Dyno Nobel Limited (DNL) Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to Incitec Pivot FY '23 Half Year Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Mr. Geoff McMurray, General Manager, Investor Relations. Please go ahead, sir.

Good morning, and welcome to Incitec Pivot Limited's 2023 Financial Half Year Results Briefing. I'm joined this morning by Managing Director and Chief Executive Officer, Jeanne Johns; and Chief Financial Officer, Paul Victor. 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, we'll have time for questions and an audio recording of this presentation will also be available on the company's website after we complete today. I'd like to draw your attention to the disclaimer found on Slide 2 of the presentation. Slide 3 contains important information about forward-looking statements. I encourage you to familiarize yourselves with the information on both slides. Before we move into the main presentation, I'd like to start with an acknowledgment of country. I'd like to acknowledge that traditional custodians of the land we are coming to you from today, the Bunurong/Boon Wurrung and Wurundjeri, Woi Wurrung peoples of the Eastern Kulin Nation. I pay my respects to the elders past, present and emerging. Thank you. And now I'd like to hand over to Jeanne.

Thanks, Geoff. Good morning, and welcome to everybody. I'm very pleased to be here today to announce IPL's half year 2023 results. Before talking about safety, I want to provide a high-level overview of the key themes coming out of today's results announcement. We have made strong progress on a number of key strategic priorities and strengthen the positions of our privileged assets. We've also delivered a resilient result while navigating some short-term headwinds across our businesses, including a dramatic drop in commodity prices following last year's record levels and some challenging weather impacts. End market fundamentals continue to be positive despite that recent volatility and the delivery of our strategy is setting up our business for growth in high-quality recurring earnings with less commodity market and manufacturing exposure. Our position is supported by our robust balance sheet and a disciplined approach to capital allocation and management. Turning now to safety and our #1 company value of Zero Harm. Across the board, the trend has been very positive with improvements across all of our metrics, including lower severity incidents. Our strong results are a reflection of the significant emphasis that we have placed across our business on our safety refresh program called SafeTEAMS. At 0.67, our total recordable injury frequency rate is 25% lower than the same time last year and below our 0.7 target. Pleasingly, there's also been a significant improvement in process safety incidents, which are down 50%, and our strong environmental performance continues with no significant environmental incidents. We also achieved an excellent safety performance during the Gibson Island closure, and I'm very proud of how the closure was managed by our dedicated team. Moving now to the significant progress that we made on our transition to net zero. Our commitment to being transparent and having an open dialogue on climate change was clear earlier this year at our AGM, where our strategy was overwhelmingly supported. Almost 90% of our shareholders voted in favor of our progress on climate change. We continue to progress 4 significant decarbonization projects which collectively would deliver in excess of 42% in greenhouse gas emission reductions against the 2020 baseline with our current portfolio. During the sales process, we will continue to progress a carbon capture facility at Waggaman, which will provide us access to decarbonize ammonia post the sale. At Moranbah, tertiary nitrous oxide abatement underpins our short-term 5% reduction target, with installation on track for the first quarter of 2024. We're continuing to work with our partners at Fortescue Future Industries on the conversion of our Gibson Island manufacturing plant to green ammonia with the final investment decision targeted for the second half of this year. The federal government safeguard mechanism will provide us clarity to inform our pathway to net zero. On Scope 3, we're making excellent progress focusing on supplier management to obtain their and their suppliers' actual greenhouse gas emissions that are essential for informing our Scope 3 targets. We will revisit our emissions reduction targets following the release of science-based targets initiative methodology for the chemical sector, we have been delayed and is now scheduled for early 2024. Turning now to an overview of our first half results. We delivered $552 million of EBIT, down 3% on the record result last half year, which was supported by almost unprecedented strength in commodity pricing. There were a number of moving parts in our results, including a range of external headwinds. We had a good result from Dyno Nobel, which benefited from a strong manufacturing performance at Waggaman. However, weather did impact the explosive performance in North America in the first half. The fertilizer result was disappointing with the combination of the wet weather and the sharp drop in commodity pricing impacting distribution earnings. While Phos Hill delivered better volumes than the year before, they were not as strong as forecast, and we also had to absorb additional costs from third-party gas supply. We returned to a very positive operating cash flow of $194 million. This result underpins our ability to pay an interim dividend of $0.10 per share or a total interim dividend payment of $194 million. We are committed to execute the previously announced $400 million market buyback, and this will commence as soon as we have an available trading window. And we will be targeting completion by the end of the calendar year. We continue to maintain a disciplined approach to capital allocation. Our return on invested capital has improved from 10% to 13% or 19.2% excluding goodwill. And our balance sheet is in very good shape. And while the first half performance was impacted by some short-term headwinds, we have delivered a resilient result while making excellent progress on executing our strategy. And we're well placed to deliver an improved underlying second half. I will now give an overview to the important progress that we've made on our strategic agenda so far this financial year in both of our businesses. The Waggaman in sale agreement enables us to reduce future earnings volatility in line with our strategy as well as crystallize the value of our Waggaman investment at a high point in the cycle, effectively monetizing our excess commodity exposure. We also agreed a strategic offtake contract with CF Industries at producer economics that will underpin further upside in DNA's future explosive margins as well as provide security of supply. Separately, the team has done a great job providing for competitive gas at DNAP's key asset, Moranbah through to 2037. And while the agreement remains subject to the satisfaction of a number of conditions, this is an excellent opportunity for competitively priced gas in the challenging gas market on the East Coast of Australia. It will underpin the cost position of more of a privileged footprint and coupled with the upside that will come from customer recontracting, we have a great platform to return our DNAP business to peak earnings as well as improving returns on invested capital to an appropriate level. The integration of Titanobel is progressing well, with the acquisition delivering in line with the business case and extending our explosive footprint into Europe and the West African gold mines. In fertilizer, the Perdaman offtake agreement will provide both security of supply and shortened supply chain to service our Australian farmers. It will also transform the recurring earnings of the distribution business upon commissioning expected to be around mid of 2027, adding an estimated $45 million of incremental annual earnings to the business. These developments in the last year and the Waggaman transaction closure timing provide considerations to the optimal timing of the demerger to set up both businesses for success. All of these initiatives are designed to improve the quality of our earnings to support shareholder returns. And subject to the usual trading restrictions, we are committed to our previously announced share buyback, which we will execute in every available window. Once complete, we will consider further capital management initiatives aligned with our capital allocation framework. This slide provides a good summary of the Waggaman transaction and its benefits including the retention of its strategic value. In March, we announced both the sale of Waggaman with a gross asset price of USD 1.675 billion as well as an offtake agreement valued at USD 425 million with the value of that agreement to be realized over the 25-year term of the supply contract. We very deliberately structured the sale to retain access to 25% of the equivalent Waggaman volumes and the associated financial and strategic benefits. The offtake agreement also significantly improves the security of supply and reduces our operational risk, limiting the cost of turnaround and disruptions. Dyno Nobel and CF Industries have now both made their submissions to the U.S. antitrust regulator. Completion planning is progressing at a pace and we are hopeful that a transaction will complete before the end of this calendar year. Looking now at how the important progress that we've made on our strategy will grow recurring earnings. As mentioned previously, our offtake agreement with CF Industries will provide earnings upside to DNA. The earnings benefit will be about USD 30 million in cash earnings annually, less the amortization, which will be determined on valuation at the deal close. The offtake agreement will also significantly reduce volatility of future DNA earnings. The recontracting of our DNAP customers has already commenced with positive earnings benefits expected from the recontracting at a better point in the cycle with the earnings upside expected to build through FY '24 and '25. The combination of this recycling cycle as well as the agreement with QPM for competitively priced gas provides us the platform to return this business to peak earnings. And the Perdaman supply agreement once online is expected to deliver an estimated $45 million per annum in incremental earnings. This will underpin the delivery of our target to double distribution earnings with more potential upside from the growth of value-added products. Turning now to technology and our value-add products that differentiates us in the marketplace and drives real value for our customers when it comes to productivity, safety and environmental benefits. As you can see here, revenue growth significantly outstripped volume growth across our premium emulsions and our electronic detonators in our explosives business reflecting the value add of our premium offering. In our fertilizer business, we successfully integrated Yara Nipro Liquid business following its acquisition announced last August. The strategy has meant that we can provide farmers with greater liquid options and enhanced security of supply. While overall, our liquids business is performing well above the business case, volumes were impacted by a price inversion, which led to short-term preference by our customers for urea over liquids. I'd now like to take a closer look at our practical explosives technology, which continues to be the reasons that our customers choose us. A great example of our technology winning customers through innovation is our advanced detonator offering, which is solving the problem of mining on unstable ground. Our ability to synchronize different types of our advanced electronics offering allows for the optimal blend and the best blasting outcomes. This means less operator time on the ground and better safety outcomes. In the U.S., our Nobel Fire technology is delivering advanced digital solutions. It has a 95% customer penetration due to its easy-to-use features and robust blast design characteristics, which also allows for easy reporting of regulatory requirements. Our technology is also allowing us to penetrate new markets, including Chile, where our Delta E technology is being combined with an advanced electronics offering. Our acquisition of Titanobel provides a platform for technology adoption in Europe and Africa. Following regulatory approval, we successfully introduced our DigiShot Ranger to the European market, completing our first shot with a Q&C customer in France. Designed for the quarry market, our reliable and easy-to-use ranger system forms a core component of our future market offering to the EMEA region, and we are looking forward to its continued rollout. I'll turn now to manufacturing and our year-on-year reliability improvements. Waggaman performed very well in the first half with above nameplate production. The temporary repairs on the ammonia cooler at Waggaman continues to exceed our expectations, allowing its replacement to be incorporated into the next scheduled turnaround in October of 2024. With no planned interruptions currently scheduled at Waggaman, there is potential upside in the plant's volumes relative to the second half of last year. A short-term equipment issue at Phosphate Hill, which has now been rectified, impacted first half volumes, and we now expect full year production to be in the order of 900,000 to 930,000 tons. Manufacturing at Gibson Island was successfully demissioned on budget following the plant performing at record levels for the first quarter and with the outstanding safety record I've previously mentioned. Let me now take you through the Dyno Nobel result in a bit more detail. Dyno Nobel Asia Pacific grew at an underlying rate of 10%, and with strong growth from our international business as well as continued growth in technology with earnings from differential emulsions and premium electronics increasing by an incremental $3 million from PCP. The EBIT result of $79 million was flat on the prior corresponding period. with impacts from wet weather, reduced joint venture income as well as the previously disclosed impact of the Gibson Island closure on DNAP earnings. In North America, our Dyno Nobel Americas business reported a very strong earnings growth with EBIT of $391 million, up 55% on PCP. There are a few moving parts within that result, so let me take a minute now to walk you through the key points. The Waggaman facility performed exceptionally well in the half, operating above nameplate and delivering over $300 million of EBIT. Looking at the base explosives business now, and the result was down slightly in U.S. dollar terms, but up 2% in Aussie dollar terms. We continue to see positive growth in our Q&C market, with volumes up 7%. In the Metals segment, the business felt an impact of an extremely cold winter and high snowfalls across North America, with a number of our customer sites being impacted. At the same time, we've not been immune from the challenges of the inflationary environment and some logistics interruptions, and Paul will cover this in more detail later. We've taken further action to optimize business performance with a disciplined focus on price and cost pass-throughs as well as cost reductions with the benefits expected to support a strong earnings uplift in the second half, with the full run rate benefits expected in FY '24. Lastly, in our agriculture and industrial chemicals business, the lower earnings reflect the combination of lower commodity prices and volumes. We expect volumes to be higher in the second half, resulting in a stronger contribution to the full year. As we look ahead, the growth potential in Dyno Nobel is significant. The business is very well placed to capture these opportunities through our superior technology offering and our deep customer relationships. In North America, we expect strong growth in Q&C and future-facing minerals markets will be the key source of earnings growth. Elsewhere, -- the business is growing internationally. And our contract win at the Casarones Copper Mine in Chile is an example of the value we create for our customers from our Delta E technology, combined with our advanced electronics offering. Through Titanobel, we've set up a platform to tap into new selected growth markets in Europe and in the West African gold sector. The combination of the recontracting of Asia Pacific volumes and the new gas agreement creates a platform to return our DNAP earnings to peak earnings and an acceptable rate of return. The offtake agreement with CF Industries provide strategic Waggaman earnings to be reflected in our Americas Dyno Nobel business, significantly improving the recurring earnings profile of our explosives business. We also have good opportunities to increase our manufactured volumes. At Moranbah, debottlenecking work at our next planned turnaround in FY '25 would restore half of the ammonium nitrate volumes lost following the cessation of manufacturing at Gibson Island, adding a further 10,000 tons of capacity annually. Options for investment and unlocking the additional volume at LOMO is also being progressed in the U.S. We're also evaluating any accretive investments and partnerships that deliver long-term earnings potential. And of course, these opportunities need to meet our capital allocation criteria and deliver attractive returns to our shareholders. Moving now to our fertilizer business. This was a challenging period with significant commodity volatility headwinds, a key driver of the lower result. In manufacturing, we were recycling a record first half result with earnings in the first half of this year, impacted by lower DAP pricing and higher gas pricing due to a third-party supply issue. Curtailments in our contracted gas supplies at Phosphate Hill have been well managed by our procurement team, optimizing around short-term gas contracts and other arrangements and spot gas purchases. They have secured supplies in a challenging market to keep the plant running and protect the valuable earnings while managing as much as possible the cost incurred above the contract. Our third-party supplier is now planning for a resumption of contract gas in June, with the additional gas costs anticipated to be in line with the previously announced range of $60 million to $70 million. The continued supply of gas allows the capture of $97 million of Phosphate Hill EBITDA this half year. Distribution earnings were impacted by severe rain and flooding pretty much wiping out the usual spring and summer application season, which was coupled with the dramatic drop in commodity pricing. Negative commodity price sentiment also contributed to delays in purchasing activity. Inventory buildup for this business usually peaks during the first 6 months of the financial year and high levels of delivered inventory was therefore exposed to this dramatic decline in urea prices of around USD 345 per ton, coupled with this unexpected contraction in demand that I mentioned earlier. While the team did an excellent job of selling excess inventory into export markets, the pricing fall resulted in an inventory write-down of $17 million, which impacted margins directly. Pleasingly, the easy liquids and Nutrient Advantage businesses performed well in the half and helped to partially offset this margin decline. Looking ahead, the agronomic conditions are very positive for the winter cropping season, and with positive farming economics, we expect winter demand to be strong with margins expected to normalize by the fourth quarter of this year. Like the resilience in the end market that we see for our explosives business, the fertilizer business, likewise, has compelling fundamentals. You can see on this chart on the left that the long-term growth trend, which was partly disrupted by the Ukraine invasion and the very high pricing that follows. But overall, you can see the strong growth profile. And on the domestic front, the numbers are also very compelling, with Australian farm gate production expected to grow to about $100 billion by 2030. Demand for fertilizers, both domestically and globally, is underpinned by the global megatrends of rising populations, rising incomes and reduced arable land per capita. We have strategically placed assets and an integrated model across distribution and manufacturing that enables us to offer value-added products and security of supply to our customers. Our distribution business has delivered solid earnings in the range of $40 million to $50 million over the last several years with this first half very much an outliner as I've explained previously. The Perdaman agreement sets the business up for success longer term and really underpins the delivery of our ambition to double distribution earnings, which is further supported by the growth in value-added products. In addition, there's further potential to transform our Gibson Island facility to green ammonia. These important strategic initiatives provide the basis to significantly increase the recurring earnings and improve the quality of earnings for our fertilizer business. And with that, I'll now hand over to our CFO, Paul Victor.

Thank you, Jeanne, and good morning to everyone on the call today. Turning to Slide 21 which provides a detailed overview of our financial performance in the half. Pleasingly, the business delivered improved manufacturing reliability and this was evident by strong earnings growth in our Dyno Nobel Americas division. As has been well publicized, though, commodity prices were a significant short-term headwind in this period. The fall in prices, coupled with extremely wet weather conditions over the spring fertilizer season as well as lower-than-expected result of Phosphate Hill led to reduce fertilizer division earnings in the half. Our explosive business shows underlying strength in expanding its growth in technology and services to current and new customers. However, there were some challenges that we had to navigate in this period, which I will discuss later. We have taken the appropriate actions in setting business up to deliver positive underlying earnings growth in the second half of this financial year. As Jeanne mentioned, we did not escape the rising inflation and as evidence, at 2% higher cost inflation compared to normal inflation rate of 4%. In addition, our business cost base did increase year-on-year related to business acquisitions and one-off costs associated with the execution of various strategic initiatives. We refer you to the cost slide included as part of the annex slide in the investor presentation pack. Overall, at group level, we delivered an EBIT result of $552 million, down 3% from the previous comparable period, which was still a very resilient result. Also on this slide, the strength of the business is reflected in our operating cash flow performance of $148 million in the first half and our excellent return on invested capital, including goodwill, at 12.8%. And as was communicated previously, our focus is on maximizing returns to shareholders. With this in mind, the Board has declared a $0.10 per share interim dividend. We also plan to execute the previously announced up to $400 million on market share buyback program in the permissible trading windows and our targeting commission by around the end of calendar year 2023. Moving now on and on the next few slides, I will go through some of the key points about our working capital and our approach to capital allocation. On Slide 22, you can see that our year-on-year movement in working capital, and it can also be really be grouped into 3 main drivers. First, was the movement in FX, which drove a $35 million increase. Second was the impact of the Titanobel acquisition and the WALA sale and the GI closure, all of which contributed a $49 million increase. The GI closure does result in IPL carrying more inventory of $30 million to facilitate sales in our distribution business. Finally, management actions around trade working capital facility usage and other initiatives led to a $20 million increase in working capital in the first half. Our continued focus on working capital management also shows up in our positive results around inventory and debtor and creditor days management. Further actions are continuing to improve our working capital management practices and to ultimately improve working capital investment levels. The next slide outlines the investments we are making to drive growth in quality earnings in future. Our expected level of sustenance capital for financial year '23 is unchanged and in line with previous expectations. We do expect turnaround CapEx to be up approximately $20 million due to FX movements and the change in scope of work at the Cheyenne turnaround. At WALA replacement of the cooler has now been deferred to align with the planned turnaround in October 2024, post anticipated completion of the transaction. The LOMO and St. Helens turnaround was successfully executed in the first half of 2023. Total sustainability CapEx is still expected to be between $40 million and $50 million in financial year '23, supporting our pathway to deliver 2030 emissions reductions and is associated with the previously communicated 4 key projects. Capital expenditure is continuously being reviewed to deliver the most optimal levels of spend to ensure long-term asset reliability as well as delivering the best ROIC on all of our assets. The next slide provides investors with an update of how we have prioritized the delivery of sustainable returns to our shareholders under our capital alation framework. The interim dividend of $0.10 per share, franked 60% represent a payout ratio of 54%. This buyout ratio compares very favorably with our peer group and our dividend yield is certainly very attractive. As we have mentioned in the past, and we are still committed to executing the $400 million on-market share buyback. I really look forward to getting this program underway as soon as we have the next permissible trading window available. As you would expect, we're also evaluating possible capital management options for the future, and we'll review these when the WALA proceeds are received. Further updates will be provided to the market once the Board approved those. Finally, from me, I'll take you through our thoughts on the outlook for the second half. Our ongoing focus is on the operational performance and the execution of our strategic objectives. At DNA, we are confident in the stronger second half earnings driven by repricing a favorable sales mix and a growing customer base. Cost pass-throughs have been completed in terms of the proceeds, and we are starting to see the results as from March2023 in our numbers. The business optimization program we have put in place is progressing really well, and we are going to see an earnings uplift in the second half with a full run rate expected to be delivered in financial year '24. Fundamentally, the markets in the -- fundamentally, the markets in which DNA operates are trending well with Q&C volumes up around 7% and the metals markets returning to historical levels. Finally, for DNA, we expect WALA to continue its strong performance and operate at nameplate capacity for financial year '23. We are very hopeful of completing the WALA transaction by the end of calendar year '23. Turning to DNAP. The business is set up for also higher earnings run rate in the second half. The business is making good progress with regards to restoring historical margins through the recontracting strategy, and we are recontracting at a better point in the cycle. We expect the earnings upside to build through financial year '24 and financial year '25. Turning our focus now to fertilizers. Agricultural conditions and farm economics are generally favorable with the recent decline in fertilizer prices expected to support stronger fertilizer demand. We also expect distribution margins will improve by quarter 4 and into financial year '24. At Phosphate Hill, the revised outlook is for full year production of between 900,000 and 930,000 tons for the year. We are seeing positive results from value-add products in our fertilizer business and anticipate further growth in the sales of enhanced efficiency fertilizers and liquid fertilizers. We also want to draw your attention to the 100,000 tons of Gibson Island urea linked manufacturing product on hand at 31 March 2023. Urea prices recently declined significantly and at prevailing spot prices, we do expect for the Gibson Island line item and negative $20 million impact to be realized for the second half of financial year '23. However, the distribution business will not be impacted by the carryover stock and will generate its rightful margin on the tons it's going to sell in the market. Overall, we think the underlying earnings will be favorably skewed to the second half, and we have taken appropriate actions to set up the business to deliver a strong second half performance. So that's all for me. Thank you, ladies and gentlemen. And on that note, I'll hand back to Jeanne.

Thanks, Paul. I'd now like to close by talking about our priorities for the second half. As always, safety remains our #1 priority, and we'll continue to execute our safety improvement plan as well as our important sustainability agenda. All 3 of our divisions are focused on delivering improved underlying performance in the second half as well as progressing important elements of our strategy. The recontracting of [ Warren book ] volumes has already commenced with considerably more favorable market conditions than at the last recontracting cycle. And we're working at pace towards the completion of the Waggaman transaction, which includes the detailed work to transition to the new operating model. We're making good progress across both our explosives and our fertilizer businesses to improve the quality of earnings and set both businesses up for success and we'll determine the optimal timing for the demerger. As we step back from the journey that we've been on. For some time, I've talked about how our strategy is positioning both of our businesses to build their recurring earnings and reduce commodity exposure. The strategic progress that we made in the first half of the year is expected to have a material impact on the delivery of that transition. We remain focused on continuing that strategy as well as delivering a strong second half performance in FY '23. That concludes our presentation for this morning, and thank you for your time, and we'll now open it up for questions.

[Operator Instructions] Our first question comes from the line of John Purtell from Macquarie.

Just had a couple of questions. Paul, just on the working capital increase there, which we see seasonally? I mean that was over $200 million up in the first half versus the end of September. Are you expecting all of that to reverse out in the second half? I mean, typically, we see a substantial reversal on a seasonal basis. But is that a reasonable assumption that all of that reverses out in the second half?

Yes, John, if I can quickly refer to that. You're absolutely correct. In addition to the seasonality of the working capital reversal, which we really fully expect to translate into our working capital numbers, the lower commodities will also drive lower working capital and that we are -- we have actually started with extensive improvement kind of initiatives to even drive more efficiencies into our working capital, not saying that we haven't done it in the past, but we just want to be more agile about it. And we also believe, specifically in fertilizers and then in some parts of our explosive business, we also anticipate to see some further benefits. So on the balance of things, year-on-year, we do expect that unwind as well as further improvements through our management actions to realize in our working capital number.

And just a second one, just on the fertilizer side redistribution. Obviously, there was a write-down there on inventory of $17 million. Has that sort of largely played out now? Or are you expecting a bit more to flow through there in the second half? I know you comment there that margins will improve in the fourth quarter. But is that inventory sort of essentially back to where it needs to be?

Yes, why don't you take that, Paul?

Okay. Absolutely. As you can expect, the prices really started to come down in March. And we had to make this in terms of IFRS, this assessment of kind of net realizable value on working capital as at the end of March. We have seen most of that stock actually being realized and sold in April and the beginning of May, and we are quite positive that that's behind us, John.

And just the last one there. Thanks for the sort of quantification of the sourcing benefits there from CF. But just in terms of the deal completion there, you've said [indiscernible] end of -- prior to sort of essentially Christmas there. I mean, how would you assess the risks around deal completion there, Jeanne?

Yes. I mean I think, obviously, both [indiscernible] and CF have looked into this, and we're of a similar view that we're hopeful that we will get it done within that window. But like I said, we're both confident and committed to doing everything we can, but it is ultimately a regulatory decision, and they will actually determine the timing of it.

The next question comes from the line of Andrew Scott from Morgan Stanley.

Jeanne, question for you. Your outlook commentary for DNA references, a focus on price pass-throughs and cost reductions. I would have thought pass-throughs were pretty much part of all contracts and cost management sort of part of your day-to-day operations. Can you talk through what hasn't been happening there? And what are the initiatives in place to rectify that?

Yes. I mean I think our DNA business, I think the first thing to say is for the full year, we remain on track. It's really a first half, second half split. We've obviously been continually pushing through costs and so forth, but we have had unprecedented amounts of inflation, weather impacted and some logistics costs as well. But we have been pushing things through. We have had our latest one happened late in the half and was our biggest one to date. So as that takes into impact, that's what underpins our confidence in the second half being materially stronger than the first.

Okay. Last time I noted you were open to recontracting early. Success in recontracting was a big part of your competitor's result last week. I wasn't clear from your commentary. Have you rolled any contracts early? And if so, how do new contract economics compare?

Yes. I mean I think it's a great point out about the difference in the cycle and when recontracting comes up. We clearly are recontracting early to any customers that are willing to do so. But it's important to point out that in our DNA business, it doesn't have a discrete recontracting cycle. There's multiple venue -- avenues into the marketplace and we've been pursuing those as we can. In the Australian market, on our base business, we have really a single AN production site at Moranbah. And so it is all tied to the Moranbah cycle timing. Those are well progressed, and we're very pleased that unlike last time when there was a lot of new capacity that has been put on the market before that, the supply-demand is very tight and very balanced now. So it is significantly a stronger environment and therefore, those earnings uplift will happen as those contracts are flow-through. So we see that increasing over FY '24 and FY '25 and are confident that we'll be able to return that business to its historic high as well as a proper return on investment.

Okay. And then just the last one. It appears rectification of the gas supply issues for fossil fuel have been delayed, albeit just a quarter. Once that's up and running, how confident are you in the reserves and the ability to have long-term consistent supply.

Yes. I mean, clearly, we were very disappointed that our third-party contract time slipped by a quarter. But it has given me comfort then and still remain in place is that the Blacktip field, which is where our supply comes from is managed by a super major and they've been working on the field for the last several months. And also the Blacktip deal is a high-quality reservoir. So we continue to talk with our third-party suppliers in order to get increased comfort in the -- that they'll honor and continued supply per that contract.

Our next question comes from the line of Brook Campbell-Crawford from Baron Joey.

Just one on Phosphate Hill costs. Can you just step through what the impact perhaps on a dollar per ton basis for the average for the ammonia plant in the first half. We can figure out gas, but just what the issue was or a cost per ton issue was with the ammonia plant, it would be great.

Very good. I'll start with kind of the strategic overlay, and then I'll hand it to Paul about the first half. I mean I think the important thing is the Phosphate Hill cost per ton, we always look at the competitive cost curve and to keep that asset in third quartile. So we aim for the P50 mark, but the third quartile is P50 to P75. So in the current environment, as we look at its competitiveness, at a 950,000 tons per annum, it is at that P50 run rate. So that gives us good confidence on the underlying competitiveness of the asset, but as far as the first half results, I'll hand that over to Paul.

Yes. So basically, two components. In terms of the can the cost levels be optimized, yes, they can be more optimized and that is our thinking that will transpire and play out in the second half. So we are the kind of the points that we need to focus on, as Jeanne already spoke about. Probably the most significant increase on our competitive rate per ton is due to the additional gas. We've incurred around about $40 million of additional gas costs as we articulated in that range of $60 million to $70 million, $41 million realized in the first half. And then on the cash fixed cost side, due to the kind of the instability and the production incidents that we experienced in the first half our expectation on cost was probably $10 million less half-on-half. So the combination of the 2 then transpired into a $51 million total cost increase half-on-half for the phosphate yield. So looking forward, we do believe that those production incidents that receive the right attention we do believe what happened there is not structural -- kind of these -- usually, these incidents have a reason why they occur, but we feel quite comfortable that managing them out should be relatively easy. And hence, for the second half, we do believe that the cost would be very much in line compared to what you've seen last year for the second half, which was a much more effective run rate of the Phosphate Hill plant. So yes, unfortunately, not such a great cost performance in the first half, but really positioned quite well with all the actions taken to ensure that we're more in line previous optimal levels of cost per ton in the second half.

And Jeanne, just one for you on the demerger. What's the latest thinking on the process just in terms of your commitment to the fertilizer demerger in general? And also, when should we expect to get an updated time line for that process?

Yes. I think there's a number of different things that are playing into the time line. certainly, the closure of the Waggaman in transaction, and it's been a year since we announced it. So we'll be looking at what optimal timing is. And -- like I said, we still -- the board still feels as the demerger is a tax-efficient way of unlocking value for shareholders. But looking at what the optimal will be a focus in the second half of the year.

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

Jeanne, can I just clarify something? I think you made reference to the things that you're doing at DNAP would return it to peak earnings or peak profitability. I've forget precisely the words you used. Could you help me understand what you're actually referencing there? Because I'm conscious of the fact that, obviously, the business is a lot smaller given what happened in WA.

The peak earnings is, I think it was FY '18 is what the peak earnings were. So I would look at FY '18, of course, you'd have to add the Titanobel acquisition to that because we're now reporting that through that stream, but we feel very comfortable that we have line of sight between the competitive gas contract and the recontracting of Moranbah that -- and the growth in technology and the underlying improvement of the business that we'll be able to return it to that level.

Okay. So just to clarify, you can get back to '18, even taking into account the fact that the WA business is very different today.

Absolutely. Yes. I mean, WA business goes back to where the margins achieved. We don't do AN processing and most of the uplift that we've seen in the industry has been because of the AN. So like I said, we get that on our technology, our services and so forth. And that continues to be very strong. Our WA profitability is as strong as it's ever been, if not stronger. So the WA business is quite a good contributor, albeit we don't get AN margin there because of our asset base.

Got it. And then in your announcement on the gas supply agreement from Moranbah last night, you made the comment that you expected it to sustain the long-term competitive advantage of the plant. I was wondering if you could expand on that and sort of help me understand precisely what those competitive advantages actually are in a new gas environment?

Yes. I mean as you referenced on the Australian East Coast market for gas has never been more challenging than it currently is. But Moranbah, as you know, has been on stranded gas which led to this really unique and innovative solution that the team has put together. It does provide us some immune from the uncertainty on the East Coast gas market and provides our customer security of supply. The areas that we're talking to where the gas comes from, the 1P resources is about double what we actually need over the 10-year contract period. With that, with our priority rights and the joint operating committee that puts us in a very good position, to be able to deal with some better pricing certainty and provide our customers with security of supply. And a bit of an extra bonus is that it also provides our customers with an ability to meet their obligations for the safeguard mechanism as well. So it's really overall a very unique and innovative solution, and it does underpin the competitiveness of the Moranbah asset for an additional 10 years, which I think is pretty unprecedented on the East Coast of Australia.

Great. And just sort of returning to the question that Scotty asked around recontracting. I'm just trying to understand if in fact, you've done, how you did that when you weren't really aware of what gas price was going to be.

Yes. Obviously, that was taken into account. But like I said, that's why we do have line of sight. We've obviously been working this deal for a while. But with line of sight to the gas and the recontracting, we're well into recontracting. And like I said we'll be completing that. But that's why you put the 2 together to really give -- and that's what gives us confidence of returning to the record earnings. And like you know, the last couple of years, we haven't been getting a proper return on investment. So this will return the business and provide us that proper return on investment for that business.

Great. And then in North America, Jeanne, I'm just trying to understand really -- I mean, you've given a good explanation. But given that Q&C was so strong, and that's you're right in your wheelhouse. What -- I'm just trying to understand where the offsets were. I understand what you talked about in relation to cost but there must be in some other markets that really knocked you around ex weather. So would that be coal in particular? And maybe you can help us understand what the net weather impact was from an EBIT perspective.

Yes. I think I mean, coal was relatively flat. So it didn't really move the dial plus or minus. The -- our metals business is what the first half suffered from. We had a change in mine planning operations in the iron ore range that hit us in the second half of last year and the first half of this year. Our understanding from the customer is that they're back blasting. So that will hit us in the second half. And the second piece that we didn't expect, obviously, was the weather impacted one, there was very heavy snows in Western Canada or Western U.S. anybody who's a skier that looked at U.S. skiing season, you note that it was a very strong season. That was unfortunately not a good blasting season. So the heavy snowfalls in the West hit the met business, particularly. The extreme cold weather hit logistics, plant operations and reduce in the rest of the country. But those were the main factors that drove on it. But I think what's important is the full year results on track. Anything to add, Paul?

Yes. Jeanne is correct. I mean just on that point, the business was running exceptionally well right up to the end of November, hitting all our targets, in December, we did see -- in January, we did see the deviation of between $5 million and $8 million on our internal plans because of the weather delay, but we've replanned that, as Jeanne says, and hence, we believe we can still make up what we've lost and [ still ] our commitment to our full run rate for the year. So it was a, let's say, half year impact, but to be kind of recovered in the second season.

That's very helpful, Paul. And just while you are the last one. I believe that GI was actually operating for one quarter in the half or the December quarter. So just trying to understand what the impact of that would have been.

Yes. It did operate, and it did contribute to our bottom line. I'll make sure that if we can give you what that impact is. I think we just need to fully kind of quantify not only the earnings but the cash impact too.

Okay. Because presumably, it was reasonably material because pricing was still quite high, even though you would have been cycling record earnings in that business.

Yes. No, earnings...

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

I just had a quick questions, both Jeanne, both yourself and Paul have made comments about a stronger second half. And I just wanted to clarify, you're talking relative to the first half as opposed to relative to the second half last year.

Yes, that's what we're referring to. I mean we normally have a SKU. We do expect the SKU to be larger than normal, but we do expect a larger-than-normal second half, first half SKU.

Yes. Okay. And then just you made reference both when you announced the sale of Waggaman and also today about the potential for increased volumes of sold product in North America. You've mentioned particularly Louisiana today. But I'm wondering if you can quantify a little bit more how much -- what sort of percentage uplift you think you can get out of efficiency gains in the North American market, please, for those downstream assets.

I think what we're referring to is our Louisiana, Missouri plant, which is always confusing with our Louisiana Waggaman plant, but the Louisiana, Missouri plant, which takes the ammonia from Waggaman and makes ammonium nitrate. We do see some opportunities to debottleneck that, that we're pursuing, given the tightness of AN market and improved profitability of that, that would, that's looking at very attractive options. So -- but we're generally talking 5% to 10%. It's a smaller debottlenecking opportunities. and provide -- and having more manufactured volumes versus purchase volumes at this point in the cycle is a very attractive proposition.

Yes. Okay. No, 5% to 10%, that was kind of the commentary I was after. And then could you just explain there's been a couple of questions on inventory and the broader fertilizers business. But with the distribution business within fertilizers, I understand the comment you made, but this -- is it normal course of business for this -- for the distribution business to take commodity price risk?

I mean, I think, first of all, it's important to recognize just the unprecedented size of the movement dropping $345 a ton is -- sometimes that's the whole price of the product. So I think that's unprecedented. And also the timing couldn't be worse. Normally, we'd constantly be selling that through. And so therefore, the exposure is a lot less. But when you couple that with all the flooding, it's one of those things, The ag business usually likes rain. It usually means a good season, but if we got so much rain that's parts of the Australian market was flooded out and the farmers just couldn't plant. So they fundamentally missed the whole season. So we basically bought inventory for what was expected to be a good season, and that didn't come and at the same time, the pricing dropped and it dropped by unprecedent amount used to be $10, $20, $30 a ton would be seen as a big drop. So it's very unfortunate timing. And coupled with the weather impact, it was sort of kind of -- everything came together at exactly the wrong time.

But I guess my point is trying to just get a sense of you, you don't have back-to-back contracts for sale of commodities that you're purchasing. You are for some degree purchasing on spec and on the expectation of the sale as opposed to with the certainty of the sale. Is that correct?

Yes. You -- I mean the business model has always been of buying and then selling through and really the exposure to the commodity usually result in a higher or lower margin on distribution. So usually, we see the distribution margin more than offsetting the price in the commodity, but when it goes against you, your margin shrinks and when it goes for you, your margin grows. But generally, that commodity pricing difference has been relatively small and absorbed within the margin.

[Operator Instructions] I am showing no further questions. I would now like to turn the conference back to Jeanne for closing remarks.

Very good. Well, thanks, Emma, and thanks, everybody, for joining us today. I think we're looking forward to a much, much stronger underlying second half and continued strong progress on strategic agenda. But we do feel very good about setting these 2 businesses up for success in the future and look forward to future calls. Thanks for your time.

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