Incitec Pivot Limited Annual Report 2020

Plain-text annual report

ANNUAL REPORT 2020 Main Menu Incitec Pivot Limited ABN 42 004 080 264 Level 8, 28 Freshwater Place Southbank, Victoria, Australia, 3006 Telephone: +61 3 8695 4400 Facsimile: +61 3 8695 4419 www.incitecpivot.com.au CONTENTS 5 6 8 9 10 13 14 16 17 18 33 34 36 38 42 44 45 47 48 50 52 55 56 60 81 120 127 128 129 130 131 ABOUT US Our Operations Who We Are Our Values Our Strategy PERFORMANCE & OUTLOOK 2020: Responding to the COVID-19 Pandemic Chairman’s Report Managing Director & CEO’s Report Operating & Financial Review BEING A SUSTAINABLE BUSINESS Zero Harm: Our License to Operate Our People Sustainability Overview Climate Change Strategy and Governance Caring for Our Communities Community Activity Highlights GOVERNANCE Corporate Governance Board of Directors Executive Team FINANCIAL & STATUTORY REPORTS Directors’ Report Remuneration Report Financial Report Independent Auditor’s Report ADDITIONAL INFORMATION Shareholder Information Five Year Financial Statistics Glossary Corporate Directory This document is interactive. Click any of the contents menu headings throughout this document to be taken to that page. Click the home icon at the bottom of any page to return to each section contents menu. Incitec Pivot Limited Annual Report 2020 3 IPL is a recognised world leader in the resources and agricultural sectors. 4 Incitec Pivot Limited Annual Report 2020ABOUT US 5 Incitec Pivot Limited Annual Report 2020OUR OPERATIONS Ankara Soma i e TURKEY CHINA PAKISTAN INDIA New Delhi Hong Kong SOUTH AFRICA Sibolga Tanjung Tabalong Jakarta Batu Kajang i i Johannesburg (SASOL Dyno Nobel) Johannesburg (DetNet) Port Hedland Mt Isa Phosphate Hill Kalgoorlie Perth Port Lincoln Port Adelaide Portland e e e e a e e Muara Tuhup Tenggarong Berau PAPUA NEW GUINEA Lihir e e INDONESIA e a Moranbah Townsville AUSTRALIA e i e Moura (Queensland Nitrates) Gibson Island Helidon Kooragang Island Warkworth Melbourne Geelong Devonport Ekati Diavik e e Flin Flon e Tumbler Ridge Calgary Biwabik St Helens Barry Salt Lake City Lincoln Cheyenne Carthage a e e a i e i a Louisiana, Missouri Waggaman, Louisiana Dinamita i Gomez Palacios Guadalajara e CANADA USA MEXICO Mary River e Meadowbank e e a e i a e e e i i Ishpeming North Bay Maitland Boisbriand Ormstown Simsbury Donora Duffield Van Wyck Brooksville Graham Wolf Lake LATIN AMERICA La Serena i e Santiago Incitec Pivot Limited Company Headquarters Incitec Pivot Fertilisers Corporate Office Manufacturing/Distribution Quantum Fertilisers Dyno Nobel Corporate Office Manufacturing/Distribution Joint Ventures/Investments Manufacturing legend i e Initiation Emulsion ANa a Long term AN supplier 2003 Listed on ASX 5000 Employees 60 Manufacturing facilities 6 Incitec Pivot Limited Annual Report 2020 Ankara Soma i e TURKEY CHINA PAKISTAN INDIA New Delhi Hong Kong e e e Muara Tuhup Tenggarong Berau PAPUA NEW GUINEA e Lihir SOUTH AFRICA Sibolga Tanjung Tabalong Jakarta Batu Kajang e e e a Port Hedland e Mt Isa Phosphate Hill Kalgoorlie Perth Port Lincoln Port Adelaide Portland INDONESIA AUSTRALIA e a Moranbah Townsville e Moura (Queensland Nitrates) Gibson Island Helidon Kooragang Island Warkworth i e Melbourne Geelong Devonport i i Johannesburg (SASOL Dyno Nobel) Johannesburg (DetNet) Ekati Diavik e e CANADA Flin Flon Tumbler Ridge Calgary Biwabik St Helens Barry Salt Lake City Lincoln Cheyenne Carthage Louisiana, Missouri Waggaman, Louisiana Dinamita Gomez Palacios Guadalajara e e a i e i a i e a e USA MEXICO Mary River e Meadowbank e e a e i a e e e i i Ishpeming North Bay Maitland Boisbriand Ormstown Simsbury Donora Duffield Van Wyck Brooksville Graham Wolf Lake LATIN AMERICA La Serena i Santiago e Incitec Pivot Limited Company Headquarters Incitec Pivot Fertilisers Corporate Office Manufacturing/Distribution Quantum Fertilisers Dyno Nobel Corporate Office Manufacturing/Distribution Joint Ventures/Investments Manufacturing legend i e Initiation Emulsion ANa a Long term AN supplier 3 million tonnes of ammonium nitrate produced 2 million tonnes of fertiliser produced World class technology Incitec Pivot Limited Annual Report 2020 7 WHO WE ARE IPL is a recognised world leader in the resources and agricultural sectors. With 60 manufacturing facilities and joint ventures across five continents, including Australia, North America, Europe, Asia, Latin America and Africa, we manufacture ammonium nitrate-based explosives and initiating systems, nitrogen and phosphorus fertilisers, and nitrogen related industrial and specialty chemicals. We have two customer facing businesses, Dyno Nobel based in the Americas and in Asia Pacific and the largest fertiliser business in Australia, Incitec Pivot Fertilisers. Through these two businesses, we make people’s lives better by unlocking the world’s natural resources through innovation on the ground. Our advanced and premium technology, manufacturing excellence and world class services are focused on the diverse needs and aspirations of our customers, ensuring IPL’s continuing key role in developing the efficiency and sustainability of the world’s resource and agricultural sectors. Dyno Nobel Global Manufacturing Dyno Nobel is IPL’s global explosives business. It is the second largest industrial explosives distributor in North America and the second largest industrial explosives distributor in Australia by volume. Americas: Dyno Nobel Americas (DNA) provides ammonium nitrate, initiating systems and services to the Quarry & Construction sector primarily in the Southern US, Northeast US and Canada; the Base & Precious Metals sector in the US mid-West, US West and Canada and the Coal sector in the Powder River Basin, Illinois Basin and Appalachia. Asia Pacific: Dyno Nobel Asia Pacific (DNAP), provides ammonium nitrate based industrial explosives, initiating systems and services to the Met Coal and Base & Precious Metals sectors in Australia, and internationally to a number of countries including Indonesia, Papua New Guinea and Turkey through its subsidiaries and joint ventures. Incitec Pivot Fertilisers Incitec Pivot Fertilisers (IPF) is IPL’s fertilisers business. With an unrivalled position across Eastern Australia, it is the largest domestic manufacturer and supplier of fertilisers by volume produced from its strategically positioned manufacturing facilities, including the ammonium phosphate fertiliser plant in Phosphate Hill, complemented by the world scale sulphuric acid plant at Mount Isa. Internationally, the fertilisers business sells to major offshore agricultural markets in Asia Pacific, the Indian subcontinent, Brazil and the United States. It also procures fertilisers from overseas manufacturers to meet domestic seasonal peaks for its customers’ diversified crops. Americas: In North America, Dyno Nobel manufactures ammonium nitrate at its Cheyenne, Wyoming and Louisiana, Missouri plants. The Cheyenne, Wyoming plant is adjacent to the Powder River Basin, strategically placed for both the Base & Precious Metals Base sector and North America’s most competitive thermal coal mining region. The Louisiana, Missouri plant has a competitive logistic footprint from which to support the Quarry & Construction sector and mining in both the Illinois Basin and Appalachia. Initiating Systems are manufactured at Dyno Nobel’s facilities in Connecticut, Kentucky, Illinois, Missouri, Chile and Mexico, and are also sourced from DetNet South Africa (Pty) Ltd (DetNet), an IPL electronics joint venture. Asia Pacific: In Australia, Dyno Nobel manufactures ammonium nitrate at its Moranbah plant, which is located in the Bowen Basin, the world’s premier metallurgical coal region. It also operates its fully integrated, state of the art joint venture ammonium nitrate facility near Moura in Central Queensland. Initiating Systems are manufactured at Dyno Nobel’s Helidon facility in Queensland, and are also sourced from IPL facilities in the Americas and its joint ventures. The business also produces nitrogen-based fertilisers and industrial chemicals across four locations including its state of the art ammonia plant in Waggaman Louisiana, that are delivered to its fertiliser end markets via an integrated supply chain. 8 Incitec Pivot Limited Annual Report 2020 OUR VALUES Our Company values are at the core of the way we work. With a One IPL – One Team mindset and behaviours, coupled with cross functional and geographical collaboration across our businesses, we are able to capture diversity of thought in an inclusive environment where the contribution of everyone is valued. We Think Safe, Act Safe, Be Safe. This is our license to operate. We listen, understand and exceed customer expectations. We are accountable, act with honesty and integrity to achieve the best outcomes. We work together across our businesses and functions with respect, trust and collaboration. We proactively listen and work in partnership with the communities in which we operate. We proactively seek to continually improve the way we work, embrace change and pursue innovative solutions. We do what we say we are going to do. Incitec Pivot Limited Annual Report 2020 9 Fertilisers Following the strategic review of the fertilisers business undertaken this year, our long term strategy is to grow IPF from a leading fertiliser company, manufacturing and distributing a range of domestic fertilisers, to a sustainable soil health company providing sustainable plant nutrition solutions to improve soil health. Our strategy will be leveraged through our expansive distribution footprint to drive new growth products and services towards soil health. OUR STRATEGY Explosives Our explosives business strategy leverages our premium technology, strategically located assets and strong customer relationships. With the best premium technology offering on the ground, designed to improve mining efficiencies, safety and reduce environmental impacts, our Dyno Nobel Differentiated Energy (Delta E) premium emulsion, delivery systems and 4th Generation Electronic Detonator Systems offer unparalleled design blast capability with safety inherent in design. The plug-in, ease of use and adoption explosives technology portfolio, coupled with strong customer partnerships underpin our growth strategy and will bring new technology innovations on the ground. Our Strategic Drivers Zero Harm: Zero Harm is good business. Our ambition is to achieve industry leading performance in occupational health, personal safety, process safety and the environment. Talented & Engaged People: Our aim is to make sure we have the right people with the right skills, in the right roles working collaboratively. This enables us to gather and capture the diverse ideas of everyone in our organisation. Customer Focus: Our focus on deepening our customer relationships and strategic partnerships across all our businesses ensures we can innovate and share technologies and solutions that improve our customers’ businesses. Leading Technology Solutions: Our technology strategy is focused on improving safety, reducing environmental impacts, creating a positive social impact and increasing productivity and efficiency in our customers’ operations. Manufacturing Excellence: Our Global Manufacturing vision is to be a world class manufacturing organisation, delivering personal and business growth. We will achieve this through Zero Harm, reliable operations and being cost competitive. Profitable Growth: We will focus on growth opportunities that are distinctive to our differentiated technology, core markets, core capabilities and advantaged market segments. 10 Incitec Pivot Limited Annual Report 2020 Incitec Pivot Limited Annual Report 2020 11 Our strong operating performance during the year delivered a solid FY20 result. 12 Incitec Pivot Limited Annual Report 2020PERFORMANCE & OUTLOOK 13 Incitec Pivot Limited Annual Report 20202020: RESPONDING TO THE COVID-19 PANDEMIC 2020 has been an extraordinary year for us all. At the time of finalising this Report, the world is still responding to the COVID-19 pandemic, which has had a profound impact on all our lives and required us to quickly adapt to new ways of doing things in order to keep ourselves safe. Across IPL, we have worked hard to respond to the COVID-19 pandemic threat. Our priority remains to protect the health, safety and well-being of our people around the world, those we work with and those in our communities. Because by keeping our people safe, we are able to continue to operate and serve our customers in the essential resources and agriculture industries. Our Global Crisis Management Team (CMT) has proactively worked across our business to implement new working standards, protocols and safety measures designed to protect our people, whether they work on the front line in our field-based operations, in our manufacturing plants, in the office or in their home environment. The CMT worked swiftly to implement preventative controls to keep our workplaces safe and to minimise exposure. These controls include the implementation of measures to ensure physical distancing, workers who are unwell staying at home, temperature and COVID-19 testing, and supportive measures through Telehealth and mental health programs. The CMT also implemented the Global Work From Home Workforce Strategy in March 2020, and more recently has been focused on safely transitioning our people back to their normal workplace under bifurcation strategies and strict COVIDSafe plans in line with local government and medical advice. We have ensured business continuity through the COVID-19 pandemic by adopting new and innovative ways of working, particularly through the use of technology, across our business: » A combination of live streaming, video and digital technologies has enabled us to keep our businesses running with minimal interruption and to service our customers in real time. » We provide remote technical support and advice to customers out in the field, through to undertaking virtual Gemba walks at our manufacturing plants to ensure continued oversight of safety practices. » Site turnarounds and restarts were successfully undertaken within strict COVID-19 controls. » We delivered our 2020 Half Year Results briefing in May, our Investor Briefing in August and our 2020 Full Year Results briefing in November, all virtually. » With the current restrictions on indoor gatherings and travel imposed by governments, we are holding our 2020 Annual General Meeting for shareholders in December 2020 through an online (virtual) platform, in the interests of protecting the well-being of our people and shareholders. The risk from COVID-19 remains with us and we will continue to align with advice from the World Health Organisation and the relevant government authorities in the jurisdictions in which we operate. We are continually monitoring the status and impacts of COVID-19 to ensure we keep our people safe and our businesses operating for our customers. We thank all our people and suppliers throughout our value chains for helping us continue to service our essential resources and agricultural customers during this challenging year. A B C A B C ctivate a daily routine e connected alm the mind Keeping our People Safe in a Global Pandemic Our response to COVID-19 was focused on the health, safety and mental wellbeing of our people and to ensure business continuity to safeguard our services to our customers around the world. Our response included a number of initiatives that we were able to develop and implement quickly and efficiently: » COVIDSafe plans across our sites, offices and workplaces. » Mobilising rapid on-site COVID-19 testing where high risks of community transfer emerge. » Close collaboration with the Chief Medical Officer and health officials in countries where we operate. » A wide range of mental health campaigns to support our people and their families including; – the One IPL ABC (Activate, Connect & Calm) Mental Health Campaign with global virtual mental health sessions for the workforce and family members who wished to participate and separate programs for leaders. – Mental health workshops and care packs for employees in periods of extended lockdown. » Digital working from home platform and collaboration forum for people new to working from home. 14 Incitec Pivot Limited Annual Report 2020 As a supplier of products and services to diverse international end markets in the essential agriculture, mining and resources industries, we continued to safely operate through FY20. We pro-actively adjusted our comprehensive business continuity plans to support continuous operation at all of our facilities and the ability to deliver to customers. Early on in the pandemic we took decisive steps to ensure the safety of our people, customers and suppliers, immediately deploying our Global Crisis Management Team. Management also responded with mitigating measures addressing the indirect impacts from the COVID-19 pandemic on the global economy, our end markets and commodity prices. For more information, see the Operating and Financial Review. Incitec Pivot Limited Annual Report 2020 15 CHAIRMAN’S REPORT There is no doubt that 2020 has been a very challenging year with the COVID-19 pandemic having an unprecedented impact on businesses and communities around the world. The safety of our people, customers and communities has been our primary focus and we have worked hard to continue to serve our customers without interruption in the essential resources and agricultural sectors. While our business performance has proven to be resilient in 2020, factors outside of our control have impacted global commodity pricing and we also saw some softening in demand in North America, associated with temporary shutdowns of some of our customers’ mining operations. As a Board we took early, decisive action to improve our financial position in undertaking an equity raising in May of this year. We successfully completed a $600m institutional placement and raised approximately $57.5m from our Share Purchase Plan. The Board was pleased with the strong support we received from both institutional investors and retail shareholders. The equity raising has enabled us to significantly strengthen our balance sheet, making our business more resilient in the current environment and giving us the financial flexibility to continue to deliver our strategic agenda. We reported Earnings Before Interest and Tax (EBIT) excluding IMIs of $374.5m for FY20, an increase of 23% compared to FY19. We reported a Net Profit after Tax of $123.4m after $64.8m of non-recurring items, compared to $152.4m in FY19. The result includes a solid performance from our Dyno Nobel explosives businesses which has high quality, strategically located assets in two of the best mining markets in the world and a premium technology offering that our customers value. We reported a significant improvement in earnings in our Incitec Pivot Fertilisers business, with the impact of historic low commodity prices being more than offset by increased demand as weather conditions improved on the east coast of Australia, as well as the absence of one-offs reported in FY19. Our Net Debt/EBITDA ratio is now 1.4x, down from 2.8x, largely reflecting the proceeds of the equity raising as well as strong operating cash flows. The Board has determined, as an exception to its dividend policy, not to pay a final dividend for FY20 in light of the ongoing uncertainty due to COVID-19 and IPL’s equity raising in May 2020. IPL’s dividend policy, which is to pay between 30% – 60% of NPAT, remains unchanged. Our team has made significant progress on the delivery of our strategic agenda during 2020, with improvements in manufacturing performance and the continued adoption of our premium technology offering by our customers. In April, we concluded the strategic review of our Fertilisers business which looked at three possible outcomes – a sale, demerger or retain and invest. Given the extraordinary market uncertainty, the Board determined that retaining the fertilisers business was the best outcome for shareholders. The business has a clear strategic agenda focused on delivering stable distribution earnings through the cycle, as well as driving growth from new value-added products and solutions. We have also made progress on our commitment to manage climate change. This year the Board endorsed reducing our global emissions by 5% from our 2020 baseline by 2026, the equivalent of 200,000 tCO2e. This target recognises the energy intensive nature of manufacturing nitrogen-based products which require natural gas as both an energy source and a raw material for hydrogen. We are also progressing our commitment to increase the diversity of our workforce. We have a stretch target to increase gender diversity by 10% year-on-year to reach 25% by FY22. In FY20, women made up 17.6% of our global workforce, a slight improvement on last year. I would like to take this opportunity to thank my fellow Board members for their contribution throughout the 2020 financial year. Our two most recent Non-executive Director appointments, Xiaoling Liu and Greg Robinson, served their first full year on the Board in 2020, bringing considerable commercial and operational experience as well as strong global perspectives. In February Joseph Breunig resigned from the Board. We also announced that Rebecca McGrath will retire, at the conclusion of the 2020 Annual General Meeting in December, after serving nine years on the Board. Both Joseph and Rebecca have provided an outstanding contribution to our Board during their tenures and we wish them both the very best for the future. Further, I am delighted that George Biltz will be joining our Board as a Non-executive Director on 1 December 2020, bringing to our Company extensive experience in the industrial chemicals sector, particularly in North America, which is of significant value given the Company’s large presence in that market. As a Board we have adapted to the restrictions imposed by the COVID-19 pandemic, holding our Board meetings virtually. We’ve been able to quickly adapt to the new format, while continuing to make important decisions to shape the future of the business, as well as endorsing management’s response to the pandemic. Operating in a COVID-19 environment has challenged everyone across the Company and I would like to sincerely thank our Managing Director & CEO Jeanne Johns, the Executive Team and all of our people for their hard work and commitment in these extraordinary times. Our people have worked tirelessly to keep each other and our customers safe, as well as deliver our customers reliable supply throughout the pandemic. Brian Kruger Chairman 16 Incitec Pivot Limited Annual Report 2020MANAGING DIRECTOR & CEO’S REPORT In a year unlike any other, our business has proven its resilience through FY20. Our embedded safety focus and strong risk management capability has served us well, with additional safety measures quickly implemented across our global operations when the COVID-19 pandemic hit. This enabled us to keep our people and customers safe while continuing to operate, ensuring our ongoing support and supply to the essential resources and agricultural industries. There has never been a more important time to live our number one value of Zero Harm and we have seen significant improvements in key safety measures. In FY18 we set a goal for a step change in our workforce Total Recordable Injury Frequency Rate (TRIFR) to achieve a 30% reduction by FY21. In FY20 we reported a TRIFR of 0.57, delivering our FY21 target of 0.70 a year early. We’ve also seen a significant improvement in process safety incidents, down to 24 compared to 33 last year. Fertilisers EBIT increased to $26.2m, a significant improvement on the loss reported last year and a positive outcome given historically low commodity prices. While performance in the first four months of the year was impacted by severe drought, improved conditions underpinned a good uplift in demand later in the year. The business is well placed to benefit from the growth of new value-add products and services for precision agriculture, as well as an improvement in commodity prices. Tragically, a multi-motor vehicle accident in April on a public road in South Carolina resulted in two fatalities and one serious injury, including the death of one of our employees. The tragic loss of life is a stark reminder of the importance of embedding Zero Harm as the number one value and priority right across our global business. Zero Harm applies as much to our impact on the environment as it does to safety, and this has continued to be a focus in FY20, with a reduction of significant environmental incidents from three last year to one this year. We continue to progress our important sustainability agenda. In August, I became a founding member of the Australian Climate Leaders Coalition (CLC), joining a range of CEOs supporting the Paris Agreement commitments and setting public decarbonisation targets. This follows the adoption of our Climate Change Policy last year which sets out our commitment to reducing our carbon footprint through our manufacturing excellence strategy, as well as helping our customers reduce theirs with our premium technologies. This year we committed to a 5% absolute reduction in our global emissions by 2026, approximately 200,000 tCO2e, or the equivalent of more than 43,000 passenger vehicles driven in a year. Our business has proven to be resilient during FY20, with EBIT increasing 23% from last year to $374.5m despite the impact of weak global commodity prices. Our manufacturing performance was significantly improved following some major interruptions last year, with underlying improvements being driven by our manufacturing excellence strategy. Our Dyno Nobel explosives business has market leading positions and technologies and strategically located assets in the attractive US and Australian explosives markets. EBIT from Dyno Nobel Americas was down 1% to $230.8m, reflecting structural declines in the coal market, as well as the temporary impact of COVID-19 on some customer mining operations. Margins in the US business continue to be strong, reflecting the value of our premium technology. Dyno Nobel Asia Pacific delivered EBIT of $149.3m, down 17% on last year. While volumes in our Australian business held up well, earnings were impacted by the previously announced re-contracting of our Moranbah foundation customers as well as lower earnings from Indonesia. Pleasingly we are seeing good momentum from technology as our sophisticated mining customers in Australia are increasingly adopting our technology into their mining operations. Our broader strategic agenda is progressing well. We are making good progress with our manufacturing excellence strategy and are on track to deliver our target uplift in earnings of $40m to $50m by FY22. We continue to leverage our premium technology offering to support our customers. Our technology is designed to be easy for our customers to adopt, as well as drive meaningful improvements in mine productivity, safety and environmental impacts. Our 4th Generation Electronic Detonator Systems combined with our Delta E technology has underpinned our market leading position in the US and in Australia, where we attract the highest quality customers. We are focused on pursuing low capital, high return opportunities to further leverage our technology platform. A good example of this is the commissioning of an emulsion plant in Chile, the largest copper market in the world. I would like to thank our team around the world for their incredible hard work, adaptability and resilience during 2020. Working in a constantly changing environment, our team has navigated significant change while continuing to offer exceptional support to our customers. I also want to acknowledge Frank Micallef whose retirement as our CFO after 10 years in the role was announced in June. I would like to sincerely thank Frank for his contribution, leadership and support. As we look to the year ahead, we have a strong team in place to lead us into the future, with new CFO Nick Stratford bringing deep financial background and strong business acumen to the role. Dr Braden Lusk has stepped into Nick’s previous role as DNA President and is well credentialled with his extensive experience with the US mining industry and our differentiated technology offerings. We also welcome Michele Mauger to the Executive Team as Chief People Officer, bringing more than 25 years’ international experience. Finally, I would like to thank Brian Kruger and the Board for their continued support, wise counsel and leadership during this unprecedented year. We’ve taken decisive action in response to the pandemic and your Company is well positioned to be stronger and more competitive in the future. During the year we made the decision to retain and invest in our fertilisers business which is Australia’s leading and only integrated supplier of premium fertiliser solutions on the east coast. Jeanne Johns Managing Director & CEO 17 Incitec Pivot Limited Annual Report 2020OPERATING & FINANCIAL REVIEW Waggaman Operations The Dyno Nobel Americas business manufactures and distributes ammonia at its Waggaman, Louisiana plant in the United States. Ammonia produced at Waggaman is used in Dyno Nobel’s manufacturing process and is also sold to third parties under long term contractual arrangements. Dyno Nobel Asia Pacific Through Dyno Nobel Asia Pacific, IPL provides ammonium nitrate based industrial explosives, initiating systems and services to the Metallurgical Coal and Base & Precious Metals sectors in Australia, and internationally to a number of countries including Indonesia, Papua New Guinea and Turkey through its subsidiaries and joint ventures. Ammonium nitrate is often sold in conjunction with proprietary initiating systems and services. Dyno Nobel is the second largest industrial explosives distributor in Australia by volume, which in turn is the world’s third largest industrial explosives market. In Australia, Dyno Nobel primarily supplies its products to metallurgical coal mines in the east and to iron ore mines in the west. In Australia, Dyno Nobel manufactures ammonium nitrate at its Moranbah ammonium nitrate plant, which is located in the Bowen Basin, the world’s premier metallurgical coal region. It also sources third party ammonium nitrate including in Western Australia to service the Iron ore and Underground sectors. Initiating systems are manufactured in Australia at Dyno Nobel’s Helidon, Queensland facility and are also sourced from IPL facilities in the Americas and from DetNet (South African joint venture). Fertilisers Asia Pacific IPL’s fertilisers business in Australia is the largest domestic manufacturer and supplier of fertilisers by volume. Internationally, the fertilisers business sells to major offshore agricultural markets in Asia Pacific, the Indian subcontinent, Brazil and the United States. It also procures fertilisers from overseas manufacturers to meet domestic seasonal peaks. Much of this activity is conducted through Quantum Fertilisers Limited, a Hong Kong based subsidiary. The Fertilisers business manufactures the following fertilisers at three locations: » Phosphate Hill: Di/mono-ammonium phosphate (DAP/MAP); » Gibson Island: Ammonia (Big N), Granulated ammonium sulphate (GranAm) and Urea; and » Geelong: Single Super Phosphate (SSP). Group Overview Incitec Pivot Limited (IPL) is a leading international explosives and blasting services company and the largest fertilisers manufacturing and distribution business in Australia. Its operations are focussed in Australia, where it operates under the globally recognised Dyno Nobel and Incitec Pivot Fertilisers brands, and in North America where it operates under the Dyno Nobel brand. IPL leverages a common nitrogen manufacturing core, with engineering synergies achieved through the Global Manufacturing organisation. The Company has operations in Australia, North America, Europe, Asia, Latin America and Africa. IPL operates through three business units, details of which are set out in this review: » Dyno Nobel Americas; » Dyno Nobel Asia Pacific; and » Fertilisers Asia Pacific. Dyno Nobel Americas The Dyno Nobel Americas business comprises three businesses: » Explosives; » Agriculture & Industrial Chemicals; and » Waggaman operations. Explosives Dyno Nobel is the second largest industrial explosives distributor in North America by volume. It provides ammonium nitrate, initiating systems and services to the Quarry & Construction sector across the US; the Base & Precious Metals sector in the US mid-West, US West and Canada; and to the Coal sector in the Powder River Basin, Illinois Basin and Appalachia. In North America, Dyno Nobel manufactures ammonium nitrate at its Cheyenne, Wyoming and Louisiana, Missouri plants. The Cheyenne, Wyoming plant is adjacent to the Powder River Basin, North America’s most competitive thermal coal mining region and well positioned to service Base & Precious Metals in Western US. The Louisiana, Missouri plant has a competitive logistic footprint from which to support mining in both the Illinois Basin and Appalachia, as well as Quarry & Construction in the US mid-West. Initiating systems are manufactured at Dyno Nobel’s facilities in Connecticut, Kentucky, Illinois, Missouri, Chile and Mexico, and are also sourced from DetNet South Africa (Pty) Ltd (DetNet), an IPL electronics joint venture. Agriculture & Industrial Chemicals The Dyno Nobel Americas business manufactures and distributes nitrogen-based fertilisers in the United States from its St Helens, Oregon and Cheyenne, Wyoming plants. Nitrogen based fertilisers and other industrial chemical products are also produced as a by-product at the Louisiana, Missouri plant. 18 Incitec Pivot Limited Annual Report 2020OPERATING AND FINANCIAL REVIEWGroup Summary Zero Harm Year ended 30 September FY20 A$m FY19 A$m Change A$m Sadly, a tragic double fatality, which included a Dyno Nobel employee, occurred in the US in April 2020. The incident involved a Dyno Nobel vehicle on a US public road. 3,942.2 3,918.2 730.5 374.5 605.3 303.7 188.2 152.4 (64.8) – 24.0 125.2 70.8 35.8 (64.8) 123.4 152.4 (29.0) IPL’s Total Recordable Injury Frequency Rate (4) (TRIFR) for the rolling twelve-month period ended 30 September 2020 was 0.57, a 29% improvement from 0.80 at 30 September 2019, and well ahead of the Group’s FY21 target of 0.70. IPL reported an improvement in Process Safety Incidents (5) of 24 (pcp: 33) and Significant Environmental Incidents (6) down to 1 (pcp: 3). Potential High Severity Incidents (7) increased marginally to 34 (pcp: 33). Financial Performance IPL GROUP Reported Revenue and Earnings Revenue EBITDA ex IMIs EBIT ex IMIs NPAT ex IMIs IMIs after tax NPAT Shareholder Returns Cents Per Share Earnings per share ex IMIs Total Dividend Credit Metrics Net debt (1) Net debt / EBITDA (ex IMIs) (2) Interest Cover (3) 10.9 nil 9.5 4.7 30-Sep-20 30-Sep-19 (1,028.7) (1,691.4) 1.4x 6.1x 2.8x 4.6x Net Profit After Tax (NPAT) excluding Individually Material Items (ex IMIs) IPL reported NPAT ex IMIs of $188m, an increase of 23% compared to $152m in the prior corresponding period (pcp). Individually Material Items (IMIs) NPAT for FY20 includes $65m (FY19: $nil) of after-tax IMIs relating to the write down of obsolete technology; and software and implementation costs of IPL’s ‘Response Plan’, a program designed to reduce costs to mitigate the earnings impacts of softer commodity prices and COVID-19. Shareholder Returns and Capital Management Earnings per share (EPS) ex IMIs of 10.9 cents per share increased by 1.4 cents per share compared to FY19 of 9.5 cents. The Company raised $646m of equity during 2H FY20 through its institutional placement and share purchase plan. The Board has determined, as an exception to its dividend policy, not to pay a final dividend for FY20 in light of the ongoing uncertainty due to COVID-19 and IPL’s equity raising in May 2020. IPL’s dividend policy, which is to pay between 30% – 60% of NPAT, remains unchanged. Net Debt Net debt decreased by $663m to $1.03bn at 30 September 2020 (pcp: $1.69bn) and Net debt/EBITDA ex IMIs decreased to 1.4x (pcp: 2.8x). The Group’s investment grade credit ratings were maintained. (1) Net Debt comprises the net of interest bearing liabilities, cash and cash equivalents, and the fair value of derivative instruments economically hedging the Group’s interest-bearing liabilities. (2) Net debt/EBITDA ratio is calculated using 12 month rolling EBITDA ex IMIs. (3) Interest Cover = 12 month rolling EBITDA ex IMIs/net interest expense before accounting adjustments. INCOME STATEMENT Revenue Business Revenue DNA DNAP Fertilisers Eliminations Group Revenue EBIT Business EBIT ex IMIs DNA DNAP Fertilisers Eliminations Corporate Group EBIT ex IMIs EBIT margin NPAT Net borrowing costs Tax expense ex IMIs Minority interest NPAT excluding IMIs IMIs after tax Group NPAT *not meaningful Year ended 30 September FY20 A$m FY19 A$m Change % 1,506.5 1,569.0 999.2 990.7 1,502.0 1,419.4 (65.5) (60.9) 3,942.2 3,918.2 230.8 149.3 26.2 (0.1) (31.7) 234.0 179.2 (79.7) (1.7) (28.1) 374.5 303.7 9.5% 7.8% (135.7) (144.1) (50.6) – (7.5) 0.3 188.2 152.4 (64.8) – 123.4 152.4 (19)% (4)% 1% 6% (8)% 1% (1)% (17)% 133% nm* (13)% 23% 7% nm 6% nm nm 23% nm Underlying interest expense (8) (130.0) (139.7) Non-cash unwinding liabilities (5.7) (4.4) (4) TRIFR is calculated as the number of recordable incidents per 200,000 hours worked and includes contractors. TRIFR results are subject to finalisation of the classification of any pending incidents. (5) Tier 1 and Tier 2 Process Safety Incidents as defined by the Centre for Chemical Process Safety. (6) Significant Environmental Incidents as assessed against IPL’s internal risk matrix with actual consequences of 5 or higher on a 6-level scale (7) Potential High Severity Incidents (excluding near misses and hazards) with potential consequences of 5 or higher on a 6-level scale. Prior year number was restated due to finalisation of classification of incidents pending at the time of previous publication date and further review in FY20. (8) Underlying interest expense represents total borrowing costs less non-cash interest unwind, representing the discount unwind on the Group’s long-term liabilities. 19 Incitec Pivot Limited Annual Report 2020OPERATING AND FINANCIAL REVIEWFY20 Business Review The Group reported FY20 Earnings Before Interest and Tax (EBIT) ex IMIs of $375m, an increase of $71m compared to pcp. Major movements for the year were as follows: Manufacturing Recovery: $186m increase, driven by improved production performance at Phosphate Hill and Waggaman; and lower gas cost from improved supply reliability at St Helens. Commodity Prices & Foreign Exchange: $100m net decrease. The impact of $123m from lower commodity prices was partially offset by $23m of benefits from the lower A$:US$ exchange rate. COVID-19 Response Plan Savings: $20m increase driven by operational productivity measures, cost efficiency gains and non-essential spend savings. Americas Explosives – Markets: $17m (US$12m) net decrease, mainly due to structural declines in US Coal demand and market volume declines impacted by the COVID-19 disruption. Asia Pacific Explosives – Contract Re-basing & Technology Growth: $25m net decrease, due to the impact of contract re-basing of $38m; partially offset by $13m of benefits from technology growth in Australia. Explosives Market Volumes: $24m decrease as international customer operations were temporarily closed due to COVID-19 restrictions. Australian Drought Recovery: $20m increase driven by strong domestic fertilisers sales volumes and product mix as a result of favourable weather conditions. Fertilisers Lower Gas Cost: $22m EBIT increase from lower contracted gas cost at Phosphate Hill and Gibson Island; and cost savings from improved supply reliability and operating efficiencies. Interest Underlying interest expense of $130m decreased 7%, compared to pcp. The decrease was mainly due to $16m of benefits from lower interest rates, as the higher cost US$800m 144A bonds matured in December 2019. This was partially offset by the $6m impact from the changes in the accounting for Leases (AASB 16: Leases). Tax Impairment of intangibles: During the year ended 30 September 2020 intangible assets were impaired by $41m (FY19: nil) following a detailed review of the Group’s technology and software products and offerings given the continued enhancement of the Group’s technology portfolio. The review considered factors such as the timing of the commercial launch of certain technologies, software versions and products, items which were superseded as a result of significant enhancements and updated versions, current experience in regard to the commercial acceptance by customers and the future economic benefit attributable to the Group. Business Restructuring Costs: In May 2020, IPL announced a cost reduction program in response to indirect impacts from the COVID-19 pandemic on the global economy, including commodity prices and customer demand. A detailed response plan was implemented in FY20 and is expected to deliver $60m (1) of sustainable annual cost savings over a three- year period to FY22. Benefits of $20m were delivered in FY20, with an additional $30m of benefits expected in FY21 and $10m in FY22. The total cost of the plan is $47m of which $30m is cash costs relating to employee redundancies and site closure & relocation costs. The remaining $17m consist of non-cash impairment write downs of several low value assets, including minor sites that were closed to drive operational efficiencies. Financial Position BALANCE SHEET Assets TWC - Fertilisers TWC - Explosives Group TWC Net PP&E Lease assets Year ended 30 September FY20 A$m FY19 A$m Change A$m (151.1) (137.8) (13.3) 165.9 141.9 14.8 4.1 24.0 10.7 4,071.7 4,190.0 (118.3) 221.1 – 221.1 Intangible assets 3,019.7 3,179.5 (159.8) Total Assets Liabilities 7,327.3 7,373.6 (46.3) Environmental & restructure liabilities (161.7) (134.8) (26.9) Tax liabilities Lease liabilities (437.0) (495.9) 58.9 (247.7) – (247.7) Net other liabilities (248.9) (363.7) 114.8 Tax expense ex IMIs of $51m increased by $43m due to higher operational earnings in FY20 and the higher effective tax rate. The Group’s higher effective tax rate on operating profit of 21.2% (pcp: 4.7%) was mainly due to increased earnings in higher tax rate jurisdictions (largely Australia) and financing structures that unwound in the prior year. Net debt Total Liabilities Net Assets Equity (1,028.7) (1,691.4) 662.7 (2,124.0) (2,685.8) 561.8 5,203.3 4,687.8 515.5 5,203.3 4,687.8 515.5 Individually Material Items NPAT includes the following items, classified as IMIs: Key Performance Indicators Net Tangible Assets per Share 1.12 0.94 Fertilisers - Ave TWC % Rev (1.6%) (0.3%) Gross A$m Tax A$m Net A$m Explosives - Ave TWC % Rev Group - Average TWC % Rev (2) 10.1% 5.7% 9.2% 5.8% IMIs Capital Expenditure Impairment of intangible assets 41.0 (10.7) 30.3 Business restructuring costs - Employee redundancies 24.8 (6.8) 18.0 Credit Metrics Net debt Net debt / EBITDA (ex IMIs) Interest Cover (1,028.7) (1,691.4) 1.4x 6.1x 2.8x 4.6x - Impairment of operating assets, site exit and other direct costs Total 20 22.1 (5.6) 87.9 (23.1) 16.5 64.8 (1) Sustained incremental earnings uplift by FY22 of $60M per annum, based on expected cost savings when compared to FY19 cost base. (2) Average TWC as % of revenue = 13-month average trade working capital/12 months rolling revenue. Incitec Pivot Limited Annual Report 2020OPERATING AND FINANCIAL REVIEWMajor movements in the Group’s Balance Sheet during the year include: Assets Trade working capital (TWC): Net increase of $11m. The movement was mainly due to lower utilisation of working capital facilities of $135m; and strong TWC management that reduced underlying TWC by $124m compared to pcp. Property, Plant & Equipment (PP&E): Decrease of $118m was mainly driven by the depreciation charge for the year of $291m; the impact of foreign currency translation of non-A$ denominated assets of $110m; and asset impairments of $17m. This was partially offset by sustenance and turnaround capital expenditure of $226m; and minor growth capital spend of $67m. Lease assets: Increase of $221m due to the adoption of AASB16: Leases, which resulted in lease assets being brought onto the Balance Sheet in FY20 offset by a $248m lease liability. The fair value of Net debt hedges at 30 September 2020 was an asset of $287m, a decrease of $102m compared to the balance at 30 September 2019 of $389m. The decrease was mainly due to the higher closing A$:US$ exchange rate. The fair value hedge includes derivatives that hedge the foreign exchange rate exposure of the Group’s USD borrowings. There are also offsetting net investment hedges for the same amount. These hedges mature in December 2022. Credit Metrics Net debt/EBITDA ex IMIs: The ratio of 1.4x improved substantially compared to pcp mainly due to $125m of improved EBITDA ex IMIs in FY20 and $646m of net proceeds from the equity raising in 2H FY20. Interest Cover: Improved to 6.1x (pcp: 4.6x). Credit Ratings: Investment grade credit ratings: S&P: BBB (Stable outlook) Moody’s: Baa2 (Stable outlook) Debt Facilities Intangible assets: Decrease of $160m mainly as a result of the impact of foreign currency translation of non-A$ denominated assets of $109m; the $41m impairment write-off of obsolete technology and software; and the amortisation charge of $25m for the year. This was partially offset by asset additions of $12m during the year. Maturing facilities: IPL cancelled $138m and US$111m of Syndicated facilities following the equity raising during 2H FY20. The Group has sufficient liquidity and headroom, with the next debt maturity in October 2021 and available undrawn debt facilities of $974m at 30 September 2020. The Company expects to refinance the Syndicated facilities during the first half of FY21. As announced on 10 November 2020, subject to market conditions, IPL is intending to invite the holders of its outstanding notes under the AMTN and EMTN Programmes to tender their notes for repurchase by IPL for up to an aggregate amount of approximately $200m. The repurchase of the notes forms part of the Group’s strategy to optimise its debt portfolio between fixed rate capital debt markets and floating rate bank debt markets. The Group’s average tenor of its debt facilities at 30 September 2020 is 5.1 years. Trade Working Capital Facilities IPL uses TWC facilities to effectively manage the Group’s cash flows, which are impacted by seasonality and demand and supply variability. The Group has a non-recourse receivable purchasing agreement to sell certain domestic and international receivables to an unrelated entity in exchange for cash. As at 30 September 2020, receivables totalling $116m (pcp: $216m) had been sold under the receivable purchasing agreement. IPL also offers suppliers the opportunity to use supply chain financing. The Group evaluates supplier arrangements against several indicators to assess whether to classify outstanding amounts as payables or borrowings. The balance of the supply chain finance program, classified as payables, at 30 September 2020 was $296m (pcp: $331m). Liabilities Environmental & restructure liabilities: Increased $27m largely due to business restructuring costs incurred during the year. Tax liabilities: Decreased by $59m mainly due the tax effect on movements in the market values of financial instruments of $56m; tax payments of $14m; the impact of foreign currency translation non-A$ denominated tax balances of $11m; and the recognition of deferred tax balances on the adoption of AASB 16: Leases of $6m. This was offset in part by $28m of tax on FY20 earnings. Net other liabilities: Decreased by $115m mainly due to market value movements and maturities of derivative hedging instruments (excluding debt hedges) of $140m; partially offset by movements in capital and other accruals. Net debt: Decreased by $663m to $1.03bn at 30 September 2020. Analysis of year-on-year movements in Net debt is covered in the Cash flow section. Net Debt & Debt Hedges NET DEBT A$m Syndicated Term Loan Syndicated Revolver Maturity Month /Year Facility Amount Drawn Amount Undrawn Amount 10/21 274.5 10/21 699.5 – – 274.5 699.5 EMTN / Regulation S notes 02/26 101.1 101.1 Medium Term Notes 03/26 450.0 450.0 EMTN / Regulation S Notes 08/27 559.6 559.6 US Private Placement Notes 10/28 349.8 349.8 US Private Placement Notes 10/30 349.8 349.8 – – – – – Total debt 2,784.3 1,810.3 974.0 Fair value and other adjustments Loans to JVs, associates/other short term facilities Cash and cash equivalents Fair value of hedges Net debt Net debt/EBITDA 33.6 26.4 (554.6) (287.0) 1,028.7 1.4x 21 Incitec Pivot Limited Annual Report 2020OPERATING AND FINANCIAL REVIEWLease Buy-out: Decrease of $47m in relation to end-of-term asset buy-outs in FY19. Year ended 30 September FY20 A$m FY19 A$m Change A$m Payments/Proceeds from derivatives: Increase of $81m mainly due to maturity of derivatives that were hedging part of the Group’s USD assets. Most of these hedges matured or were exited in FY20. 730.5 605.3 125.2 Financing Cash Flow Cash Flow CASH FLOW Operating Cash Flow EBITDA ex IMIs Net Interest paid Net income tax paid TWC movement (excl FX movements) Profit from JVs and associates Dividends received from JVs Environmental and site clean-up Restructuring costs Other Non-TWC Operating Cash Flow Investing Cash Flow Minor growth capital Sustenance Lease buy-out Payments - Central Petroleum Joint operation Proceeds from asset sales Loans to JV Proceeds from sale of equity securities Acquisition of subsidiaries & non- controlling interests (Payments) / proceeds from derivatives Investing Cash Flow Financing Cash Flow Dividends paid to non-controlling interest holders Lease liability payments Payment for buy-back of shares Purchase of IPL shares for employees Proceeds on issue of shares Realised market value gain on derivatives (135.5) (131.1) (13.7) (8.4) (32.3) 30.9 (8.0) (8.0) (10.4) (20.8) (12.2) (44.9) 27.5 (8.8) (6.7) 6.5 (4.4) 7.1 3.8 12.6 3.4 0.8 (1.3) (16.9) 545.1 414.8 130.3 (60.2) (55.2) (218.2) (246.3) – (46.6) (9.8) – 7.4 10.8 – – (6.8) 2.3 (5.0) 28.1 46.6 (9.8) (3.4) 6.8 (2.3) (23.4) (5.3) (18.1) (75.2) 5.5 (80.7) (379.4) (341.6) (37.8) – (5.9) 5.9 (41.9) – (1.3) 645.5 10.3 – (89.7) (0.6) – – (41.9) 89.7 (0.7) 645.5 10.3 80.8 9.4 Dividends paid to members of IPL (30.7) (121.7) 91.0 Net loss on translation of US$ Net Debt (78.2) (159.0) Non-cash movement in Net Debt (6.7) (16.1) Financing Cash Flow Change to Net debt 497.0 (393.0) 890.0 662.7 (319.8) 982.5 Fertilisers Opening balance Net debt (1,691.4) (1,371.6) (319.8) Sustenance Closing balance Net debt (1,028.7) (1,691.4) 662.7 Operating Cash Flow Operating cash inflow of $545m increased by $130m compared to FY19. Significant movements included: EBITDA ex IMIs: Increased by $125m, or 21% when compared to the pcp. Investing Cash Flow Net investing cash outflow of $379m increased $38m as compared to FY19. Significant movements included: Sustenance: Decrease of $28m in line with the COVID-19 Response Plan targets and impact of a low turnaround year. 22 Net financing cash inflow of $497m increased $890m as compared to FY19. Significant movements included: Dividends: $91m increase due to the lower FY19 final dividend payment of $31m and IPL not paying an interim dividend in FY20. Lease liability payments: $42m decrease due to changes in accounting for leases (AASB 16: Leases). These cash flows were historically classified under Operating Cash Flows. Share buy-back: $90m increase following completion of the Group’s share buy-back program in FY19. Proceeds on issue of shares: $646m increase from net proceeds received from IPL’s equity raising during 2H FY20. Translation of US$ Net debt: Increase of $81m primarily due to the non-cash impact from movements in foreign exchange rates and interest rates on the Group’s debt balances. Capital Allocation IPL’s capital allocation process is centralised and overseen by the Group’s Corporate Finance function. Capital is invested on a prioritised basis and all submissions are assessed against risk factors including HSE, operational, financial and strategic risks. Capital is broadly categorised into major growth capital, minor growth capital and sustenance capital. The table below includes a summary of cash spend per business on growth, sustenance and lease buy-out of Property, Plant & Equipment and Intangible assets: IPL GROUP Capital Expenditure DNA DNAP Fertilisers Minor growth capital DNA DNAP Fertilisers Lease buy-out Total Year ended 30 September FY20 A$m FY19 A$m Change A$m 18.6 34.7 6.9 60.2 50.8 25.5 30.7 21.9 2.6 55.2 73.0 27.5 141.9 145.8 218.2 246.3 – – 46.6 46.6 278.4 348.1 (12.1) 12.8 4.3 5.0 (22.2) (2.0) (3.9) (28.1) (46.6) (46.6) (69.7) There was no major growth capital spend items in FY20. Minor growth spend of $60m in FY20 included plant efficiency projects; expansion of the Delta E truck fleet; and other projects supporting Explosives volume growth and technology investment. Sustenance capital spend in FY20 of $218m was 11% lower than pcp in line with the Group’s COVID-19 Response plan targets and low turnaround year. Significant spend items in FY20 included: Gibson Island turnaround of $60m, planning spend on the FY21 scheduled turnarounds at Waggaman, St Helens, Mt Isa and Moranbah of $26m; and Explosives truck fleet sustenance of $9m. The remaining sustenance spend was made up of various sustenance projects with project values of less than $5m each. Incitec Pivot Limited Annual Report 2020OPERATING AND FINANCIAL REVIEWDyno Nobel Americas EBIT US$ million 180 175 170 165 160 155 150 145 140 Explosives Ag & IC Waggaman 7 (12) 164 3 (2) (12) 12 (10) 21 (6) (2) (8) 155 FY19 EBIT COVID-19 Response Plan Savings Coal Volumes Market Volumes Manufacturing - Gas Cost COVID-19 Response Plan Savings Volumes Commodity Prices Manufacturing Performance Fixed Costs Commodity Prices FY19 Land Sale FY20 EBIT Dyno Nobel Americas Explosives Waggaman Ag & IC Total Revenue Explosives Waggaman Ag & IC Other EBIT EBIT margin Explosives Waggaman Ag & IC A$m Revenue EBIT Year ended 30 September FY20 US$m 768.4 124.5 126.0 FY19 US$m 824.5 147.4 130.9 1,018.9 1,102.8 121.1 136.1 32.4 1.3 – 19.2 0.2 8.0 Change % (7)% (16)% (4)% (8)% (11)% 69% nm nm 154.8 163.5 (5)% 15.8% 16.5% 26.0% 13.0% 1.0% 0.2% 1,506.5 1,569.0 230.8 234.0 (4)% (1)% Dyno Nobel Americas earnings for FY20 of US$155m decreased 5% compared to the pcp. FY19 earnings included US$8m of one-off profit on sale of excess land. Outlined below are the major earnings movements during FY20 for each business. Explosives Business Performance Explosives earnings for FY20 of US$121m decreased $15m compared to the pcp due to the following: COVID-19 Response Plan: US$7m increase driven by operational productivity measures, including cost efficiency gains and discretionary spend savings. Coal Volumes: US$12m decrease due to structural demand declines, exacerbated by low US natural gas prices; and lower industrial demand (COVID-19). Market Volumes: US$10m decrease mainly due to lower volumes to US iron ore, Arctic and Mexico customers. In addition, the South African JV’s that are consolidated into DNA’s result experienced a US$5m decline in earnings, associated with a significant reduction in mining activity due to COVID-19 related mine closures. Market Summary Explosives business performance in FY20 was impacted by structural demand changes in the Coal sector; and COVID-19 related demand softness across all sectors primarily in the second half of the year. Quarry & Construction 43% of Explosives revenue was generated from the Quarry & Construction sector in FY20. Volumes were up 1% vs the pcp. Following a strong 1H FY20, volumes were slightly down in Q3 FY20 due to softer non-residential construction sector demand that was impacted by COVID-19 related project deferrals. Demand recovery in Q4 FY20 was driven by stronger residential construction activity. Base & Precious Metals 35% of Explosives revenue was generated from the Base & Precious Metals sector in FY20. Volumes were down 9% vs pcp as COVID-19 related lower industrial demand and temporary mine closures in Q3 and Q4 impacted volumes to US iron ore, Arctic and Mexico customers. Coal 22% of Explosives revenue was generated from the Coal sector in FY20. Volumes were down 24% compared to pcp, but largely in line with industry volume declines. The lower volumes were driven by the underlying structural decline of the US Coal industry, exacerbated by lower US natural gas prices during the first half of the year (increasing substitution from thermal coal for electricity generation) and lower industrial demand (COVID-19). Agriculture & Industrial Chemicals (Ag & IC) Ag & IC Total Revenue EBIT EBIT margin Year ended 30 September FY20 US$m FY19 US$m Change % 126.0 130.9 1.3 0.2 1.0% 0.2% (4)% nm Business Performance Ag & IC earnings for FY20 of US$1m increased from $0.2m in the pcp, due to the following: Manufacturing – Gas Cost: US$12m net benefits from lower gas cost and improved plant efficiencies, absent third-party gas supply interruptions that occurred in FY19. 23 Incitec Pivot Limited Annual Report 2020OPERATING AND FINANCIAL REVIEWCOVID-19 Response Plan: US$3m increase driven by operational productivity and efficiency gains. Commodity Prices: US$12m decrease mainly due to the US$7m impact from lower Urea prices. Lower global nitrogen prices also had a US$5m impact on the pricing of products produced at Cheyenne and St Helens. Sales Volumes: US$2m decrease as softer industrial demand from COVID-19 impacted sales volumes. Waggaman Operations WAGGAMAN Thousand metric tonne Ammonia manufactured at Waggaman Ammonia sold External Revenue Internal Revenue Total Revenue EBIT EBIT margin Year ended 30 September FY20 FY19 Change % 729.0 730.0 634.4 729.6 15% – 124.5 147.4 40.0 45.6 (16)% (12)% 164.5 193.0 (15)% 32.4 19.2 69% 26.0% 13.0% Manufacturing Manufacturing performance in the Explosives and Ag & IC businesses during FY20 was as follows: Cheyenne, Wyoming: Cheyenne Nitric Acid production was down 3% compared to pcp. Ammonia production was down 7% compared to pcp due to a planned maintenance outage and unplanned downtime caused by a third-party power supply interruption in 1H FY20. St Helens, Oregon: Urea production from the St Helens plant increased 20% compared to pcp mainly due to improved uptime and efficiencies at the plant absent FY19 gas supply interruptions. The plant’s major 6-week turnaround campaign commenced at the end of September 2020. Waggaman, Louisiana: The plant operated in line with expectation at 91% of nameplate capacity (1) (pcp: 79%), producing 729k mt of ammonia in FY20, up 15% on pcp. The higher production was driven by improved plant reliability and efficiencies. The plant recorded its second longest uninterrupted production run of 210 days through August 2020. (1) 800k mt per annum Waggaman plant capacity. Waggaman Ammonia Production Thousand metric tonnes Business Performance Waggaman earnings for FY20 of US$32m, increased US$13m compared to the pcp due to the following: Manufacturing Performance: US$21m increase from improved production and higher plant efficiencies compared to the pcp. Fixed Costs: US$6m earnings decrease, with US$3m due to the temporary cost increase until after the FY21 plant turnaround to drive plant reliability improvement; and US$3m of additional operating costs, including higher insurance cost. Commodity Price: US$2m net decrease from lower ammonia prices of US$23m, mostly offset by the positive impact from lower gas pricing of US$21m. 900 750 600 450 300 150 0 824 729 634 540 FY17 FY18 FY19 FY20 24 Incitec Pivot Limited Annual Report 2020 OPERATING AND FINANCIAL REVIEW Dyno Nobel Asia Pacific EBIT A$ million 200 180 160 140 120 100 Net Re-contracting 179 (10) (28) 5 13 (10) 149 FY19 EBIT FY18 Western Australia Contracts Contract Renewals (Gross) Technology Growth Australia Manufacturing Performance Market Volumes FY20 EBIT Year ended 30 September Base & Precious Metals FY20 FY19 Change % 42% of Dyno Nobel Asia Pacific revenue was generated from the Base & Precious Metals sector, which comprises iron ore mines in Western Australia and hard rock and underground mines throughout Australia. 371.3 762.6 365.0 785.7 2% (3)% Volumes from the sector increased 7% compared to pcp, driven by strong customer demand and new business. DYNO NOBEL ASIA PACIFIC Thousand metric tonne Ammonium Nitrate – manufactured at Moranbah Ammonium Nitrate sold A$m Australian Coal Base & Precious Metals International Total Revenue EBIT EBIT margin 472.4 415.5 111.3 999.2 149.3 14.9% 477.7 381.9 131.1 990.7 179.2 18.1% (1)% 9% (15)% 1% (17)% Business Performance Dyno Nobel Asia Pacific earnings for FY20 of $149m, decreased $30m compared to the pcp due to the following: Contract Losses: $10m decrease, from contracts lost in FY18 in Western Australia, in line with previous guidance. International 11% of Dyno Nobel Asia Pacific revenue was generated internationally in Indonesia, Turkey and Papua New Guinea. Volumes decreased 21% as compared to pcp, largely due to lower demand from Indonesian Thermal Coal customers which had their operations substantially impacted by COVID-19 during the year. Manufacturing Moranbah produced 371k mt of ammonium nitrate during FY20, up 2% on the pcp and equalling FY18 record production. Strong plant reliability continued to deliver plant efficiencies in FY20, the final year of its four-year turnaround campaign. Moranbah Ammonium Nitrate Production Contract Renewals: $15m net decrease. This comprised of $28m from lower pricing on contract renewals; partially offset by $13m of earnings growth from technology related cost efficiencies, increased technology conversion (electronic detonator systems) and market share gains in Australia. Thousand metric tonnes 400 300 321 371 365 371 Manufacturing Performance: $5m increase from higher production and improved plant efficiencies at Moranbah during FY20. Market Volumes: $10m decrease, largely due to lower demand from Indonesian customers that were impacted by COVID-19 restrictions at their operations. Market Summary Australian Coal 47% of Dyno Nobel Asia Pacific revenue for FY20 was generated from the Australian Coal sector, most of which was from supply to Metallurgical Coal mines in the Bowen Basin. Volumes from the sector decreased 5% compared to pcp mainly due to planned lower contracted volumes and impacts from weather events in Queensland through the Australian summer. Ammonium nitrate production capacity at the Moranbah plant remains fully contracted to customers. 200 100 0 FY17 FY18 FY19 FY20 25 Incitec Pivot Limited Annual Report 2020OPERATING AND FINANCIAL REVIEWFertilisers EBIT A$ million 160 140 120 100 80 60 40 20 0 -20 -40 -60 -80 (80) FY19 EBIT Distribution Manufacturing Non-controllables 13 9 15 (103) 22 135 26 (5) 20 Distribution Volumes & Margins Distribution Costs & Other Manufacturing Performance Gas Cost & Efficiency FY19 SSP Plant Closure Insurance Proceeds & COVID-19 Savings Foreign Exchange Commodity Prices FY20 EBIT FERTILISERS ASIA PACIFIC Thousand metric tonne Phosphate Hill production (ammonium phosphates) Gibson Island production (urea equivalent) A$m Manufacturing Distribution Fertilisers Elimination Total Revenue Manufacturing Distribution Profit-in-stock elimination Fertilisers EBIT EBIT margin Year ended 30 September FY20 FY19 Change % 979.3 674.7 45% 400.5 369.7 8% 766.1 947.6 653.8 908.9 (211.7) (143.3) 1,502.0 1,419.4 (26.1) (121.6) 54.6 (2.3) 26.2 39.9 2.0 1.7 % (5.6)% 17% 4% nm 6% 79% 37% nm (79.7) 133% Business Performance Fertilisers Asia Pacific earnings for FY20 of $26m, increased $106m compared to the pcp due to the following: Market Summary Domestic fertilisers sales volumes were 14% up in FY20 at 2,212k mt (pcp: 1,945k mt). The year started slower as 2019-20 summer crop sales volumes, in particular irrigated cotton, were adversely impacted by lasting drought conditions at the time. Above average rainfall through autumn in many key farming areas supported good winter crop plantings and fertilisers (phosphates) application. Built up soil moisture reserves and substantial rainfall in late winter drove strong winter crop top dress fertilisers (nitrogen) application. Above average rainfall through spring across most cropping regions supplemented water availability, driving early summer crop planting (phosphates application). Manufacturing Manufacturing performance in the Fertilisers Asia Pacific business in FY20 was as follows: Phosphate Hill Ammonium phosphates production increased to 979k mt, up 45% on pcp mainly due to improved plant performance and efficiencies absent extended production outages in FY19 associated with the Queensland rail outage and the phosphoric acid reactor failure. The plant operated reliably at 93% (pcp: 75%) during FY20, with > 1 million tonnes annual equivalent Ammonium Phosphates production during the second half of the year. Distribution Volumes: $20m increase driven by strong fertilisers sales volumes and favourable product mix following much improved weather conditions across Eastern Australia. The Phosphate Hill plant received $8m of benefits from a full twelve months of lower cost gas under the Northern Territory gas supply agreement (1) that commenced in January 2019. Distribution Costs/Other: $5m decrease including investment in distribution network and higher insurance cost. Manufacturing Recovery: $135m increase from higher production and improved plant performance at Phosphate Hill, delivering positive Manufacturing cash earnings (EBITDA) in FY20. Lower Gas Cost: $22m increase from lower contracted gas cost at Phosphate Hill and Gibson Island of $13m; and $9m from lower 3rd party charges due to improved gas supply reliability and operating efficiencies. FY19 Portland SSP Closure Cost: $13m increase relating to the permanent closure of the Portland SSP plant in FY19. Insurance Proceeds & COVID-19 Response Plan: $9m increase. Insurance payments of $7m received in relation to the FY19 Queensland rail outage; and $2m benefits from COVID-19 Response plan efficiency gains and non-essential spend savings. Phosphate Hill Phosphates Production Thousand metric tonnes 941 850 979 675 1000 800 600 400 200 0 FY17 FY18 FY19 FY20 Gibson Island The plant produced 401k mt of urea equivalent product, up 8% on pcp. The planned major turnaround was successfully completed in March 2020. The new gas supply from Australia Pacific LNG, which commenced in April 2020 and continues through to the end of December 2022, delivered a reduction in gas cost of $5m in FY20. Foreign Exchange and Commodity Prices: $88m net decrease, due to lower global fertilisers prices of $103m, partially offset by $15m of benefits from the lower A$:US$ exchange rate compared to pcp. (1) In November 2015, IPL announced that it had entered an agreement providing gas to Phosphate Hill from the commencement of supply from the Northern Gas Pipeline, through to 2028. 26 Incitec Pivot Limited Annual Report 2020OPERATING AND FINANCIAL REVIEWOUTLOOK AND SENSITIVITIES IPL generally does not provide profit guidance, primarily due to the variability of commodity prices and foreign exchange movements. Instead, IPL provides an outlook for business performance expectations and sensitivities to key earnings drivers based on management’s current view at the time of this report. Outlook COVID-19 & Response Plan The extent of the future impact of COVID-19 on the Group’s operational and financial performance depends on certain developments, including the duration and spread of the outbreak, regulations imposed by governments with respect to the outbreak response, and the impact of the pandemic on the global economy, including commodity prices and customer demand. The Group continues to actively manage the risks arising from COVID-19 on its people and operations, which includes a financial response plan that is expected to deliver cost savings of $60m (1) per annum by FY22, of which $30m will be delivered in FY21, heavily weighted to Australian Fertiliser manufacturing. Dyno Nobel Americas » » The operational earnings of Waggaman remain subject to movements in ammonia and natural gas prices. Lower 1H FY21 production expected at Waggaman, following a two-week outage in November 2020 as site operations were interrupted by hurricane activity that caused widespread power outages; and the seven-week major turnaround of the Waggaman plant which is scheduled to commence in January 2021. The FY21 earnings impact of the turnaround is expected to be approximately US$25m (2) (including depreciation). Plant reliability is expected to improve following the completion of the turnaround. » Agriculture & Industrial Chemicals earnings remain subject to movements in global fertilisers prices, particularly Urea and by-product Urea Ammonium Nitrate. » A six-week turnaround of the St Helens plant was successfully completed in early November 2020. The FY21 earnings impact of the turnaround is approximately US$5m (2) (including depreciation). Dyno Nobel Asia Pacific » As part of a four-year campaign, a major turnaround of the Moranbah plant is scheduled to commence in May 2021. The FY21 earnings impact of the turnaround is expected to be approximately $15m (2). » The FY21 impact from the FY18 contract losses in Western Australia remain unchanged at $3m. This is expected to be more than offset by cost savings and operating efficiencies in the business as part of the Group’s Response plan. » Technology growth is expected to offset the $12m re-contracting impact from foundation customers in FY21. Fertilisers Asia Pacific » » Fertilisers earnings will continue to be dependent on global fertilisers prices, the A$:US$ exchange rate and weather conditions. Increased soil moisture levels in many districts across the East Coast of Australia, coupled with an outlook from the Australian Bureau of Meteorology for La Nina conditions (higher summer rainfall compared to recent years) is expected to drive strong demand for fertilisers in FY21. » Distribution margins for FY21 are expected to be largely in line with FY20, subject to global fertilisers prices and favourable weather conditions. » Phosphate Hill production for FY21 is expected to lower due to the three-week planned maintenance shut down at Mt Isa that reduced sulphuric acid availability to Phosphate Hill. The shutdown was successfully completed in October 2020. » Expecting additional benefits of approximately $5m in FY21 from the full year impact of lower gas supply cost to Gibson Island under the Australia Pacific LNG contract that commenced in April 2020. Group Corporate: Corporate costs are expected to be approximately $30m in FY21. Borrowing Costs: Net borrowing costs for FY21 are expected to be approximately $125m, due to lower debt levels, and excludes the impact from the planned bond repurchase which would be determined once finalised. Taxation: IPL’s effective tax rate for FY21 is expected to be between 21% and 23%. Foreign Exchange Hedging Program: 90% of estimated FY21 US$ linked fertilisers sales are capped at a rate of $0.74, with full participation down to an average rate of $0.71 and 40% participation below $0.71. Gas Hedging Program: 50% of the November 2020 – March 2021 gas price risk associated with ammonia manufacturing at Waggaman and St Helens is hedged, with protection at US$3.45 and participation down to US$2.55. The remaining 50% is exposed to fluctuating gas prices. Group capital expenditure: Sustenance capital expenditure for FY21 is expected to range between $280m and $300m, including turnarounds spend of approximately $150m. Sensitivities The table provides sensitivities to key earnings drivers excluding the impact of hedging. Commodity Americas Ammonia (3) Proxy Index EBIT Sensitivities CFR Tampa + / - US$10/mt = +/-US$6.1m Natural Gas (4) Henry Hub + / - US$0.10/mmbtu = -/+ US$2.1m Urea (5) FOB NOLA + / - US$10/mt = +/-US$1.8m FX EBIT Translation (6) Asia Pacific DAP (7) Urea (8) + / - A$/US$0.01 = -/+ A$3.3m FOB Tampa + / - US$10/mt = +/-A$14.4m FOB Middle East + / - US$10/mt = +/-A$4.1m FX EBIT Transactional (7,8) + / - A$/US$0.01 = -/+A$7.8m (1) Sustained incremental earnings uplift by FY22 of $60M per annum, based on expected cost savings when compared to FY19 cost base. (2) Estimated FY21 EBIT impact based on FY20 realised commodity prices. (3) Based on FY20 Waggaman plant production of 729k mt, less FY20 internal sales volumes of 124k mt. (4) Based on FY20 Waggaman plant production of 729k mt less FY20 internal sales volumes of 124k mt, and FY20 gas efficiency of 35 mmbtu per mt of ammonia. (5) Based on St Helens plant capacity of 175k mt of urea equivalent product. (6) Based on actual FY20 Dyno Nobel Americas EBIT (ex IMI) of US$155m and FY20 average foreign exchange rate of A$/US$0.68. (7) Based on FY20 Phosphate Hill manufactured ammonium phosphate of 979k mt; average realised FY20 DAP price of US$304; and FY20 average foreign exchange rate of A$/US$0.68. (8) Based on actual FY20 Gibson Island production sold subject to urea price movement of 280k mt; average realised FY20 urea price of US$242; and FY20 average foreign exchange rate of A$/US$0.68 Note: Proxy Index prices are available on Bloomberg. 27 Incitec Pivot Limited Annual Report 2020OPERATING AND FINANCIAL REVIEWPrincipal Risks Set out below are the principal risks and uncertainties associated with IPL’s business and operations. These risks, which may occur individually or concurrently, could significantly affect the Group’s business and operations. The global impacts of the current COVID-19 pandemic have the potential to exacerbate some of the risks described below. There may be additional risks unknown to IPL and other risks, currently believed to be immaterial, which could become material. In addition, any loss from such risks may not be recoverable in whole or in part under IPL’s insurance policies. The treatment strategies noted below are not exhaustive and do not remove the risks; while in some cases they may either partially or fully mitigate the exposure, residual risk remains. The Group’s process for managing risk is set out in the Corporate Governance Statement (Principle 7: Recognise and manage risk). Broad Risk Category Description and potential consequences Treatment strategies employed by IPL Strategy IPL operates in highly competitive markets with varying competitor dynamics and industry structures. The actions of established or potential competitors could have a negative impact on sales and market share and hence the Group’s financial performance. » » In respect of IPL’s advanced technologies, there is a risk that the intellectual property may be replicated or challenged, resulting in potential loss of business. IPL’s fertiliser operations compete against global manufacturers many of whom have lower input costs and may enjoy regulatory and economic advantages. A number of entities in the IPL Group currently undertake or are parties to joint ventures in different jurisdictions. Where IPL does not have operational control over these joint ventures, there is a risk that IPL’s financial performance or reputation may be adversely impacted. Health, Safety, Environment, Community & Climate Change IPL’s operations are inherently dangerous. IPL operates 15 key manufacturing and assembly sites and is exposed to operational risks associated with the manufacture, transportation and storage of fertilisers, ammonium nitrate, initiating systems, industrial chemicals and industrial explosives products. These operational risks include an unintended detonation of explosives, or unintended toxic release or fire/explosion during manufacture, transportation or storage. IPL’s business, and that of its customers and suppliers, is subject to environmental laws and regulations that require specific operating licences and impose various requirements and standards. Changes in these laws and regulations, failure to abide by the laws and/or licensing conditions, or changes to licence conditions, may have a detrimental effect on IPL’s operations and financial performance. Where IPL vacates a site, additional environmental remediation obligations may arise. Depending on the extent and nature of contamination, remediation obligations could be significant. The current COVID-19 pandemic has created a risk that an infection outbreak may occur at one or more manufacturing and/or distribution sites, which could impact minimum operator requirements and result in reduced production and/or output from one or more manufacturing and/or distribution sites. Additionally, there may be increased downtime due to staggered shift times and increased cleaning requirements. The impact of carbon emissions, and governments’ policies and actions to limit them, may have an impact on IPL’s operations. The extent of the impacts will be influenced by factors such as whether there are policies and actions aimed at a rapid decarbonisation of the global economy, or whether less stringent approaches are taken. These impacts could include more severe extreme weather events, such as droughts and floods, changes to regulations that could result in an increase to the cost base or operating cost of plants, or a transition away from fossil fuels which would likely significantly decrease demand for thermal coal. A detailed discussion of the risks and opportunities identified through IPL’s comprehensive assessment of both physical and transitional risks can be found on pages 14-17 of IPL’s 2019 GRI Index and Data, which supplements the 2019 Sustainability Report available on the IPL website. (1) IPL seeks to maintain or develop competitive cost positions in its chosen markets, whilst maintaining quality product and service offerings. IPL continues to invest in new technologies and premium product offerings in order to meet the needs of our customers while limiting both IPL’s, and our customers’, carbon footprints. » Where IPL is a party to a joint venture without having operational control, oversight of the joint venture’s operations, governance practices and risk management activities is maintained through membership on the entity’s Board of Directors, Audit Committee and/or Committee of Management. In addition, IPL receives regular operational and financial reports and conducts periodic audits. » A comprehensive Health, Safety, Environment and Community (HSEC) management system is in place. » Where remedial obligations are identified, an analysis is undertaken to assess any potential costs. Where applicable, provisions are made in the accounts in line with relevant accounting standards. » HSEC risk identification, mitigation and management strategies are employed at all times and across all sites. » Systems and procedures, including Standard Operating Procedures and Work Instructions, are established, documented, implemented and maintained to reduce HSEC risk in all work activities. » Appropriate workers’ compensation programs are in place globally to assist employees who have been injured while at work, including external insurance coverage. » » » The Group has strict processes around the stewardship, movement and safe handling of dangerous goods and other chemicals. Crisis Management Teams exist at various levels of management across the business to monitor the situation at a local level and escalate concerns as required. Physical distancing, face masks and staggered shifts have been introduced as far as practical. Where not practical, alternative controls such as plexi-glass screens have been implemented at work stations and employees are encouraged to work from home where they can. Increased hygiene and cleaning routines have been implemented and record keeping and contact tracing procedures are in place across the Group. Through engagement with an expert third party, a comprehensive assessment has been completed of IPL’s physical and transitional risks and opportunities associated with climate change. The assessment was conducted using two future climate related scenarios created specifically for IPL (a two-degree scenario and a four-degree scenario) in line with TCFD guidelines. (1) Refer to IPL’s Climate Change Policy (available on IPL’s website) for further details on the Company’s support for the international climate agreement developed at the 2015 Paris Conference of Parties. 28 Incitec Pivot Limited Annual Report 2020OPERATING AND FINANCIAL REVIEWBroad Risk Category Description and potential consequences Treatment strategies employed by IPL Compliance People Manufacturing IPL’s business, and that of its customers and suppliers, is subject to various laws, policies and regulatory provisions across the jurisdictions in which it operates, including anti- bribery and corruption laws, sanctions, anti-trust laws, domestic or international laws relating to import and export quotas, tariffs and geopolitical risks relating to countries with which IPL, or its customers and suppliers, engages to buy or sell products and materials. Failure to abide by, or changes in, these laws and regulatory provisions in any of the countries in which IPL operates or in which it has dealings may adversely impact its business, financial condition and operations, or the business, financial condition and operations of IPL’s customers and suppliers, including reputational damage to IPL as well as legal action, and could impact on the willingness of parties, including financiers, to transact with IPL. IPL is also exposed to potential legal and other claims or disputes in the course of its business and in connection with its operations. Additionally, IPL manufactures or produces product to specific customer and industry specifications and statutory parameters. The Group is exposed to financial and reputational risk if these standards, requirements and limits are not met. IPL has operations in regional and remote locations where it can be difficult to attract and retain critical and diverse talent. A shortage of skilled labour or loss of key personnel could disrupt IPL’s business operations or adversely affect IPL’s business and financial performance. IPL’s manufacturing systems are vulnerable to equipment breakdowns, energy or water disruptions, natural disasters, unforeseen human error, sabotage, terrorist attacks and other unforeseen events which may disrupt IPL’s operations and materially affect its financial performance. Sulphuric acid is a major raw material required for the production of ammonium phosphates. Approximately 50-60% of Phosphate Hill’s sulphuric acid comes from processing metallurgical gas sourced from Glencore’s Mt Isa Mines copper smelting facility. Sulphuric acid supply into Phosphate Hill would likely be negatively impacted, from a volume and/or price perspective, should the Mt Isa Mines copper smelter close. Natural gas is the major input required for the production of ammonia and therefore is a critical feedstock for IPL’s nitrogen manufacturing operations. Competitive and economic availability of natural gas is key when sourcing supply, as this impacts the variable cost of production of ammonia and significantly influences the plants’ overall competitive position. There is a risk that a reliable, committed source of natural gas at economically viable prices may not be available for the Australian manufacturing operations. » Corporate functions are in place to provide sufficient support and guidance to ensure regulatory risks are identified and addressed, including regular reviews of country regulatory risk, comprehensive checks of customers and suppliers for compliance with relevant sanctions laws, and the undertaking of due diligence processes as required. » Where possible, IPL appoints local business leaders and management teams who bring a strong understanding of the local operating environment and strong customer relationships. » » » » » IPL engages with governments and other key stakeholders to ensure potential adverse impacts of regulatory changes are understood and, where possible, mitigated. Regular training is provided to relevant staff on their obligations and reporting requirements under appropriate anti-bribery and corruption laws. IPL provides a whistleblower hotline where employees and third parties can anonymously notify the Group’s General Counsel and Chief Risk Officer of any suspected fraudulent or illegal activity. IPL operates and manufactures products using detailed quality management systems. Quality assurance plans are in place for manufactured products intermediaries, procured products and raw materials. The Group has policies and procedures, including flexible working arrangements and competitive compensation structures, designed to help attract and retain workforce. » Management identifies critical roles and implements policies to help ensure that appropriate succession and retention plans are in place for those roles. » IPL undertakes business continuity planning and disaster preparedness across all sites. » Global industrial special risk insurance is obtained from a variety of highly rated insurance companies to ensure the appropriate coverage is in place with regard to damage to the Group’s plants and property and the associated costs arising from business interruptions. » » » » » The Group has several sources of sulphuric acid for supply for Phosphate Hill including its Mt Isa operations, which produces sulphuric acid from burning imported elemental sulphur, and purchasing directly from a domestic smelter. In addition, Phosphate Hill uses phosphoric acid reclaimed from its gypsum stacks in place of sulphuric acid. The Group has medium term gas contracts in place for its Australian manufacturing sites. The contracts have various tenures and pricing mechanisms. IPL explores new gas supply arrangements as an ongoing part of its operations, including the extraction of natural gas from the tenement awarded to Central Petroleum Limited (Central) by the Queensland government in March 2018, in respect of which IPL has entered into a 50:50 joint venture with Central. The US natural gas market is a well-supplied and liquid market. The Americas business has short term gas supply arrangements in place for its gas needs with market referenced pricing mechanisms. In respect of the Americas business, there is an ability to hedge gas prices in accordance with policies approved by the Board. The Group seeks to maintain or achieve low cost positions in its chosen markets, which helps its businesses to compete in changing and competitive environments. 29 Incitec Pivot Limited Annual Report 2020OPERATING AND FINANCIAL REVIEWBroad Risk Category Description and potential consequences Treatment strategies employed by IPL IPL has strong relationships with key customers for the supply of products and services, and these relationships are fundamental to the Group’s financial performance. The loss of key customer(s) may have a negative impact on the Group’s financial performance. Customer(s)’ inability to pay their accounts when they fall due, or inability to continue purchasing from the Group due to financial distress, may expose the Group to customer credit risks. Timely and economic supply of key raw materials represents a potential risk to the Group’s ability to manufacture and supply products. In some markets in which IPL operates, economic supply of key raw materials is reliant on only a few external parties and in some cases, only one. In some markets, the availability of transportation routes for moving raw materials and finished product, such as rail, barge, truck and ship, as well as the methods for transporting key raw materials directly to sites, such as pipelines, underground aquifers and electricity networks, are reliant on only a few external parties. There is a risk that if these transportation routes or methods are disrupted, IPL’s manufacturing and distribution capacities may be reduced. There is a risk that if production is not sold and effectively moved from site, plant uptime and earnings could be negatively impacted should storage at site become full. Pricing for fertilisers, ammonia, ammonium nitrate and certain other industrial chemicals is linked to internationally traded commodities (for example, ammonia, ammonium phosphates and urea). Some raw materials, such as phosphate rock, is also an internationally traded commodity. The pricing of internationally traded commodities is based on international benchmarks and is affected by global supply and demand forces, therefore price fluctuations in these products, combined with fluctuations in foreign currency exchange rates, particularly the A$/US$ rate, could adversely affect IPL’s manufacturing operations and financial performance. Weaker hard and soft commodity prices (particularly coal, iron ore, gold, corn, wheat, cotton and sugar) could have an adverse impact on the Group’s customers and has the potential to impact the customers’ demand, impacting volume and market prices. » The Group attempts to diversify its customer base to reduce the potential impact of the loss of any single customer. » Where practical, for customers in the Explosives sector, IPL prefers to engage in long term customer contractual relationships. » The Group manages customer credit risks by monitoring and actively managing overdue amounts within policy guidelines, and through endeavouring to negotiate contractual terms that provide protection to address customer non-payment or financial distress. » When appropriate, the Group purchases trade credit insurance to minimise credit risk. » Integrated Business Planning (IBP) and inventory processes assist in optimising inventory to reduce price risk of stock on hand and provide flexibility to mitigate the impacts of short term disruptions. » Where possible, flexible supply chain and alternative sourcing solutions are explored and maintained as a contingency. » » » » » Reviews of single-point sensitivity exposures within IPL’s supply chain are undertaken. Where material risks are identified, contingency plans are developed, including identification of alternative sources of supply, additional storage capacity and increased safety stock. Plants have storage capacity, as well as logistics capability, that allows for offtake to be distributed via various channels, including via rail, truck, barge and pipeline. IPL manages commodity price risk via a trading book approach which allows the business to better manage its short and medium-term exposures to commodity price fluctuations, while taking into account its commercial obligations and the associated price risks. To ensure volume and price commitments are upheld, the Group has firm and enforceable customer supply contracts. The Group may enter into derivative contracts, where available on a needs basis, to mitigate commodity price risk. However, in some instances price risk exposure cannot be economically mitigated by either contractual arrangements or derivative contracts. The current global economic and business climate and any sustained downturn in the North American, South American, Asian, European or Australian economies may adversely impact IPL’s overall performance by affecting demand for industrial explosives, industrial chemicals and fertilisers and related products and services, and profitability in respect of them. The balance between supply and demand of the products that IPL manufactures and sells can greatly influence prices and plant utilisation. The structural shift in the North American energy sector, which has seen a movement away from coal-fired energy production towards natural gas has increased competitive pressure on some of IPL’s major existing customers (giving rise to increased cost pressure on inputs to their supply such as explosives) and has also resulted in reduced demand for their outputs. » Diversification across explosives and fertilisers markets in numerous geographical locations helps manage exposures: IPL’s international explosives businesses operate across geographically diverse locations with exposures to diverse sectors including coal, iron ore, quarry & construction and metals mining; IPL’s Australian fertilisers business operates in all Australian States other than Western Australia and has diversity across market segments and customers serviced. » » Continuous review of country specific risks helps proactive management of potential exposures. The IBP process incorporates forecasting on a rolling 24-month basis which enables scenario planning and some supply flexibility. Forecasts are based on typical weather conditions and are reviewed on an ongoing basis as the seasons progress to help align supply to changing demand. Reduced demand for steel inputs (in particular iron ore and metallurgical coal) can lead to a decrease in demand for explosives in these industries. Seasonal conditions (particularly rainfall), are a key factor for determining demand and sales of explosives and fertilisers. Any prolonged change in weather patterns & severity of adverse weather conditions could impact the future profitability and prospects of IPL. Customer Supply Chain Commodity Price Demand 30 Incitec Pivot Limited Annual Report 2020OPERATING AND FINANCIAL REVIEWBroad Risk Category Description and potential consequences Treatment strategies employed by IPL Finance Security Cyber The appreciation or depreciation of the A$ against the US$ may materially affect IPL’s financial performance through the translation of US$ denominated sales, borrowings and related interest payable. Other financial risks that can impact IPL’s earnings and/or ability to operate include the cost and availability of funds to meet its business needs, movements in interest rates and the imposition or removal of tariffs. While IPL currently forecasts that it will have sufficient funds to meet its business needs and to service its debt requirements, no assurance can be given that, in the future, IPL will continue to have sufficient funds to meet its financial covenants, debt repayment obligations, or be able to refinance its debt prior to its expiry. Changes in tax legislation or compliance requirements in the jurisdictions in which IPL operates, or changes in the policy or practices of the relevant tax authorities in such jurisdictions, may result in additional compliance costs and/or increased risk of regulatory action. IPL’s operations are vulnerable to sabotage, terrorist attacks and other unforeseen events which may disrupt IPL’s operations and materially affect its financial performance. Sensitive data, pertaining to IPL, its employees, associates, customers or suppliers, may be lost or exposed, resulting in a negative impact to reputation or competitive advantage, and potential breach of regulatory compliance obligations. IPL may be the target of cyber-attacks which could result in commercial, financial, health and safety, environmental, community or reputational impacts. » » » » » » IPL’s capital management strategy is aimed at maintaining an investment grade credit profile, an appropriate mix of A$/US$ debt, funding flexibility by accessing different debt markets and reducing refinancing risk by ensuring a spread of debt maturities. A detailed discussion of financial risks is included in Note 17 (Financial Risk Management). Financial risk management is undertaken in accordance with policies, including hedging strategies, that are approved by the Board. IPL engages with governments and other key stakeholders to ensure potential adverse impacts of proposed fiscal and/or tax changes are understood and, where possible, mitigated. IPL undertakes business continuity planning and disaster preparedness across all sites. The Group has strict processes around the stewardship, movement and safe handling of dangerous goods and other chemicals. Policies, procedures and practices are in place regarding the use of company information, personal storage devices, IT systems and IT security. » A data breach response plan has been established to respond to, and mitigate the effects of, any instances of sensitive data breaches that may occur. » » » » External testing is performed to assess the security controls of the Group’s IT systems. Security Operations Centre, threat intelligence, advanced threat analytics, system/network controls and industry standard cyber frameworks are collectively leveraged for the prevention and detection of, and response against, cyber threats. Incident Response Plans, including Disaster Recovery arrangements, are in place to help IPL effectively respond to and recover from a cyber security incident. To ensure a degree of risk transfer in the event of a major cyber security incident, IPL retains a cyber security insurance policy. 31 Incitec Pivot Limited Annual Report 2020OPERATING AND FINANCIAL REVIEWWe are committed to the long-term sustainability of our businesses, the environment and the communities in which we operate. 32 Incitec Pivot Limited Annual Report 2020BEING A SUSTAINABLE BUSINESS 33 Incitec Pivot Limited Annual Report 2020ZERO HARM: OUR LICENSE TO OPERATE Zero Harm is our core Company value and is fundamental to everything we do – it is essentially our license to operate. Tragically, a multi-motor vehicle accident in April on a public road in South Carolina resulted in two fatalities and one serious injury, including the death of one of our employees. The tragic loss of life is a stark reminder of the importance of embedding Zero Harm as our number one value and priority. Zero Harm applies as much to our impact on the environment as it does to safety, and this has continued to be a focus in FY20, with a reduction of significant environmental incidents from three last year to one this year. ZERO HARM – Key Metrics TRIFR Potential High Severity Incidents Process Safety Incidents Significant Environmental Incidents FY20 FY19 FY18 0.57 0.80 0.94 34 24 1 34 33 3 42 27 1 Our Zero Harm strategy drives the success of the Company. It sets out our ambition to integrate our approach in achieving an industry leading performance in personal safety, process safety, occupational health and reducing our impact on the environment. Our Zero Harm strategy underpins our global Zero Harm Strategic Driver and integrates all Health, Safety, Environment and Community elements under one framework under the themes of Simplify, Get the Fundamentals Right, Lead and Engage and Strengthen our Learning Culture. These all provide a common language and the basic principles which will guide our effort, reflect the voice of our internal customer and improve our performance. Our three-year tactical plan targets the delivery of global Zero Harm initiatives through our collaboration networks, focusing on specific Health, Safety, Process Safety and Environment continuous improvement plans. Driving down TRIFR In FY18 we set a goal for a step change in our workforce Total Recordable Injury Frequency Rate (TRIFR) to achieve a 30% reduction by FY21. This focus has resulted in us achieving our FY21 target of 0.70 a year early – with an FY20 TRIFR of 0.57. We’ve also seen a significant improvement in process safety incidents, down to 24 compared to 33 last year. 2020 Zero Harm Snapshot 2021 Goal 30% improvement in TRIFR (1) by 2021 TARGET 0.70 29% DECREASE TRIFR of 0.57 Achieved FY21 TARGET a year early 27% REDUCTION in Tier 1 and Tier 2 events 2021 Goal Year-on-year reduction in Tier 1 and Tier 2 Process Safety Incidents (3) Process Safety Personal Safety Zero Harm Significant Event Management Environment 2021 Goal Zero Significant Environmental Incidents (2) 66% reduction on last year Stretch ACHIEVED for both INVESTIGATIONS and ACTIONS COMPLETED 2021 Goal Sustainable year-on-year reduction in Potential High Severity Incidents (1) TRIFR is calculated as the number of recordable injuries per 200,000 hours worked and includes contract workers. (2) Significant Environmental Incidents as assessed against IPL’s internal risk matrix with potential consequences of 5 or higher on a 6-level scale. (3) Tier 1 and 2 Process Safety Incidents as defined by the Center for Chemical Process Safety. 34 Incitec Pivot Limited Annual Report 2020 Zero Harm Strategic Themes Simplify We support people with easy to understand and easy to use systems. Get the Fundamentals Right We define our minimum expectations: we will be excellent at the fundamentals. Lead and Engage We empower, develop and expect everyone to be leaders in Zero Harm. Strengthen our Learning Culture We learn, we share and we fix for good. IPL Zero Harm Achievements in FY20 Proactively responded to COVID-19 Implemented our One IPL strategy for Zero Harm Established global collaboration networks for Process Safety, Health and Wellbeing, Safety and Environment Zero Harm Developed the refreshed Global Safety Behavioural Program (SafeTEAMS) Successful completion of the enhanced Operations Risk Management pilot Refreshed our Compliance Management Framework (Environmental focus) Global Assurance Process for Ammonium Nitrate Storage Keeping Everyone Safe from COVID-19 As we continue to respond to the COVID-19 pandemic, our people have come together to support one another like never before. At IPL, we are proud of the inspiring resilience and resourcefulness that has been exhibited by our people, our customers and our communities during the COVID-19 pandemic. It is this spirit that will get us through these unprecedented times and will allow all of us to come out of this pandemic stronger than before. Throughout the COVID-19 pandemic, our Crisis Management Team has been focussed on keeping our people safe and our operations running by implementing a range of new processes, action plans and site specific responses, which has enabled us to safely protect our people, our customers and our communities. Development of Global Standards for Tyre and Rim Management Implemented our Global Event Management Process Targeted Mental Health and Wellbeing Campaign E N T A L HEALTH M A B C WELLBE I N G Incitec Pivot Limited Annual Report 2020 35 OUR PEOPLE Talented, Engaged and Collaborative People Our People Strategy is focused on developing a diverse and inclusive company with the right people in the right roles. It involves building people focused leaders across our organisation with the skills and capabilities to coach, develop and inspire using local action plans for an engaging experience for all employees. Employees at all levels of our business are encouraged to think laterally, to share their experiences and ideas, and to participate in implementing improvements, resulting in outcomes which are highly valued by both the Company and our people. 36 Incitec Pivot Limited Annual Report 2020 Strategic Themes Engaging Leaders Building engaging leaders across our Company who create a One IPL culture and target strategic results. Talented People Attracting, retaining and developing the right people in the right roles, both now and for the future. Engaging Leaders in 2020 » Our One IPL Leadership Framework was integrated globally to inspire our people to deliver results that create value now, and into the future. » We commenced the rollout of our One IPL Leadership Foundations Program for our frontline leaders. Built around a core high performance team model, this program is designed to develop common foundational leadership capabilities, aligned to our One IPL Leadership Framework. » We designed, developed and piloted the Frontline Management Program to empower our leaders to manage their people, assets and resources safely and effectively. » Building on last year’s Your Voice employee survey, a number of pulse surveys were undertaken across targeted business units and manufacturing sites to drive and track improvements in engagement. Talented People in 2020 » We launched our digital, multi-lingual One IPL Learning Pathways training suite, making it globally accessible to all our people anywhere and at any time. » Our training and application in the competencies that underpin the One IPL Leadership Framework regarding talent acquisition were launched, including the development of new self-assessment tools for release in early 2021. » As part of our continual improvements and global response to the COVID-19 pandemic, we launched our new ‘working on-site’ video and video interview platform. » We refreshed our Australian Manufacturing Graduate Program to include a value proposition for diverse candidates in technical roles. » We continued our Dyno Nobel Vacation Program, which actively supports Austmine’s ‘Women In STEM: METS Career Pathway Program’, to attract high potential talent. Diverse & Inclusive Ensuring a diverse & inclusive environment is the everyday experience for our employees. Diversity and Inclusion in 2020 Diversity of people and perspectives is an essential enabler of innovation and collaboration across IPL and is key to our One IPL culture of working together to capture diversity of thought in an inclusive environment, where the contribution of everyone is valued. Collaboration Achieving strong business outcomes together as One IPL. » We achieved an increase in gender diversity across all business units, by 6.2% in Australia and 8.7% across the Asia Pacific region. » Our IPL Flexible Work Policy and Procedure was refreshed to support better outcomes for our people and the company. » We developed and piloted our Upstander Bystander training program across our Global Manufacturing Leadership Team and the Australian Manufacturing Leadership Team to embed our inclusive culture and behaviours. » Australian Indigenous cultural awareness was facilitated through promoting and participating in Reconciliation Week, NAIDOC Week and celebrating National Aboriginal and Torres Strait Islander Children’s Day with employee donations to the Indigenous Literacy Foundation. » We were proud to have continued to be selected for inclusion in the Bloomberg Gender-Equality Index. Collaboration in 2020 Collaboration is core to our culture and our One IPL Leadership Framework. Our people have collaborated like never before during the pandemic. » We found new ways of providing remote technical support to our customers using virtual technologies. » » » Remote troubleshooting became the norm as we were unable to move around our locations. Factory testing of a number of new Manufacturing Processing Units was also undertaken safely, remotely and virtually. Site turnarounds and restarts were undertaken in a new COVIDSafe world, achieving Zero Harm and to strict COVID-19 controls. » We also brought all our global leaders together in a semi-virtual setting for the 2019 One IPL Leadership forum which focused on developing our leaders’ behaviours and mindsets to lead people and outcomes in the present and the future. » We introduced a new Collaboration Competencies self-assessment tool for our leaders and wider workforce. » Our Global Information Technology function introduced a new CIO Standing Ovation Award to recognise and reward team and individual achievements across the IT Group that deliver outstanding value and innovation. 37 Incitec Pivot Limited Annual Report 2020SUSTAINABILITY OVERVIEW Our Sustainability Strategy To deliver sustainable growth and shareholder returns while caring for our people, our communities and our environment. IPL is committed to operating in a manner which acknowledges and proactively manages those issues which are most material to the long term sustainability of our business, the environment and the communities in which we operate. This commitment is driven by our Company Values, which are core to our business, and built into our Strategic Drivers. In order to identify those issues most material for our stakeholders and our business, we conduct a biennial materiality review. The steps in this process follow Global Reporting Initiative (GRI) guidelines, with our most recent materiality assessment conducted in 2019. The identified material issues and topics, our strategy and the 2020 highlights related to each are described in the overview on the following page. More detailed information on our materiality assessment, our stakeholder engagement strategies and our management strategies is available in IPL’s annual Sustainability Reports and GRI Index and Data supplements. These reports can be accessed at https://www.incitecpivot.com.au/sustainability/ sustainability-report. Benchmarking our Performance As part of our commitment to transparent reporting, IPL’s sustainability performance is assessed against leading indices. This gives us the opportunity to benchmark our performance against other organisations in our sectors, provides insight into areas for improvement, and provides investors and other stakeholders with an objective measure of our environmental, social and governance (ESG) risk management and business practices. Dow Jones Sustainability Index (DJSI) is widely recognised as the leading reference point in the growing field of sustainability investing due to the robustness of its assessment process. Since 2010 IPL has been included in the DJSI where performance is benchmarked against peers in the global Chemicals sector. The results since 2015 are represented below. Dimension Economic Environmental Social Total for IPL Chemicals sector average 2015 2016 2017 2018 2019 2020 67 51 63 60 58 74 60 65 67 56 73 61 68 68 53 71 64 57 65 44 72 73 60 69 47 78 71 58 69 36 In 2020, the FTSE Group confirmed that IPL has been independently assessed according to the FTSE4Good criteria, and has satisfied the requirements to remain a constituent of the FTSE4Good Index Series for the seventh year running. Companies in the FTSE4Good Index Series have met stringent environmental, social and governance criteria. Other indices and membership are shown to the right. 38 Incitec Pivot Limited Annual Report 2020 DJSI Member since 2010 FTSE4Good Member since 2014 CDP Reporter since 2009 IPL has been a voluntary CDP (formerly Carbon Disclosure Project) reporter since 2009. Our most recent CDP report can be downloaded from our website. CDP Water Reporter since 2014 IPL has been a voluntary CDP water reporter since its introduction in 2014 and uses WRI Aqueduct Water Tool to report. Our most recent CDP Water report can be downloaded from our website. Bloomberg GEI 2019 and 2020 Member EcoVadis Member since 2015 EcoVadis is assessed biennially. Our next rating will be in 2021. Our Strategic Approach 2020 Highlights Material Issues Ensuring Ethical Conduct Climate Change Governance and Strategy Workplace Safety Employee Health and Wellbeing Community Safety Managing Environmental Impacts: Environmental Compliance Sustainable Economic Performance Climate Change Risks and Opportunities Community Engagement Resource Efficiency and Emissions Sustainable Products, Services and Customer Relationships Innovation and Technology Strong Governance: As part of our commitment to operating to the highest standards of ethical behaviour, our policies and practices set ethical standards for directors and employees, and our Supplier Code of Conduct outlines our expectations for suppliers and contractors. Our governance framework and practices are consistent with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (3rd Edition). For more detail on governance see the Corporate Governance and Climate Change Governance sections. Zero Harm: We set continuous improvement objectives across key metrics including health, safety, environment and process safety as part of ensuring a safe, high performing workplace through: easy-to-use systems and processes; non-negotiable safety and environmental standards; a high level of ownership and accountability; and a strong supportive safety learning culture. See our Zero Harm section for more detail. Profitable Growth: Focusing on existing and new opportunities that are distinctive to our differentiated technology, core markets, core capabilities and market segments to deliver sustainable returns for our shareholders; and driven by a focus on continuous improvement, cost efficiency and the strategic management of climate risks and opportunities. Building long-term and meaningful relationships with our local communities through an active and grass- roots approach to community engagement, and the economic development that flows from employment opportunities provided by our business and the natural resources unlocked by our products. See the Caring for Our Communities section for more detail. Manufacturing Excellence: Driving consistency across the performance of our assets with a focus on continuous improvement in measurement and monitoring, the efficient use of energy and water, and exploring new ways to reduce our greenhouse gas emissions. See our 2020 Sustainability Summary and 2020 Sustainability Report for more details, including the key findings of our Solar Hydrogen Feasibility Study. Customer Focus: Partnering with our customers to develop new products and specific, sustainable solutions. Leading Technology Solutions: Providing innovation on the ground that our customers can use to increase profitability and safety, and reduce environmental and social impacts. Employee Engagement Diversity Talent Attraction and Retention Talented, Engaged and Diverse People: Building a One IPL collaborative and high performing culture with engaged, diverse and inclusive teams through: strengthening our learning culture; enabling innovation through diversity of people and perspectives; and attracting and developing high potential talent. Read more under ‘People’ and ‘Diversity’ in IPL’s 2020 Corporate Governance Statement. » Adoption and implementation of IPL’s Modern Slavery Policy. » Completion of a $2.7m Solar Hydrogen Feasibility Study, supported by ARENA, for renewable ammonia production at Moranbah, Queensland. » Achieving our FY21 TRIFR goal of 0.70 a year early with an FY20 performance of 0.57. » » » » » » » » » » » » » 27% reduction in Tier 1 and Tier 2 Process Safety Incidents. 100% compliance with required Community Safety Communications. Investing $4.5m in leading environmental controls at our Townsville IPF Primary Distribution Centre. $3,942.2m Revenue for 2020. $374.5m EBIT for 2020. $0.5m Community Investment. $1,826m metric tonnes of resources mined using our explosives. 32m metric tonnes of food and fibre grown by Australian farmers using our fertilisers. 36% reduction in NOx per tonne of nitric acid produced against a 2015 baseline. 10% reduction in GHG emissions per tonne of ammonia produced against a 2015 baseline. Setting an absolute GHG reduction target of 5% by 2026 against our 2020 baseline. (1) 24% increase in customer satisfaction scores. 300+ Agronomists at our industry accredited IPF Agronomy in Practice course over the last three years. » 7 Joint research partnerships. » Growth in technology based sales volumes since 2016, with a Compound Annual Growth Rate of 32% for Electronic Detonator Systems and 24% for Premium Emulsions. » » » 2020 pulse surveys show improved employee engagement scores at targeted sites. Increase in global gender diversity, with an 8% increase across our Asia Pacific business. Refresh of our Australian Manufacturing Graduate Program. (1) IPL’s total global 2020 emissions were 3,616,740 tCO2e. The 2020 GHG baseline is subject to adjustment due to unforeseen future expansions and acquisitions/divestments which may occur before the end of the 2026 IPL financial year. 39 Incitec Pivot Limited Annual Report 2020Our Use of Natural Resources in 2020 Energy and GHG The manufacture of nitrogen-based products is energy intensive because it requires natural gas as both an energy source and a raw material, with carbon dioxide being liberated during manufacturing. We have reduced our global GHG emissions intensity per tonne of ammonia by 4% since last year, and by 10% since 2015 through energy efficiency projects and investment in a new US$820m highly efficient ammonia plant. As described above, the production of these essential agricultural and mining products is currently based on a hard-to-abate chemical process, however, we continue to invest in abatement technologies and seek new ways to reduce our impact. In 2020, we set an ambitious absolute medium-term GHG reduction target of 5% by 2026, which is approximately 200,000 tCO2e. This reduction is equivalent to the emissions generated by 43,209 average passenger vehicles being driven for a year. Meeting this target will require significant financial investment. New technologies, such as solar hydrogen, will be required to achieve greater GHG reductions in the long-term, and we continue to investigate these emerging pathways. Total direct and indirect greenhouse gas emissions ENERGY Million tonnes of CO2e 4 Scope 1 Scope 2 Total GHG emissions 3 2 1 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 GHG intensity per tonne of ammonia produced tCO2e 3.0 Trend 2.5 2.0 1.5 66,383,873 GJ total global energy use * 10% * 1% 2,063,598 GJ (3.4%) of which was purchased electricity GHG 3.6m tCO2e Total GHG * 7% * 7% GHG INTENSITY & PRODUCTION 0.3 t Scope 2 GHG (no change) 3.3m tC02e of which was Scope 1 GHG tCO2e/t Ammonia as per 2020 target 4% 14% Ammonia Production 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 * Energy and GHG increases were due to increased global production. Water Use and Discharge Cooling water is also a key necessity for nitrogen manufacturing. In addition to IPL’s comprehensive annual risk management process, the World Resources Institute Aqueduct Water Tool is completed each year for long term projections and reviewed by IPL’s Chief Risk Officer. While the majority of IPL’s major manufacturing plants are located in regions with plentiful natural supplies of water, several smaller sites in Australia have been identified by the Water Tool as being located in areas which may experience water stress by 2025. In North America, water resources are of particular concern at Cheyenne, Wyoming. IPL engages with key stakeholders, including the Wyoming State Engineer’s Office, which manages stakeholder access to the local groundwater aquifer. In other regions, where there is higher rainfall, IPL recognises that water management is also important. Gross Water Use 43,853 ML Discharge 29,737 ML Net Water Use 14,502 ML 4% 2% 6% Water Use by Source Surface water: 74% Ground water: 15.5% Municipal water: 10.2% Recycled water: 1.9% Storm water: 0.1% Desal water: 0.002% Rain water: 0:00003% Water Discharge by Destination Surface water: 98.7% Ground water: 1.28% Sewers: 0.002% 98.7% clean water to surface waters 43,853 ML Clean water to surface waters 40 Incitec Pivot Limited Annual Report 2020Incitec Pivot Limited Annual Report 2020 41 CLIMATE CHANGE STRATEGY AND GOVERNANCE Manage physical climate change risks & advocate for a just transition The right people in the right roles within a culture of innovation Manage climate- related financial risks and opportunities strategically Reduce emissions, increase efficiencies & explore new technologies We recognise the challenge of reducing our own emissions while continuing to provide products which improve people’s lives by unlocking the world’s natural resources on the ground. We believe that innovative fertiliser and explosives products and services will play an increasingly important role in reducing emissions and land clearing while increasing yields of food and fibre, and efficiently and effectively accessing the minerals and aggregates required for new technologies and infrastructure rebuilding in a world impacted by climate change. Our Climate Change Policy describes how the management of the risks, opportunities and impacts associated with climate change is integrated into our six strategic drivers, on which the success of the Company is built. Download the policy at www.incitecpivot.com.au. Develop and deliver products and services which reduce customer GHG Partner strategically for customer solutions & sustainable product use Climate Change Governance The charters of the IPL Board and its Audit and Risk Management Committee formally and specifically assign oversight of climate change policy and strategy, and climate change-related risks and opportunities to IPL’s directors. Reports on matters relating to climate change are received directly by the Board and through the Audit and Risk Management Committee and the Health, Safety, Environment and Community Committee of the Board. Assessing Climate Change-related Risks and Opportunities In 2018, we engaged an expert third party to complete a comprehensive assessment of IPL’s physical and transitional (market based) risks and opportunities associated with climate change. The assessment was conducted using two future climate related scenarios created specifically for IPL (a two-degree scenario and a four-degree scenario) in line with TCFD guidelines. A description of the scenarios and the methodologies used to create them is available in the Managing Climate Change section of the 2018 During 2020 IPL set an absolute GHG reduction target of 5% by 2026 against our 2020 baseline. (1) This is supported by our commitment to the investigation, identification and implementation of one or more projects to reduce our global emissions by 200,000 tCO2e which is equal to ~5% of our global 2020 emissions. IPL Sustainability Report. Our two and four-degree future climate related scenarios will be updated during 2021. Detailed reporting on identified climate-related risks and opportunities is included in our annual Sustainability Reports and the TCFD sections of their GRI Index and Data supplements. Highlights in 2020 » Moving from intensity based GHG targets to our first absolute GHG reduction target of 5% by 2026. » Completion of a $2.7m Solar Hydrogen Feasibility Study: contributing to new pathways for potential long-term GHG reductions. Key findings from the study are reported in our 2020 Sustainability Summary and 2020 Sustainability Report. » 28% growth in sales volumes of our new high efficiency fertiliser eNpower, which helps to reduce nitrogen losses to the atmosphere as GHG. » The continued successful rollout of Delta E (Differential Energy) technology to the global explosives market. This technology reduces energy use and GHG for our mining customers while resulting in increased productivity and safety. This reduction in GHG is equal to: OR 43,209 passenger vehicles being driven for one year The average passenger vehicle being driven for 798,681,886km (2) (1) IPL’s total global 2020 emissions were 3,616,740 tCO2e. The 2020 GHG baseline is subject to adjustment due to unforeseen future expansions and acquisitions or divestments which may occur before the end of the 2026 IPL financial year. (2) United States Environmental Protection Agency (2020) Greenhouse Gas Equivalencies Calculator. 42 Incitec Pivot Limited Annual Report 2020 Incitec Pivot Limited Annual Report 2020 43 CARING FOR OUR COMMUNITIES In line with our Care for the Community & our Environment Value, we are committed to building long term and meaningful relationships with the communities in which we operate. Engagement with our communities takes place at a local level with our people who live or work in the area, which ensures community needs are best understood. Our people are empowered to engage with their local community members and representatives of national and international charities, regulators, Governments and grass-roots community organisations including resident groups, councils, farmers, sporting clubs and environmental groups. We aim to have a positive impact by providing local employment, selecting local suppliers wherever possible and creating shared value for our urban, regional, mining and farming communities. We empower our people to engage with their local communities and seek to mitigate negative impacts and create positive perceptions and outcomes for our business. Our Sustainable Communities Policy defines our approach to community relations, including commitments to: » » » listen to and work with the community; strive to be a valued corporate citizen; and respect our neighbours, their values and cultural heritage, and be considerate of them in carrying out our operations. Community Safety The nature of our work is hazardous which is why we have robust safety measures in place to manage any potential risk or impact on our local communities. Our Site Leaders collaborate and engage with local community leaders and first responders on many areas, the most important being community safety planning. Nothing is more important than the safety of our people, our communities and the environment, and our priority is to ensure everyone is clear on emergency plans to follow in the unlikely event of any incident. To ensure the emergency controls we have in place are always working, we hold regular Emergency Response drills involving Emergency Services and first responders. Copies of the Emergency Response Plans are lodged with regulatory agencies, with information provided to local community libraries. Community Investment Our Dollar for Dollar program, a key component of our Community Investment Framework, matches employee donations and site based fundraising efforts that are aligned to our Principles for Giving. Our Workplace Giving program offers Australian employees a voluntary Workplace Giving scheme whereby they can donate to one or more of the company’s nominated not-for-profit charities. IPL matches our employees’ Workplace Giving to $20,000 each year. During 2020, almost $540,000 of community investment was made globally through IPL’s Dollar-for-Dollar program, the Australian Workplace Giving program and various site-based initiatives. 100% of both local and Group donations were made in line with our Principles for Giving, with 4% allocated to improving education 26% contributing towards health and sport initiatives, and 70% to local community development. Local Sites We support activities that provide solutions to local challenges & opportunities in the communities where our people work and live. Education Providing support for childhood, adult and indigenous specific education activities. Local Initiatives We support initiatives that help local organisations develop skills & resources to bring positive and lasting benefits to communities. OUR PRINCIPLES FOR GIVING OUR AREAS OF FOCUS Health Providing support for activities and organisations working towards better physical and mental health. IPL Values We fund initiatives that are aligned to our values & business strategy, and are integral to the sustainability of our communities. Community Development Supporting activities that enrich community life & enhance the environmental, social & economic sustainability of local communities. IPL COMMUNITY INVESTMENT FRAMEWORK Our Framework preferences local approaches, enabling each IPL business and site to respond to the distinct needs of their communities. 44 Incitec Pivot Limited Annual Report 2020 COMMUNITY ACTIVITY HIGHLIGHTS Heavy Lifting for Simsbury Chamber of Commerce in Connecticut, USA When we heard Simsbury Chamber of Commerce needed help with some heavy lifting, we were only too happy to volunteer. In preparation for the annual 2020 Art Trail, we carefully and safely unloaded 36 life like sculptures from a world-renowned sculptor from two 40ft tractor trailers, contributing to this wonderful annual community event in Simsbury, Connecticut. Supporting our COVID-19 Front Line Workers From 3D face mask printing initiatives, donating and transporting medical grade PPE to medical practices in our communities around the world, supplying care packs and home-made meals, making hand-sewn masks for our people and their families, through to a range of mental health and wellbeing programs and educational based programs to help reduce the spread of the virus, including a children’s competition reinforcing good hygiene and physical distancing – our resilient people have been united in our response to supporting our communities during the COVID-19 pandemic. Community events were held around the world to support the communities in which we live and work, a small selection from FY20 include: East Coast of Australia Bushire Appeal Our people came together from far and wide volunteering as emergency first responders and to undertake a wide range of fundraising efforts that were combined with a corporate donation, bringing a total contribution of $150,000 to the National Bushfire Disaster Appeal to support emergency response efforts. Our fertilisers business has also established a Customer Bushfire Recovery Program to support our farming communities on the ground. Gibson Island, Queensland, Australia Restoration Project We proudly contribute funding and volunteers to the Gibson Island Restoration Project – a community, industry and Department of Natural Resources partnership project aiming to restore and re-invigorate the Brisbane based Gibson Island Conservation. Community Clean Up in Dinamita, Mexico Our Dinamita team in Mexico sponsored and facilitated a significant community clean up involving 165 people and the removal of 18 tonnes of rubbish. Australian National Aboriginal & Torres Strait Islander Children’s Day Supporting indigenous peoples located in the communities in which we operate is a critical part of our Group Diversity Strategy. We supported the Indigenous Literacy Foundation to raise funds during the week of National Aboriginal and Torres Strait Islander Children’s Day. Incitec Pivot Limited Annual Report 2020 45 We are committed to doing business ethically and in accordance with high standards of corporate governance. 46 Incitec Pivot Limited Annual Report 2020GOVERNANCE 47 Incitec Pivot Limited Annual Report 2020CORPORATE GOVERNANCE We are committed to doing business ethically and in accordance with high standards of corporate governance – which is fundamental to the continued growth and success of IPL, for our shareholders and other stakeholders. Corporate Governance Framework IPL’s Board of Directors is responsible for charting the direction, policies, strategies and financial objectives of the Company. The Board serves the interests of IPL and its shareholders, as well as other stakeholders such as employees, customers and the community, in a manner designed to create and continue to build sustainable value. IPL’s Board operates in accordance with its charter and has reserved certain powers for itself. The Board has established four standing Committees to assist the Board with effectively discharging its responsibilities: » Audit and Risk Management Committee; » Nominations Committee; » Remuneration Committee; and » Health, Safety, Environment and Community Committee. The Board has delegated the day-to-day management of IPL, and the implementation of approved business plans and corporate strategies, to the Managing Director & CEO, who in turn may further delegate to senior management. IPL’s governance framework: » plays an integral role in helping the business deliver on its strategy; » provides the structure through which strategy and business objectives are set, performance is monitored, and risks are managed; » provides guidance on the standards of behaviour that IPL expects of people; and » aligns the flow of information and accountability from our people, through the management levels, to the Board and ultimately our shareholders and key stakeholders. Stakeholders Board Assurance and oversight through reporting Delegation Accountability Managing Director & CEO Accountability Delegation Independent Assurance Audit and Risk Management Nominations Remuneration Health, Safety, Environment and Community Executive Team Internal Audit External Auditor Board Committees Accountability Delegation Our People 48 Incitec Pivot Limited Annual Report 2020 IPL Policies and Practices As part of our commitment to operating to the highest standards of ethical behaviour, we have a range of policies and practices that set ethical standards for directors, employees, contractors and third parties. These policies describe core principles designed to ensure ethical conduct is maintained in the interests of shareholders and other stakeholders. The IPL Code of Conduct is our global code for business conduct – it contains principles and standards of conduct which are based on IPL’s values and represents our commitment to uphold ethical business practices and meet applicable legal requirements. This is supported by key policies, including our Anti-bribery and Improper Payments Policy, Human Rights Policy, Modern Slavery Policy, Supplier Code of Conduct, Whistleblower Protection Policy; Continuous Disclosure Policy and Securities Trading Policy (which are available on our website), together with a number of other company policies which outline expected standards of behaviour. Board Composition Under IPL’s Board Charter, the composition of the Board is determined having regard to what is appropriate to achieve efficient and prudent decision making. The Board is committed to ensuring that it is comprised of individuals with an appropriate range of skills, experience, expertise and diversity to deal with current and emerging issues in our business. The Board currently comprises six directors, including five Non-executive Directors and one executive Director (being the Managing Director & CEO), and details of their qualifications and experience is provided under the Board of Directors section of this Annual Report. Corporate Governance Statement Our corporate governance framework and practices have complied with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (3rd Edition) (ASX Recommendations) throughout the 2020 financial year. The Board continually reviews IPL’s governance policies and practices to ensure that they remain appropriate in light of corporate governance developments and changes in expectations, including as reflected in the revised 4th Edition of the ASX Recommendations. Many of the new recommendations contained in the 4th Edition are already embedded in IPL’s existing governance arrangements. IPL’s 2020 Corporate Governance Statement, which can be viewed at www.incitecpivot.com.au/about-us/ about-incitec-pivot-limited/corporate-governance, provides detailed information on IPL’s corporate governance practices for the year ended 30 September 2020. 49 Incitec Pivot Limited Annual Report 2020BOARD OF DIRECTORS Brian Kruger BEc Independent Non-executive Chairman Mr Kruger was appointed as a non- executive director on 5 June 2017 and was appointed Chairman on 1 July 2019. Committee memberships Chairman of the Nominations Committee Member of the Remuneration Committee Member of the Health, Safety, Environment and Community Committee Skills and experience Mr Kruger is the former Managing Director & Chief Executive Officer of Toll Holdings Limited, having joined Toll in 2009 as Chief Financial Officer, before being appointed Managing Director & Chief Executive Officer in 2012. Prior to joining Toll, Mr Kruger had a career spanning 25 years in the resources and industrial sectors in Australia and the U.S. Mr Kruger brings to the Board significant experience in the industrial sector and a deep knowledge of manufacturing operations including in North America, as well as executive leadership experience in the Australian listed company environment. Other directorships/appointments Racing Victoria Limited – Chairman 50 Rebecca McGrath BTP(Hons), MASc, FAICD Independent Non-executive Director Ms McGrath was appointed as a non- executive director on 15 September 2011. Committee memberships Chairman of the Health, Safety, Environment and Community Committee Member of the Nominations Committee Member of the Audit & Risk Management Committee Skills and experience Ms McGrath had a 23-year career with BP plc, where she held a number of senior roles including as Chief Financial Officer and Executive Board member for BP Australia and New Zealand. Ms McGrath brings to the Board over 20 years’ experience in the international oil industry, senior executive experience in operations and finance, an operational and strategic understanding of occupational health and safety both as an executive and as a director and experience gained through significant exposure to manufacturing and supply chain management. Other listed company directorships in the past three years OZ Minerals Limited – Non-executive Chairman (from 2017) and Non-executive Director (from 2010) Goodman Group – Non-executive Director (from 2012) Other directorships/appointments Investa Commercial Property Fund Holdings – Non-executive Director Scania Australia – Independent Chairman Kilfinan Australia – Chairman Victorian Council of the Australian Institute of Company Directors – State President and Member of National Board Director Advisory Panel of the Australian Securities and Investments Commission – Member Advisory Council JP Morgan Australia – Member Jeanne Johns B.S. Chemical Engineering, magna cum laude Managing Director & CEO Ms Johns was appointed as Managing Director & CEO on 9 August 2017 and commenced in the role on 15 November 2017. Committee memberships Member of the Health, Safety, Environment and Community Committee Skills and experience Ms Johns is a global executive and chemical engineer with over 30 years’ experience in the international refining, petrochemicals, oil and gas industries. Ms Johns brings to the Board her broad experience in the chemicals and energy sectors, having held executive roles in North America, UK, China, Europe and Asia. Her global experience includes a deep understanding of the strategic and operational issues facing companies in cyclical and commodity-based businesses. Other listed company directorships in the past three years Tate & Lyle, plc – Non-executive Director (2016 - 2017) Parsons Corporation – Non-executive Director (2014 - 2017) Other directorships/appointments International Fertilizers Association – Director Australian Climate Leaders Coalition (CLC) – Founding Member American Chamber of Commerce in Australia (AmCham) Council of Governors – Chair, Victoria Liveris Academy for Innovation and Leadership, University of Queensland – Advisory Board Member Incitec Pivot Limited Annual Report 2020Bruce Brook BCom, BAcc, FCA, MAICD Independent Non-executive Director Mr Brook was appointed as a non- executive director on 3 December 2018. Committee memberships Chairman of the Audit & Risk Management Committee Member of the Nominations Committee Member of the Remuneration Committee Skills and experience Mr Brook was the Chief Financial Officer of Western Mining Resources Limited and Deputy Chief Financial Officer of the Australian & New Zealand Banking Group. Mr Brook brings to the Board extensive executive experience in Australia, America, the UK and Africa, across a range of industries including mining, finance, manufacturing and chemicals. Other listed company directorships in the past three years CSL Limited – Non-executive Director (from 2011) Newmont Corporation – Non-executive Director (from 2011) Other directorships/appointments Australian Institute of Company Directors, Corporate Governance Advisory Committee – Member Guide Dogs Victoria – Director Gregory Robinson Bsc(Hons), MBA, MAICD Independent Non-executive Director Mr Robinson was appointed as a non- executive director on 25 November 2019. Committee memberships Chairman of the Remuneration Committee Skills and experience Mr Robinson has held various senior management and executive roles during his executive career which spans over 30 years, including as a Director of Merrill Lynch Investment Banking, CFO/ CDO of BHP Petroleum, Finance Director and ultimately Managing Director & Chief Executive Officer of Newcrest Mining Limited. Mr Robinson brings to the Board significant senior executive experience in strategy, projects, operations, finance, accounting, capital management and risk management within the mining, oil and gas industries in Australia and internationally. Other directorships/appointments Royal Automobile Club of Victoria (RACV) – Deputy Chairman and Non-executive Director 51 Xiaoling Liu PhD (Extractive Metallurgy), BEng (Extractive Metallurgy), GAICD, FAusIMM, FTSE Independent Non-executive Director Dr Liu was appointed as a non-executive director on 25 November 2019. Committee memberships Member of the Health, Safety, Environment and Community Committee Member of the Audit & Risk Management Committee Skills and experience Dr Liu is a metallurgical engineer and experienced non-executive director who has had extensive executive experience in leading global mining and processing businesses, including a 26-year career with Rio Tinto. Dr Liu brings to the Board her extensive executive experience in Australia, America, Asia and Europe, across a range of industries including global mining and processing businesses. Other listed company directorships in the past three years South32 Limited – Non-executive Director (from 2017) Newcrest Mining Limited - Non-executive Director (2015-2020) Iluka Resources Limited – Non-executive Director (2016-2019) Other directorships/appointments Queensland University of Technology – Chancellor Incitec Pivot Limited Annual Report 2020EXECUTIVE TEAM Jeanne Johns B.S. Chemical Engineering, magna cum laude Managing Director & CEO See Board of Directors page. Nick Stratford B.Ec, CA Chief Financial Officer Nick commenced as Chief Financial Officer in July 2020. With more than two decades of professional experience in international finance and business management, Nick brings a wealth of expertise to the role, including more than a decade of experience with IPL, most recently as Dyno Nobel Americas President. This saw Nick based in the US for seven years where he also served as a member on seven of the North American business’s joint venture Board of Directors. Nick’s appointment as CFO sees him return to his hometown of Melbourne where he began his career with IPL and worked as the company’s Group Financial Controller and General Manager Investor Relations. Nick has previously worked for large firms across the globe, including Deloitte & Touche where he was based in Melbourne and Los Angeles and Reckitt Benckiser where he was based in Europe. Greg Hayne BComm, MBA President, Dyno Nobel Asia Pacific Greg was appointed as President, Dyno Nobel Asia Pacific in January 2018. With over 20 years’ experience in international business development, operations and P&L management, Greg has held a number of senior leadership positions within IPL, including as Vice President of Marketing where he led the establishment of the foundation contracts for Dyno Nobel Moranbah, Vice President of International Operations responsible for Dyno Nobel’s Indonesian expansion, and most recently as Senior Vice President, Retail Sales & Operations for Dyno Nobel Americas, supporting the growth of the company’s wholly owned distribution network across the region. Braden Lusk PhD, P.E. President, Dyno Nobel Americas Braden has more than 20 years’ experience in the mining and explosives industry and was appointed as Dyno Nobel Americas President in July 2020. Braden has been with IPL’s Dyno Nobel Americas business since 2018 and prior to being appointed President, served as Senior Vice President Corporate Accounts and Tech Services. In that role, he leveraged expertise in mining and blasting optimisation to develop outcome-based offerings that provided significant downstream value for critical customers. Braden has a combination of practical on-site skills, including working as a mine supervisor, international consultant, and trainer, along with extensive academic experience. Prior to joining Dyno Nobel, Braden was Chair of Mining and Nuclear Engineering at Missouri University of Science and Technology where he had previously earned a PhD in mining engineering, with an emphasis in explosives engineering. Stephan Titze Bachelor Applied Science (Rural Management, Agriculture Marketing) President, Incitec Pivot Fertilisers Stephan was appointed as President, Incitec Pivot Fertilisers in January 2019. Stephan is an Agribusiness professional with more than 25 years of experience in crop protection, seeds and irrigation. Stephan has held senior management positions in Syngenta, Zeneca and ICI Australia in Asia, including China, Japan, Korea and Indonesia and also in Europe, East Europe and Australia. Stephan served 5 years as Chairman of Crop Life China and Vice President for the Swiss Chamber of Commerce in China and in 2011 was named China’s Swiss CEO/Entrepreneur of the Year. In September 2020, Stephan was appointed as the Deputy Chairperson of Fertilizers Australia. 52 Tim Wall BE(Hons) Electrical Engineering, CPEng, GAICD President Global Manufacturing & Corporate HSE Tim was appointed in November 2018. Tim’s previous role was General Manager, Manufacturing at Caltex Australia and prior to this he worked across Australia and the UK for BP. In a career spanning over 30 years, Tim has held senior executive positions in Operations, Reliability, Safety & Risk, Strategy and Engineering. Seth Hobby LL.B (Hons), Juris Doctorate Executive Commercial Officer Seth was appointed as IPL’s Executive Commercial Officer in January 2018. Seth has fifteen years of international legal and business experience, including working across the IPL Group, both in Asia Pacific and the U.S. Seth has led and been involved with major commercial and strategic projects for IPL and Dyno Nobel in both corporate, commercial and legal capacities. Seth has served as the Chairman of the Institute of Makers of Explosives in the U.S., and for many years as a director on the boards of each of IPL’s North American joint venture businesses. Michele Mauger AHRI, HRINZ Chief People Officer Michele commenced as Chief People Officer in November 2020. Michele has more than 25 years of international experience in human resources, working across a range of industries including mining, construction, government and hospitality. Michele has held a number of global executive leadership roles, including the Executive General Manager, People Capability and Communications at Thiess, the Group People Director for global engineering company Worley and most recently the Executive Director, People, at Metro Trains Melbourne. Michele is a Member of the Resourcing and Innovation Board Committee at the Minerals Council of Australia and a Board Member of Arts Project Australia. Robert Rounsley MSc (Chem), BSc Hons (Chem), MBA Chief Technology Development Officer Rob was appointed as Chief Technology Development Officer in January 2018 and leads IPL’s Global Technology Group, bringing an increased focus on value creation for IPL’s global explosives and fertiliser customers through technology and innovation. With over 20 years’ experience, Rob was previously Senior Vice President Technology across the Asia Pacific and US regions. Margot Sharapova BA Executive Chief Information Officer Appointed in April 2019, Margot’s role is to ensure the IPL Group’s enterprise technology supports our commitments to customers, employees, and shareholders. Margot brings experience in large and complex, multi-site IT transformations, leveraging technology to engage clients and consumers, and is pivotal in supporting IPL’s Strategic Value Drivers for the Group’s performance and growth. With a career spanning over 25 years, Margot has held senior executive positions as CIO in large global and regional matrix organisations. Incitec Pivot Limited Annual Report 2020Incitec Pivot Limited Annual Report 2020 53 Our business has proven to be resilient during FY20. 54 Incitec Pivot Limited Annual Report 2020FINANCIAL & STATUTORY REPORTS 55 Incitec Pivot Limited Annual Report 2020DIRECTORS’ REPORT The directors of Incitec Pivot Limited (the Company or IPL) present their report together with the financial report of the Company and its controlled entities (the Group) for the year ended 30 September 2020 and the auditor’s report. The following sections of the Annual Report form part of, and are to be read in conjunction with, this Directors’ Report: Board of Directors, Operating and Financial Review (OFR), Remuneration Report and the Auditor’s Independence Declaration. Directors Particulars of the qualifications, other directorships, experience and special responsibilities of each Director as at the date of this report are set out in the Board of Directors section. During the financial year, the following changes to the composition of the Board of Directors occurred: » Dr Liu and Mr Robinson were appointed as directors on 25 November 2019; » Ms Fagg AO retired as a director on 20 December 2019 (at the conclusion of the Company’s 2019 Annual General Meeting); and » Mr Breunig resigned as a director on 28 February 2020. Directors’ meetings The number of Board and Board Committee meetings attended by each of the directors of the Company during the financial year are listed below: Board Audit and Risk Management Committee Remuneration Committee Nominations Committee Health, Safety, Environment and Community Committee Additional Meetings (3) Director – Current (1,2) Held Attended Held Attended Held Attended Held Attended Held Attended Held Attended B Kruger (4) B Brook X Liu (5) R McGrath G Robinson (6) J Johns Director – Former K Fagg AO (7) J Breunig (8) 8 8 7 8 7 8 2 3 8 8 7 8 7 8 2 3 1 5 4 5 – – – – 5 5 4 5 1 5 – – 6 6 – – 5 – 1 – 6 6 2 – 5 6 1 – 3 3 – 3 – – – – 3 3 – 3 – – – – 2 – 3 4 – 4 1 2 2 – 3 4 – 4 1 2 6 6 4 4 4 6 – – 6 6 4 4 4 6 – – Chairman Member (1) ‘Held’ indicates the number of meetings held during the period that the director was a member of the Board or Committee. (2) ‘Attended’ indicates the number of meetings attended. Directors who are not members of the Board Committees do attend Committee meetings from time to time (as non-executive directors have a standing invitation to attend all Committee meetings). (3) Reflects the number of additional formal meetings attended during the financial year by each director, including Committee meetings (other than the standing Board Committees) where any two directors are required to form a quorum. (4) Mr Kruger was appointed Chairman of the Remuneration Committee effective 20 December 2019. Mr Kruger was a member of the Audit and Risk Management Committee until 20 December 2019 and attended one scheduled meeting during the period he was a member. (5) Dr Liu was appointed as a director on 25 November 2019 and as a member of the Audit and Risk Management Committee and the Health, Safety, Environment and Community Committee with effect from 20 December 2019. (6) Mr Robinson was appointed as a director on 25 November 2019 and as a member of the Remuneration Committee with effect from 20 December 2019. Mr Robinson was subsequently appointed Chairman of the Remuneration Committee from 1 October 2020. (7) Ms Fagg AO retired as a director on 20 December 2019. (8) Mr Breunig resigned as a director on 28 February 2020. 56 Incitec Pivot Limited Annual Report 2020DIRECTORS’ REPORT Directors’ interests in share capital The relevant interests of each director in the share capital of the Company as at the date of this report is disclosed in the Remuneration Report. Company Secretary Ms Richa Puri was appointed to the role of Company Secretary on 8 August 2019. Ms Puri (LLB (Hons). B. Com (Accounting), FGIA) is a corporate lawyer and governance adviser with over 15 years relevant professional experience. She has practiced as a lawyer for legal firms in Australia and has experience in providing in-house legal, governance and company secretarial advice to ASX listed companies. Principal activities The principal activities of the Group during the course of the financial year were the manufacture and distribution of industrial explosives, industrial chemicals and fertilisers, and the provision of related services. No significant changes have occurred in the nature of these activities during the financial year. Dividends Dividends since IPL’s 2019 Annual Report: Dividend type Dividend per share Total amount $mill Franked percentage Date of payment Paid during the financial year 2019 final dividend 3.4 cents 54.6 30% franked 8 January 2020 2020 interim dividend nil To be paid after end of the financial year 2020 final dividend nil nil nil N/A N/A N/A N/A Review and results of operations A review of the operations of the Company during the financial year, the results of those operations and the Company’s financial position is contained in the OFR. Significant changes in the state of affairs FY20 was a year of unpredicted and unexpected events, including the Australian bushfires and drought during the Australian summer, as well as the international effect of the COVID-19 pandemic which impacted the demand of some of the industries we service and our customers outside Australia. While IPL was impacted by COVID-19, as a supplier to industries that are deemed as providing “essential services”, such as Agriculture, Mining and Construction, the impact was largely limited to our businesses outside Australia and occurred early in the pandemic as business was determining a safe way to operate. IPL proactively adjusted its comprehensive business continuity plans to support continuous operation at all of its facilities and the ability to deliver to customers. Early on in the pandemic the Company took decisive steps to ensure the safety of its people, customers and suppliers through establishing a Global Crisis Management Team, which escalated key decisions to the Executive Team. Management also responded with mitigating measures to address the indirect impacts from the COVID-19 pandemic on the global economy, our end markets and commodity prices, implementing a Response Plan to deliver short term non-essential operational spend savings of $20m and the deferral of non-essential sustenance capital in FY20. In May 2020, IPL undertook an institutional placement and share purchase plan, raising approximately $657.5m ($645.5m net of costs) in equity, to underpin the financial strength of the business, to ensure it is well placed to front the impacts of the COVID-19 pandemic and to capitalise on strategic opportunities that may arise. In August 2020, IPL announced a comprehensive Response Plan that will deliver sustained incremental cost savings from business efficiencies of approximately $60m per annum (including the $20m already delivered in FY20) by FY22. Further information on these matters is contained in the OFR. Events subsequent to reporting date In November 2020, the Board has determined, as an exception to its dividend policy, not to pay a final dividend for FY20 in light of the ongoing uncertainty due to COVID-19 and IPL’s equity raising in May 2020. IPL’s dividend policy, which is to pay between 30% – 60% of NPAT, remains unchanged. As announced on 10 November 2020, subject to market conditions, IPL is intending to invite the holders of its outstanding notes under the AMTN and EMTN Programmes to tender their notes for repurchase by IPL for up to an aggregate amount of approximately $200m. The repurchase of the notes forms part of the Group’s strategy to optimise its debt portfolio between fixed rate capital debt markets and floating rate bank debt markets. The Group has and continues to actively manage the risks arising from COVID-19 on the safety of our people and the business continuity of our operations. The Group’s operations are in industries that have been deemed essential by Governments and we are continuing to run in line with the required safety and health guidelines in our operations. The company has also implemented a financial response plan that focuses on sustained cost savings and improvement of free cash flow. The extent of the future impact of COVID-19 on the Group’s operational and financial performance will depend on certain developments, including the containment strategies imposed by governments and duration of the COVID-19 Pandemic, and the subsequent impact of these strategies on the operations of customers, employees and vendors. Likely developments The OFR contains information on the Company’s 2020 financial performance and prospects for future financial years, and refers to likely developments in the Company’s operations and the expected results of these operations in future financial years. Information on likely developments in the Company’s operations for future financial years and the expected results of those operations together with details that could give rise to material detriment to the Company (for example, information that is commercially sensitive, confidential or could give a third party a commercial advantage) have not been included in this report where the directors believe it would likely result in unreasonable prejudice to the Company. Environmental regulation and performance The operations of the Group are subject to environmental regulation under the jurisdiction of the countries in which those operations are conducted including Australia, United States of America, Mexico, Chile, Canada, Indonesia, Papua New Guinea and Turkey. The Group is committed to complying with environmental legislation, regulations, standards and licences relevant to its operations. The environmental laws and regulations generally address certain aspects and potential impacts of the Group’s activities in relation to, among other things, air and noise quality, soil, water, biodiversity and wildlife. The Group operates under a Global Health, Safety and Environment Management System which sets out guidelines on the Group’s approach to environmental management, including a requirement for sites to undertake an Environmental Site Assessment. 57 Incitec Pivot Limited Annual Report 2020DIRECTORS’ REPORTIn certain jurisdictions, the Group holds licences for some of its operations and activities from the relevant environmental regulator. The Group measures its compliance with such licences and reports statutory non-compliances as required. Measurement of the Group’s environmental performance, including determination of areas of focus and assessment of projects to be undertaken, is based not only on the actual impact of incidents, but also upon the potential consequence, consistent with IPL’s risk-based focus. During the year, the Group has continued to focus on licence compliance and identification and mitigation of environmental risks. Remediation works have progressed at a number of sites in Australia and the United States. For the 2020 financial year, one prosecution was recorded in relation to an acid spill at the Phosphate Hill site in 2018. In May 2020, Southern Cross Fertilisers Pty Ltd (SCF) pleaded guilty to two charges in relation to proceedings brought by the Department of Environment and Science due to a breach of the site Environmental Authority. SCF was fined $45,000 and ordered to pay $3,664 in costs. In May 2020, Dyno Nobel Inc. entered into a Consent Decree with the U.S. Environmental Protection Agency (EPA) after reaching a resolution of a civil matter relating to allegations of Clean Water Act and hazardous waste violations at its facilities in Carthage, Missouri and Louisiana, Missouri. The resolution primarily addresses events that predate 2017, and the civil settlement concludes the EPA’s investigation and lawsuit. As part of the settlement Dyno Nobel Inc. paid a civil penalty of $2,900,000 and committed to ongoing compliance monitoring obligations and implementation of physical improvements at both facilities. Indemnities and insurance The Company’s Constitution provides that, to the extent permitted by law, the Company must indemnify any person who is, or has been, a director or secretary of the Company against any liability incurred by that person including any liability incurred as an officer of the Company or a subsidiary of the Company and legal costs incurred by that person in defending an action. The Constitution further provides that the Company may enter into an agreement with any current or former director or secretary or a person who is, or has been, an officer of the Company or a subsidiary of the Company to indemnify the person against such liabilities. In accordance with the Company’s Constitution, the Company has entered into Deeds of Access, Indemnity and Insurance with each director of the Company and certain officer’s and members of senior management. Pursuant to those deeds, the Company has paid a premium in respect of a contract insuring directors and officers of the Group against any liability for costs and expenses incurred by them in defending civil or criminal proceedings involving them as such officers, with some exceptions. The contract of insurance prohibits disclosure of the nature of the liability insured against and the amount of the premium paid. Auditor independence and non-audit services Deloitte Touche Tohmatsu (Deloitte) was appointed as the Company’s external auditor at the 2011 Annual General Meeting and continues in office in accordance with section 327B(2) of the Corporations Act 2001. Mr Tim Richards is the Company’s lead audit partner for the 2020 financial year. The Group may decide to engage the auditor, Deloitte, for the provision of non-audit services, where such services are not in conflict with their role as auditor and their expertise and/or detailed experience with the Company may allow cost efficiencies for the work. 58 The Board has considered the position and, in accordance with advice received by the Audit and Risk Management Committee, is satisfied that the provision of non-audit services during the year by Deloitte is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 and does not compromise the external auditor’s independence. The Board also notes: » » the engagements for all non-audit services provided by Deloitte were reviewed by the Chief Financial Officer, and where relevant, approved by the Audit and Risk Management Committee, in accordance with the Committee’s Charter and the Company’s policy on the engagement of the external auditor for the provision of non-audit services to ensure they do not impact the integrity and objectivity of the auditor; and the non-audit services provided by Deloitte did not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Group, acting as an advocate for the Group or jointly sharing economic risks or rewards. Deloitte provided non-audit services to the amount of $50.3k during the year ended 30 September 2020 (refer to note 23 to the financial statements). The lead auditor has provided a written declaration that no professional engagement for the Group has been carried out during the year that would impair Deloitte’s independence as auditor. A copy of the auditor’s independence declaration is set out on page 80 and forms part of this report. Proceedings on behalf of IPL No application has been made under section 237 of the Corporations Act 2001 in respect of IPL, and there are no proceedings that a person has brought or intervened in on behalf of IPL under that section. Rounding As the Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, the amounts shown in this report and in the financial statements have been rounded off, except where otherwise stated, to the nearest one hundred thousand dollars. The Directors’ Report, which includes the OFR and the Remuneration Report, is signed in accordance with a resolution of the directors of Incitec Pivot Limited. Brian Kruger Chairman Jeanne Johns Managing Director & CEO 10 November 2020 Incitec Pivot Limited Annual Report 2020DIRECTORS’ REPORTIncitec Pivot Limited Annual Report 2020 59 59 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORT Introduction from the Chairman of the Remuneration Committee Dear Shareholders, On behalf of Incitec Pivot Limited’s (IPL or the Company) Remuneration Committee and the Board, I am pleased to present the Remuneration Report for 2020 which sets out the remuneration information for the Managing Director & Chief Executive Officer (MD&CEO), Executive Key Management Personnel (KMP) and the Non-executive Directors. Our approach The Remuneration Committee’s overarching aim is to ensure our remuneration framework delivers outcomes with a clear link to company and individual performance, and to IPL’s long-term strategy and values. We were pleased to again receive strong support for our Remuneration Report at the 2019 Annual General Meeting, given 2019 was seen at that time as being a challenging year. Fast forward 12 months and the COVID-19 pandemic has provided a new perspective on what we now classify as challenging. Executive changes during FY20 Nicholas (Nick) Stratford has assumed the role of Chief Financial Officer (CFO). Nick has returned to Australia, with Braden Lusk promoted into Nick’s former US-based role of President, Dyno Nobel Americas (DNA). Both appointments took effect 1 July 2020. It was pleasing to promote from within to fill these two key Executive roles. Fixed remuneration Prior to Nick’s move to the CFO role on a Fixed Annual Remuneration (FAR) of $900,000, comparable to his US-based role, he received a 2.8% increase effective 1 October 2019 as President, DNA. Greg Hayne, President Dyno Nobel Asia Pacific (DNAP) underwent a FAR review and received an 8.1% increase effective 1 October 2019. Braden Lusk is remunerated via a USD-denominated salary and was promoted to a FAR of US$550,000 for his appointment to President, DNA effective 1 July 2020. All other Executives, including the MD&CEO did not receive an increase to FAR for the 2020 performance period. Information on fixed remuneration for the 2020 financial year is provided in section 4.2 of this report. Short-term incentive Under the current Executive STI programme, no non-Zero Harm components of the STI program are paid if a designated Group financial STI Gate is not achieved. In addition, the Board retains a discretion to forfeit all or part of the STI award payable for the Zero Harm performance condition in the event of a fatality or major safety incident. With the STI Group financial Gate and Zero Harm performance condition both failing to be met, no STI awards were paid across the Executive population for the 2020 performance period. More information on the Company’s 2020 performance period and resulting STI outcomes is provided in section 4.3 of this report. Long-term incentive For the 2017/20 LTI plan with the performance period ending on 30 September 2020, the performance conditions were relative Total Shareholder Returns (TSR) (weighted at 50%); Growth in Return on Equity (ROE) (weighted at 35%); and the delivery of Strategic Initiatives (weighted at 15%). No performance rights will vest for the TSR component, as the Company delivered relative Total Shareholder Return below the median of the S&P/ASX 100 60 for the performance period. No performance rights relating to the ROE objective component will vest, as the minimum level of ROE performance was not achieved. There will be partial vesting of 66.7% of performance rights emanating from achievements against the Strategic Initiatives measures. This will result in 10% of the performance rights granted under the plan vesting. More information on the LTI program, including 2017/20 performance period, is provided in section 4.4 of this report. Strategic Review Performance Bonus Stephan Titze, President Incitec Pivot Fertilisers (IPF) received a performance bonus of $487,500 (75% of the total bonus opportunity available) for his successful running of the Strategic Review of the Incitec Pivot Fertilisers business unit during the period. More information on this Strategic Review Performance Bonus is provided in section 4.5 of this report. 2021 Remuneration framework We continue to review market trends to ensure our remuneration framework supports the execution of our strategies to increase shareholder value as well as the retention and motivation of our key talent. No major structural changes are planned for the 2021 financial year, however, some adjustments are to be implemented that we believe will better help us to navigate through the challenging period ahead. Key amongst these are a re-balancing of the LTI program that will see an increased 10% weighting directed to the Return on Invested Capital (ROIC) metric (increasing to 40% of the total opportunity available) and less weighting on the Long Term Value Metrics (LTVM) (formerly Strategic Initiatives) that will decrease in weighting from 30% to 20%. We have retained some LTVM metrics in the LTI program as we believe that management delivering on these metrics will add considerable sustainable value to our shareholders. Also, a modified Headline Net Profit After Tax (NPAT) gate approach will be introduced into the 2021 STI program, that will cap all non-safety related metrics at a maximum of target payment if the NPAT gate is not met, rather than reducing them to zero. The Board believes this approach will strike a better balance between rewarding and motivating our key talent and shareholder value alignment. It is important to note that if the NPAT gate is not met, but executives meet or exceed their targets for all other objectives, only 43% (for the MD & CEO) and 35% (for other Executive KMP) of the maximum opportunity can be received. The strategic measures within the 2021 STI will emphasise cash and cost control management to align with this year’s Response Plan. These changes have no impact on the remuneration outcomes for the 2020 financial year, as presented within this document. More information on the changes to the 2021 Remuneration framework can be found in section 5 of this report. We look forward to ongoing dialogue with, and the support of our shareholders, and welcome your feedback and comments on any aspect of this report. Brian Kruger Chairman Incitec Pivot Limited Annual Report 2020REMUNERATION REPORTThis document is interactive. Click any of the contents menu headings throughout this document to be taken to that page. Click the home icon at the bottom of any page to return to each section contents menu. REMUNERATION REPORT CONTENTS 62 63 63 64 64 64 64 65 65 67 68 70 1. Introduction 2. Executive Remuneration & Governance 2.1 Executive remuneration overview 2.2 Executive remuneration strategy 2.3 Executive remuneration governance 3. 2020 Executive Remuneration Framework 3.1 Overview 3.2 Fixed annual remuneration 3.3 Short-term incentive 3.4 Long-term incentive 3.5 LTI performance conditions 3.6 Executive service agreement terms 71 4. Remuneration Outcomes in 2020 Financial Year and link to the 2020 Financial Year Performance 71 4.1 Analysis of relationship between the Company’s performance, shareholder wealth and remuneration 4.2 2020 Fixed annual remuneration outcomes 4.3 2020 STI outcomes 4.4 LTI 2017/20 outcomes 4.5 Strategic Review Performance Bonus 4.6 Performance related remuneration 4.7 Further details of Executive remuneration 5. Overview of Remuneration changes for the 2021 Financial Year 6. Non-executive Director Remuneration 7. Shareholdings in IPL 8. Other KMP Disclosures 72 72 73 73 74 76 77 78 79 79 Incitec Pivot Limited Annual Report 2020 61 REMUNERATION REPORT 1. Introduction The directors of Incitec Pivot Limited (IPL or the Company) present the Remuneration Report prepared in accordance with the Corporations Act 2001 (Cth) for the Company for the year ended 30 September 2020. This Remuneration Report is audited. This Remuneration Report sets out remuneration information for Key Management Personnel (KMP) who had authority and responsibility for planning, directing and controlling the activities of the Company during the 2020 financial year, being each of the Non-executive Directors and designated Executives. The use of the term “Executives” in this report is a reference to the Managing Director & Chief Executive Officer (MD&CEO) and certain direct reports during the 2020 financial year. Refer to Table 1 below for all individuals comprising IPL’s KMP for the 2020 financial year. All KMP held their positions for the entirety of the 2020 financial year, unless noted otherwise. Table 1 – Individuals forming IPL’s KMP for the 2020 reporting period Non-executive Directors Current Mr Brian Kruger Mr Bruce Brook Chairman and Independent, Non-executive Director Independent, Non-executive Director Dr Xiaoling Liu (1) Independent, Non-executive Director Ms Rebecca McGrath Independent, Non-executive Director Mr Gregory Robinson (2) Independent, Non-executive Director Former Mr Joseph Breunig (3) Independent, Non-executive Director Ms Kathryn Fagg AO (4) Independent, Non-executive Director Executives Current Ms Jeanne Johns Managing Director & Chief Executive Officer Mr Nicholas Stratford (5) Chief Financial Officer Mr Tim Wall Mr Greg Hayne President, Global Manufacturing President, Dyno Nobel Asia Pacific Dr Braden Lusk (6) President, Dyno Nobel Americas Mr Stephan Titze President, Incitec Pivot Fertilisers Former Mr Frank Micallef (7) Chief Financial Officer (1) Dr Liu commenced as an Independent, Non-executive Director with effect from 25 November 2019. (2) Mr Robinson commenced as an Independent, Non-executive Director with effect from 25 November 2019. (3) Mr Breunig resigned as an Independent, Non-executive Director on 28 February 2020. (4) Ms Fagg retired as an Independent, Non-executive Director on 20 December 2019. (5) Mr Stratford ceased as President, Dyno Nobel Americas on 30 June 2020, and commenced as Chief Financial Officer with effect from 1 July 2020. (6) Dr Lusk commenced as President, Dyno Nobel Americas with effect from 1 July 2020. (7) Mr Micallef retired as Chief Financial Officer on 30 June 2020. 62 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORT2. Executive Remuneration & Governance 2.1 Executive remuneration overview In alignment with its remuneration strategy, the Board’s policy on Executive remuneration is that it comprises both a fixed remuneration component (FAR) and an “at risk” or performance-related component (short term incentive (STI) and long term incentive (LTI)) where: (i) the majority of Executive remuneration is “at risk”; and (ii) the level of FAR for Executives is benchmarked against that paid for similar positions at the median of companies in a comparator group with a range of market capitalisations (50% – 200% of that of the Company). A summary of the Company’s approach to Executive remuneration for the 2020 financial year, including performance conditions and their link to the overall remuneration strategy is set out below: Performance Conditions Remuneration Strategy/Performance Link Considerations Scope of individual’s role Individual’s level of knowledge, skills and expertise Company and individual performance » » » » Market benchmarking Set to attract, retain and motivate the right talent to deliver on IPL’s strategy and contribute to the Company’s financial and operational performance. For the Company’s Executives, the aim is to set fixed remuneration at market relevant levels and link any future increases to individual performance and effectiveness whilst continuing to have regard to market relevance. Zero Harm The award payable for the Zero Harm performance condition may be forfeited in the event of a fatality or major incident having regard to its circumstances. To align with the Company’s commitment to “Zero Harm for Everyone, Everywhere”. Safety measures (generally, 10% of STI award) » Safety performance balanced scorecard across the dimensions of behavioural safety and process safety management comprising input and output measures. In assessing the safety balanced scorecard, the Board may, in its discretion, have regard to the results achieved against the measures comprising the scorecard without applying a specific weighting to any particular measure. Credit Rating ‘gate’ An additional ‘gate’ was introduced this year that applied to the financial components of the plan. This gate related to the 2020 financial year only, whereby the Group’s overall credit rating was required to be maintained for participants to be eligible to receive payments. Net Profit After Tax (NPAT) ‘gate’ Minimum NPAT performance level that must be achieved before any non-safety component of the STI is payable. » Requires achievement of a designated Group NPAT as determined by the Board Financial measures (generally, a maximum of 70% of STI award, incorporating metrics relevant to an Executive’s area of influence) » Group NPAT » Group Adjusted NPAT » Business Unit Adjusted EBIT (earnings before interest and tax) To introduce a cashflow-related metric into the STI that ensures participants focus on both cashflow management as well as balance sheet strength. To align with the Company’s strategic intent of achieving top quartile performance as measured against S&P/ASX 100 companies. To ensure robust alignment of performance in a particular Business Unit with reward for the Executive managing that business unit. Performance conditions are designed to support the financial direction of the Company (the achievement of which is intended to translate through to shareholder return) and are clearly defined and measurable. Strategic objectives (for most of the Executives, a maximum of 20% of STI award) aligned to personal strategic objectives. Key strategic and growth objectives targeted at delivering ongoing benefit to the Company. Performance conditions Distinct categories of performance that are weighted to align with the Group’s focus over the three-year period that each tranche of the plan spans. » » » Relative total shareholder returns Strategic initiatives Return on invested capital (ROIC) Performance conditions designed to encourage Executives to focus on the key performance drivers which underpin sustainable growth in shareholder value. The mix of performance conditions is designed to ensure the share price growth is supported by the Company’s absolute ROIC performance as well as strategic initiatives, and not market factors alone. Fixed Annual Remuneration Salary and other benefits (including statutory superannuation). Refer section 3.2 for more details Short Term Incentive Annual incentive opportunity delivered 50/50 in cash/ restricted shares for the MD&CEO (if Minimum Shareholding Requirement (MSR) has yet to be achieved) or 100% in cash if MSR has been achieved. For all other Executives opportunity delivered 75/25 in cash/restricted shares (if MSR has yet to be achieved) or 100% in cash if MSR has been achieved. Refer section 3.3 for more details Long Term Incentive Three-year incentive opportunity delivered through performance rights. Refer section 3.4 and 3.5 for more details Total Remuneration The combination of these elements is designed to attract, retain and motivate appropriately qualified and experienced individuals, encourage a strong focus on performance, support the delivery of outstanding returns to shareholders and align Executive and stakeholder interests through share ownership. Incitec Pivot Limited Annual Report 2020 63 REMUNERATION REPORT2.2 Executive remuneration strategy IPL’s purpose is to make people’s lives better by unlocking the world’s natural resources through innovation on the ground. IPL embraces a set of Strategic Value Drivers that underpin the Company’s business and form the platform for the Company’s future earnings growth and shareholder returns: Zero Harm – Broadening and setting year-on-year improvement objectives across key metrics including environmental care and process safety. Talented and Engaged People – One IPL collaborative culture with engaged, diverse and inclusive teams focused on customers and value creation. Customer Focus – Partnering with our customers to create added value and practical solutions for today and the future. Manufacturing Excellence – Driving consistently high performance across all of our assets. Leading Technology Solutions – Innovation on the ground with practical innovations that our customers can use today to improve their operations. Profitable Growth – Focus on opportunities that are distinctive to our differentiated technology, core markets, core capabilities and market segments. Under the Strategic Value Driver of ‘Talented and Engaged People’, IPL recognises that to generate competitive returns for its shareholders, it requires talented people who are capable, committed and motivated. IPL’s remuneration strategy is designed to support the objectives of the business and to enable the Company to attract, retain and reward Executives of the requisite skill and calibre. The key principles of the Company’s remuneration strategy are to: » reward strategic outcomes at both the Group and business unit level that create top quartile long term shareholder value; » encourage integrity and disciplined risk management in business practice; » drive strong alignment with shareholder interests through delivering part of the reward in the form of equity; » structure the majority of executive remuneration to be “at risk” and linked to demanding financial and non-financial performance objectives; » attract and retain the best available talent; » reward Executives for high performance within their role and responsibilities, and ensure rewards are competitive within the industry and market for their role in respect of pay level and structure; and » ensure the remuneration framework is simple, transparent and easily implemented. 2.3 Executive remuneration governance The remuneration of the Executives is set by the Board, having regard to recommendations from the Remuneration Committee. Where appropriate, the Remuneration Committee of the Board engages external advisors to provide input to the process of reviewing Executive and Non-executive Director remuneration. For the 2020 financial year, the Remuneration Committee received market and benchmarking data from various sources, but this information did not constitute a remuneration recommendation for the purposes of the Corporations Act 2001 (Cth). Further information in relation to the Board and the Remuneration Committee can be found in IPL’s Corporate Governance Statement available on IPL’s website. 3. 2020 Executive Remuneration Framework 3.1 Overview The charts below set out the theoretical breakdown of the Executives’ total remuneration package for the 2020 financial year. The FAR component is inclusive of cash and superannuation only, whilst “at risk” compensation is based on maximum entitlement that could potentially be awarded under the STI and LTI plans. MD&CEO Fixed 25% STI – cash/ restricted shares 38% FAR 25% LTI 37% Other Executives STI – cash/ restricted shares 40% At Risk 75% Fixed 33% At Risk 67% FAR 33% LTI 27% 64 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORT3.2 Fixed annual remuneration Executives receive their fixed remuneration in a variety of forms, including cash, superannuation, and any applicable fringe benefits. The Executives’ FAR is set by reference to appropriate benchmark information for each Executive’s role, level of knowledge, skill, responsibilities and experience. The level of remuneration is reviewed annually in alignment with the financial year and with reference to, among other things, Company and individual performance and market data provided by an appropriately qualified and independent external data specialist. 3.3 Short-term incentive The STI is an annual “at risk” incentive which is dependent on the achievement of particular performance measures. The following table summarises the STI plan that applied in the 2020 financial year (2020 STI): What was the performance period? The performance period for the 2020 STI was the financial year from 1 October 2019 to 30 September 2020. Who was eligible for the STI? The MD&CEO and all other Executives participated in the 2020 STI. What was the target and maximum STI opportunity? Target STI opportunity was 100% of FAR for the MD&CEO, and 60% of FAR for all other Executives. Maximum STI opportunity (for stretch outcomes) was 150% of FAR for the MD&CEO, and 120% of FAR for all other Executives. What were the Performance Conditions and Measures? Performance conditions under the STI are determined by the Board for each financial year. The performance conditions for the 2020 STI are set out below: Performance Conditions Measures to assess satisfaction of Performance Condition Rationale for the Performance Conditions Group Financial Performance Group NPAT (Net Profit After Tax). Group Adjusted NPAT (1) (Net Profit After Tax). To align with the Company’s strategic intent of achieving top quartile performance as measured against S&P/ASX 100 companies. Business Unit Financial Performance Business Unit Headline EBIT (Earnings Before Interest and Tax). Business Unit Adjusted EBIT. (1) To ensure robust alignment of performance in a particular business unit with reward for the Executive managing that business unit. Zero Harm Strategic Outcomes Manufacturing reliability. Safety performance balanced scorecard across the dimensions of behavioural safety and process safety management comprising input and output measures.(2) Measures based on performance criteria for the execution and implementation of strategic objectives and business priorities. These include measures related to environmental and process safety, product innovation, customers and organic growth. To align with the Company’s commitment to “Zero Harm for Everyone, Everywhere”. In 2017, the Company adopted its second five-year Global HSE Strategy to continue to drive improvement in the Group’s health, safety and environmental performance. Tailored to individual Executive’s role, to drive performance and behaviours consistent with achieving critical aspects of the Group’s strategy. (1) Adjusted for foreign exchange and commodity price movements. (2) In assessing the safety balanced scorecard, the Board may, in its discretion, have regard to the results achieved against the measures comprising the scorecard without applying a specific weighting to any particular measure. Where any Individually Material Item (IMI) is separately recognised in the financial report, the Board will have discretion to include or exclude the IMI for the purpose of determining any STI award, taking into account the nature of the IMI and having regard to whether, in the circumstances, it would be appropriate for the IMI to be attributable to Management. Determination of the extent to which each of the above measures was satisfied was based on a review by the Board of the audited financial report and performance of the Group for the financial year, following the annual performance review process for the Executives. Are there minimum performance levels which must be achieved before awards can be made under the STI? For the 2020 financial year, to ensure STI awards are aligned with business performance outcomes, the Board determined that two separate STI Gates are to operate. As well as the “STI Financial Gate” a second gate known as the “STI Credit Gate” has been introduced specifically for this year. The STI Financial Gate reflects a requirement to exceed a designated level of the Group’s NPAT performance before any awards can be made. The STI Credit Gate requires that the Group’s overall credit rating is maintained in order for participants to be eligible to receive payments. If either gate is not met, no awards are to be made under the STI, save that these two gates do not apply to any awards payable in relation to the Zero Harm performance condition, reflecting the primacy of safety. In relation to the Zero Harm performance condition, the Board retains a discretion to forfeit all or part of the award payable for this performance condition in the event of a fatality or major incident having regard to the circumstances of the incident. 65 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORTWhat were the weightings for the STI performance measures? The weighting of Executives’ STI performance measures (as a percentage of 100%) for 2020 were: Table 2 Group NPAT Financial Group Adjusted NPAT Business Unit Adjusted EBIT As a percentage of Maximum opportunity Non-financial/ Business/Strategic Safety Strategic Outcomes 40% 30% 10% 20% 100% 40% 30% 10% 20% 100% 40% 40% 40% 10% 30% 10% 20% 100% 30% 10% 20% 100% 30% 10% 20% 100% 70% 10% 10% 100% 40% 30% 10% 20% 100% Executives – Current J Johns* Managing Director & CEO N Stratford*(1) Chief Financial Officer T Wall**(2) President, Global Manufacturing G Hayne** President, Dyno Nobel Asia Pacific B Lusk** President, Dyno Nobel Americas S Titze**(3) President, Incitec Pivot Fertilisers Executives – Former F Micallef*(4) Chief Financial Officer *Group role **Business Unit role (1) Mr Stratford spent the first 9 months of the financial year working as the President, Dyno Nobel Americas, pro-rated under the weightings outlined for Dr Lusk above. The final 3 months of the year were spent as the Chief Financial Officer, pro-rated as outlined. (2) Mr Wall’s business unit measures are based on manufacturing reliability. (3) Mr Titze has 40% of his Business Unit EBIT measure dedicated to Headline EBIT. (4) Mr Micallef spent the first 9 months of the financial year working as the Chief Financial Officer. Is there an STI deferral component? A mandatory 25% STI deferral (50% for the MD&CEO) continues until an Executive’s Minimum Shareholding Requirement (MSR) is achieved. The MSR is 50% of FAR for Executives (100% for the MD&CEO). How is the STI delivered? The STI is delivered partly in cash and partly in the form of restricted shares. The split between cash and restricted shares is determined based on each participant’s shareholding under the MSR. Was there a mechanism for clawback? The 2020 STI included a clawback provision, which requires the repayment of all or part of any STI awarded within three years after a payment is made, in the event of a material misstatement or omissions in IPL’s financial statement which results in a restatement of the audited financial report. 66 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORT3.4 Long-term incentive The LTI is the long term incentive component of remuneration for Executives. The LTI is provided in the form of performance rights. What LTI plans were applicable for the 2020 financial year? The LTI Plans applicable to the 2020 financial year were the: » » » Long Term Incentive Performance Rights Plan for 2017/20 (LTI 2017/20); Long Term Incentive Performance Rights Plan for 2018/21 (LTI 2018/21); and Long Term Incentive Performance Rights Plan for 2019/22 (LTI 2019/22) (together, the LTI Plans). Under the LTI Plans, participants are entitled to acquire ordinary shares in the Company, on a one right to one share basis, for no consideration at a later date. The performance rights are issued by Incitec Pivot Limited and the entitlement of the participants to acquire ordinary shares is subject to the satisfaction of certain conditions. As no shares are provided to participants until vesting, performance rights have no dividend entitlement. Performance rights expire on vesting or lapsing of the rights. What is the purpose of the LTIs? The LTI is designed to link reward with the key performance drivers which underpin sustainable growth in shareholder value. As rights under the LTI Plans result in share ownership on the achievement of demanding targets, the LTI ties remuneration to Company performance, as experienced by shareholders. The arrangements also support the Company’s strategy for retention and motivation of the Executives. What is the process for determining eligibility? The decision to grant performance rights under the LTI Plans and to whom they will be granted is made annually by the Board, noting that the grant of performance rights to the MD&CEO is subject to shareholder approval. Grants of performance rights to participants are based on a percentage of the relevant Executive’s FAR. What is the maximum LTI opportunity under the LTI Plans? How was the number of performance rights calculated under the LTI Plans? The maximum LTI opportunities under each LTI Plan are: » » for the MD&CEO, 150% of FAR; and for all other Executives, 80% of FAR. For the LTI 2017/20 and LTI 2018/21 the number of performance rights issued to a participant was based on the market value of the Company’s volume weighted average share price over the 20 business days up to but not including the first day of the relevant performance period. For LTI 2019/22, the number of performance rights issued to a participant was based on the market value of the Company’s shares over the 5 business days immediately after the release of the Company’s full year results in the first year of the performance period, being 10 November 2020. The respective issuances were determined by dividing the dollar value of the relevant participant’s LTI opportunity by these outcomes. What are the performance conditions, performance period and status of the LTI Plans? LTI Plan Performance Conditions Performance Period Status Weighting of Performance Condition LTI 2017/20 LTI 2018/21 LTI 2019/22 » » TSR Condition Strategic Initiatives Condition 50% 15% » ROE Growth Condition 35% » » TSR Condition Strategic Initiatives Condition 40% 30% » ROE Growth Condition 30% » » TSR Condition Strategic Initiatives Condition » Absolute ROIC Condition 40% 30% 30% 1 October 2017 to 30 September 2020 Testing to occur after completion of performance period. 1 October 2018 to 30 September 2021 Testing to occur after completion of performance period. Testing to occur after completion of performance period. November 2019 to November 2022 (TSR condition only) 1 October 2019 to 30 September 2022 (other conditions) The performance conditions are determined by the Board annually. Refer to section 3.5 for a discussion of the performance conditions. 67 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORTWhen are the performance conditions measured? After the expiry of the relevant performance period, the Board determines whether the performance conditions of the relevant LTI Plans are satisfied. The performance conditions are tested once, at the end of the relevant performance period. If the performance conditions are satisfied and the rights vest, the participant is entitled to receive ordinary shares in the Company. The participant does not pay for those shares. To the extent the performance conditions are not satisfied during the performance period, the performance rights will lapse. What happens if a participant leaves the Company? Generally, the performance rights granted under the LTI Plans will lapse on a cessation of employment except where the participant has died, becomes totally and permanently disabled, is retrenched, retires or is terminated without cause. In those circumstances (subject to Board discretion), the number of performance rights retained by the participant will be reduced pro rata to reflect the proportion of days worked during the relevant performance period and will be tested in the ordinary course. In what other circumstances may the performance rights vest (which may be before or after the expiry of the performance period) under the LTI Plans? The Board may provide a notice to the participants specifying that the performance rights will vest at a time stipulated in the notice on the occurrence of one of the following events in relation to the Company: » » » a takeover bid; a change of control; the Court ordering a meeting be held in connection with a scheme for the reconstruction of the Company or its amalgamation with any other companies; or » a voluntary or compulsory winding-up. 3.5 LTI performance conditions For the LTI 2017/20 and LTI 2018/21, the performance conditions are measured by reference to the TSR Condition, a Strategic Initiatives Condition and growth in Return on Equity (ROE Growth Condition). For the LTI 2019/22 the ROE Growth Condition has been replaced by a Return on Invested Capital (Absolute ROIC Condition). Details of the performance conditions for each of the LTI 2017/20, LTI 2018/21 and LTI 2019/22 are set out below. TSR Condition The TSR Condition (applicable to each of LTI 2017/20, LTI 2018/21 and LTI 2019/22) requires growth in the Company’s TSR to be at or above the median of the companies in the comparator group, being the S&P/ASX 100. This condition provides shareholder alignment as it takes into account the Company’s share price movement as well as dividends paid, relative to other organisations comparable to the Company. The S&P/ASX 100 has been chosen as the comparator group because, having regard to the business segments in which the Company operates and, specifically, the absence of a sufficient number of direct comparator companies, the Board considers the S&P/ASX 100 to represent the most appropriate, and objective, comparator group. It also represents the group of companies against which the Company competes for shareholder capital. The Board has the discretion to vary the Comparator Group at any time, including to remove companies from, or include companies in, the Comparator Group. The table below sets out the TSR Condition, and the percentage of the performance rights that will vest based on satisfaction of this condition. Relative TSR ranking of IPL Less than 50th percentile % of performance rights subject to the TSR Condition that will vest Nil At or greater than 50th percentile but less than 75th percentile Pro rata from 50% on a straight-line basis At 75th percentile or greater 100% Strategic Initiatives Condition The Strategic Initiatives Condition relates to the delivery of significant aspects of the Board approved strategy. For the LTI 2017/20, the Strategic Initiatives Condition relates solely to the Business Excellence System (BEx). For the LTI 2018/21 and LTI 2019/22, the Strategic Initiatives Condition comprises components aligned with the Company’s strategic drivers: Manufacturing Excellence (ME) and Customer, Practical Technology & Innovation (CPT&I). 68 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORTThe table below summarises the Strategic Initiatives Condition components for the LTI 2017/20, the LTI 2018/21 and the LTI 2019/22: Strategic Initiatives Condition component Rationale Measurement criteria Performance goals Scorecard Business Excellence (BEx) System and Manufacturing Excellence (ME) (1) BEx and ME are improvement systems, through which the Company seeks to enhance productivity on a sustainable basis. The LTI performance goals in relation to BEx focus on incentivising the delivery of sustainable productivity improvements, rather than one-off benefits. ME performance goals target delivering sustainable year on year improvements in reliability and efficiency. Performance in relation to this component of the Strategic Initiatives Condition comprise performance goals related to: » Business system maturity (practices) » Cumulative productivity benefits (performance) » Manufacturing volume (performance) » Manufacturing unit cost improvement (performance) Business system maturity: For LTI 2017/20 – An absolute improvement in BEx system maturity over the performance period, or satisfaction of an exit score requirement at the end of the performance period. Cumulative productivity benefits: For LTI 2017/20 and LTI 2018/21 – Delivery of cumulative savings over the performance period against targets approved by the Board. Manufacturing volume: For LTI 2017/20, LTI 2018/21 and LTI 2019/22 – Achievement of target volumes of particular products at specified manufacturing plants. Manufacturing unit cost: For LTI 2019/22 – Improvement in the unit cost of Initiating Systems. Customer, Practical Technology & Innovation (CPT&I) (1) IPL’s growth strategy includes providing value added differentiated products & services, and innovations to meet the challenges of customers, to assure sustainable earnings and maximise shareholder return. Performance in relation to this component will be assessed against a Scorecard comprising performance goals related to: Revenues from technologies: For LTI 2018/21 and LTI 2019/22 – Annual growth in technology sales from 2018 and 2019 baselines. » » Revenues from technologies Net Promoter Score (NPS): Company customer retention and growth in footprint For LTI 2018/21 and LTI 2019/22 – Improvement in NPS over 2019 baseline. Key customer retention: For LTI 2018/21 and LTI 2019/22 – Quantitative targets against 2018 and 2019 baselines assessed by the Board. (1) BEx applies to 15% in the LTI 2017/20 grant. The ME and CPT&I components combined apply to 30% of the performance rights in the grants for LTI 2018/21 and LTI 2019/22. Details of the Scorecards and specific performance goals for each component of the Strategic Initiatives Condition were notified to Executives on commencement of each applicable LTI plan. These performance goals involve commercial-in-confidence quantitative targets and, as such, details of the performance goals are disclosed only at the end of the performance period. For the LTI 2017/20, these details are set out in section 4.4. For the LTI 2018/21 and LTI 2019/22, the relevant details will be set out in the 2021 Remuneration Report and the 2022 Remuneration Report respectively. The Board will determine the outcome for the relevant component of the Strategic Initiatives Condition under each LTI plan having regard to the results achieved against the performance goals across the entirety of the Scorecard for that component. If the Board determines that all of the performance goals in respect of a component of the Strategic Initiatives Condition have been achieved, all of the performance rights subject to that component will vest. If not all performance goals in respect of a component of the Strategic Initiatives Condition are met over the performance period, the extent to which that component of the Strategic Initiatives Condition has been satisfied (if at all) will be determined by the Board. In doing so, the Board will have regard to the results achieved against the performance goals across all of the components of the relevant Scorecard, without applying a specific weighting to any particular performance goal. 69 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORTROE Growth Condition The ROE Growth Condition was introduced in 2016 and applies to the LTI 2017/20 and LTI 2018/21. The ROE Growth Condition measures the compound annual growth in ROE over the performance period. ROE was considered an appropriate measure at that time, as it was a widely recognised and reported metric and reflected the levers required to create shareholder value. It does not however, focus on the efficient deployment of capital to the extent that the Board requires currently, so has been replaced by a ROIC condition for LTI 2019/22 (see below). The table below sets out the ROE Growth Condition, and the percentage of performance rights that will vest based on satisfaction of this condition: ROE Compound Annual Growth Rate % of performance rights subject to the ROE Growth Condition that will vest Less than 7% Nil At or above 7% but less than 11% Pro rata from 50% on a straight-line basis 11% or greater 100% Absolute ROIC Condition The Absolute ROIC Condition was introduced for the LTI 2019/22, to replace the ROE Growth Condition. ROIC has been selected as it is a key determinant of efficient use of the capital entrusted to management by shareholders. It also reflects factors that improve shareholder value, including operational efficiency, capital efficiency, asset utilisation and profitability. The table below sets out the Absolute ROIC Condition, and the percentage of performance rights that will vest based on satisfaction of this condition: Absolute ROIC Targets Less than 5.6% % of performance rights subject to the Absolute ROIC Condition that will vest Nil At or above 5.6% but less than 6.0% Pro rata from 50% on a straight-line basis 6% or greater 100% 3.6 Executive service agreement terms Remuneration and other terms of employment for the Executives are formalised in service agreements. Most Executives are engaged on similar contractual terms, with minor variations to reflect differing circumstances. Each agreement is unlimited in term; however, each agreement provides that the Company may terminate an Executive’s employment immediately for cause without any separation payment, save for accrued amounts such as leave, or otherwise without cause, with or without notice, in which case the Company must pay a separation payment plus accrued amounts such as leave. The notice period to be provided by the Executives is set out in the table below: Current Executives Notice period to be provided by the Executive J Johns N Stratford T Wall G Hayne B Lusk S Titze 52 weeks 26 weeks 26 weeks 26 weeks 26 weeks 26 weeks The separation payment included in each Executive’s contract is capped at an amount equivalent to a specified number of weeks of FAR for the Executive. Ms Johns’ separation payment is equal to 52 weeks of FAR as at the date of termination (subject to the provisions relating to termination benefits in Part 2D.2 of the Corporations Act 2001). All other Executives’ contracts provide for a separation payment of 26 weeks of FAR, save for Mr Stratford’s and Mr Hayne’s contracts which provided for a separation payment equal to 52 weeks of FAR (subject to the terminations provisions in the Corporations Act). 70 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORT2020 188.2 10.9 3.4 nil 2.03 (37) – 645.5 $mill 6 l l i m $ - d e d r a w a I T S l a t o T 5 4 3 2 1 0 4. Remuneration Outcomes in 2020 Financial Year and link to 2020 Financial Year Performance 4.1 Analysis of relationship between the Company’s performance, shareholder wealth and remuneration In considering the Company’s performance, the benefit to shareholders and appropriate remuneration for the Executives, the Board, through its Remuneration Committee, has regard to financial and non-financial indices, including the indices shown in the below table in respect of the current financial year and the preceding four financial years. Table 3 – Indices relevant to the Board’s assessment of the Company’s performance and the benefit to shareholders. NPAT before IMIs and excluding non-controlling interests ($m) EPS before IMIs (cents) Dividends per share (DPS) paid in the financial year (cents) DPS declared in respect of the financial year (cents) Share price ($) (Financial Year End) (1) TSR (%) (2) On-market share buyback ($m) Equity Raising (net of cost) ($m) 2016 295.2 17.5 11.5 8.7 2.82 14 – – 2017 318.7 18.9 9.1 9.4 3.60 36 – – 2018 347.4 20.9 9.4 10.7 3.98 14 (210.3) – 2019 152.4 9.5 7.5 4.7 3.39 30 (89.7) – (1) Share Price as at the end of the 2015 financial year was $3.90. (2) TSR is calculated in accordance with the rules of the LTI 2013/16, LTI 2014/17, LTI 2015/18, LTI 2016/19 and LTI 2017/20 as applicable over the three-year performance period, having regard to the volume weighted average price of the shares over the 20 business days up to but not including the first and last day of the performance period. Relationship between the Company’s performance and STI outcomes The attached graph shows the relationship between the Company’s performance and STI awards in respect of the current and preceding four years. For the 2016 financial year, with NPAT (before IMIs and excluding non-controlling interest) declining by 25.5% to $295.2m, no awards were made under the 2016 STI, save in relation to the successful completion of the Louisiana Ammonia Project as well as the Company’s safety performance. For the 2017 financial year, NPAT (before IMIs and excluding non-controlling interest) increased 8% to $318.7m resulting in certain Executives earning partial STI awards in respect of this measure. For the 2018 financial year, Group NPAT (before IMIs and excluding non-controlling interest) increased 9.0% to $347.4m resulting in Executives earning full STI awards in respect of this measure. For the 2019 financial year, Group NPAT (before IMIs and excluding non-controlling interest) decreased 56.1% to $152.4m resulting in Executives earning 0% STI awards in respect of this measure. For the 2020 financial year, Group NPAT (before IMIs and excluding non-controlling interest) increased 23.5% to $188.2m, however the financial gate for the STI did not open, resulting in Executives earning 0% STI awards in respect of this measure. Relationship between the Company’s performance and LTI outcomes The attached graph shows the relationship between IPL’s Absolute TSR and its percentile ranking relative to its S&P/ASX 100 peer group. IPL outranked the 50th percentile TSR for the ASX 100 peer group for the 2014-17 performance period with a 53rd percentile ranking (Absolute TSR: achieved 36%). The 2015-18 performance period achieved an Absolute TSR increase of 14%, delivering fourth quartile performance, the 2016-19 performance period achieved an Absolute TSR increase of 30%, and the 2017-20 performance period achieved an Absolute TSR decrease of 37%, delivering 12th percentile performance. As a consequence, the LTI 2014/17 partially vested, the LTI 2015/18 and LTI 2016/19 TSR did not vest and the LTI 2017/20 did not vest as outlined in section 4.4 of this report. The performance rights in LTI 2013/16 plan did not meet the performance conditions set out in the plans (including a TSR condition) and lapsed. Positive TSR has been achieved in 4 out of the 5 periods reported. Note: The absolute TSR for IPL and for the ASX100 has been calculated using the methodology noted in footnote (2) Table 3. Group performance and STI outcomes t s e r e t n i $mill 600 g n i l l o r t n o c - n o n g n d u l c x e d n a i s I M I e r o f e b T A P N 500 400 300 200 100 0 2016 2017 2018 2019 2020 50 40 30 20 10 0 -10 -20 -30 -40 -50 % - R S T l e t u o s b a L P I Total STI awarded NPAT before IMIs and excluding non-controlling interests IPL Absolute TSR % and ASX 100 Percentile Ranking 60 40 20 0 -20 -40 -60 % - 0 0 1 X S A n i g n i k n a r e l i t n e c r e p L P I 2016 2017 2018 2019 2020 IPL Absolute TSR IPL Percentile Ranking in ASX 100 71 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORT 4.2 2020 Fixed annual remuneration outcomes The former President, DNA received a 2.8% increase to his Fixed Annual Remuneration (FAR) prior to moving to the CFO role on a comparable FAR of $900,000 to his US-based role. The President, DNAP underwent a FAR review and received an 8.1% increase. The new President, DNA is remunerated via a USD-denominated salary and was promoted to a FAR of US$550,000. All other Executives, including the MD&CEO did not receive an increase to FAR for the 2020 period. 4.3 2020 STI outcomes Performance Condition Outcome Group Financial Performance (NPAT) Group Credit Rating Group NPAT serves as one of the two “gates” for all Financial and Strategic Outcomes within the STI Plan. As performance was below the level necessary for the gate to open, no payment was made for this, and/or any other Financial or the Strategic Outcomes component. The Group Credit Rating also serves as one of the two “gates” for all Financial and Strategic Outcomes within the STI Plan for the 2020 financial year. Although the requirement to satisfy this gate was achieved, no payment was made for the Financial and the Strategic Outcomes components due to the Group NPAT gate failing to open. Group Financial Performance (Adjusted NPAT) As the Group NPAT Financial gate was not met, no payment was made for this component. Business Unit Financial Performance As the Group NPAT Financial gate was not met, no payment was made for this component. Zero Harm The balanced scorecard which applies to all Executive KMPs was not met. Consideration of the gate for this measure was applied by the Board and no payment was made for this component. Strategic Outcomes As the Group NPAT Financial gate was not met, no payment was made for this component. The Board approved the STI outcomes on 10 November 2020 with the outcomes reflected in the following table: Table 4 – Short term incentives awarded for the year ended 30 September 2020 Details of the vesting profile of the STI payments awarded for the year ended 30 September 2020 as remuneration to each Executive are set out below: Executives – Current J Johns N Stratford T Wall G Hayne B Lusk (1) S Titze Executives – Former F Micallef (2) Executives – Current J Johns (3) T Wall (4) Short term incentive for the year ended 30 September 2020 Cash STI $000 Minimum share holding allocation (A) $000 Included in remuneration $000 % earned of maximum opportunity % forfeited of maximum opportunity – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Deferred Short term incentive for the year ended 30 September 2020 – – 175 58 100 100 100 100 100 100 100 100 100 – – (A) Under the terms of the 2020 STI, to the extent that Executives have not achieved their Minimum Shareholding Requirement the following applies: 50% of the MD&CEO’s award is delivered in cash and the remainder is delivered in restricted shares. For all other Executives, 75% of their award is delivered in cash and the remainder is delivered in restricted shares. Cash is generally paid and shares generally allocated around December. (1) Dr Lusk received a pro-rata STI for time served pre-KMP. He commenced as the President, Dyno Nobel Americas with effect from 1 July 2020. (2) Mr Micallef was entitled to a pro-rata amount (if any STI were to be paid) for his time served as a KMP, up until his retirement as Chief Financial Officer on 30 June 2020. (3) Under the terms of the 2018 STI in which Ms Johns participated the total STI award was $2.09m, of this 50% was paid in cash in 2018. The remaining 50% was awarded in the form of performance rights of which 25% fully vested in fully paid ordinary shares on 30 November 2019 and the remaining 25% of the award will vest on 30 November 2020 subject to Ms Johns meeting a service condition. On this date and subject to satisfying the service condition, Ms Johns will receive the remaining 25% award amount in cash or fully paid ordinary shares in the Company as determined by the Board. The value of the rights is calculated at grant date using the Black Scholes option pricing model as disclosed in the footnotes under Table 7. (4) Mr Wall received special performance rights related to his employment in 2018, of which 50% fully vested into fully paid ordinary shares following testing in November 2019, with the remaining 50% to vest in November 2020, subject to Mr Wall satisfying individual performance criteria. The value of rights is calculated at grant date using a Black Scholes pricing model as disclosed in the footnotes under Table 7. Following testing in November 2020, the Board determined that 100% of the performance rights relating to performance period 1 November 2018 to 30 September 2020 will vest. This will be reported in the 2021 Remuneration Report. 72 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORT4.4 LTI 2017/20 outcomes The performance period for the LTI 2017/20 ended on 30 September 2020. Following testing against the performance conditions on 10 November, the Board determined that 10% of the performance rights granted under the plan will vest (with the remaining 90% to lapse). Details in relation to each of the performance conditions are set out below. The number of rights vested and lapsed will be reported in the 2021 Remuneration Report. TSR Condition In relation to the TSR Condition, the Company’s relative TSR performance over the period did not achieve median performance of the comparator group of S&P/ASX100 companies. Accordingly, 0% of the performance rights granted subject to the TSR Condition will vest (out of a maximum of 50% of performance rights granted under the plan). Strategic Initiatives Condition In relation to the Strategic Initiatives Condition – the Board assessed this component against a balanced scorecard and determined the outcome partially achieved the performance goals across the entirety of the scorecard. The Board has determined that 66.7% of the performance rights granted subject to this condition will vest (out of a maximum of 15% of performance rights granted under the plan). Commentary on the performance against the scorecard is set out in the following table. Strategic Initiatives Condition component Commentary on Performance Against Scorecard Business Excellence (BEx) System The performance goals for the BEx scorecard comprised of non-financial input and financial and non-financial output measures. In relation to the input measures, the Business System Maturity outcomes were verified by independent third parties and whilst full stretch performance was delivered at all the initiating system plants globally, slightly over half of the continuous manufacturing sites in scope achieved target outcomes, hence the overall assessment was partial achievement. Cumulative productivity benefits of $110.6m were delivered, which exceeded the stretch objective established against this measure. Manufacturing volume performance was mixed during the period which resulted in an assessment of partial achievement. Overall assessment: having regard to the outcomes in relation to the input and output measures, the Board determined that the performance goals were partially delivered against the balanced scorecard. Actual Vesting (%) 66.7% of Rights for this component ROE Growth Condition In relation to the ROE Growth Condition, the Company’s performance over the period did not achieve a 7% Compound Annual Growth Rate. Accordingly, 0% of the performance rights granted subject to the ROE Growth Condition will vest (out of a maximum 35% of performance rights granted under the plan). 4.5 Strategic Review Performance Bonus A Strategic Review Performance Bonus equal to $487,500 has been awarded to Mr Stephan Titze in the current financial period. This bonus equates to 75% of the total bonus opportunity available and was driven by performance criteria relating to Mr Titze’s ongoing role (not covered by the 2020 STI program) as well as criteria relating to the successful running of the Strategic Review of the Incitec Pivot Fertilisers (IPF) business unit. Performance criteria for Mr Titze’s ongoing role (50% of bonus opportunity) were focused on leading the continuing operations of IPF as well as keeping his team motivated and engaged during the uncertainty of the Strategic Review. The remaining 50% of the bonus opportunity related to conditions specific to the review itself. These conditions were both quantitative and qualitative in nature and were assessed under three broad categories relating to: the objectives of the review; quality of information input into the review; and actions resulting from the review. The bonus recognises the outstanding performance of Mr Titze throughout this process. This payment is reflected in Table 7 of this report, under the “Short Term Incentive & other bonuses” column. 73 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORT4.6 Performance related remuneration Table 5 – Details of performance rights granted and vested in the year ended 30 September 2020 and the vesting profile of performance rights granted as remuneration LTI Details of performance rights vested and forfeited set out in the table below relate to the performance rights granted under the LTI 2016/19 (performance period: 1 October 2016 to 30 September 2019) which, following testing in November 2019 resulted in the Board determining that 20% vested. In relation to the LTI 2017/20 (performance period: 1 October 2017 to 30 September 2020), following testing in November 2020, the Board determined that 10% of the performance rights will vest. This will be reported in the 2021 Remuneration Report. STI Details of performance rights in relation to short term incentive plans are set out in the table below. Granted during 2020 as remuneration (A) $000 Exercised in year $000 Vested in year % Forfeited in year % Financial year in which grant may vest Maximum value of outstanding rights (B) $000 Grant date Key Management Personnel Executives – Current J Johns Long term incentive rewards LTI 2017/20 LTI 2018/21 LTI 2019/22 Short term incentive rewards 30 January 2018 5 February 2019 13 January 2020 – – 1,755 – – – – – – Performance period: 23 October 2017 to 30 November 2019 5 February 2019 Performance period: 23 October 2017 to 30 November 2020 5 February 2019 N Stratford Long term incentive rewards LTI 2016/19 LTI 2017/20 LTI 2018/21 LTI 2019/22 T Wall Long term incentive rewards LTI 2018/21 LTI 2019/22 Short term incentive rewards 19 April 2017 30 January 2018 5 February 2019 13 January 2020 5 February 2019 13 January 2020 Performance period: 1 November 2018 to 30 September 2019 5 February 2019 Performance period: 1 November 2018 to 30 September 2020 5 February 2019 G Hayne Long term incentive rewards LTI 2017/20 LTI 2018/21 LTI 2019/22 B Lusk Long term incentive rewards LTI 2019/22 S Titze Long term incentive rewards LTI 2018/21 LTI 2019/22 Executives – Former F Micallef (1) Long term incentive rewards LTI 2016/19 LTI 2017/20 LTI 2018/21 LTI 2019/22 1 March 2018 5 February 2019 13 January 2020 13 January 2020 5 February 2019 13 January 2020 25 January 2017 30 January 2018 5 February 2019 13 January 2020 – – – – – 528 – 425 – – – – 382 – – 371 – – – 534 – – – – – 440 100 – – 150 20 80 – – – – – – – – – – 114 100 – – – – – – – – – – – – – – – – – – – – – – – – – – – 2020 2021 2022 2020 2021 2019 2020 2021 2022 2021 2022 2019 2020 2020 2021 2022 1,820 1,605 1,755 – 432 - 476 443 528 399 425 – 112 316 332 382 2022 – 2021 2022 314 371 174 20 – – – – – – 80 – 80 90 2019 2020 2021 2022 – 567 100 53 (A) The value of rights granted in the year is the fair value of those rights calculated at grant date using a Black-Scholes option-pricing model. The value of these rights is included in the footnotes under Table 7. This amount is allocated to the remuneration of each Executive over the vesting period (that is, in the 2020, 2021 and 2022 financial years). (B) The maximum value of outstanding rights is based on the fair value of the performance rights at the grant date. This may be different to the value of the rights in the event that they vest. The minimum value of rights yet to vest is zero, as the performance criteria may not be met. (1) Mr Micallef ceased being a KMP on 30 June 2020. The outstanding balance represents the value of his performance rights as at 30 September 2020. 74 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORTModification of terms of equity-settled share-based payment transactions No terms of equity-settled share-based payment transactions (including rights) granted to a KMP have been altered or modified by the issuing entity during the reporting period. Table 6 – Movements in rights over equity instruments in the Company The movement during the reporting period in the number of rights over shares in the Company, held directly, indirectly or beneficially, by each KMP, including their related parties, is as follows: Key Management Personnel Opening balance Granted as compensation (A) Vested (B) Forfeited (C) Closing balance Number of Rights Executives – Current J Johns Long term incentive rewards Short term incentive rewards N Stratford 1,290,189 268,230 723,486 – – (134,115) – – 2,013,675 134,115 Long term incentive rewards 574,954 217,681 (45,766) (183,066) 563,803 T Wall Long term incentive rewards Short term incentive rewards G Hayne 152,981 69,302 175,283 – – (34,651) Long term incentive rewards 244,220 157,637 B Lusk Long term incentive rewards – – S Titze Long term incentive rewards 120,443 152,932 – – – Executives – Former F Micallef (1) – – – – – 328,264 34,651 401,857 – 273,375 Long term incentive rewards 668,031 220,060 (53,158) (564,275) 270,658 (A) For the 2020 financial year, this represents the rights granted to Executives during the reporting period under the LTI 2019/22. The grant of rights under the LTI 2019/22 to Ms Johns was approved by shareholders at the Company’s 2019 Annual General Meeting. (B) For the 2020 financial year, this represents the number of rights vested during the reporting period under short term incentive rewards and the LTI 2016/19. Each right entitled the participating Executive to acquire a fully paid ordinary share in IPL for zero consideration. (C) For the 2020 financial year, this represents rights that were forfeited by Executives during the period under the LTI 2016/19. In addition, in the case of Mr Micallef who ceased employment during the reporting period, a portion of his rights held under the LTI 2018/21 and the LTI 2019/22 were also forfeited as at the date of cessation, in accordance with the plan rules. (1) Mr Micallef ceased being a KMP on 30 June 2020. The outstanding balance represents the number of his performance rights as at 30 September 2020. 75 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORT4.7 Further details of Executive remuneration Table 7 – Executive remuneration Details of the remuneration for each Executive for the year ended 30 September 2020 are set out below: Short-term benefits Post employment benefit Other long term benefits (C) Termination benefits Short term incentive & other bonuses (A) Other short term benefits (B) Salary & Fees Superannuation benefits Share-based payments Accounting values Prior periods expense write- back (D) Current period expense (D) Total share- based payments Total Year $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 Executive KMP – Current J Johns Managing Director & CEO N Stratford (1) Chief Financial Officer T Wall (2) President, Global Manufacturing 2020 2019 2020 2019 2020 2019 2020 G Hayne President, Dyno Nobel Asia Pacific 2019 B Lusk (3) President, Dyno Nobel Americas 2020 S Titze (4) President, Incitec Pivot Fertilisers 2020 2019 Executives – Former F Micallef (5) Chief Financial Officer A Grace (6) President, Global Manufacturing Total Executives 2020 2019 2019 2020 2019 1,640 1,630 890 825 724 664 649 599 192 629 446 686 915 63 175 331 – – 58 172 – 62 – 488 – – – – 11 90 312 154 – – – 2 226 – 158 – – – – – 21 21 21 19 21 21 – 21 16 16 21 2 17 15 24 46 6 3 32 12 – 5 2 16 35 1 5,410 5,142 721 565 549 404 100 100 100 114 – – – – – – – – – – – 468 – – 468 – 1,458 1,142 451 433 275 125 297 216 – 228 82 202 504 20 (538) – (141) (237) – – (93) – – – – 920 1,142 310 196 275 125 204 216 – 228 82 2,763 3,208 1,557 1,242 1,084 983 906 912 418 1,371 704 (301) (360) (347) (99) 144 1,087 1,115 (327) (261) 2,911 2,522 (1,073) (944) 1,838 1,578 9,186 7,903 (A) For Mr Titze, this amount reflects a Strategic Review Performance Bonus relating to the 2020 financial year as outlined under section 4.5 of this report. For Ms Johns this includes STI rights granted on 5 February 2019 under the 2018 STI and for Mr Wall this includes special performance rights granted on 5 February 2019 related to his employment. Grant date Fair value per share treated as rights at grant date J Johns Performance period: 23 October 2017 to 30 November 2019 Performance period: 23 October 2017 to 30 November 2020 T Wall Performance period: 1 November 2018 to 30 September 2019 Performance period: 1 November 2018 to 30 September 2020 5 February 2019 5 February 2019 5 February 2019 5 February 2019 $3.32 $3.22 $3.34 $3.23 (B) Other short term benefits include rent and mortgage interest subsidies, relocation allowances and other allowances, where applicable. (C) Other long term benefits represent long service leave accrued during the reporting period. (D) In accordance with accounting standards, remuneration includes the amortisation of the fair value at grant date of performance rights issued under the LTI Plans that are expected to vest, less any write-back on performance rights lapsed or expected to lapse as a result of actual or expected performance against non-market hurdles (“Option Accounting Value”). The value disclosed in the above Table 7 represents the portion of fair value allocated to this reporting period and is not indicative of the benefit, if any, that may be received by the Executive should the performance conditions with respect to the relevant long term incentive plan be satisfied. LTI 2016/19 – TSR LTI 2016/19 – Strategic Initiative LTI 2016/19 – ROE Growth LTI 2017/20 – TSR LTI 2017/20 – Strategic Initiative LTI 2017/20 – ROE Growth LTI 2018/21 – TSR LTI 2018/21 – Strategic Initiative LTI 2018/21 – ROE Growth LTI 2019/22 – TSR LTI 2019/22 – Strategic Initiative LTI 2019/22 – Absolute ROIC Grant date 25 January 2017 25 January 2017 25 January 2017 30 January 2018 30 January 2018 30 January 2018 5 February 2019 5 February 2019 5 February 2019 13 January 2020 13 January 2020 13 January 2020 Fair value per share treated as rights at grant date $2.87 $3.45 $3.45 $1.98 $3.42 $3.42 $1.82 $3.13 $3.13 $1.58 $2.99 $2.99 (1) Mr Stratford spent the first 9 months of the performance year as President, Dyno Nobel Americas (a US-based role) prior to being appointed to the CFO role for the final 3 months of the year. (2) Mr Wall became a KMP on 1 November 2018 and the disclosures for the 2019 financial year are from that date and do not represent a full financial year. (3) Dr Lusk became a KMP on 1 July 2020 and the disclosures for the 2020 financial year are from that date and do not represent a full financial year. Fixed remuneration payments were converted from US$ to A$ at the average rate for 1 July 2020 to 30 September 2020, being $1.3982. (4) Mr Titze became a KMP on 16 January 2019 and the disclosures for the 2019 financial year are from that date and do not represent a full financial year. (5) Mr Micallef ceased being a KMP on 30 June 2020. Disclosure for the 2020 year is from 1 October 2019 to 30 June 2020. Termination benefits accrued for Mr Micallef in the 2020 financial year include a separation payment of $467,657 in accordance with his contract of employment. (6) Mr Grace ceased being a KMP from 31 October 2018. Disclosure for the 2019 year is from 1 October 2018 to 31 October 2018. 76 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORT Table 8 – Actual Pay The table below provides a summary of actual remuneration paid to the Executives in the 2020 financial year (noting that for individuals who became KMP in the 2020 financial year, only 2020 financial year information is shown in the table). The accounting values of the Executives’ remuneration reported in accordance with the Accounting Standards may not always reflect what the Executives have actually received, particularly due to the valuation of share based payments. The table below seeks to clarify this by setting out the actual remuneration that the Executives have been paid over the last twelve months, excluding any STI rights and LTI rights that were exercised during the year. Executive remuneration details prepared in accordance with statutory requirements and the Accounting Standards are presented in Table 7 of this report. Executive KMP – Current J Johns Managing Director & CEO N Stratford (1) Chief Financial Officer T Wall President, Global Manufacturing G Hayne President, Dyno Nobel Asia Pacific B Lusk (2) President, Dyno Nobel Americas S Titze President, Incitec Pivot Fertilisers Executives – Former F Micallef (3) Chief Financial Officer A Grace (4) President, Global Manufacturing Total Executives Year 2020 2019 2020 2019 2020 2019 2020 2019 2020 2020 2019 2020 2019 2019 2020 2019 Salary & Fees $000 1,640 1,630 890 825 724 664 649 599 192 629 446 686 915 63 Short term incentive & other bonuses (A) Other short term benefits (B) Superannuation benefits Other long term benefits (C) Termination benefits $000 $000 $000 $000 $000 – 1,045 – 781 – – 62 332 – 488 – – 879 626 11 90 312 154 – – – 2 226 – 158 – – – 549 404 – – 21 21 21 19 21 21 – 21 16 16 21 2 100 100 – – – – – – 121 143 – – – – – 277 121 420 – – – – – – – – – – – – – – – – 5,410 5,142 550 3,663 Total $000 1,651 2,765 1,223 1,781 745 683 853 1,097 418 1,138 620 702 1,815 968 6,730 9,729 (A) Represent a special incentive paid during the 2020 financial year to Mr Titze (outlined in Section 4.5 of the report). For Mr Hayne, this includes a special discretionary bonus payment made in December 2019 as well as a short term incentive payment paid in 2019 prior to him becoming a KMP. (B) Other short term benefits include rent and mortgage interest subsidies, relocation allowances and other allowances, where applicable. (C) Other long term benefits include long service leave paid on cessation of employment. For Mr Hayne this includes a cash payment relating to a long term incentive plan for the periods prior to him becoming a KMP. (1) Mr Stratford spent the first 9 months of the performance year as President, Dyno Nobel Americas (a US-based role) prior to being appointed to the CFO role for the final 3 months of the year. (2) Dr Lusk became a KMP on 1 July 2020 and the disclosures for the 2020 financial year are from that date and do not represent a full financial year. (3) Mr Micallef’s ceased as a KMP on 30 June 2020 and the disclosures for the 2020 financial year are up until that date and do not represent a full financial year (4) Mr Grace ceased as a KMP on 31 October 2018 and the disclosures for the 2019 financial year are up until that date and do not represent a full financial year. 5. Overview of Remuneration Changes for the 2021 Financial Year No major structural changes are planned for the 2021 financial year. A number of minor adjustments will be implemented that aim to better align executive reward with performance and shareholder experience: » » LTI – Long Term Value Metrics (LTVM) which are focused on financially oriented objectives, will replace the previous Strategic Initiatives Conditions. LTI – Weightings within the program will be rebalanced. Return on Invested Capital (ROIC) will make up 40% (formerly 30%) and LTVM will make up 20% (formerly 30%) of the reward opportunity available. » STI – The Headline Net Profit After Tax (NPAT) gate will be modified to cap all non-safety related metrics at a maximum of target payment if the gate is not met. » STI – The Credit Rating gate introduced for the 2020 financial year only, will be removed as planned and replaced with a measure within the plan that focusses on cashflow management. » STI – New strategic measures will be introduced that emphasise cash and cost control management to align with this year’s Response Plan. The Board will continue to monitor and consider any trends that may become apparent with respect to remuneration (both domestically and internationally) and look to incorporate changes that may contribute to the efficacy of the Company’s overall remuneration structure. 77 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORT6. Non-executive Director Remuneration IPL’s policy is to: » » remunerate Non-executive Directors by way of fees and payments which may be in the form of cash and superannuation benefits; and set the level of Non-executive Directors’ fees and payments to be consistent with the market and to enable the IPL Group to attract and retain directors of an appropriate calibre. Non-executive Directors are not remunerated by way of options, shares, performance rights, bonuses nor by incentive-based payments. Non-executive Directors receive a fee for being a director of the Board and Non-executive Directors, other than the Chairman of the Board, receive additional fees for either chairing or being a member of a Board Committee. The level of fees paid to a Non-executive Director is determined by the Board after an annual review and reflects a Non-executive Director’s time commitments and responsibilities. For the 2020 financial year, there were no increases to Non-executive Directors’ fees. Fees paid to Non-executive Directors amounted to $1,524,000 which was within the $2,000,000 maximum aggregate fee pool approved by shareholders at the 2008 Annual General Meeting. For the 2021 financial year, the Board has determined that there will be no increase in Non-executive Director fees. The table below sets out the Board and Committee fees as at 30 September 2020: Board Fees Committee Fees Chairperson Members Audit & Risk Management Committee Chairperson Members Remuneration Committee Chairperson Members HSEC Committee Chairperson Members Nominations Committee Chairperson Members $532,500 $177,500 $47,200 $23,600 $35,400 $17,700 $35,400 $17,700 N/A $8,250 Table 9 – Non-executive Directors’ remuneration Details of the Non-executive Directors’ remuneration for the financial year ended 30 September 2020 are set out in the following table: Non-executive Directors – Current B Kruger, Chairman B Brook X Liu (1) R McGrath G Robinson (2) Non-executive Directors – Former P Brasher, Chairman (3) J Breunig (4),(5) K Fagg AO (6) G Smorgon AM (7) Total Non-executive Directors Board and Committee Fees Cash allowances and other short term benefits (A) Post-employment benefits Other long term benefits Year 2020 2019 2020 2019 2020 2020 2019 2020 2019 2020 2019 2020 2019 2019 2020 2019 Fees $000 512 299 240 173 176 239 224 151 383 81 195 47 210 40 1,446 1,524 Superannuation benefits $000 $000 $000 – – – – – – – – – 15 30 – – – 15 30 21 21 11 16 8 5 21 14 15 – – 4 21 5 63 99 – – – – – – – – – – – – – – – – Total $000 533 320 251 189 184 244 245 165 398 96 225 51 231 45 1,524 1,653 (A) Cash allowances and other short term benefits include travel allowances and the taxable value of fringe benefits paid attributable to the fringe benefits tax year. (1) Dr Liu was appointed as an Independent, Non-executive Director with effect from 25 November 2019. (2) Mr Robinson was appointed as an Independent, Non-executive Director with effect from 25 November 2019. (3) Mr Brasher retired as a Non-executive Director and Chairman on 30 June 2019 and was succeeded by Mr Kruger with effect from 1 July 2019. (4) Mr Breunig resides in the United States and received a travel allowance of $5,000 per trip to Australia to attend Board and/or Committee meetings. (5) Mr Breunig resigned from the Board as a Non-executive Director on 28 February 2020. (6) Ms Fagg retired from the Board as a Non-executive Director on 20 December 2019. (7) Mr Smorgon retired from the Board as a Non-executive Director on 20 December 2018. 78 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORT7. Shareholdings in IPL The 2020 financial year saw the commencement of the MSR for Non-executive Directors. The MSR is an initiative to better align Director and Shareholder interests and requires each Director to hold the equivalent of 100% of their base Board fee in IPL shares and/or rights to shares (that have been fully sacrificed for under IPL’s Non-executive Director Fee Sacrifice Plan) at the completion of 5-years of service. As at 30 September 2020, all Directors (excluding those joining the IPL Board during the current financial year) were required to hold 20% of their base Board fee in IPL shares and/or rights to shares. All Directors satisfied this requirement. Table 10 – Movements in rights in the Company IPL’s Non-executive Director Fee Sacrifice Plan (the Plan) commenced in 2019. The first six-monthly tranche of rights issued under the Plan vested into shares in 2020. Rights issued under the second tranche are scheduled to vest in November 2020. These rights, as well as those that subsequently convert to shares, combine to form part of the Non-executive Director’s Minimum Shareholding Requirement (MSR) that is outlined in further detail in the next section of the report. The movement during the reporting period in the number of rights for each Non-executive Director, including their related parties, is set out in the table below: Number of Rights (A) Opening balance Rights acquired Vested (B) Forfeited Closing balance $’000 Maximum value of outstanding rights (C) Non-executive Directors – Current B Kruger B Brook X Liu R McGrath G Robinson 0 0 0 0 0 38,459 22,687 7,239 – – (12,397) (5,313) – – – – – – – – 26,062 17,374 7,239 – – 53 35 15 – – (A) Includes movements of rights acquired under the Plan. (B) For the 2020 financial year, this represents the number of rights vested during the reporting period under the Plan. (C) Value of outstanding rights based on 20 Day VWAP - 4 March 2020 to 31 March 2020. Table 11 – Movements in shares in the Company The movement during the reporting period in the number of shares in the Company held directly, indirectly or beneficially, by each KMP, including their related parties, is set out in the table below: Opening balance Shares acquired Shares disposed Closing balance (B) Number of Shares (A) Non-executive Directors – Current B Kruger B Brook X Liu R McGrath G Robinson Non-executive Directors – Former J Breunig K Fagg AO Executive Director – Current J Johns Executives – Current N Stratford T Wall G Hayne B Lusk S Titze Executives – Former F Micallef 14,620 12,000 – 25,008 – – 10,000 158,090 19,620 – 8,633 – – 99,478 27,397 20,313 43,000 15,000 67,020 – – 459,905 27,459 44,651 15,000 – – 53,158 – – – – – – – – – – – – – – 42,017 32,313 43,000 40,008 67,020 – 10,000 617,995 47,079 44,651 23,633 – – 152,636 (A) Includes fully paid ordinary shares and shares acquired under IPL’s incentive plans. Details of these plans are set out in note 18, Share-based payments. (B) Where a director or an Executive has ceased to be a KMP during the reporting year, the balance stated in this column represents the number of shares held as at the date the director or Executive ceased to be a KMP. 8. Other KMP Disclosures Loans to KMP In the year ended 30 September 2020, there were no loans to key management personnel and their related parties (2019: nil). Other KMP transactions In the year ended 30 September 2020, there were no transactions entered into during the year with key management personnel (including their related parties). 79 Incitec Pivot Limited Annual Report 2020REMUNERATION REPORTDeloitte Touche Tohmatsu ABN 74 490 121 060 477 Colins Street Melbourne VIC 3000 Phone: +61 3 9671 7000 www.deloitte.com.au The Board of Directors Incitec Pivot Limited Level 8, 28 Freshwater Place Southbank Victoria 3006 10 November 2020 Dear Board Members Incitec Pivot Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Incitec Pivot Limited. As lead audit partner for the audit of the financial statements of Incitec Pivot Limited for the financial year ended 30 September 2020, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU A T Richards Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation Member of Deloitte Asia Pacific and the Deloitte organisation 80 Incitec Pivot Limited Annual Report 2020 FINANCIAL REPORT CONTENTS 82 82 83 84 85 86 87 119 127 120 128 129 Introduction Content and Structure of the Financial Report Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements Directors’ Declaration on the Consolidated Financial Statements set out on pages 82 to 118 Additional Information Independent Auditor’s Report Shareholder Information Five Year Financial Statistics This document is interactive. Click any of the contents menu headings throughout this document to be taken to that page. Click the home icon at the bottom of any page to return to each section contents menu. Incitec Pivot Limited Annual Report 2020 81 FINANCIAL REPORT Introduction This is the consolidated financial report of Incitec Pivot Limited (the Company, IPL, or Incitec Pivot) a company domiciled in Australia, and its subsidiaries including its interests in joint ventures and associates (collectively referred to as the Group) for the financial year ended 30 September 2020. Content and Structure of the Financial Report The notes to the financial statements and the related accounting policies are grouped into the following distinct sections in the 2020 financial report. The accounting policies have been consistently applied to all years presented, unless otherwise stated. Section Description Financial performance Shareholder returns Capital structure Capital investment Risk management Other Provides detail on the Group’s Consolidated Statement of Profit or Loss and Other Comprehensive Income and Consolidated Statement of Financial Position that are most relevant in forming an understanding of the Group’s financial performance for the year. Provides information on the performance of the Group in generating shareholder returns. Provides information about the Group’s capital and funding structures. Provides information on the Group’s investment in tangible and intangible assets, and the Group’s future capital commitments. Provides information about the Group’s risk exposures, risk management practices, provisions and contingent liabilities. Provides information on items that require disclosure to comply with Australian Accounting Standards and the requirements under the Corporations Act. Information is included in the notes to the financial report only to the extent it is considered material and relevant to the understanding of the financial report. A disclosure is considered material and relevant if, for example: the dollar amount is significant in size (quantitative factor) the item is significant by nature (qualitative factor) the Group’s result cannot be understood without the specific disclosure (qualitative factor) it relates to an aspect of the Group’s operations that is important to its future performance. » » » » 82 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORTConsolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 September 2020 Notes 2020 $mill 2019 $mill Revenue Financial and other income Share of profit of equity accounted investments Operating expenses Changes in inventories of finished goods and work in progress Raw materials and consumables used and finished goods purchased for resale Employee expenses Depreciation and amortisation Financial expenses Purchased services Repairs and maintenance Outgoing freight Lease payments – operating leases Asset impairment write-downs Other expenses Profit before income tax Income tax expense Profit for the year Other comprehensive income, net of income tax Items that will not be reclassified subsequently to profit or loss Actuarial losses on defined benefit plans Gross fair value losses on assets at fair value through other comprehensive income Income tax relating to items that will not be reclassified subsequently to profit or loss Items that may be reclassified subsequently to profit or loss Fair value losses on cash flow hedges Cash flow hedge gains transferred to profit or loss Exchange differences on translating foreign operations Net gains/(losses) on hedge of net investment Income tax relating to items that may be reclassified subsequently to profit or loss Other comprehensive income for the year, net of income tax Total comprehensive income for the year Profit attributable to: Members of Incitec Pivot Limited Non-controlling interest Profit for the year Total comprehensive income attributable to: Members of Incitec Pivot Limited Non-controlling interest Total comprehensive income for the year Earnings per share Basic (cents per share) Diluted (cents per share) (2) (2) (14) (2) (2) (2) (3) (20) (17) (17) (17) (17) (5) (5) 3,942.2 43.4 32.3 (121.3) (1,707.4) (723.8) (356.0) (139.6) (200.0) (181.2) (287.6) (26.7) (57.3) (66.1) 150.9 (27.5) 123.4 (9.0) – 2.5 (6.5) (4.3) (19.0) (354.5) 125.5 49.3 (203.0) (209.5) (86.1) 123.4 – 123.4 (86.1) – (86.1) 7.1 7.1 3,918.2 58.7 44.9 70.7 (2,028.0) (686.8) (301.6) (149.1) (185.5) (172.3) (283.9) (60.6) (11.5) (53.6) 159.6 (7.5) 152.1 (36.6) (0.1) 10.2 (26.5) (72.5) (18.0) 226.1 (107.8) 14.4 42.2 15.7 167.8 152.4 (0.3) 152.1 168.1 (0.3) 167.8 9.5 9.4 83 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Consolidated Statement of Financial Position As at 30 September 2020 Notes 2020 $mill 2019 $mill Current assets Cash and cash equivalents Trade and other receivables Inventories Other assets Other financial assets Total current assets Non-current assets Trade and other receivables Other assets Other financial assets Equity accounted investments Property, plant and equipment Right-of-use lease assets Intangible assets Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Lease liabilities Interest bearing liabilities Other financial liabilities Provisions Current tax liabilities Total current liabilities Non-current liabilities Trade and other payables Lease liabilities Interest bearing liabilities Other financial liabilities Provisions Deferred tax liabilities Retirement benefit obligation Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity 84 (8) (4) (4) (17) (4) (17) (14) (9) (10) (11) (3) (4) (10) (8) (17) (16) (4) (10) (8) (17) (16) (3) (20) (7) 554.6 373.9 474.4 47.2 79.8 576.4 316.7 600.9 50.6 6.2 1,529.9 1,550.8 26.9 25.8 56.1 326.3 4,071.7 221.1 3,019.7 13.5 7,761.1 9,291.0 1,049.4 41.5 21.2 93.6 102.3 21.5 47.4 21.6 16.6 357.7 4,190.0 – 3,179.5 15.9 7,828.7 9,379.5 1,152.0 – 1,213.4 39.2 86.1 13.4 1,329.5 2,504.1 16.2 206.2 1,849.1 65.3 125.5 429.0 66.9 2,758.2 4,087.7 5,203.3 3,806.2 (221.8) 1,618.9 5,203.3 17.4 – 1,443.0 45.1 116.5 498.4 67.2 2,187.6 4,691.7 4,687.8 3,136.8 (19.9) 1,570.9 4,687.8 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Consolidated Statement of Cash Flows For the year ended 30 September 2020 Cash flows from operating activities Profit after tax for the year Adjusted for non-cash items Net finance cost Depreciation and amortisation Write-down of property, plant and equipment Impairment of intangible assets Share of profit of equity accounted investments Net gain on sale of property, plant and equipment Non-cash share-based payment transactions Income tax expense Changes in assets and liabilities (Increase)/decrease in receivables and other operating assets Decrease/(increase) in inventories (Decrease)/increase in payables, provisions and other operating liabilities Adjusted for cash items Dividends received Interest received Interest paid Income tax paid Net cash flows from operating activities Cash flows from investing activities Payments for property, plant and equipment and intangibles Proceeds from sale of property, plant and equipment Payments for acquisition of subsidiaries and non-controlling interests Payments towards investment in joint arrangement Proceeds from sale of equity securities Loans to equity accounted investees (Payments)/receipts from settlement of net investment hedge derivatives Net cash flows from investing activities Cash flows from financing activities Repayment of borrowings Proceeds from borrowings Proceeds from equity raising Realised market value gain on derivatives Lease liability payments Dividends paid Dividends paid to non-controlling interest holder Purchased shares for IPL employees Payment for buy-back of shares Net cash flows from financing activities Net decrease in cash and cash equivalents held Cash and cash equivalents at the beginning of the year Effect of exchange rate fluctuations on cash and cash equivalents held Cash and cash equivalents at the end of the year Notes 2020 $mill 2019 $mill Inflows (Outflows) Inflows (Outflows) 123.4 135.7 356.0 16.3 41.0 (32.3) (1.6) 2.4 27.5 (47.1) 112.3 (70.2) 663.4 30.9 3.9 (139.4) (13.7) 545.1 (278.4) 7.4 (23.4) (9.8) – – (75.2) (379.4) (1,487.6) 723.0 645.5 10.3 (41.9) (30.7) – (1.3) – (182.7) (17.0) 576.4 (4.8) 554.6 (2) (9) (11) (14) (2) (18) (3) (14) (8) (8) (7) (6) (8) 152.1 144.1 301.6 11.5 – (44.9) (12.0) 1.6 7.5 35.5 (81.7) 23.9 539.2 27.5 5.0 (136.1) (20.8) 414.8 (348.1) 10.8 (5.3) – 2.3 (6.8) 5.5 (341.6) (429.7) 553.7 – – – (121.7) (5.9) (0.6) (89.7) (93.9) (20.7) 588.5 8.6 576.4 85 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT – (0.3) – – – – – – – – – – – – (89.7) (7.9) (0.6) 1.6 4,687.8 4,687.8 (14.3) 123.4 (209.5) (54.6) 669.4 (1.3) 2.4 5,203.3 Consolidated Statement of Changes in Equity For the year ended 30 September 2020 Issued capital $mill Notes Cash flow hedging reserve $mill Share- based payments reserve $mill Foreign currency translation reserve $mill Fair value reserve $mill Retained earnings $mill Non- controlling interest $mill Total $mill Total equity $mill Balance at 1 October 2018 3,226.5 15.6 25.0 (84.0) (12.0) 1,566.6 4,737.7 6.5 4,744.2 Profit for the year Total other comprehensive income for the year Dividends paid Share buy-back (6) Change in non-controlling interest Purchased shares for IPL employees Share-based payment transactions (18) – – – (89.7) – – – – (63.9) – – – – – Balance at 30 September 2019 3,136.8 (48.3) – – – – – (0.6) 1.6 26.0 – – 152.4 152.4 (0.3) 152.1 106.1 (0.1) (26.4) 15.7 – 15.7 (121.7) (121.7) (5.9) (127.6) – – – – – – – (7.6) – – – – – – (89.7) (7.6) (0.6) 1.6 22.1 (19.7) 1,570.9 4,687.8 Balance at 1 October 2019 3,136.8 (48.3) 26.0 22.1 (19.7) 1,570.9 4,687.8 Adoption of AASB 16 Leases(i) Profit for the year Total other comprehensive income for the year Dividends paid Shares issued during the year Purchased shares for IPL employees (6) (7) Share-based payment transactions (18) – – – – 669.4 – – – – (16.0) – – – – – – – – – (1.3) 2.4 – – (187.0) – – – – – – – – – – – (14.3) (14.3) 123.4 123.4 (6.5) (209.5) (54.6) (54.6) – – – 669.4 (1.3) 2.4 Balance at 30 September 2020 3,806.2 (64.3) 27.1 (164.9) (19.7) 1,618.9 5,203.3 (i) Refer note 10 for additional information on the adoption of AASB16 Leases Cash flow hedging reserve This reserve comprises the cumulative net change in the fair value of the effective portion of cash flow hedging instruments related to hedged transactions that have not yet occurred. Share-based payments reserve This reserve comprises the fair value of rights recognised as an employee expense under the terms of the 2017/20, 2018/21 and 2019/22 Long Term Incentive Plans. Foreign currency translation reserve Exchange differences arising on translation of foreign controlled operations are taken to the foreign currency translation reserve. The relevant portion of the reserve is recognised in the profit or loss when the foreign operation is disposed of. The foreign currency translation reserve is also used to record gains and losses on hedges of net investments in foreign operations. Fair value reserve This reserve represents the cumulative net change in the fair value of equity instruments. The annual net change in the fair value of investments in equity securities (including both realised and unrealised gains and losses) is recognised in other comprehensive income. 86 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements For the year ended 30 September 2020 Basis of preparation Financial performance 1 Segment report 2 Revenue and expenses 3 Taxation 4 Trade and other assets and liabilities Shareholder returns 5 Earnings per share 6 Dividends Capital structure 7 Capital management 8 Net debt Capital investment 9 Property, plant and equipment 10 Leases 11 Intangibles 12 Impairment of goodwill and non-current assets 13 Commitments 14 Equity accounted investments 15 Investments in subsidiaries, joint arrangements and associates Risk management 16 Provisions and contingencies 17 Financial risk management Other 18 Share-based payments 19 Key management personnel disclosures 20 Retirement benefit obligation 21 Deed of cross guarantee 22 Parent entity disclosure 23 Auditor’s remuneration 24 Events subsequent to reporting date 88 89 91 92 93 94 94 95 96 98 99 100 101 103 103 104 106 107 115 115 116 117 117 118 118 87 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORTNotes to the Consolidated Financial Statements: Basis of preparation For the year ended 30 September 2020 Basis of preparation and consolidation The consolidated financial statements of the Group have been prepared under the historical cost convention, except for certain financial instruments that have been measured at fair value. The resulting accounting estimates will, by definition, seldom equal the subsequent related actual result. The estimates and judgments that have a significant risk of causing a material adjustment to the carrying amounts of the assets and liabilities within the next financial year are set out in the notes. Rounding of amounts The Company is of a kind referred to in ASIC Legislative Instrument, ASIC Corporations (Rounding in Financial/ Directors’ Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission dated 24 March 2016 and, in accordance with that Legislative Instrument, the amounts shown in this report and in the financial statements have been rounded, except where otherwise stated, to the nearest one hundred thousand dollars. Accounting standards issued The Group adopted all amendments to Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that are relevant to its operations and effective for the current year. The adoption of these revised Standards and Interpretations did not have a material impact on the Group’s results, except for: » AASB 16: Leases Details of the impact of AASB 16 on the Group are included in note 10. The following relevant standards were available for early adoption and were early adopted by the Group: » AASB 2019-3: Amendments to Australian Accounting Standards – Interest Rate Benchmark Reform » AASB 2020-8: Amendments to Australian Accounting Standards – Interest Rate Benchmark Reform – Phase 2 The global interest rate benchmark reform is resulting in the replacement of Inter-Bank Offered Rates (IBORs) with alternative risk-free rates by 1 January 2022. The Interest Rate Benchmark Reform Accounting Standard amendments modify specific hedging accounting requirements to allow hedge accounting to continue during the period of uncertainty relating to the benchmarking reforms for affected cash flow and fair value hedges. London Inter-Bank Offered Rate (LIBOR), Hong Kong Inter-Bank Offered Rate (HIBOR) and Bank Bill Swap Rate (BBSW) are benchmark rates impacted by the reform and are referenced in the Group’s debt and derivative contracts. A working group with representation from different functions across the Group has been established to monitor the developments in the global reform and manage the transition of contracts affected. The ‘Interest Rate Risk’ section in note 17 summarises the Group’s derivative instruments in hedging relationships at 30 September 2020, including the nominal amounts in those hedge relationships. The adoption of the new standard had no impact on the Group’s financial results for the year ended 30 September 2020. The financial results and financial position of the Group are expressed in Australian dollars, which is the functional currency of the Company and the presentation currency for the consolidated financial statements. Where applicable, comparative disclosures have been reclassified for consistency with the current period. The consolidated financial statements were authorised for issue by the directors on 10 November 2020. Subsidiaries Subsidiaries are entities that are controlled by the Group. The financial results and financial position of the subsidiaries are included in the consolidated financial statements from the date control commences until the date control ceases. A list of the Group’s subsidiaries is included in note 15. Joint arrangements and associates A joint venture is an arrangement where the parties have rights to the net assets of the venture. A joint operation is an arrangement where the parties each have rights to the assets and liabilities relating to the arrangement. Associates are those entities in respect of which the Group has significant influence, but not control, over the financial and operating policies of the entities. Investments in joint ventures and associates are accounted for using the equity method. They are initially recognised at cost, and subsequent to initial recognition, the consolidated financial statements include the Group’s share of the profit or loss and other comprehensive income of the investees. The interests in joint operations are brought to account recognising the Group’s share of jointly controlled assets; liabilities; expenses; and income from the joint operation. A list of the Group’s joint arrangements and associates is included in note 15. Statement of compliance The consolidated financial statements are general purpose financial statements which have been prepared in accordance with Australian Accounting Standards (including Australian Interpretations) and the Corporations Act 2001. The consolidated financial statements of the Group comply with International Financial Reporting Standards (IFRS) and interpretations. The Company is a for-profit entity. Key estimates and judgments Key accounting estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectation of future events that may have a financial impact on the Group and that are believed to be reasonable under the circumstances. 88 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORTNotes to the Consolidated Financial Statements: Financial performance For the year ended 30 September 2020 Asia Pacific Eliminations (APAC Elim): represent elimination of sales and profit in stock arising from Fertilisers APAC sales to DNAP. Americas Dyno Nobel Americas (DNA): manufactures and sells industrial explosives and related products and services to the mining, quarrying and construction industries in the Americas (Canada, Mexico and Chile) and inititating systems to businesses in Australia, Turkey and South Africa. It also manufactures and sells industrial chemicals to the agriculture and specialist industries. Corporate Corporate costs include all head office expenses that cannot be directly or reasonably attributed to the operation of any of the Group’s businesses. Group Eliminations (Group Elim): represent elimination of sales and profit in stock arising from intersegment sales. 1. Segment report The Group operates a number of strategic divisions that offer different products and services and operate in different markets. For reporting purposes, these divisions are known as reportable segments. The results of each segment are reviewed monthly by the executive management team (the chief operating decision makers) to assess performance and make decisions about the allocation of resources. Following the conclusion of the Fertilisers Strategic Review during the current financial year, the operating segments were changed to align with the reports that are used by the Group’s executive management team. As a result, Incitec Pivot Fertilisers (IPF) and Southern Cross International (SCI) were combined into one reporting segment, Fertilisers Asia Pacific. The prior year comparatives have been restated in line with this change. Description of reportable segments Asia Pacific Fertilisers Asia Pacific (Fertilisers APAC): manufactures and sells fertilisers in Eastern Australia and the export market. It also manufactures, imports and sells industrial chemicals to the agriculture and specialist industries. Dyno Nobel Asia Pacific (DNAP): manufactures and sells industrial explosives and related products and services to the mining industry in the Asia Pacific region and Turkey. Reportable segments – financial information Asia Pacific Americas Fertilisers APAC $mill DNAP $mill APAC Elim $mill Total $mill DNA $mill Group Elim $mill Corporate(i) $mill Consolidated Group $mill 1,502.0 999.2 (18.5) 2,482.7 1,506.5 (47.0) – 11.8 129.0 230.7 – – – – 11.8 20.5 359.7 396.3 (184.2) (165.5) 175.5 230.8 – (0.3) 0.2 (0.1) 1,536.0 2,564.9 – 4,100.9 4,436.5 (770.1) (282.4) – (1,052.5) (639.2) 765.9 2,282.5 – 3,048.4 3,797.3 – – – 740.1 9,277.5 (1,967.0) (3,658.7) (1,226.9) 5,618.8 30 September 2020 Revenue from external customers Share of profits of equity accounted investments EBITDA(ii) Notes (2) (14) Depreciation and amortisation (2) (102.8) (81.4) EBIT(iii) Net interest expense Income tax expense (excluding IMIs) Profit after tax(iv) Individually material items (net of tax) (2) Profit attributable to members of IPL 26.2 149.3 Segment assets Segment liabilities Net segment assets(v) Deferred tax balances Net assets (3) (i) Corporate assets and liabilities include the Group’s interest bearing liabilities and derivative assets and liabilities. (ii) Earnings Before Interest, related income tax expense, depreciation and amortisation and individually material items. (iii) Earnings Before Interest, related income tax expense and individually material items. (iv) Profit after tax (excluding individually material items). (v) Net segment assets exclude deferred tax balances. – – (25.2) (6.5) (31.7) 3,942.2 32.3 730.5 (356.0) 374.5 (135.7) (50.6) 188.2 (64.8) 123.4 (415.5) 5,203.3 89 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Financial performance For the year ended 30 September 2020 30 September 2019 Asia Pacific Americas Fertilisers APAC $mill Notes DNAP $mill APAC Elim $mill Total $mill DNA $mill Group Elim $mill Corporate(i) $mill Consolidated Group $mill Revenue from external customers (2) 1,419.4 990.7 (13.4) 2,396.7 1,569.0 (47.5) Share of profits of equity accounted investments (14) – 13.1 EBITDA(ii) 0.4 255.4 Depreciation and amortisation (2) (80.1) (76.2) EBIT(iii) Net interest expense Income tax expense Profit after tax Non-controlling interest Profit attributable to members of IPL Segment assets Segment liabilities Net segment assets(iv) Deferred tax balances Net assets (79.7) 179.2 1,454.7 2,564.9 (655.5) (290.5) 799.2 2,274.4 (3) (3) – – – – – – – (i) Corporate assets and liabilities include the Group’s interest bearing liabilities and derivative assets and liabilities. (ii) Earnings Before Interest, related income tax expense, and depreciation and amortisation. (iii) Earnings Before Interest and related income tax expense. (iv) Net segment assets exclude deferred tax balances. 13.1 255.8 31.8 376.6 (156.3) (142.6) – (1.7) – 99.5 234.0 (1.7) – – (25.4) (2.7) (28.1) 3,918.2 44.9 605.3 (301.6) 303.7 (144.1) (7.5) 152.1 0.3 152.4 4,019.6 4,647.8 (946.0) (562.0) 3,073.6 4,085.8 – – – 696.2 9,363.6 (2,685.3) (4,193.3) (1,989.1) 5,170.3 (482.5) 4,687.8 Geographical information – secondary reporting segments The Group operates in four principal countries being Australia (country of domicile), USA, Canada and Turkey. In presenting information on the basis of geographical information, revenue is based on the geographical location of the entity making the sale. Assets are based on the geographical location of the assets. 30 September 2020 Revenue from external customers Non-current assets other than financial assets and deferred tax assets Trade and other receivables 30 September 2019 Revenue from external customers Non-current assets other than financial assets and deferred tax assets Trade and other receivables Australia $mil 2,399.0 3,549.2 215.9 Australia $mil 2,304.8 3,412.8 143.3 USA $mill 1,237.5 3,942.2 98.6 USA $mill 1,320.2 4,187.8 89.8 Canada $mill 249.8 80.6 46.7 Canada $mill 218.0 66.6 43.4 Turkey $mill 50.5 2.0 11.2 Turkey $mill 50.3 1.6 18.1 Other/Elim $mill Consolidated $mill 5.4 3,942.2 117.5 28.4 7,691.5 400.8 Other/Elim $mill Consolidated $mill 24.9 3,918.2 127.4 69.5 7,796.2 364.1 90 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT 3.9 5.0 Employee redundancies 24.8 (6.8) 18.0 Notes to the Consolidated Financial Statements: Financial performance For the year ended 30 September 2020 2. Revenue and expenses Notes 2020 $mill 2019 $mill 3,942.2 3,918.2 3,942.2 3,918.2 Revenue External sales Total revenue Financial income Interest income Other income Royalty income and management fees Net gain on sale of property, plant and equipment Other income from operations Total financial and other income Expenses 27.3 1.6 10.6 43.4 33.0 12.0 8.7 58.7 Profit before income tax includes the following specific expenses: Notes 2020 $mill 2019 $mill Depreciation and amortisation Depreciation property, plant and equipment leases Amortisation Total depreciation and amortisation Recoverable amount write-down property, plant and equipment intangible assets Total recoverable amount write-down Amounts set aside to provide for: impairment losses on trade and other receivables inventory losses and obsolescence employee entitlements environmental liabilities legal and other provisions restructuring and rationalisation costs Research and development expense Defined contribution superannuation expense (9) (10) (11) (9) (11) (4) (4) (16) (16) (16) (16) Defined benefit superannuation expense (20) Financial expenses Interest on lease liabilities Unwinding of discount on provisions Net interest expense on defined benefit obligation Interest expenses on financial liabilities Total financial expenses (10) (16) (20) 290.7 277.9 40.7 24.6 356.0 16.3 41.0 57.3 6.1 0.2 8.5 1.9 2.4 29.3 18.9 33.5 2.9 5.9 5.7 1.4 – 23.7 301.6 11.5 – 3.1 3.6 8.3 4.6 6.4 11.7 18.2 31.7 4.6 – 4.4 1.4 126.6 139.6 143.3 149.1 Individually material items 30 September 2020 Profit after tax includes the following expenses whose disclosure is relevant in explaining the financial performance of the Group: Gross $mill Tax $mill Net $mill Impairment of intangible assets (1) 41.0 (10.7) 30.3 Business restructuring costs (2) Impairment of operating assets, site exit and other direct costs Total individually material items 22.1 87.9 (5.6) (23.1) 16.5 64.8 (1) During the year ended 30 September 2020 intangible assets were impaired by $41.0m (2019: nil). Refer to note 12 for further details. (2) Costs incurred directly due to the business restructure which include redundancies and related costs, asset impairment write downs, and site exit and reconfiguration costs. 30 September 2019 There were no individually material items for the year ended 30 September 2019. Key accounting policies Revenue Revenue is measured at the fair value of the consideration received or receivable by the Group. Amounts disclosed as revenue are net of returns, trade allowances and amounts collected on behalf of third parties. Revenue is recognised for the major business activities on the following basis: » Sale of goods and services: revenue from the sale of goods and services is recognised at the point in time when the performance obligations under the customer contract are satisfied. This is typically when control of goods or services is transferred to the customer. The fee for the service component is recognised separately from the sale of goods. 11.5 » Take-or-pay revenue: revenue is recognised in line with the sale of goods policy. In circumstances where goods are not taken by the customer, revenue is recognised when the likelihood of the customer meeting its obligation to ‘take goods’ becomes remote. » Interest income is recognised as it accrues using the effective interest method. The Group disaggregates its revenue per reportable segment as presented in Note 1, as the revenue within each business unit is affected by economic factors in a similar manner. Goods and services tax Revenues, expenses, assets and liabilities (other than receivables and payables) are recognised net of the amount of goods and services tax (GST). The only exception is where the amount of GST incurred is not recoverable from the relevant taxation authorities. In these circumstances, the GST is recognised as part of the cost of the asset or as part of the item of expenditure. Other income Other income from operations represents gains that are not revenue. This includes royalty income and management fees from the Group’s joint ventures and associates, and income from contractual arrangements that are not considered external sales. 91 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Financial performance For the year ended 30 September 2020 3. Taxation Income tax expense for the year Movements in net deferred tax liabilities The table below sets out movements in net deferred tax balances for the period ended 30 September: 2020 $mill 2019 $mill Current tax expense Current year Adjustments in respect of prior years Deferred tax expense Current year Total income tax expense 25.1 (1.7) 23.4 4.1 27.5 Income tax reconciliation to prima facie tax payable Profit before income tax Tax at the Australian tax rate of 30% (2019: 30%) Tax effect of amounts which are not deductible/ (taxable) in calculating taxable income: Other foreign deductions Joint venture income Sundry items Difference in overseas tax rates Adjustments in respect of prior years Income tax expense attributable to profit 2020 $mill 150.9 45.3 – (8.1) (4.2) (3.8) (1.7) 27.5 (17.1) (3.0) (20.1) 27.6 7.5 2019 $mill 159.6 47.9 (15.9) (11.6) 2.9 (12.8) (3.0) 7.5 Tax amounts recognised directly in equity The aggregate current and deferred tax arising in the financial year and not recognised in net profit or loss but directly charged to equity is $51.9m for the year ended 30 September 2020 (2019: credit of $24.6m). Net deferred tax assets/(liabilities) Deferred tax balances comprise temporary differences attributable to the following: Employee entitlements provision Retirement benefit obligations Provisions and accruals Lease liabilities Tax losses Property, plant and equipment Right-of-use lease assets Intangible assets Joint venture income Financial instruments Other 2020 $mill 21.7 18.4 51.1 70.6 170.3 (554.0) (62.9) (91.2) (13.1) (12.4) (14.0) 2019 $mill 17.7 18.0 47.6 – 136.5 (527.4) – (99.0) (10.2) (64.0) (1.7) Net deferred tax liabilities (415.5) (482.5) Presented in the Statement of Financial Position as follows: Deferred tax assets Deferred tax liabilities Net deferred tax liabilities 13.5 (429.0) (415.5) 15.9 (498.4) (482.5) Opening balance at 1 October Adoption of AASB 16 Leases Debited to the profit or loss Charged to equity Foreign exchange movements 2020 $mill 2019 $mill (482.5) (465.9) 6.0 (4.1) 51.8 13.3 – (27.6) 24.6 (13.6) Closing balance at 30 September (415.5) (482.5) Key accounting policies Income tax expense Income tax expense comprises current tax (amounts payable or receivable within 12 months) and deferred tax (amounts payable or receivable after 12 months). Tax expense is recognised in the profit or loss, unless it relates to items that have been recognised in equity (as part of other comprehensive income). In this instance, the related tax expense is also recognised in equity. Current tax Current tax is the expected tax payable on the taxable income for the year. It is calculated using tax rates applicable at the reporting date, and any adjustments to tax payable in respect of previous years. Deferred tax Deferred tax is recognised for all taxable temporary differences and is calculated based on the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied when the asset is realised or the liability is settled, based on the laws that have been enacted or substantively enacted at the reporting date. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the assets can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefits will be realised. Offsetting tax balances Tax assets and liabilities are offset when the Group has a legal right to offset and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Tax consolidation For details on the Company’s tax consolidated group refer to note 22. Key estimates and judgments Uncertain tax matters The Group is subject to income taxes in Australia and foreign jurisdictions and as a result the calculation of the Group’s tax charge involves a degree of estimation and judgment in respect of certain items. In addition, there are transactions and calculations relating to the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises liabilities for potential tax audit issues in deferred tax liabilities based on management’s assessment of whether additional taxes may be payable and calculates the provision in accordance with the applicable accounting standards including IFRIC 23 Uncertainty over income tax treatments. Where the final tax outcome of these matters is different from the amounts that were initially recorded, these differences impact the current and deferred tax provisions in the period in which such determination is made. 92 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Financial performance For the year ended 30 September 2020 4. Trade and other assets and liabilities The Group’s total trade and other assets and liabilities consists of inventory, receivables and payables balances, net of provisions for any impairment losses. 30 September 2020 Inventories Receivables Payables 30 September 2019 Inventories Receivables Payables Inventory by category: Raw materials and stores Work-in-progress Finished goods Provisions Total inventory balance Provision movement: 30 September 2020 Carrying amount at 1 October 2019 Provisions made during the year Provisions written back during the year Amounts written off against provisions Foreign exchange rate movements Trade $mill 474.4 338.9 Other $mill – 61.9 Total $mill 474.4 400.8 (798.5) (267.1) (1,065.6) 14.8 (205.2) (190.4) Trade $mill 600.9 286.2 Other $mill – 77.9 Total $mill 600.9 364.1 (883.0) (286.4) (1,169.4) 4.1 (208.5) (204.4) 2020 $mill 131.8 62.6 293.5 (13.5) 474.4 2019 $mill 137.1 61.3 416.2 (13.7) 600.9 Trade receivables $mill Inventories $mill (28.1) (6.1) 0.8 6.7 4.4 (13.7) (0.2) – 0.3 0.1 Carrying amount at 30 September 2020 (22.3) (13.5) Receivables ageing and credit loss provision Included in the following table is an age analysis of the Group’s trade receivables, along with credit loss provisions against these balances at 30 September: 30 September 2020 Current 30–90 days Over 90 days Total 30 September 2019 Current 30–90 days Over 90 days Total Gross $mill 332.3 3.0 25.9 361.2 Gross $mill 278.7 8.9 26.7 314.3 Credit loss provision $mill (3.1) (1.0) (18.2) (22.3) Credit loss provision $mill (2.0) (2.2) (23.9) (28.1) Net $mill 329.2 2.0 7.7 338.9 Net $mill 276.7 6.7 2.8 286.2 The graph below shows the Group’s trade working capital (trade assets and liabilities) performance over a five year period. 13 month rolling average trade working capital*/ Annual net revenue Explosives (DNA, DNAP) Fertilisers Group % 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 FY16 FY17 FY18 FY19 FY20 * Trade working capital is reported net of debtor factoring and supply chain financing arrangements. Key accounting policies Inventories Inventories are valued at the lower of cost and net realisable value. The cost of manufactured goods is based on a weighted average costing method. For third party sourced goods, cost is net cost into store. Trade and other receivables Trade and other receivables are initially recognised at fair value plus any directly attributable transaction costs. Subsequent to initial measurement they are measured at amortised cost less any provisions for expected impairment losses or actual impairment losses. Credit losses and recoveries of items previously written off are recognised in the profit or loss. Where substantially all risks and rewards relating to a receivable are transferred to a third party, the receivable is derecognised. To manage cash inflows which are impacted by seasonality and demand and supply variability, the Group has a nonrecourse receivable purchasing agreement to sell certain receivables to an unrelated entity in exchange for cash. As at 30 September 2020, receivables totaling $115.9m (2019: $216.3m) had been sold under this arrangement. The receivables were derecognised upon sale as substantially all risks and rewards associated with the receivables passed to the purchaser. Trade and other payables Trade and other payables are stated at cost and represent liabilities for goods and services provided to the Group prior to the end of financial year, which are unpaid at the reporting date. To manage the cash flow conversion cycle on some products procured by the Group, and to ensure that suppliers receive payment in a time period that suits their business model, the Group offers some suppliers the opportunity to use supply chain financing. At 30 September 2020, the balance of the supply chain finance program was $296.4m (2019: $330.7m). The Group evaluates supplier arrangements against a number of indicators to assess if the payable continues to have the characteristics of a trade payable or should be classified as borrowings. These indicators include whether the payment terms exceed customary payment terms in the industry. At 30 September 2020, the Group has assessed that on balance the payables subject to supplier financing arrangements did not meet all of the characteristics to be classified as borrowings and accordingly the balances remained in trade and other payables. 93 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Shareholder returns For the year ended 30 September 2020 4. Trade and other assets and liabilities (continued) The graph below shows the Group’s earnings per share and dividend payout over the last five years. Company performance and dividends declared Key estimates and judgments The expected impairment loss calculation for trade receivables considers the impact of past events, and exercises judgment over the impact of current and future economic conditions when considering the recoverability of outstanding trade receivable balances at the reporting date. In establishing the expected impairment loss provision, the Group also assessed the impact of COVID-19 and its potential to affect customers’ repayment ability. Subsequent changes in economic and market conditions may result in the provision for impairment losses increasing or decreasing in future periods. Cents 25 20 15 10 5 0 5. Earnings per share Basic earnings per share including individually material items excluding individually material items Diluted earnings per share including individually material items excluding individually material items Weighted average number of ordinary shares used in the calculation of basic earnings per share Weighted average number of ordinary shares used in the calculation of diluted earnings per share 2016 2017 2018 2019 2020 Earnings per share (before individually material items) Earnings per share (including individually material items) Dividend declared in respect of the financial year 2020 Cents per share 2019 Cents per share 6. Dividends Dividends paid or declared by the Company in the year ended 30 September were: 7.1 10.9 7.1 10.8 9.5 9.5 9.4 9.4 Number Number 2020 $000 2019 $000 Ordinary shares Final dividend of 6.2 cents per share, 20 percent franked, paid 17 December 2018 Interim dividend of 1.3 cents per share, unfranked, paid 1 July 2019 – – 100,848 20,875 Final dividend of 3.4 cents per share, 30 percent franked, paid 8 January 2020(1) 54,591 – 1,734,434,874 1,610,122,059 Total ordinary share dividends 54,591 121,723 (1) The dividend paid in cash was $30.7m, and $23.9m (2019: nil) was satisfied by the issue of 7,658,312 ordinary shares (2019: nil) under the Company’s Dividend Reinvestment Plan. In November 2020, the Board has determined, as an exception to its dividend policy, not to pay a final dividend for FY20 in light of the ongoing uncertainty due to COVID-19 and IPL’s equity raising in May 2020. IPL’s dividend policy, which is to pay between 30% – 60% of NPAT, remains unchanged. 1,738,277,711 1,613,569,524 Reconciliation of earnings used in the calculation of basic and diluted earnings per share 2020 $mill 2019 $mill Profit attributable to ordinary shareholders 123.4 152.4 Individually material items after income tax 64.8 – Profit attributable to ordinary shareholders excluding individually material items 188.2 152.4 94 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Capital structure For the year ended 30 September 2020 6. Dividends (continued) Franking credits Franking credits available to shareholders of the Company were $8.9m (2019: $7.6m). Key accounting policies A provision for dividends payable is recognised in the reporting period in which the dividends are paid. The provision is for the total undistributed dividend amount, regardless of the extent to which the dividend will be paid in cash. 7. Capital management Capital is defined as the amount subscribed by shareholders to the Company’s ordinary shares and amounts advanced by debt providers to any Group entity. The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern while providing returns to shareholders and benefits to other stakeholders. The Group’s key strategies for maintenance of an optimal capital structure include: » Aiming to maintain an investment grade credit profile and the requisite financial metrics. » Securing access to diversified sources of debt funding with a spread of maturity dates and sufficient undrawn committed facility capacity. » Optimising over the long term, to the extent practicable, the Group’s Weighted Average Cost of Capital (WACC), while maintaining financial flexibility. In order to optimise its capital structure, the Group may undertake one or a combination of the following actions: » change the amount of dividends paid to shareholders and/ or offer a dividend reinvestment plan with or without a discount and/or with or without an underwriting facility when appropriate; » return capital or issue new shares to shareholders; » vary discretionary capital expenditure; » raise new debt funding or repay existing debt balances; and » draw down additional debt or sell non-core assets to reduce debt. Key financial metrics The Group uses a range of financial metrics to monitor the efficiency of its capital structure, including EBITDA interest cover and Net debt/ EBITDA before individually material items. Financial metric targets are maintained inside debt covenant restrictions. At 30 September the Group’s position in relation to these metrics was: Net debt/EBITDA (times) equal or less than 2.5 Interest cover (times) equal or more than 6.0 1.4 6.1 2.8 4.6 Target range 2020 2019 These ratios are impacted by a number of factors, including the level of cash retained from operating cash flows generated by the Group after paying all of its commitments (including dividends or other returns of capital), movements in foreign exchange rates, changes to market interest rates and the fair value of hedges economically hedging the Group’s net debt. Self-insurance The Group also self-insures for certain insurance risks under the Singapore Insurance Act. Under this Act, authorised general insurer, Coltivi Insurance Pte Limited (the Group’s self-insurance company), is required to maintain a minimum amount of capital. For the financial year ended 30 September 2020, Coltivi Insurance Pte Limited maintained capital in excess of the minimum requirements prescribed under this Act. Issued capital Ordinary shares Ordinary shares issued are classified as equity and are fully paid, have no par value and carry one vote per share and the right to dividends. Incremental costs directly attributable to the issue of new shares are recognised as a deduction from equity, net of any related income tax benefit. Issued capital as at 30 September 2020 amounted to $3,806.2m (1,942,225,029 ordinary shares). During the financial year ended 30 September 2020, the Company issued 7,658,312 ordinary shares ($23.9m) under its Dividend Reinvestment Plan in relation to the 2019 final dividend, at an average price per share of $3.118. The Company also issued 328,782,750 ordinary shares under the institutional placement and share purchase plan completed during the year which raised $645.5m in capital, net of related costs. 95 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORTNotes to the Consolidated Financial Statements: Capital structure For the year ended 30 September 2020 8. Net debt The Group’s net debt comprises the net of interest bearing liabilities, cash and cash equivalents, and the fair value of derivative instruments economically hedging the foreign exchange rate and interest rate exposures of the Group’s interest bearing liabilities at the reporting date. The Group’s net debt at 30 September is analysed as follows: Interest bearing liabilities Cash and cash equivalents Notes 2020 $mill 1,870.3 (554.6) Fair value of derivatives (17) (287.0) 2019 $mill 2,656.4 (576.4) (388.6) Net debt 1,028.7 1,691.4 At 30 September 2020, the Group’s Net debt/EBITDA before individually material items was 1.4 times (2019: 2.8 times). Refer note 7 for detail on the key financial metrics related to the Group’s capital structure. Interest bearing liabilities The Group’s interest bearing liabilities are unsecured and expose it to various market and liquidity risks. Details of these risks and their mitigation are included in note 17. The following table details the interest bearing liabilities of the Group at 30 September: Current Other loans Loans from joint ventures Fixed interest rate bonds Non-current Other loans Bank facilities Fixed interest rate bonds Total interest bearing liabilities 2020 $mill 4.8 16.4 – 21.2 5.2 – 1,843.9 1,849.1 1,870.3 2019 $mill 12.6 17.0 1,183.8 1,213.4 7.4 293.0 1,142.6 1,443.0 2,656.4 Fixed Interest Rate Bonds The Group has on issue the following fixed interest rate bonds: » USD500m of Notes in the US Private Placement market. USD250m has a fixed rate semi-annual coupon of 4.03 percent and matures in October 2028 and USD250m has a fixed rate semi-annual coupon of 4.13 percent and matures in October 2030. » HKD560m 7 year bond as a private placement in the Regulation S debt capital market. The bond has a fixed rate annual coupon of 4.13 percent and matures in February 2026. » AUD450m 7 year bond on issue in the Australian debt capital market. The bond has a fixed rate semi-annual coupon of 4.30 percent and matures in March 2026. » USD400m 10 year bond on issue in the Regulation S debt capital market. The bond has a fixed rate semi-annual coupon of 3.95 percent and matures in August 2027. Bank Facilities The Group holds the following committed bank facilities: » 3 year facility domiciled in Australia, entered into in August 2018 consisting of two tranches: Tranche A had a limit of AUD260m and Tranche B had a limit of USD220m. Following the equity raising during 2020, the facility limits were reduced resulting in the following new limits: Tranche A has a limit of AUD122m and Tranche B has a limit of USD109m. The facility had an initial maturity of August 2021 which was extended in August 2020 to October 2021. » 5 year facility of USD500m domiciled in the US, entered into in August 2015, with an initial maturity of August 2020. In 2017 the maturity was extended to October 2021. Tenor of interest bearing liabilities The Group’s average tenor of its drawn interest bearing liabilities at 30 September 2020 is 7.3 years (2019: 3.4 years) and the average tenor of its total debt facilities is 5.1 years (2019: 3.9 years) The table below includes detail on the movements in the Group’s interest bearing liabilities. Cash flow Non-cash changes 1 October 2019 $mill Proceeds from borrowings $mill Repayments of borrowings $mill Acquisition of Subsidiaries $mill Reclassification $mill Foreign exchange movement $mill Funding costs & fair value adjustments $mill 30 September 2020 $mill 30 September 2020 Current Other loans Loans from joint ventures Fixed interest rate bonds Non-current Other loans Bank facilities Fixed interest rate bonds Total liabilities from financing activities Derivatives held to hedge interest bearing liabilities 12.6 17.0 1,183.8 7.4 293.0 1,142.6 2,656.4 – 0.3 – – – 722.7 (13.8) – (1,172.6) – (301.2) – 723.0 (1,487.6) (388.6) – – Debt after hedging 2,267.8 723.0 (1,487.6) 96 1.0 – – 4.0 – – 5.0 – 5.0 5.8 – – (5.8) – – – – – (0.8) (0.9) (10.6) (0.4) 5.4 (59.4) (66.7) 136.5 69.8 – – (0.6) – 2.8 4.8 16.4 – 5.2 – 38.0 1,843.9 40.2 1,870.3 (34.9) (287.0) 5.3 1,583.3 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Capital structure For the year ended 30 September 2020 30 September 2019 Current Other loans Loans from joint ventures Fixed interest rate bonds Non-current Other loans Bank facilities Fixed interest rate bonds Total liabilities from financing activities Derivatives held to hedge interest bearing liabilities Debt after hedging Cash flow Non-cash changes 1 October 2018 $mill Proceeds from borrowings $mill Repayments of borrowings $mill Acquisition of Subsidiaries $mill Reclassification $mill Foreign exchange movement $mill Funding costs & fair value adjustments $mill 30 September 2019 $mill 1.3 11.8 199.8 4.5 499.6 1,657.8 2,374.8 (414.7) 1,960.1 2.5 4.3 – – – 546.9 553.7 – 553.7 (2.9) – (200.0) – (210.0) – (412.9) (16.8) (429.7) 8.3 – – 5.5 – – 13.8 – 13.8 2.9 – 1,109.3 (2.9) – (1,109.3) – – – 0.5 0.9 73.1 0.3 1.7 40.7 117.2 57.9 175.1 – – 12.6 17.0 1.6 1,183.8 – 1.7 6.5 9.8 7.4 293.0 1,142.6 2,656.4 (15.0) (388.6) (5.2) 2,267.8 Interest rate profile Cash and cash equivalents The table below summarises the Group’s interest rate profile of its interest bearing liabilities, net of hedging, at 30 September: Fixed interest rate financial instruments Variable interest rate financial instruments 2020 $mill 1,746.5 123.8 1,870.3 2019 $mill 2,266.8 389.6 2,656.4 Detail on the Group’s interest hedging profile and duration is included in note 17. Funding profile The graph below details the Group’s available funding limits, its maturity dates and drawn funds at 30 September 2020: AUDm 800 Available limits Drawn funds Cash and cash equivalents at 30 September 2020 were $554.6m (2019: $576.4m) and consisted of cash at bank of $105.1m (2019: $101.4m) and short term investments of $449.5m (2019: $475.0m). Key accounting policies Interest bearing liabilities Interest bearing liabilities are initially recognised at fair value less any directly attributable borrowing costs. Subsequent to initial recognition, interest bearing liabilities are measured at amortised cost using the effective interest method, with any difference between cost and redemption value recognised in the profit or loss over the period of the borrowings. The Group derecognises interest bearing liabilities when its obligation is discharged, cancelled or expires. Any gains and losses arising on derecognition are recognised in the profit or loss. Interest bearing liabilities are classified as current liabilities, except for those liabilities where the Group has an unconditional right to defer settlement for at least 12 months after the year end, which are classified as non-current. Cash and cash equivalents Bank facility AUD122m Bank facility USD109m Bank facility USD500m Reg HKD560m Bond AUD450m Reg S USD400m USPP Tranche 1 USD250m USPP Tranche 2 USD250m Cash includes cash at bank, cash on hand and short term investments, net of bank overdrafts. Oct 21 Oct 21 Oct 21 Feb 26 Mar 26 Aug 27 Oct 28 Oct 30 Borrowing costs The Group has undrawn financing facilities of $974.0m (2019: $1,029.1m) at 30 September 2020. Borrowing costs include interest on borrowings and the amortisation of premiums relating to borrowings. Borrowing costs are expensed as incurred, unless they relate to qualifying assets (refer note 9). In this instance, the borrowing costs are capitalised and depreciated over the asset’s expected useful life. 97 600 400 200 0 Maturity Date Incitec Pivot Limited Annual Report 2020FINANCIAL REPORTNotes to the Consolidated Financial Statements: Capital investment For the year ended 30 September 2020 9. Property, plant and equipment Notes Freehold land and buildings $mill Machinery, plant and equipment $mill Work in progress $mill Total $mill At 1 October 2018 Cost Accumulated depreciation Net book amount Year ended 30 September 2019 Opening net book amount Additions Subsidiaries acquired Disposals Depreciation Impairment of assets Reclassification from work in progress Foreign exchange movement Closing net book amount At 30 September 2019 Cost Accumulated depreciation Net book amount Year ended 30 September 2020 Opening net book amount Additions Subsidiaries acquired Disposals Depreciation Impairment of assets Reclassification from work in progress Foreign exchange movement Closing net book amount At 30 September 2020 Cost Accumulated depreciation Net book amount (2) (2) (2) (2) 969.2 (300.1) 669.1 669.1 9.5 2.0 (7.0) (29.7) (0.4) 56.4 18.1 718.0 1,047.2 (329.2) 718.0 718.0 9.5 1.8 (0.5) (29.8) (2.6) 8.4 (16.8) 688.0 1,040.7 (352.7) 688.0 4,934.2 (1,707.8) 3,226.4 3,226.4 3.9 2.4 (6.1) (248.2) (11.1) 205.0 102.9 3,275.2 5,248.7 (1,973.5) 3,275.2 3,275.2 – 9.0 (4.2) (260.9) (8.5) 247.7 (88.5) 3,169.8 5,335.2 (2,165.4) 3,169.8 108.8 – 108.8 108.8 344.7 – – – – (261.4) 4.7 196.8 196.8 – 196.8 196.8 283.3 0.4 (1.1) – (5.2) (256.1) (4.2) 213.9 213.9 – 213.9 6,012.2 (2,007.9) 4,004.3 4,004.3 358.1 4.4 (13.1) (277.9) (11.5) – 125.7 4,190.0 6,492.7 (2,302.7) 4,190.0 4,190.0 292.8 11.2 (5.8) (290.7) (16.3) – (109.5) 4,071.7 6,589.8 (2,518.1) 4,071.7 Key accounting policies Property, plant and equipment is measured at cost, less accumulated depreciation and any impairment losses. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Borrowing costs in relation to the funding of qualifying assets are capitalised and included in the cost of the asset. Qualifying assets are assets that take more than 12 months to get ready for their intended use or sale. Where funds are borrowed generally, a weighted average interest rate is used for the capitalisation of interest. Property, plant and equipment is subject to impairment testing. For details of impairment of assets, refer note 12. Depreciation Property, plant and equipment, other than freehold land, is depreciated on a straight-line basis. Freehold land is not depreciated. Depreciation rates are calculated to spread the cost of the asset (less any residual value), over its estimated useful life. Residual value is the estimated value of the asset at the end of its useful life. Estimated useful lives for each class of asset are as follows: » Buildings and improvements » Machinery, plant and equipment 20 – 50 years 3 – 50 years Residual values and useful lives are reviewed and adjusted where relevant when changes in circumstances impact the use of the asset. 98 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Capital investment For the year ended 30 September 2020 10. Leases AASB 16 Leases replaces AASB 117 (including associated guidance) and specifies how to recognise, measure and disclose leases. Under AASB 16, the present value of a lease commitment is shown as a liability on the balance sheet together with a right-of-use asset. The Group has adopted AASB 16 from 1 October 2019, using the modified retrospective approach. In accordance with this approach, the lease liability was calculated using the incremental borrowing rate at date of transition. The difference between the asset and liability (net of tax), was recognised as an adjustment to opening retained earnings on 1 October 2019 with no restatement to comparative information. The Group has elected to apply the following practical expedients available on transition: » Short term (12 months or less) or low value leases will continue to be expensed to the profit or loss; » Application of a single discount rate to a portfolio of leases with reasonably similar characteristics; and » The use of hindsight in determining the lease term. Adoption of AASB 16 resulted in an increase in lease liabilities of $243.7m; increase in right-of-use assets of $216.0m; increase in deferred tax asset of $6.0m; decrease in other liabilities of $7.4m and a decrease to retained earnings of $14.3m at 1 October 2019. The weighted average incremental borrowing rate applied to the Group’s lease liabilities at 1 October 2019 is 2.5 percent. The following table provides a reconciliation of the operating lease commitments disclosed in the comparative column in note 13 to the total lease liability recognised at 1 October 2019: Operating lease commitments as at 30 September 2019 Add: Cost of reasonably certain extension options (undiscounted) Less: Components excluded from lease liability (undiscounted) Less: Effect of discounting Total additional lease liabilities recognised at 1 October 2019 Total $mill 233.3 82.0 (14.3) (57.3) 243.7 The carrying value of right-of-use lease assets and lease liabilities is presented below: Right-of-use lease assets Land and buildings $mill Notes Machinery, plant and equipment $mill At 1 October 2019 Cost Accumulated depreciation Net book amount Year ended 30 September 2020 Opening net book amount Adoption of AASB 16 Leases Additions Disposals Depreciation Foreign exchange movement Closing net book amount (2) At 30 September 2020 Cost Accumulated depreciation Net book amount Lease liabilities – – – – 156.1 28.0 (0.4) (17.7) (0.9) 165.1 180.6 (15.5) 165.1 Carrying amount at 1 October 2019 Adoption of AASB 16 Leases Additions Disposals Payments made during the year Interest unwind Foreign exchange movement Carrying amount at 30 September 2020 Current Non-current Total $mill – – – – 216.0 50.4 (1.2) (40.7) (3.4) 221.1 – – – – 59.9 22.4 (0.8) (23.0) (2.5) 56.0 76.4 (20.4) 56.0 257.0 (35.9) 221.1 2020 $mill – 243.7 50.4 (0.7) (47.8) 5.9 (3.8) 247.7 41.5 206.2 The Group has lease contracts for various items of property, plant and equipment used within its operations and office premises. These assets have lease terms ranging between 1 to 48 years for land and buildings, and 1 to 8 years for machinery, plant and equipment. Refer to Note 17 for the maturity profile of the Group’s committed lease liabilities before discounting. Amounts recognised in the income statement Amounts recognised in the income statement relating to the Group’s lease arrangements are as follows: Depreciation Interest Total Notes (2) (2) 2020 $mill 40.7 5.9 46.6 99 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Capital investment For the year ended 30 September 2020 Key accounting policies All leases except for short term or low value leases are recognised on the balance sheet; as a right-of-use asset and a corresponding lease liability. Short term (12 months or less) and low value leases are recognised in the profit or loss as a lease expense. Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentive received. Right-of-use assets are depreciated on a straight line basis in the profit or loss over the lease term. Lease liabilities are recognised by the Group, at the commencement date of the lease and are measured at the present value of lease payments to be made over the lease term. Lease payments include fixed payments and variable lease payments that depend on an index or rate. Key estimates and judgments Extension options - The Group considers whether an option to extend a lease is reasonably certain on a lease-by-lease basis which considers the importance of the lease to the Group’s operations and its economic incentive to extend the lease. The lease term is reassessed upon the occurrence of a significant event or change in circumstance. Incremental borrowing rate – To calculate the present value of lease payments, the Group uses an incremental borrowing rate at the commencement date of the lease. The incremental borrowing rate reflects the duration and the financing characteristics of the lease. Where the interest rate implicit in the lease is not readily available, the Group uses its incremental borrowing rate applicable to a portfolio of leases with reasonably similar characteristics. 11. Intangibles At 1 October 2018 Cost Accumulated amortisation Net book amount Year ended 30 September 2019 Opening net book amount Additions Subsidiaries acquired Amortisation Foreign exchange movement Closing net book amount At 30 September 2019 Cost Accumulated amortisation Net book amount Year ended 30 September 2020 Opening net book amount Additions Subsidiaries acquired Impairment of assets Amortisation Foreign exchange movement Closing net book amount At 30 September 2020 Cost Accumulated amortisation Net book amount Notes (2) (2) (2) Software $mill 136.5 (90.0) 46.5 46.5 22.7 – (5.5) 3.9 67.6 166.2 (98.6) 67.6 67.6 11.7 – (41.0) (6.7) (3.8) 27.8 129.8 (102.0) 27.8 Goodwill $mill Patents, trademarks & customer contracts $mill Brand names $mill Total $mill 2,618.4 – 2,618.4 2,618.4 – 5.6 – 100.5 2,724.5 2,724.5 – 2,724.5 2,724.5 – 1.9 – – (88.3) 2,638.1 2,638.1 – 2,638.1 292.3 (211.9) 80.4 80.4 – 2.9 (18.2) 3.8 68.9 309.9 (241.0) 68.9 68.9 – 1.6 – (17.9) (2.3) 50.3 298.5 (248.2) 50.3 301.3 – 301.3 301.3 – – – 17.2 318.5 318.5 – 318.5 318.5 – – – – (15.0) 303.5 303.5 – 303.5 3,348.5 (301.9) 3,046.6 3,046.6 22.7 8.5 (23.7) 125.4 3,179.5 3,519.1 (339.6) 3,179.5 3,179.5 11.7 3.5 (41.0) (24.6) (109.4) 3,019.7 3,369.9 (350.2) 3,019.7 Allocation of indefinite life intangible assets The Group’s indefinite life intangible assets are allocated to groups of cash generating units (CGUs) as follows: 30 September 2020 Fertilisers APAC Dyno Nobel Asia Pacific (DNAP) Dyno Nobel Americas (DNA) Goodwill $mill Brand names $mill Total $mill 30 September 2019 Goodwill $mill Brand names $mill Total $mill 186.4 908.5 1,543.2 2,638.1 – 40.3 263.2 303.5 186.4 948.8 1,806.4 2,941.6 Incitec Pivot Fertilisers (IPF) Southern Cross International (SCI) Dyno Nobel Asia Pacific (DNAP) Dyno Nobel Americas (DNA) 183.8 2.7 908.5 1,629.5 2,724.5 – – 40.3 278.2 318.5 183.8 2.7 948.8 1,907.7 3,043.0 100 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Capital investment For the year ended 30 September 2020 Key accounting policies Key assumptions Goodwill Goodwill on acquisition of subsidiaries is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually, or more frequently if events or circumstances indicate that it might be impaired. Brand names Brand names acquired by the Group have indefinite useful lives and are measured at cost less accumulated impairment. They are tested annually for impairment, or more frequently if events or circumstances indicate that they might be impaired. Other intangible assets Other intangible assets acquired by the Group have finite lives. They are stated at cost less accumulated amortisation and impairment losses. Details of the key assumptions used in the recoverable amount calculations at 30 September are set out below: Key assumptions 1 – 5 years 2020 US$ 2019 US$ 330 to 441 233 to 311 2.46 to 2.95 252 to 315 0.73 to 0.74 DAP(1) 340 to 455 Urea(2) 275 to 332 Gas (DNA CGU)(3) 2.65 to 3.29 Ammonia(4) 310 to 389 AUD:USD(5) 0.68 to 0.73 (1) Di-Ammonium Phosphate price (FOB Tampa – USD per tonne). (2) Granular Urea price (FOB Middle East – USD per tonne). (3) Henry Hub natural gas price (USD per mmbtu). (4) Ammonia price (CFR Tampa – USD per tonne). (5) AUD:USD exchange rate. Terminal value (after 5 years) 2019 2020 US$ US$ 510 352 3.21 435 0.72 518 379 3.11 444 0.73 Subsequent expenditure Subsequent expenditure on intangible assets is capitalised only when it increases the future economic benefits of the asset to which it relates. All other such expenditure is expensed as incurred. For both DNAP and Fertilisers APAC, the gas price assumption for the period after the current gas contracts expire, is based on a long term gas production cost forecast of between $6.70 and $7.00 per gigajoule. Amortisation Goodwill and brand names are not amortised. For intangible assets with finite lives, amortisation is recognised in the profit or loss on a straight-line basis over their estimated useful life. The estimated useful lives of intangible assets in this category are as follows: » Software » Product trademarks » Patents » Customer contracts 13 – 15 years 10 – 17 years 3 – 10 years 4 – 10 years Useful lives are reviewed at each reporting date and adjusted where relevant. 12. Impairment of goodwill and non- current assets Impairment testing of goodwill The Group performs annual impairment testing as at 30 September for intangible assets with indefinite useful lives. More frequent reviews are performed of the relevant assets or asset groups where there are potential indicators of impairment. At 31 March 2020, the Group had identified the global economic impact of COVID-19 as a potential indicator of impairment. Accordingly, an impairment assessment was performed for all of the Group’s CGUs, resulting in no impairment of any CGU. COVID-19 remains a potential indicator of impairment and impairment testing at 30 September 2020 resulted in no impairment of any CGU, being Fertilisers APAC, DNAP and DNA. The previously reported IPF and SCI CGUs were combined into the Fertilisers APAC CGU which aligns to how the Group manages the business. The Group is actively managing the impacts and risks arising from COVID-19 on its people and operations and to date there are no known significant long term structural changes that affect the future cash flows of the CGUs. As a result, the recoverable amounts of IPL’s CGUs continued to exceed their carrying amounts at 30 September 2020. Sensitivity analyses of the recoverable amounts of the Group’s CGUs, considering change scenarios relating to key assumptions and considering the current economic environment are included below. Fertiliser prices, foreign exchange rates and natural gas prices are estimated by reference to external market publications and market analyst estimates, and are updated at each reporting date. Discount and growth rates The post-tax discount rate used in the calculations is 9% (2019: 9% for IPF and SCI) for the Fertilisers APAC CGU and 8.5% for the DNA and DNAP CGUs (2019: 8.5%). The rate reflects the underlying cost of capital adjusted for market and asset specific risks. The terminal value growth rate represents the forecast consumer price index (CPI) of 2.5% (2019: 2.5%) for all CGUs. Sensitivity analyses on the discount and growth rates, considering the current volatile market conditions, are provided below. Sensitivity analyses As part of its COVID-19 response plan, the Group has run several sensitivity analyses under different scenarios that could impact operations in the short term. These include but are not limited to manufacturing plant and distribution centre shut-downs, customer demand reduction and supply chain interruption scenarios. These short term scenarios currently have no significant structural impacts that affect the long term cash flows of the Group’s CGUs. In addition, the Group prepared sensitivity analyses of the recoverable amounts of the CGUs relating to key long term assumptions considering change scenarios in the current economic environment. The impact of these change scenarios on the recoverable amount of the CGUs at 30 September 2020 are included below: Post-tax discount rate Terminal value growth rate +0.5% -1.0% Natural gas price +AU$1 per gigajoule DNAP AU$mill AU$mill AU$mill Change in recoverable amount Impairment charge (184.0) (58.0) Post-tax discount rate +0.5% (280.2) (154.2) (57.2) – Ammonia price -US$50 per tonne Terminal value growth rate -1.0% Natural gas price +US$1 per mmbtu DNA US$mill US$mill US$mill US$mill Change in recoverable amount Impairment charge (327.1) – (462.5) – (472.3) – (301.6) – 101 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORTNotes to the Consolidated Financial Statements: Capital investment For the year ended 30 September 2020 Fertilisers APAC Change in recoverable amount Impairment charge Post-tax discount rate AUD:USD exchange rate Terminal value growth rate +0.5% AU$mill (152.6) – +5c AU$mill (489.8) – -1.0% AU$mill (214.0) – DAP Price -US$50 per tonne AU$mill (626.0) – Urea price -US$50 per tonne AU$mill (248.5) – Natural gas price +AUD1 per gigajoule AU$mill (206.0) – Each of the sensitivities above assumes that a specific assumption moves in isolation, while all other assumptions are held constant. A change in one of the aforementioned assumptions could be accompanied by a change in another assumption, which may increase or decrease the net impact. Impairment of other property, plant and equipment During the year ended 30 September 2020 property, plant and equipment was impaired by $16.3m (2019: $11.5m) as a result of the abandonment of certain assets following a strategic review of the Group’s operating assets. As at 31 March 2016, the Group recognised a non-cash impairment charge of $150.8m against the Gibson Island assets largely due to the impact of lower forecast fertiliser prices and higher cost of natural gas delivered to the Australian East Coast. In 2018, the Group announced that it had entered into a joint operation with Central Petroleum Limited for the development of acreage in Queensland that could deliver economic gas to the Gibson Island manufacturing facility in the future. In June 2019, the Group announced that it had entered into multiple arrangements for the supply of gas to allow continuation of manufacturing operations at its Gibson Island plant through to 31 December 2022. On 27 March 2020, the Group announced that the project for the development of gas acreage in Queensland has been temporarily paused at the request of its joint arrangement partner, Central Petroleum Limited considering the current disruptions in the oil and gas markets driven by COVID-19. However, IPL and Central Petroleum Limited remain committed to the project and look forward to recommencing the project as soon as possible. There was no significant impact on the assumptions and sensitivities used in the Fertilisers APAC impairment modelling as a result of the temporary postponement of the project. As the long term gas supply of the Gibson Island facility remains dependent on the outcome of the gas acreage development, or alternative economic gas supply, there was no reversal of the previously recognised impairment or any further impairment charge. Any potential reversal of the previous impairment or any further impairment charge will be dependent on the result of the drilling activities and other economic factors at that time. Impairment of other intangible assets During the year ended 30 September 2020 intangible assets were impaired by $41.0m (2019: nil) following a detailed review of the Group’s technology and software products and offerings given the continued enhancement of the Group’s technology portfolio. The review considered factors such as the timing of the commercial launch of certain technologies, software versions and products, items which were superseded as a result of significant enhancements and updated versions, current experience in regard to the commercial acceptance by customers and the future economic benefit attributable to the Group. Key accounting policies Impairment testing The Group performs annual impairment testing as at 30 September for intangible assets with indefinite useful lives. More frequent reviews are performed for indicators of impairment of all the Group’s assets, including operating assets. The identification of impairment indicators involves management judgment. Where an indicator of impairment is identified, a formal impairment assessment is performed. The Group’s annual impairment testing determines whether the recoverable amount of a CGU or group of CGUs, to which goodwill and/or indefinite life intangible assets are allocated, exceeds its carrying amount. A CGU is the smallest identifiable group of assets that generate cash flows largely independent of cash flows of other groups of assets. Goodwill and other indefinite life intangible assets are allocated to CGUs or groups of CGUs which are no larger than one of the Group’s reportable segments. Determining the recoverable amount The recoverable amount of an asset is determined as the higher of its fair value less cost of disposal and its value-in-use. Value-in- use is a term that means an asset’s value based on the expected future cash flows arising from its continued use in its current condition, discounted to present value. For discounting purposes, a post-tax rate is used that reflects current market assessments of the risks specific to the asset. The Group has prepared value-in-use models for the purpose of impairment testing as at 30 September 2020, using five year discounted cash flow models based on Board approved forecasts. Cash flows beyond the five year period are extrapolated using a terminal value growth rate. Impairment losses An impairment loss is recognised whenever the carrying amount of an asset (or its CGU) exceeds its recoverable amount. Impairment losses are recognised in the profit or loss. Impairment losses recognised in respect of CGUs are allocated against assets in the following order: » Firstly, against the carrying amount of any goodwill allocated to the CGU. » Secondly, against the carrying amount of any remaining assets in the CGU. An impairment loss recognised in a prior period for an asset (or its CGU) other than goodwill may be reversed only if there has been a change in the estimates used to determine the recoverable amount of the asset (or its CGU) since the last impairment loss was recognised. When this is the case, the carrying amount of the asset (or its CGU) is increased to its recoverable amount. 102 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORTNotes to the Consolidated Financial Statements: Capital investment For the year ended 30 September 2020 Key estimates and judgments The Group is required to make significant estimates and judgments in determining whether the carrying amount of its assets and/or CGUs has any indication of impairment, in particular in relation to: » key assumptions used in forecasting future cash flows; » discount rates applied to those cash flows; and the expected long term growth in cash flows. » Such estimates and judgments are subject to change as a result of changing economic, operational, environmental and weather conditions. Actual cash flows may therefore differ from forecasts and could result in changes in the recognition of impairment charges in future periods. 13. Commitments Capital expenditure commitments Capital expenditure contracted but not provided for or payable at 30 September: no later than one year Lease commitments no later than one year later than one, no later than five years later than five years 2020 $mill 68.9 68.9 2020 $mill – – – – 2019 $mill 72.5 72.5 2019 $mill 43.8 98.4 91.1 14. Equity accounted investments The Group has performed an analysis of the statements of financial position and the results of each of its joint ventures and associates (as listed in note 15) at 30 September 2020 and considers them to be individually immaterial to the Group. As a result, no individual disclosures are included for the Group’s investments in joint ventures and associates. Included in the table below is the summarised financial information of the Group’s joint ventures and associates at 30 September: Carrying amount of joint ventures and associates Carrying amount at 1 October Share of net profit Share in joint venture transferred to controlled entities Dividends received/receivable Foreign exchange movement 2020 $mill 357.7 32.3 (6.1) (30.9) (26.7) 2019 $mill 336.1 44.9 (5.7) (27.5) 9.9 Carrying amount at 30 September 326.3 357.7 Carrying amount of investments in: Joint ventures Associates Carrying amount of investments in joint ventures and associates 254.5 71.8 287.8 69.9 326.3 357.7 Transactions between subsidiaries of the Group and joint ventures and associates Sales of goods/services 233.3 Purchase of goods/services From 1 October 2019, the Group recognises lease commitments as lease liabilities under the requirements of AASB 16 Leases. Lease commitments as at 30 September 2019 have been reconciled to the opening lease liability adjustment. Refer to note 10 for details of the Group’s transition to AASB 16 Leases. Management fees/royalties Interest income Interest expense Dividend income 2020 $mill 391.1 (55.6) 27.3 0.3 (0.4) 30.9 2019 $mill 418.8 (43.8) 33.0 0.5 (0.4) 27.5 Joint ventures and associates transactions represent amounts that do not eliminate on consolidation. Outstanding balances arising from transactions with joint ventures and associates Amounts owing to related parties Amounts owing from related parties Loans with joint ventures and associates Loans to joint ventures and associates Loans from joint ventures and associates 2020 $mill 3.1 59.7 19.9 16.4 2019 $mill 6.3 53.6 19.9 17.0 Outstanding balances arising from transactions with joint ventures and associates are on standard market terms. 103 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Capital investment For the year ended 30 September 2020 15. Investments in subsidiaries, joint arrangements and associates The following list includes the Group’s principal operating subsidiaries and subsidiaries that are party to the Deed of Cross Guarantee dated 30 September 2008. Other than as noted below, there were no changes in the Group’s existing shareholdings in its subsidiaries, joint ventures and associates in the financial year. Ownership interest Name of entity Ownership interest Controlled Entities – operating (continued) Incorporated in Canada Dyno Nobel Canada Inc. Dyno Nobel Transportation Canada Inc. Dyno Nobel Nunavut Inc. Incitec Pivot Finance Canada Inc. Polar Explosives 2000 Inc. Dene Dyno Nobel (Polar) Inc. Dyno Nobel Waggaman Inc. Newfoundland Hard-Rok Inc. Dyno Nobel Labrador Inc. Dyno Nobel Baffin Island Inc. Incorporated in Hong Kong Incitec Pivot Holdings (Hong Kong) Limited Quantum Fertilisers Limited Incorporated in Singapore Coltivi Insurance Pte Limited Incorporated in Chile Dyno Nobel Explosivos Chile Limitada Incorporated in Peru Dyno Nobel Peru S.A. Incorporated in Mexico Dyno Nobel Mexico, S.A. de C.V. (3) Incorporated in Papua New Guinea DNX Papua New Guinea Ltd (3) Incorporated in Indonesia PT DNX Indonesia Incorporated in Turkey Nitromak DNX Kimya Sanayii A.S. Incorporated in Romania SC Romnitro Explosives Srl. Incorporated in Albania DNX Nitro Industrial Kimike Sh.p.k (1) A party to Deed of Cross Guarantee dated 30 September 2008. (2) The remaining 50 percent interest in Alpha Dyno Nobel Inc. was acquired in the 2020 financial year. (3) This entity has a 31 December financial year end. 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 99% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Subsidiaries Name of entity Company Incitec Pivot Limited (1) Controlled Entities – operating Incorporated in Australia Incitec Fertilizers Pty Limited (1) TOP Australia Pty Limited (1) Southern Cross Fertilisers Pty Ltd (1) Southern Cross International Pty Ltd (1) Incitec Pivot LTI Plan Company Pty Limited Incitec Pivot Explosives Holdings Pty Limited (1) Queensland Operations Pty Limited Incitec Pivot Investments 1 Pty Ltd (1) Incitec Pivot Investments 2 Pty Ltd Incitec Pivot US Holdings Pty Ltd Incitec Pivot Finance Australia Pty Ltd (1) Dyno Nobel Pty Limited Dyno Nobel Europe Pty Ltd Dyno Nobel Management Pty Limited Industrial Investments Australia Finance Pty Limited Dyno Nobel Asia Pacific Pty Limited (1) Dampier Nitrogen Pty Ltd DNX Australia Pty Ltd (1) Dyno Nobel Moranbah Pty Ltd (1) Dyno Nobel Moura Pty Limited (1) Incited Pivot Queensland Gas Pty Ltd Incorporated in USA Incitec Pivot US Investments Incitec Pivot Management LLC Incitec Pivot Finance LLC Dyno Nobel Australia LLC The Dyno Nobel SPS LLC Dyno Nobel Holdings IV LLC Dyno Nobel Holdings USA III, Inc. Dyno Nobel Holdings USA II Dyno Nobel Holdings USA II, Inc. Dyno Nobel Holdings USA, Inc. Dyno Nobel Inc. Dyno Nobel Transportation Inc. Simsbury Hopmeadow Street LLC Dyno Nobel Holdings V LLC Tradestar Corporation CMMPM, LLC CMMPM Holdings L.P. Dyno Nobel Louisiana Ammonia, LLC Dyno Nobel Labs, LLC Midland Powder LLC Mine Equipment & Mill Supply Company Controlled Explosives Inc. Drisk Insurance Inc. Boren Explosives Co., Inc. Alpha Dyno Nobel Inc. (2) 104 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Capital investment For the year ended 30 September 2020 Joint arrangements and associates Name of entity Associates Incorporated in USA Maine Drilling and Blasting Group Independent Explosives Incorporated in Canada Labrador Maskuau Ashini Ltd Innu Namesu Ltd Joint operations Ownership interest 49% 49% 49% 49% IPL has a 50% interest in an unincorporated joint operation with Central Petroleum Limited for the development of gas acreage in Queensland, Australia, which commenced in the 2018 financial year. (1) Due to the contractual and decision making arrangement between the shareholders of the entities, despite the legal ownership exceeding 50 percent, this entity is not considered to be a subsidiary. (2) Due to legal requirements in the Canadian Northwest Territories, the Group cannot own more than 49 percent of shares in Qaaqtuq Dyno Nobel Inc. However, under the joint venture agreement, the Group is entitled to 75 percent of the profit of Qaaqtuq Dyno Nobel Inc. (3) Due to legal requirements in the Canadian Northwest Territories, the Group cannot own more than 49 percent of shares in Dene Dyno Nobel (DWEI) Inc. However, under the joint venture agreement, the Group is entitled to 95 percent of the profit of Dene Dyno Nobel (DWEI) Inc. Name of entity Joint ventures Incorporated in USA Buckley Powder Co. (1) IRECO Midwest Inc. Wampum Hardware Co. Western Explosives Systems Company Warex Corporation Warex LLC Warex Transportation LLC Vedco Holdings, Inc. Virginia Explosives & Drilling Company Inc. Austin Sales LLC Virginia Drilling Company, LLC Incorporated in Canada Quantum Explosives Inc. Dene Dyno Nobel Inc. Qaaqtuq Dyno Nobel Inc. (2) Dene Dyno Nobel (DWEI) Inc. (3) Incorporated in Australia Queensland Nitrates Pty Ltd Queensland Nitrates Management Pty Ltd Incorporated in South Africa DetNet South Africa (Pty) Ltd Sasol Dyno Nobel (Pty) Ltd Incorporated in Mexico DNEX Mexico, S. De R.L. de C.V. Explosivos De La Region Lagunera, S.A. de C.V. Explosivos De La Region, Central, S.A. de C.V. Nitro Explosivos de Ciudad Guzman, S.A. de C.V. Explosivos Y Servicos Para LA Construccion, S.A. de C.V. Ownership interest 51% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 49% 49% 49% 50% 50% 50% 50% 49% 49% 49% 49% 49% 105 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORTNotes to the Consolidated Financial Statements: Risk management For the year ended 30 September 2020 16. Provisions and contingencies Provisions at 30 September 2020 are analysed as follows: 30 September 2020 Carrying amount at 1 October 2019 Provisions made during the year Provisions written back during the year Payments made during the year Interest unwind Foreign exchange movement Carrying amount at 30 September 2020 Current Non-current Employee entitlements $mill Restructuring and rationalisation $mill Environmental $mill Asset retirement obligations $mill Legal and other $mill Total provisions $mill 58.9 8.5 (0.6) (4.4) 0.6 (0.1) 62.9 58.2 4.7 6.9 29.3 – (8.0) – (0.1) 28.1 23.2 4.9 45.9 1.9 – (6.6) 1.4 (1.5) 41.1 16.1 25.0 82.0 9.4 – (1.4) 3.7 (1.2) 92.5 1.6 90.9 8.9 2.4 – (8.1) – – 3.2 3.2 – 202.6 51.5 (0.6) (28.5) 5.7 (2.9) 227.8 102.3 125.5 Key accounting policies Legal and other Provisions are measured at management’s estimate of the expenditure required to settle the obligation. This estimate is based on a “present value” calculation, which involves the application of a discount rate to the expected future cash flows associated with settlement. The discount rate takes into account factors such as risks specific to the liability and the time value of money. There are a number of legal claims and other exposures, including claims for damages arising from products and services supplied by the Group, that arise from the ordinary course of business. A provision is only made where it is probable that a payment or restitution will be required and the costs involved can be reliably estimated. Employee entitlements Key estimates and judgments Provisions are made for liabilities to employees for annual leave, long service leave and other employee entitlements. Where the payment to employees is expected to take place in 12 months time or later, a present value calculation is performed. In this instance, the corporate bond rate is used to discount the liability to its present value. Provisions are based on the Group’s estimate of the timing and value of outflows of resources required to settle or satisfy commitments and liabilities known to the Group at the reporting date. Restructuring and rationalisation Contingencies Provisions for restructuring or rationalisation are only recognised when a detailed plan has been approved and the restructuring or rationalisation has either commenced or been publicly announced. The following contingent liabilities are considered unlikely. However the directors consider they should be disclosed: » Under the terms of the ASIC Legislative Instrument, ASIC Environmental Provisions relating to the remediation of soil, groundwater, untreated waste and other environmental contamination are made when the Group has an obligation to carry out the clean-up operation as a result of a past event. In addition, a provision will only be made where it is possible to reliably estimate the costs involved. Asset retirement In certain circumstances, the Group has an obligation to dismantle and remove an asset and to restore the site on which it is located. The present value of the estimated costs of this process is recognised as part of the asset that is depreciated and also as a provision. At each reporting date, the provision is remeasured in line with changes in discount rates and the timing and amount of future estimated cash flows. Any changes in the provision are added to or deducted from the related asset, other than changes associated with the passage of time. This is recognised as a borrowing cost in the profit or loss. Corporations (Wholly-owned Companies) Instrument 2016/785, issued by the Australian Securities and Investments Commission dated 17 December 2016, which relieved certain wholly-owned subsidiaries from the requirement to prepare audited financial statements, IPL and certain wholly-owned subsidiaries (identified in note 15) have entered into an approved deed for the cross guarantee of liabilities. No additional liabilities subject to the Deed of Cross Guarantee at 30 September 2020 are expected to arise to IPL or the relevant subsidiaries. » The Group is regularly subject to investigations and audit activities by the revenue authorities of jurisdictions in which the Group operates. The outcome of these investigations and audits depends upon several factors which may result in further tax payments or refunds of tax payments already made by the Group over and above existing provisions. Refer to note 3 for further details. » Contingent liabilities arise in the normal course of business and include a number of legal claims, environmental cleanup requirements and bank guarantees. The Directors are of the opinion that no additional provisions are required in respect of these matters, as it is either not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement. 106 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Risk management For the year ended 30 September 2020 17. Financial risk management The Group is exposed to financial risks including liquidity risk, market risk and credit risk. This note explains the Group’s financial risk exposures and its objectives, policies and processes for measuring and managing these risks. The Board of Directors (the Board) has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board established the Audit and Risk Management Committee (ARMC) which is responsible for, amongst other things, the monitoring of the Group’s risk management plans. The ARMC is assisted in its oversight role by the Group’s Risk Management function. The Risk Management function performs reviews of the Group’s risk management controls and procedures, the results of which are reported to the ARMC. The ARMC reports regularly to the Board on its activities. The Group’s financial risk management framework includes policies to identify, analyse and manage the Group’s financial risks. These policies set appropriate financial risk limits and controls, identify permitted derivative instruments and provide guidance on how to monitor and report financial risks and adherence to set limits. Financial risk management policies, procedures and systems are reviewed regularly to ensure they remain appropriate given changes in market conditions and/or the Group’s activities. Financial risks Liquidity risk: The risk that the Group is not able to refinance its debt obligations or meet other cash outflow obligations when required. Source of risk capital requirements. Exposure to liquidity risk derives from the Group’s operations and from the external interest bearing liabilities that it holds. Risk mitigation Liquidity risk is managed by ensuring there are sufficient committed funding facilities available to meet the Group’s financial commitments in a timely manner. The Group’s forecast liquidity requirements are continually reassessed based on regular forecasting of earnings and Outstanding financial instruments This includes stress testing of critical assumptions such as input costs, sales prices, production volumes, exchange rates and capital expenditure. The Group aims to hold a minimum liquidity buffer of at least $500m in undrawn non-current committed funding to meet any unforeseen cash flow requirements. Details on the Group’s committed finance facilities, including the maturity dates of these facilities, are included in note 8. The Group’s exposures to liquidity risk are set out in the tables below: Contractual cash flows(1) $mill 0 – 12 months $mill 1 – 5 years $mill more than 5 years $mill 30 September 2020 Non-derivative financial liabilities 30 September 2019 Non-derivative financial liabilities Contractual cash flows(1) $mill 0 – 12 months $mill 1 – 5 years $mill more than 5 years $mill Interest bearing liabilities 1,870.3 21.2 4.0 1,845.1 Interest bearing liabilities 2,656.4 1,213.4 300.4 1,142.6 Interest payments 541.4 55.3 299.3 186.8 Interest payments 357.5 57.9 191.7 107.9 Trade and other payables 1,065.6 1,049.4 – Trade and other payables 1,169.4 1,152.0 17.4 235.4 134.2 41.1 43.5 16.2 95.8 10.0 98.5 80.7 External lease liabilities – – – Bank guarantees 146.4 44.3 21.4 80.7 – – Forward exchange contracts 61.1 61.1 Lease liabilities Bank guarantees Total non-derivative cash outflows Derivative financial (assets)/liabilities Cross currency interest rate swaps Interest rate swaps Interest rate options Commodity swaps Commodity options Net derivative cash outflows 3,846.9 1,210.5 425.3 2,211.1 Total non-derivative cash outflows Derivative financial (assets)/liabilities – – – Forward exchange contracts (1.2) Cross currency interest rate swaps 18.0 (14.2) Interest rate swaps (46.8) 13.4 (48.0) 17.2 – (3.2) 0.1 – – (3.1) (0.1) 0.1 – – – – 27.2 24.7 17.9 (15.4) Interest rate options Commodity swaps Commodity options Net derivative cash outflows 4,329.7 2,467.6 530.9 1,331.2 (5.6) 37.1 6.0 23.0 0.7 – (5.6) 46.7 – – (9.5) (0.1) 8.0 – 0.7 – 7.6 23.0 – – (9.6) – – – 61.2 49.8 21.1 (9.7) (1) Contractual cash flows are not discounted, and are based on foreign exchange rates at year end. Any subsequent movements in foreign exchange rates could impact the actual cash flows on settlement of these assets and liabilities. 107 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Risk management For the year ended 30 September 2020 Market risk: The risk that changes in foreign exchange rates, interest rates and commodity prices will affect the Group’s earnings, cash flows and the carrying values of its financial instruments. Foreign exchange risk Source of risk Risk mitigation The Group is exposed to changes in foreign exchange rates (primarily in USD) on the following transactions and balances: » Sales and purchases » » Trade receivables and trade payables Interest bearing liabilities The Group is also exposed to foreign exchange movements (primarily in USD) on the translation of the earnings, assets and liabilities of its foreign operations. Outstanding financial instruments and sensitivity analysis Foreign exchange exposure to sales and purchases is managed by entering into formal hedging arrangements. The Group hedges both specific transactions and net exposures by entering into foreign exchange rate derivative contracts. The translation risk of USD denominated interest bearing liabilities and net investments in foreign operations and their earnings is also managed by entering into foreign exchange rate derivative financial instruments. The table below summarises the Group’s exposure to movements in the AUD:USD exchange rate and the derivative financial instruments that are in place to hedge these exposures at 30 September: 2020 AUD:USD USD mill 2019 AUD:USD USD mill 5.8 41.9 (378.5) (253.9) (1,200.0) (1,400.0) (1,572.7) (1,612.0) – (18.5) 352.3 242.9 1,200.0 – 1,552.3 – 800.0 1,024.4 (20.4) (587.6) 2020 AUD:USD USD mill 2019 AUD:USD USD mill (138.8) (300.0) (438.8) 2020 AUD:USD USD mill 70.4 – 70.4 2019 AUD:USD USD mill 2,520.4 2,520.4 2,006.4 2,006.4 (373.0) (930.0) (1,303.0) (1,244.4) 271.4 (973.0) 1,217.4 1,033.4 Foreign exchange options Net contract amounts mill 2020 Strike(1) 2020 Net contract amounts mill 2019 Strike(1) 2019 Contracts maturing between 1 and 5 years Sold AUD Call USD 60 Bought AUD Call Sold AUD Put (1) AUD:USD foreign exchange rate USD 300 USD 160 Foreign exchange rates 0.78 0.74 0.71 – – – – – – The AUD:USD foreign exchange rates used by the Group to translate its foreign denominated earnings, assets and liabilities are set out below: 30 September foreign exchange rate Average foreign exchange rate for the year 2020 AUD:USD 0.7148 0.6783 2019 AUD:USD 0.6762 0.7037 Foreign exchange rate sensitivity on outstanding financial instruments The table below shows the impact of a 1 cent movement (net of hedging) in the AUD:USD exchange rate on the Group’s profit and equity before tax in relation to foreign denominated assets and liabilities at 30 September: + 1c AUD:USD AUD mill 2020 - 1c AUD:USD AUD mill 2020 + 1c AUD:USD AUD mill 2019 - 1c AUD:USD AUD mill 2019 Foreign exchange sensitivity – (net of hedging) Trade and other receivables and payables – (profit or loss) Hedge of forecast transactions – (equity) Interest bearing liabilities (equity) Investments in foreign operations – (equity) (0.4) 0.4 (0.3) 8.5 (8.7) (1.5) 0.3 1.6 – – 12.9 (13.3) (23.5) 24.2 (22.3) 22.9 Transactional exposures Trade and other receivables Trade and other payables Interest bearing liabilities Gross exposure (before hedging) Hedge of transactional exposures Trade and other receivables Forward exchange contracts Trade and other payables Forward exchange contracts Interest bearing liabilities Forward exchange contracts Cross currency interest rate swaps Total hedge contract values Net exposure (after hedging) Hedge of forecast sales and purchases Forward exchange contracts Foreign exchange options Total hedge contract values Translational exposures Net investment in foreign operations Gross exposure (before hedging) Hedge of translational exposures Cross currency interest rate swaps Forward exchange contracts Total hedge contract values Net exposure (after hedging) 108 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Risk management For the year ended 30 September 2020 The fertiliser sales sensitivity calculation is based on actual tonnes manufactured by the Australian fertiliser plants and sold during the year, the average AUD:USD exchange rate for the year, and the average USD fertiliser price. The North American earnings translation sensitivity calculation is based on the earnings before interest and tax from the North American business for the year and the average AUD:USD exchange rate for the year. Sensitivity to foreign exchange rate movements during the year (unhedged) The table below shows the impact of a 1 cent movement in the AUD:USD foreign exchange rate on the Group’s profit before tax, in relation to sales and earnings during the year that were denominated in USD. + 1c AUD:USD AUD mill 2020 - 1c AUD:USD AUD mill 2020 + 1c AUD:USD AUD mill 2019 - 1c AUD:USD AUD mill 2019 (7.8) (3.3) 8.1 3.4 (6.3) (3.3) 6.4 3.3 USD Fertiliser sales from Australian plants North American USD earnings Market risk Interest rate risk Source of risk Risk mitigation Exposure to interest rate risk is a result of the effect of changes in interest rates on the Group’s outstanding interest bearing liabilities and derivative instruments. The exposure to interest rate risk is mitigated by maintaining a mix of fixed and variable interest rate borrowings and by entering into interest rate derivative instruments. Outstanding financial instruments and sensitivity analysis The tables below include the Group’s derivative contracts that are exposed to changes in interest rates at 30 September: Average pay/(rec) fixed rate LIBOR Average pay/(rec) fixed rate BBSW Average pay/(rec) fixed rate HIBOR Duration (years) Net contract amounts mill Interest rate options Net contract amounts USD mill 2020 Strike(1) 2020 Duration (years) Net contract amounts USD mill 2019 Strike(1) 2019 Duration (years) 0.2 USD 500 Contracts maturing later than 5 years – Sold cap – 2.0 AUD 200 Bought cap 2.7 USD 600 Sold floor 1.6 USD 600 Bought floor – – – – – – – – – – 350 3.75% 350 2.58% 350 2.58% 350 0.01% 0.2 0.2 0.2 0.2 Interest rate swaps 2020 Less than 1 year 1 to 5 years 1 to 5 years 1 to 5 years Later than 5 years Later than 5 years 2019 Less than 1 year Less than 1 year Less than 1 year 1 to 5 years 1 to 5 years Later than 5 years Later than 5 years 3.58% – – (0.20%) 3.14% (1.70%) (2.02%) – 3.54% (3.11%) – – – – – – (4.30%) 2.51% (1.77%) (2.02%) – – – – – – – – – (4.13%) – – – – – – (4.13%) 6.2 USD 200 5.4 HKD 560 0.2 0.2 1.0 1.8 2.8 6.2 6.4 USD 400 USD 300 AUD 250 USD 900 USD 500 USD 200 HKD 560 Interest rate options Net contract amounts USD mill 2020 Strike(1) 2020 Duration (years) Net contract amounts USD mill 2019 Strike(1) 2019 Duration (years) Contracts maturing between 1 and 5 years Sold cap – – Bought cap Sold floor Bought floor (1) LIBOR – – – – – – – – – – 350 3.75% 350 2.58% 350 2.58% 350 0.01% 3.8 3.8 3.8 3.8 (1) LIBOR Interest rate sensitivity on outstanding financial instruments The following table shows the sensitivity of the Group’s profit before tax to a 1 per cent change in interest rates. The sensitivity is calculated based on the Group’s interest bearing liabilities and derivative financial instruments that are exposed to interest rate movements and the AUD:USD exchange rate at 30 September: Interest rate sensitivity LIBOR BBSW + 1% AUD mill 2020 - 1% AUD mill 2020 + 1% AUD mill 2019 - 1% AUD mill 2019 (0.7) 0.1 0.7 (0.1) (2.6) (1.3) 2.6 1.3 The sensitivity above is also representative of the Group’s interest rate exposures during the year. 109 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Risk management For the year ended 30 September 2020 Market risk Commodity price risk Source of risk Risk mitigation Exposure to changes in commodity prices is by virtue of the products that the Group sells and its manufacturing operations, and can be categorised into six main commodities, namely: Ammonia, Ammonium Nitrate, Ammonium Phosphate, Urea, Oil and Natural Gas. Where possible, commodity price risk exposure is managed by entering into long term contracts with customers (i.e Ammonium Nitrate and Ammonia) or derivative contracts for input cost (i.e US natural gas). However, in some instances price risk exposure cannot be economically mitigated by either contractual arrangements or derivative contracts by virtue of the products that the Group sells. Outstanding financial instruments and sensitivity analysis The table below includes the Group’s derivative contracts that are exposed to changes in natural gas and oil prices at 30 September: Total volume (MMBTU)(1) 2020 Price/ Strike USD(2) 2020 Total volume (MMBTU)(1) 2019 Price/ Strike USD(2) 2019 Natural gas Contracts maturing within 1 year Natural gas swaps fixed payer Natural gas options 961,800 USD 2.54 1,307,800 2.58 Bought Call 5,150,000 USD 3.44 Sold Put 5,150,000 USD 2.56 – – – – Contracts maturing between 1 and 5 years Natural gas swaps fixed payer 680,000 USD 2.53 1,421,200 2.53 (1) Million Metric British Thermal Units (2) Nymex Henry Hub gas price Oil(2) Total volume (barrels) 2020 Price USD 2020 Total volume (barrels) 2019 Price USD(1) 2019 Contracts maturing within 1 year Oil swaps fixed payer – – 100,035 58.48 Sensitivity to natural gas price movements during the year The table below shows the sensitivity of the Group’s profit before tax to a change of US$1 per MMBTU in the US Henry Hub natural gas price. The sensitivity is based on the average natural gas price, the average AUD:USD exchange rate (excluding the impact of hedging) and the current annual natural gas consumption of the Group’s manufacturing operations in the Americas that are exposed to changes in natural gas prices: Natural gas price sensitivity + US$1 per 1 MMBTU AUD mill 2020 - US$1 per 1 MMBTU AUD mill 2020 + US$1 per 1 MMBTU AUD mill 2019 - US$1 per 1 MMBTU AUD mill 2019 Henry Hub USD (31.3) 31.3 (32.2) 32.2 Sensitivity to fertiliser price and ammonia movements during the year The table below shows the sensitivity of the Group’s profit before tax to a US$10 per tonne change in Ammonium Phosphates, Urea and Ammonia prices. The sensitivity is based on actual tonnes manufactured and sold by the Group that is sensitive to commodity price changes and the average AUD:USD exchange rate (excluding the impact of hedging) for the year: + US$10 per tonne AUD mill - US$10 per tonne AUD mill 4.1 14.4 1.8 8.9 3.5 9.6 2.7 7.0 (4.1) (14.4) (1.8) (8.9) (3.5) (9.6) (2.7) (7.0) (1) Oil-Brent (DTD)-Platts Marketwire (2) The Group had a gas supply agreement in Australia in 2019 with pricing referenced to the USD Brent oil price. As a result, the Group held Brent oil fixed price swaps to eliminate the exposure to changes in the Brent oil price. Price sensitivity 2020 Granular Urea (FOB Middle East) Natural gas price sensitivity on outstanding financial instruments The table below shows the sensitivity of the Group’s equity before tax to a change of US$1 per MMBTU in the US Henry Hub natural gas price. The sensitivity is based on natural gas derivative contracts held by the Group at 30 September. Gains or losses recognised in equity will be reclassified to the profit or loss as the underlying forecast transaction occurs: Natural gas price sensitivity + US$1 per 1 MMBTU AUD mill 2020 - US$1 per 1 MMBTU AUD mill 2020 + US$1 per 1 MMBTU AUD mill 2019 - US$1 per 1 MMBTU AUD mill 2019 Henry Hub USD 7.0 (7.0) 4.0 (4.0) DAP/MAP (FOB Tampa) Urea (FOB NOLA) Ammonia (FOB Tampa) 2019 Granular Urea (FOB Middle East) DAP/MAP (FOB Tampa) Urea (FOB NOLA) Ammonia (FOB Tampa) 110 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORTNotes to the Consolidated Financial Statements: Risk management For the year ended 30 September 2020 Included in the table below are details of the Group’s derivative instruments at 30 September 2020, classified by hedge accounting type and market risk category: 30 September 2020 Cash flow hedges Foreign exchange risk on forecast sales & purchases Forward exchange contracts Foreign exchange options Discontinued hedge(3) Commodity price risk on forecast purchases Commodity swaps Commodity options Discontinued hedge(3) Interest rate risk on highly probable debt Interest rate swaps Interest rate options Cross currency interest rate swaps Discontinued hedge(3) Total cash flow hedges Net investment hedges Foreign exchange risk on foreign operation Cross currency interest rate swaps Forward exchange contracts Discontinued hedge(3) Total net investment hedges Fair value hedges Foreign exchange risk on USD and HKD borrowings(4) Cross currency interest rate swaps Forward exchange contracts Interest rate risk on fixed USD, HKD and AUD bonds(5) Interest rate swaps Cross currency interest rate swaps Discontinued hedge Total fair value hedges Held for trading(6) Forward exchange contracts Cross currency interest rate swaps Total held for trading Offsetting contracts(1) Equity instruments Total net Balance at 30 September 2020 During the period Carrying amount of hedging instrument asset(1) Carrying amount of hedging instrument liability(1) Fair value hedge adjustment of hedged item(8) Balance of gains/ (losses) in reserves before tax Gains/ (losses) recognised in reserves(2) Reclassification of (gains)/ losses from reserves to profit or loss(2,7) Note 31.8 1.1 – 4.3 0.5 – 0.1 – 0.1 – (54.8) – – (0.9) – – (69.5) – – – 37.9 (125.2) 37.9 75.3 – – (339.0) – 113.2 (339.0) – – – – – – – – – – – – – – – (1.6) (0.3) (2.7) 3.2 0.4 (4.4) (19.8) – 0.1 (63.7) (88.8) (1.8) (0.3) 16.3 3.9 0.4 (1.0) 2.4 19.2 (0.4) (43.0) (4.3) 73.3 90.5 (771.8) (608.0) 73.3 90.5 (38.3) 125.5 10.8 300.9 51.9 0.1 – (1.4) (75.3) – (245.5) – – – (45.7) – 1.0 (8) 363.7 (76.7) (290.2) 0.1 0.1 0.2 (0.1) – (0.1) (382.1) 382.1 3.0 – – – – – – – – – – – – – – – – (17.0) – – – – – – – – – – – – – (20.7) – – 0.2 – – – 1.5 (19.0) – – – – – – – – – – – – – – – 135.9 (158.9) (290.2) (713.8) 121.2 (19.0) (1) Balances are included in other financial assets/liabilities in the Statement of Financial Position. Financial assets and financial liabilities that are subject to enforceable master netting arrangements are offset in the Statement of Financial Position. (2) Gains or losses recognised in the reserves will be reclassified to the same line item in the profit or loss as the underlying hedged item when the underlying forecast transaction occurs. (3) Gains or losses on discontinued hedges that were in cash flow hedge or net investment hedge relationships remain in the reserves until the underlying transactions occur or upon disposal of the underlying net investment. Any changes in the market value of the discontinued hedges are recognised in the profit or loss from discontinuation. (4) The total fair value of derivatives hedging the Group’s interest bearing liabilities is $287.0m. The derivatives hedging the foreign currency exposure of the Group’s USD and HKD borrowings have a contract value of USD1,200m and HKD560m, and are economic hedges of an equivalent amount of the Group’s USD and HKD borrowings. (5) Interest rate swap contracts effectively convert USD500m, HKD560m and AUD450m of the Group’s fixed interest rate borrowings to floating interest rates. The fair value hedge adjustment of a hedged item where the hedging instrument is discontinued remains in the carrying amount of the hedged item and is amortised to the profit or loss over the life of the hedged item. (6) Derivatives which are classified as held for trading are in economic hedge relationships that do not qualify for hedge accounting. These hedges are effective economic hedges or offsetting hedges based on contractual amounts and cash flows over the life of the underlying item. (7) At 30 September 2020, there were no gains/losses that were transferred from reserves to profit or loss in relation to ineffective hedges. (8) Fair value adjustment of hedged items includes the revaluation of debt that was refinanced during the year. 111 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Risk management For the year ended 30 September 2020 Included in the table below are details of the Group’s derivative instruments at 30 September 2019, classified by hedge accounting type and market risk category: Balance at 30 September 2019 During the period Carrying amount of hedging instrument asset(1) Carrying amount of hedging instrument liability(1) Fair value hedge adjustment of hedged item Balance of gains/ (losses) in reserves before tax Gains/ (losses) recognised in reserves(2) Reclassification of (gains)/ losses from reserves to profit or loss(2,7) Note 30 September 2019 Cash flow hedges Foreign exchange risk on forecast sales & purchases Forward exchange contracts Discontinued hedge(3) Commodity price risk on forecast purchases Commodity swaps Discontinued hedge(3) Interest rate risk on highly probable debt Interest rate swaps Interest rate options Cross currency interest rate swaps Discontinued hedge(3) Total cash flow hedges Net investment hedges Foreign exchange risk on foreign operation Cross currency interest rate swaps Forward exchange contracts Discontinued hedge(3) Total net investment hedges Fair value hedges Foreign exchange risk on USD and HKD borrowings(4) Cross currency interest rate swaps Interest rate risk on fixed USD, HKD and AUD bonds(5) Interest rate swaps Cross currency interest rate swaps Discontinued hedge Total fair value hedges Held for trading(6) Forward exchange contracts Cross currency interest rate swaps Total held for trading Offsetting contracts(1) Equity instruments Total net 0.2 – 0.2 – – – 0.5 – 0.9 – 4.4 – 4.4 371.2 15.6 1.8 – 388.6 0.5 0.1 0.6 (0.1) – (0.9) – (22.4) (24.1) – – (47.5) (408.2) (0.2) – (408.4) – – – – – (0.1) – (0.1) (371.7) 371.7 (8) – 22.8 – – – – – – – – – – – – – – (369.2) (8.9) (1.9) 2.8 (377.2) – – – – – 0.2 1.7 (0.7) (3.6) (22.2) (19.2) 0.5 (22.2) (65.5) (0.8) 8.8 (12.2) 11.8 (34.0) (25.9) 0.5 (20.7) (72.5) – (10.0) – (9.8) – – – 1.8 (18.0) (405.5) (114.2) 4.1 (332.1) (733.5) 4.1 2.3 (107.8) – – – – – – – – – – – – – – – – – – – (17.0) (0.1) – – – – – – – – – – – – – – – (84.3) (377.2) (816.0) (180.4) (18.0) (1) Balances are included in other financial assets/liabilities in the Statement of Financial Position. Financial assets and financial liabilities that are subject to enforceable master netting arrangements are offset in the Statement of Financial Position. (2) Gains or losses recognised in the reserves will be reclassified to the same line item in the profit or loss as the underlying hedged item when the underlying forecast transaction occurs. (3) Gains or losses on discontinued hedges that were in cash flow hedge or net investment hedge relationships remain in the reserves until the underlying transactions occur or upon disposal of the underlying net investment. Any changes in the market value of the discontinued hedges are recognised in the profit or loss from discontinuation. (4) The total fair value of derivatives hedging the Group’s interest bearing liabilities is $388.6m. The cross currency interest rate swaps hedging the foreign currency exposure of the Group’s USD and HKD borrowings have a contract value of USD800m and HKD560m, and are economic hedges of an equivalent amount of the Group’s USD and HKD borrowings. (5) Interest rate swap contracts effectively convert USD800m, HKD560m and AUD250m of the Group’s fixed interest rate borrowings to floating interest rates. The fair value hedge adjustment of a hedged item where the hedging instrument is discontinued remains in the carrying amount of the hedged item and is amortised to the profit or loss over the life of the hedged item. (6) Derivatives which are classified as held for trading are in economic hedge relationships that do not qualify for hedge accounting. These hedges are effective economic hedges or offsetting hedges based on contractual amounts and cash flows over the life of the underlying item. (7) At 30 September 2019, there were no gains/losses that were transferred from reserves to profit or loss in relation to ineffective hedges. 112 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORTNotes to the Consolidated Financial Statements: Risk management For the year ended 30 September 2020 Credit risk: The risk of financial loss to the Group as a result of customers or counterparties to financial assets failing to meet their contractual obligations. Source of risk Credit risk exposure The Group is exposed to counterparty credit risk from trade and other receivables and financial instrument contracts that are outstanding at the reporting date. The Group’s maximum exposure to credit risk at 30 September is the carrying amount, net of any provision for impairment, of the financial assets as detailed in the table below: Risk mitigation The Group minimises the credit risk associated with trade and other receivables balances by undertaking transactions with a large number of customers in various countries. The creditworthiness of customers is reviewed prior to granting credit, using trade references and credit reference agencies. Credit limits are established and monitored for each customer, and these limits represent the highest level of exposure that a customer can reach. Trade credit insurance is purchased when required. The Group mitigates credit risk from financial instrument contracts by only entering into transactions with counterparties that have sound credit ratings and, where applicable, with whom the Group has a signed netting agreement. Given their high credit ratings, the Group does not expect any counterparty to fail to meet its obligations. Trade and other receivables Cash and cash equivalents Derivative assets 2020 $mill 400.8 554.6 132.9 1,088.3 2019 $mill 364.1 576.4 22.8 963.3 Financial assets and financial liabilities that are subject to enforceable master netting arrangements and are intended to be settled on a net basis are offset in the Statement of Financial Position. At 30 September 2020, the amount netted in other financial assets and other financial liabilities is $382.1m (2019: $371.7m). Fair value Fair value of the Group’s financial assets and liabilities is calculated using a variety of techniques depending on the type of financial instrument as follows: » » » » » The fair value of financial assets and financial liabilities traded in active markets (such as equity securities and fixed interest rate bonds) is the quoted market price at the reporting date. The fair value of financial assets and financial liabilities not traded in active markets is calculated using discounted cash flows. Future cash flows are calculated based on observable forward interest rates and foreign exchange rates. The fair value of forward exchange contracts, interest rate swaps, cross currency interest rate swaps, commodity swaps and forward contracts is calculated using discounted cash flows, reflecting the credit risk of various counterparties. Future cash flows are calculated based on the contract rate, observable forward interest rates and foreign exchange rates. The fair value of option contracts is calculated using the contract rates and observable market rates at the end of the reporting period, reflecting the credit risk of various counterparties. The valuation technique is consistent with the Black-Scholes methodology and utilises Monte Carlo simulations. The fair value of commodity swaps and commodity forward contracts is calculated using their quoted market price, where available. If a quoted market price is not available, then fair value is calculated using discounted cash flows. Future cash flows are estimated based on the difference between the contractual price and the current observable market price, reflecting the credit risk of various counterparties. These future cash flows are then discounted to present value. » The nominal value less expected credit losses of trade receivables and payables are assumed to approximate their fair values due to their short term maturity. Fair value hierarchy The table below analyses financial instruments carried at fair value by valuation method. The different levels have been defined as follows: » » » Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). 2020 Derivative financial assets Derivative financial liabilities Investment in Equity Instrument 2019 Derivative financial assets Derivative financial liabilities Level 1 $milll – – – Level 1 $milll – – Level 2 $mill 132.9 (158.9) – Level 2 $mill 22.8 (84.3) Level 3 $mill – – 3.0 Level 3 $mill – – Fair value of financial assets and liabilities carried at amortised cost Cash and cash equivalents, trade and other receivables, and trade and other payables are carried at amortised cost which equals their fair value. Interest bearing liabilities are carried at amortised cost and have a carrying value of $1,870.3m (2019: $2,656.4m) – refer to note 8. The fair value of the interest bearing financial liabilities at 30 September 2020 was $1,949.2m (2019: $2,709.9m) and was based on the level 2 valuation methodology. 113 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORTNotes to the Consolidated Financial Statements: Risk management For the year ended 30 September 2020 Key accounting policies Foreign currency transactions and balances Cash flow hedges The Group presents its accounts in Australian dollars. Foreign currency transactions are translated into Australian dollars using the exchange rates at the date the transaction occurs. Monetary assets (such as trade receivables) and liabilities (such as trade creditors) denominated in foreign currencies are translated into Australian dollars using the exchange rate at 30 September. Non-monetary items (for example, plant and machinery) that are measured at historical cost in a foreign currency are not re- translated. Foreign exchange gains and losses relating to transactions are recognised in the profit or loss with the exception of gains and losses arising from cash flow hedges and net investment hedges that are recognised in other comprehensive income. Foreign operations The assets and liabilities of the Group’s foreign operations are translated at applicable exchange rates at 30 September. Income and expense items are translated at the average exchange rates for the period. Foreign exchange gains and losses arising on translation are recognised in the foreign currency translation reserve (FCTR). If and when the Group disposes of the foreign operation, these gains and losses are transferred from the FCTR to the profit or loss. Derivatives and hedging The Group uses contracts known as derivative financial instruments to hedge its financial risk exposures. On entering into a hedging relationship, the Group formally designates and documents details of the hedge, risk management objective and strategy for entering into the arrangement. The Group applies hedge accounting to hedging relationships that are expected to be highly effective in offsetting changes in fair value, i.e. where the cash flows arising from the hedge instrument closely match the cash flows arising from the hedged item. Hedge accounting is discontinued when: » » The hedging relationship no longer meets the risk management objective. The hedging instrument expires or is sold, terminated or exercised. » The hedge no longer qualifies for hedge accounting. Derivatives are measured at fair value. The accounting treatment applied to specific types of hedges is set out below. Changes in the fair value of effective cash flow hedges are recognised in equity, in the cash flow hedge reserve. To the extent that the hedge is ineffective, changes in fair value are recognised in the profit or loss. Fair value gains or losses accumulated in the reserve are taken to profit or loss when the hedged item affects profit or loss. When the hedged item is a non-financial asset, the amount recognised in the reserve is transferred to the carrying amount of the asset when the asset is purchased. Net investment hedges Hedges of a net investment in a foreign operation are accounted for in a similar way as cash flow hedges. Gains or losses on the effective portion of the hedge are recognised directly in equity (in the FCTR) while any gains or losses relating to the ineffective portion are recognised in the profit or loss. On disposal of the foreign operation, the cumulative value of gains or losses recognised in the FCTR are transferred to profit or loss. Fair value hedges The change in the fair value of the hedging instrument and the change in the hedged item are recognised in the profit or loss. Hedge ineffectiveness The Group aims to transact only highly effective hedge relationships, and in most cases the hedging instruments have a 1:1 hedge ratio with the hedged items. However, at times, some hedge ineffectiveness can arise and is recognised in profit or loss in the period in which it occurs. Key sources of hedge ineffectiveness for the Group are as follows: » Maturity dates of hedging instruments not matching the maturity dates of the hedged items. » Credit risk inherent within the hedging instrument not matching the movement in the hedged item. » Interest rates of the Group’s financing facilities not matching the interest rates of the hedging instrument. » Forecast transactions not occurring. Classification of financial instruments Financial instruments are classified into the following categories: » Amortised cost (cash and cash equivalents, interest bearing liabilities and trade and other receivables and payables). » » Fair value through other comprehensive income (listed equity securities). Fair value through profit or loss (derivative financial instruments except those that are in a designated hedge relationship). 114 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORTNotes to the Consolidated Financial Statements: Other For the year ended 30 September 2020 18. Share-based payments 19. Key management personnel Incentive Plans The Long Term Incentive Plans (LTIs) are designed to link reward with the key performance drivers that underpin sustainable growth in shareholder value. With regard to the 2017/20, 2018/21 and 2019/22 Long Term Incentive Plans, the performance conditions comprise relative total shareholder return, the delivery of certain strategic initiatives and growth in return on equity. Certain Executives have been awarded performance rights under Short Term Incentive Plans (STIs) based on financial, safety and strategic outcomes. disclosures Key management personnel remuneration Short-term employee benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payments 2020 $000 8,141 163 100 468 1,838 10,710 2019 $000 7,665 199 114 – 1,578 9,556 These arrangements support the Company’s strategy for retention and motivation of its executives. Determination of key management personnel and detailed remuneration disclosures are provided in the Remuneration Report. Loans to key management personnel In the year ended 30 September 2020, there were no loans to key management personnel and their related parties (2019: nil). Other key management personnel transactions In the year ended 30 September 2020, there were no transactions entered into during the year with key management personnel (including their related parties). Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: Accounting value of performance rights issued under the LTI and STI performance plans 2020 $mill 2019 $mill 2.4 1.6 2020 Number 2019 Number Number of performance rights outstanding under the LTI and STI performance plans 5,082,644 4,881,245 Details of the movements in LTI and STI performance rights are disclosed in the Remuneration Report. Key accounting policies The rights to shares granted to employees under the terms of the plans are measured at fair value. The fair value is recognised as an employee expense over the period that employees become unconditionally entitled to the rights. There is a corresponding increase in equity, which is reflected in the share based payments reserve. The amount recognised as an expense is adjusted to reflect the actual number of rights taken up, once related service and other non-market conditions are met. 115 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Other For the year ended 30 September 2020 20. Retirement benefit obligation The Group operates a number of defined benefit plans in the Americas and Asia Pacific to provide benefits for employees and their dependants on retirement, disability or death. The Group also makes contributions to defined contribution schemes. Financial position and performance Net defined benefit obligation at 30 September Present value of obligations Fair value of plan assets Net defined benefit obligation 2020 $mill 321.9 (255.0) 66.9 2019 $mill 356.6 (289.4) 67.2 Maturity profile of the net defined benefit obligation The expected maturity analysis of the undiscounted defined benefit obligation is as follows: Within next 10 years Within 10 to 20 years In excess of 20 years 2020 $mill 207.2 127.8 41.8 Return on plan assets for the year ended 30 September Actual return on plan assets Composition of plan assets at 30 September 2020 $mill 15.1 2019 $mill 221.3 142.6 43.6 2019 $mill 17.7 The percentage invested in each asset class: Equities Fixed interest securities Property Other 2020 2019 43% 42% 7% 8% 39% 47% 6% 8% Movements in plan assets/liabilities Amounts recognised in Other Comprehensive Income Losses arising from changes in actuarial assumptions Return on plan assets greater than discount rate Total losses recognised in other comprehensive income Notes 2020 $mill 2019 $mill (16.2) (43.8) 7.2 7.2 (9.0) (36.6) Amounts recognised in Profit or Loss Net interest expense Defined benefit superannuation expense (2) (2) (1.4) (2.9) (1.4) (4.6) Key assumptions and sensitivities Principal actuarial assumptions Discount rate (gross of tax) Future salary increases Sensitivity analysis 2020 2019 2.0% – 6.9% 2.7% – 7.6% 2.0% – 5.0% 2.5% – 5.0% The sensitivity analysis is based on a change in a significant actuarial assumption while holding all other assumptions constant. The following table summarises how the defined benefit obligation as at 30 September 2020 would have increased/(decreased) as a result of a change in the respective assumption by 1 percentage point: Discount rate Rate of salary increase Key accounting policies 1 percent increase 1 percent decrease (29.3) 1.6 35.5 (1.4) All employees of the group are entitled to benefits from the Group’s superannuation plan on retirement, disability or death or can direct the group to make contributions to a defined contribution plan of their choice. The Group’s superannuation plan has a defined benefit section and a defined contribution section. The defined benefit section provides defined lump sum benefits based on years of service and final average salary. The defined contribution section receives fixed contributions from group companies and the Group’s legal or constructive obligation is limited to these contributions. The liability or asset recognised in the Consolidated Statement of Financial Position in respect of defined benefit superannuation plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. Remeasurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in the period in which they occur, directly in other comprehensive income. They are included in retained earnings in the Consolidated Statement of Changes in Equity and in the Consolidated Statement of Financial Position. Changes in the present value of the defined benefit obligation resulting from plan amendments or curtailments are recognised immediately in profit or loss as past service costs. Contributions to the defined contribution section of the Group’s superannuation fund and other independent defined contribution superannuation funds are recognised as an expense as they become payable. Key estimates and judgments The present value of the defined benefit obligation at the reporting date is based on expected future payments arising from membership of the fund. This is calculated annually by independent actuaries considering the expected future wage and salary levels of employees, experience of employee departures and employee periods of service. Expected future payments are discounted using market yields on corporate bonds at the reporting date, which have terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. 116 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Other For the year ended 30 September 2020 21. Deed of cross guarantee Entities that are party to a Deed of Cross Guarantee are included in note 15. The Statement of Profit or Loss and Other Comprehensive Income and the Statement of Financial Position for this closed group are shown below: Statement of Profit or Loss and Other Comprehensive Income Profit before income tax Income tax benefit Profit for the year 2020 $mill 9.1 29.3 38.4 2019 $mill 95.3 1.7 97.0 22. Parent entity disclosure Throughout the financial year ended 30 September 2020 the parent company of the Group was Incitec Pivot Limited. Parent entity guarantees in respect of debts of its subsidiaries The parent entity is part of a Deed of Cross Guarantee, under which each entity guarantees the debt of the others. Statement of Profit or Loss and Other Comprehensive Income Retained profits at 1 October 1,437.1 1,470.0 Profit for the year Other movements in retained earnings Dividend paid Retained profits at 30 September 38.4 (19.5) (54.6) 1,401.4 97.0 (8.2) (121.7) 1,437.1 Statement of Financial Position Results of the parent entity Profit for the year Other comprehensive income Total comprehensive income for the year Statement of Financial Position Current assets Cash and cash equivalents Trade and other receivables Inventories Other assets Other financial assets Total current assets Non-current assets Other financial assets Property, plant and equipment Right-of-use lease assets Intangible assets Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Lease liabilities Other financial liabilities Provisions Current tax liabilities Total current liabilities Non-current liabilities Trade and other payables Lease liabilities Interest bearing liabilities Other financial liabilities Provisions Deferred tax liabilities Retirement benefit obligation Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity 2020 $mill 2019 $mill 495.0 86.2 294.3 18.3 76.6 970.4 5,063.1 2,159.9 132.1 246.2 200.6 7,801.9 8,772.3 963.2 20.5 93.2 67.6 16.8 1,161.3 272.2 135.2 1,290.6 65.3 84.4 389.3 26.8 2,263.8 3,425.1 5,347.2 3,806.2 139.6 1,401.4 5,347.2 478.5 285.4 404.9 18.0 5.4 1,192.2 3,535.6 2,132.2 – 246.4 181.8 6,096.0 7,288.2 1,213.4 – 38.8 60.2 10.8 1,323.2 227.9 – 556.4 45.1 72.6 438.1 23.3 1,363.4 2,686.6 4,601.6 3,136.8 27.7 1,437.1 4,601.6 2020 $mill 66.1 (23.8) 42.3 2019 $mill 452.6 (72.9) 379.7 2020 $mill 2019 $mill 538.3 8,406.6 779.2 4,232.7 4,173.9 866.7 7,255.2 856.5 3,650.7 3,604.5 3,806.2 3,136.8 (153.1) 520.8 (57.0) 524.7 4,173.9 3,604.5 Current assets Total assets Current liabilities Total liabilities Net assets Share capital Reserves Retained earnings Total equity Parent entity contingencies and commitments Contingent liabilities of Incitec Pivot Limited are disclosed in note 16. Capital expenditure – commitments Contracted but not yet provided for and payable: 2020 $mill 2019 $mill Within one year 2.4 5.4 Tax consolidation The Company and its wholly-owned Australian resident entities have formed a tax consolidated group. As a result it is taxed as a single entity. The head entity of the tax consolidated group is Incitec Pivot Limited. 117 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Notes to the Consolidated Financial Statements: Other For the year ended 30 September 2020 23. Auditor’s remuneration Deloitte and related network firms Audit or review of financial reports Group Subsidiaries and joint operations Other assurance and agreed upon procedures under other legislation or contractual arrangements Other services: Tax compliance services Other consulting services Total remuneration Non-Deloitte audit firms Audit services Other non-audit services Total remuneration of non-Deloitte audit firms 2020 $000 2019 $000 1,183.1 1,203.0 550.8 639.0 1,733.9 1,842.0 40.0 156.0 10.3 - 10.3 231.1 101.4 332.5 1,784.2 2,330.5 28.4 26.8 55.2 24.7 36.1 60.8 From time to time, the auditors provide other services to the Group. These services are subject to strict corporate governance procedures which encompass the selection of service providers and the setting of their remuneration. The Audit and Risk Management Committee must approve individual non audit engagements provided by the Group’s auditor above a value of $100,000, as well as where the aggregate amount exceeds $250,000 per annum. 24. Events subsequent to reporting date In November 2020, the Board has determined, as an exception to its dividend policy, not to pay a final dividend for FY20 in light of the ongoing uncertainty due to COVID-19 and IPL’s equity raising in May 2020. IPL’s dividend policy, which is to pay between 30% – 60% of NPAT, remains unchanged. As announced on 10 November 2020, subject to market conditions, IPL is intending to invite the holders of its outstanding notes under the AMTN and EMTN Programmes to tender their notes for repurchase by IPL for up to an aggregate amount of approximately $200m. The repurchase of the notes forms part of the Group’s strategy to optimise its debt portfolio between fixed rate capital debt markets and floating rate bank debt markets. The Group has and continues to actively manage the risks arising from COVID-19 on the safety of our people and the business continuity of our operations. The Group’s operations are in industries that have been deemed essential by Governments and we are continuing to run in line with the required safety and health guidelines in our operations. The company has also implemented a financial response plan that focuses on sustained cost savings and improvement of free cash flow. The extent of the future impact of COVID-19 on the Group’s operational and financial performance will depend on certain developments, including the containment strategies imposed by governments and duration of the COVID-19 Pandemic, and the subsequent impact of these strategies on the operations of customers, employees and vendors. Other than the matters reported on above, the directors have not become aware of any other significant matter or circumstance that has arisen since the end of the financial year, that has affected or may affect the operations of the Group, the results of those operations, or the state of affairs of the Group in subsequent years, which has not been covered in this report. 118 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Directors’ Declaration on the Consolidated Financial Statements set out on pages 82 to 118 In accordance with a resolution of the directors of Incitec Pivot Limited (the Company), we state that: 1. In the opinion of the directors: (a) the consolidated financial statements and notes, set out on pages 82 to 118, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the financial position of the Company and the Group as at 30 September 2020 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards in Australia (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; (b) the financial report also complies with International Financial Reporting Standards as disclosed on page 88; and (c) there are reasonable grounds to believe the Company will be able to pay its debts as and when they become due and payable. 2. There are reasonable grounds to believe that the Company and the controlled entities identified in note 15 will be able to meet any obligations or liabilities to which they are or may become subject by virtue of the Deed of Cross Guarantee between the Company and those subsidiaries pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785. 3. The directors have been given the declaration by the Chief Executive Officer and the Chief Financial Officer as required by section 295A of the Corporations Act 2001 for the financial year ended 30 September 2020. Brian Kruger Chairman Jeanne Johns Managing Director & CEO Melbourne, 10 November 2020 Melbourne, 10 November 2020 119 Incitec Pivot Limited Annual Report 2020FINANCIAL REPORT Deloitte Touche Tohmatsu ABN 74 490 121 060 477 Colins Street Melbourne VIC 3000 Phone: +61 3 9671 7000 www.deloitte.com.au Independent Auditor’s Report to the members of Incitec Pivot Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Incitec Pivot Limited (the “Company”) and its subsidiaries (the “Group”), which comprises the consolidated statement of financial position as at 30 September 2020, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 September 2020 and of its financial performance for the year then ended; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional & Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Liability limited by a scheme approved under Professional Standards Legislation Member of Deloitte Asia Pacific and the Deloitte organisation 120 Incitec Pivot Limited Annual Report 2020INDEPENDENT AUDITOR’S REPORT Key Audit Matter How the scope of our audit responded to the Key Audit Matter Carrying value of goodwill and non- current assets Refer to Note 9 Property, plant and equipment, Note 11 Intangibles and Note 12 Impairment of goodwill and non-current assets As at 30 September 2020, the Group held goodwill of $2,638.1 million, intangible assets of $381.6 million and property, plant and equipment of $4,071.7 million, allocated to its group of cash generating units (CGUs). The assessment of the recoverable amount is subject to a high level of judgement and is based on management’s view of key variables and market conditions. The Group has prepared a value-in-use model to determine the recoverable amount of each CGU. The Group’s Dyno Nobel Asia Pacific (‘DNAP’) model is highly sensitive to changes in terminal value assumptions, including natural gas prices, commodity prices, terminal value growth rate and discount rate. Our procedures included, but were not limited to: • Understanding the relevant controls and process that management has undertaken to assess the recoverable amount • In conjunction with our valuation specialists: o Evaluating the appropriateness of the model used by management to calculate the value-in-use of the CGU o Assessing and challenging the key inputs to the DNAP terminal value by: § Corroborating the key independent market based assumptions built into the terminal value to external analysts’ reports, published industry growth rates and industry reports; § Corroborating the key non-market based assumptions by comparing Board approved forecasts to historical performance to test the accuracy of management’s projections; and the § Comparing the discount rates applied terminal value with an to independently developed rate • Agreeing contracted volumes and pricing assumptions in the model to the Board approved forecasts • Performing a range of sensitivity analysis on the terminal value with other assumptions including discount rates, natural gas prices, commodity prices and foreign exchange rates • Assessing the the disclosures included in the Notes to the financial statements. appropriateness of 121 Incitec Pivot Limited Annual Report 2020INDEPENDENT AUDITOR’S REPORT Provisions for uncertain tax positions Refer to Note 3 Taxation and Note 16 Provisions and contingencies is subject jurisdictions and The Group operates across a large number of to investigations and audit activities by revenue authorities on a range of tax matters during the normal course of business, transfer pricing, indirect taxes and transaction related tax matters. including The outcomes of these investigations and audits depend upon several factors and as a result management exercise judgement in the determination of the tax position and the estimates and assumptions, including the probability of potential outcomes, in relation to the provision for taxes. Our procedures included, but were not limited to: • Understanding the relevant controls and process that management has undertaken to identify and assess uncertain tax positions, including the monitoring and consideration of guidance issued by regulatory authorities • In conjunction with our tax specialists: o Understanding the current status of tax assessments and investigations and the process to monitor developments in ongoing investigations and tax audit activities; o Assessing how the Group has accounted for uncertain tax positions in accordance with IFRIC 23 Uncertainty over income tax treatments; o Reviewing external tax and legal advice where available; o Challenging the probabilities management has applied in determining the tax position and the estimates and assumptions in relation to the provision for taxes; and recent and correspondence with local tax authorities, to assess that the tax provisions have been appropriately recorded or adjusted to reflect the latest external developments. o Reviewing rulings • Assessing the appropriateness of the disclosures included in the Notes to the financial statements Other Information The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 September 2020, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. 122 Incitec Pivot Limited Annual Report 2020INDEPENDENT AUDITOR’S REPORT In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as intentional omissions, involve collusion, fraud may misrepresentations, or the override of internal control. forgery, • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the director’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group’s audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. 123 Incitec Pivot Limited Annual Report 2020INDEPENDENT AUDITOR’S REPORT From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 60 to 79 of the Director’s Report for the year ended 30 September 2020. In our opinion, the Remuneration Report of the Incitec Pivot Limited, for the year ended 30 September 2020, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. DELOITTE TOUCHE TOHMATSU A T Richards Partner Chartered Accountants Melbourne, 10 November 2020 Genevra Cavallo Partner Chartered Accountants Melbourne, 10 November 2020 124 Incitec Pivot Limited Annual Report 2020INDEPENDENT AUDITOR’S REPORT Incitec Pivot Limited Annual Report 2020 125 INDEPENDENT AUDITOR’S REPORTOur team has made significant progress on the delivery of our strategic agenda during 2020. 126 Incitec Pivot Limited Annual Report 2020ADDITIONAL INFORMATION 127 Incitec Pivot Limited Annual Report 2020Shareholder Information As at 11 November 2020 Distribution of ordinary shareholder and shareholdings Size of holding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Number of holders 10,162 20,605 6,688 Percentage of holders 23.02% 46.68% 15.15% Number of shares 4,721,971 60,812,302 49,160,608 6,532 153 44,140 14.80% 0.35% 142,213,850 1,686,505,521 100.00% 1,943,414,252 Percentage of shares 0.24% 3.13% 2.53% 7.32% 86.78% 100.00% Included in the above total are 3087 shareholders holding less than a marketable parcel of shares. The holdings of the 20 largest holders of fully paid ordinary shares represent 85.26% of that class of shares. Twenty largest ordinary fully paid shareholders HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited National Nominees Limited BNP Paribas Nominees Pty Ltd BNP Paribas Noms Pty Ltd Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited HSBC Custody Nominees (Australia) Limited - A/C 2 AMP Life Limited BNP Paribas Noms (NZ) Ltd HSBC Custody Nominees (Australia) Limited UBS Nominees Pty Ltd Sandhurst Trustees Ltd Netwealth Investments Limited Pershing Australia Nominees Pty Ltd Woodross Nominees Pty Ltd Gwynvill Trading Pty Ltd National Nominees Limited BNP Paribas Nominees Pty Ltd HUB24 Custodial Serv Ltd Total Substantial shareholders Number of shares 768,520,379 408,721,189 182,487,136 154,162,052 46,201,261 40,837,895 19,823,694 7,280,213 6,209,631 4,596,072 3,812,438 2,956,153 2,936,216 1,723,300 1,548,106 1,002,396 902,597 783,000 714,386 703,578 Percentage of issued capital 39.57% 21.04% 9.40% 7.94% 2.38% 2.10% 1.02% 0.37% 0.32% 0.24% 0.20% 0.15% 0.15% 0.09% 0.08% 0.05% 0.05% 0.04% 0.04% 0.04% 1,655,921,692 85.26% The number of shares to which each substantial holder and the substantial holders’ associates have a relevant interest, as disclosed in substantial holding notices given to IPL under the Corporations Act, are as follows: Name Harris Associates L.P. Schroder Investment Management Australia Limited Perpetual Limited Allan Gray Australia Pty Ltd The Vanguard Group, Inc. Date Notice Received 20 April 2020 21 April 2020 19 May 2020 25 May 2020 9 July 2018 Votes/Number of shares 153,545,019 132,401,072 155,158,981 95,945,001 83,268,074 Percentage of issued capital 9.52% 8.21% 8.11% 5.01% 5.013% Voting Rights for Ordinary Shares Votes of shareholders are governed by the Company’s Constitution. In broad summary, but without prejudice to the provisions of these rules, the Constitution provides for votes to be cast: (a) on a show of hands, one vote for each shareholder; and (b) on a poll, one vote for each fully paid share. Unquoted Equity Securities As at 11 November 2020, there were 5,133,319 of rights on issue, comprising of: » 5,082,644 performance rights with 12 holders were on issue pursuant to Incitec Pivot employee incentive plans; and » 50,675 share rights with 3 holders were on issue pursuant to Non-executive Director minimum shareholding plan. Performance rights and share rights do not carry any voting rights. On-market share purchases During the 2020 financial year, 395,000 ordinary shares were purchased on-market at an average price of $3.2793 per share for the purposes of awards under IPL employee incentive plans and the Non-executive Director minimum shareholding plan. 128 Incitec Pivot Limited Annual Report 2020ADDITIONAL INFORMATIONFive Year Financial Statistics Incitec Pivot Limited and its controlled entities 2020 $mill 2019 $mill 2018 $mill 2017 $mill 2016 $mill Sales 3,942.2 3,918.2 3,856.3 3,473.4 3,353.7 Earnings before depreciation, amortisation, net borrowing costs, individually material items (IMIs) and tax Depreciation and amortisation (excluding IMI's) Earnings before net borrowing costs, IMIs and tax (EBIT) Net borrowing costs (excluding IMIs) IMIs before tax Taxation (expense) / benefit Operating profit after tax and IMIs Operating profit/(loss) after tax and IMIs attributable to non-controlling interest Operating profit after tax and IMIs attributable to shareholders of Incitec Pivot Limited IMIs after tax Operating profit after tax before IMIs (net of tax) Dividends paid Current assets Property, plant and equipment Equity accounted investments Intangible assets Other non-current assets Total assets Current borrowings, payables and other liabilities Current provisions 730.5 (356.0) 374.5 (135.7) (87.9) (27.5) 123.4 – 123.4 (64.8) 188.2 54.6 1,529.9 4,071.7 326.3 605.3 (301.6) 303.7 (144.1) – (7.5) 152.1 (0.3) 152.4 – 152.4 121.7 851.0 (294.3) 556.7 (128.0) (236.0) 18.1 210.8 2.9 207.9 (139.5) 347.4 157.4 774.5 (273.3) 501.2 (108.7) – (70.9) 321.6 2.9 318.7 – 318.7 153.5 672.6 (244.5) 428.1 (50.2) (241.3) (7.2) 129.4 1.3 128.1 (167.1) 295.2 194.0 1,550.8 1,471.5 1,453.0 1,141.9 4,190.0 4,004.3 3,854.8 3,892.7 357.7 336.1 316.9 318.0 3,019.7 3,179.5 3,046.6 3,121.0 3,182.5 343.4 101.5 95.5 76.0 143.9 9,291.0 9,379.5 8,954.0 8,821.7 8,679.0 1,227.2 2,418.0 1,331.8 1,087.0 102.3 86.1 75.6 78.0 955.8 114.4 Non-current borrowings, payables and other liabilities 2,632.7 2,071.1 2,698.4 2,802.5 2,944.4 Non-current provisions Total liabilities Net assets Shareholders’ equity Equity attributable to non-controlling interest Total shareholders’ equity 125.5 116.5 104.0 95.1 88.1 4,087.7 4,691.7 4,209.8 4,062.6 4,102.7 5,203.3 4,687.8 4,744.2 4,759.1 4,576.3 5,203.3 4,687.8 4,737.7 4,753.1 4,572.0 – – 6.5 6.0 4.3 5,203.3 4,687.8 4,744.2 4,759.1 4,576.3 Ordinary Shares thousands 1,942,225 1,605,784 1,630,214 1,687,171 1,687,171 Number of shares on issue at year end thousands 1,942,225 1,605,784 1,630,214 1,687,171 1,687,171 Weighted average number of shares on issue (investor and ordinary) thousands 1,734,435 1,610,122 1,664,617 1,687,171 1,686,971 Earnings per share before IMIs including IMIs Dividends (declared) Dividends (paid) Dividend franking Share price range Stockmarket capitalisation at year end Net tangible assets per share Net Debt/EBITDA Interest Cover Net capital expenditure on plant and equipment (cash flow) Net capital expenditure on acquisitions (cash flow) Return on average shareholders funds before IMIs including IMIs cents cents cents cents % High Low Year end 10.9 7.1 – 3.4 – $3.63 $1.67 $2.03 9.5 9.5 4.7 7.5 22 $4.24 $3.05 $3.39 20.9 12.5 10.7 9.4 12 $4.03 $3.34 $3.98 18.9 18.9 9.4 9.1 – $3.89 $2.78 $3.60 17.5 7.6 8.7 11.5 47 $4.07 $2.67 $2.82 $mill 3,942.7 5,443.6 6,488.3 6,073.8 4,757.8 $ 1.12 0.94 1.04 0.97 0.83 times times $mill $mill % % 1.4 6.1 271.0 23.4 3.8 2.5 2.8 4.6 337.3 5.3 3.2 3.2 1.6 7.3 319.1 5.8 7.3 4.4 1.7 7.9 279.9 2.5 6.8 6.8 2.1 7.9 434.3 – 6.4 2.8 129 Incitec Pivot Limited Annual Report 2020ADDITIONAL INFORMATION Glossary Our Company Board DNA DNAP IPF Board of directors of Incitec Pivot Limited Dyno Nobel Americas Dyno Nobel Asia Pacific Incitec Pivot Fertilisers IPL or the Company Incitec Pivot Limited The Group, We, Us or Our Incitec Pivot Limited and its subsidiaries Financial and Remuneration AASB DRP EBIT EBITDA EPS FAR KMP LTI NPAT ROE ROIC STI TSR Other ASIC ASX Australian Accounting Standards Board Dividend Reinvestment Plan Earnings before interest and tax Earnings before interest, tax, depreciation and amortisation Earnings per share Fixed annual remuneration Key Management Personnel Long term incentive Net profit after tax for the financial year Return on equity Return on invested capital Short term incentive Total Shareholder Return Australian Securities and Investments Commission Australian Securities Exchange Corporations Act Corporations Act 2001 (Cth) GHG LTIFR TRIFR tCO2e Greenhouse gas Lost Time Injury Frequency Rate Total Recordable Injury Frequency Rate Metric tonnes of carbon dioxide equivalent 130 Incitec Pivot Limited Annual Report 2020ADDITIONAL INFORMATIONCorporate Directory Registered Office Incitec Pivot Limited Level 8, 28 Freshwater Place, Southbank Victoria 3006, Australia Telephone: +61 3 8695 4400 Facsimile: +61 3 8695 4419 www.incitecpivot.com.au Company Secretary: Richa Puri Auditor Deloitte Touche Tohmatsu 477 Collins Street, Melbourne Victoria 3000, Australia Securities Exchange Listing Incitec Pivot Limited shares are listed on the Australian Securities Exchange (ASX: IPL). Notes issued under Incitec Pivot’s US$1,500,000,000 Euro Medium Term Note Programme are listed on the Singapore Stock Exchange. Incitec Pivot Limited ordinary shares are traded in the US in the form of American Depository Receipts (ADR) issued by the Bank of New York Mellon as Depositary. Share Registry and Other Enquiries If you have any enquiries in relation to your shareholding, share transfers or dividends, please contact our share registry: Link Market Services Limited Locked Bag A14, Sydney South New South Wales 1235, Australia Telephone: +61 1300 303 780 General Facsimile: +61 2 9287 0303 Proxy Facsimile: +61 2 9287 0309 Email: registrars@linkmarketservices.com.au Website: www.linkmarketservices.com.au For enquiries about American Depositary Receipts: Computershare Investor Services 150 Royall Street Canton, MA 02021 United States of America Telephone: 1-888-269-2377 International: +1-201-680-6825 Email: shrrelations@cpushareownerservices.com Website: www-us.computershare.com/investor ADDITIONAL INFORMATION For enquiries about the operations of the Company, please contact our Investor Relations team: Incitec Pivot Limited Level 8, 28 Freshwater Place, Southbank Victoria 3006, Australia Email: investor.relations@incitecpivot.com.au Website: www.incitecpivot.com.au Electronic Communications The Company has an online share registry facility, where shareholders can: » check their current and previous holding balances; » update their address details; » update their bank details; » » review their transaction and dividend history; confirm whether they have lodged a TFN/ABN exemption; » elect to receive electronic communciations and Company information eletroncially and change their Annual Report election; » download commonly used forms; and » subscribe to email announcements. The online share registry can be accessed at https://investors. incitecpivot.com.au/shareholder-information/shareholder-services. For security reasons, shareholders will be required to verify their identity before being able to access their records. Annual General Meeting Incitec Pivot Limited’s 2020 Annual General Meeting will be held virtually on Friday, 18 December 2020 at 11.00am (AEDT). Incitec Pivot Limited Annual Report 2020 131 ABN: 42 004 080 264 Level 8, 28 Freshwater Place Southbank Victoria 3006, Australia This publication is printed on ecoStar+, a carbon neutral environmentally responsible paper, manufactured from 100% post-consumer waste, chlorine free environment using the ISO14001 environmental management system. The fibre source is certified by the Forestry Stewardship Council. 132 Incitec Pivot Limited Annual Report 2020

Continue reading text version or see original annual report in PDF format above