Dyno Nobel Limited (DNL) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Incitec Pivot Limited's results presentation for the half year ended 31 March 2020. I'm joined this morning by Managing Director and Chief Executive Officer, Jeanne Johns; and Chief Financial Officer, Frank Micallef. Jeanne will also provide an overview of the equity raising that was announced today. The materials we will be discussing has been lodged with the Australian Stock Exchange and can also be found on the ASX and Incitec Pivot's websites. At the end of the presentation, we will have time for questions from the audience. And an audio recording of this presentation will also be available on the company's website after we conclude today. Finally, I'd like to draw your attention to the disclaimer found on Page 2 of this presentation and note that due to legal restrictions, we are not able to discuss any details around the equity raising other than the basic terms referred to in the announcement and the presentation. Please refrain from asking questions beyond these details as we are legally restricted from answering those questions on this call. Thank you, and I would now like to hand over to Jeanne.

Thank you, Chris, and good morning, and welcome. You will all have seen the announcement we made this morning about the equity raising and our first half results. So I plan to go through the background of that raise first and then I'll go through the half year results. As you all know, we've been talking for some time about our objective to strengthen our balance sheet following the FY '19 unusual events that occurred. Our ability to do so on our own has been constrained by the impact of sustained low commodity pricing. Given the uncertainty brought about by COVID-19, the importance of a balance sheet strength has clearly been heightened. So we have decided to take preemptive action today to undertake an equity raising to strengthen our balance sheet. This will increase our resilience in the current environment and provide financial flexibility to deliver our strategy. The raise will be structured as a fully underwritten $600 million institutional placement as well as a $75 million share purchase plan. As would be expected, we have determined not to pay an interim half year dividend. The capital raising will bring our net debt-to-EBITDA ratio on a pro forma basis to 1.9x at the end of March and support our commitment to maintaining investment-grade credit rating profile. The strengthening of our balance sheet will also support the delivery of our strategy across our premium technology solutions for our customers, our manufacturing excellence agenda and to target prudent investments. While we will remain very disciplined about capital, it's important that we maintain our flexibility for growth in the low-capital project opportunities, where the returns are compelling. Turning to the next slide. This shows the impact of the capital raising on our balance sheet. The proceeds from the raising will be used to repay drawn balances of syndicated facilities with any remaining amount held as cash on deposits. Our net debt-to-EBITDA ratio of 2.8x for the half year will come down to 1.9x on a pro forma basis, and our liquidity position will be increased substantially. And we are also well placed from a refinancing perspective, having an average tenure of 5.2 years and our next debt maturity not until August of next year. This slide gives a more detailed overview of the offer. The $600 million institutional placement has been fully underwritten and will involve $300 million -- of 300 million new shares being issued, which represents 18.6% of our current shares on issue. The shares are being issued at a price of $2, which represents an 8.7% discount on Friday's close. The $75 million share repurchase plan gives our retail shareholders an opportunity to participate. Eligible shareholders in Australia and New Zealand can apply for up to $30,000 of new shares. The issue price of the share purchase plan will be the lower of the placement price and a 2% discount on the 5-day VWAP ahead of the closing date. This next slide gives you an overview of key dates. We plan to announce the outcome of the institutional placement tomorrow with the new shares trading by Friday. You can also see on this slide the key dates for the share purchase plan. I'm now going to run through our results presentation before opening up for questions. So on our half year results, I'm going to run through the agenda. We're first going to start with Zero Harm and then cover the highlights of group performance and our response to the COVID-19 pandemic. Frank will then cover the group results, the profit and cash flow statement, balance sheet and capital management and returns. And then I'll cover each of our businesses in more detail before moving on to the progress on our 2 strategic drivers, Manufacturing Excellence and technology solutions, before I conclude with FY '20 priorities and on to questions. So starting with Zero Harm, our most important value and our license to operate. Zero Harm is especially important during a global pandemic. Our safety focus is deeply embedded in our business and has enabled us to swiftly mobilize with multiple levels of crisis management and implement changes that have allowed us to continue to operate in a COVID-19 environment. I'll talk about that a bit more later. But looking at the overall Zero Harm scorecard, you will recall that in 2018, we set ourselves a goal on recordable rate, which at that time was close to 1, to be 0.7 by FY '21. The focus on our recordable rate has resulted in the incidents coming down to 0.65 this last half year, ahead of our goals. And we've also made significant progress on potential high-severity incidents, down from 20 last year to only 17 this year. And process safety incidents have also reduced and are now at 9 compared to 22 last year. And of course, Zero Harm applies as much to the impact of the environment as it does to safety. And I'm pleased to see that we haven't had a significant environmental incident in the first half. Before I move on, however, I do want to share a tragic incident that occurred the last week of April after our half year close. An employee in our U.S. Dyno Nobel business was tragically killed in a double fatality vehicle accident on a public road in South Carolina. We are devastated and providing support to the family and all those involved. The incident is still being investigated, and we will ensure that any lessons from this tragic accident are applied throughout our business. Turning now to our first half results. We delivered an EBIT of $159 million, a 34% increase relative to the last half year. The half year was negatively impacted by $104 million of global commodity price movements, primarily phosphate fertilizers and secondarily the continued weakness in the nitrogen complex. This was partially offset by $32 million of positive impact from foreign exchange rate fluctuations. And I will note that last year's first half included $141 million of nonrecurring items. Once you take all these factors into account, the result is roughly flat, which shows the resilience of our mining volumes that were underpinned by the strength of our technology offer. Our volume of Premium Emulsions were up 18% and our Electronic Detonator volumes were up 7%, off a very strong base, which has delivered a 3-year CAGR of 42%. Our operating cash flow improved significantly to $152 million on much improved trade working capital and a stronger EBITDA. Our improved working capital was a reflection of much lower fertilizer inventory levels at the half year, which followed on the demand of strong rains across Eastern Australia later in the half. At 85% manufacturing reliability, performance was significantly better than last year, no surprise, given the issues we had last year. But we're starting to see some of the upside from the Manufacturing Excellence strategy with more to play for. And as we've already covered, the capital raising will significantly reduce our leverage and strengthen our balance sheet. This will increase our resilience in the current environment and provide the financial flexibility to pursue disciplined organic growth opportunities. Now to our Fertilizer business and our announcement last month, following the completion of our strategic review and decision to retain the business. You will recall that the strategic review was announced last September and was expected to run throughout FY '20. During that, we committed to look at 3 possible outcomes, sales, demerger or retain. We ran through a very robust and thorough process, including an extensive review to formally explore market interest in the business. Given the extraordinary market uncertainty and the travel restrictions imposed by the COVID-19 pandemic, we decided to conclude the review and that the right outcome for the shareholders was to retain the business. We have a good position in an attractive market and a clear strategy with supportive long-term fundamentals and resilience. The business is very well placed to benefit from the strong demand that we're currently experiencing with the widespread rains as well as being positioned for any future improvement in fertilizer commodity pricing. I'll talk more about the Fertilizer business later in the presentation. I'd now like to turn to how we responded to the COVID-19 pandemic. And we've taken early decisive actions across multiple levels of crisis management teams, both at the group level and divisional levels and a 3-pronged approach that started at the end of January. The first part of our strategy was about the health and safety of our employees, our contractors and our customers. We acted early and applied safety protocols across all of our businesses. These included robust health screenings, virus-appropriate hygiene and cleaning practices, along with physical distancing guidelines and restricting access to sites. We protected our customers in the same way. For example, at our fertilizer product distribution centers, we designed our work to transfer bulk fertilizer product to our customers without any face-to-face contact. Our second focus was in workforce and supply chain contingency. We made significant adjustments to how our people work to ensure business continuity, including temporarily relocating people ahead of state border closures and roster changes. On our supply chain, we've had contingency plans in place well before COVID-19. And they served us well, and the impact has been minor as we've had to rely on backup plans that were already in place. We've also had to respond to the economic impact, which to date has been minor. There's been no impact on continuity of our Fertilizer business operations. And across our Explosives business, the vast majority of our sites continue to operate. A small number of our sites have been affected in Australia, Indonesia and Mexico. And in North America, 3 of the Arctic mines that we service have been temporarily shut and are expected to reopen in July. We will continue to monitor the conditions and adapt as necessary. And so while the impacts have been minor, it would be wrong for me not to acknowledge the hard work that the team has put in to deliver this result. And it shows the resilience of our business in what's been a challenging operating environment. I'd now like to cover the COVID-19 financial response plan, where we've aggressively been managing cash during this uncertain environment through both cash savings of $20 million and $40 million of capital. The $20 million of cost savings have come from the benefits of travel restrictions and a reduction of all nonessential spend. We've had a particular focus on the rationalization of contractors and slowing down of all recruitment activities for non-safety-critical roles. On the capital side, our COVID safety protocols have pushed back the timing of some of our capital spend. And we've made some prudent decisions on rescheduling turnaround at Waggaman and St. Helens in order to follow these COVID safety protocols. Some other nonurgent capital spend has also been stopped. Our capital raising will strengthen our balance sheet and increase our resilience in light of this uncertainty. I will now hand over to Frank to cover the group P&L items and the balance sheet. Over to you, Frank.

Thanks, Jeanne, and good morning, everyone. Today, I'll take you through a summary of the group's financial performance for the half year just ended before addressing cash flows, the balance sheet and our approach to capital management and returns. Our group revenue for the period increased by 6% to $1.848 billion. In Dyno Nobel Americas, revenue was down by 4% in U.S. dollar terms, but EBIT was up 19% on the same basis, reflecting higher earnings from the Waggaman ammonia plant. In Dyno Nobel Asia Pacific, revenue was up 5% off the back of strong volumes, but margins were lower as East and West Coast recontracting impacts continued to flow through. In Fertilizers, revenues were up 11%. We saw increased production and sales at Phosphate Hill following last year's event. And Distribution business volumes were strong, reflecting much improved conditions since February. The high-level waterfall chart on this slide allows us to step out the movement in EBIT from the first half in FY '19 of $119 million to the $159 million of EBIT produced in the first half just completed. As you'll remember, last year, we had the 1-in-100-year rain event at Phosphate Hill gas pipeline and cost issues impacting our St. Helens Oregon plant and the manufacturing issues at Waggaman and Phosphate Hill, which is the $141 million of EBIT improvement this half. Softer commodity prices during the current period were negative $104 million with DAP, ammonia and urea all down. The soft Aussie dollar partly compensated for that with a net $32 million positive, the average exchange rate, Aussie versus U.S., down around $0.04. While manufacturing performance was very solid across the portfolio for the period at an average of 91% of capacity, the gap to perfect was a negative $27 million from the rebased number last half year. There's a lot more upside from improved manufacturing performance, but we're certainly heading in the right direction. In Dyno Nobel Americas, the EBIT result proved resilient as Quarry & Construction and technology product growth of $9 million offset significantly lower coal demand caused by lower gas prices. In Dyno Nobel Asia Pacific, earnings were down about $6 million for the half as a result of the contract resets that we previously flagged. Underlying volumes in end markets in the business were generally strong, particularly in Australian met coal and iron ore markets. In Fertilizer, as I've already mentioned, the business began a strong turnaround as the weather dramatically improved from February onwards. Turning to the next slide. We can round out the financial performance picture by looking at returns, corporate costs, borrowing costs and tax. We're focusing very heavily on what it takes to increase on our return on invested capital, which is well below an appropriate level. Our management team's success measures include return on invested capital improvement targets. And we're ensuring that any growth we undertake has very strong returns. Our asset efficiency and customer-focused technology product sales are also helping to address this issue. Looking at corporate costs. At $12 million, they were lower than the same period last year with a continued focus on cost efficiency and about a $1 million savings in the corporate center coming out of COVID-19, things like discretionary spend and travel. Note that the strategic review of the Fertilizer business cost $3 million in the first half and the final expected cost will be around $6 million. Net borrowing costs were up 11% for the half with a lower Australian dollar and higher debt levels contributing to the increase as well as the accounting change relating to leases, were about $3 million as transferred from above the EBIT line to the interest line. Tax expense is up as the effective tax rate climbs towards the mid-20s as flagged last year. Finally, as Jeanne has already mentioned, given the circumstances, no dividend will be paid for this half year. Turning to the cash flow statement. The stronger business performance resulted in improved cash flows for the half despite significantly softer commodity prices. Operating cash flows turned around dramatically, primarily as a result of good trade working capital outcomes and improved earnings for the period. Investing cash flows were higher mainly due to higher sustenance CapEx as a result of the Gibson Island turnaround, which is now complete, with other movements relating to higher minor growth capital, a decrease in lease buyouts, the buyout of the minority interest in some of our joint ventures and derivative settlements relating to U.S. dollar asset hedges. Financing cash flows were down over $220 million with lower dividends, lower losses on the translation of U.S. dollar debt and the absence of the share buyback being the major movers. As at 31 March this year, we had $924 million of committed undrawn funds, diverse debt funding sources and an average tenor of over 5 years. We have no further debt maturities until late next year, when our syndicated bank facilities are due. Of course, the equity raise will further strengthen this profile, an undrawn committed facilities of around $1.7 billion on a pro forma basis at the 31st of March. Turning to net debt and credit metrics. Absolute net debt was down marginally on the pcp and, of course, up on September 2019, reflecting the normal seasonal working capital increase. Importantly, net debt-to-EBITDA came in flat and in line with what we guided to last year at 2.8x. As I've said consistently for 10 years, our investment-grade credit rating is important to our business model. And the proposed equity raise reduces our net debt-to-EBITDA on a pro forma basis to 1.9x, which will provide strong support to our credit ratings and resilience in the face of current uncertainties. Finally, as is usually the case, I'll finish up discussing the principles guiding our decision-making on capital management, capital allocations and returns. I've just discussed our approach to capital structure with the retention of investment-grade credit ratings as a prime objective. In terms of capital allocation and capital efficiency, discipline is our mantra. Of course, in the short term, we'll be careful with our capital expenditure as we navigate through COVID-19. We continue to have small but relatively meaningful organic growth opportunities, such as JV buyouts in North America and technology-based organic business growth, which provides strong and immediate returns as well as great outcomes for customers. I've discussed our increased focus on return on invested capital earlier, and that will continue. Post the equity raise, we'll have a stronger and more resilient balance sheet to support the business. Thank you, and I'll hand back over to Jeanne.

Okay. Thank you, Frank. I'd now like to take you through a summary of segment financial performance. In our Americas business, EBIT was up 29% despite significantly weaker coal volumes. Market share gains and continued growth in the high-quality Quarry & Construction markets as well as sales of our premium technology helped to mitigate this softening, along with improved manufacturing performance. In Asia Pacific Explosives, EBIT was down 7% despite continued growth in technology as we saw the flow-through of the recontracting that we announced last year. In the Fertilizer business, the EBIT loss was improved significantly. However, we saw the impact of 13-year lows pricing for phosphate fertilizer weighing on the first half as well as the impact -- the ongoing impact of the drought in the first 4 months of the half. Both of those weighed on the results. I'd now like to turn to each of these businesses separately. I'd like to start with an overview of our Dyno Nobel Explosives businesses. These 2 businesses account for $155 million of our group earnings and have a strong track record of resilient earnings and EBIT growth. We have strong positions in the 2 most attractive explosives markets in the world, Australia and the U.S., and we have strategically located assets close to our customer operations in both countries. We serve a broad range of high-quality customers across the Base & Precious Metals, Quarry & Construction, Coal and Metallurgical Coal sectors. Our customers continue to demand our premium technology products, which are key to them increasing their productivity, reducing their environmental impact and helping to improve the safety of their operations. And our customers' end markets are underpinned by the long-term trends of infrastructure growth as well as accelerating digitization and urbanization. I'd now like to turn to the Americas Explosives business, which reported an EBIT of USD 55.6 million. This was flat on the previous half and it was strong performance, given the headwinds from a 16% decline in thermal coal experienced across the industry. On an Australian dollar basis, the result was up 8%. Performance overall reflects the resilience of that business. And we are able to mitigate the significant fall in Coal with continued growth in our Quarry & Construction business. This sector represents 40% of our Explosives business in North America. And we continue to grow market share in the half with our volumes up 4%. And our premium technology underpins these gains. As we move into the second half, there has been a slow start to the season, but it is still early days. Consistent with what our large customers have publicly said, we're expecting a tougher second half due to COVID-19 and a slowdown of residential and nonresidential sectors. In the medium term, however, we're pleased to see growing bipartisan support of including infrastructure spending in the U.S. as part of the federal government's relief bill. This would underpin medium-term growth in this sector. Turning now to Base & Precious Metals, which is 36% of this Explosives business. Our volumes were down 9%, reflecting lower international volumes on the back of COVID-19, especially the Arctic mines that were closed in support of the native communities in those areas. Most of these Arctic mines have reopened and are reopening, although there are 3 that we service that are not expected to resume operations until July. But despite this volume drop, our technology sales increased. And that mitigated the impact of the volume and delivered a flat EBIT result. We've also seen some impact indirectly on the iron ore activity in the U.S. And mines have temporarily closed due to the associated U.S. auto industry slowdown. We will continue to monitor this situation, although those have been announced to reopen in July. In thermal coal in the U.S., we saw a 16% decline in coal volumes, consistent with industry trends due to the incredibly low pricing of natural gas in the U.S. in the first half, well below $2 for extended periods. This led to substitution of thermal coal in the electricity generation, which accelerated the decline that we've expected for some time. Coal demand is expected to stay weak throughout 2020 with electricity demand weakness and substitution impacts. Gas prices in the U.S. have firmed, however, with the decline in global oil pricing. And this provides the potential for coal to stabilize next year. I'd like to now turn to our Asia Pacific business, which delivered an EBIT of $71.1 million, down from $76.6 million last year. This largely reflects the impact of the previous disclosed contract rebasing on the 10-year contract renewals from our foundation customers in Eastern Australia. International volumes were flat in Turkey versus previous period but down overall due to lower thermal coal demand in Indonesia. Balancing these declines have been Premium Emulsion growth, which was up 62% in the half year, driven by customer conversions. We've also seen continued growth in our electronic initiating systems, which were up 14% versus previous year. And the good results of high growth in the first half saw some large conversions coming through. However, we've seen a slowdown in technology trials and uptake towards the end of the first half due to COVID-19 safety protocols. So we're expecting the net impact of the contract renewals to be $7 million higher due to the slower pull-through. As we've previously disclosed, the impact of contract losses in WA is unchanged at $10 million. At our Moranbah facility, manufacturing performance improvements resulted in a 5% increase in production year-on-year and efficiency gains there have also been strong. We have decided to put on hold our Moranbah expansion, given the Australian AN balance and the demand uncertainty related to COVID-19. We've always said this would be a demand-led project. And it remains the next logical capacity addition, and we will revisit this when the demand profile becomes compelling. In the meantime, we're focusing on improving plant efficiencies and reducing operating costs, including the opportunity to improve gas conversion efficiency. And in April, demand held for both the Australian met coal and iron ore customers. And we will continue to keep watching brief of any potential impacts from COVID-19. I'd now like to turn to Waggaman, which delivered a USD 18 million earnings, reflecting a 79% increase from last year. You will remember that the first half of '19 had a negative $32 million impact from a major plant outage. The margin at Waggaman has been impacted by weaker ammonia pricing, which is partially mitigated by lower natural gas costs. I'll speak to volumes and operations on the next slide. Our Agriculture & Industrial Chemicals business recorded a $1 million EBIT in the first half compared to a $3 million loss last year. The third-party natural gas disruption and elevated gas pricing that we saw last year at St. Helens has been resolved. And the outlook for this business will be dependent upon nitrogen commodity pricing and the production levels. Moving on to manufacturing reliability update. You will recall that with our issues we had last year at Waggaman and Phosphate Hill, I wanted to provide you an update on those plants. At Waggaman, the reliability in the first half was 83% versus 76% last year. We are now 91% of nameplate capacity, broadly in line with expectations. We converted our operators and key maintenance personnel to become Dyno Nobel employees at Waggaman. And this will be helping us improve reliability as these operators are now picking up weak signals before an outage occurs. At Phosphate Hill, reliability was at 90%, up on the 75% that we experienced last year. And we've addressed the long-standing issues with linings and phosphoric acid reactors. Production was slightly below expectations due to a number of external factors impacting sulfuric asset availability, including some outage from our sulfur supply source at the mine, Mount Isa, and a 2-week rail outage due to Queensland rail flooding. But our mitigation plans worked well and the result was relatively muted. So I'd now like to turn to our Asia Pacific Fertilizer business, where we had an EBIT loss of $9.9 million compared to a $32.5 million loss last year. The first 4 months of the half, we saw volumes continue to suffer due to the extreme drought conditions that still persisted. However, volumes in February and March were very strong as a result of the much improved weather conditions, and this has continued into April. Unfortunately, the 13-year global commodity prices also impacted profitability. At our Gibson Island plant, we successfully completed a turnaround, setting the plant up to run reliably for the next 3 years. And the plant has restarted in April with the new gas supply from Australia Pacific LNG. And as I've mentioned at Phosphate Hill, we've had improved performance, where production was up 47% versus last year. I'd now like to turn to the outlook of the Fertilizer business because it's been very pleasing to see the significant rain across Eastern Australia driving increased demand for fertilizer, and there's already enough moisture in the ground to support a strong season. At Phosphate Hill, we're expecting slightly higher production in the second half compared to the first, absent any rain impact that will allow consistent rail operations. Global fertilizer prices have been under pressure with DAP and urea close to the marginal cost of production to industry. Commodity prices are hard to predict at the best of times but even harder now due to the uncertainty in economies around the world because of COVID. And that's why we're focusing on the things we can control, like the efficiencies and the business improvements that we've set out for ourselves. And we remain well positioned to benefit when there's an improvement in pricing. As we turn to the strategy of our Fertilizer business, the fundamentals of this business are underpinned by long-term demand for high-quality food, especially from a growing Asian middle class. The business has an unrivaled position with a strong distribution network in Eastern Australia, which is proximate to farmers across a broad, diversified crops. We're also pursuing a number of strategic growth initiatives, including expanding our liquid fertilizer range to make it available to growers on the East Coast for use in precision agriculture. This is a value-added product that's cost-effective and efficient and convenient for the growers and leverages some of our underutilized assets. We're also developing and commercializing new efficiency-enhanced fertilizer products and leveraging our lab services. This includes eNpower, which can be used on phosphate and other blends to reduce nutrient losses. And our LabSTREAM app will be launched in the second half to provide agronomists and growers with enhanced oil testing services. We will be looking for an opportunity to update you on the fertilizer strategy in the coming months, with the format dependent on the COVID-19 situation. We thought it would be helpful now to give you an update on what we're seeing in April. The performance has been pretty resilient in our Explosives business, and this is a good reflection of the benefits of being diversified across geography and commodity. Our overall explosives volumes in April compared to last year were broadly flat. The mining sector in Australia continues to operate well in a COVID-19 environment. And to date, we have not seen any weakening in the demand. In the U.S., it's been more mixed, and as I've mentioned, putting aside the decline in coal, we've seen only a slight softening. In our fertilizer business, we continue to see very strong volumes in April on the back of good rainfall across large parts of Eastern Australia. In April, we continued to see weak global commodity pricing. And as I mentioned, global economic uncertainty is likely to impact commodity price recovery and demand. I'd now like to move to highlight 2 of our key strategic drivers, starting with manufacturing excellence. Our target of a $40 million to $50 million uplift by FY '22 is still in place, and we're on track. We're continuing to shift our mindset across the business to run for reliable production every day, not short sprints. We've tailored plans for each of our plants with initial focus being on Waggaman and Phosphate Hill, given the issues we saw in FY '19. Waggaman is currently on its third longest production run, operating reliably since January of this year. At Moranbah, the nitric acid plant has just completed its second longest run and had its best-ever April production. We're moving our focus to the smaller plants and implementing more detailed reliability improvement plans there as we have at Waggaman and at Phosphate Hill. I'd now like to move to our premium technology, where we're seeing strong demand from our customers, who want to improve their productivity and safety while reducing their impact on the environment. We tailor our premium technology solutions to manage specific site requirements and issues, and our customers are getting better blast outcomes as a result. We are advancing our joint technology alliance with the world's largest mining company, and this will deliver value to them, our business and the industry. In Asia Pacific, our larger Australian-based miners are increasing their adoption of technology solutions, and we see that this will only continue more so after COVID-19. We've seen stronger growth rates in both our premium emulsions and EDS. Our customer demand is also pulling through demand for Delta E trucks, with our fleet growing 145% since FY '16. The fleet has also benefited from improvements in the supply chain, which lowers our cost to produce them as well as increasing the speed to market. With the COVID safety protocols, we're also seeing an incentive to use easy-to-adopt technologies, and our GPS EDS technology is one good example of that. So very practical innovation that's easy to adopt, and it provides great benefits to the quality of blast for our customers. It eliminates human error and actually results in a much more consistent outcome. It underpins our further growth in our electronics detonator sales. Looking into our future technology pipeline, our agenda will be more relevant than ever as customers continue to look for ways to make their operations safer, and automated solutions will be a key part of that. We've made good progress on the integrated strategy that leads our products, our know-how and our technology that creates a better drill and blast result. Our strategy progress continues, and we've hit all of our key milestones in this program. We've had the successful release of second-generation Delta E system, which allows for semi-automated load planning and product placement. We've also seen key milestones for our wireless strategy, including a successful communications trial. And our Nobel fired digital strategy is also on track. So in closing, I'd like to turn to an update on our strategic priorities before taking questions. As I mentioned, Zero Harm remains our #1 priority, and we will continue to work towards year-on-year improvement on our balanced scorecard. Our strategic priorities haven't changed, but we are sensibly responding in the short-term to the impact of COVID-19. We're increasing our focus on cost and capital efficiency, and we will take a disciplined and targeted approach to growth, focusing on low capital, high-return project opportunities. This includes our proactive steps to raise equity to strengthen our balance sheet and increase our resilience in the current environment. And while COVID-19 will inevitably present challenges for every business, we are well placed to manage short-term risks. This will allow us to continue to leverage our market-leading position and strategically-located assets in 2 important and vital industries of the world. Our response plan, along with the resilience of our businesses, our industries and our customers positions us well as we go into the future. I'd now like to open it up for questions.

[Operator Instructions] Your first question today comes from Grant Saligari with Crédit Suisse.

Jeanne, I just wonder if I could clarify just a couple of statements around the outlook. One statement was in relation to an additional $7 million impact on recontracting compared with previous guidance. Could you just elaborate on that? Is that, that you had previously factored in to your contract guidance an uplift in technology? And therefore, the figure was a net figure? Or how is the additional $7 million coming about? And how does it reflect on, I guess, the customer attitudes to take-up of technology at the moment?

Yes, Grant, that's a great question, but that's exactly correct. The previous guidance was always a net number, which assumed the rate of technology uptake, and that has been slowed down with COVID-19, especially some of the more complex technology to adopt. We do think that is merely a delay in the adoption. But just like we have in our own operations with COVID-19, restrictions to site are limited to only essential personnel. We've done the same thing at Phosphate Hill and most premium customers have restricted access as well as some of the state borders here in Australia. And so a number of customers have said for now, they want to stick with what they're using today. And -- but they do intend to continue to move ahead towards conversion, but the conversions do require new people and technical experts to support that.

Okay. That's understood. And just in terms of volume exposure, I guess Australia is sort of indicating maybe some risks around coal when it's quite uncertain. My understanding, though, would be you would have fairly minimal lock-in with respect to take-or-pay on volume, and therefore, would be exposed to any change in mine plans and usage from your customers. Would that be correct? Or is there a significant take-or-pay component in the contracts?

No, we don't see any impact from "take-or-pay" at this point. I mean, we're managing and we're looking at volumes. It's very difficult in this environment to be predicted. But that's why we shared what we're seeing in April, which is very strong volumes across our Australian businesses and talking to our customers and their mine plans. They continue to indicate strong volumes into the future.

But just -- I might have heard it a bit differently, Grant, so I just want to make sure it's landing exactly with you. We do have some take-or-pay volumes on our contracts out of Moranbah and some of the other contracts in Australia. Now under normal, let's call it, normal reduced demand scenarios, those take-or-pay sort of provisions hold. They only don't hold outside of those conditions, right?

Okay. So we might have some unusual conditions. We'll have to see how that comes about.

Sorry, sorry, just to make sure -- because we're just trying to make sure we're actually hearing your question properly.

Yes. It's not -- we don't have take-or-pay in Moranbah. Our customers have a degree of their volumes on take-or-pay from us.

Okay. All right. Just finally for me on manufacturing. I thought -- well, Phosphate Hill and Waggaman, as you've acknowledged, they're improving, but still below, I guess, where I think you'd like them to be. I thought the Waggaman impacts on costs that you outlined, the $13 million were higher than what you would normally expect with the gas efficiency change that you outlined and manufacturing overhead recovery. So wondering what else is happening there? And Phosphate Hill, your guidance for a slight increase in volume still puts it well below nameplate. I'm just wondering what's -- what you're anticipating is constrained in Phosphate Hill, because the cost of Phosphate Hill is still in that mid-$400ish, $450 a tonne. And your aspirations are to get it down quite closer to $400 a tonne?

Yes. I'll answer the Phosphate Hill question first. I mean, absolutely, we're aiming to bring those costs well below $450, but it is highly volume dependent, as you say. I mean, Phosphate Hill actually ran very well in the first half. We did have constraints on the sulfuric acid supply. And it was an unusual combination that all hit sulfuric acid availability at Phosphate Hill between flooding a portion of the rail line for 2 weeks, in conjunction with some unplanned downtime from the mine, which is our source of -- our third-party source of a significant piece of our sulfuric acid and a small turnaround at Mt Isa. So it was an unusual confluence of three different things, but it all hit sulfuric acid availability, which required us to slow down production at Phosphate Hill due to sulfuric acid availability. But the underlying reliability of Phosphate Hill was very high. And that's why we think in the second half will be an improvement on the first half because the rail flooding, the 2-week rail flooding, in and of itself, we could have managed that impact due to the mitigation plans we have in place, but the confluence of all 3 factors in a short period of time resulted in a logistical challenge for us. So that's why we're expecting the second half to be stronger, but that plant has had a very good reliability in the first half. At the Waggaman facility, we've -- we're now in our third-longest run, and that's been running well since January. We did see 2 outages late in 2019, both of which were related to third-party power outages, one off-site and one in the chemical plant itself. So we're working with both of those parties to understand what the root cause of those power outages were that had a knock-on impact on Waggaman. So since the beginning, we converted the operators over to our own workforce at the end of the calendar year, which has also coincided with this excellent run we're in right now. So we do feel as though we're in a much better shape. Obviously, we've always said that there is some risk of these new plant issues until after the turnaround. And so we're cautiously optimistic. But we are confident that we're on the right track with our reliability plans.

Our next question comes from John Purtell with Macquarie Group.

Just had a couple of questions. Just on the fertilizer distribution side, I note your comment there that you're expecting flat distribution margins. Generally, would expect margins to improve on seasonally stronger conditions, so I just wanted to understand that.

Yes. I think it's probably a story of 2 halves. I think that the distribution margins are always trickier in a falling commodity environment, which we saw in the first half. I think commodity prices have steadied. They're holding firm at a low value, but they're holding. And so, we might see a little bit. But in general, the margins are fairly steady. They kind of -- they go up a little and down a little bit depending on movements in supply and demand. But overall, I think that's where our guidance is that they would be roughly flat in the year. They were quite strong last year. And so -- but that was in a more of a rising market.

Yes. So John, if prices hold more steady and demand continues to look good, you'd expect quite a different outcome in the second half.

And look, just in terms of the fertilizer business, obviously, you're retaining that business post the review. Is there a potential plan to revisit that down the track? Just wanted to sort of get a better understanding of your thoughts there.

There's no plans at this point. I think we understand the value of the different options, and we're focused now on how to make that business valuable to our shareholders. We're focusing on improving its operations and also to make sure that we continue to follow the industry trends of high-performance products as well as precision agricultural trends. And so we think it's a very strong business. I think it will be very resilient in this COVID environment and provides us a lot of flexibility and upside when commodity prices improve.

And just a last one. You've obviously indicated you'll be deferring the Moranbah expansion there. What about sort of other growth initiatives across the sort of Delta E and the emulsion side? Are they still sort of moving forward?

Yes. I think, yes, all of those are still moving forward. That was part of the rationale for the capital raise is to make sure that all of those high-returning projects continue to be funded as they have been to date. We continue -- none of them are large capital outlays, but they're all small capital outlays with very high returns and very certain returns as well. They're supported by customer demand and customer contracts, and I think as we go into this environment in places, there may be good opportunities to pick up some customers and/or some small businesses that struggle to meet the demand in a COVID-19 world.

Your next question comes from Alex Karpos with Goldman Sachs.

Just a few on my end. First, on that fertilizers business. Jeanne, you touched on precision agriculture and some of the kind of exciting opportunities here. How should we think about the investment needed in this business to position it for these kind of future trends?

Yes, that's a great question, Alex. I think it'll be modest. We're not expecting massive investments, but there's some investment needed to capture these opportunities. But really, what we're focused on is kind of leveraging the underpinning strength of the business and building on those strengths. So the incremental capital will be relatively modest and we'll scrutinize it. But we do think it's important to make sure that we maintain the competitive positioning of that business.

Got it. And turning to the U.S. on the coal side. Your commentary here contrasts pretty meaningfully with your major competitor last week. Was there any customer-specific kind of outages there or actions we should be aware of in the first half or any share loss? Just any incremental color you can give on that market would be helpful.

Yes. The market is holding up fairly well, but we certainly have a watching brief on it. I mean, the only 2 issues that we've had was the Arctic mines that I mentioned in Eastern Canada. Those are located in native populations that were particularly sensitive to the potential health risk, and so, many of our customers chose to proactively shut down for a period of time. And as I mentioned, those are slowly reopening with the last -- there are only 3 that we service that are still closed and due to reopen in July. In the U.S. itself, we've -- the only impact on the ongoing business has really been in the iron ore area due to the auto industry and the demand pull-through from that. Again, they've announced that they're going to reopen in July, and we'll keep a watching brief on that. But overall, we're very pleased with our positioning in the U.S. market. We believe we're the strongest positioned in that market. We've got high-quality customers and great contracts. But clearly, what we're looking at is most of these contracts about servicing all their volumes. And if their volumes go down, that would obviously impact our volumes. But it's not about our contracting. Our contracted volumes are very strong, and we're very pleased about how we positioned that business.

Your next question comes from Richard Johnson with Jefferies.

A couple of questions on Dyno or DNAP, if I could start with, please. Just going back to the technology shortfall commentary you made. Apologies if I'm being slow here, but is the $7 million all in the second half? Or was some of that incurred in the first half?

It's mostly a second half issue because of most of the COVID restrictions started in March. And so that's where the restrictions on technical support people in order to support those conversions were restricted. And so therefore, the -- without the trials and without that technical support, the conversions will be delayed.

Right. Okay. And then when I think about the underlying performance of the Asia Pac business, and if you adjust for all the contract renewal impacts, I mean, how are you feeling about the business? I just want to try and clarify whether you've lost any share on the East Coast?

No, we haven't lost any share. We did make a decision when we recontracted not to over contract. Previously on the Moranbah foundation customers, those 10-year contracts, there was a decision made 10 years ago to over contract and to buy in spot to supply those. As those contracts went through their cycle, that was a very good strategy for most of those 10 years. But the last year or 2, kind of buying in extra volume and reselling it was actually very low-margin and sometimes at a loss. And so when we recontracted, we consciously made the decision not to have the strategy of over contracting. And so some of our volumes came off a bit as a result. But that was part of the strategy and not a financing -- was a financial optimization decision.

Got it. And then the international business, I just want to clarify, does that make any money at all?

It does make money. Like I said at the start, our 2 large and the best explosives business in the world are Australia and the U.S. The international business does continue to make money. Otherwise, we wouldn't be in this. But the U.S. and Australia remains the 2 best explosives markets in the world.

Got it. And then just finally, Frank mentioned those 2 organic growth opportunities buying in the JV partners and some technology-based investment. I was just wondering if you could talk a little bit more about the benefits of that and trying to put some context around it or some scale, please?

Yes. I mean, I think we're all talking small investments with high returns, the kinds of whether some might be JV partners, some may be distribution outlets. But the advantage of buying those out, if we were to do that, is that, for instance, some of the distributors do not sole source from Dyno, and so it allows us to lock in sole sourcing. But more importantly than that is that it allows us to sell our technology in a powerful way. A number of them still basically push the same product people have bought for the last 10 years. And we think there's real value to customers in our premium products. And a number -- some of the joint ventures do a great job of selling that. And some actually don't do as strong of a job. So we do think there's big benefits in actually our conversion to premium technologies if we had better control of some of its routes to market.

That's really a continuation also, Richard, of what we've been looking at for the last little while. So it's not a change in direction as such.

And I think the reason we bring it up, Richard, is only because we think it's the COVID environment. It's more challenging. There could be more opportunities. We've been proactively doing that, where opportunities arose, and we thought the benefits were there. But we think there may be more coming.

Our next question comes from Sam Teeger with Citi.

What proportion of AN customer contracts come up for renewal, both this year and next year? And perhaps, if you can just talk about any prospects of stronger prices coming through, given some of the recent movements we've observed in the AN price?

Yes. I think it's difficult to say, Sam, about movements in pricing. Obviously, we spent a lot of time testing the market for what price we can do anytime we have contract renewals. We've had very strong contract renewals over the last couple of years here in Australia due to the fall off of 10-year contracts. In the U.S., we actually proactively went out and renewed a lot of our contracts early, which I have to say in hindsight, we thought it was a good idea at the time, but in hindsight turned out to be a very good idea. We knew that coal was in structural decline, and we felt it would be beneficial to renew some of those contracts and extend them early. So we have a relatively light renewal cycle coming up, but there's always contracts. We have a very broad customer base and a lot of contracts. There's always a small churn. And the good thing about that, it does give us line of sight to what the market pricing is in each of the respective markets.

Sure. And can you please provide a little bit more color on the $40 million to $50 million manufacturing opportunity you discussed on Slide 35? Just keen to understand which parts of the business do you see this mainly coming through in.

Yes. That's -- if you look at the appendix, we show the 4 assets that that's associated with. And it basically says moving reliability up from the 85% mark to the 95% mark will translate into that. Obviously, commodity pricing will have some impact on that absolute number. But it really is focused on the foremost leveraging plants, and those are Waggaman, Phosphate Hill, Moranbah and Cheyenne. And obviously, we're pushing reliability across our portfolio, but just those 4 assets, moving them to a 95% reliability, which is borderline first and second quartile industry benchmarking will result in that prize by FY '22.

Your last question today comes from Scott Ryall with Rimor Equity Research.

I was just wondering, Frank, can you just remind me your target gearing ratios, please?

We've always said our target gearing ratio is depending on where you are. But through the cycle, ideally 2x or less, extended at certain times up to 2.5x. For example, it was extended up to around that 2.5x level at a certain time in the cycle and during the build of Waggaman, but normally speaking, less than 2x.

Okay. So am I -- I'm just trying to get my mind around the comments around financial flexibility for the next couple of years. So obviously, some of your businesses that you would suggest are at the low point of the cycle. And therefore, as earnings improve, your gearing metrics improve and you have increased financial flexibility. Are you -- if by taking the actions today though, you're a little concerned that with COVID, you potentially don't have as fast a recovery from the cyclical lows? Is that one of the points? And I guess what I'm interested in, it looks to me, and I'm just trying to get my mind around it, looks to me like a classic case of, didn't sell the business you're aiming to sell, and therefore, you've got to raise equity as opposed to giving you a huge amount of financial firepower for opportunistic growth avenues? Because every growth prospect you've talked about that might involve capital doesn't look to be hugely capital intensive.

Yes, I'll take that, Scott. I mean, I think that, as we said, it really is an uncertain environment that we're in, and we want to make sure we have a strong balance sheet for whatever things may eventuate. And so the risks are clearly the overall global economy and how that flows back into demand for primary products and services that we supply. And there's also the commodity pricing. And clearly, we've been waiting for the rebound in commodity pricing for some time. And there is the risk now that COVID-19 may delay that. It's those kinds of risks that we want to have a strong balance sheet for and the equity raise supports that. It also allows, as you say, a lot of these smaller opportunities to -- but those opportunities are more high returning and more business as usual. I mean, I think none of us really know what the environment holds ahead of us. And clearly, if the environment turns out to be more benign than that, it does provide more optionality. But right now, our focus is not on the upside. It really is about mitigating the downside, and we'll continue to monitor that and take prudent action. But we're going to take all the mitigations that we possibly can to minimize any potential impact of COVID-19 on our business.

The only thing I'll add to that, Scott, complementary to that answer is that in normal times, half year is our peak gearing level. So 1.9 is a mid-year on a pro forma basis, mid-year gearing level. Of course, we don't understand how things are going to play out over the next month to the normal times that would come down a bit.

And I would just say, Scott, I think you made the assertion of linking fertilizers with the equity raise. Those were absolutely 2 separate decisions. It was never about 1 or the other. It was really about what's in the shareholders' best interest.

We have one final question, which comes from Belinda Moore with Morgans.

Can I just clarify, Frank, just full year CapEx? And also, are you expecting your normal sort of through the cycle cash flow conversion? And also, Jeanne, you've talked about the cost savings, thank you, but what sort of increased supply chain costs do you also expect?

Yes. Let me answer mine first because I think that's easy. The supply -- the increased supply chain costs, you are correct that there has been some as we used our secondary supply sources, but it's been quite minor. And the $20 million was meant to be a net number of the direct supply chain impact. But they have been relatively minor, but they do -- there's bits here and there. And I think that I think, overall, we feel confident that our supply chain is robust and our secondary sources generally are not significantly higher than the primary preference.

Thanks, Jeanne. Belinda, the CapEx assessments and secondary CapEx to date, the half year is just under $120 million. And I guess, in answering what the outlook will be for the remainder of the year, I'll kind of put a health warning on it, because it's a very dynamic situation that we're managing, right? We're being very careful to make sure we spend what we need to spend to keep our plant safe and reliable. At the same time, there's no point undertaking also activities where you are going to be able to bring the right people to a site or get the right path sometimes. So all of that's very dynamic and fluid. Looking through all of that, we're probably going to be on the other side of it, maybe around the [ 2, 270 ] mark. But I really put a warning on that, because we do have to manage it in a dynamic way.

And also, can you just talk about sort of your full year cash flow expectations, please?

I won't get too specific, Belinda, but you've been around as long as I have on this stock, maybe longer. So you know what happens in the second half is, normally speaking, we have a lot stronger cash flow. Now we happen to have a pretty good cash flow in the first half as well this year, which is somewhat abnormal. So we can hope that if conditions are close to normal, that we'll see the typical strong cash flow coming in the second half.

So more checking, there's no sort of customers of concern. But yes, you do generate very strong cash flow on a full year basis.

Yes. Thanks, Belinda. Well, thank you, operator. And on behalf of Jeanne, Frank and myself, thanks for joining us this morning on the presentation call. And with that, that closes the call of the meeting.

Yes. Thank you.

Thanks.