Dyno Nobel Limited (DNL) Earnings Call Transcript & Summary

Good morning, and welcome to Incitec Pivot Limited's 2021 Financial Half Year Results Briefing. I'm joined this morning by Managing Director and Chief Executive Officer, Jeanne Johns; and Chief Financial Officer, Nick Stratford. The materials we'll be covering today have been lodged with the Australian Securities Exchange and can be found on the ASX and Incitec Pivot Limited's websites. At the end of this presentation today, we'll 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 complete today. Finally, I would like to draw your attention to the disclaimer found on Page 2 of the presentation. Thank you. And now I'd like to hand over to Jeanne.

Thank you, Geoff. Good morning, and thank you for joining us today. I'll start with the performance overview and key business issues, including a deep dive on manufacturing, before Nick covers financials today. Then I'll turn to each of our businesses and take a closer look at technology, sustainability and outlook. We'll conclude with our priorities for the second half before taking questions. I'll start with our #1 value and our license to operate, Zero Harm, which has been especially important during a global pandemic. Our Zero Harm culture and discipline has helped us to design and implement extensive COVID safe protocols, allowing us to continue to operate throughout. Looking at our overall Zero Harm scorecard, our total recordable injury frequency rate of 0.72 is slightly above the 0.7 target that we set for ourselves. Last year, I spoke about the increased focus that we were placing on our environmental performance, and that's pulled through in our results that has seen us meet our target of 0. We've also been driving a culture of recognizing and recording process safety incidents, which you can see coming through in our numbers, particularly in our customer-facing areas. Importantly, this is not feeding through to potential high-severity incidents. We're continuing to focus on safety improvements with targeted, site-specific safety plans and a refresh of our company-wide safety training program. Turning now to our first half performance. The biggest impact on our performance versus last year was a scheduled turnaround, which had an impact of $59 million. We've also had some unplanned outages with a $14 million impact. Our Explosives businesses have performed well, with our mining volumes and margins continuing to be underpinned by the resilience and the reopening of our key markets as well as the competitive strength of our technology offer. Our fertilizer business returned to a first half profit with good potential upside in the second half from firm commodity prices and good agricultural conditions. Our net debt-to-EBIT ratio of 2.1 is down from 2.8 last year, and we will be paying an interim dividend in line with our policy. As we move into the second half, we're confident of capitalizing on our growing momentum. It's important to note that there'll be a much greater skew to the second half than our usual seasonality, with both a reduced turnaround activity load resulting in a $44 million difference between the halves and a realization in excess of $25 million of earnings from unsold fertilizer that was manufactured in the first half. Turning now to our 5 key building blocks to improve financial performance. As you can see, good progress has been made on 4 of these. A highlight of the half year is the recovery and return to profit for our fertilizer business. Good agricultural conditions and strong production runs at Phosphate Hill have captured the current high fertilizer prices. We've had good momentum in our explosives technology with strong growth in the sales of premium technology in the first half, and we remain confident in delivering the 10% earnings growth by FY '22. Looking at the response plan that we put in place last year. We've seen an uplift in organizational efficiency, delivering the first half target of $20 million. And we are on track to deliver the $30 million for the full year. On Manufacturing Excellence, clearly, the first half has been difficult. But the strategy is the right one, and we're continuing to focus on the unlocking of the $40 million to $50 million of earnings potential. The timeframe for this delivery has been moved back by about 12 months, reflecting the impact of COVID on our turnaround schedule and resourcing plans. As per our update in February, our plants in Missouri and Wyoming experienced unexpected downtime during the first half. The issue involved has been resolved at the Missouri plant. And at Cheyenne, Wyoming, the plant has been running normally with the issue being managed and will be permanently addressed at its scheduled turnaround next year. I will give you an update on our Manufacturing Excellence strategy shortly. But first, I want to talk about our Waggaman plant. Clearly, the restart of the Waggaman plant has been disappointing, and the issues behind them are being addressed with a real sense of urgency. We've spoken about the legacy of the plant's initial build. But regardless of the plant's history and plant's past decisions, I'm 100% focused on fixing the problems. Essentially, the plant is capable of long runs, and the issues that are preventing them are all fixable. We've put in place a reliability task force at the beginning of the year to address the post turnaround reliability optimization. And that has now been augmented with more internal and external capability and breadth of skills. We now have 3 expert teams dedicated to the repair, restart and reliability of the plant. The immediate priority is restarting the plant and keeping it running. The root cause of the current outage has now been identified, and a detailed work plan to fix it has been put in place. The coupling failure was caused by liquid carryover, which destabilized the compressor during the start-up phase. And to address this, we'll lower both the liquid levels and address the trip points during the start-up phase. Along with this, the coupling and the bearing are being replaced, which will take the full 3 weeks of the announcement we had last week, given the need to de-inventory a section of the plant. Upon successful start-up at the end of the month, the restart team will be monitoring all the critical parameters of the plant to keep it running and prevent trips. Alongside this, the reliability task force will work to improve the plant's resilience against future trips and improve the time it takes to fix and restart. Its target is to get the plant running consistently at nameplate. That's 800,000 metric tons a year that we know it's capable of. The task force has been addressing the longer-term redundancy issues that we've talked about before. This is expected to culminate with the replacement of the ammonia cooler. Per our April update, an outage of 3 weeks is expected in FY '22 or '23 to allow for the new cooler to be installed. We will aim to provide steam and possibly power redundancy at the same time to provide Waggaman greater independence from the Cornerstone site. I'd like now to turn to the outlook. Waggaman has produced 205,000 metric tons of ammonia to the end of May. Importantly, we have set the task force a stretch objective in delivering reliable nameplate production in FY '22. While we're not aware of anything specific that would result in plant downtime in the last 4 months of the year, our team is focused on reducing risks that could cause a plant in downtime. We do know that the plant is capable of good long runs. And once it gets running, it runs very well. We thought it would be helpful on this slide to split out the earnings impact from the cash fixed costs and the trading losses for the second half that were embedded in the previously announced update. And we will give you an operational update on how we are tracking in August, halfway through the 4-month potential period. I would now like to talk about our manufacturing strategy more broadly and our target. We've always said that the Manufacturing Excellence strategy was a 4-year process, reflecting the time needed to embed the changes on the back of the turnaround cycles. There's a lot of work that's been done over the last few years improving preventative and predictive maintenance and embedding improved operating discipline, but the real upside in terms of tonnes only pull through post turnaround. We've also focused on designing turnarounds for the long-term reliability that we expect from our plants, which drives better scope definition, schedule and cost. This year, we've delivered the Mt. Isa and the St. Helens turnaround successfully and on budget, and the Moranbah turnaround is currently underway. The Cheyenne and the Phosphate Hill turnarounds are scheduled for next year. Each turnaround we learn from the previous, and our execution capability has continued to grow. There's also work to optimize post turnaround to ensure the delivery of the production promise. I'd now like to turn to that promise. We remain focused on delivering the $40 million to $50 million through this program. But as I mentioned, we have extended the target realization date to 2023. You can see here where we are heading and the status and the benefits for each of the 4 plants. The prize is dominated by our 2 largest plants, Phosphate Hill and Waggaman. We've talked about Waggaman, where there's clearly earnings upside when we get the plant back to nameplate. Phosphate Hill ran well in the first half, capturing the benefit of the improved commodity pricing cycle as it enters its last year before its turnaround. Planning for the turnaround is well progressed. At Cheyenne, we're confident of a good run following the FY '22 turnaround. And at our Moranbah plant, we have had a good run with the plant running at strong rates this year, and it's on track to hit its target post the current turnaround. I'm pleased now to turn to a key part of our sustainability agenda, our response to climate change and our long-term aspiration to net zero. Our products and services are vital to providing food for the world's growing population, along with the raw materials required to shape our cities and help build renewable energy infrastructure that's critical for a decarbonized future. The challenge for us is how to continue to do this while reducing the environmental footprint. We operate in hard-to-evade industries and recognize that new technologies will be necessary to meet our long-term net zero aspiration that we're committed to achieving as soon as possible. We've evaluated our emission sources and have identified emission reduction technologies. We're now assessing technologies such as solar hydrogen and carbon capture and storage for technical and commercial readiness, which also presents us with opportunities given our hydrogen and our ammonia handling expertise. I'll cover later the progress that we're making on our short- and medium-term actions on climate change. But first, I'll hand it over to Nick to talk through our financials.

Thanks, Jeanne, and good morning, everyone. In my presentation today, I'll cover the key financial metrics of the company and provide an update on the key focus areas for finance that we disclosed to the market last year. I'll start today with an update on our response plan. Pleasingly, we are ahead of plan and on track to deliver the program in accordance with our market promise. In the first half, we have delivered a further $20 million in savings, which you'll see embedded in the business earnings waterfall graphs, verifying that these savings are all hitting the bottom line. For the program to date, we have now delivered $40 million in savings. In regards to the composition of the cost reductions in the program to date, I'll provide some more detail. 70% of the savings are from personnel costs, which is split evenly between employee and contractors. These costs have been reduced in all areas of the business, except for North American manufacturing. 30% of the cost savings were derived from reductions negotiated with our loyal suppliers working collaboratively within our procurement team in North America and Australia. As you can see, we're tracking ahead of our targets and remain confident in delivering the total program value in line with or slightly ahead of the guidance we provided last year. These programs are tough for the organization to manage and deliver, and I'd like to thank our people for their effort to date to deliver these outcomes that are helping underpin our business results. Moving to the group results. Overall, the results can be summarized as having 3 main drivers: manufacturing, customer-facing businesses and market factors. In manufacturing, the planned turnarounds at Mt. Isa, St. Helens and Waggaman have had a significant earnings impact, while unplanned plant outages in North America have also negatively impacted results. For the customer-facing businesses, overall, the businesses are performing well in the markets they are operating in. In DNA and DNAP, business earnings were largely flat in tough market conditions, delivering the result by continuing to show the benefit of the technology value-driven sales approach. In IPF, the business held volumes and margins in a competitive market. And as mentioned on the previous slide, the response plan helped underpin the earnings of all these businesses. Finally, to market factors. We're finally seeing some tailwinds in commodity prices, which are being partially offset by the stronger Australian dollar. We've seen $25 million benefit in the first half. And as Jeanne mentioned, we have seen -- we have in excess of $25 million of profit sitting in ammonia phosphate inventory at 31st March 2021, which has been largely realized in the second half already. As we look ahead, we've provided details of the FX hedge protection that we've put in place to mitigate the risk of the rising Australian dollar impact on our U.S. dollar-denominated fertilizer sales. We take a risk-based approach to hedging while looking to maximize participation. The program we have in place provides this for the second half of FY '21 and for FY '22. As we look at the rest of the P&L, we've seen a reduction in interest costs of $11 million. This has been driven by a lower average debt balance for the period, coupled with the positive impact of the higher Australian dollar on our U.S. dollar-denominated interest cost. The reduction in interest expense was partially offset by a $14 million one-off cost associated with the repurchase of $144 million of long-term bonds as part of the business strategy to rebalance this debt funding structure. The business declared a dividend of $0.01 per share that was fully franked, representing 53% reported first half NPAT. This represents a return to the company's dividend policy of paying between 30% and 60% of NPAT, after not paying dividends in the previous financial year due to the refinancing of the company's balance sheet during more uncertain times. Moving to cash flow of the business. This is an area that is a key focus for the company as we look to drive stronger cash flows to fund returns to shareholders, improve our balance sheet and provide funds to reinvest for future growth. In the first half, we recorded $104 million cash outflow from operations. This was largely driven by a return to more normalized funding structures and seasonal conditions. The half year has always been a low point in the cash flow cycle for IPL, and our expectation and targets for the second half give us confidence in the strong cash flow outcome for the full year. As we review the cash flow in more detail, there are some key drivers that are as follows. The movement in trade working capital represented a $145 million cash outflow despite underlying trade working capital at 31st March 2021 being almost $50 million lower than the prior year. This is a result of reduction in trade working capital facilities and a higher underlying opening balance in FY '19. The other key movement I'd like to point out is the $141 million spend on sustenance capital. This is attributable to the completed turnarounds at Mt. Isa, St. Helens and Waggaman during the period, with the Waggaman extended turnaround costing an additional $20 million above initial estimates. When IPL raised equity a year ago, we made the commitment that we would use those funds to strengthen the balance sheet. We remain 100% committed to the promise we made. And as you can see, we are making progress towards that goal. I'll draw your attention to the table on the top right-hand side of this page entitled Financial Indebtedness. This is the first time we've disclosed this table, and it represents how we view and manage the financial obligations of the company. Pleasingly, we have seen an almost $1.1 billion improvement in our indebtedness as a business over the past 12 months. A large part of this is represented by the $644 million equity raise in the second half last year. But this has been supplemented by a $280 million FX improvement from the translation of our U.S. dollar debt position, driven by an appreciating Australian dollar, as well as the $168 million reduction in trade working capital facilities, which we applied operating cash flows against. We've undertaken the following activities in the past 6 months to optimize the balance sheet. We repurchased $144 million of fixed-term bonds to rebalance our funding between fixed term and variable term debt. As you may remember, we announced at the end of last year an intent to repurchase up to $200 million of bonds. We did not reach that level as the pricing required to complete it fell outside the financial returns metric we set for the repurchase. Recently, we renewed our SFA for a further 3 years, reduced the amount of the facility to reflect the company's improved debt position. The facility was renewed with sustainability KPIs, whereby IPL will achieve a lower interest rate if we hit defined metrics that improve the impact of -- our operations have on the environment over the next 3 years. We are proud to commit to this improvement to our lenders. And as Jeanne mentioned earlier, we are working hard at delivering these initiatives and raising the bar further the next time we renew this facility. And finally, we have reduced 37% of our balance sheet hedge position over the past 6 months and are committed to closing out the remaining position by 30 September 2021. As outlined last year, this action will result in our cash net debt position being more closely aligned to our reported net debt, bringing greater transparency to our balance sheet. At our investor briefing in August last year, we made a commitment to deliver improvement in the areas outlined on this slide. Today, to conclude my presentation, I'd like to give you an update on how we are tracking against these. Focus on balance sheet strength. I've largely addressed this section in the previous slide, but I want to reiterate our commitment to simplifying and strengthening the balance sheet. And as you've just seen, we are making good progress, and I look forward to a strong second half and further improvement in this area. Free cash flow generation. We set a goal to focus on underlying trade working capital improvement. That is the trade working capital position before balance sheet factoring. At 31st March 2021, we've recorded a $50 million or 7% improvement in underlying trade working capital compared to the prior year at a time when commodity prices are higher. The business has transparent targets for improvement that are set and owned by appropriate people within the organization. For the response plan, we are on track to deliver and have now moved our focus to driving greater operational efficiency to ensure that the savings we deliver are sustainable and don't creep back into the cost base. And on sustenance and capital spend efficiency, this is an area that remains a work in progress for the business. Given the additional spend required to complete the Waggaman turnaround this year, we've increased our sustenance budget to $320 million in FY '21. While this is still below depreciation, it is above our previous guidance of $280 million to $300 million. We're working hard to improve long-term sustainable CapEx planning and improve project execution, while delivery of the Manufacturing Excellence program will also be a key contributor to this area. And finally, targeting higher returns. To drive ROIC improvement, we have 2 key focus areas: number one, improving the cash flows from our existing asset base; and secondly, improving our ROIC from future investments made. The business has a good recent track record of investing growth capital. We have clearly defined target that focuses much on cash payback as they do on project IRR. Our margin expansion in North America explosives is a good example of this, and our expected growth in DNAP will demonstrate this as well. The best recent example we have is the Perdaman offtake agreement, which will provide a significant material improvement for the fertilizer business ROIC. On the underlying business, we have a specific target for improvement on our assets that are delivering below cost of capital today. In many cases, the delivery of our Manufacturing Excellence program will result in significant and material improvements that will improve asset returns and contribute to IPL's overall improvement in return on capital. With that, I'd like to thank you for your time today and hand back to Jeanne.

Thanks, Nick. And I'll now speak to each business, starting with the summary. The EBIT for the group was $110 million, and the first half was significantly impacted by our 3 scheduled turnarounds. This shows up mostly in the Dyno Nobel Americas numbers. But also, Mt. Isa's shut was in the fertilizer business. I've already spoken about the challenges of the Waggaman plant, and I'd now like to address the underlying business, which performed very well. In our Explosives businesses, demand for our premium technology has underpinned our volumes and our margins. And as we head into the second half, we're seeing good momentum in technology and its ability to help us win business. Our fertilizer business pleasingly has returned to profit, benefiting from strong operations that have captured improved commodity prices. Now I'll turn to each of our Explosives businesses, where we operate in the 2 best mining markets of the world, starting with the Americas. As I mentioned, earnings were impacted by the manufacturing performance, including the unplanned downtime at the Missouri and the Wyoming plant. From the adjusted numbers on the slide, you can see that we had a really strong Explosives performance given that the market was challenging. In constant currency, our EBIT was only down 1%. That's 12% in Aussie dollar terms. This performance reflects the strength of our technology, which continues to underpin our ability to grow in the high-quality sectors of quarry and construction and base and precious metals, mitigating the impact of the coal market. And you can see the success of our diversification strategy from the pie chart on the left, with 80% of our revenue now coming from these quality sectors, a significant increase on just 5 years ago when it was only 60%. This is showing up in our premium technology sales, which continue to perform well. And during the half, we saw good growth with a 20% increase in revenues in base and precious metals as our technology continues to enable us to win new contracts in that high-value market. Quarry and construction continues to track in line with the market, and we continue to gain momentum with our value-driven sales approach. Turning to the markets of -- in the Americas. In the second half, all 3 market sectors are expected to grow. The outlook is very strong in both quarry and construction and base and precious metals, where 80% of our revenue is generated. In base and precious metals, the sector has experienced strong gold and copper pricing, which are supporting mine recovery following some COVID-related closures last year. In quarry and construction, we expect mid-single-digit volume growth compared to the same time last year as the economy starts its post-COVID recovery. And there's clearly upside beyond this financial year with the step-up in U.S. infrastructure spending. Turning to coal, which represents around 20% of our revenue. Market forecasters are predicting a recovery in the second half on the back of better economics and the cycling of a very poor half last year. However, some coal bankruptcies are expected to limit our volume growth to low single digits. In summary, the demand outlook for our U.S. Explosives business is positive for the second half of the year. And we're confident that we'll start seeing the pull-through growth of -- in earnings from our technology and our customer wins. And as soon as we're able to resume overseas travel, I look forward to inviting you to the U.S. to see firsthand our impressive Explosives business there. Turning now to the Asia Pacific. We're pleased with our performance. The flat result of $70 million EBIT is a good outcome given the softness in some of our end markets. The response plan savings offset the impact of softer demand from coal in international markets. Moranbah delivered a strong manufacturing performance in the half with production up 4%, and it's pleasing to see such a strong result at the end of its pre-turnaround run. It is now in the early stages of its turnaround, which is going to plan. As we indicated at full year, strong growth in technology has offset the impact of the recontracting. And you can see strong growth in our electronic detonators, up 30% PCP. Our technology performance continues to underpin our ability to win contracts. And in FY '22, we expect to see technology growth really pull through more visibly in our earnings once the Moranbah turnaround is complete and the recontracting has washed through. Turning to the markets of Asia Pacific. We're expecting good Australian volume growth in met coal, which makes up the bulk of our coal business. Iron ore demand and prices remain strong, as does gold and metals, which should provide favorable trading conditions for our business. The market outlook supports our continued performance and growth in technology sales. Turning to our fertilizer business, which returned to profit during the half, delivering an EBIT of $20 million. Our solid Distribution business performed well, reflecting favorable agronomic conditions, although the March flooding did defer some sales into the second half. Our strong operating performance enabled us to capture value from the improved commodity pricing. And as I mentioned, we ended the half with excess of $25 million of unsold manufactured stock. It's important to note that the manufacturing performance included the planned Mt. Isa turnaround, which impacted volumes at both Mt. Isa and Phosphate Hill. As we progress our strategy to become a soil health company, we're seeing growing demand for our intensive soil testing, which is resulting in good growth in our laboratory sales and liquid fertilizers. Turning now to the fertilizer markets. The outlook for fertilizers in the second half is very positive. We are well placed to benefit from the improved commodity prices, and recent rainfall is providing us confidence in the winter crop. And improved water availability provides potential upside from BigN volumes in the fourth quarter and into next year. Customers are responding well to our value-added products, and we continue to develop our precision farming solution. We will also see the earnings from that unsold manufacturing product that I mentioned earlier. Longer term, as we told the market earlier this month and Nick spoke to, we've reached a 20-year offtake agreement with Perdaman Chemicals and Fertilisers for up to 2.3 million tonnes a year of urea. The deal, which is conditional on Perdaman obtaining finance for its proposed plant, underpins our strategy of creating a soil health company and provides a low-capital, high-return option to secure local urea supply at globally competitive prices and urea that's made with low emissions. It improves supply chain security for local farmers while also providing the scale and security of supply. This agreement has no implications for our Gibson Island operations, where we continue our efforts to secure affordable, internationally competitive gas supply. In the coming months, we will go to market to test future gas supply for the plant from 2023. Now I'll go to our premium technology, which is seeing strong demand from customers who are looking to improve their productivity and safety while reducing their environmental footprint. We're seeing strong adoption of our electronic detonators in the Australian market with growth of 15% pcp, and our premium emulsions and electronics continues to deliver new customers in North America. And there's more earnings growth potential with electronic detonators representing approximately 15% of the current market. This underpins our technology building block and the target of a 10% technology-driven earnings growth by FY '22. Our recent win of a gold customer in Indonesia is a great example of our technology, in particular, Delta E and Nobel Fire, enabling us to improve our exposure in the attractive gold sector. And we're also seeing increased momentum from customers for technology trials, which have restarted following COVID interruptions. And our customer trials in Chile are progressing well, where our technology is delivering superior blasting outcomes. Our premium technology offering today is in support of our vision of the automated connected bench, and this vision is starting to become a reality. And it continues to resonate with our customers as they look for ways to make their operations safer, with automated solutions playing a key role. We've made significant progress on our Nobel Fire digital platform, which will tie it all together by enabling end-to-end automation from the blast hole design to recording blast outcomes. Looking at our technology strategy pyramid. It starts with our raw materials, where we're focused on commercializing a new stabilized bulk AN, which dramatically improves the durability and quality of AN in transport and storage. Our automated bulk explosives loading equipment has cleared a major hurdle and is starting to move into field trials as part of our technology alliance with a large Australian miner. Regulatory approvals for our wireless CyberDet have been completed, and the first releases of Nobel Fire platform have been commercialized. I'm now pleased to return to sustainability by looking at our agenda more broadly. As part of our license to operate and as societal expectations continue to grow, we are increasing our focus on operating sustainably and how we care for the environment, our people and our communities. In March, we released our 10th sustainability report with the key elements captured on this slide. And as I mentioned earlier, a key part of our sustainability agenda is our response to climate change and our long-term aspiration to net zero. Last year, we delivered our target of a 10% reduction in emissions intensity against the 2015 baseline. And we're continuing to progress decarbonization projects, which are the equivalent of removing 43,000 cars every year from the road. Published in the first half, our $2.7 million feasibility study with ARENA explored ammonia production from large-scale renewable solar hydrogen. And our new Decarbonization and Energy Transition Steering Committee will look for opportunities to capitalize on the transition to net zero, including investigating what's required to make solar hydrogen a commercial reality. I'll turn now to an update on our outlook and our strategic priorities before taking questions. Our detailed outlook commentary is in the profit report, but I wanted to touch on here the stronger-than-normal weighting of earnings that we expect in the second half. Seasonally, our business has always had a stronger second half. But this year, it will be more exaggerated. We talked about the more than $25 million of earnings of manufactured product from the first half, which will be realized in the second. And we have only 1 turnaround in the second half compared to 3 in the first, which results in a $44 million difference. We are looking to deliver better plant reliability, and the fertilizer market conditions are also more positive than second half of last year. Our underlying markets remain strong, and you can see here the current commodity price expectations are positive. So as we head into the second half, it goes without saying that our COVID safe protocols will continue, allowing us to safely operate. We'll continue to drive our sustainability agenda across our business. Our key focus will be on resolving the issues at Waggaman and driving our Manufacturing Excellence strategy, including the scheduled Moranbah turnaround. Our strong market position means our Fertilizers and our Explosives businesses are well positioned to capitalize on the positive market conditions that I've spoken about, and demand from our customers for our premium technology will continue to drive growth across these businesses. Now I'll open it up for questions and hand it over to you, Myles.

[Operator Instructions] But our first question today comes just from the line of John Purtell from Macquarie Group.

Just had a couple of questions, please. Firstly, just trying to understand that profit and stock elimination there, just does seem quite a large implied profit per tonne there. So I just wanted to get some further color on that, if I could.

Yes. I think I'll have Nick answer the magnitude of the question.

So John, there's more product on hand than we had last year by about 55,000 tonnes. So that's part of it. And obviously, the price we're holding onto is significantly higher as well. So it's a volume and a margin differential. I think if you go back to many years ago when we had these price levels, that's probably fairly consistent to some previous years of similar market conditions. I think the other thing to give you an explanation on the volume piece, we diverted a lot of our product from Phosphate Hill into the local market this year, where normally, we may have exported it because it was hard for us to get imported ammonia phosphate into Australia. So that explains the volume increase.

Yes. And I think if you look back at 2018, there was a similar magnitude type number as well then.

And sorry, just to clarify, is that an EBIT impact or is it EBITDA, that $25 million?

Well, it's always been an elimination entry. So what this represents is it's sales of product from the STI entity to the IPF entity. So it's really an opportunity cost that's sitting on our inventory balances. So it doesn't impact the earnings necessarily. It's always been a representation of the earnings we have sitting in inventory that will get realized in the second half because of timing.

Okay. And Jeanne, just coming back to WALA, and thanks for the color there. But maybe just to -- if you could just briefly summarize sort of what you've learned in the last week around -- I think you've now established the root cause. But essentially, what's happened in the last week? And how that's sort of impacting -- what you're thinking about that in terms of outlook?

Yes. I think the -- I mean, what we've learned in the last week is we've augmented the task force there. We've got significant extra resources, both internal and external. We've got 2 vice presidents on the ground full time at the Waggaman plant, both the U.S.-based individual and an Australian-based Vice President over there. We've also called on our design licensor, KBR, and have significant resource from their current staff as well as some retired as well as our other U.S. resources. So we've got a huge amount of resource there, and they've -- they're looking under every rock and cranny to make sure that when it starts up, it continues to run. And the repair is fairly straightforward. The timeframe is really associated with having to de-inventory a section of the plant. So the repairs themselves should be starting Monday U.S. time. But in order to get to the bearing, it needed to have a fairly large section of the plant to de-inventory. So the fixes are really fairly straightforward, but the length of time required has to do with the de-inventory and the restart-up. In the meantime, the resources on the site are going through all the procedures, going through all the -- with each shift of operators to make sure that they understand the start-up procedures, what could happen, what they should look at. And we'll be putting on restart a team of 24-hour coverage of internal and external extra resources. We always put extra resources on for a restart. But again, we've augmented that with more people and more clarity on exactly what they should be looking for and ability to escalate anything that looks abnormal. So that's what we've learned, and those are the changes that we've made as a result.

And just a final question in terms of the IPF business. You're able to comment on the outlook for distribution margins in the second half. You were just down slightly there in the first half. But just trying to think through the moving parts there for the second, particularly given presumably some expectation of a better BigN season, as you pointed out.

Yes. John, it's always difficult. I mean, the margins are reasonably stable in the distribution. They do fluctuate based on mix and based on the commodity price movements that occur. So I don't think that the base margin, we're expecting a big difference. But the BigN is a real upside in the second half. The challenge there is that the BigN season tends to fall across the end of our financial year. And so some of it may fall into the next financial year versus this one. So predicting how that BigN upside falls is always a bit of a challenge.

Next, I'll go to Richard Johnson from Jefferies.

Sorry to harp on Waggaman, Jeanne. I was just -- did I hear you correctly when you said the reliability task force was established at the start of the year?

That's correct. The -- we sent over a Vice President of Engineering from Australia over there at the start of the year, and he's headed up a task force of internal and external resource at that point for the post optimization reliability task. Clearly, in hindsight, given the amount of issues that we found during the turnaround, we've augmented that with additional resourcing.

Great. I was just going to ask, just really wondering whether there was an issue around your risk management process? Or is that really not the case?

No. I think the risk management process is fine. I think that what we found during the turnaround is more issues than we expected, that did divert some of the reliability task force to fixing those problems that we found during the turnaround. Those have all been addressed and are being managed. Now we're actually having that reliability task force looking at longer-term issues and what I'd call the double contingency that called -- that resulted in this last turnaround. So this last turnaround was 2 things that went wrong at the same time, and the risk management process had deprioritized those. And those will now be taken up.

Got it. That's helpful. And if my memory serves me correctly, I think you had issues the last time you did a big turnaround at Phos Hill. So I just kind of wanted to raise it and make sure that kind of -- well, what are you doing to make sure that doesn't happen again?

Yes. I think Waggaman's unique in the sense that it's -- in its first turnaround post commissioning. It is a time when you discover anything in the original construction or design that may have not been correct. And so we did expect to find more than usual, but we did find -- we found even more than that. So I think in hindsight, we underestimated how much we would find. Phosphate Hill was a bit different. That was done pre-Manufacturing Excellence strategy. And there were a number of decisions in the scope there not to address some end-of-life issues that actually bit us after we started up. And that's why we started Manufacturing Excellence. It was exactly those experiences that if you don't address them during the turnaround, it will impact your reliability in the run after the turnaround.

Got it. That's helpful. And then just finally, I've just got a question on Dyno North America and the margins there. If you look at the underlying margin, it looks to be flat period-on-period, which is obviously quite a good outcome. I'm just trying to think about that in the context of the 2 charts on the right, which obviously show quite good growth in value add. So perhaps you could help me understand the mix issues.

The mix issues...

Yes. I think, Richard, you've seen volume decline, and there's likely some -- yes, I'm trying to take the question here. So I mean, the volume decline has been offset by margin uplift on sales. So I think that's what you're seeing underpinning the result there.

Your next question just comes from the line of Grant Saligari from Credit Suisse.

Just trying to -- Jeanne and Nick, just trying to understand the cost structure at Phosphate Hill and the impact that the turnaround might have had on that. So you've disclosed a $472 a tonne cost for Phosphate Hill. And then separately, you've disclosed a $13 million turnaround impact, I guess. But I guess that's the impact on profit. So can you give us some indication of what the sort of the underlying costs would have been at Phosphate Hill ex the sort of turnaround impact?

Yes. Thanks, Grant. Look, I think we'd expect that cost to stay fairly flat ex turnaround. So that's back of the envelope where that would -- we'd expect that to come in at. And I think you've seen that in the second half.

And can you just remind me just for clarification, that cost of $472, does that include depreciation? Or is that before depreciation?

That includes depreciation, yes. That's the cost of the port at Townsville.

So I recall historically that, that cost is sort of sitting at around $440, and there was an objective to get it down towards $400. I know a lot of things have changed since. But why is it actually going up? What's influencing the increase in cost there?

So it's -- Grant, I think as you -- as we talked about, the cost in the first half being influenced by the turnaround. And the unabsorbed -- I mean, the lower volume is unabsorbed cost base, which is what drives it up. We would expect that to start coming back the other way. So we'd expect in the second half -- so the underlying cost performance of the plant would be closer to $452. We expect a good second half production-wise. And that happening, you'd expect to see that cost a tonne heading back sub-$450. And then post turnaround, again, with the Manufacturing Excellence targets we have in place, to get back to -- $400 might have been guidance, but they get back definitely below the $400 number. And really, what we're targeting with Phosphate Hill is middle of the cost curve-type performance.

Okay. All right. That's helpful. Just a question on LOMO and Cheyenne. The disruptions, the unplanned disruptions you had there, would you say they're within the sort of typical, I guess, variability you would expect in plant uptime over time? Or are they sitting above that? I'm just curious to understand why that was the case.

Yes. I think I'd characterize LOMO, which had the axial compressor failure, as that failure happens about every 30 years. So we had that exact issue happen 30 years ago. When it was looked at last turnaround, it was felt like it didn't need replacing. But it is sort of a 30-year life type issues. So I think that's unusual. And I think in Cheyenne, it really -- we replaced the bearing problems. But the alignment issue needs a turnaround to address. We will address the alignment issue there. But I think in our Manufacturing Excellence strategy, the last turnaround, we would have addressed the alignment issues. And I think that's one of the kinds of things that our Manufacturing Excellence strategy is looking to do during the turnaround, so we don't have issues between turnarounds.

We have another question in queue just from the line of Sophie Spartalis from the Bank of America.

Jeanne and team, I wanted to ask about the technology value. You talk around the 10% uplift. Can you just quantify the contribution that we've seen thus far for technology?

Yes. I think that's -- well, we've been trying to show that. In Asia Pacific, that's been what's held things flat year-on-year with the recontracting costs flowing through. And so net-net-net, we'd expect that to flow through to the bottom line next year after the Moranbah turnaround is behind us. In the Americas, we expect that to flow through with our diversification strategy and through our ability to win new volumes in the quarry and construction and the base and precious metals. So that's a 10% EBIT lift between FY '20 and FY '22 that we put out there that we feel confident of delivering.

Okay. Great. And then you mentioned in your commentary around -- after looking at those businesses where the ROIC continues to underperform. Can you just clarify your intention there? Is that where you would identify potential issues for sale? Or do you think that you could absorb that underperformance even though you've been trying to apply sort of strategic initiatives to improve that business?

Well, I think Nick's outlined that -- the 2 parts of improving ROIC. One is about the future and how we look at allocation of new capital and the Perdaman deal, which is a low-capital, high-return type contract. So we will continue to invest preferentially in those areas where we expect a higher ROIC than those that do not.

Okay. So if you have perennial underperformance of some businesses, are you willing to make those tough decisions?

Well, we'll make the right decisions for the business overall on a net present value basis, but they will be biased towards decisions that improve the ROIC.

Okay. Okay. And then just a bit of a housekeeping question. Just in terms of guidance, so depreciation and tax for the year, if you can, please?

I think we'll stick with the guidance we provided in the profit report. We haven't provided guidance for depreciation. So I don't think we can call it out now. I think tax, we guided to a similar number to last year, from memory, so between 22% and 24%. Before we continue, I just want to address the question Richard answered -- Richard asked because I'll give a more complete answer having looked at the numbers. So Richard, your question was around where the technology uplift come in North America. I understand where you're coming from. So revenue is up 3% in Explosives. However, volumes are down. Now the difference between revenue and volumes in that business is all back -- all due to the gas price. So as you know, our ammonium nitrate pricing is linked to rise and fall of gas. Gas prices are up 18% half-on-half. And so we've had a higher revenue number but actually a lower volume number. So the quality of earnings there based on volumes that's coming through, it's just not apparent when you look at the face of the P&L. Hope that makes sense.

I'll next go to Scott Ryall from Rimor Equity Research.

Nick, you spoke to the ROIC targets in your part of the presentation. Can you just remind us what the ROIC targets are if you've disclosed them?

Thank you. We have not disclosed them. We obviously have internal targets we set the business. We haven't put targets out there for the market other than to say that, obviously, the first target for us to get to is getting the business back above cost of capital. So -- but I'll assure you that they're strong targets in the business. It's in our LTI program, which I think is the appropriate place for it to lie. And we have a strong tracking mechanism that's not just ROIC-based but actually based on the drivers in regards to how we deliver.

Yes. When was the last time you were above cost of capital?

Good question. We'd be going back a number of years. So I'd say, top of my head, at least 2014.

Okay. All right. And then my second question is you've formed -- this is probably for Jeanne, I think. The -- you've formed this, sorry, that's a long steering committee name, Decarbonization and Energy Transition Steering Committee, in the first half, I think. At the full year result last year, I asked you whether or not your decarbonization targets were not ambitious enough. I think the world's changed in the last 6 months quite considerably. So I guess I'd be interested in your updated views on that. And given you've only just formed this steering committee, it would appear, could you just let me know what -- who does it comprise of? And are you aiming to get more ambitious in your decarbonization outlook given, I would argue, the risk profile has changed quite dramatically over the last 6 months?

Yes. Well, I think the point of the steering committee is indeed to try and accelerate our ambition to net zero, accelerate our ability to deliver the commitments that we've already made and to look at medium-term milestones along the way. It's also going to look at opportunities. Because with any transition, there's opportunities as well as risks. And so the committee is committed to looking at both risks and opportunities. The risk -- the committee is chaired by myself and obviously convened by our expert on decarbonization efforts and sustainability. We -- it's attended by the key executives that have a material role in this. So Nick's on it as well as Tim Wall of manufacturing, Michele Mauger as our Chief People Officer. And we bring in the executives as required by project. So it is the highest levels of executive management inside the company. I think one thing I was just going to mention on the ROIC question that you asked earlier is, it is important to note that the subpar ROIC is contributed to by the goodwill on our balance sheet from the acquisition. But our focus is -- regardless is to get it above the return on capital.

Yes. Okay. All right. So just the steering committee is 100% executives, it's not the Board at all?

Not that particular committee. That's a management committee. Obviously, the Board likewise reviews our sustainability, decarbonization path to net zero on a regular basis.

And we have a last question just from the line of Brook Campbell from JPMorgan.

Just the first one around Waggaman. Just not entirely clear on what sort of target you have for utilization of the plant from next month to September. Is it a -- yes, how gradual that ramp will be to nameplate?

Well, I think on that, I'd have to put -- point you back to the outlook slide in the presentation. We're not aware of anything specific that would result in the plant downtime in these last 4 months of the year. So clearly, the team is focused on delivering nameplate and reducing the risks that could cause a trip and downtime in the next 4 months.

Okay. That's fine. And then just on the Manufacturing Excellence target being pushed back a year, do you mind just going through some sort of practical examples why COVID would really influence that being pushed back in 12 months?

Yes. I think that the -- as I mentioned in our Manufacturing Excellence strategy, the real tonnes and the full year of tonnes comes through post the turnaround. And because of COVID, we pushed back a number of our turnarounds. We had, for instance, the St. Helens turnaround planned for 2020 in the early days of the pandemic. We could not get any assurance about the ability for the supply chain to work accordingly, the materials we needed for the turnaround or the manpower. These turnarounds, you bring in hundreds of people from across -- in the U.S. from across the nation in order to execute against that. And we were not in a position in the COVID to undertake shutting down the plant without the materials and the people to put it -- to fix it and put it back together. And so we had to defer a lot of turnarounds, and that had knock-on effects for the whole turnaround schedule. So we moved the St. Helens into this year. That's why we had 3 in the first half of this year. That's why we have 4 this calendar year, is we're basically doing 2020 and 2021 in the same year. But pushing all those turnarounds back delayed that realization of the prize. As a lesser impact, some of the resourcing was also impacted. As you can imagine, international borders are really quite tight. A lot of our Manufacturing Excellence staff that was there to support the sites in their transition are based here in Australia. And they were not able to get to the U.S. In the meantime, we've started recruiting on the ground and augmenting our resources in the U.S. to support our U.S. sites. But again, that caused a delay in the delivery of the Manufacturing Excellence prize.

Yes. Okay. I was just really, I guess, comparing back to the last update in November. Just wondering really what's changed between then and now to have an extra year, but maybe we'll take it off-line.

Yes. Thank you. I don't think there's any more questions. Is that right, Myles?

No further questions at this stage. So I'll hand the conference back to you for now.

Okay. Well, I think with that, I'd like to close it down. Thanks for your time today, and we look forward to meeting with a number of you over the coming days.

Ladies and gentlemen, that does conclude today's conference call. So once again, thank you all for participating, but you may now all disconnect.