Dyno Nobel Limited (DNL) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Incitec Pivot Investor Market Update Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Geoff McMurray, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Thanks for joining us at short notice. I'd like to welcome you to our Waggaman strategic review update. On today's call, you'll first be hearing from our CEO and Managing Director, Jeanne Johns, who will take you through the outcome of the strategic review and how this fits in with our strategic agenda. Then you'll be hearing from our CFO, Paul Victor, who will provide some more specific details on the transaction itself. Following Paul, we'll open the lines for a Q&A session. Can I remind you that Incitec Pivot is currently in a blackout period leading into our half year results, and so we'll need to restrict questions only to the WALA strategic review. It's now my pleasure to hand you over to our CEO and Managing Director, Jeanne Johns.

Well, thank you, Geoff, and welcome to everyone on today's call, which finds me here in Chicago with our CFO, Paul Victor, and the rest of our deal team. It is a pleasure to announce the achievement of a significant milestone in the execution of IPL's strategy. As an outcome of the Waggaman strategic review, IPL has reached agreement for the sale of our ammonia manufacturing facility in Waggaman, Louisiana to CF Industries for a total value of USD 1.675 billion or roughly AUD 2.5 billion. Within this transaction, we've also preserved the strategic value of this asset to our Dyno Nobel explosives business through a 25-year ammonia supply agreement for up to 200,000 tonnes per annum of ammonia at producer costs, which effectively equates to retaining about 25% of the economic benefit of WALA. This successfully concludes an important step in IPL's strategic execution. Consistent with IPL's strategy to create 2 great businesses, we announced the Waggaman strategic review in November to improve the quality of our earnings for our premium global explosives business. Of Waggaman's ammonia production, only about 20% of today's volume is utilized within our manufacturing footprint, which underpins the Dyno Nobel Americas explosives business. With the decision to sell this world-class asset, we will reduce our excess exposure to commodity and operating risk while maintaining Waggaman's strategic value. Since our strategic review process was announced, we've undertaken a robust competitive sales process to seek full value delivery. We've also secured a long-term cost competitive ammonia supply for our Dyno Nobel Americas business with a strategic buyer with an excellent operating track record that can provide us with the desired supply flexibility. Today is the result of the successful execution of these strategies. We have significantly reduced the excess commodity exposure while maintaining the strategic value of producer-priced, cost-competitive ammonia supply into our explosives business. In summary, this transaction monetizes our excess commodity exposure, decreases our operating risk and strengthens Dyno Nobel Americas' competitive position with a strong and flexible offtake agreement with a world-class operator. Today represents a significant step in executing IPL strategy of growing both of our businesses in technology-based customer solutions and allows us to concentrate on the growth of our recurring earnings platform. The deal that we've struck gives further strength to our balance sheet and provides optionality for growing our recurring earnings. Our focus now is to close this deal as expeditiously as possible, the timing of which Paul will address later, as well as managing the transition of WALA to CF. We are in blackout in the lead up to half year results, but we are keen to progress the previously announced proposed $400 million buyback as soon as we can. And as always, our focus remains on delivering long-term value to shareholders. The divestment we're announcing today unlocks value and supports the strategy of creating 2 industry-leading businesses. I'd now like to hand over to Paul, who will take you through more of the details of the deal before we answer your questions. Over to you, Paul.

Thank you, Jeanne. Good day, ladies and gentlemen. Over the past couple of months, we spent considerable efforts negotiating a deal of what we believe is realizing a fair value on our investment in the Waggaman facility as well as securing the strategic value WALA provides for our U.S. DNA explosives business. The deal construct essentially consists of 2 key elements, namely the sale of our 100% stake in the Waggaman facility for a consideration of USD 1.675 billion. As part of the transaction, we also secured a long-term supply cost advantage ammonia, 25-year supply agreement valued at USD 425 million. We are also very delighted to execute the supply agreement with CF Industries. The transaction translates to an upfront cash consideration of USD 1.25 billion. As reported in our ASX release, the net cash proceeds amounts to USD 837 million or AUD 1.24 billion after tax. Please allow me now to step you through the salient features of the sales transaction, the supply agreement, the relevant accounting and tax considerations, approach to capital allocation, and finally, the closing considerations. So let's start with the sales transaction. As part of the strategic review, several proposals were considered by IPL management and the Board. It was really essential to realize best value through a competitive sales process and secure a strong and flexible long-term supply agreement in order to preserve the strategic value of WALA for our U.S. explosives business. As mentioned before, the gross proceeds of the transaction amounts to USD 1.675 billion and $1.262 billion on an after-tax basis. I will discuss the tax considerations very shortly. We believe the valuation represents a meaningful premium to both the replacement value and IPL's investment in the facility. The transaction implies a multiple of 9.3x EV-to-EBITDA based on a through-the-cycle EBITDA compared to a 5-year IPL multiple of 7.3x. Let's turn our attention now to the long-term supply agreement. As Jeanne mentioned, it was essential that we negotiated the strong and flexible supply agreement in order to preserve the strategic value of WALA for our U.S. explosives business. Once should really think of the long-term supply agreement as securing 25% of WALA's economic benefits for DNA for 25 years. These economic benefits are secured in the low-cost position and the security around a per annum supply of 200,000 tonnes of low-cost ammonia to the DNA business. We view the 25-year, long-term ammonia supply agreement highly attractive as it will provide significant value to IPL. The supply agreement essentially positions the business as follows: 200,000 tonnes, and it will be short tonnes of ammonia per annum, will be supplied to DNA for the use at our Louisiana, Missouri facility and other potential users for an initial period of 15 years with an option to extend it by another 10 years with 2 5-year renewal period options at IPL's election; 150,000 tonnes of the 200,000 short tonnes of ammonia per annum will be supplied to LOMO and additional 50,000 tonnes per annum will be available for planned LOMO debottlenecking opportunities or business -- or other business ammonia requirements. Really over the short to medium term, until the debottlenecking has then given effect at LOMO, the additional 50,000 tonnes of ammonia have strategic value in that it provides us with the opportunity and flexibility to secure aimed positions and/or provide us with the flexibility as a further top-up feedstock for other parts of our DNA business. The additional tonnes can also be monetized at our election. Pricing of the contract between the parties is a gas-based contract at producer cost for DNA. This results in a cost of ammonia to below the previous price used to allocate value to WALA from the tonnes supplied to LOMO. The DNA reporting segment will, in the future, include this margin in its reporting results compared to the results previously allocated to the WALA reporting segment. Further, the DNA reporting segment will also realize the earnings benefit for the additional 50,000 tonnes referenced above. This position provides DNA with significant favorable cost advantage in manufacturing ammonia nitrate to effectively compete in the North American market. The details of the supply agreement are commercially sensitive. We do, however, take great comfort that we have negotiated significant flexibility more than what exists today to ensure a consistent supply of cost-competitive ammonia to our DNA business. The DNA business is now very well positioned to achieve strong margins and returns for IPL shareholders through this cycle, therefore, driving higher sustainable return on capital on a go-forward basis. The value of the supply agreement is calculated as the net present value of the margin between the gas cost ammonia mechanism explained above and our estimated market price assessment over the contract period. Lastly, CF Industries' view as the best counterparty to enable the successful execution of the supply agreement. CF, as you know, is a global leader of hydrogen and hydrogen products. CF has industry-leading ammonia production capabilities and will be a strong custodian for the WALA asset. Let's talk a bit about tax considerations. As mentioned before, the transaction value post-tax amounts to $1.262 billion. The total net liability -- sorry, the total net tax liability amounts to USD 413 million and consists of 2 parts: one, a USD 292 million cash tax payable pertaining to the net cash consideration of the transaction costs on the sale of the assets; and two, USD 121 million tax payable as a result of the supply agreement. Important to note that this creates a tax asset on the balance sheet that will unwind over a period of time that's coupled to the supply agreement. As previously communicated to the market, the extent of the tax charge is as a result of the low tax base of the Waggaman facility, which amounts to approximately $110 million. As part of the strategic review of WALA, we challenge ourselves with the help of our advisers to investigate and consider the best and appropriate tax options. We believe that this tax outcome represents the best outcome in the interest of our shareholders. To complete the accounting treatment, and based on the balance sheet of today and an exchange rate of AUD 0.67 to USD, IPL would realize an accounting gain of AUD 146 million. This takes into account the proceeds from the transaction of -- net of transaction costs, the current reported net asset value of $850 million, the goodwill allocated to the asset of USD 580 million, the corresponding accounting tax effect against a net asset of $210 million and the net positive impact of the unwind of the foreign currency translation reserve credit of $131 million. This gain on sale is indicative at this point as the balance sheet may differ at the date of completion when the transaction is recorded for accounting purposes. Now after that accounting lesson, let's move on to the closing considerations. The completion of this transaction is subject to the U.S. antitrust regulatory clearance and completion of the customary closing conditions. While we're very hopeful that this process will be completed within the next 9 to 12 months, I do want to emphasize that the process will run its due course. Moving on to the use of proceeds. As communicated before, we anticipated based on the successful execution of this transaction that significant cash proceeds will become available and will be allocated in line with IPL's long-term capital allocation framework, which seeks to deliver maximum sustainable value to our shareholders. That really brings me to the end of my section, and I will now hand over to Leanne, the operator, who will facilitate the questions-and-answers section. Thank you very much, Leanne. Over to you.

[Operator Instructions] Our first question comes from the line of Brook Campbell-Crawford of Barrenjoey.

Just the first one around the offtake agreement. Can you just step through what the cost of production at Waggaman is at the moment at the spot gas prices?

Yes. Let me take that and see if Paul has anything additional to add. I mean I think the way we think about the offtake is that the supply contract looks to mimic today's cost, which is roughly fiscal year '23 with a good reliability run rate. And of course, it does fluctuate with the Henry Hub price. So I think we've disclosed the various aspects of those over time, but it roughly mimics today's current costs.

Yes. Okay. Nothing further on what that is today at spot gas?

I think you have to make your own assumption in terms of that. We know what the gas price is. When we release our results, you will be able to ascertain what the cost base is of WALA. I think what -- we feel comfortable just on the principal level in terms of the cost formula that, effectively, the cost of conversion has been based on an effective WALA operation, which really creates the base. And then from there onwards, it will escalate with inflation. So we quite feel comfortable that it's an effective WALA operation then with the gas price, which we feel take us into the future of [ being quite ] competitors.

Okay. I'm just keen to understand the contract a bit better if there was an adage, for example, at Waggaman down the track. Is there any adverse impact to your explosives business, whether it be the owners on CF Industries to find ammonia and supply to you at that implied cost of Waggaman? Or could there be an adverse sort of impacted to IPO, whether it be volumes or having to pay a higher price at sort of market prices?

Yes. I mean I think -- I guess one thing just worth saying upfront is that the details of the offtake agreement are commercially sensitive. But I will say that in the offtake agreement, there was consideration given to a number of different scenarios and how those would be handled. And on aggregate, those are more favorable and more flexible than what we have today.

Our next question comes from the line of Richard Johnson of Jefferies.

Jeanne, I'm just trying to make sure that I understand properly what the net benefit to Dyno going forward is of the offtake agreement because I just want to make sure we don't get confused with the $425 million number you've quoted. It seems to me the net benefit will be the difference between the price you pay for your ammonia going forward and the price you're currently paying. You've previously disclosed that the internal price is done on a long-term average. So I'm just trying to get a better understanding of what the net benefit -- I mean, clearly, there's a benefit -- but what the net benefit to Dyno will be going forward using the current arrangements as a base.

Yes. I think Paul will answer that.

Yes. I think your summary is correct. The net benefit is today that, effectively, the margin that is part of the LOMO or WALA to LOMO price will effectively be -- we will not have that anymore. So effectively that value transfers to the DNA explosive business. That would be the first one. But then secondly is when you look in terms of the explosive business, also we have additional 50,000 tonnes that ultimately also carries an economic value. So those -- in terms of what you can do with it, whether you sell it, whether you effectively use it as ammonia swap for [ Shahan ] or whether you just use it ultimately to trade for [ aimed ] positions, we do believe hold more value for us. And then the last thing is, Richard, that I think we shouldn't forget, this is a continuous supply of 200,000 tonnes of ammonia. So we're -- typically in the current setup is where you would have unplanned outages or the planned outages at WALA. This contract actually allows you to see through that and actually deliver a continuum of volumes to LOMO and the rest of the DNA business, so that is always eligible, in most instances, to that 200,000. So I think if you really look at the economic benefits, it is much greater than what we have today.

Yes. No, no, I get that, Paul. I'm just trying -- I mean going forward, clearly, we're all going to need to change our numbers because there's a margin benefit from your existing arrangements to the new arrangements whenever those actually kick off. And it's impossible to tell from the data you've given what that impact is. I'm just trying to understand why you aren't able to actually give us that number.

Yes. I mean I guess the way to think about it, Richard, is that there's basically 200,000 tonnes of -- per annum of ammonia production. Today, as you said, 150,000 of that is done at this internal transfer price, which is somewhat arbitrary. And in the future, that will be a cost base. So quote any profit on that 150,000 that today shows up in Waggaman, will show up in the explosives business. We'll also get an additional 50,000 tonnes per annum, which eventually will go into probably debottlenecking of LOMO, but in the meantime, we'll be used to supply it. And the difference in the profitability of that segment will be the difference between cost economics and the ongoing market rate of ammonia. So those are the 2 major value aspects of the contract going forward, which hopefully will address your question.

Yes. No, it does. I mean it just seems to me, we're just going to have to guess what the benefit to you is because it's impossible to calculate it. Because it's -- I'm just concerned that if you use the $425 million as a starting point, you're going to overestimate what the benefit is because that's just very misleading. Because it's the delta that matters. It's the delta that matters.

Yes. Richard, I will say today, we kind of -- there is hopefully an understanding of what that margin benefit is effectively between WALA and LOMO in terms of the charge on above gas between the 2 assets. And effectively, what we're saying is in the future, it will be gas-based. So if you take your cost of disclosed WALA cost plus the -- currently, gas, you will be able to determine what that margin delta is between WALA and LOMO.

Okay. Great. And then can you just give me a sense of when the tax incurred will actually need to be paid, please?

Yes. So it will be paid on the completion of the transaction, so effectively, when the cash settlement needs to make, and that's effectively in the condition precedent has been fulfilled in terms of us receiving antitrust approval.

Got it. And then finally, Paul, just -- I was wondering if you can give me a sense of what the costs of the transaction are. So what are the all-in associated legal and other costs?

Yes, that's -- in total, it's around about USD 16 million for the total transaction.

Our next question comes from the line of Daniel Kang. One moment please. There seems to be a disconnect from Daniel Kang. Our next question comes from the line of John Purtell of Macquarie.

I just had a few questions. And just following on from sort of Richard's question there. In terms of how you ensure that Dyno Americas hangs on to that cost benefit rate of sourcing arrangement, so as the risk we've seen historically, is that cost benefit competed away?

Yes. And I think there's 2 aspects to that. I mean, first of all, we do exercise a strong cost discipline, and we will continue to do that into the future. And the second one, of course, we do have a number of reporting mechanisms that -- and performance management mechanisms that we will be able to ensure that, that benefit is not -- is appropriately captured by the Dyno Nobel explosives business.

The second one there, just in terms of the offtake value and the tax implications, will there be a tax callback from that gross amount of tax that you've indicated on that offtake value, so over time, it sort of nets out at a lower level?

Yes. So ultimately, based on the kind of the current tax regulation you have to raise on day 1, the tax liability on the full offtake, and effectively pay that, so that's why on the tax basis, kind of the asset immediate, that's our outflow. But then correspondingly, you raise a deferred tax asset and then you are allowed to unwind that over the period of the contract. So effectively, it will reduce your effective tax rate in the years to come as you unwind it because it will count as a deduction against taxable income.

And just the last one, Paul, and I think you've covered it a little bit before. But just in terms of use of proceeds, how do we think about the potential for further capital management beyond the buyback that you've got in place and how do we compare and contrast versus growth?

I think we've been very clear about our announced capital allocation, Board-approved capital allocation framework in the way that we treat our secondary capital. What we -- what is quite important is that we get the deal done. The Board really needs to kind of make this -- sold this decision in terms of how capital will be allocated. Those levers that we will usually consider to return maximum value to shareholders as part of capital allocation will be considered. And I think once the Board is in a position to communicate those, John, so it will be done. But we will be very consistent with that capital allocation that we communicated to the market before.

Yes. And the only thing I would add is we're obviously quite keen to execute our previously announced $400 million buyback program. And like I said, we do expect that, that will likely take most of the financial year to properly execute, at which time the Board will review the capital allocation framework.

Our next question comes from the line of Daniel Kang of CLSA.

Sorry about before, my line got cut off. Just firstly, in terms of the sale agreement to CF, I just want to clarify, is there any potential for a counterbid at this point?

No, there is not. The bid is binding, and both parties are committed to the process forward.

Very clear. Okay. And second one, in terms of your comment on the share buyback being completed this financial year. So given that you're in blackout, so we should expect that the $400 million is likely to be accelerated and completed in the second half. Is that the right way to look at it?

Yes. I mean we're still hopeful and do plan on being able to complete it this financial year.

Okay. And just finally, Jeanne, I realize this is a WALA-focused call, but just wondering if you can comment on whether Phosphate Hill was recently impacted by the recent rains, flooding in North Queensland.

Yes. Sorry, Daniel, we're not really in a position to comment on anything outside of the transaction for Waggaman today. So we will be reviewing that clearly at half year results.

Our next question comes from the line of Nathan Reilly of UBS.

Just coming back to the value of the long-term ammonia offtake agreement. Can I just get some, I guess, some more detail around how, I guess, the cost of production equation has taken into consideration, CF's plans for blue ammonia production there as well? So potentially, if you could just sort of share some of your thoughts around that and also some of the -- I guess the through-the-cycle cost and ammonia pricing assumptions that have gone into that calculation?

Yes. I'll let Paul take that.

Yes. I think it's what -- let's share what we can. I think Jeanne has been clear that we can share the -- we cannot share any confidential details in terms of what is in that volume offtake agreement. Safe to say that, ultimately, the first objective of CF is to take over the operations to run it as effectively and efficiently as possible. And so that's kind of the first objective that's very, very important, I think, for both of us. As I've said, our cost of production and the formula that we've used have been based off a very effective financial year '23 operational environment and envelope. If CF improves on that, then ultimately they're the owner of the asset. Our formula has been set with in terms of what we feel comfortable in terms of the production cost structure as well as the production reliability today. I will say in terms of blue ammonia, just remember what we've said before, we have previously communicated that on our watch, we were interested in executing the carbon caption storage project. And typically, we don't see that, that project, because it changed ownership, will be derailed. We actually see that if the project gets sanctioned, we'll continue in executing that at WALA. And obviously, Dyno will have access to those low-carbon ammonia volumes under the long-term supply agreement. But that's as much as we want to say. The whole environment about blue ammonia is still very much developing. And I think at this stage, we feel comfortable that we've got access to low-carbon ammonia as produced from WALA when the CCS gets approved in time. So that's -- hopefully, that answers your question.

Okay. And sorry, just finally, the value of the intangible asset that you'd be recognizing for the offtake agreement value, will that be subject to annual true-ups to reflect, I guess, changes to Henry Hub pricing and also ammonia pricing?

Yes. It is an instrument. We have to accept that. So we have to do the fair value testing and the value and use assessment for impairment. You're 100% right, but it also will unwind over time.

Our next question comes from the line of Scott Ryall of Rimor Equities.

Quick question on -- we'll follow up on the blue ammonia side of things. Could you just confirm, do you have, I guess, an access to blue ammonia under the contract? Or is it just if it comes from Waggaman, then you'll receive low-carbon ammonia? I'm just wondering how the contract is structured in terms of being explicit around that, please.

I think we see it as much as we can say in terms of the contract in terms of blue ammonia. As I've said, blue ammonia is still very much in development in the market in terms of what it means and what criteria it is. And we, however, feel comfortable that we wanted to link ourselves to the WALA facility. We feel that the contract mostly kind of puts us in that position. The first big step is the CCS project, which hopefully, when it gets sanctioned, we'll have benefits in that it will deliver low carbon ammonia. And under the volume offtake agreement, we have access to that. And I think the world will develop from there onwards. So that's really kind of what we can say at the moment.

Okay. All right. Paul, so you -- basically, as you say, you've tied it to Waggaman. So whenever Waggaman goes to lower carbon, you will receive lower carbon. And is there any price adjustment to recognize that? Or is that captured under the benefit that you've valued in the contract?

At this point in time, I don't think that's a bit of detail that we want to kind of disclose. This environment is developing. Thanks.

Okay. And then the second question I had is, what -- just with respect to the antitrust approval. They're pretty famous in the U.S. for taking some time. And I guess, what happens if you don't get antitrust approval? What's Plan B for this transaction, please?

I'll take that, Scott. I mean, obviously, we wouldn't have entered this transaction if we didn't see a pathway to success on the antitrust. And there is a process by which different stages goes through. There's different time frames for those processes. But both us and CF are committed to the process, and there is a break fee if indeed the transaction doesn't complete. But we do -- we are hopeful that -- and like I said, we do see the pathway to success on it.

And the break fee is payable from CF to IPL in that instance?

That's correct.

Our next question comes from the line of Richard Johnson of Jefferies.

Paul, just a follow-on from Nathan's question about the unwind. I just want to make sure I understand properly what the -- if there's any P&L impact of that is and how you calculate it? And what discount rate are you likely to use?

Usually, kind of the discount rates that we'll use, we'll use a risk-free rate to discount kind of the liability, and then we'll unwind it accordingly on an annualized basis. Is that enough detail for you, Richard?

I just want to make sure that, that flow through the interest line.

It will -- there will definitely be a component that flows through the interest line. Yes.

Okay. And then -- but that you can't tell me what the discount rate is you're going to use to calculate that?

No, not at this point in time. But I think what we will do is as we approach closer to the deal, we are -- there are still some aspects of kind of the exact modeling that we need to kind of resolve in the way that kind of we will set it up. But ultimately, once we resolve it closer to the transaction close, those details will be provided to the market. But we'll use a discount rate to calculate the present value.

At this time, I would now like to turn the call to Jeanne Johns for closing remarks.

Very good. Well, thanks, everyone, for joining us today. It certainly has been an important day and a milestone in our strategic execution. So I think the team has done a great job of achieving the fair value and retaining the strategic value of the Waggaman asset to underpin the continued success of the Dyno Nobel Americas business. So with that, we'll close the call today. Thank you very much.

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