Dyno Nobel Limited (DNL) Earnings Call Transcript & Summary

Good morning, and welcome to Incitec Pivot Limited's 2021 Financial Full 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 the 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. I'd like to start with an acknowledgment of country. I'd like to acknowledge the traditional custodians of the land we are coming to you from today. The Bunurong Boonwurrung and Wurundjeri Woiworung peoples of the Eastern Kulin nation. I pay my respects to the elders past, present and emerging. 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.

Good morning, and thank you for joining us today. I'm going to start today with a performance overview and then turn to sustainability and our strategic agenda. Nick will then cover the financials. Then I'll turn to each of our businesses and take a closer look at technology, manufacturing excellence, our strategic priorities and the outlook for FY '22 before moving on to questions. I'll start with our #1 value and our license to operate, Zero Harm, which has been especially important during the global pandemic. We've continued to be vigilant and our teams across our operations have done a great job in adhering to the COVID safe protocols. But it hasn't come without challenges and the additional controls have added complexity and obligations on our people. In addition, there's been an increase in hazard recognition and reporting discipline across our sites. These 2 factors combined have negatively impacted some of our key safety statistics. Looking at our overall Zero Harm scorecard. Our total reportable injury frequency rate of 0.87 is above our 0.7 target, and we're disappointed with this result. The injuries reported, however, are less severe with about a 40% reduction in our lost day severity rate compared to the same time last year. We are nonetheless committed to getting back on track to our target. Our results for process safety were below expectations, with incidents rising in line with the improved reporting, particularly in our commercial businesses, as I had mentioned earlier. Pleasingly, we achieved very positive outcomes in both our significant event management and environmental incidents, and we'll continue to focus on learning and prevention going forward. Across the board, we're increasing our focus on safety improvements, including targeted site-specific safety programs. And we've also refreshed our company-wide safety training program, Safe Team, and redoubled our efforts in response to COVID. Reflecting on the year, it was very much a year of 2 halves. The strong full year result reflects the strength of the performance in the second half, which has been the best half since 2012. We saw a strong pull-through from our technology and explosives and the recovery in our end markets. And our fertilizer business captured the upswing in commodity prices. We also saw a significant improvement in our manufacturing performance with a good second half across our plants. Waggaman performed strongly after the restart in June and it was good to see a clean restart following the preemptive shutdown associated with Hurricane Ida. We continue to manage the ever-changing COVID restrictions as well as our 4 manufacturing turnarounds during the year and make sure that we delivered our essential products to our customers day in and day out. And we're really pleased with the progress that we've made in our strategic agenda in what has been a very busy year operationally with continued momentum in technology, a step change approach on climate change and our response plan delivered a full year ahead of schedule. We also reluctantly made the difficult decision to transition Gibson Island to an import model due to being unable to secure an affordable long-term gas supply beyond our current contract. Looking to the future, we formed 2 quality partnerships to explore the potential to leverage our ammonia expertise into green ammonia commercial opportunities. Turning to our headline results. We delivered a very strong result for the full year with earnings before IMIs up 51% on last year to $566 million and NPAT up 91% to $359 million. The second half was very strong as our Dyno business in the U.S. returned to growth and strong commodity prices pulled through to deliver a great earnings outcome for fertilizers. Our return on invested capital increased to 5.8% this year. And the strong operating cash flows have underpinned our final year dividend of $0.083 per share, taking our full year dividend to $0.093 per share as well as allowing the reduction in our net debt to further strengthen our balance sheet. When I step back and think about our business, we have 2 strong high-quality base businesses in our Dyno Nobel Explosives and Incitec Pivot Fertilizers that are industry leaders in their attractive markets with quality customers and a strong upside from technology. And both businesses have good opportunities in the future decarbonized world. While we've been helping our mining customers improve efficiencies with our premium technology for some time, we are further embedding sustainability in both our businesses. I will now talk in more detail about sustainability across our company. We've had a long-term commitment to sustainability. And on this slide, you can see a snapshot of some of our achievements during the past year. I'm particularly proud of our green ammonia partnerships, which I'll talk to more shortly. Moving on to climate change in particular. We've made an important step change in our climate change strategy and commitments this year. We have robust governance structures at both the board and executive level and have linked outcomes to short- and long-term incentives. We are embedding our climate change agenda into our strategy so we can capitalize on commercial opportunities as well as manage risks in a decarbonizing world. We've also increased our commitment to decarbonization, including setting an ambition to be net zero by 2050 or sooner if practical. And importantly, our pathway is outlined in our first stand-alone climate change report. Released today, this report is aligned to the Task Force on Climate-Related Financial Disclosures guidelines. We're investing in new technologies and forming partnerships to help us decarbonize across our global operations. And when it comes to our customers, we are helping them reduce their emissions with our premium explosives technologies and our soil health services. In FY '22, we will be focusing further on our Scope 3 emissions and strategies for decarbonization. I'll now turn to take a closer look at our new and accelerated commitments. As I mentioned, we have an ambition to be net zero by 2050 or sooner if practical. We have accelerated our short-term greenhouse gas reduction target that we announced last year and committed to a new medium-term target of a 25% absolute reduction in greenhouse gas emissions by 2030 against our 2020 baseline. Our approach is a just transition that will protect and sustain the employment opportunities for our people and communities. I'll turn now to a detailed look at our potential pathway to reduce baseline emissions that you can see here. For the majority of our emissions, creating a pathway to net zero currently requires investigation of new and emerging technologies, along with the other enablers shown here. At our own manufacturing sites, there's unlikely to be a one-size-fits-all strategy. Our pathway enablers include green ammonia options, carbon capture and storage and nitrous oxide abatement. Green ammonia is expected to play a key role in some of the hard-to-abate sectors of our economies. And we have world-leading ammonia expertise and are leveraging this to investigate green ammonia commercial opportunities. As I committed to in our July investor briefing, we have now formed 2 significant partnerships. One is with Fortescue Future Industries on a feasibility study on the manufacture of green ammonia at our Gibson Island facility. The potential repurposing of Gibson Island is the most attractive near-term option in Australia to make green ammonia at industrial scale. And most recently, we announced a partnership with 2 of Singapore's leading companies, Keppel Infrastructure and Temasek Holdings, to investigate the feasibility of producing green ammonia at our Kooragang Island site in New South Wales and the potential greenfield site in Gladstone, Queensland, to meet the rapidly growing demand for carbon-free energy across Asia. I'm very proud of both of these high-quality partnerships. I'll now turn to our broader strategic agenda. As I said earlier, we are very pleased with the progress on strategy in what was operationally a very busy year. Our market-leading technology that's on the ground today continues its momentum and our new wireless product has been very well received with commercial supply arrangements expected to commence in 2022 and trials now planned in the Americas. We have strong positions in the attractive metals and quarry and construction markets that are underpinned by our premium technology offering. In fertilizers, we've captured some $240 million of EBIT, net of ForEx from the recovery in commodity pricing, and we've made good progress on repositioning our stable distribution earnings for growth through our soil health transition. And as I've explained, we've made a step change in our climate change agenda. We also delivered our response plan ahead of schedule to give our 2 base businesses a more sustainable cost base through cycle. As you can clearly see from this slide, the balance in earnings between our businesses has changed significantly with the mix showing the upside in fertilizers from an upswing in the commodity cycle. We have 2 very strong business franchises. Dyno Nobel is a premium explosives brand, operating in 2 highly attractive markets with mining customers extracting the minerals needed for a decarbonized world. Incitec Pivot Fertilisers is an iconic brand operating in the large and attractive Australian market, with an unrivaled distribution platform able to support the major agricultural markets on the East Coast. Over the last couple of years, as we've navigated the down cycle, we have worked hard to strengthen both businesses so that they are more resilient through the cycle. Essentially, we sought to derisk the downside whilst being able to capture earnings from the commodity up cycle. We have 2 industrial businesses with strong growth prospects that play well in a decarbonizing world. And as you can see from our second half performance, our business has delivered significant profit positioning us well to invest in our base business to drive earnings growth and continue to grow our return on invested capital. And with that, I'll now hand over to Nick to talk through the financials.

Thanks, Jeanne. I'll start today with a summary of how we have progressed in the past year against objectives we communicated to the market in August 2020. On the balance sheet, we've taken a number of actions to simplify and delever over the past 12 months. Our objective has been to drive transparency and simplification of the balance sheet and to reduce IPL leverage. We've achieved that by taking the following actions. In the second half, we exited the noncash balance sheet hedges, which means that our reported net debt is now aligned to our cash net debt position. While net debt is our key metric, we've started to report financial indebtedness to give a clear picture of all financing facilities, including lease liabilities and trade working capital facilities. At year-end, total financial indebtedness is down $384 million compared to the prior year. The SFA was renewed for 3 years, extending the tenure to 5.1 years. Pleasingly, the SFA included a sustainability wrap that incentivizes IPL to achieve specific sustainability objectives to achieve a lower interest rate. And $148 million of bonds were repurchased in the first half as an action to optimize the debt book. The response plans delivered ahead of plan and is now complete. IPL has always had a competitive cost base, and this program has underpinned that position for the years ahead. The reduction in financial indebtedness was driven by strong operating cash flow performance. We were able to convert higher commodity prices to a good cash outcome underpinned by strong trade working capital management. And this has supported our dividend program while reducing our net debt-to-EBITDA ratio to 1.1x. Moving to the next slide and a more detailed look at the income statement performance in FY '21. Jeanne has already discussed the EBIT, which has been underpinned by a strong commodity price rebound, solid commercial business performance and a good manufacturing output in the second half. Net borrowing costs reduced by $23 million, reflecting a lower average debt balance, offset in part by a one-off cost to buy back long-term bonds. Tax expense remained consistent as a percentage of earnings. The expense reflects the statutory rate from the jurisdictions we operate in, reduce the impact of joint venture income. IPL incurred $209 million of individually material items in the second half as follows. The business impaired the Cheyenne manufacturing plant assets by $79 million. This reflects the impact of the accelerated reduction in U.S. thermal coal demand over the past year. The impairment reflects a future reconfiguration of the nitric acid plant to reduce ammonium nitrate production. As announced last week, the decision to close Gibson Island resulted in an after-tax cost of $130 million, representing the impairment of assets and the accounting for closure costs. And the business announced a final dividend of $0.083, which is 14% franked, representing 50% of NPAT ex IMIs, in line with IPL's dividend policy. Operating cash flows increased by $105 million for the year, which included paying down $80 million of trade working capital facilities. Excluding that $80 million, the net operating cash flow for the business were up $730 million, an increase of $185 million from the previous year. Underlying trade working capital increased by $46 million. However, importantly, the underlying 13-month rolling average trade working capital percentage of net revenue reduced by 2% from the previous year to 16%. Given the significant increase in commodity prices in the second half, this was a good result and helped underpin the efficient conversion of EBITDA. As highlighted earlier in the year, sustenance CapEx was higher as a result of turnaround at St. Helens, Mt. Isa, Waggaman and Moranbah during the 2021 financial year. And financing cash flow is related largely to the removal of noncash balance sheet hedges, which accounted for $274 million in the prior year end. As discussed earlier, we've made good progress on balance sheet financing over the past 12 months. I've talked to the key actions already, however, there are a few other points to highlight. IPL has delivered its cash result based on the incentives that are aligned across the organization. It's a collaborative and embedded discipline but is a key part of how we operate. This has put the company in a strong position with commodity tailwinds prevailing at the start of the new financial year. IPL's focus remains on a strong cash flow generation, which is unchanged regardless of market conditions. And my final slide reflects the financial objectives and our status against these. On balance sheet strength, we have talked about that already. So we'll move to free cash flow generation. And after delivering the response plan targets, the focus will continue on cost discipline to ensure that the cost base remains sustainably competitive, especially in light of the current inflationary environment. On working capital, we continue to focus on reducing our 13-month average trade working capital balances further from the gains made in FY '21. And trade working capital facilities are now at a level that is sustainable for the business. Looking forward, investors should not expect this level of funding to move much from this point. On sustenance capital, in FY '22, we again expect to spend around $320 million in base sustenance spend due to the turnaround of Phosphate Hill, Mt. Isa and Cheyenne. In addition, it is expected that the business will incur an additional $50 million CapEx to the investment in a new boiler to address steam capacity at the Waggaman plant and to invest in an upgrade to the Brisbane product distribution center as we consolidate the distribution facilities in the Pinkenba site to Gibson Island and reinvest in the infrastructure of the site. It's important to note that this project is not related to the closure of the GI manufacturing plant. The business expects to fund the additional $50 million in CapEx from proceeds from land sales of $50 million that are expected to occur in the next 12 months. Targeting high returns. IPL is currently experiencing a positive ROIC trend from higher commodity prices. Our resolve and actions remain unchanged, which is to focus on driving improvement from the control of objectives we have set ourselves, and these remain firmly on track. The positive trend on capital-light technology growth is continuing and picking up momentum post COVID. We have put in place new hurdle rates for growth projects over the past 12 months, which consider the impact of carbon emissions on new investments. We strongly believe this will underpin the improvement of our ROIC. And following completion of the current turnaround cycle in FY '22, we'll have a strong platform for earnings uplift from our manufacturing plans. So overall, we're making good progress against our stated objectives. To conclude, I'd like to thank the finance team that is largely responsible delivering the outcomes we've discussed. It's a strong team, and I'm confident that it will continue to deliver for IPL and its shareholders in the future. And with that, I'll hand back to Jeanne.

Thanks, Nick. I'll now speak to each of our businesses, starting with the summary. In Dyno Nobel Americas, EBIT was down 9% in constant currency, largely due to planned and unplanned outages at Waggaman. Our Explosives business in the U.S. performed well as growth in the base and precious metals sector more than offset the ongoing decline in coal. In Dyno Nobel Asia Pacific, the business also performed well with strong growth from premium technology for the first time outpacing the last impact of our recontracting cycle. EBIT was down $9 million as the business absorbed the $15 million impact from the planned turnaround at Moranbah in the second half. Fertilizers delivered an EBIT of $268 million, a significant increase from $26 million last year as the strong manufacturing performance enabled the business to capture the earnings upside from the commodity pricing. Our EBIT also benefited from our response plan, which was completed 12 months ahead of schedule with $40 million of sustainable cost savings delivered in the year, putting both of our businesses in good position for through-cycle performance. As you can see from this slide, the year was very much a year of 2 halves, with demand recovering in Explosives in the second half, coupled with the strong pull-through from firming commodity prices and strong manufacturing performance in Fertilizers. Explosives earnings recovered to pre-COVID levels and Waggaman and St. Helens ran well post their turnaround, enabling the benefits of commodity prices to flow through to earnings. Moving to our Americas Explosives business. Earnings grew 5% in constant currency and 15% if you adjust for the manufacturing outages as the market recovered to pre-COVID levels and we continue to focus on quality volumes underpinned by our premium technology. Over 80% of our business now comes from the attractive base and precious metals and the quarry and construction sectors. The upside from those sectors is more than offsetting the ongoing decline in coal, which continued in the second half, albeit at a slower rate. We were very pleased with the growth in our underground base and precious metals. And while quarry and construction volumes were down 5% in the first half they recovered to growth in the second half with a positive outlook for FY '22. We continue to see strong demand for our premium technology with premium emulsion sales up 22% and our electronic detonators up 18%. Moving on to our markets. In base and precious metals, volume growth has been supported by strong gold and copper pricing as well as mines coming back online after COVID-related shutdowns. We are well placed to grow earnings in the year ahead, underpinned by mine recoveries and technology-driven share gains. The quarry and construction market has continued to grow in low and mid- to mid-single digits as the U.S. economy continues to recover and infrastructure spending steps up. We're well placed to grow our Q&C volumes in line with or above market rates as technology continues to position us well with customers. Coal markets are expected to decline 5% through FY '22, but it's worth noting that coal accounts for less than 20% of our revenues in the Americas. Overall, the outlook for our U.S. Explosives business is positive, leading into FY '22 with growth in the 2 premium sectors currently expected to outpace any decline in coal. As you're well aware, the performance of Waggaman was impacted by the planned turnaround and the challenges we faced on restarting the plant with earnings down for the year to the USD 4 million. But what I'm really pleased about is that the plant has been running very well since the restart in June, with earnings in the second half increasing to USD 22 million, up from $14 million in the second half of last year. In August, the plant was taken offline as a precautionary measure ahead of Hurricane Ida. And I'm pleased to report that the plant started flawlessly from the full cold restart upon restoration of regional power and plant utilities. And that gives us real confidence in the team's operating discipline. The task forces that we put in place during the year have now been largely absorbed into the team, with the exception of the reliability task force which is continuing their work on the cooler replacement, which is expected to be on-site in March for installation later in the year. And good progress is being made on the steam redundancy planning with the installation of the boiler plant to coincide with the cooler replacement. The generator element of the co-gen solution is estimated now to be more costly than first expected but more importantly, would have delayed the boiler installation. So we're now planning to install the boiler first and continue to look at an optimal solution for power redundancy. And we're very pleased with how the plant is running, and it's been delivering nameplate to date this financial year. Now turning to our Explosives business in the Asia Pacific. EBIT was down $9 million to $140 million as the business absorbed the $15 million impact from the planned turnaround at Moranbah in the second half as well as the ongoing COVID impacts on international volumes. The business performed well with strong growth from premium technology for the first time outpacing the last impact of our recontracting cycle. Electronic detonator volumes grew 22% on PCP. And while underlying volumes for premium emulsions were strong, overall volumes were impacted by the loss of a medium-sized metals customer early in the year. We were pleased with the manufacturing performance at Moranbah in the last phase of its 4-year operating campaign and the plant is running well post turnaround. The business has now fully absorbed the impact from our recontracting. So we look forward to seeing the growth in our technology pull-through into our earnings in future years. And the chart on the left of this slide shows that potential. Looking now at the outlook for our key markets in the Asia Pacific. Market volumes are expected to grow about 1% in met coal, with demand from India, Europe and South America forecast to replace tons previously sold to China. Australian production of iron ore is forecast to marginally increase in FY '22 with pricing off their recent highs. We expect our business serving iron ore customers to benefit from growth in electronic detonators and premium emulsions. And the volumes in our international markets are expected to return to pre-COVID levels in the next year or two. The outlook for our end markets, coupled with our premium technology provides a positive outlook for FY '22. Our Fertilizer business delivered an EBIT of $268 million, a significant increase from $26 million last year as the business benefited from an upswing in commodity prices. Distribution volumes were flat and impacted by supply disruptions and margins were stable in a competitive market. Phosphate exports outside of the Australian season allowed Phosphate Hill to realize higher netbacks from an international market. And the business absorbed the cost of our reinvestment in the Gibson Island PDC, which is expected to be completed during FY '22. As you can see from the graph on the left, our Fertilizer business is made up of 2 parts with very different earnings profile. We have a strong base distribution business, which is delivering stable earnings and is in a good position to grow, and a manufacturing business whose earnings fluctuate based on commodity prices. That being said, our new manufacturing profile with Gibson Island moving to an import model will significantly reduce our downside risk on the commodity cycle. So we now have a strong base business from which to grow and develop new products and services to differentiate our market offer. We're continuing to invest in precision agriculture. And this year, we launched a new soil health testing package to farmers to improve the health and productivity of their soil and to measure carbon. You can see on the left the momentum that we're starting to see from our liquid fertilizers and our nutrient advantage solutions. Taking a look at the end markets. The outlook is positive across the field with strong fertilizer volumes expected to continue due to favorable conditions across the key agricultural markets on the East Coast of Australia. Commodity pricing has remained robust, and we remain focused on managing the business with continued pricing volatility. I'd now like to turn to technology. Our premium technologies continue to be in demand by our customers looking to increase their productivity and safety while reducing their environmental footprint. As demand for ore and raw continues to grow, the easiest to extract have already been mined, leading our customers to increasingly require more sophisticated blasting solutions. This has helped us continue to grow high-quality revenue in attractive explosive sectors and markets. These drivers are leading to an increased interest in Delta E emulsion with, for example, a busy trial schedule underway as Australia's domestic borders reopen. Pleasingly, we are ahead of our target to deliver technology-driven earnings growth of 10% by FY '22. And you can see here that the growth of our electronic detonators, which are up almost 20% on PCP and 36% versus 3 years ago. There remains room to grow in our existing markets, and it provides us an attractive platform to expand into new markets. What's really exciting is the development work that we've been doing with our new products coming to fruition and ready to commercialization, which I'll talk to now. We're starting to see our technology vision come to life with our product development work in recent years now being commercialized to benefit our customers in the field. You'll be familiar with our technology strategy pyramid. And you can see on the right some of the key achievements during FY '21. Our digital offering, Nobel Fire, is now in use across 80% of our customers in North America. Further enhancements will continue to add value to our customers' blasting optimization. During the year, we completed trials of our wireless technology, CyberDet I, including completing the first ever underground wireless detonator blast in Western Australia at Westbold's Big Bell mine. Recognizing the value of our premium technology and following an extensive evaluation on competing offers, West Gold selected us as their preferred supplier. The CyberDet I technology was also trialed at another existing customer in WA and will be supplied as part of an extension to that customer contract. And during FY '22, we'll be trialing CyberDet I in our North American business. We're also excited about the next step in surface automation with CyberDet II field trials scheduled for FY '22. Our Delta E continues to be popular with our customers including in Indonesia, where strong uptake has enabled us to improve our exposure in the attractive gold sector. I'd now like to turn to manufacturing. Our manufacturing excellence strategy remains unchanged and is helping drive improved reliability across our plants, reinforced by the transition we made in July to a regional manufacturing model. This regional model is working very well, providing the region's greater day-to-day accountability and oversight and ensuring operational resources are available locally to deliver technical support. I'm confident we now have the right manufacturing depth and capability in the region with the accountability through to the heads of our businesses. Across our manufacturing portfolio, we'll be focusing on performance and executing our manufacturing excellence strategy across our high-quality plants. I'll turn now to look at the turnaround schedule and its importance to underpin our reliability promise. Following the heavy schedule of 4 turnarounds that we completed in this last year, we have 2 turnarounds planned for FY '22 at Phosphate Hill and Cheyenne. We then have a clear year in FY '23 and only 1 turnaround plan for FY '24 and 2 in '25. Importantly, by the end of FY '22, all of our plants will have been through a full turnaround program under our manufacturing excellence strategy. With a less concentrated turnaround schedule and reliability improvements from our manufacturing excellence strategy pulling through, we have a strong platform for earnings uplift in the business from increased manufacturing volumes in future years. Now to what's ahead in our strategic priorities. Turning to the outlook for the full year. We have strong momentum leading into FY '22. In Dyno Nobel Americas, we are confident in delivering above-market growth in metals and quarry and construction. In Dyno Nobel Asia Pacific, the growth in technology is expected to pull through into earnings now that the recontracting impacts have washed through. And in Fertilizers, we're well placed to grow our base business as well as continue to capture the upcycle in commodity pricing. We're well positioned for a good upside in manufacturing volumes compared to FY '21. The market conditions are positive with commodity tailwinds, positive pricing dynamics and good farm conditions, although we will keep a watchful eye on inflation as well as ongoing supply chain congestion. And longer term, we have good potential earnings upside. We expect steady growth in our Explosives underpinned by demand for metals that will help decarbonize the world as well as ongoing urbanization and infrastructure investments. We will continue to pursue capital-light, high-return investment opportunities that leverage existing and new technology across our footprint as well as in new geographies. We will maintain our strong focus and discipline as we look to do this. And we're well positioned for growth in Fertilizers through our soil health strategy. The benefits of our manufacturing excellence is expected to really pull through once the current turnaround cycle is completed in FY '22. And we also see good potential to commercialize green ammonia opportunities. So in summary, we have 2 strong base businesses with iconic customer-facing brands that are well positioned for the future. Our Dyno Nobel Explosives and Incitec Pivot Fertilizer distribution businesses have reliable earnings with compelling opportunities for growth. And our manufacturing businesses provide us with attractive upside exposure to commodities and a significantly derisked profile to the downside. Our businesses are supported by our commitment to industry leadership and safety, our commitment to decarbonization as well as improved reliability from our manufacturing assets and our premium technology offerings. Pleasingly, we look into the year ahead with good momentum as well as some positive tailwinds. And now I'll open it up to questions. Tara, over to you.

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

Good to see a good set of numbers. First question just on ammonium nitrate pricing opportunity in Australia, so environment now where spot price obviously moved a lot higher. Could you outline you've -- as I understand it, you've completed the recontracting of the foundation customers at Moranbah. Could you outline any opportunity to increase price in Australia over the next 12, 18 months through any other noncontracted business.

Yes. I mean, I think that our focus has been on the foundation customer contract cycle, which had us with a lot of contracts that were not priced to market. So those have all been priced to market. And clearly, we continue to compete in the marketplace along with everybody else. I think that each and every offer in the short, medium and long term, we'll do that according to the competitive dynamics that we see at that point in time.

So is there any sort of material volume that could -- that is up for contract renewal over the next 18 months? Or any sort of free spot volume that -- of any materiality that could take advantage of the higher prices?

I think that we've recontracted all of our foundation customers and those all have varying contract renewal dates, and we look to spread those out over time, and those will get repriced at the market at the time they come up for a renewal.

Yes, okay. Second question, if I could, just on Phosphate Hill. On Page 13 of the profit report, you've actually disclosed 2 cost per ton numbers. Both have gone up by AUD 30 a ton. I think about half of the increase or just under half is due to the ammonia plant shutdown that you incurred during the period. But outside of that, the costs have gotten up on a per ton basis. I just wonder whether you could talk about the increase in costs at Phosphate Hill. And I guess what we should be thinking about in terms of the go-forward cost position of that business, please?

Yes. I mean, that increase in cost is solely due to the sulfur pricing, and that's likewise a commodity globally base price for the sulfur input. So overall, sulfur price going up tends to get translated into the end product AP and NAP going up. So it doesn't negatively impact the competitiveness of Phosphate Hill.

Our next question comes from Andrew Scott at Morgan Stanley.

Jeanne and Nick, first question just on WALA. There's a comment in the profit release about the cooler change being if required. I'm just trying to understand, you then spoke, Jeanne as if it's going to happen, is that just a factor of where it falls into '22 or '23? Or is there another delta in the decision there?

Yes, thanks for the question. Yes, that's -- it's not about if, it's about when. As we've previously disclosed, that cooler was not able to be fixed during the turnaround. The temporary fix was put in place and a new cooler was ordered. But -- and it depends on how long that temporary fix lasts for. Right now, the cooler is running very well and is being monitored regularly. And so it's expected last until the end of FY '22 or '23. So it really just depends on which financial year that falls into.

That makes sense. And just a couple on your U.S. coal business. First of all, I was intrigued by volumes in the second half, down 12%. I think most of the data we're seeing is suggesting some pretty good coal volume growth, albeit off a horrible year last year. So can you help me reconcile that? And then secondly, against that backdrop, we've obviously taken the accounting impairment for Cheyenne and dropping the nitric acid plant. When would you anticipate that actually occurs in a physical sense?

Yes. I think for coal, we actually saw the second half volumes being roughly flat, but it was a decline for the full year. And it really just depends on which individual contracts and which basins that the contracts are based in that provide any differential performance relative to the market as a whole. As far as the physical changes in Cheyenne, we will definitely at least be putting the tie-ins during the turnaround in Cheyenne that's coming in FY '22, whether we go ahead and do the piping changes, the relatively minor change to make just a couple of million dollars as we've disclosed in the past to make that physical change. So we'll make that decision closer to the time, but we'll be in a position to do it anywhere from FY '22 onwards.

And just one very last one, just while interested if you have a large portion of your gas requirements hedged away for the year ahead?

No, we don't. We've generally taken a position not to hedge our gas volumes at Waggaman. Henry Hub is a very liquid price point in the world. And generally, we just flowed on that up and down. So we don't have any hedging in place for that.

Our next question comes from Richard Johnson at Jefferies.

Jeanne, just firstly, I was wondering if you could talk a little bit about your sales strategy for Phosphate Hill exports. Obviously, we've seen exports going into North America go up quite dramatically which makes perfect sense given the price premium there. So if you could just maybe give us some idea of how we should think about that in fiscal '22. And I also note that you're sort of referring to the China export price that there kind of isn't one. So what's the best guide in that regard?

Yes. I mean the market has been very dynamic internationally, and we've got a very experienced supply team that continually looks at how to ensure that we have volume to fulfill all of our contracts here in Australia as well as providing strong netbacks to Phosphate Hill. In general, our first priority is to ensure that we continue to supply the Australian market. And then once that's supplied, then we look to optimize our volumes internationally. And so right now, phosphate, as you know, is quite a tight and dynamic market. And so we're continuing looking at that and the supply team is optimizing that on a weekly basis.

So there's no reason to think that the mix will change significantly if I assume you're going to have a similar proportion of sales into North America, that would be logical?

Yes, although it may be slightly less given the turnaround expected. So because of the turnaround, we will have less volume of phosphates to sell. So that delta is likely to come from the international sales.

Got it. And then secondly, thank you for all the information you provided on the discount at Waggaman, which is very helpful. I was just wondering if you could help me reconcile the difference between the first half and the second half. It looks like the first half was much higher than the second half even though ammonia pricing was pretty good in the second half.

Yes. I think with the -- it's really a timing impact, Richard. As you know, ammonia has just been climbing up and up and up. And given the timing of our production and where that fell, it artificially looked like the discount was lower because of the timing impact of when those volumes were produced.

Got it, that's helpful. And then just finally, back in July, you said when you made a management change on the manufacturing side, you were starting a global search for a replacement. I may have missed it, and if I have, I apologize. But I was wondering where you've got to with that because obviously it's quite some time ago.

Yes. I think what we've done, and I think as I mentioned in the July investor update is that we had put in place a regional model. And with that, we've decided to maximize the regionalization. And so the global position is a different position than it's been in the past. We will continue to have the day-to-day safe, reliable, compliant operations accountable to the business president and the global position will be much more about standards, assurance and expertise about how we operate our plants globally. And so that position is soon to be named probably by the end of the year, but it's a very different position than what it's been in the past.

Our next question comes from John Purtell from Macquarie Group.

Look, just the first question relating to Slide 21 of the presentation in terms of your balance sheet there. And it's mentioned that forecast strong cash flows provide options for growth or capital management post '22. I'd just be interested in some further color around what type of -- or what sort of growth areas or regions look attractive relating to that comment? And does that include potential both organic and inorganic growth?

Yes. I mean, I think our focus on operating cash flows, obviously, FY '22, we still do have a strong supplement capital pull. But beyond that, we're really looking at, first and foremost, to reinvest in our base business and the technologies in our base business and then to augment that in a disciplined way for complementary organic and inorganic opportunities.

And just related to the capital management piece of that. Are you sort of alluding to -- you've obviously got a payout ratio range there. Are you alluding to sort of flexing that range or moving to potentially sort of the upper half or upper end as well as or buybacks? Is that sort of what's been foreshadowed there?

I mean I don't think there's anything being foreshadowed. I think at this point, we're very pleased with a very strong balance sheet. And given the cyclical nature of part of our business, we are committed to a very conservative balance sheet. I think our dividend policy has been in place for a number of years and has served us well through that period of time. And it's easily too early to speak about any capital management beyond that.

Got it. I just had 2 other questions, if I can. Just the first one in relation to -- and I know you sort of flagged this, Jeanne, but if you could just sort of sketch out again the changes that you've made on the ground at WALA over the last sort of 6 months, what's sort of been happening on the ground there? Obviously, you've seen a better sort of second half, obviously, with still some interruptions from hurricanes, et cetera, there. But just what are the changes you've made there?

Yes. I mean we're really pleased with the Waggaman team and its performance since the restart. It's been running at nameplate except for the preemptive shutdown with the hurricane coming, which you can't do much about. So it's been an excellent performance post the restart. And the changes -- we've made a number of changes. We had a task force on the ground to help with the operating discipline on the site, and we've made significant management changes. So the previous plant manager at Moranbah is now the plant manager at Waggaman. The head of the operating discipline task force is now the operations manager there and a long-term Dyno Nobel employee from our LOMO facility. And so we made a couple of key management changes. We've invested in extra training. And quite honestly, we did address a number of reliability and redundancy issues during the turnaround itself. And so all of those things together have actually resulted in a much better outcome.

Got it. And just a final question, if I can, just sort of further to Richard's question there on the side. I mean, obviously, we're seeing shortages of DAP and urea globally. Are you sort of -- are you comfortable that you'll be able to meet -- and obviously, that's good news for prices. But are you confident you'll be able to meet Australian pharma demand over the next 6 to 9 months sort of particularly in the context of sort of the China export curtailment?

Yes. I think -- I mean we talked a little bit earlier about our supply team. I mean we've got an excellent integrated business planning process as well as a very experienced supply team. They've been adaptable as well as innovative about making sure we get supplied in order to supply all the -- all of our customers. So our -- we've been in this business for 100 years. We're a very dependable supplier. And so we certainly have reason to believe that all of the demands that we sell, we'll be able to meet.

Our next question comes from Brenton Saunders at Pendal Group.

Jeanne, just on green ammonia, the new buzzword. Last time we spoke, you were not terribly enthused or encouraged by the notion of your clients that you had notionally canvassed for a green ammonia initiative at Moranbah. You weren't very encouraged by their propensity to pay for green ammonia. Your comments now suggest that might have changed. Can you just maybe make some comments in that regard?

Yes, I think the challenge with green ammonia is a combination of bringing down the cost of it through technology breakthroughs and providing a commercial outcome and affordability for customers. I think for our base customers today, I think it still is a challenge to find customers willing to pay the premium for green ammonia. But there are other customers that have more propensity to pay than our base customers. So we're continuing to pursue both angles to bring the cost down and to provide that opportunity to customers with that propensity to pay, as well as pursuing other options such as ways of getting the product licensed such that it can be recognized as a carbon offset for industries that are looking at an opportunity to do so. So there are a number of technical and commercial challenges, but we're absolutely committed to trying to find a way through those.

I mean everybody sounds like they're committed to the process, it's just hard to understand how it gets commercialized. Could you maybe just generically give us an idea of the kind of clients or industries that are prepared to pay a premium for green ammonia?

Yes. I mean, I think if you look at both of our partners in these, I think they are both looking for those customers. I think you'll see that, of course, Fortescue Future Industries are looking at overseas customers. And our Temasek and Keppel are looking for the Asian market, which are looking for -- they're net energy short to begin with, so they're always importing their energy needs. And there's a portion of those that are looking for carbon-free energy and are willing to pay a premium.

Our final question comes from Scott Ryall from Rimor Equity Research.

I might just continue on with the hydrogen, green ammonia theme for a second. You make in your climate change report on Page 5, you've got a couple of footnotes in there that relates to some of your points that you discussed, Jeanne. And I was just wondering if you could talk through footnotes 2 and 3. The first one is subject to economic feasibility of carbon capture utilization and storage at Waggaman. And just talk through the process there given 2 of your competitors in the region have already decided to go down the path of producing blue ammonia using that technology. And the second one is, I just want to clarify, you've got a footnote there that says green hydrogen reaches economic parity with natural gas for hydrogen production by 2040. Is that the reason that you only see that as part of your decarbonization transition beyond 2040 in the chart that you've extracted on, I think, it's Slide 13?

Yes. I think taking the first point on the Waggaman blue ammonia option, that is -- that footnote is associated with our 2030 target. So clearly, we're expecting to be able to make that happen physically in advance of that. And so there's a number of options that we've been looking at and we'll continue to look at in order to do that. But that's the feasibility. But right now, it does -- we expect it to be feasible, hence, why we committed to that as a target by 2030. As far as green ammonia, I think we've always said green ammonia is what's necessary for us to hit our net zero ambition. And while we say that by 2050, we always say sooner if practical. So really, our commitment is looking to investigate new and emerging technologies that would allow us to bring that forward and to do it as soon as practical. But we want to also be realistic about where the technology sits today and the enablers that would need to be in place to move that forward.

Yes, okay. Great. And my second question is just on commodity prices. And the -- you've talked a little bit about this already in the chart, the little table you've got on Slide 40 is quite helpful. I was wondering if you could just talk about how you see mid-cycle commodity prices. And I'm really trying to get a sense of how you're managing the business for the medium to long term here. Do you see any changes in what historically we can all look at and say, there's mid-cycle and that's what mid-cycle is likely to be going forward? Or do you see any changes structurally that have been made there? And I guess in that context, maybe revisit just some of the stuff we talked about last week on Gibson Island, where you were mentioning that Gibson Island now -- I don't want to -- there's no transcript available that I can find, so I can't -- I just want to check I've got your answer correct here but you mentioned that Gibson Island was breakeven over the last 12 months, which seems pretty difficult to fathom given the stunning second half that you've had in the Asia Pac business. So I'm just wondering if you could contextualize it with Gibson Island as well and just talk through how you're thinking about that business over the next 3 to 5 years.

Yes. I mean, I think commodity cycles are always difficult. And I think that's why we've positioned both of our businesses to be robust and resilient through cycle. The last several years, we've been at the bottom of cycle in very difficult circumstances. That's led to a tightening of supply and demand and -- but clearly, the current tightness in the market is due largely due to the European gas supply situation and the cost there. So that's, I would say, sort of supercharged what would have been a normal commodity up cycle. That's expected to last by most industry pundits through halfway into maybe second quarter of 2022 when Nord Stream starts online to bring extra gas supplies from Russia into Europe. But that's a short-term disruption in the market that you'd expect -- and you said 3 to 5 years that, that would be a historical anomaly as opposed to a new normal. So I think that as we think about where we're at in the cycle, we are in a tighter supply and demand balance, which gives us confidence that in the short term, prices should be better than average in the past, but not at the current elevated rates once the European gas situation sorts itself out. In relation to Gibson Island, the current gas -- I mean, the important thing on the timing of Gibson Island is we were looking for gas supply starting in mid of '23 and going 4 years from there. So you're talking out with the normalization of the cycle. In the current gas contract, the point I was trying to make is it's been roughly breakeven with the current gas contract. And over the 3 years of the current gas contract, the average urea price was slightly above its 10-year averages. And as we went out to market, the gas market in Australia has only gotten harder. And so that's there really -- it was a commercial decision that there was no way of making those ends meet. And why reluctantly, we came to a hard decision of ceasing normal operations there and looking at a potential option to convert it to green ammonia given the unaffordability of gas for that plant.

Okay. But that's even though you're still expecting green ammonia to not reach price parity until 2040?

Well, we expect the green ammonia will -- that there will be a credit of one sort or another for green ammonia relative to gray ammonia, which is the traditional ammonia that is made from natural gas.

We have no further questions. So I'll hand back to Jeanne for closing comments. Thank you.

Well, thanks, everyone, for joining us today and for your questions. And before we close, I want to take this opportunity to thank our Chief Financial Officer, Nick Stratford, who you will know is -- will be leaving us. Nick has made significant contributions to our business over his 12 years with IPL in a number of roles, including the CFO. I want to thank Nick for his valuable service and wish him all the best in his future endeavors. And as we explained in our ASX this morning, an international search is underway for Nick's replacement. But in the meantime, I'm very pleased that Chris Opperman, will step into the role as of today as our interim CFO. Chris was most recently our CFO of our Dyno Nobel Asia Pacific business and will be familiar to many of you as our former Investor Relations Manager. Thank you for joining us today, and enjoy the rest of your day.

Thank you so much. Ladies and gentlemen, this concludes the call today. Thank you all for joining. You may now disconnect.