Orica Limited (ORI) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our financial year 2020 full year results presentation. Thank you for joining us today after what has been an extraordinary year. I'm joined today by our Chief Financial Officer, Chris Davis. On Slide 2, I will ask you to take a moment to read the disclaimer. The 2020 financial year is a year of 2 very different halves. In the first half, we were very successful in building up the strategic momentum we developed in fiscal year '19 and then COVID hit, temporarily disturbing that momentum. However, despite the challenges of the pandemic, I am very pleased to say that we delivered on all the initiatives and key strategic milestones that we set ourselves up in the year -- for the year. We successfully completed the acquisition of Exsa in Peru bringing with it its strategic growth and greater commodity diversification; excess exposure to copper and gold, along with Orica's continuing diversification strategy has reduced our coal exposure to 16% from 17% last year, and we expect this to drop by a further 1% in the medium term. This is a substantial reduction from 2015. The integration of Exsa into our Latin American business is progressing very well. Peru commenced operations in May and is producing good quality. And in July, we rolled out the final phase of our SAP 4S project, a historic game-changing milestone for Orica. I will talk more about each of these initiatives later in the presentation. We continue to increase the strength of our balance sheet, through a very timely capital raising and U.S. private placement, both of which were oversubscribed. First volume -- half volumes were up 4%, in line with our expectations, and we believe that we were on track to maintain that same level of growth in the second half. However, as COVID took a hold, volumes reduced in the second half by about 300,000 tonnes below our pre-COVID expectations, excluding Exsa, which is a 4% down year-on-year. In addition, increased supply chain costs due to COVID-19 continued into the second half negatively affecting EBIT by about $25 million. While focusing on keeping our people safe and servicing our customers, we also implemented several cost reduction measures enabling us to offset around 40% of this impact. Despite these challenges, this is a strong result against the COVID-19 backdrop, demonstrating the resilience of our business. Both underlying and statutory net profit after tax were down year-on-year. This is due to a combination of reduced EBIT, the previously flagged significant items and the lower interest rate impacting the discount of provisions, which Chris will explain later. Gearing at 36.4%, excluding the effect of the new lease accounting standard, is comfortably within our target range of 30% to 40%. Our strong earning results and confidence in the future has enabled us to maintain a dividend, prudently reduced to reflect continuing operating environment uncertainty. The Board has declared a final dividend of $0.165 per share, unfranked. This takes the total dividend for 2020 year to $0.33 per share, which represents a payout ratio of 45%, which is within our stated dividend policy of 40% to 70% of underlying earnings. Moving now to Slide 5. Throughout the pandemic, just as it always is, our #1 priority was the safety of our people. We moved quickly to introduce new working arrangements and hygiene protocols for teams in critical front line and manufacturing roles. We brought our remote workers home wherever possible and enabled those who could work from home to do so. Recognizing the strain on mental wellbeing, we also provided online support programs. As teams return to their workplace, we have implemented COVID-safe plans that go beyond the minimum health requirements. We also launched numerous initiatives to support our local communities. As we mentioned at the half year results, COVID-19 has had a varying geographical impact on our business. In Australia and the U.S.A., mining activity remains robust. Canada has been slower to recover, and we are closely monitoring the European second wave and its potential to prolong the impact. Elsewhere in the world, we have seen a harsher and more sustained impact. In Peru and Colombia, activity fell to less than half its normal level. There has been signs of recovery, and Peru is currently at around 85% to 90% of pre-COVID levels. Mexico has been significantly impacted, which is compounded by the uncertain political environment, and we continue to see high cases of numbers in Indonesia, India and across Africa. Throughout this period, our customers have appreciated the way our people have done -- gone to great lengths to keep supporting them and their operations. Our global Net Promoter Score has increased by 21% to 51 points this year with reliability of supply quoted as the key differentiator. Our balance sheet remains very strong, thanks to our preemptive refinancing which extended our average debt maturity and ensured we have sufficient liquidity. It is hard to predict the coming months, but from what we can see today, we are cautiously optimistic of a strong uplift in the second half of 2021. Nevertheless, I am confident that we have positioned ourselves well for when normalized mining growth returns. Moving now to Slide 6 and sustainability. I'm pleased to report that once again, we have achieved our most important metric of having no fatalities this year. I'm equally pleased to say that our serious injury case rate is down 29%, the lowest it has been in the past 4 years. While we are proud of these results, we are never complacent, and we know we can always do better. As part of our focus on operating responsibly, this year, we launched a new product security standard that will further minimize the chances of our products ending up in the wrong hands. We made good progress in reducing our impact on the environment. Our greenhouse emissions were 9% lower year-on-year, and we had no significant environmental incidents. I am very pleased to report that we achieved our target for both gender and cultural diversity. 1/4 of our senior leaders and 1/2 of our leadership programs nominations are female, while 48% of our senior management identify their nationality as other than Australian or New Zealander, which is aligned to our revenue profile. Now we will look at the performance of each region, starting with APA, Slide 7. As mentioned before, mining activity in Australia has remained robust with only some slowdown in a few customer operations. However, COVID-19 has led to significantly lower volumes in parts of Asia. Notably in Indonesia, demand was affected by restrictions on some customer sites and declining thermal coal prices. Back in Australia again, the volume demand in the Pilbara remains strong in line with the iron ore market. The East Coast coal sector has proven resilient, and we've seen growth, thanks to new contracts and one-off sales to competitors. However, the well-publicized Australia-China trade issue over the past few months has resulted in some weaknesses in this sector. Cyanide's volumes increased from new business in Asia and higher demand in Australia. EBS volume growth was up 19%, 1-9 percent, from new contract wins and further custom conversion from lower-margin conventional detonators. New technology sales grew on the prior year. However, new trials were delayed due to COVID-19. Our superior technology means we continue to achieve a high contract win rate with close to 95% of existing contracts and around 75% of greenfield contracts. While AN volume in the region was up 5% from 2019, EBIT was down by 1%, excluding the $8 million related to the China ownership structure change as mentioned at the half year results. This misalignment between volume and EBIT is mostly a result of 2 things. First, higher East Coast gas cost which are a result of the new gas supply contract, and the associated pricing impact in a competitive market, which impacted EBIT by $12 million. And second, from the impact of COVID in Asia and supply chain cost, which should normalize as the market recovers. With Peru coming online this year, we've been able to gain some local sourcing benefits and remain on target to deliver the expected $25 million EBIT in a full year of production. Cost-saving measures partly offset the COVID-19-related impact on volumes. We now move to North America on Slide 8. In the U.S.A., mining activity was deemed to be essential, resulting in minimal volume impacts. The largest impacts from COVID-19 were in Mexico where mining was initially declared nonessential. We did see early volume impacts in Canada, around 10% year-on-year, but mines have now reopened. Unfortunately, Mexico was hit much worse, and ongoing geopolitical issues compounded the challenging situations on the ground. Volumes are down by around 1/3 year-on-year, but we do expect a recovery. We're actually seeing it right now and a better second half on the coming year. Quarry and construction remained stable overall, with the decline in larger infrastructure projects, offset by increased demand in small to medium-sized initiatives. A strong supply of natural gas in the U.S. has resulted in a shift in demand away from thermal coal. While this market is forecast to partially rebound over the next year or so, we expect U.S. coal prices will remain under pressure. While U.S. thermal coal contributes less than 3.6% of the group's EBIT, it contributes around 10% to North America's EBIT directly and through our 50% joint venture servicing the U.S. coal sector. We expect this negative impact to continue due to the structural change. Growth in other commodities in this region remains strong. Continued opportunities of gold and copper, greenfields growth in Canada and further penetration in technology, particularly in EBS, WebGen and digital upselling will continue to support EBIT. We now move to Latin America on Slide 9. Latin America has been one of the worst affected regions in this pandemic. Peru, including Exsa, was hard hit particularly in underground mines. Although there has been some recovery, current operations are only at about 85% of pre-COVID levels. Colombia, where our volumes dropped by over 70% from last year, has yet to show meaningful recovery with shutdowns still in place at most sites. Chile and Brazil have proved more resilient, and performance has now largely recovered in those countries. And those were the 2 largest regions. Chile, Brazil and Peru are the largest in Latin America. The acquisition of Exsa was completed at the end of April, and as expected, the EBIT contribution for the remaining part of the year was neutral. This is a good result given the challenge of COVID in Peru. I will cover the integration in detail later. I would like to credit the team's tremendous job in moving quickly to implement cost-saving initiatives to substantially offset the impact of COVID. As you can see, the declines in revenue and EBIT are broadly in line, demonstrating what a good job our Lat Am team did with costs. Growth is expected in both copper and gold segments as fundamentals for these commodities remain strong. With over 75% of the revenue in this region exposed to these commodities and a strong market share position, the Latin American region remains an important growth region for Orica. Now move to EMEA, Slide 10. COVID has impacted this region in varying degrees. The most significant impact was in Africa with total lockdowns in South Africa and Namibia and 2 mine closures in the DRC. In Norway, the government postponed spending on new projects, while reduced -- which reduced tunneling and construction activity negatively impacting EBS volumes in the second half. In the first half, we built excellent volume momentum from continued growth in the CIS, and from new contract wins and higher spot sales in Africa. EBS volumes also grew in the first half for continued growth in Norway reflecting the ongoing shift towards more advanced EBS detonators. This, along with improved cyanide pricing in a tighter global market had a positive impact on the region's EBIT. But when COVID hit volumes declined across all the profitable European markets due to the closure of mines and lockdown in many countries, including Belgium, Spain, Portugal and Norway. Similar to other regions, reduced volumes and increased supply chain costs impacted EBIT in the second half with some offsets from management initiatives. We expect growth in the region to resume post-COVID, supported by expanding our footprint in the CIS consolidation in West and East Africa, Namibia and the copper belt and further EBS growth in the Nordics, Africa and CIS. Looking now at Orica Monitor on Slide 11. While we saw our monitoring business was COVID impacted customers changing their strategy from one-off purchases to leasing arrangements, and we have adapted accordingly. While this has a short-term impact, it will even out over the longer term. This, along with the increase in supply chain costs, explains the EBIT decline this year. It is important to note that we continue to win 65% of all new business opportunities. And since acquisition, we have signed around 40 contracts with Orica customers. Geotechnical services revenue continues to grow strongly, showing 28% annual growth. GroundProbe is still on track to achieve the EBIT targets we set ourselves at acquisition. Nitro Consult also included in this segment has delivered positive earnings following a restructure as discussed in the half year results. Overall, the underlying fundamentals of Orica Monitor remains strong and the value of technology is unquestionable. Finally, into Minova, there was a strong revenue contribution from sales of powder and resin volumes in Poland, the U.K. and Russia. However, these were countered by a decline in steel volumes and lower levels of Australian underground coal mining activity. COVID-19 impacted Minova's revenue in the second half due to lockdowns in South Africa and India. These pressures were partly offset through lower raw material price and positive production mix in Europe, improved manufacturing efficiency and reduced discretionary spend. EBIT has come under pressure from a soft thermal coal market in the U.S.A., but we have seen upside from improved chemical sales and pricing. Even though revenue was down, the management team actively reducing overhead costs and delivered annual EBIT growth of $6 million or 40%, which is a terrific result. I will now hand you over to Chris to take you through the financials.

Thanks, Alberto. Looking at the key financial metrics on Slide 14. As Alberto has already mentioned, 2020 has certainly been a tale of 2 halves. We started the year strongly with first half reported volumes increasing 4% on the prior period. Similarly, revenue and underlying EBIT were up 2% at that time, with strong performances across all of our business units. Despite that, the impact of COVID-19 has had a significant impact on the second half with volumes in the second half down 15% against what was originally expected, and down 10% against the same period in 2019. Therefore, looking at the full year results for 2020. Sales revenue of $5.6 billion was down 5% from the prior period driven by North America, Latin America and Minova. The decrease is driven by lower volumes in the second half of the year as a result of reduced demand in countries impacted by COVID-19, reduced pricing following consolidation in the North America gold sector and in Latin America as a result of competitive pricing pressures, and the impact of the change in ownership of the China business. This was partially offset by increased demand, new contract wins and sales to competitors in Australia, added revenue from the newly acquired Exsa business in Peru and favorable FX. Underlying EBITDA has increased 2%. Adjusting for the impact of the new lease accounting standard, which reclassifies operating lease expenses to depreciation and interest, EBITDA is down 6%. Underlying EBIT has decreased 9% over the same period and includes the impact of the China business, which is now equity accounted and no longer consolidated. Underlying NPAT of $299 million is 20% below the prior period, driven by higher interest expense as a result of the application of a lower discount rate to the measurements of environmental provisions, and the noncash year-on-year movement of $39 million being reflected as an interest cost. I need to stress this is one-off in nature and is noncash. In 2021, net financing costs including the impact of leasing, will remain at around $110 million to $120 million. Statutory NPAT of $168 million was 31% lower than the prior period, driven primarily by lower earnings in 2020, which I will outline in more detail in the following slides. The effective tax rate of 32% on underlying earnings is in line with expectations. At $0.757, earnings per share is down 23% on the prior period, driven by a lower underlying NPAT and an increase in issued shares during the period following the equity capital raising to support the acquisition of Exsa in Peru. The final dividend of $0.165 per share will be unfranked, and represents a payout ratio on the final dividend of 50%. We are pleased that we have been able to continue paying a dividend at a time when other companies have suspended dividend payments to shareholders. We believe we have struck an appropriate balance between shareholder returns and safeguarding the capital structure in this still uncertain external COVID-19 environment. Turning to Slide 15, entitled individually significant items. As flagged to the market on the 12th of October, Orica has implemented several efficiency improvement initiatives to simplify, streamline and standardize end-to-end processes globally. As a result, we have recognized $170 million before tax of individually significant items, which include the following. Firstly, we are undertaking a global project to rationalize our product portfolio, simplify and reduce our different technologies, and enable the optimization of our initiating system plant network. This project is expected to result in a substantial increase in plant utilization from around 48% to above 80% by 2024. Accordingly, the Minden and Hallowell plants in the U.S.A. and the Tappen plant in plants in Canada will cease production. Secondly, as we have progressed with the final stage implementation of our single SAP project, we have identified legacy IT assets that will no longer be utilized within the business. And accordingly, these have been impaired. And finally, as part of the realignment of our organizational structure to support the new standardized end-to-end processes of new SAP system, we have identified a reduction in head count that has resulted in restructuring costs. Given the size and importance of these items to the users of the financial statements, these one-off costs have been accounted for as significant items and do not form part of the underlying result. Turning now to the EBIT bridge on Slide 16. As a reminder, the impact of the change in ownership of the China business means that $8 million of EBIT previously consolidated is now treated as an after-tax equity accounted investment at 49%. Inflation on overheads had an adverse impact of $32 million, which is in line with our expectations. Ammonium nitrate volumes at 3.9 million tonnes includes 98,000 tonnes of sales from the recently acquired Exsa business. Excluding the Exsa tonnes, sales volumes for the full year at 3.8 million tonnes decreased by 4% compared to the prior period, which resulted in an adverse volume variance of $38 million. This reduction in volumes is driven by reduced mining activity and customer mine closures associated with COVID-19 in Canada, Mexico and large parts of Latin America and Asia, a continuation of unfavorable operating conditions in Mexico due to political uncertainty and reduced sales of AN in Colombia following a change in supply arrangements, whereby the customer directly sources its own AN. Net mix and margin decreased by $9 million, with the most notable impacts felt in the Australia Pacific, Asia business, North America and the EMEA businesses. This has been driven by new gas supply arrangements at a higher cost in Australia, which cannot be fully passed through to customers; adverse price impacts following the consolidation in the North American gold sector; and increased supply chain costs across the business. Global manufacturing impacts. The impact of reduced customer demand in the second half has resulted in reduced throughput adversely impacting fixed costs and plant recoveries. This has resulted in an adverse variance in manufacturing of $13 million against the prior period, most notably at Carseland in Canada and the initiating system plants. Adjacent businesses includes Orica Monitor and Minova. The GroundProbe business continues to deliver in line with the original investment case. However, the impact of customers moving to leasing of radars over outright purchases in the short term, has meant that Orica Monitor has delivered an EBIT of $20 million, marginally below that in the prior year. Looking at the Minova business, this continues to perform well and deliver on its turnaround journey. 2020 was no exception, with Minova delivering an EBIT of $21 million, a 40% improvement on the prior period despite contraction in the U.S.A. thermal coal market. Finally, savings and reduced overheads and management initiatives has resulted in a benefit on the prior period of $36 million. The net result is that EBIT finished the year at $605 million despite the impact of COVID-19. Whilst we have not quantified the impact of COVID-19, it has had a significant impact on our results in the second half of the year, most notably through reduced volumes, reduced service income and increased supply chain costs. With the biggest impact in Canada, Mexico, Latin America and parts of EMEA and Asia as a result of lockdowns and lower levels of mining activity. Importantly, demand in Australia, U.S.A. and the CIS countries were largely unaffected by the pandemic in the second half of the year. However, higher manufacturing and supply chain costs were incurred to ensure compliance with COVID-19 restrictions and ensure security of supply to our customers. Given the high fixed cost nature of our business, the impact on EBIT due to lost tonnes can be disproportionate, diluting EBIT beyond the fully absorbed EBIT margin. Looking at capital expenditure on Slide 17. As mentioned over the past few years, we continue to ensure that capital allocations related to safety and environmental obligations are not restricted. All other capital requirements are subject to rigorous review and approval processes. Excluding the $78 million of capital expenditure to replace the defective Burrup assets, total capital expenditure for the full year was $394 million, in line with our guidance range of $380 million to $400 million, which included Exsa's capital requirements. Growth capital expenditure of $91 million includes increased investments in GroundProbe radars to support new lease contracts, further investment in the commercialization and manufacturing capacity of WebGen in both North and Latin America and increased capital to support new customer contracts in Asia, Canada, Africa and Peru. Sustaining capital expenditure of $159 million reflects spend on compliance and efficiency capital at Kooragang Island, Yarwun and Carseland, and further replacement of the older MMU fleets on existing customer contracts. At $159 million, sustaining capital expenditure is lower than normal, with reduced spend in the second half of the year driven by the targeted deferral of nonessential projects and extended maintenance cycles. Importantly, no projects were deferred that impacted safety and environmental obligations. Whilst spend on sustaining capital was reduced, this was offset by higher spend on the final implementation of the SAP system. The spend on the rectification works at the Burrup plant has progressed well, with the plant producing approximately 100,000 tonnes in the second half of the year. A further $25 million is anticipated for the final Phase 3 works, which are expected to be completed in the second half of 2021 bringing the plant to its design capacity of 330,000 tonnes. In 2021, capital expenditure is expected to be in the range of $380 million to $400 million, excluding the final spend on the Burrup plant. Including the impact of the new lease accounting standard, which has resulted in leases being brought on to the balance sheet in 2020, depreciation and amortization has increased to $351 million. For the full 2021 year, it is expected that depreciation and amortization will be up to 30% higher due to the commencement of depreciation on our investment in SAP systems, the impact of a full year of depreciation from the Burrup plant and the inclusion of depreciation associated with the recently acquired Exsa business. Moving on to Slide 18 entitled cash flow. The generation of strong cash flows remains a key priority for the business. Unfortunately, the timing of the implementation of the SAP go live, in close proximity to the September year-end, resulted in temporary delays in the processing of invoices to customers, resulting in lower cash collections. This impact was temporary but substantial and peaked in September. This is evident in the trade working capital balance, which has increased by over $300 million. We estimate the temporary impact on debtors to be approximately $200 million. Importantly, we have no reason to believe payment commitments will not be met going forward. The reduction in creditors balance was in line with expectations as we achieve discipline, simplification and standardization across our supplier base on contractual terms aligned with the implementation of a single SAP system. Despite this, cash generation remained positive in the year, with net operating cash flow generation of $277 million, and cash conversion above our stated expectation of 70%, coming in at 74.4%. Turning to net debt and gearing on Slide 19. And our balance sheet remains strong despite the impacts of COVID-19 and the temporary impact to cash conversion. Excluding lease liabilities of $299 million, our net debt of $1.8 billion translates to gearing at 36.4%, which is comfortably within our target range of 30% to 40%. The increase in net debt was driven by the payment of dividends during the course of the year, the previously mentioned impacts of increased trade working capital, partially offset by the excess equity capital raise to fund the Exsa acquisition and favorable foreign exchange. The final slide I will talk to you today is Slide 20 on our strong liquidity position. The actions we have taken during 2020 to strengthen our balance sheet have positioned us well as we navigate these uncertain times. We have high levels of liquidity available as demonstrated by the $1.5 billion of undrawn committed bank facilities and a further $921 million of cash at year-end. Over the past year, we completed an equity capital raising of $505 million in a pre-COVID-19 environment to fund the Exsa acquisition. We have refinanced and proactively pre-financed $437 million of committed debt facilities to extend our debt maturity profile. In June of this year, we completed the issue of $725 million of fixed rate senior unsecured notes in the long-term U.S. private placement market, which extended our debt maturity profile and further strengthened our balance sheet. Together with the over raise of equity of $126 million to fund the Exsa acquisition in February 2020, means that we stand well from a liquidity perspective. Our average drawn debt tenor is currently 5.0 years. Our all-in cost of funds is 3.9%. Our 2 debt covenants, namely gearing and interest cover, are comfortably within requirements. Our focus in the near term will remain on cash preservation with a specific focus on inventory management, where we will continue to maintain inventory at appropriate levels in the business. With the plan to reduce the manufacturing footprint and number of SKUs, we expect to see a gradual reduction in inventory levels over the next 3 years. We will also focus on debt collections as we continue to embed the new SAP system and improved collections in the first half of the 2021 financial year. Cost reductions from operating efficiencies and discretionary spend will remain a key focus area to offset increased supply chain costs caused by COVID-19. And finally, capital expenditure discipline will continue without compromising safety or environmental obligations. We remain committed to maintaining a strong and flexible balance sheet and adequate liquidity levels as we continue through these unprecedented times. It is important to note that we entered the COVID-19 crisis in a position of strength with significant cash on hand and strong levels of liquidity, and we have continued to prudently maintain that position. This also places us in a good position for our business to be ready to support growth, and be ready for when customer demand returns to normalized levels. With that, I'll now hand you back to Alberto. Thank you.

Thank you, Chris. We now move to Slide 22, where you will see our road map of strategic priorities. In my mind, it's probably the most important slide of this presentation. We have 5 key drivers: Exsa and how we successfully integrated the initiating systems network optimization; improving our manufacturing, reliability and efficiency across manufacturing; embedding a refresh operating model, basically, the benefits of SAP that we expect to see during the next years; and then continuing to drive customer adoption of our world-class technology portfolio. All of these initiatives will represent a very significant positive impact in EBIT that will allow us to compensate for the still impact of COVID in 2021. And that's why we can confidently say that we would expect to see a significant growth in EBIT in 2021. Probably more importantly as COVID fades in 2022 when we get back to normal, we are confident that we will recover the momentum that we have before COVID. So when we were sitting at the end of the first half of last year, we are confident that we can regain that momentum because of the initiatives that we'll keep delivering benefits in '21, '22 and '23. So let's start with Exsa. We have now acquired just under 97% of shares, and we are following the process to extend the offer to all Exsa shareholders. As mentioned earlier, the acquisition has further diversified our commodity exposure and reduced our thermal coal exposure. I'm so proud of our integration team. We have kept on track with our detailed plans despite having to operate remotely. This is probably the first integration operation done remotely, at least in the history of Orica. In the past few months, we have achieved some key milestones, including the first bulk AN import received in Peru in August. Our state-of-the-art facility in Lurin has begun producing Orica-branded package emulsion and the Trujillo plant is now producing bulk emulsion using our own formulation. Expected benefits are already materializing, and our team is exploring further potential synergies including streamlining of corporate functions and the cross-selling of our products. So overall, we are on track to deliver around $25 million of run rate synergies by 2023. So that's the half of the -- our expected EBITDA in 2023 of $50 million. The acquisition of Exsa has provided the impetus to rationalize and standardize our global product portfolio, which I will talk about on the next slide. Slide 24. As you know, Orica today operates a global network of initiating systems, manufacturing facilities and distributes a wide range of products throughout the world. The current network is suboptimal. It has low levels of utilization at about 48%, uses different technologies and is not as cost competitive as it could be. This optimization initiative will reduce network costs, drive inventory efficiencies, standardize technologies and reduce existing supply risks. As we announced last month, our Hallowell, Tappen and Minden plants will close with further rationalization plan over the next couple of years. At the same time, our SKU rationalization program continues, and we expect the momentum we built up in the project to resume following a slowdown as we implemented our SAP system. Since the commencement of this program, we have already had the number of SKUs, and plan to further reduce by around 40%. This project is expected to result in a substantial increase in the network utilization from around 48% to around 75% by 2023 and 80% by 2024. And deliberately approximately $20 million annualized EBIT exit rate in FY '21 and $35 million to $40 million annualized EBIT exit rate in 2022. Let's move now to Slide 25. I am pleased that our levels of overall equipment effectiveness at each of our plants, including Burrup, is above our 80% target. Burrup produced around 100,000 tonnes of AN since commencing production in May, in line with our expectations. Plant utilization is high, supported by ongoing strong demand across the Pilbara. The plant will be closed fully loaded with current contracts. We continue to receive very positive feedback from our customers about the quality of the product. Stage 3 rectification works are set to be completed in 2021, which will bring production to full capacity. And we expect OEE to reach 90% post these works. With Australia iron ore material move projected to grow by 9% in the next 5 years, you can see the potential for this strategically located facility. Next, on Slide 26, I would like to talk more about SAP. This slide shows the stark contrast between our old operating systems and the benefits of our new single standard, simple SAP platform. Previously, we had, for example, supply chain planning and transportation management was managed through excel. Commercial bids were stored across multiple databases with sale contracts in various locations. We had some 4,000 general ledger accounts and 250 payment terms. We had 650 bank accounts in 140 different banks. Our SAP platform had 22,000 customizations, and our HR system contained 2,000 different jobs. Now you can see both the need for change and why it has been such a long and complicated journey to bring everything in one place. I'm very proud to say that the final and most significant phase of the system was successfully implemented and went live in July. We now have a cloud-based standardized and integrated single enterprise system supporting the entire organization. We have moved from literally thousands of spreadsheets and process variations to one standard set of integrated and optimized end-to-end processes. This enables real-time data-driven insights based on a single source of truth. This is no small feat given we operate across more than 120 countries. Now all of this in place, we can begin realizing the myriad of benefits from improved agility, product security, customer outcomes and global competitiveness. We expect to see more efficient procurement spend, improved sales contract, increased automation and accompanying decline in manual work. By aggregating the value of these benefits, we are confident of realizing 20% annualized cash return of $60 million by 2023. I think we are on our way to realize about 50% of that in 2021. Slide 27. Technology continues to be a cornerstone of Orica's differentiated offering, and I am pleased to report that despite covered restrictions, we achieved our global adoption targets. This could not have been done without the great ingenuity our team showed in using augmented reality to enable remote installation, training and support. Our traditional technologies such as electronic blasting systems and premium bulk emissions, continue to show growth -- strong growth profiles and hold market-leading positions. But we are most excited by the continued growth in adoption and market penetration of our game-changing suite of new technologies. The number of sites using BlastIQ increased threefold over the prior year with several global customers adopting multi-site applications and FRAGTrack, our award-winning fragmentation measurement technology. This year, we also successfully commercialized a new digital solution we call designed for excavation. This technology uses data to create and implement automated plus loading designs that optimize mining excavation rates it is applicable across multiple commodities and mining applications, and we are very excited by its potential. We have now completed over 1,000 blasts of WebGen, our proprietary fully wireless initiating systems and volumes more than doubled during the year despite COVID. Importantly, trial sites in both underground and open cut have increased significantly in advance of the release of our second-generation WebGen 200 which is currently in alpha trials. Overall, we expect an EBIT uplift of $15 million from new technology in 2021. This represents a 15% return on investment for these technologies, with significant growth projected in the future years as we achieve critical mass in our portfolio and the benefits of scale. Slide 28. In early November, Orica was awarded a 5-year explosive technology and service contract for Glencore's Australian copper and zinc operations, which comes into effect in January 2021. The last time we serviced these operations was in 2008. And we feel privileged to be partnering with Glencore again. Building on our long standing relationship, this contract will see us deliver our full suite of explosive technology and blasting services to the company's 6 copper and zinc underground and open cut operations in Australia. It is a fantastic opportunity to integrate our most advanced solutions to meet Glencore's more complex operational needs. Glencore's Ernest Henry mine in Northwest Queensland was the first site in the world to trial and adopt our wireless explosives technology, WebGen. This deal shows Glencore's confidence in our technology road map, and aligns with their strategic vision for technology to deliver added value to their operations. Next, on Slide 29, I will talk about something that is now an important priority for us. Over the past year, we have made good progress to reduce our impact in that environment with our operational Scope 1 and Scope 2 greenhouse gas emission reductions of 9%. Today, I'm very proud to announce our new emission target on our journey to decarbonize Orica, which will reduce our Scope 1 and 2 emissions by at least 40% by 2030 from 2019 levels. It is very important to note that this target is not an aspirational goal. It is an evidence-based, credible and achievable target. Our success will be founded on practical initiatives and proven low emissions technology that will allow us to deliver in an economically sustainable manner as well as improving efficiencies in our industrial processes, we have plans to implement new catalyst abatement technology that will significantly reduce our emissions. Next year, we'll complete the final planning for this catalyst abatement to be introduced into our Carseland manufacturing center in Canada. We have also completed initial assessments of on-site and off-site renewables in Australia, energy efficiency projects at the Kooragang Island ammonia plant and heat recovery in Yarwun. These projects will be implemented during plant turnarounds and will accelerate towards the middle of this decade. Success will also require a collaborative approach with government. Our customers and civil societies to help our industry to decarbonizing ways that would otherwise be uneconomical. I look forward to future partnership opportunities to drive the adoptions of low emissions technology. Approved by the Board, I have made this target a key priority for the group, and we're committed to continuously monitoring progress and actively reviewing and refining our approach to ensure we succeed. And finally, towards the outlook. In the first half, volumes were up 4% and EBIT was up 2%. The impact of COVID is evident as volumes, excluding the Exsa, for the full year dropped by 4% and EBIT dropped by 9%. That is we expect that if we had continued without COVID, we would have ended with about a 4% growth in volumes and probably a similar growth in EBIT. The solid operational platform that we built pre-COVID, position us well to deliver EBIT growth going forward. Our balance sheet remains healthy and gives us the flexibility to pursue value-creating outcomes for our shareholders. While the COVID situation means the year ahead cannot be predicted with any great certainty, the impacts are temporary, and we are in the best possible position to navigate through fiscal year 2021. We are beginning to see some of our customers' operation in developed countries returning to pre-COVID levels, and this is evident in the run rates of volumes over the past 2 months. If this trend continues and subject to no substantial resurgence of the pandemic, we expect volumes skewed to the second half as we anticipate that the first half of 2021 year-on-year will be more impacted by COVID than the second half. Our focus will remain on delivering at what we can control and that being realizing initial benefits from our strategic priorities that I spoke about earlier. Based on the current view of mining activity, AN volume, excluding Exsa, is expected to grow by approximately 1% on the 2020 financial year, coupled with growth in both GroundProbe and Minova. Exsa volumes growth for the 2021 financial year are expected to be approximately 3x that of the pcp, given a full year contribution. We will start realizing the benefits of the Exsa acquisition synergies as it starts ramping up in the 2021 financial year. We expect further progress on our initiating systems network and product portfolio optimization, operating model and technology strategic priorities during the year and will deliver around $50 million of EBIT in the 2021 financial year, with the annualized run rate significantly higher than this range. We will also benefit from positive EBIT contribution from Burrup in its full year of production. Putting all this together, we expect to see interesting EBIT or significant EBIT growth in the 2021 financial year weighted towards the second half. To sum up, we have established a solid platform to support underlying growth, and we remain cautiously optimistic that we will recover the majority of the COVID impact over the next 18 to 24 months. Before I open to questions, I would like to thank all of our employees around the globe who have worked tirelessly to keep our business going and to our investors and shareholders for your continued support throughout this uniquely challenging period. That concludes our presentation, and we now open to questions.

[Operator Instructions] Our first question is from Alex Karpos from Goldman Sachs.

Can you hear me?

Yes.

Yes.

Great. Look, I think the first one for me is just on the outlook commentary. I appreciate the color on overall EBIT growth, but can you give us a little more sense of, I guess, how to think about that in terms of more explicit terms? Is that low single digits, mid-double digits, high single digits? Like how should we framing that overall EBIT growth commentary?

Look, it's difficult in this environment to give more precise numbers. But I did say probably significant growth. So you should frame that around that. We -- yes, it's -- there's still some uncertainties on things that probably makes it difficult. But what -- with what we can control, if you add up the initiatives -- let me put it this way. The strategic initiatives, I spoke about a $50 million, and that doesn't include Burrup, it doesn't include Exsa. Those 2 are important. So there is a lot of positives on one side. We are still, again, being impacted by Burrup, and we have probably some impact on depreciation and inflation. So when you put all those pluses and minuses, there's what I would believe in the current environment, a significant growth I would probably focus more importantly in 2022 and as we have the disappearance of the impact on COVID and we still have the strategic priorities delivering additional benefits, I still think that we can get back, as I said, to what probably the analysts had for 2022 before COVID hit.

Got it. And maybe if I turn to the cash flow here. I appreciate the color on conversion and the factors being called out there. How should we think about conversion in '21. Any reason it shouldn't get back to that 90% to 100% range? Then maybe if I...

You're exactly right. It -- we expect it to get back to that 100% range.

Our next telephone question in queue is from Grant Saligari from Crédit Suisse.

First question, if I could, if I could focus on thermal coal. Well, first of all, I'd like to acknowledge the strategic initiatives to reduce the group exposure of thermal coal. If I could focus on a couple of particular exposures, please? One, Bontang, Indonesia. So production -- coal production in Indonesia down sort of 25% through the second half. So I'd be interested to understand how you managed the placement of product out of Bontang through that downturn. And how you think about Bontang in a scenario that thermal coal demand stays very weak. And the second plant being Yarwun, I'd be interested to understand better its exposure to thermal coal. And generally how you're managing the utilization of Yarwun at the moment, please?

So if we start with Bontang, actually, we expect to see a better 2021 than 2020. Now the issue in Bontang is that we sent about 80,000 tonnes into Burrup that is not repeated. So all in all, if you isolate that, we expect to see some level of growth in Bontang. And so that would probably be the first thing. Look, on thermal coal, let me talk about probably to put it out there because there -- one is the China impact that we are seeing, but more than the probably the medium term. And on that, we have done a lot of work. As probably we all know, Asia, thermal coal is still very strong, let's say, in the next 5 or 10 years. We're not expecting any growth in thermal coal, we expect it to be flat. But we're expecting it to still be present, let's say, all throughout this decade. There is a short-term impact, and that is well-known in the media, which is some thought of China coal boycott that we are seeing. Probably to put it out there, we don't know what -- like nobody knows what's going to happen. But I want to put some bound into it because I've seen some questions coming throughout there. We are seeing a decrease in volumes not a cancellation of volumes. And if that continued through the whole 2021, it would diminish about 60,000 tonnes of our volumes of AN in the East Coast. That is like a worst-case scenario. When we talk to the big companies, they expect a better outcome in January or February of this year. So I'm just putting out the worst case. I don't think that, that's going to happen. But if it happens, it's still going to be moderately impacting us. Now if you want to put it probably further information is we expected some growth in Australia AN volumes this year. If this happened, that negative, AN volumes in Australia will be flat if the China eventually is through the whole year. So it's sort of a pretty manageable situation. I probably just wanted to put it out there.

That's helpful. And just on Yarwun, it's -- how you're managing its utilization at the moment?

No, that's fine. That's -- we expect to see -- as I said, we expect to see, if anything, some growth in Australia volumes. And if this China continues through the whole year, it will be flat. So Burrup would still -- Yarwun would still be producing in the 400,000 levels.

Okay. That's helpful. If I could just ask a second question, please. It looks like looking at your waterfall EBIT impact chart for the full year and just comparing that with the equivalent waterfall for the first half, that the variance of volume mix manufacturing impacts in the second half were about negative $80 million or so. So that's the entire second half. Could you give us some sense of where you exited the second half? Because there was a recovery as you've noted in Peru, for example, in some of these markets sort of came at their bottom. So could you give us some sense of the exit rate relative to what happens through the entire second half, either in terms of the EBIT impact or the volume?

Look, how I see it is, yes, the -- there's 2 different things. One is we were only impacted half a year and now we will impact it for 12 months, but the level of impact is much, much less than in the second half of the year. So what we have tried to guide, if you look at how I would see it as we've said, we expect still to see a 1% growth in volumes, excluding Exsa. If you go to 2019, it's about 100,000 volumes less than 2019. So that could be -- sort of give you an indication of -- now there's always growth in the market. So you would have to add something around that. But -- so we are still being impacted. What we have internally assumed, but it's difficult as to put a number is that -- but we -- let put it in, in terms of Exsa. At some point, we're at 50% to 60% of capacity. Now we're at about 85% to 90%. We expect that to continue in the first 6 months and then to improve in the last 6 months of the year. And so all in all, I would say that the total impact on COVID for 2021 will be probably around similar to the half year impact for 2020. So half of the impact, if you want to say, but through 12 months, I don't know if I'm clear.

That's very helpful, yes. That's understandable. That's really helpful. And just quickly, some one final one, just, Chris. You talked about the temporary debtors impact of $200 million. Is it fair to say that's fully unwound now as we sit here in end of November? Or is that temporary impact still to unwind?

No, that temporary impact will unwind itself over the next 6 months. What we are seeing already in October is some of that is starting to come back.

Our next telephone question is from Sophie Spartalis from Bank of America.

I just wanted to just focus on the Australian business, particularly from 2017 so looking more at the medium-term impact. So you've seen volumes increase quite significantly. But we've seen that structural looks like to be a structural decline in margins. So excluding COVID impact, can you just talk more broadly as to why that is happening? Obviously, we've seen price declines over those years. But when we can expect maybe a recovery in margins from the technology investments that we've seen that you do over the last few years?

Yes, that's a really good question. Thank you, Sophie. Look, there are -- there's some things that affect the EBIT margin but not really affects the profitability, which is -- well, one is the JV of China. So that affected some percentage of points. What has probably affected in the past year, more than anything else, is the gas price increases. And that $12 million how I would see it is we were not able -- that we were able to pass a lot of the gas price increases. Actually, it was much higher than that. But this remaining part, we were not able because we were hitting with IPP. And so I think more than anything, that is what has impacted us the margin in the past 12 months. One is really an accounting thing. It's just that China goes into NPAT and EBIT. So that's really not relevant. The $12 million for me would be the biggest impact. Pricing is sort of I would say flat on IPP, and we expect that to be the case as we go in the next 12 months. So the margin -- you're right, I've said it before. We do expect the EBIT margin to increase as we get more technology. Right now, as the number is important, but not significant, that $15 million, but that goes very marginally into the profit. But we do expect within maybe 2 years as the volumes of wireless go significant and jump, we're saying like a 4 or 5x, you should see it in the EBIT margin.

Okay. So just then on the gas prices. I know in the previous commentary you talked around the FY '21 contract price reset. You wanted to be in a position where you could put in a clause around gas price pass-throughs. Can you just talk through the progress of that. And also the details around the percentage of renegotiated contracts that are needed in FY '21?

So we have -- the outcome of this was that point that we were able to pass most of it because the gas prices were much, much higher from the base that we had it. But we were unable to pass -- we flagged in the first half, $10 million. And then we had another $2 million in the second half, and we don't expect any more impact of gas in the future. So that's the first thing. We have -- we will renegotiate in 2000 -- we have contracted for 2021, I think, around 65%. So that's about 35% that we have to renegotiate in '21.

Okay. No, that's great. If I can ask one more question. Just in terms of North America, surprising to see that the Q&C volumes are stable. Just given the structural decline that we're expecting in North American coal volumes, is there -- sort of where is the focus on the North American business to recover or offset those volumes? Is it through Q&C? Or are you targeting other base metal projects?

Look, I think Q&C will -- there's this famous sort of infrastructure play that has never materialized. I think at some point, it will. We're still expecting a 4% growth in Q&C. And then one area that I'm positive more than in the last 12 months in Mexico. So if you would hear Newmont, Peñasquito, which is such a large operation for us in Mexico, it's ramping up to probably to a level it hasn't been in the past 12 months. So that is -- there will be some growth from that. On the other hand, we used to have some carbon credits of about $10 million per year that for the time being are not there. We expect to see them back in '22. So there's pluses and minus in North America, but it's actually quite -- yes. North America is quite stable. But yes, the quarries will grow by about 4%.

Our next telephone question is from Andrew Scott from Morgan Stanley.

If I could just go back to the waterfall chart on Slide 16. For FY '20, you had a $36 million reduced overheads but it was broadly offset by inflation on overheads of $32 million. So I just wanted to ask, if we roll forward to the year ahead and the $40 million to $50 million of strategic priorities, would you expect there a similar offsetting inflationary impact on the cost base there that will offset that? Or do we expect the $40 million to $50 million to drop straight through to the bottom line?

Or we expect what, sorry?

Do you expect the $40 million to $50 million to drop straight through to the EBIT line?

So the $40 million to $50 million will drop-through to the bottom line, but we always have around $30 million of inflation on overheads across our business.

And you expect to have similar -- other reducing initiatives in the year ahead? Or that is the $40 million to $50 million will be part of that?

We've got a number of initiatives. So that comes through in the $40 million to $50 million of initiatives Alberto spoke about. We've got the contribution from Burrup that comes on board, and we've got the contribution from Exsa.

So if I -- yes, if you add that, there's a very significant amount of the initiatives that's up to a very high number. But then we always have to compensate the inflation on our non-billables because the billables have a pass-through. So that's that $30 million.

No. Understood. And then, Alberto, you mentioned earlier, Burrup, and I think your release sort of confirms medium term, the $25 million outlook. But the outlook commentary for FY '21 just says EBIT positive. So I'm to interpret that, that we're not going to be at $25 million this year for Burrup?

No, we will be. It's just the marginal because we had some production last year. But -- so I would say it's about -- the margin is about $20 million on 2000 -- versus 2020. But yes, we will get the full contribution of $25 million in '21. It's just the bridge.

And then just finally. This might be for you, Chris. Just Latin America. I know volumes down 3%, revenue is down 8%. That is an Aussie dollar number. So just -- is the delta there? Was there discounting in that market? Or is that purely a currency delta?

That's probably purely currency delta.

Our next telephone question is from Richard Johnson from Jefferies.

Alberto, I just want to go back to one of the earlier questions on the overall guidance for the group because on the front page of your release, it says you've got a significant increase. We're expecting a significant increase in EBITDA in a slightly less definitive comment on EBIT. Obviously, you've got a big rise in D&A. So would it be fair to say that just on the back of the envelope, the sort of mid-single-digit increase in EBIT is kind of consistent with what you're trying to say?

I think that is fair.

Great. That's very helpful. And then you've helpfully covered the issue of China on the China and the impact that's having on East Coast coal. There's pretty mixed signals at the moment coming out from some of the customers. I mean some of the Glencore mines have started up again having these shutdowns. So I'm just wondering what your sense is and what you're hearing from the customers to the extent you can say. And how much of a risk is that going forward.

So the -- so from what we have seen now and if we extrapolate it for the whole year, Richard, it would be an impact of about 60,000 tonnes, but that's probably limit on a worst-case scenario. Well, not at 99% but at 80% worst-case scenario. I actually think that things will -- and you're seeing the signals from the government because this is all -- unfortunately, sort of this battle of words that we're in with the government. But we are seeing that the pressure that probably send some signals. And so there is a possibility that things are reset to the positive in some time in the Q1. That is -- my best estimate is that in Q1 of next year, of the calendar year we should see a reset, and we should see those tonnes coming back. That is -- so that would be better than what I've just said.

Got it. Yes. Yes, definitely. That's very helpful. And I'm sort of thinking about it more because in '20, you, obviously, in the first half in Australia, you had some significant fire and weather impacts on volume. I mean do you -- very high level, do you just always assume you're going to have an element of that every year when you think about your volume assumptions looking forward?

But not as bad. So when I -- so the other public guidance that I gave, Richard, is, even with those 60,000 tonnes, Australia would be flat. So that sort of means that we recover part of that bushfires. The bushfires at last year, we always have bushfires. But this year, we have La Nina instead of El Nino. And you know that, that leads to a very different outcome in terms of bushfires. So we certainly don't expect the bushfires last year. So that's why we say even in that bad scenario, we are flat. If the bad scenario doesn't come, we should have some growth in Australia.

Got it. And then just in North America, can I assume that the price resets you saw in the gold market are done?

Yes.

Great. And then finally, just one for Chris. I apologize if I missed this, Chris, but I was wondering if you could perhaps quantify what the working capital impact was around the SAP. Or alternatively, give us some sort of idea of what working capital benefits you'll get in the current year as that unwinds.

So Richard, the impact from SAP due to the debt was about $200 million. We should see that $200 million flowing through in the first half of next year. So that will benefit your working capital as we recover it.

Our next phone question is from [ Anshul Viridia ] from Citigroup.

This is [ Anshul ] on behalf of Sam Teeger from Citigroup. First, congrats on winning the recent contract at Glencore. If I correctly understand that, did you say that the pricing has been flat in Australia this year, and the expectation is flat going forward? Assuming that -- I have seen that the IPP has increased by -- increased substantially in the 9 months after the 12 months in FY '20.

So I did say that EBS increased by 19% but that's just a substitution between nonelectric and EBS. But in terms of volumes, I did say that we expect volumes to be flat in Australia between '20 and '21. I don't know if I understood your question well.

Okay. So I'm trying to understand if some color on the pricing environment, your recent contract wins with the Glencore, aren't they based on the pricing or the Orica superior technology?

Oh no. Thank you for that. No, no, no. It's all based in technology. So we didn't win that contract on pricing. The pricing would be probably the similar landscape that we have. It was all -- this is an important probably comment. There's a big stickiness for all of us, all of the big players tend to renew their contracts at about 90% of the time. And that's why because it's costly to change providers. And because mines get accustomed -- GMs, general managers get accustomed to working with people and sites. So change is to change something, something significant needs to happen. And to change, in this case, 9 mines, it had to be something significant. And so it was clear, and it was told to us and very explicitly that it was all related to the potential basically around wireless and BlastIQ and the value that we can unlock in the next years for Glencore. So that's why this is a clear probably proof if you want to put it this way, that our belief and our investment because we have been probably the only player investing in this new technology. Not in traditional technology, but a new technology is paying off.

That's very helpful. Just one follow-up on the SAP project. Just curious to know what is the split between the license cost and the implementation cost?

Sorry, the full CapEx that's being spent on that project is about $350 million. And then we will have ongoing license fees annually as we go forward.

Our next telephone question is from Scott Ryall from Rimor Equity Research.

Could I just clarify, Alberto, where is Burrup in the second half was running in terms of EBIT? Were you at -- or annualized rate is [ $55 million ]? Or is it something less because of ramp up?

Burrup was a lot less and -- because it was in ramp-up phase. And in fact, in the last month of September, it had some works on it. The biggest impact you'll see in 2021 where you should have an incremental EBIT benefit of about $20 million. But on a full year basis, Burrup generates about $25 million of EBIT. So I think you can do the math there.

Yes. Yes. Okay. Great. And so limited contribution in the second half, I guess, is what I was trying to get to. And then could I just confirm your comment earlier on gas prices, please? You mentioned at the first half, you said the impact would be $10 million and now at $12 million. Is that spread across the year? That's not a first half most of the impact was it?

No, this is $10 million in the first half, $2 million in the second half for total $12 million. So what I'm saying is that it's the full impact is now into our base.

Yes. But the impact was far lower in second half than the first half...

Yes. Yes. That's just because of the type of contracts, the time we renegotiated and those that we were been able to -- some we were able to pass-through and others, we weren't.

Okay. So can I -- what I'm trying to figure out is why the second half performance in the Asia Pac was worse than the first half. It's got the gas impact primarily in the first half. You've got a limited Burrup contribution in the second half but presumably, that allowed you to avoid some shipping ammonium nitrate from some of the other plants. So leaving those 2 factors aside, which should be positive relative to the first half. Why is the second half outcome worse than the first half, please?

It is about Asia. So if Asia is about the size of EMEA, and in terms of COVID, they were similarly impacted. So the impact was significant. And so that's really what explains it.

All right. That's very clear. And then to one of the earlier questions, Alberto, you mentioned that -- were you encouraged us to look forward to fiscal '22, which is fortunately one of the key [ years ] for me as well. And you said that you thought the outcome for Orica could be somewhere near where consensus was prior to COVID. So can I just clarify what your understanding of consensus was prior to COVID because on the numbers that I see in front of me, it was an EBIT of $820 million and an EBITDA of $1.15 billion. Is that what you've got in your mind?

It was -- from my recollection, it was much lower than that. But look, I'm not giving a guidance for 2022. I'm saying is we expect to see the disappearing of the COVID impact in 2022 which is significant, and then continued benefits from the strategic initiatives. So that would tell you, I don't remember -- it had a -- I remember that there was some analysts that had some 7 and then some in it somewhere [ 7 20 others were 7 30 or 7 40 ]. That's what I remember from memory. But that's something like that should be achievable. But yes, it's early days. I'm just saying there's a lot of ifs. If something disappears in the -- if the full COVID is normalized, which everybody believes it will in '22, and these initiatives that we are working today will continue to deliver benefits -- additional benefits. So that's Exsa, SAP initiating systems and technology, in particular, have additional benefits in 2022.

Yes. Okay. And congratulations, by the way, for actually quantifying some of those benefits that you expect. I think that was -- that was very much appreciated. My last question is on your decarbonization pathway. And congratulations for putting out a specific target over the next decade. I think that's very much appreciated. If I go back to your sustainability report from last year, just in your Scope 1 and 2 emissions were due to nitrous oxide emissions, which you mentioned the importance of tertiary catalysts, I think were the issues, the unique operational challenges that you'd had. Your partner in Burrup has eliminated nitrous oxide emissions on a global basis. I'm just wondering, is this -- do you think over a time frame, you've now got the secret for eliminating nitrous oxide through abatement catalyst. In which case, shouldn't you be targeting taking out 59% as opposed to 40%?

Look, the -- I don't know about Yara. I don't believe that, that would be the case, maybe obviously, new plants have different setup systems. What I can say is that I...

They published -- that's their published statement that they have eliminated nitrous oxide gas greenhouse gas emissions.

Maybe they have, but they have not put to the best of my understanding a statement as clear in reduction of global emissions as we have. So I think that -- if you look at -- there's 2 types of announcements in the past sort of months, one, where they go to 2050, and they don't have any sort of plan. They just say, oh, we're going to be carbon neutral. But that's an aspiration. And then you have the ones that put a concrete target and say we're working on it. So you take BHP has said, 30% reduction by 2030. So we -- again, took best of ability. I haven't seen anything that puts a 40% and saying, we are actually working, and we know how we're going to do it. So that's what I would stress. I haven't seen that -- one thing is aspiration, and another thing is have a detailed plan of how to do it. So of course, we don't stop in 2040, and we said at least 40%. So we actually think we're going to comfortably exceed that 40%. But I don't like to put out numbers that I am not absolutely sure that the company can hit, and that's why we put that number at this stage.

Yes. Okay. Great. And then just one last question on that one is the targets are on Scope 1 and Scope 2, which is in your control, clearly. Your Scope 3 emissions just from suppliers, which you put in your sustainability report are more than half of your total emissions. So can I take from this also that it's effectively on a like-for-like basis with respect to your external supply arrangement suddenly outsourced production is something that allows to maybe Scope 1 and Scope 2 target, but have a significant jump in Scope 3 from suppliers. Can you just clarify that?

But what is the exact question?

Whether it's -- I guess what I'm just trying to clarify is that a like-for-like, in terms of your operations currently, do you see a shift out of what you do yourself with Scope 1 and Scope 2 into Scope 3 emissions?

So we will track Scope 3 emissions, but we are basically committing to what we can control. Again, we can't really -- we will track according to TCFD Scope 3, which is part of that commitment. But we're not committing to anything of what we cannot control.

Yes. No, I understand that. I'm wondering whether -- I'll take it off-line. I think that's it. Anyway, congratulations...

Thank you.

Our next telephone question is from John Purtell from Macquarie Group.

Just had 3 brief questions, if I can. Look, firstly, in relation to SAP and maybe for Chris, how is the SAP system running now. And how would you assess overall implementation in terms of how it's gone?

Listen, I mean, I think with SAP systems, they invariably have some teething issues after go live. I mean what I was really pleased about is that despite going live 3 months before year-end, we've successfully signed all our accounts with no qualifications whatsoever. There will continue to be some improvements to it as we go through the next 6 months. And I suspect by the half, we'll be in a much better position.

And that is coming from the glass-half-empty person, John. So if you want a glass-half-full person, I've been through many of these, and we will stabilize much quicker than anything I have seen, including the BHP one and other places that have been. We should be in 4 to 5 months, we should be fully stable and with automatic billing, automatic invoicing and so on and so forth.

Just the second one in relation to your gold-related business. Appreciate Lat Am's had COVID issues. But to what extent in other markets, here in Australia and North America, are you seeing increased demand and the outlook for that part of the business.

Look, gold is an interesting one. We're quite bullish on that. It's one where the forward plans of the miners are usually, for some reason, not that good. But I -- as I see everything on iron ore, gold, copper, we're seeing growth averages about 2% to 3% across the world. I think gold will be higher, but that's what we have right now currently. But as I said, the forward sort of plans, it's -- for some reason are more opaque. But gold is going gangbusters. And all of the sort of internal communications from the mines around the world are prepared for ramp-ups.

And just the last one. In relation to Burrup, just to clarify expected utilization for this year, would appear to be implying pretty close to full, although you've got the rectification there. So just trying to get a sense of what impact that will have on full year volume.

So we -- the plant at -- let's say, pre capacity would be 3 30. So we expect to run it at about 2 93. So basically full. But what we're really preparing is, as you know, the West is now in equilibrium. And in 1 to 2 years, it will be in deficit. And the whole Australia will be probably running into deficits. So we want that debottlenecking, so we can go to 3 20 or something like that. But the forecast for this year is in the 2 90s.

Next telephone question is from Brook Campbell from JPMorgan.

Just a quick one on Exsa. When you talk about a target for EBITDA of $50 million and on track. What sort of D&A do you think will be within that business once you reach $50 million of EBITDA?

The D&A should be around $25 million.

Okay. $25 million. So I guess up to a $25 million of EBIT on $300 million plus of investments. So it gives you sort of a pretax return of about 8% and, thus, how you think about that opportunity and growth CapEx and investment going forward?

Look, there are several ways of looking at it. But if you look at it in pure I think for like a private equity, we invested around $350 million. And this year, in cash, it will give about a 15% return. Now in 3 years, we expect that number to double and so that return will be significantly higher. But it's already in a cash return, producing very decent cash returns. So your estimate is right. It's going to be north of 20 in EBIT, depending, obviously, on things on this year. We have a slightly higher number than that.

Okay. That's fine. And then on sort of SKU rationalization, driving some efficiencies through the initiation systems network. Do you have a target at all for what sort of working capital benefit you could realize from those and those projects?

Look, what I can tell you is that when we track our inventories, where we have the greatest difficulty and the greatest number of days is in our initiating systems because it is a very complex system that is the inheritance of years of M&A activities of decades of M&A activities. So the reason why we say that 45% of utilization capacity is not because we want to, but it's because we cannot put it higher because of the current different technologies and complexity. So we -- so if you look at our working days in inventory, I think we're right now tracking at about 78 days. And optimally, we'll be around 75 with the current complexity. Once we get to an 85% number and with sites that are much less number of sites and much less complexity, that number could go significantly down. I can't put a number. But you're right in saying that, that will be an additional benefit to the sort of $40 million for 2022 that we've quantified in EBIT.

And the final question today is from Nathan Reilly from UBS.

Alberto, just a quick one. Just -- I'll get you to quickly confirm what you're expecting in terms of contract repricing through '21? Is that right, 35% of your book is repriced this year?

In Australia, it's about 35%. But in North America, it's about 10%. EMEA is different because it's much shorter. And Latin America, I think it's only about 10%. So it's only an Australian thing, and it's about 35%. So it's not that high.

Got it. And I guess just bringing that back to your comments about your expectations for that FY '22 EBIT recovery profile, going back to sort of pre-COVID levels. I guess one challenge that's kind of emerged through this COVID process that potentially wasn't factored into that was, I guess, the deterioration in thermal coal profitability for the industry there. So just how are you anticipating the recontracting process, just given that dynamic through '21 in terms of your thinking about FY '22 EBIT recovery.

Look, this is, as I said in the past, it's the same thing as the difference between iron ore and steel. The steel market may be very bad at so many years. But if the iron market is tight, then the iron ore market has its own dynamics. So as long as the -- we expect in the next, like, again, 12 to 24 months, the market to be in rough equilibrium, domestically. So IPP still runs the day. Now IPP has a lot of variables and all of that, and it probably has gone down a little bit. But IPP still will be the guidance on what we would call the next best alternative. So if thermal coal goes down or up, it really doesn't matter in our negotiations. Surely, obviously, the clients would argue that. But in the end, as we've seen already in things that we have done in the past 3 or 4 months, in the end, IPP is where everybody gets to in what we call the next best alternative. So yes, I wouldn't be -- as I said -- it's interesting. The thermal price of coal at AUD 60. If you look at the issues that we had in 2015, Aussie price then was about AUD 40 thermal coal. So even though AUD 60 is not a great price, there's still way -- they're in the black most mines in terms of cash profits, not in terms of EBIT, but in terms of cash profits, which means that the incentives for them is to keep open. So as we obviously, hopefully, get over this China diplomacy thing, that has really nothing to do with fundamentals, and as we see still a lot of demand and plants being built in Asia, I think the Australian thermal coal market, our expectation of something flat or slightly decreasing for the next years, 5, 6 years, is quite reasonable.

Got it. And do you want to talk about Indonesia in that same vein as well?

Well, it's -- so Indonesia has something similar they -- because the quality of coal is not as great. They were -- I mean COVID, they were impacted. Having said that, our expectation, as I said, is in the Indonesian market, we expect to see a better year in '21 than '20.

Okay. Got it. And maybe a question for Chris. Just in relation to that D&A guidance, pretty significant uplift there. Can you just talk me through that increase in terms of where, I guess, the buckets within which that increase gets allocated across S&P -- sorry, SAP and also Burrup, I think you've already given some guidance around Exsa.

Yes. You've got the Burrup increases by about 25. You've got Exsa, which is the increase of about 20. Then on the SAP systems, you've got about 32. And then the rest of the investment that we've been doing is the balance.

Got it. And with respect to the CapEx guidance of $380 million to $400 million, can you also talk me through some of the shifts there in terms of the buckets around SAP, the growth in sustaining. And if I could also just get a quick update on your turnaround schedules, turnaround schedule?

Yes. So our sustenance spend in 2021 should be around $220 million. Now the turnarounds that we've got is we've got an ammonia mid plant mid run turnaround happening. We've got a turnaround on the nitric acid plants at Yarwun. And then we've got a site-wide turnaround happening at Carseland. And that's been all built into the $220 million. We then have about $120 million of growth capital as we go into the new year. And some of that's linked to new opportunities. Some of that is linked to increasing our investments in manufacturing capacity for the WebGen units. And then you've got about $28 million for Exsa, which is per the original plan when we announced to the market in February when we were acquiring this business. We've got a remaining possibly $10 million related to the 4S closeout.

Perfect. And final one, very quickly, just in terms of that Exsa EBIT contribution you're thinking for '21, is it about $20 million?

Yes.

There are no more further questions at this time. I would like to hand the call back to the speakers for closing remarks. Please go ahead.

Thank you very much all for your very good and multiple questions. Thank you. Bye.

That does conclude the call for today. You may all disconnect. Goodbye.