Orica Limited (ORI) Earnings Call Transcript & Summary

Thank you all for standing by, and welcome to the Orica Limited 2021 Full Year Financial Results. [Operator Instructions] I'd now like to hand the conference over to Chief Communications Officer, Ms. Delphine Cassidy. Thank you. Please go ahead.

Good morning, everyone. And welcome to our full year 2021 results presentation. Thank you for joining us today. In the room with me, I've got Sanjeev Gandhi, our Managing Director and CEO; and Christopher Davis, our Chief Financial Officer. Before we start the presentation, just a couple of points, if I may. We have extended today's session to 1.5 hours to give you enough time to talk and question us on our strategy -- to raise questions on our strategy, I beg your pardon and to discuss our results. And secondly, before I hand over to Sanjeev, I'd like you all to just take a quick minute to review the disclaimer on Slide 2. Thank you. With that, I'll hand over to Sanjeev

Thank you, Delphine. Good morning, everyone. Thank you all for joining. Let's start. When I presented the half year results in May, I said that I would take the next 6 months to stabilize our core business, and in parallel, to work with the executive team on our refreshed strategy and would present to you, our investors, at the full year results. I'm pleased that we are able to do both of that today. So for the next 60 minutes or so, we will talk briefly about the performance of the 2021 financial year and then spend most of the time on our refresh strategy, followed by Q&As. Moving to Slide 5. I've spent the last 6 months uncovering the competencies and strengths of our business and identifying opportunities for growing our business profitably in the future. In May, I said that the fundamentals of the business remain sound, and this has been validated in the second half of the last financial year. Orica is the global leader in mining blasting. Our core business in on-mine blasting and detonator supplies, which has been built over the past 148 years remains strong. But today, Orica is more than that. We are the leading quarry and construction blasting and services provider in a highly fragmented but attractive market. We are a leading provider of blasting and ore body intelligence software, fragmentation and stability monitoring. And we are a leading provider in mining chemicals, particularly cyanide, where our product is trusted by gold miners around the world. Our refresh strategy has been built on exploiting the strong competitive advantages in each of these 4 verticals to drive profitable growth and doing it sustainably as we mobilize the earth's resources with our customers. I will go into detail after we have covered our 2021 performance. Turning to Slide 6. At Orica, nothing is more important than safety, and we are pleased to report that once again, we had no fatalities across our operations. Our focus has remained on the health and well-being of our people. We continue to provide support for employees and their families in areas most impacted by COVID-19. And sadly, we lost 12 colleagues to COVID-19. We extend our deepest condolences to the families and friends of our colleagues who lost their lives. In 2021, we continue to focus on delivering on our sustainability commitments. We are pleased to report a 13% reduction in our combined Scope 1 and 2 greenhouse gas emissions from the 2019 baseline and have now set a new 0 ambition by 2050. In October, we completed the installation of tertiary abatement catalyst technology at our Carseland plant in Canada and have announced our Kooragang Island decarbonization project for tertiary abatement in partnership with the New South Wales government and Clean Energy Finance Corporation. Importantly, the executive compensation from myself and my relevant ExCo members now includes a climate change metric. I will go into more detail about our approach to sustainability later in the presentation. Turning now to our financial and operational performance on Slide 7. The second half was focused on delivery. Our key focus was on stabilizing the core of our business and building on the key priorities that I spoke about at the half year results. The adoption of our products and solutions from our new technology portfolio has delivered to plan. With a good proportion of this from our digital suite of products, which I will talk more about in detail later. Exsa has now been successfully integrated and is delivering in line with the original investment case. So we have achieved business as usual. Burrup is fully operational and producing good quality product, so we have again achieved business as usual. The team have worked hard on reducing the number of SKUs by over 70% since 2018 and the previously announced closures of the Minden and the Tappen initiating system plants have been completed. I'm also pleased to report that good progress has been made on stabilizing the new ERP system, and we will start seeing the benefits come through from FY 2023. All of these measures gives us a strong foundation for our refreshed strategy and sound platform for future growth. Moving to Slide 8. Critical to delivering on our refreshed strategy will be a relentless focus on improving profitability through 3 key areas. Firstly, pricing discipline. We have already commenced lifting prices as contracts come up for renewals and obviously also for new contracts that we will bid for. This will reflect the value we provide to our customers and the security of supply we are able to offer from our global network. Secondly, ongoing reduction in our cost base. In the second half, we started to reduce our headcount, mainly in functional roles, which account for the restructuring charges that Chris Davis will talk about later. As we embed more efficient ways of working, we will focus on continuously reducing our cost base moving forward. Finally, getting the benefits from the new SAP system. It has been a substantial investment for Orica. We will leverage the integrated system to enable better operational and commercial outcomes. This is over and above the cost reduction that I just spoke about. Our global reach is one of our most competitive advantages, but there are some countries that are not strategically aligned or could be serviced through alternative channels. Based on our review, we will exit our physical presence including offices in up to 10 countries with some countries already exited over the last 6 months. Good progress has also been made in the disposal -- in the disposal of some of our noncore land holdings and Chris Davis will cover this later. Moving on to Slide 9 for a summary of the FY '21 financial results. Our financial performance this year has been disappointing due to a very challenging first half. We have felt the impacts of a strong Australian dollar, ongoing trade tensions with China and the ongoing impact of COVID, mainly in the first half of the year. All of this contributed to underlying earnings before interest and tax decreasing by 30% to $427 million. Following our announcement in September, we booked $382 million after tax in individually significant items, leading to a statutory net loss after tax of $174 million compared to a profit of $82 million in FY 2020. We maintain a very disciplined approach to our balance sheet and capital management while stepping up our cash generation and controlling our levels of debt and gearing. The final ordinary dividend of $0.165 per share unfranked, brings the total dividend to $0.24 per share, down $0.09 per share compared with FY 2020 reflecting a payout ratio of 47% of underlying earnings. Gearing of 34.6% remains within our target range of 30% to 40%. Chris will go through the financial performance in more detail shortly. Turning now to the regional performance on Slide 10. I will keep this at a high-level summary because there's a lot more detail in the appendix. Australia Pacific and Asia. Two key factors contributed to the 25% reduction in EBIT this year. Firstly, the impact from disrupted thermal coal trade in the first half. It was a combination of lower volumes and also the under recovery of continuous manufacturing plant fixed costs. This was partially offset by growing demand from metals customers, both in the Pilbara and on the Australian East Coast. Secondly, with global ammonia prices increasing by around 85% in the second half of the financial year, there is a temporary lag in the recovery through our rise and fall mechanism. North America. Operationally, this region was sound, albeit faced with ongoing political and economic challenges in Mexico and labor shortages in the U.S. and Canada. The 35% EBIT decline on the pcp was largely driven by the non-repeat of carbon credits in 2020, temporary external sourcing costs and adverse foreign exchange impacts. Latin America. The 25% reduction in EBIT in the region was due to several factors impacting business in the first half, including the significant downturn in the Colombian coal market production, strikes in Chile, unfavorable foreign exchange movements and freight cost increase, noting that all ammonium nitrate and cyanide in this region is sourced offshore and not manufactured locally. As mentioned earlier, the Exsa business is now successfully integrated and performing well to plan. Europe, Middle East and Asia. EBIT in this region was 61% lower than last year, reflecting a soft first half followed by a much improved second half. You will recall that the first half performance was impacted by significant second and third waves of the COVID-19 pandemic, which affected higher-margin markets of Europe and the Middle East as well as unfavorable foreign exchange movements. While these factors improved in the second half, margin was impacted by a substantial increase in sea freight costs and a shift to lower-margin products in Africa as customers sought to cut costs in the first half. Pleasingly, across all regions, firstly, there was increased adoption of Orica's new technology, particularly our digital solutions. And secondly, there was improved performance in quarter 4, giving us good momentum into the new financial year. Moving now to Orica Monitor and Minova on Slide 11. Our GroundProbe business celebrated 20 years this year and continues to grow from strength to strength. Sales were higher than the pcp, driven by increased demand for radar systems mainly in Brazil and Africa, the introduction of new products and remote geotechnical services. EBIT improved on the pcp from positive mix as high-margin leases and premium radar sales increased. Minova performance was solid despite weaker thermal coal production in the first half in Australia and the Americas. Growth was led by increased demand, most notably in Canada in hard rock. The business remains EBIT and cash flow positive with positive momentum going into the future. I will now hand over to Chris for a review of the financial performance.

Thanks, Sanjeev. For clarity, the numbers on these slides presented today include Minova, whereas in the financial report, Minova has been treated as a discontinued operation. With that in mind, looking at the key financial metrics on Slide 13. As we mentioned at our half year results in May, the first half of 2021 was challenging. Specifically, a strengthening in the Australian dollar, which resulted in lower foreign earnings; China trade tensions, which impacted Australian thermal coal exports; the ongoing uncertainty associated with COVID-19 and further political and economic uncertainty in Latin America. Despite these external factors, the second half of the year has seen a strong improvement driven by stronger sales volumes of ammonium nitrate and EBS and strong contributions from Orica Monitor. Looking at the full year results for 2021. Sales revenue of $5.7 billion was up 1% from the prior period, with improved performances from Orica Monitor and the full year contribution from the newly acquired Exsa business in Peru. At $796 million, underlying EBITDA has decreased 16% over the comparable period. Underlying EBIT of $427 million has decreased 30%, which I will outline in more detail on the following slides. Underlying NPAT of $208 million is 30% below the prior period, driven primarily by the lower earnings. Statutory net loss after tax of $174 million has been impacted by after-tax significant items of $382 million, which I will outline in more detail on the next page. At $0.512, earnings per share is down $0.244 on the prior period, driven by a lower underlying NPAT. The final dividend of $0.165 per share will be unfranked and represents a payout ratio of 50%. We implemented our revised dividend payout ratio policy in 2016 in which we committed to shareholders to pay 40% to 70% of underlying earnings as a dividend. I am pleased to report that despite the challenges and uncertainty, we have maintained the dividend payout ratio policy over the past 5 years. Turning to Slide 14 entitled individually significant items. On the 29th of September, we communicated to the market several items that were not in the ordinary course of business that were expected to impact the statutory reported results. These include the sale of 2 land holdings in New South Wales that generated an after-tax cash profit of $118 million with the full $140 million in cash proceeds received in September; a continuation of the global restructuring project resulting in $33 million in after-tax costs being recognized during the period; the previously reported $28 million increase in provisions for environmental remediation; a noncash impairment of the goodwill in the EMEA segment of $162 million. And finally, following the impairment recognized by our joint venture partner, Yara, we have reviewed the carrying value of our 50% shareholding in the Pilbara joint venture, resulting in a noncash impairment of $277 million, which includes a full impairment of the goodwill associated with the investment. Given the materiality of these items, these one-off costs have been accounted for as significant items and do not form part of the underlying result. Turning to the EBIT bridge on Slide 15. The impact of the strengthening Australian dollar on the translation of our foreign currency earnings has had a significant impact compared to the prior period. By way of example, the Australian dollar to U.S. dollar average exchange rate for 2020 was approximately $0.68 compared to $0.75 for 2021. Considering the basket of currencies in which Orica operates, this has had an adverse impact of $42 million in the 12 months to 30 September with the largest impact in North America, Latin America and Asia. The increase in costs associated with the new SAP system of $32 million includes increased licensing and maintenance costs, infrastructure support as well as incremental depreciation. Ammonium nitrate sales volumes at 4.1 million tonnes includes 327,000 tonnes of sales from the Exsa business, which was acquired in the second half of the 2020 financial year. Excluding the lower margin Exsa tonnes, sales volumes for the year decreased compared to the prior period, which resulted in an adverse volume variance of $31 million. This reduction in volumes was driven by a disruption in thermal coal trade flows with China, which has impacted the higher-margin Australian thermal coal business; the nonrepeat of higher-margin spot sales to competitors that occurred in 2020; reduced mining activity and customer mine closures associated with COVID-19 in Colombia, Africa, Mexico, Indonesia and parts of Europe; social unrest in Peru and strikes in Chile, which temporarily reduced mining activity at certain customer sites and delayed sales of cyanide in the latter part of the year as a result of constrained global shipping capacity. This was partially offset by new contracts in the Australia East Coast metals market and increased demand from the lower-margin Pilbara region. The impact of significantly reduced customer demand in the first half of the year resulted in reduced throughput adversely impacting manufacturing fixed cost recoveries at Kooragang Island, Yarwun, and Bontang. Additionally, increased insurance costs have been incurred following an incident at the lead azide press at the La Portada plant in Chile in the first half of the year, which, together with the lower manufacturing recoveries has resulted in an adverse variance in manufacturing of $22 million against the prior period. Net mix and margin decreased by $40 million, with impacts felt across all regions due to the previously mentioned and expected reduction in carbon credits in Canada, contract pricing in Latin America and Australia and increased freight and supply chain costs across the business. In the second half of the year, we experienced a significant increase in ammonia and gas pricing with ammonia rising approximately 85% since the 1st of April. Whilst most of these costs are ultimately passed through to our customers as part of the rise-and-fall pricing mechanism, there remains a lag on contract pricing adjustments that resulted in a temporary impact of $27 million. Adjacent businesses includes Orica Monitor and Minova. Orica Monitor has delivered a 51% improvement in EBIT compared to the prior period. The GroundProbe business continues to perform well with increased demand for RADAR systems, remote geotechnical services and [ care plans ]. The Nitro Consult business has delivered a significant improvement in EBIT, with the growth in revenue on the back of improved infrastructure spending and new contract wins as well as a reduction in operating costs following the restructuring activities in late 2020. Despite the challenging operating environment and reduced demand from coal customers, the Minova business has delivered an EBIT of $22 million, an improvement on the prior period. This has been achieved as a result of increased demand and new customer wins in infrastructure and hard rock mining. Finally, the other category reflects a year-on-year EBIT reduction of $5 million. The net result is that EBIT finished the year at $427 million. Looking at capital expenditure on Slide 16. In the 2021 financial year, we have applied a disciplined approach to capital expenditure which has resulted in total capital expenditure for the year of $323 million. This is at the lower end of our guidance of $320 million to $360 million that we communicated to the market at our half year results presentation. Growth capital expenditure at $100 million includes investments in new emulsion manufacturing plants in Africa and CIS to support new customer contracts, new MMUs and fixed plant to service new customers in Australia and Brazil, capital to support expansion of the Exsa facility in Peru and further investments in the commercialization and manufacturing capacity of WebGen in North America. Sustaining capital expenditure of $187 million reflects spend on compliance and efficiency capital at Kooragang Island, Yarwun and Carseland; tertiary abatement at Carseland and ongoing replenishment of end-of-life MMU fleets on existing customer contracts. In 2022, capital expenditure is expected to be in the range of $340 million to $360 million. Adjusting for the changes in the new accounting standard, depreciation and amortization has increased 12% to $358 million, reflecting the commencement of depreciation on Burrup in 2021 and the inclusion of a full year of depreciation associated with the Exsa business that was acquired in May 2020. In 2022, it is expected that depreciation and amortization will be up to 5% higher than 2021. Moving on to Slide 17, entitled Cash Flow. As I've previously reinforced to the market, the generation of strong cash flows remains a key focus for the business. In this respect, I'm extremely pleased to report strong cash generation with positive net operating cash flow of $619 million and cash conversion of 127%. As we had previously communicated to the market, with the timing of the implementation of the SAP Go Live in close proximity to the September 2020 year-end, it resulted in temporary delays in the processing of invoices to customers resulting in lower cash collections in the prior reporting period. During the 2021 financial year, we have been progressing with system stabilization to ensure correct and timely invoicing and follow-up on customer collections. Excluding the $56 million of trade working capital of Minova that has been reclassified as assets held for sale, the underlying decrease in trade working capital is $217 million, which includes a reduction in debtors of $92 million. Going forward, we expect cash conversion to normalize towards the 90% to 100% level. Turning to net debt and gearing on Slide 18. We remain pleased with the balance sheet performance despite the impact of lower earnings. The actions we have taken during 2021 to focus on capital expenditure discipline, trade working capital optimization and monetizing noncore land sales, which has released $140 million in cash proceeds has positioned us well with net debt at under $1.5 billion. This is a reduction of $342 million against the 2020 financial year and represents the lowest level in the past 4 years. This results in gearing of 34.6%, which is comfortably within our target range of 30% to 40%. Moving on to my final slide on Page 19, reflecting our balance sheet and liquidity profile. We continue to have significant levels of liquidity available as demonstrated by the $1.5 billion of undrawn committed bank facilities and a further $594 million of cash at 30 September. We monitor debt capacities against our 2 key financial covenants, namely the gearing ratio and the interest cover ratio. With gearing at 34.6% and interest cover at 4.6x, our 2 debt covenants are comfortably within requirements. These ratios, together with additional performance measurement criteria determined by Standard & Poor's are targeted in support of the maintenance of an investment-grade credit rating, which provides us with access to borrowings from a range of sources. Of note, Standard & Poor's rating methodology adjusts Orica's net debt to incorporate leases, post retirement benefit obligations and asset retirement obligations. By comparison, Orica's debt covenants are exclusive of these. Our average drawn debt tenor is currently 5.4 years, and we have limited near-term refinancing requirements. Our all-in cost of funds is 3.8%. With that, I'll now hand you back to Sanjiv. Thank you.

Thank you, Chris. Let's talk strategy. On Page 21, I would like to call out that Orica is the leading global supplier of blasting products and services today. We would like to leverage our global footprint and our aspiration is to become the leading supplier of mining services. We are active in more than 100 countries, and that is so important today given the challenges that we all face in supply chains in inter and intra-regional trade. And we have this extensive network of both continuous and discrete manufacturing sites spread globally. We have a fantastic suite of technologies, highly skilled and competent workforce and a heritage of over 140 years and we would like to leverage this by delivering solutions and technologies that drive productivity for our customers globally. Turning now to Page 22, our Refreshed Strategy. This is our strategy on a page. It focuses us on delivering solutions and technology that drive productivity for our mining and infrastructure customers across the globe, leading to profitable growth and creating enduring value for our shareholders in a sustainable manner. Our refreshed strategy is about focus using our scale and our expertise. Our business has not changed. It's the how and where that have changed. The how is centered on 3 key elements: delivering smarter solutions, optimizing our operations and partnering for progress across our core business. The first element is offering smarter solutions and cutting-edge disruptive technologies. WebGen is 1 example. There are many more where we are world leading and we will continue to invest in smarter solutions and new technologies. Secondly, we will continue to focus on optimizing our operations, not only our continuous and discrete manufacturing assets to make us more cost competitive, but also our global business and services. What can we do in-house? What should be outsourced? How do we leverage our centers of excellence and our new ERP platform. Last but not least, is partnering for progress. Partnering within and outside our organization. Internally, we want our teams working as partners across regions, across functions, across businesses, across manufacturing sites sharing best practices, helping each other to grow and learn from each other. Partnering with our customers is equally important. Design for outcome, which I will talk about shortly, is a fantastic example of partnering with customers where we share in the benefits with our customers. We are also partnering with future-facing industry players such as Alpha HPA and MCi. The Alpha HPA project is a new low-carbon economy project providing materials to electric vehicle batteries. Orica will supply key process reagents to Alpha HPA and in turn, be the recipient of core products from the project via pipelines connecting Orica's Yarwun plant to Alpha HPA facility in Gladstone across the fence. MCi or Mineral Carbonation International, a joint venture between Orica and the GreenMag Group with support from the University of Newcastle is a world-leading Australian clean technology company. I will talk more about this later. The where, is focusing on our 4 key business verticals: mining, quarry and construction, our digital business and the Mining Chemicals business, which will allow us to leverage our strengths and create opportunities for growth beyond blasting. I will go into each of these verticals in detail shortly. Turning now to Slide 23. With our purpose centered around sustainably mobilizing the earth's resources, we truly believe that sustainability and value creation go hand-in-hand. Orica operates within a very hard-to-abate manufacturing environment, the primary greenhouse gas emissions associated with our operations, our nitrous oxide from the production of nitric acid and industrial carbon dioxide emissions. At our 9 nitric acid plants, we are focusing on mitigating our nitrous oxide emission -- process emissions by deploying the best available catalytic technology. Tertiary abatement catalysts can eliminate up to 95% of nitrous oxide emissions compared to unabated levels. This year, tertiary abatement catalyst technology was successfully installed at our Carseland plant in Canada. And we announced recently the Kooragang Island decarbonization project in partnership with the New South Wales government and Clean Energy Finance Corporation in Australia. In June this year, MCi, the joint venture that I spoke about earlier, was awarded one of the largest individual grants by the Australian federal government from its inaugural carbon capture use and storage fund. Proceeds from the grant will go towards construction of a world-first mineral carbonation mobile demonstration plant being built on our KI site. This technology and this demonstration facility will have access to approximately 250,000 tonnes of captured carbon dioxide on site from our manufacturing operations. This technology, by the way, won the first prize as the most innovative sustainability technology at COP26 at Glasgow. Our first-ever automated used oil recycling system Cyclo is another outstanding example of how we are creating smarter solutions for our customers. The system was originally developed by a third-party technology partner to recycle used oil for ammonium nitrate fuel oil in the Australian coal fields. Our team put in some amazing work to develop the Cyclo service, which combines our emulsifier technology with used oil processing technology to transform mine site used oil for application in explosives. This is a fantastic example of our strategic focus on optimized resource use through circularity. This is, in turn, also reducing diesel consumption for our customers, which can be a major challenge. We remain confident on achieving our targets of at least 40% reduction in Scope 1 and 2 greenhouse gas emission by 2030. Turning to Slide 24. Building on our medium-term target to reduce Scope 1 and 2 operational emissions by at least 40% by 2030, in October, we announced our ambition to achieve net 0 emissions by 2050, covering Scope 1 and 2 greenhouse gas emissions and our most material Scope 3 greenhouse gas emission sources. This ambition is based on a credible road map that we have developed, which includes continuing to prioritize our Scope 1 and 2 operational emission reduction by deploying tertiary catalyst abatement technology, sourcing renewable energy and optimizing energy efficiency and industrial processes. We've allocated approximately $45 million over the next 5 years in capital to deploy tertiary abatement technology across our Australian sites, which could deliver 750,000 tonnes CO2 equivalent reduction annually. Collaborating with our suppliers to source lower emission intensity ammonium nitrate and ammonia to reduce Orica's Scope 3 emissions as new and emerging technology scale and become commercial. This accounts for approximately 70% of Orica's total Scope 3 emissions and prioritize and develop low-carbon intensity ammonium nitrate as well as new products, services and technology offerings to help customers achieve their own sustainability goals. Cyclo was a good example of that. Our ambition of net 0 emissions by 2050 show our commitment to playing a part in achieving the goals of the Paris Agreement, and we will hold ourselves accountable for making a difference. Turning now to the 4 verticals on Slide 25. As mentioned earlier, our refreshed strategy is about focus using our scale and expertise. I spoke about the how through smarter solutions, optimized operations and partnering for progress. Now let's look at where we will win. We have divided the business into 4 verticals, the first one being the mining vertical. Blasting and mining for metals and both thermal and met coal is still the core of our business. We already have a very strong presence in copper, a future-facing commodity. And we will look to service other future-facing commodities, including nickel, cobalt, lithium, manganese and more. To complement this, we will continue to accelerate adoption of our industry-leading suite of blasting technology and solutions and simultaneously unlock value across our global manufacturing network. Quarry and Construction is the second vertical servicing the quarry, construction and tunneling markets. We are today a leading player in the sector and are very well positioned to capture opportunities from both mature and developing Q&C markets. The third vertical is digital solutions. We are now taking our expertise in innovation and technology in blasting solutions to beyond blasting from ore body intelligence to blast design and execution to measurement and monitoring. Orica is at the forefront of this end-to-end solution or what we call a design for outcome across the entire mining value chain. Last but not least is our mining chemicals business. Orica has a strong and successful history servicing the cyanide market as well as being one of the leading producers of emulsifiers in the world. Using this expertise, we want to explore extraction opportunities in other commodities, including some of the future-facing exciting opportunities that we see in front of us. I will now go into each of these verticals in detail, starting with the mining vertical on Slide 26. Without doubt, blasting and mining remains at the core of our business, and Orica is the industry leader in blasting technologies and solutions. Expected global growth, excluding China, over the next 5 years in iron ore and met coal is 2.4% and 3.4%, respectively, with Gold growing at around 1%. Copper, which is considered a future-facing commodity is expected to grow at around 3% over this time. Negative production growth is expected in coal over the next 5 years. As part of our strategy, our focus will be to prepare an orderly transition away from thermal coal. That does not mean that we will stop servicing the coal business. The coal business will continue to remain a very important part of our portfolio but we will follow our customers as they move away from coal into new future-facing commodities such as copper, cobalt, nickel, lithium. All of these, which will help with the energy transition of the world. We have the products and service offerings. We will start customizing these offerings for future-facing commodities. Turning now to Slide 27. I've already spoken about the expected growth in the traditional commodities. So I will go into a bit of detail on future-facing commodities, which are expected to grow the fastest. Sustainability is the most important megatrend and is comprised of 2 main elements impacting our business. First, growth in electric lightweight vehicles or e-mobility. The transition from internal combustion engines to electric vehicles will drive demand for battery raw materials, including lithium, cobalt, nickel, graphite and manganese. And the increased demand for light-weighting vehicles for better fuel efficiency will increase demand for materials such as aluminum. Secondly, as the world shifts from fossil fuels to renewable energy, there will be an expansion of energy networks based on wind and solar energy and addition of storage capacity to accommodate intermittent renewable energy. And this will require copper, nickel, iron ore and zinc. All of this amounts to substantial opportunities for Orica, where we can build on our already strong presence in these sectors and will give us new opportunities to extend our digital and monitor offerings. Looking to Slide 28. The blasting segment of the value chain remains at the core of our business model. The convergence of new technologies and solutions enables us to think differently, mine differently, operate more precisely and more importantly, responsibly. Critical to leveraging these trends will be accelerating the penetration of our core and new flagship technologies as our customers will continue to demand increased efficiency and productivity with safe and sustainable outcomes. Through our green technology road map, we are investing in technology to capitalize on new commercial opportunities in converging areas of decarbonization, automation and digitization across the value chain. We believe that this approach also strengthens our overall customer value proposition and our competitive advantage by targeting technologies that improve safety and productivity and focus on renewables, recycled or low carbon intensity and circular solutions. This year, we unveiled 4D, our new variable density bulk explosive system, which has a real-time matching of explosive energy to geology changes, with wider range than any other existing product. This is a step change in bulk explosives and value delivery. Our second-generation fully wireless technology WebGen 200 entered alpha trials with a commercial product this year. The technology has been engineered for new markets and applications and paves the way for the first stage of blast automation through our world-first Avatel technology. These exciting new technologies focus on better blasting outcomes. Turning to Slide 29. Finally, we will continue to identify opportunities to unlock value across our continuous and discrete manufacturing operations and supply chains. In continuous manufacturing, we will strive to achieve the right balance between make and buy in both ammonium nitrate and ammonia. We are already today a major purchaser of ammonia and ammonium nitrate globally. We have commenced the application process to build a new 30,000 tonne ammonia storage tank at KI. This will give us optionality as and when the market changes and furthermore, enable us to explore options for lower carbon inputs, including imported green ammonia. All of this will help build in flexibility for future operations and our investment in KI's long-term sustainability. The structural change to combine discrete manufacturing and global supply chain will accelerate synergies and strategic sourcing and operational growth and efficiencies in our discrete manufacturing products. We are projecting to grow EBS capacity by 30% to service higher demand from our customers. With 21 discrete manufacturing sites across the globe, network optimization will be core to unlocking efficiencies and increasing utilization. Some examples include: in packaged emulsions, work has begun on standardizing product offerings, which will lead to increased plant utilization. Shifting production to the Lurin plant, which was part of the Exsa acquisition has enabled the closure of 2 sites, driving manufacturing efficiencies. On the global supply chain front, we are implementing a global supplier quality framework and strategic sourcing implementation to support growth and also reduce shipping complexity. We will also be strengthening our security of supply position by implementing a global logistics [ c ] charter model and utilizing our global network more efficiently. Turning to the next vertical, quarrying and construction on Slide 30. We are today a leading global player in a highly fragmented market, and we are the market leader in tunneling, drill and blast solutions. Volumes in this sector are expected to grow -- to continue to grow strongly as global economies start to come out of recession and governments are going to spend more and more on infrastructure. As an example, the $1.2 trillion infrastructure bill that was recently passed in the U.S. So the intention is to grow this business, focusing on quarry, construction and tunneling on the next slide. Orica is the leading supplier of ammonium nitrate and services to Q&C globally, predominantly where Q&C is mature and consolidated in markets, including Australia, North America and the Nordic countries in Western Europe. We also have a very strong track record in servicing developing Q&C markets as is evidenced by our presence in countries such as Malaysia and the Philippines. We will leverage our expertise in these markets where we have been very successful, use that know-how and competency and enter into new markets where there are new growth opportunities. As an example, Asia is expected to be the fastest-growing market in quarry and construction. China, India, Southeast Asia are all expected to invest significantly in the Q&C sector and we will have a lot of opportunities to deliver focused technology specific to the needs of our customers in these emerging economies. We are creating a new region, Asia, headquartered out of Indonesia to drive growth in these regions. Slide 32. In the mining vertical, I spoke about our innovation and better blasting technology. We are also accelerating our technology offerings beyond blasting. Leveraging advanced workflows, measurement, modeling and data science, Orica is developing high-impact solutions across the mining value chain from ore body intelligence to blasting and processing to wall stability monitoring, expanding the company's footprint with both existing and new customers. This business has seen double-digit growth in uptake over the last couple of years, and we have doubled and tripled even our footprint in terms of customer access and activities on customer sites. We've had success winning business at sites where competitors supply blasting solutions. That tells you how powerful this business and our offering is. The opportunities are immense and exciting. Let me talk to you a little bit more on Slide 33. Moving beyond blasting to design for outcome. Over the last 12 months, we have been building a portfolio, which is today an industry-leading end-to-end solution in the mining industry. We have acquired 5 technology companies in the last 6 months alone and an excellent bunch of competent people along with it. Our industry is being reimagined, robotics, automation and big data are transforming every element of the mining value chain. We are today the only company in the industry who can provide a holistic offering to customers in terms of end-to-end digital solutions backed by our core blasting products and services. With our digital technologies, we can now quantify value delivered at every stage of the mining value chain, including reduced energy consumption, costs or emissions as well as the ability to manage environmental factors such as dust and vibration. Let me take you through design for outcome. Upstream from blasting, we are actively taking steps to help our customers better understand ore body. Recent digital acquisitions such as Rhino, HIG and Rig Technologies International gives us a strong presence in ore body intelligence. We think the emerging integrator set is something unmatched in the market and our trial customers seem to agree. We are collaborating with customers and industry ecosystem partners to develop technologies and integrate vast amounts of complex geotechnical data into the blast design process. This is where our SHOTPlus blast design and OREPro 3D modeling software come into play by helping to ensure the right explosives are delivered into the right holes at the right time to achieve desired customer outcomes. Our BlastIQ advanced vibration management solution, safeguards license to operate and optimizes blasting productivity in constrained environments, such as near heritage sites and civil structures, by providing our customers the tools to design, model, implement and measure blast within vibration limits. We've also made significant progress downstream from blasting in post-blast monitoring, including GroundProbe technologies and measurement technologies that deliver insights around blast outcomes. FRAGTrack, for example, captures 2D and 3D blast fragmentation imagery and data with auto analysis capability. MonitorIQ is the industry's most sophisticated and feature-rich platform for monitoring that gathers and visualizes all information from on-site sensors, ensuring users spend less time collecting data and more time analyzing data and identifying trends in enabling decision-making in real time. Further downstream, we are building capability and technologies in ore processing with tools like IES, which is a great example of a digital technology, which can improve the value of major mine sites by up to 5% to 6% through the optimization of processing operations. We recently established a digital immersion center in Brisbane. It's a specialized facility where we work with development partners, including Microsoft and customers to promote innovation, spur collaboration and also establish an Orica data and analytics center of excellence. This center of excellence brings together data science, artificial intelligence, modern cloud computing and Orica's 140-plus years of domain expertise. It will also act as an incubator for new Orica digital businesses in future. We will continue to invest in this vertical and acquire new technologies, integrate them into the digital portfolio and strengthen our offerings to our customers. We are proud to be delivering -- driving this change, and we are very excited about the critical role we play here. Turning to the last vertical on Slide 34. Mining Chemicals. Orica has run a very successful cyanide business servicing over 80 gold mines globally, security of supply through our extensive supply chain network and our safer sparge transport technology makes Orica a leading supplier in this industry. Orica is also one of the leading producers of emulsifiers in the world with manufacturing plants in Australia and North America. We want to do more here. As we are successful extraction of gold, we will develop products and solutions that we could use for extraction of future-facing commodities. We are going to invest in this business. We want to build on the portfolio and be able to expand our offerings. I hope I've given you some insights into where we will win. I would like to hand over now to Chris to talk more about our approach to cost efficiencies and capital management.

Thanks, Sanjiv. Looking at Slide 35 on sustainable cost reduction the success of our refreshed strategy will be underpinned by our continued focus on ongoing cost effectiveness and process efficiencies. In 2017, we established a center of excellence in Manila with the aim to build core competencies in back-office finance transactional activities. This allowed us to scale a highly skilled employee workforce and standardized common transactional processes. Our SAP investment has further accelerated the standardization. And today, our center of excellence in Manila has grown to approximately 250 Orica staff across processes and finance, human resources, supply chain and IT. Some of the benefits that have already been delivered include simplification and standardization of key finance processes; increased organizational productivity, including transactional speed and efficiency with customers and vendors and a lower operating cost with the benefit of highly talented employees. Key to this delivery has been the selection and retention of highly capable employees in this region as well as appropriate application of automation technology, including robotic process automation. As we look forward, our attention is now on establishing other centers of excellence in Brisbane for technology, close to our key mining customers and our GroundProbe business, in India for SAP to access the depth of talent in SAP support and in Manila to perform reporting and analysis activities, thereby leveraging the benefits of a single SAP system. We expect that these centers of excellence in Manila, Brisbane and India will contribute cost and productivity benefits to the organization on a long-term sustainable basis over the next 3 years. Turning to Slide 36, entitled Capital Management Framework. We maintain a prudent and disciplined approach to investment decisions with the objective of ensuring that the capital structure protects and balances financial flexibility against an effective cost of capital. Our capital management framework is underpinned by this disciplined approach toward the deployment of capital and is based upon 3 key objectives, namely: maintaining our investment-grade credit rating, preserving the flexibility for investment and to respond to changes in the external operating environment and maximizing returns to shareholders. We seek to promote and maintain safe and reliable operations first and foremost while maintaining a strong liquidity position and balance sheet, an investment-grade credit rating and delivering sustainable returns to shareholders. This framework is designed to keep in balance our 2 sources of capital, namely equity and debt, whilst maximizing shareholder value. As we move forward with our refreshed strategy outlined today, we will continue to focus on trade working capital efficiencies, disciplined capital expenditure and further sale of noncore assets, most notably landholdings to release cash. Importantly, our organic growth ambitions as outlined by Sanjeev today are premised on a capital-light strategy. With that, I will now hand you back to Sanjeev to take you through our 3-year performance indicators and outlook, starting on Slide 37. Thank you.

Thanks, Chris. So to pull it all together, I believe this refreshed strategy gives us a clear pathway towards sustainable profitable growth, creating value for our stakeholders. By focusing on the how and the where of our plan, we will pursue organic growth from the core, accelerate adoption of innovative blasting technologies and digital solutions, both upstream and downstream; continue to optimize manufacturing and supply chains; grow presence in future-facing commodities; diversify portfolio by increasing presence in quarry and construction markets and increase presence in high-growth economies; and expand in high-growth mining chemicals markets. This will be supported by a continued focus on cost reduction and pricing discipline, and we will leverage the capabilities of our new ERP system. It is expected that this strategy will deliver a 3-year average RONA between 10% and 12%, aligned with the long-term incentive targets set for my management team. Overlaying all of this will be our continued focus on working towards our net 0 ambition. Looking at the outlook for 2022 financial year on Slide 39. I Global commodity growth in copper and gold and in the Q&C market is anticipated to continue. FY '22 EBIT is anticipated to increase from FY '21 EBIT from continuing operations with a much stronger first half than the last year based on carrying forward strong momentum from the last quarter. Earnings are expected to be weighted towards the second half. There have been no material changes in our assumptions since our update in September. And accordingly, we expect the year-on-year increase from volume growth in line with global GDP growth, increased adoption from our technology offerings, particularly digital and monitoring solutions, supply chain efficiencies, overhead cost reductions net of inflation. Our focus on pricing discipline is expected to mitigate some of the pass-through lag from rising input costs. As Chris mentioned, CapEx will be between $340 million and $360 million. and gearing within our stated range of 30% to 40%. D&A is expected to increase by up to 5% from 2021. With that, we're now open to questions.

[Operator Instructions] Our first question comes from Richard Johnson from Jefferies.

Sanjeev, can I just start with the first point you made on Slide 8 on pricing discipline, which I'm sure everybody is very pleased to hear you talk about. I was just wondering how you go about actually implementing that from a practical perspective.

Richard, thanks for the question. I mean there are several ways we're doing this. The first is that we now have fantastic transparency on pricing with our new ERP system, right? And not to make a joke of it, but there's nowhere to hide. So obviously, all pricing is now transparent, and we know well what prices we are setting, and we know what our commercial teams are delivering to our customers. So we have a very, very strict price management policy here to ensure that these increased input costs that we are facing in terms of inflation are obviously then pushed through. The second mechanism is obviously our rise-and-falls that happen every quarter, as you know, for existing contracts. We have also done a clear check and a very, very thorough check of the rise-and-fall engine to ensure that there are absolutely no leakages happening there because we just cannot afford this. Now obviously, when we go out and bid for new businesses, our intention will be to get those prices up because high inflation and high input costs are just putting a lot of pressure on margins. So it's a twofold approach. One is obviously the transparency that we get on pricing from our new ERP system. And secondly is the stringent discipline that we have in terms of pushing through those inflated costs. So the twofold effect is, first of all, obviously, to maintain our margins and wherever we see opportunities also to improve on our margins.

That's great. But if I go back quite some years, when last time there was an efficient pricing culture within the business, there's no question that security of supply was an important aspect of that. And in fact, I think everybody will remember that Orica used to achieve a premium to import parity at the time. I mean are you sensing from your customers now that supply security is becoming an increasingly important issue?

Supply security is absolute key, given an environment where there's inflation, where there's challenges in moving products around. And just given the nature of our product, right, there's more and more regulatory scrutiny with unfortunate incidents like Beirut not helping here. So supply chain is very, very tight. I think we mentioned it earlier, supply chain costs are up nearly 40%. But even more challenging, there's no capacity in the market. right? So it's very difficult even to book cargoes and try to ship cargoes. So supply chain is -- and reliability it is very, very crucial to our customers. Now here again, Orica and our global network comes into play because we have now the luxury of moving products around from our regional assets from the countries and the inventories that we keep across the globe to ensure that we do not fail our customers. But as you can imagine, Richard, this comes at a cost. Nothing comes for free. And that's why we do expect that our pricing reflects this supply security and the insurance policy that we are providing to our customers.

Got it. And then secondly, I just wanted to ask about plant performance, which you detailed on Slide 37. I mean you can see the big step-up at the Island in the second half which is very encouraging. Carseland seemed to go the other way in the second half. I was just curious to understand why that was.

Yes. Richard, that was planned because we had the annual turnaround in Carseland starting early September. And then we have -- that's when we put in the tertiary abatement, by the way. And then we also did our maintenance and inspections and everything else. The plant is now in October up and running. So it was straddling 2 years -- 2 financial years. It was -- there was an impact in September and there's also some impact, obviously, in the first part of October, but the plant is up and running. The team did a fantastic job, as you can imagine, with all the COVID restrictions and hundreds of contractors operating on the site, but it was very well executed, and I'm pretty pleased. Most importantly, that was our proof of concept for tertiary abatement because the technology is working absolutely to plan. So I'm quite pleased about that.

Great. And then just lastly sort of an easy one for Chris. On the interest charge, can you just take us through the moving parts, explain what were the reasons for the big move year-on-year? And how we should think about that for the current year?

Thanks, Richard. If I can point you probably to note -- it's note 3B in the financial statements. In the 2020 year, our net financing costs are about $161 million. Whereas if you look at it in the current year, it's $106 million. In the 2020 year, we had a significant decrease in the discount rate, which resulted in an unfavorable unwind on the discounting of provisions, predominantly related to the Botany groundwater provision. That is not expected to repeat on that magnitude going forward. That was about $48 million. I think the way you need to look at interest and just looking at the interest expense plus the lease interest is really I've always maintained it will sit at about $100 million to $110 million. And that's the cash component. Anything that happens on the discount on provisions is really a noncash element. So when you look at the cash component being the interest expense and the lease interest, actually, this year was about $111 million, and last year, it was about $113. So it's normally pretty static.

That's great. And sorry, if I could just add 1 more quick one for Sanjeev. I think you said, Sanjeev, the RONA target was the average over the 3 years. So presumably then on a run rate basis, the fourth year steps up relatively materially again.

That's the plan, Richard. And to keep in mind that we have ended up with around 8% for the last financial year. So obviously, we would like to progressively get that up.

Our next question comes from Grant Saligari from Credit Suisse.

Thank you for the expensive discussion around the strategy. I guess just 1 question on that for me. You talk about the infrastructure and the Q&C opportunity, particularly in Asia. Can you elaborate on what you need to do in terms of development of capability to take advantage of that opportunity, please?

Thanks, Grant. The capability is there because we are already active in Asia in the mining space. But our presence in the Q&C market is underrepresented. And my view was, when I looked into the business, it was just because of a lack of knowledge and expertise that we've had in other parts of the world. We are very successful in the U.S. market. We're very successful in the Nordics in Europe, but that has not translated into a skill upgrade of our teams there. So now based on the new region that we are setting up in Asia, one of the tasks of the regional president will be to build that capability, leverage of our existing footprint of manufacturing sites. For example, we have manufacturing in Bontang. We are investing in Indonesia. We are manufacturing in Philippines. We are manufacturing in India. We have a presence in China, but to start looking more into the Q&C opportunities and start bidding for business there. That's something that we really were not doing. As you can imagine why that was because our folks -- our frontline folks are focusing on the big volumes coming out of the mining business, but the Q&C market is much more fragmented. So you have to bid for several more contracts there. And that's where you start to build scale, but obviously, the margins are also pretty good there. And I had a feeling that we were kind of ignoring that market because we were all busy catering to the big mining customers. So we're going to put in some dedicated resources. We're going to do a lot of training, and then we're going to leverage off our existing offerings that we have and start to bring them into those new tenders.

That's helpful. Second question, if I could. I guess just over the last decade or so, I've had various discussions with Orica around the value-added technology. And no doubt, it's a contributor, and you've outlined a range of technologies in the presentation today. But how should we actually think about the profit contribution of that in terms of potential given that in a lot of cases, you're selling bundled contracts where the products are bundled under a single pricing arrangement. And I would sort of assume that if the -- for example, the growth in EBS was contributing materially that would be called out somewhere on the earnings bridge. So how should we actually think about the real profit contribution that the various technology initiatives will deliver for Orica?

So Grant, I'll just refer to the earlier comment I made. Bundling in future in Orica for new contracts and for new businesses will be built bottom up, product by product. So nothing is given away for free. And that is possible today because we have this new ERP system with individual SKUs for every product and service that we offer. So there's no way for cross subsidization, that is not permitted anymore. And we have hardwired that into the pricing system. So obviously, we will not be giving anything away for free, unless obviously, it's a demonstration product where we then have to do trials. So that's the first aspect of it. Technology rollout. And as I mentioned, this also in May, especially for products like WebGen was significantly delayed, unfortunately because of COVID. Now since borders start to open, since we have higher vaccination rates, we are able to travel, we have done a lot of new blasts. So basically, we have doubled the number of trial blasts we have done year-on-year, for example, in WebGen, and we're starting to scale up that technology. The same with 4D. But again, to put it into context, this is still the beginning, right? It's not really making a material impact on our bottom line because we need to scale this up. Once we start to scale this up and there will be a rapid scaling up, we will start to see a material impact, a positive impact in terms of margin uplift, in terms of returns that we get out of the new products and technologies. It's the same with EBS, right? Today, we are selling EBS at a significant premium to the standard detonators. And our expectation is that we are going to sell WebGen at a significant premium to EBS. But you will not see that impact until we could scale it up. So for us now with our dedicated commercialization team, in the technology and innovation scope now, their task is 24/7 get new contracts, get the trials done and start to scale the business up. We have seen fantastic momentum year-on-year. And given the plans that we have with our customers in terms of trialing and commercialization, I'm pretty excited that we'll see big numbers coming in the near future.

Okay. And just finally, if I could, just what's the expected timing on Minova?

So I would have hoped that I could have announced Minova today, but given the fact that it's a complex global business, some of these interested bidders would like -- would have -- they wanted to go do physical due diligence and visit sites in the U.S. in our new investment in India, in Europe. And obviously, because of COVID, the logistics has been challenging. So that part of the negotiation is still ongoing. I do hope that before the end of this calendar year, we will have something to announce and we'll come back to you and give you information. Just to reiterate, I have no intention of giving it away for free. As we have seen our 2021 performance, Minova has been performing to plan, and we do see significant uplift in their business and earnings as global economies start to recover. So the process is well on track. It's just slightly delayed because of logistics issues related to COVID.

Our next question comes from Andrew Scott from Morgan Stanley.

Sanjeev, I just wanted to start, if I could, with just some of the premises or the background to how you've sat back and thought about and laid out this strategy. And what I'm particularly interested in, we've obviously seen a huge dislocation in global gas markets in recent months. Has that played a part in how you position the business? And do you think that is something that you're viewing at the moment as structural or temporary? Or are you trying to position the business to, if you like, be agnostic to how that plays out?

That's a great question. I mean it helps that there's a fresh pair of eyes, right? Because coming in new, I have no legacy issues. I look at the business without emotions, and I see where the opportunities are, and that's exactly what I've done in the last 6 months. Obviously, couple this with a refreshed management team, we have built this strategy bottom-up internally. It's a strategy made by Orica with Orica resources but with significant contributions from the outsiders and newcomers like myself. So all of that has gone into the formulation of the strategy. There are obvious trends to the business that we have. In my view, we have not leveraged that enough. I spoke about a few of them, like our global footprint, our technology and innovation machine. We have not done enough in terms of monetizing that. And then there are obviously some structural weaknesses, right? So the strategy has built on the strengths and will address the weaknesses. Now an interesting aspect is obviously the gas markets and the current energy crisis that the world is facing. And this is still before winter sets in the Western Hemisphere. So it's going to be challenging. It's not structural. I'm not surprised it happens because some economies were a little bit too quick to pull the trigger in terms of transitioning away from conventional energy into renewable energy. And obviously, the grids are not robust enough. There was not enough inventories, connectivity and all the other issues that we have. This, coupled with the bounce back of economies in terms of demand, recovery from COVID, in terms of the pent-up demand of consumers and all of that has led to a shortage, and I'm not surprised about this. I had already when I called out inflation in May when we last spoke, I already had a feeling that something like this would happen. It would be a V-shaped recovery, and this would have a lot -- put a lot of pressure on global supply chains. But this is not something that will continue forever. Now it's anybody's guess when it will normalize, but it will eventually normalize. For me, it was more important that we reflect the megatrend of sustainability and the impact that will have on our future business, on our asset base and on the way we will function in future. And that's been, I think, a more important factor in our thinking in terms of the strategic direction of the company.

That's very helpful. And then if I can extend maybe the answer to Richard's question around the domestic manufacturing business and the gas dislocation is essentially seeing those assets return to sort of privileged asset class, however long that may last. But then when we turn it around, how does it make you think about your positions where you don't have manufacturing. And in particular, I'm thinking about Latin America, where I think you're sort of circa 900,000 tonnes short. Does that leave you exposed or at a competitive disadvantage relative to the other players in that market and maybe extend that to Europe as well, if you could?

And it's not just -- you're right. It's not just Latin America, also in Europe we don't have our own ammonium nitrate manufacturing and cyanide manufacturing. So all the product is either imported or traded in. Now having said that, and I referred to that in my talk earlier, we have run a strategy quite successfully on make and buy, right? So it is not possible for us to build heavy assets with heavy capital investment in all regions, right? That's something that's not feasible for us. We have a very, very strong network of 5 ammonium nitrate manufacturing assets and 1 cyanide asset, but obviously, we cannot reach the globe here. So we have run this make-and-buy strategy quite successfully. And as a result, we are a major purchaser of ammonia and ammonium nitrate in the global markets. That means we have a bit of pricing power. We have a bit of leverage with our ammonium nitrate and ammonia suppliers, and that helps us because they value our business. We are a baseload business for quite a few of our global suppliers. And we are able to leverage this. So fortunately for us so far, despite the challenges with the very high gas prices and ammonia prices in Europe and in the U.S., our supply from our customer -- from our suppliers did not get interrupted. Now obviously, our suppliers have been charging us surcharges for the additional costs. And we have been very, very diligently passing those surcharges within our trading models in Latin America as well as in EMEA to our customers. We have no choice. We cannot absorb those temporary surcharges in terms of higher freights, higher natural gas price, a higher labor cost and everything else. So we are pushing that down to our customers. Nobody is happy about the situation, but it is a fact, and we have to find ways to mitigate this.

Yes, understood. And last one for me. To what extent did your analysis and your strategic considerations turn your mind to whether it would be advantageous to funnel product into the agricultural market or fertilizer market, whether it be to combat declining volumes from coal or short-term opportunities. Is that something that's being considered?

I mean you know we gave up the fertilizer business, right? And we are not a big fan of the volatility that brings to our business. We would like to have a stable, predictable, steadily growing business, and I'm not a big fan of the volatility that, that brings in. Now obviously, if there are short-term opportunities to help out, and if we have capacity, we are more than happy to do so. But for us and for me, that was not a strategic consideration at all.

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

Sanjeev, I was wondering if you could talk about maybe just expand a little bit on what you described as the momentum in the second half. And you almost touched on it in your closing remarks talking about the last quarter. But if I look at the second half performance versus the second half last year, you're down at EBITDA and EBIT in every business. So can you just expand a little bit more about what your -- what the momentum you're talking about, please?

Thanks, Scott. When I was talking of momentum. I was comparing this to the first half. And when we went out in May, I did mention that we see month-on-month volume improvement and that was basically the bounce back of the coal business here in Australia and the recovery of global economies from COVID. And we've seen that happen in the second half as predicted, and we do see that momentum continuing in terms of volume improvement continuing into the next year. Now when you couple this with the cost reduction efforts that we have put in, where we have had some effects in the first -- in 2021, but this will carry forward also into 2022. That's going to help us. On top of that, the focus on stringent margin management that's the third aspect that's going to help us. So the momentum comes from 3 factors. One is the growing volumes that we continue to see and will continue to deliver. It's the continuous focus on reducing costs and it's the focus on improving margins and pricing. And when you couple all of this with the technologies that come on top of it with the digital suite where we are growing very, very smartly, all of that adds up, and that's the momentum I'm talking about going into the next 3-year plan.

Okay. Great. And then you touched a little bit on it in an answer to an earlier question around the process of developing strategy, and you mentioned that it was a bottom-up driven strategy. Could you just give maybe an example -- maybe quarry and construction is a great example where perhaps that hasn't been as big a focus as what you've emphasized today. So how do you decide to focus on that from a bottom up side of things as opposed to top down, please?

So that's a very interesting question, right? I mean I'll give you 1 example. I can give you many, but in the interest of time, I was looking into the U.S. market and the very successful transition we have done away from the coal exposure. So our coal exposure is now down to something like 10%, 11%. It was obviously 10 years back significantly higher. And we saw this transition away from coal and the natural gas shale gas impact coming into our business. And I wanted to understand how did we manage to do this very successfully. And then I understood that we grew our presence in the quarry and construction market, which is quite an exciting market because as you know, in the U.S., a lot of infrastructure needs to be upgraded because there's been significant backlog of investment even before COVID. And we've become quite successful there and market-leading. And then I also started looking into the Nordics, where there's not much of mining activity, but we have a very profitable business there. And once again, quarry and construction stood out there. We are a market leader in the Nordics in tunneling, for example. So I said, if we have all of that expertise, why are we not participating in the most exciting growth market in the world, which is Asia. That's where most of the new infrastructure is coming. That's where population is growing, and that's where quality of life will improve, and governments will continue to put more and more money. And then I realized, obviously, because mining was such a big part of that portfolio, there was not much attention focused on Q&C. So I asked the question why? And then we started the discussion and then we realized there are clear opportunities. And we don't have to reinvent the wheel. We just have to transfer the knowledge from the U.S. and from the European colleagues down to the Asian colleagues, train them up, put them on stream, focus them and start to grow the business. So it was -- in the end, it was quite a simple activity, but then we wanted to verify that with growth rates, right? And then we cross-checked construction market statistics that externals provide us. We looked at new housing starts. We looked at infrastructure spend. And then we realized, interestingly enough, outside of some future-facing commodities, Q&C is going to be the fastest-growing market in the world in the next 3 to 5 years. So that just reinforced what our thinking was. And we said now we want to double down on this, and we want to participate in that growth.

Okay. Great. And then last question from me. You set out some decarbonization goals, obviously, and made some pretty good progress actually on some of them with Carseland and the agreements that you've indicated in Newcastle. How does that tie in to achieving the goals that you've set out today, please?

In my view, everything we do going forward now will be keeping in mind our ambition to become carbon neutral by 2050. I think it's going to be very, very important. This means continuous optimization of our manufacturing sites. It means continuous optimization of our global supply chains. It means introducing new products to our customers, which helps them with their Scope 3 emissions. I mean I quoted the example of Cyclo, which is a very, very exciting technology, where we take used oil from our customers' mine sites, and we put it into our manufacturing assets. So we're talking here about circularity. We're talking here about closed-loop systems. There is another added benefit, obviously. It also reduces diesel consumption on the site, which is a major bugbear of a lot of our mining customers. But that's just one example. Our end-to-end digital solutions will help to optimize these global operations of miners and make them more efficient. So we're talking about energy waste. We're talking about ground water remediation. We're talking about a lot of things that our technology can offer, which we did not have in the past. And then future-facing commodities, right? I mean this is going to be an exciting growth area, and I talked about it, whether it is e-mobility, whether it is energy storage, whether it is lightweighting, whether it is solar and wind installations, all of that need these future-facing commodities. And as you can imagine, we are here in pole position to take advantage of this. So everything we thought of, we always thought of also from a sustainability angle and we would like to reflect that in everything we do going forward. And I think that's going to be very, very important. I think it is just a responsibility of ours to do that. And the feedback I got from all of our key customers when I shared our ambition with them was extremely positive. And they said, thank you, Orica, for leading the way. We understand you are in a very hard-to-abate industry. So chemical manufacturing, continuous manufacturing, heavy industry, it is very difficult to abate this. But with the support of authorities, for example, the Alberta province in Canada, where we have our Carseland plant or New South Wales, we have been very, very grateful for all the support we have been getting from the Australian government and we are going to continue on this path towards decarbonization and net 0 by 2050.

Can I just clarify one thing though. With those customers who are very happy with you, are they looking to change providers? Or do you think it becomes a source of competitive advantage to either be lower carbon at the same price? Or are you starting to see some of your customers willing to pay more for decarbonized offerings

I hope that happens, and I expect it to happen because if countries and customers are serious about their 2050 ambition. And most of our customers have announced this, then they need to also work with their suppliers, which is Orica. So it will not happen overnight. Differentiation will happen already today. Premiums will come in future. I don't expect premiums to come overnight, and that's not factored into our 3-year plan. But the differentiation advantage we have as a leading-edge player in this industry that will certainly give us advantages when we go out bidding for new businesses because our customers and their procurement teams just cannot afford to ignore this anymore.

Our next question comes from John Purtell at Macquarie.

Look, I just had a single question on price. Obviously, I had a few questions on that today. But regarding the focus on lifting prices, I mean, is this across all regions and is the competitive environment supporting this. So I note that the commentary mentioned the competitive environment in Latin America. And just the last part is, are you prepared to walk away from business if acceptable pricing is not achieved.

John, the answer is yes to everything. Pricing focus is across the globe in all our portfolios, in all our products and in all the regions. And yes, if the pricing does not fulfill our expectations, I'm more than happy that our teams will walk away from the business.

And Sanjeev, is that over and above sort of cost? I mean, obviously, you've got to manage sort of cost at the moment or cost inflation. So we're talking sort of underlying sort of in addition to cost, obviously, the focus in the first instance is to get inflation recovered.

Yes. That's -- so I'll clarify that. For existing contracts, you know we have the rise-and-fall engine. We have the rise-and-fall mechanism. So every quarter, we pass on inflation, CPI, labor costs, higher raw material costs, gas prices, whatever else it is. And that's what will continue to happen. When we bid for contract renewals or for new businesses, obviously, we are also going to go not only for passing through inflation, but also trying to get our margins up. So it's kind of a two-pronged approach. First is to protect margins in existing businesses. And obviously, with our cost reduction and everything else, we'll also find potential to improve that. And then -- and the second one is obviously when we bid for new businesses, we want to go for better margins. Now as these inflationary pressures start to ease, obviously, we will see some margin expansion happening. I think Chris called it out. He said there's a lag of something like $27 million that we have carried forward into this financial year, and we will catch up with that once we see inflationary pressures start to ease off. But it's anybody's guess when that will happen.

[Operator Instructions] Our next question comes from Brenton Saunders at Pendal Group.

Just very briefly, I was just wondering with the SAP system, if there was some way you could get a vertical for some of the technology offerings that Orica has. I detect there's a lot of money being spent on R&D in the space, and it's very hard for us to understand what it's all amounting to and whether it's just a loss leading sort of you must have or if it's a profit generating nice to have part of the offering. That's my first question.

Thanks, Brenton. That's a very fair question. So first of all, all new technologies have been margin and EBIT accretive for us. We even gave some numbers last year, and we hit all of them, we even exceeded them. So yes, all of those products are generating profits and margins, quite high margins for us, which is very, very promising. Now our ERP system, yes, obviously, can and, hopefully, in the future, will report on vertical P&Ls, but I was not brave enough to do it today because we are still in the phase of stabilization. I do not want to do anything that will distract the team working on this 24/7. We need to get that system fully stabilized. It's going to take us another, I would say, 7 to 8 months. My hope and expectation is in the last quarter, of the new financial year, we should have a fully stabilized system operating with no more challenges and teething issues. We have done -- we've had significant progress in stabilizing the system, but we are not yet there in terms of announcing business as usual. And that's why I have held back on trying to report on those verticals. But in future, I do have the intention of doing that so that you get a lot more transparency on what we are investing, what are we getting out of it? How are we growing? Where are we growing and what kind of margins we are contributing to the bottom line here.

Yes. Okay. I mean I guess my question sort of refers more to the fact that there's a lot of focus that the company spends on telling investors about these initiatives, but we just see margin squeeze and that's been happening for years and years and years. And so I guess we are wondering when the benefits of this expenditure will show up in some kind of tangible way where we can see improved margins on divisionals and different geographies, which has not been apparent to date.

Yes. I'll just clarify that. And I mentioned that earlier, right? I said as soon as we see scale. So at the moment, the business is exciting. It's growing from a very small base. So we are doubling and tripling our business there, but it's still small in the bigger scheme of things at Orica. So we need to scale that up. right? And it's been challenging over the last 2 years because of all the restrictions that we have all faced in our lives. Now that those restrictions ease, we are seeing very rapid scale up. And you know that any technology introduction comes with a lot of challenges. You have the prototyping, you do the testing, you get approvals from your customers and then you start to sign commercial contracts. And it's all about proof of concept. It's about giving confidence to our customers. So we have reached that stage where we have viable commercial products already in the market and now the focus is on commercialization and scaling up. As soon as that starts to happen, we'll see the needle moving. Until then, there's a lot of promise, but it's not contributing a lot, but it's -- we are on the cusp of starting to scale this thing up. And then we'll -- hopefully, from next year, we'll be able to talk about some material gains coming from the new technology investments that we've been making so far.

Can I just ask on the LatAm division. So you've got nearly $1 billion of revenue and like $30 million of EBIT. It seems like a lot of effort for a little bit of EBIT. And there's been quite a lot of capital put to work in that geography with the Exsa acquisition in the last while. In fact, I think Exsa was supposed to be close to $20 million of EBIT by itself by now. So I'm just wondering about that divisional. It seems like it's been very volatile for the group over time, and it still feels like it's really battling. I understand there's a lot of disruption from an industrial action perspective and a COVID perspective in Lat Am. But maybe you could just describe to us how that EBIT number gets better and how you get better operating leverage there?

No, absolutely, Brenton. So first of all, Exsa, the integration is on track. The business delivered basically the synergies and the results that were in the acquisition case. So I'm pretty pleased with this given the fact that we have this fantastic position in Peru, where we are a market leader. LatAm as a region was one of the most severely impacted in terms of COVID. And then you mentioned all the civil strives and strikes and the inflation that's also been quite significant in LatAm. There are certain markets like Brazil where we have seen 30%, 40%, 50% cost inflation coming and not just us, but everybody who active -- who participates in that region. So a couple of measures that we are doing. We are using now leveraging off the network of Exsa to start consolidating our manufacturing footprint in Latin America. We've had a couple of country exits there, where we don't see potential. So we're working very hard on taking costs out. We have started to upsell to Exsa customers because you know Exsa was offering basic products. We have now brought the Orica suite of products and services, the higher-margin solutions, and that's starting to flow through into Exsa customers, which is fantastic to see. So that's working very well. And then the last is the pricing discipline. So we are really working very, very hard on. In fact, LatAm and I have to give credit to my team there, they were the leaders in trying to push prices up because obviously, we had the lowest margins globally in that region given the nature of the business, and they have been very, very successful. In fact, they led the way, and they gave confidence into the rest of the organization to say, this is working. This can happen, right? And we'll all do it. So there are a lot of measures happening. And I'm hoping that next year when we talk about our full year results, we will see improvements in the LatAm contribution to Orica.

Our next question comes from Nathan Reilly from UBS.

Just with respect to some of these strategic pillars that you've outlined in terms of supporting that strategic refresh. Do you see any particular pillar or pillars being, I guess, a more material driver in terms of achieving your 3-year RONA targets?

In my view, all of them are and will continue to be material drivers. The one I'm most excited about is digital, as you can imagine, right? And it's not just a buzzword, right? We have the offerings today, right? So today, what we can do is we can tell a mining customer about their ore body. We can give them -- we have sensors today, which are able to, in real time, as we drill into the ground, into the ore, give us information. That helps us to do the mine planning. That helps us then to design the blast and then you have the BlastIQ coming in, obviously. That helps us then to look at the ore and the fragmentation size. We have the frac track and the ore track that looks in real time at ore size, feeds that back into the drill and plan -- blast plans, feeds that back in real time to our blasting intensity. And then we have the 4D where we can do variable blasting per hole to get the adequate fragmentation size that helps the customer to get the most out of the ore, most efficiency, least wastage and then to get the highest quality that goes into the market. We are also able then to speed up the process, right, from ore to mill and then from mill to the market because our customers today are quite excited. They have these high prices, and they are telling us, Orica, we need more volumes and we need it yesterday, right? So we have our Sprint services. We have the new BM7s with the latest BlastIQ technology in it. It's all there. So if a customer is interested in design for outcome, we can do end-to-end, including blasting. If a customer says, no, we are only interested in ore body intelligence. There you go. We have the offering ready to go, right? And I did mention that we are today in a situation where we are offering our digital solutions to customer sites where we don't do blasting. And this means that some of our peers in the industry, our competitors are planning their blasting based on our technology and software. And I think that's a fantastic ratification of this technology. Now the good news was that we were able to scale this up despite COVID because a lot of those digital technologies are then rolled out over the cloud and virtually. So that was one fortunate part that we had that COVID did not slow us down there as it did in WebGen and all these other widgets that we're introducing into the market. So for me, that's the most exciting future growth business. Outside of that, it's obviously going to be future-facing commodities, and I talked a lot about it.

Okay. And maybe a question for Chris, just in terms of some of these cost reduction targets or the focus on cost reduction. Shorter term, can you give us an idea of how much I guess that cost reduction process is going to support the earnings growth outlook into F '22.

We haven't given any guidance on what that cost reduction is going to be. There's going to be cost reduction over the next 3 years. Part of it is related to the Manila Centers of Excellence, the Brisbane Centers of Excellence and India Centers of Excellence. But I think broadly speaking, you should look at what happened in the past years and that's about it.

Understood. And final question, just in relation to your gas supply portfolio in terms of any near-term contract maturities? I know there's -- you've got some longer-term gas supply arrangements in there. But just wondering in terms of the near-term outlook, particularly on the East Coast, just anything that needs to be renegotiated there and how you're factoring that into your AN contract pricing management plans going forward?

Nothing in the near term, Nathan, because we are booked -- our contract booked until 2026. So at the moment, there is not much we can and will do. Obviously, in terms of the pricing, the gas price is reflected in the rise and falls. So when gas price moves, the pricing on every quarter moves there. But in terms of anything material in 2022, no, there is nothing material in 2022.

Our final question comes from Brook Campbell at Baron Joey.

Just in relation to the RONA targets, are you able to provide an idea of how you think the asset base or the funds employed might move over the next 3 years. Any potential impairment, for example, with these countries that you're exiting?

Yes. So we're not planning on any impairments per se. But I think if you just turn to the compendium, which we've released as part of the market results, it gives you the net operating asset base. What I did reflect in my comment right upfront is it is a capital-light strategy. The quantum of the CapEx that I've outlined today is pretty much aligned with depreciation. So if you take it on that basis, it's a level head on the net operating asset base.

Understood. And then just with WebGen, can you confirm what proportion of your sales at the moment are on a trial basis versus paying customers?

I don't have the numbers with me, but I can tell you that the number of blasts we did year-on-year doubled, so from 2020 to 2021. And the plan is to double them again in 2022. So -- and the number of customer sites that we have where we did trials and have started also commercial supply has also doubled year-on-year, and we're going to continue that momentum going forward. The only thing that holds us back is that we have to get through those final trials because the proof of concept is there. We have now videos of different customers site blasts that we are able to share. But obviously, customers would like to do a test on their own sites. And that's what's taking time because we are going side by side, region by region, customer by customer and getting those blasts done and then starting to negotiate commercial contracts. So the scale-up is pretty rapid, but also to keep in mind, it comes from a very, very small base.

Okay. One more, if I could, actually. Just with respect to COVID, is there any parts of your business, any regions where that's still impacting customer demand? Or are you back to sort of normal operating conditions?

I think in most regions, fortunately now, the world has gotten used to live with this pandemic, and we have business as usual. There are always concerns. I've been reading that Europe is facing a fourth wave of COVID. So we have to wait and watch as they get into winter, whether that would impact. I cannot predict this. The other one is China because I understand that the Chinese population is starting to now stock up on essential goods. I have a feeling that they might end up in a national lockdown because they've also seen a resurgence. So there are always pockets of concern. But I have a feeling that, I mean, having learned the hard way, the challenges that COVID comes up with in the first half of last year, we have become a little bit more resilient. We have all the systems in place, and we focus on what we can control and what's within our scope of influence.

That was our final question.

Okay. I'll close and thank you all for joining us today. I'm available at any time if you have any further questions. So thank you for your time. Have a good day.