what will the balance sheet look like relative to their capital base?

James Fazzino:
I spoke of assets around about $500M plus, their debt’s likely to be around the $200 level. So obviously from the two of those you can work out the equity.

Genesys:
Could I just remind everybody before we put this last final question through that if you are waiting on question queuing instructions it is 14 on your telephone keypads at any time.

Mark Wilson, JP Morgan:
Malcolm just a quick question. You did state at the beginning that this was a low risk controllable transaction but at the same time you are increasing your exposure to a very volatile seasonal business in fertilisers?

Chair:
We’ve got more geographic spread. In this current drought for example that’s occurring primarily in northern Australia and in Victoria and South Australia is getting pretty good rain, so I think it actually smooths some of those earnings a little bit. And I think you’ve also got a company which has got better purchasing power and so on, so I see the risk or the volatility of earnings actually being a bit more subdued in this company.

Genesys:
Mr Broomhead there appear to be no further questions in queue at this time and I am handing over to you now if you wish to conclude the meeting.

Chair:
All right, thank you very much and James or myself will be available if you have got any follow up questions but thanks for your interest.


End of recording.