Dyno Nobel Limited (DNL) Earnings Call Transcript & Summary

Good morning, everyone. Apologies for being slightly late. Thank you for joining us. I'm joined today by our Managing Director and CEO, Jeanne Johns; and our 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's websites. In a moment, Jeanne and Nick will provide an overview. There will be time for questions at the end. I would like to remind you that with our full year results announcements next Monday, we'll only be taking questions on today's announcement. Now I'll hand over to Jeanne.

Thanks, Geoff, and good morning, everyone. As we announced to the market this morning, we reluctantly decided to cease manufacturing operations at our Gibson Island plant in Brisbane at the end of December 2022. It's not the outcome we had wanted. As you know, gas is the feedstock for this manufacturing operation, and constitutes over 50% of the product cost. The decision was made after extensive effort over a number of years to secure affordable long-term gas supply. This included vigorously pursuing innovative gas supply solutions, engaging with Australian gas producers, and extensive advocacy efforts with the government. But despite these efforts, we were not successful in securing a 4-year gas supply agreement during the recent gas tender and negotiations at an economically affordable price. Unfortunately, the domestic Australian gas market has only become more difficult since we last went to market. Regrettably, this means that we are expecting up to 170 roles will be impacted by the decision. In the coming period, we'll be focusing heavily on the well-being and safety of our employees, providing both support and redeployment opportunities to them. I'll now cover some of the operational impacts of that decision before I hand it over to Nick for the financial impacts. As we manage the transition, we'll be working with our agricultural, and our industrial customers, and suppliers, who have supported our manufacturing operations at the Gibson Island plant. We have existing supply chain for imports to replace the supply of most of our products, including urea and GranAm. As we move the facility to an import model, our big end manufactured product will be discontinued, but we do have urea and easy liquids that are available as good replacements. We remain committed to being the leading supplier of high-quality fertilizer products and services in Australia. And as we announced last month, we're undertaking a feasibility study for green ammonia with Fortescue Future Industries. This may present future transition opportunities, and may inform how we plan the manufacturing plant closure into the future. With that, I'll now hand over to Nick, who will take you through the financial impacts of the decision.

Thanks, Jeanne. As outlined in our ASX release this morning, the financial implications of the plant closure formed to 2 main categories: the impact on annual earnings; and the one-off cash and noncash costs of the closure. In terms of the impact on ongoing earnings, GI manufacturing earnings will cease post the December 2022 closure. When the plant closes, there will be stranded corporate and insurance costs, which will need to be absorbed by the global business. These are estimated to be around a maximum of $10 million per annum. DNAP's Moranbah plant currently sources approximately 20,000 tonnes of ammonia from GI annually to produce approximately 40,000 tonnes of ammonium nitrate. We are currently in advanced negotiations with third parties to source ammonia or ammonium nitrate to replace this volume from 1 January, 2023. The increased cost impact on the DNAP business is expected to be around $5 million to $10 million on a per annum basis. The one-off financial impacts include: A pretax cash cost closure of $84 million, which includes employee redundancies, and costs associated with the planned decommissioning, and noncash write-downs of assets of $102 million. These one-off costs will be included in our FY '21 results. To offset the one-off costs, IPL is looking to maximize the value of the land upon which the manufacturing plant is located. Our preferred option is the operation of the green ammonia facility, which will bring an annual earnings benefit. However, if that were not to proceed, it is estimated that the net proceeds from the sale of land could be up to $45 million. I'll now hand back to Jeanne for some closing remarks.

Thanks, Nick. The decision to close manufacturing at Gibson Island at the end of its current contract has not been an easy 1. I can assure you that we've been relentless in trying to find ways to keep the manufacturing facility open post December of 2022. Unfortunately, a financially viable solution was not possible. It's important to stress, however, that the earnings of the distribution business is not expected to be adversely impacted by this. We are confident of a smooth transition to a urea import model that will allow us to continue to provide our agricultural customers with the high level of products and services that they've come to expect from us. And looking forward, we'll be focused on the feasibility study and repurposing the site to green ammonia production. I'll now open it up for questions.

[Operator Instructions] Your first question comes from Grant Saligari from Credit Suisse.

Jeanne, could you give some indication of what the profitability of Gibson Island manufacturing was maybe in the first half, just so we've got a reference point for what the earnings impact might be?

Yes, I think we're not in a position to talk about the earnings of Gibson Island. As you can imagine, it's quite volatile with the -- with the commodity price cycle. If you take the current gas contract year-to-date, it's slightly underwater. We expect by the end of the current gas contract it will be slightly above water, but it's fundamentally a breakeven proposition over the last gas contract.

Yes, as you said, I guess, urea prices have moved quite a lot. Will you provide maybe a more fulsome update on that at the full year results where we could get some better calibration of what the earnings impact might be, and we can make our own mind about the urea pricing?

We'll give that some thought as we think about the full year disclosures.

Okay. Second question, if I could. You announced some time ago, the arrangements with Perdaman Industries as a potential substitute, I guess, source of product for -- for the East Coast. Is there any update you can provide there? Are you more or less confident as to whether that project will go ahead?

Yes. I think the Perdaman contract would be a good substitute in time. For some of the imports that we currently source internationally. It continues to hurdle -- cross a number of hurdles, and therefore, by definition, become slightly more likely. So we're hopeful that we'll have some certainty on that in the coming months. But at this point, it's not yet fully approved.

Okay. And what would be the commencement date of that, if it were to be approved?

I believe that's 2026, or '25. Yes. I mean it's probably circa 3 years from when it gets started. So it depends on that goes. We'll give you a further update maybe at full year on that.

Your next question comes from Andrew Scott from Morgan Stanley.

Jeanne, could I just start with why now? Obviously, we're seeing the -- the best nitrogen markets we've seen for a decade. We're seeing restrictions on exports from a number of countries, gas cost pressures in Europe. Why make the decision now? And what should I read into that from your medium-term view of where you think nitrogen prices are going?

Yes. I think the important thing is that we were looking for a gas contract from 2023 until 2027. So that's the time horizon that we were looking at a gas contract. Complex manufacturing sites need to do thorough turnarounds every 4 years, and the Gibson Island plant was faced with an investment of $60 million to $70 million that would need to be remunerated over that period of time. So I wouldn't read anything into the short and even the slight medium-term prospects of it. Just that the current gas contracts that we have in place, as I mentioned before, roughly breakeven, even with this 1- or 3-year high pricing. And the assumption that these current prices would last through the next 7 years is not a reasonable assumption. But as I say, the gas market in Australia has only become more difficult since last time we went to market.

Okay. Understood. And can I ask when does actual decommissioning, if you like, commence? And when do we get to the point of no return? So if we were to see whether it be sustained nitrogen prices or a new -- however it may happen in your cheaper gas alternative, when do we get to the point of no return, or is this it?

I think that the decision has been made. These complex turnarounds take about 18 months to plan. And we've extended the decision process in order to allow us full time to pursue every avenue for achieving affordable gas. So it would take a long time to plan, and properly execute the turnaround that would be necessary to continue operations. So the actual ceasing of manufacturing will not be to the end of December of 2022. And after that, we would start the closure process. Obviously, we would know more at that time about the feasibility study into green ammonia, and that might inform those plans.

Okay. Understood. And last one, someone is going to ask you so it might as well be me. Can we get an update on WALA operations since you presumably brought that plant back online?

Unfortunately, I'm not in a position to talk about that. We will be releasing our full year results next week at this time, and you will get a full update at that point.

So you're not going to provide any update on WALA right now?

No, that's correct.

Your next question comes from Richard Johnson from Jefferies.

Thanks very much. Jeanne, can I just ask Grant's original question on the profitability of the plant in a slightly different way. What I'm interested to get a feel of, if you were to assume, you have signed a new gas contract at current or whatever the elevated price was, at low cycle nitrogen prices. What would the losses be from the plant has been very roughly?

Yes. I think we'll have to take that off-line and think that through.

I mean if you go back beyond, before '21, the business was loss-making, correct? So I'm just trying to get a sense of what -- the extent to what you're better off at the low point in the cycle, closing the plant?

From current gas contracts? Or -- because at the current gas contract, yes, we beat tens of millions better off by closing the plant at bottom of cycle.

Got it. That's very helpful. And sorry about this. Would you mind repeating what you said about BigN?

Yes. The BigN as a product, we will discontinue in the current market, and ammonia pricing. It doesn't make sense on an import basis. So we will substitute urea, and our liquids products, for BigN usage.

Got it. And then just finally, on the Dyno element and the ammonia shorts. What are the practical challenges of solving for that? I'm just trying to get an understanding what you're thinking is in that regard.

Yes. I think we're looking at a number of different options there. Obviously, ammonia, we're looking at both import and domestic manufacturers for a contract, and we're also looking at replacing the ammonium nitrate through domestic and import options. And so we'll evaluate those. We're in deep conversations on all those options, and we'll get the 1 that's best economic outcome.

Okay. So just if I understand you correctly, you're either going to make less ammonia nitrates, or you're going to import ammonia?

That's correct. We're either going to -- yes.

Your next question comes from John Purtell from Macquarie Group.

Look, just firstly, just back on the underlying economics of the plant. Jeanne, you mentioned it's a breakeven proposition of the last gas contract there or based on the current 1. Is that at an EBITDA or EBIT level?

EBITDA level. Yes.

Okay. On free cash flow.

Yes, free cash flow. If you think about, you fundamentally had 1 year at bottom of cycle, 1 year at top of cycle on 1 transition year for urea. So roughly, it's through -- it's sort of a through price cycle.

Okay. And in terms of the cash -- pretax cash cost closures of $84 million, that amount there that's associated with plant decommissioning, are those costs incurred even if you do repurpose the plant eventually?

John, that is on the basis we close the plant, so that's what we know today. In the event that the MOU results in a different outcome in the future, and that becomes the new path. Yes, there will potentially be some synergies in those numbers, but we can only evaluate that as and when we complete the MOU, we don't have that data today.

Got you. Okay. And just the last 1. In terms of the timing of the feasibility study there, and I know it's sort of probably difficult to comment, but just trying to get a sense of if it did proceed in a positive way of the feasibility study, how quickly it would take to build a green ammonia plant? And any comment on the -- how you think about returns in that type of profile? I appreciate if it's early days.

Yes. As you say, this is early days. I think -- but we do -- we're aligned with our partner to go as fast as possible. We're hoping to at least start -- have the feasibility done by the end of the year, and then looking through what would -- how would -- how we proceed on a basis. And we would look at like that as any other opportunity cost. We'd be looking for ensuring that it's a good business, and that it makes sense for us as well as our partner. So it's very early days. But I think with the gas contract and operations continuing til the end of '22, we should have good line of sight to that feasibility study. What it's likely to do, and how that might impact closure cost, and redeployment of personnel.

And just last 1, if I can. I mean just in terms of thinking about green ammonia versus obviously base urea, I mean, are the 2 sort of events sort of mutually exclusive? I mean it would appear that this potentially allows you to expedite green ammonia, sort of the green ammonia project itself? Or could you have a kind of done the 2 in parallel or sort of -- or was it either/or?

The plan was to try and do both in parallel. But obviously, with this decision, it does give us all the more reason to go as fast as we can on the green ammonia option. So that we minimize the time between ceasing operations with urea, and moving to green ammonia.

Your next question comes from Richard Johnson from Jefferies.

Sorry, Jeanne, I forgot to ask you. If you decide that from -- for the ammonia issue for Moranbah, that you go the import solution. Do you need to invest in incremental storage capacity?

I think that we'd be looking to use existing infrastructure, if we went that route. I think that the economics will point to importing ammonium nitrate before investing in infrastructure for import options.

Got it. But potentially, you might be able to source the AN domestically as well, is that right?

That is correct.

Your next question comes from Scott [indiscernible] Ryall from Rimer Equity Research.

I was hoping to follow up on John's question about the FFI deal. Jeanne, you've mentioned the timing of the feasibility study. But -- in terms of the on-site ability in the press release, you've indicated around about 50,000 tonnes of renewable hydrogen per year. Can you just remind me, I don't have a stat in front of me this morning, but can you just remind me how much that would be relative to the hydrogen you produce in your current operations? And whether or not if you go ahead, there's an ability to scale up meaningfully beyond that, please?

Yes. The size of the -- of green ammonia options, roughly equal to the existing operation on the ammonia, and the hydrogen we make today. So fundamentally, it was a retrofit of the existing plant, to substitute the natural gas feedstock it uses today, to using the green hydrogen from the electrolyzer. So roughly, the ammonia production would be roughly the same.

Yes. Okay. And then what you do with the ammonia from there, is obviously a subject -- well, I'm guessing subject to the highest and best use case. Is that -- and therefore, it may not be into fertilizer markets, it may be into other global markets for ammonia? Is that the major thing we should be thinking about?

Yes. I think the most likely outcome is that it will go to the markets that can support the premium for green ammonia. So I think that it's less likely to go into the agricultural market, but some of it does depend on the ability to have on tradable credits on the green ammonia, which could displace the physical molecules, and the premium for the green ammonia to different sources. So that will all be part of the feasibility study as FFI, and us look at where is the best net back to the plant for the green ammonia.

Yes. And so the movement on the tradable credit, so that seems some way off to me. Is that something you've feel more positive about?

I think it's something that would enable a faster transition to a decarbonized world. And so by being able to trade those credits separately from the molecules, you'll save a lot of transportation costs in the supply chain. So I think it makes eminent sense, but it is about having the political infrastructure in place that recognizes those credits, and allows for that optimization of the system. So I think it's a great enabler. It's difficult to predict when that might come into play.

Who -- sorry, can you -- sorry to harp on it, who -- what's the government that is most important? Is that a federal government decision? Or is it something that they have to be -- to reach international agreement on? And I guess the comment I'd make, I don't expect you to comment on this, but you're not exactly helping them with their gas-led recovery here. So I'm just wondering why, how the federal government would expedite the process on that?

Yes. I think that the important thing is that there need to be credits that are recognized by consumers and the world. There's a lot of demand for clean energy, and green hydrogen is a part of that equation. And for a lot of industries, that are less material to their business model, and they would be willing to pay a premium in order to have green energy. But if you have a tradable credit, it makes it to be easier not to have to ship it to all those parts, and you can keep it here. There's plenty of ammonia demand in Australia, but some of the markets are -- would not be internationally competitive with that premium. So it's not a necessary part of making green ammonia work at Gibson Island, but it would indeed help the efficiency, and the speed of transition to the greening future.

Okay. And is that a federal government thing?

Most likely, but it's really about it being recognized by the customers, and the customers' customers. And so it would certainly be helped by federal government, but it really is about being acceptable and recognized by the people willing to pay the premium.

There are no further questions at this time. Please continue, presenters.

Okay. Well, I appreciate your time today. We'll be able to give a more fulsome update on the overall business next week, and I appreciate that. I'm sure you wanted some update on that, but we will do that next week. In the meantime, it's been -- we're focusing, of course, on our employees impacted by this decision. And thank you for calling in.

This concludes today's conference call. Thank you for participating. You may now disconnect.