Orica Limited (ORI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for joining us today at our 2023 Full Year Results Presentation. We do apologize for the slight delay. We've just had a couple of technical issues, which have now been sorted out. In the room with me today, we've got Sanjeev Gandhi, our CEO and Managing Director; Kim Kerr, our CFO; and also joining us in the room is German Morales, Group Executive and President, AusPac. We'll have plenty of time for questions after the presentation so feel free to queue up and we'll get to your questions in a timely manner. Before we start the presentation, can I please ask you to take a moment to have a look at the disclaimer on Slide 2? Thank you. And with that, I hand it over to Sanjeev.

Thank you, Delphine, and welcome, everyone. Starting with our #1 priority, safety. I'm pleased to report that this year we achieved our safety targets and have remained fatality free in FY 2023. For a second consecutive year, we have achieved a reduction in our serious injury case rate. Although our safety numbers track well this year, we remain vigilant and always strive for continuous improvement when it comes to safety. I'm also pleased that we have had no serious environmental incidents since FY 2018 and our loss of containment target has continued to decrease remaining below our own targets. Finally, on to people and community. Our people are our #1 asset and retaining our talented and diverse workforce and attracting new talent remains a priority. This year we have made a significant progress on gender diversity with nearly 35% of women in senior leadership roles, continuing to improve this as an area of focus. We will undertake targeted actions for women in senior roles in 2024 and improve the overall representation of women in our workforce globally. Fostering a strong culture is also a key priority at Orica. Our high Inclusion Index score of 87% significantly outperforms global high performing manufacturing and mining peers. This is the result of executing our global diversity, equity and inclusion strategy across our global operations. We are also on track to achieve our 5-year community investment target of at least $15 million by 2025 having contributed more than $10 million since 2021. This includes investments made to the Orica Impact Fund, regional contributions and matched payroll giving. Turning now to Slide 5.

Sorry for all those on the call. I've got a few messages from all of you saying that there's a bit of an echo coming through. Can I just ask you to be patient with us? We'll pause it for a couple of minutes and get this tech issue sorted out. Apologies. Please stay online.

Thanks, Delphine. In the interest of time, I'll jump straight to Slide 6 and talk about our results and take it from there. As we continue to successfully execute our refreshed strategy, I'm very pleased with the substantial uplift in our performance and more importantly, the quality of earnings that the team has delivered. This is despite the ongoing volatility in the external environment and extreme weather conditions in some regions. Global supply constraints persisted this year and are expected to remain in the near term. Our global manufacturing and supply networks and our ability to leverage our purchasing scale and logistics capabilities ensured continued security of supply to our customers. This is truly one of Orica's competitive advantages. We delivered double-digit growth across sales, earnings and net profit. And from an EBIT perspective, this is the highest underlying EBIT since 2014, a 9-year high. Underlying earnings on continuing operations were up 24% on strong customer demand, continued commercial discipline and increased earnings from our advanced technology offerings. If we remove the impact of the Russian operating business, which we exited in the prior year, the growth in underlying earnings was 29%, a very strong result indeed. Return on net assets has improved by 120 basis points from 11.4% in 2022 to 12.6% in 2023, which is at the upper end of our target range of 10.5% to 13%. At the half, we mentioned our focus on improving trade working capital and operating cash flow. I'm pleased that our trade working capital improved at the end of the year. Stronger earnings also led to significant improvement in operating cash flow. In manufacturing, all our major scheduled turnarounds were completed safely, on time and on budget. This is an important step as we continue to optimize our global manufacturing and supply network. Gearing is below the 30% to 40% target range at 18.6%. Our prudent balance sheet and approach to capital management positions us well to support further business growth and deliver improved shareholder returns. The Board has declared a final unfranked dividend of $0.25 per ordinary share within target payout ratio at 55%. This brings the total dividend for the 2023 financial year to $0.43 per share and a payout ratio of 53%. Turning to the regional performance on Slide 7. I'm pleased to report that earnings increased in all segments compared to last financial year. Starting with Australia, Pacific and Asia: commodity prices and mining activity across the region remain robust. Demand and supply for AN continued to be balanced across the region. Security and flexibility of supply remained a key customer need and Orica was able to leverage our strong global supply network. High demand for Orica's products together with continued commercial discipline drove earnings performance and structural improvements in contracts. In AusPac, Orica continued to strengthen market position across coal, metal and quarrying and construction segments with high retention rates and new wins. Growth in Asia remained strong and commercial discipline resulted in increased earnings, particularly in Indonesia. Technology adoption also increased. In Indonesia and Australia, successful 4D trials at multiple sites started to convert to commercial contracts. There was also a significant uplift in WebGen sales in Asia. Turning now to North America. While market fundamentals for most commodities in the region remain strong, activity in the United States and Canada was impacted by extreme cold weather, forest fires and a hurricane in Eastern Canada. Mining activity in Mexico was impacted by prolonged industrial action late in the financial year. Rising interest rates and inflation impacted operational costs as well as limited project investments in parts of the United States. Against this challenging backdrop, North America delivered resilient earnings performance. Improved quality of earnings were driven by strong EBS conversion, technology growth, commercial discipline and cost management initiatives. This was partly offset by increased freight costs due to the extreme weather and prolonged industrial action. The region also progressed with the strategic transitioning of its commodity base. Revenue growth was strong in metals and Q&C markets in FY 2023. The growth in Q&C continued to be supported by the significant infrastructure investments by the U.S. government. I just want to spend a minute on the announcement from last week. Orica is a joint plaintiff in a lawsuit filed in the United States on 21st October 2023 U.S. time against CF Industries regarding contractual disputes under an ammonium nitrate purchase agreement for the supply of ammonium nitrate and related products for use by Orica's business across North America. The next date, on 22nd November 2023, CF Industries filed a separate lawsuit in the United States regarding contractual disputes of this agreement. Orica will, as it always has done, continue to comply with our contractual obligations. We can confirm there is no impact to our product supply in North America during litigation and our contractual agreements with our customers in the region will continue to be met. As legal proceedings are ongoing, I am unable to provide any further information or discuss this matter in further details today. We will provide any relevant updates to you in due course if they occur. Now moving on to Latin America. We have seen strong overall mining activity in the region, particularly in Southern Peru. Significant AN supply interruptions due to the ongoing Russia-Ukraine conflict continued in 2023. The current restrictions on the Panama Canal capacity added an extra level of complexity. Security of supply remained Orica's competitive advantage. We were able to ensure supply continuity to our customers from alternative supply sources albeit at higher costs. Underlying earnings were strong due to commercial discipline and continued technology penetration as demand for technology and premium products continues to grow. We continue to progress with global manufacturing optimization activity in the region. The Lurin site is on track to be the major supplier for Orica's mining customers both for North America as well as for Latin America. And now on to the EMEA region. Mining activity was stable in Europe and Central Asia and there is a strong continued focus on ESG. In the Middle East, Saudi Arabia is investing heavily in infrastructure development projects and strongly incentivizing mining investments in gold and copper. Robust commodity prices drove strong mining activity for gold, copper and other future-facing commodities across Africa. However, the weak economic outlook and high inflation in Northern Europe continued to impact Q&C activity there. I'm very pleased with the significant EBIT improvements in this region despite the loss of volume and earnings from the Russia business last year. Excluding the impact of Russia, the regional underlying earnings more than doubled. This was driven by strong growth from Africa, Southern Europe, Middle East and Central Asia. New business in Africa will help to deliver growth, improve earnings and increase our exposure to future-facing commodities. A highlight for the region was the launch of the world's first lead-free nonelectric detonator range, Exel Neo in Europe. This lead-free nonelectric detonator range creates a safer and more sustainable product by removing lead while maintaining the same consistent and reliable product performance. And finally, turning to Digital Solutions. This is the first full year result for the new segment. We continue to see favorable external conditions for this segment. Demand for software, sensors and data science continues to increase as ore bodies are increasingly becoming harder to find and extract against the backdrop of high commodity prices and increasing ESG obligations and commitments. Customers are continuing to seek operational efficiencies across the mining value chain and unlocking the value of digitization and automated workflows is key to achieving these efficiencies. Digital Solutions had a very strong year doubling their earnings in 2023 with significant improvements in margin. This was driven by growth across all 3 subverticals namely: Orebody Intelligence, Blast Design and Execution and GroundProbe. Annual revenue from recurring contracts remained stable within our targeted range of 60% to 70% of segment revenue. The integration of Axis is progressing to plan. Axis entered new markets in Canada, Africa and the U.S. in the second half of the financial year. The Digital Solutions business has been identified as one of Orica's key growth verticals as we continue to build and invest in the next generation of digital technologies and solutions beyond our blasting core. Innovation continues to be a focus and this year we have released 15 new digital features with a focus on artificial intelligence-based solutions to support our customers. As the industry and our customers look to solve their biggest challenges through partnership, we are excited to announce today a new collaboration with an industry technology leader in the resource industry namely Caterpillar. Orica and Caterpillar have signed a memorandum of understanding to explore opportunities to integrate key elements of their respective domain strengths. The initial focus will be on potential integration between Orica's RHINO, BLASTIQ and FRAGTrack technologies with Cat, MineStar, Terrain technologies from Caterpillar. The goal of this integrated workflow is to provide customers with high fidelity rock property information enabling significant improvements to on-bench safety, drilling and blasting program accuracy and productivity along with higher quality blast outcomes that generate enhanced mill performance. In the future, the 2 companies intend to extend their collaboration to optimization of the entire value chain from mine to mill. This approach aligns with both organizations' ambitions to create sustainable solutions and services that will build the momentum for more intelligent and solution-driven mining ecosystems. Technology and innovation are ingrained in Orica's DNA and have been for almost 150 years. It remains one of our key competitive advantages. This slide shows the more than 20 new products we have released to our customers this year across both our core blasting businesses and Digital Solutions, which expands well beyond blasting. We continue to lead the market in delivering customer-driven innovation across the entire value chain to meet our customers' most critical needs and challenges. These include safety and security: we aim to reduce or completely remove safety risks for our customers and reduce the need for human intervention across the mining and infrastructure industries. As examples: WebGen, our wireless blasting system; and Avatel. Sustainability and climate change: we are harnessing our technology to help customers improve social and environmental outcomes for our customers. As examples; Cyclo, Exel Neo and lower carbon intensity products in our portfolio. Enhance productivity: our new technologies and solutions are enabling the customer to think and mine differently and operate more efficiently and responsibly. As an example, 4D and BlastIQ. And maximize recovery: we focus on precision and insights across the value chain to help achieve better recovery rates and reduce energy usage for our customers as they chase more complex and harder to access ore bodies. Example, Axis Mining Technologies and OREPro 3D. Importantly, because we have developed these technologies and value propositions in collaboration with our customers and the broader industry, the industry is both recognizing and accepting Orica's commitment to innovation and adopting our technologies at an ever increasing rate. In September this year, Orica was recognized by the Australian Financial Review as the Most Innovative Large Company in Australia. And our unique Avatel automated blasting technology took the #1 Most Innovative Technology in the resource category. We were also recognized in FY 2023 by Mining magazine taking home 2 awards for our revolutionary blasting technologies including WebGen, the wireless blasting system, for operational and safety excellence; and 4D bulk explosive system for drill and blast excellence. A fitting recognition for our people, our partners and customers and for our commitment to delivering smarter solutions to solve shared industry challenges and ultimately fulfilling our purpose of sustainably mobilizing the earth's resources. We will continue to bring new and disruptive innovation to our customers and expect adoption of these new solutions to accelerate even further into the future. I now hand over to Kim to give you an update on the financials.

Thanks, Sanjeev. I'll move to the key financial metrics shown on Slide 10. As Sanjeev stated earlier, we have delivered improvements across our key financial measures. We have delivered a $134 million increase in underlying EBIT to $698 million, which I will cover in more detail on the next slide. Our statutory net profit after tax of $296 million includes the impact of previously announced significant expenses in the order of $73 million after tax relating to the loss on sale of the Turkiye business, our exit from Venezuela and the earnout relating to the acquisition of the Axis business. Our net operating cash flow of $899 million reflects higher earnings net of associated taxes, cash freed up from the significant reduction in trade working capital in the second half of the year partly offset by the impact of higher interest rates on financing costs. And our earnings per share before individually significant items of $0.812 is an increase of $0.048 per share. Turning to the EBIT bridge on Slide 11. Underlying EBIT of $698 million was a 24% increase against the prior year or a 29% increase after we remove the FY '22 earnings from our Russian operations, which we exited in September 2022. The impact of the movement in the Australian dollar on the translation of our foreign currency denominated earnings had a positive impact of $28 million. Higher volumes had a positive impact on EBIT of $44 million. Ammonium nitrate volumes were slightly higher due to increased mining activity driven by strong commodity prices and Orica's continuing ability to provide security of supply to our customers. Sales volumes of our premium electronic blasting systems continue to increase as new customer contracts ramped up and customers continued to shift away from conventional detonators. The EBIT benefit in manufacturing was $21 million due to increased volumes at our continuous plants as well as the nonrepeating costs in FY '22 relating to alternate sourcing of ammonium nitrate during the Carseland plant turnarounds in North America. The largest contribution to our improved earnings performance was mix and margin, which contributed $56 million to the EBIT increase. Customers have continued to shift to our premium products. We have achieved increased penetration with our blasting technology offerings and ongoing commercial discipline with our customer and procurement contracts is ensuring that we are delivering appropriate returns. Earnings from mining chemicals were down $14 million due to lower production volumes at our Yarwun plant in Australia and lower demand for cyanide in Latin America. Digital Solutions, our new reporting segment, contributed an additional EBIT benefit of $28 million compared to the prior year. Growth in adoption of digital technologies, the introduction of new solutions and contribution from the newly acquired Axis Technologies business saw earnings increase across all subverticals in the Digital Solutions segment. Global support costs have increased $8 million primarily due to inflation and increased nonbillable employment costs. Turning now to Slide 12, trade working capital. Our trade working capital balance has peaked in the second half of the year before improving significantly to end the year at $643 million, a $41 million decrease from the prior year. The $200 million reduction in our trade working capital since the half year was driven by our ongoing inventory optimization program, which delivered a reduction in stock volumes as we responded to the easing of supply constraints. Declining ammonia prices also contributed to the reduction in both inventory and debtors. Our trade working capital balances will fluctuate over time to ensure they are aligned to our operating conditions as we invest in further growth and given our exposure to external market conditions. We remain focused on optimizing our investment in trade working capital over the cycle such as through continued assessment of our supply chain network, ensuring appropriate inventory volume is maintained in the right location to support our customers and through programs aimed at continuous improvement in our receivables and payables management. Turning to capital on Slide 13. We prioritize capital allocation for safety, environmental and asset maintenance followed by growth capital prioritized by return. Total capital expenditure for the year was $439 million. We invested $260 million in sustenance capital expenditure. This reflects spend on major planned turnarounds at Bontang, Kooragang Island and Burrup as well as on customer-facing assets. We remain committed to decarbonization and supporting sustainability initiatives. In FY '23, we invested further $37 million on sustainability projects predominantly relating to the tertiary catalyst abatement technology installed at our Kooragang Island plants and being installed at Yarwun in FY '24 as well as prill tower scrubber being installed at Kooragang Island to reduce particular emissions. And we invested $142 million in growth capital expenditure to target customer growth opportunities particularly in Australia and Africa, to further develop our digital technologies and to continue work optimizing our discrete manufacturing network. I will now talk to Slide 14, balance sheet and liquidity. Our year-end net debt was $923 million and our average drawn debt tenor was 5.9 years, which was up from 4.3 years at the end of last year as a result of the refinancing activity we undertook earlier in the year. Our year-end gearing ratio was 18.6%. This remains below our stated range of 30% to 40%, which we consider prudent in the current external environment and which also ensures our balance sheet is well placed to support our stated growth ambitions. Turning now to dividends on Slide 15. As Sanjeev mentioned earlier, our improved earnings performance has translated into increased dividends to our shareholders. The Board has declared a final dividend for FY '23 of $0.25 per share unfranked representing a dividend payout ratio of 55% on second half earnings. This brings total dividends declared for FY '23 to $0.43 per share, a 23% increase against FY '22. And with that, I will now hand back to Sanjeev.

Thanks, Kim. We are deeply committed to the continued execution of our strategy and to deliver enduring returns for our shareholders and broader stakeholders. At the core, we continue to pursue organic growth from blasting and by expanding Orica's presence across future-facing commodities and emerging markets. Beyond blasting, we are accelerating customer adoption of our new technologies and demonstrating our strength and capabilities in providing integrated digital workflows from mine to mill. Mining chemicals continues to present new growth opportunities for our business. Turning now to Slide 18, which summarizes our performance against our strategic targets in 2023. We continue to make good progress across our financial and nonfinancial metrics in the financial year 2023. Having met all of our financial targets, we have been able to deliver improved shareholder returns this year. We continue to make significant progress towards a simpler, more efficient and more sustainable organization; which will help deliver future value for our shareholders and broader stakeholders. Whilst the contribution from chemicals this year was lower than last year, we remain of the view that with 150 years of knowledge and chemistry, we can and will capture new opportunities in this high growth market. We have updated our 3-year average RONA target to 12% to 14% range from the 10.5% to 13% from last year. While I'm pleased with our improved performance on safety in 2023, there is always more to do to keep our people and environment safe. We will target improved safety performance and serious injury case rate next year and continue to focus on keeping our people safe at all times. Turning now to Slide 19. As updated at our recent Sustainability Investor Day, there are a number of substantial turnarounds scheduled in 2024 particularly in the first half. These turnarounds are necessary to ensure that we maintain safe and reliable manufacturing operations, that our manufacturing utilization remains high and we maintain supply security for customers. I want to spend a couple of minutes on these turnarounds due to the relatively high number scheduled for this year and the impact on production. The first major turnaround is the 6 yearly ammonia plant turnaround at Kooragang Island. Due to the complexity of work to be executed, this turnaround is being completed in 2 discrete events in October this year and February 2024. Fortunately, perhaps as we speak today, the ammonia plant is now ready for startup and hopefully we will have production running then from tomorrow. This will result in approximately 60,000 tonnes reduction in ammonia production, which roughly equates to 120,000 tonnes of ammonium nitrate, which we will be missing at Kooragang Island this year. This will be fully mitigated through imports of third-party ammonia into both Yarwun and KI and therefore, we don't expect any noticeable impact to our customers. However, as you can see on the chart on the right, the cost of ammonia is rising. This will have a financial impact in the first half of FY 2024 due to the lagging impact of the flow-through of the rise and fall product price adjustments as well as increased ammonia purchases to cover production shortfalls. We will also be installing an emission abatement system on the prill tower at Kooragang Island. This will be completed over 3 discrete events with 2 in the first half of this year. Production will be down for approximately 8 weeks over these 3 events and will have an estimated AN production impact of around 40,000 tonnes. Upon completion, the system will eliminate all particulate emissions from the prill tower, which will satisfy the site environmental protection license requirements reducing all residual environmental impacts for the site. These turnarounds in KI have been spaced across the year to minimize the impact on AN supply. This will be covered both from internal as well as from third-party sources. The other planned major turnaround in the first half is at the NAP3/Ammonium Nitrate 2 plants at Yarwun. We will also be installing a tertiary abatement system at the Yarwun NAP1 plant in the second half. This will impact AN production capacity by approximately 30,000 tonnes. Following this installation, it is expected that the annual greenhouse gas emissions from this site will reduce by approximately 200,000 tonnes of carbon dioxide equivalent per year. This new investment in tertiary abatement continues to underpin our updated targets to net 0. The last planned turnaround in FY 2024 will be at the NAP1 and 2 and the ammonium nitrate plants in Carseland. This has been scheduled for the second half to align with the adjacent ammonia plant shutdown. Statutory compliance work will be brought forward as mitigation to minimize the requirements for future outages. Now turning to outlook for financial year 2024. As mentioned earlier, I'm really pleased with the quality of earnings that has underpinned the substantially improved results in 2023 and I expect this will continue into 2024. The 2024 financial year EBIT from continuing operation is expected to increase on the PCP attributable to strong demand for our products and services from continued anticipated growth in global commodities, increased adoption of blasting and digital technology offerings, further benefits from commercial discipline. This will partially be offset by the major 6 yearly ammonia plant turnaround and prill tower scrubber installation at Kooragang Island. And then we will always continue to face these inflationary pressures, higher energy costs and increasing geopolitical risks, and this will remain an ongoing challenge. Earnings will be more skewed to the second half compared with FY 2023 due to the heavy plant turnaround schedule in the first half as well as the normal seasonality. CapEx is expected to be within the range of $410 million to $430 million driven by the turnaround schedules, depreciation and amortization to be slightly higher than the PCP. Net finance costs are expected to be in line with FY 2023 subject to interest rate movements. The effective tax rate is expected to be around 30%. We will continue our disciplined approach to organic and inorganic growth opportunities. Looking forward, we expect the 3-year average RONA range from FY 2024 to 2026 to be in the range of 12% to 14%, up from the 10.5% to 13% from the prior year. In June 2024, Orica will celebrate its 150th year anniversary. This is an important milestone for our business and an exciting opportunity to celebrate our history, our people and our exciting future. Founded in 1874 as a supplier of explosives to the Victorian gold fields in Australia, Orica has grown to become a leading publicly owned company listed on the Australian Stock Exchange operating across more than 100 countries across the world. As you can see from the timeline, there have been several transformations through our journey. Orica has since evolved into one of the world's leading mining and infrastructure solutions provider that it is today while maintaining its proud tradition of safety, leadership, innovation and quality; all enshrined in our brand today. We are continuing to make progress on the execution of our strategy. Our customers' appetite for new technology and our refreshed strategy sets us on a clear pathway to drive organic growth from blasting technologies and to accelerate the adoption of our new technologies and Digital Solutions portfolio from mine to mill, growing beyond blasting. Our financial position is prudent in the current volatile external environment. With our strong balance sheet and disciplined capital management, Orica remains well positioned to take advantage of strategic growth opportunities. We remain committed to accelerating our sustainability agenda, helping our customers achieve their targets while remaining competitive in a low carbon future and delivering value for our shareholders and our stakeholders. Thank you. And with that, we'll open up for questions.

[Operator Instructions] First, we have Brook Campbell-Crawford from Barrenjoey.

Just the first on the first half FY '24 EBIT, just given the significant turnarounds that you've talked through on the slides. Can you just maybe characterize what your growth aspirations are in the first half, please?

Brook, look, we'll be volume constrained in the first half clearly especially here in Australia given the fact that we are missing about approximately 200,000 tonnes if you just add up the numbers that I've mentioned earlier. The focus clearly in FY 2024 is going to be on quality of earnings, on margin management and obviously on the commercial discipline that we have been trying to bring into the organization. So the bottom line is we'll be volume constrained in the first half because of the turnarounds and we leverage our global network as well as third-party sourcing to ensure that our customers do not get disrupted.

Okay. And then just second one. You talk to strategic growth opportunities in your sort of final remarks. Do you mind just sort of elaborating on what's most of interest at the moment and confirm whether or not you're looking at any targets at the moment as well?

Look, the strategy that we have outlined in 2021 states that we'll focus on growing our exposure to future-facing commodities, you see that in our product portfolio now. Copper becomes really big and important for us. We have now started looking at opportunities in lithium especially here in Australia, which is quite exciting. And the other strategic growth driver is our presence in emerging markets. We've seen significant success in Africa, you saw that in our results in the EMEA region. LatAm continues to be a very, very attractive opportunity for us and then emerging markets in Asia like China and India are very attractive. And then clearly our Digital Solutions portfolio, this is the first full year. You've seen that we've already in this year launched 15 new products. We're going to now continue to leverage AI and all the new technologies and come up with new mine to mill end-to-end solutions in terms of offering smarter solutions to our customers here. That's an attractive strategic area of growth. And finally, mining chemicals. We have not talked too much about mining chemicals, but there are clearly some interesting opportunities out in the market and we'll continue to explore them if it makes sense.

Next we have Richard Johnson from Jefferies.

Sanjeev, can you talk a little bit about the general availability or supply availability of AN globally at the moment? Have you seen much change in recent months?

Richard, no, not too much change. I would define the market as kind of balanced. Obviously there's seasonality. The seasonality comes from the peak ag season and then we are in the low season for ag, the planting season in the Western Hemisphere. It's also dependent obviously on gas price and ammonia price inputs. And as you have seen ammonia, the Tampa Index as well as JKM have started to move upwards again as we enter the winter in the Western Hemisphere. So I would say it is balanced. Now we are obviously a major purchaser of third-party ammonia and ammonium nitrate as you know. We are dealing with a lot of different supply sources and I can tell you it's not easy to source the molecule at the right price and in the right location. And then there are other constraints, for example supply chain constraints. I talked about the Panama Canal capacity restriction, I've talked about trying to get ships and charters at the right price in the right schedule. So it's an ongoing challenge. It's not an easy product to handle as we all know. So I would say that the market continues to stay balanced to tight depending on which region of the world you're talking about.

That's great. You've been very clear about the timing of the recontracting cycle and the impacts on '24. I was wondering if I could just roll forward a year to '25. I just want to make sure I understand there's obviously 1 big one that rolls, but really what proportion of the book will adjust in fiscal '25?

So, Richard, I've always said that we have on an average between 10% to 30% of our contract book rolling off every year. We did pull forward a lot of contract renegotiations and extensions in the last 2 years because customers were looking for security of supply. We wanted visibility on our ammonia and gas demands. We've been very successful. So most of the heavy lifting has been done in '21, '22 and the early part of '23. The benefits of that obviously on a full year basis will flow into 2024. That will help with quality of earnings next year. For next year, we'll be at the lower part of that range of 10% to 30% because, as I said, most of the big work has been done already. So we'll be closer to 10% recontracting rather than 30% or 40%. And then in '25, the book again starts to roll over. So we'll start that 3- to 5-year cycle of recontracting again in 2025. So 2025, again there will be a lot of work done and then we'll move again to the upper range of the recontracting cycle and that should then bring us further momentum going into the second half of this decade.

That's very clear. And then finally, I mean it sounds like Mexico continued to be difficult in the second half. I just wondered if you can give us an update on how it stands today because it's obviously quite an important business for you in North America.

Absolutely. We had a major account with IR issues for an extended period of time. The good news is last week we've restarted operations there. So the expectation is outside of October, we should hopefully not see any other material impact for the rest of the year in Mexico. It's a very, very important business for us. We've been very successful there. But unfortunately in the last financial year; in the first half we had a major strike at our supplier, in the second half we had a strike at one of our major customers there. So I'm hoping for a smooth year in 2024.

Our next question comes from James Wilson from Jarden Australia.

Just firstly, on the North America business. Are you able to talk to us about how you think pricing discussions evolved in North America heading into next year? Conscious that sort of the ag outlook there is softening a little.

Happy to do that, James. Look, when I talk of global recontracting, it includes our North American contracts and we've been very, very successful predominantly in Canada and also in Mexico. The U.S. business for Orica is predominantly exposed to Q&C and civil infrastructure business. Here the industry standard is normally 12-month contracts, which roll over every year. So we'll start now in November, December recontracting for the next 12 months for the next calendar year. And look, given that the material shortages and inflation came through also for us in North America, we've been quite successful with the recontracting and security of supply still remains a big concern for that market. What really helps us is our technology offering because we are then able to supplement our traditional blasting opportunities with all the new technologies that we offer and that's been a big, big success for us in the U.S. markets.

Great. And then just my next question, Sanjeev, is on working capital. Are you able to just give us some color on how much of that working capital unwind over the second half was driven by a lower ammonia price and the value of inventories as opposed to the volume of inventories that you're keeping in your stocks?

So predominantly, the major part of that benefit came from reduced inventories because we got a better grip on global supply chains. I've talked about this in the past that we moved away from 2 predominant suppliers for our third-party purchases to a portfolio of suppliers. We had to get their supply chains lined up. We had to get them experience in exporting. Some of our new suppliers did not have that experience. So we've set up a totally new supply chain now and that has given us the confidence to start pulling back on safety stocks. Now having said all of that and given that we have these major turnarounds in the first half of the year, we do keep a bit of buffer inventory so that we do not stock out any customers. But most of that unwind came from lower safety stocks and inventory carrying. It also helps that we have been running our discrete manufacturing so our downstream manufacturing optimization. That has helped us to also reduce intermediate inventory between sites, which means that we are holding overall within the value chain less inventory, and that's an ongoing activity. So we'll continue to do that. This whole regional hub-and-spoke model for our EBS manufacturing and for our nonelectric manufacturing, that is also giving us significant benefits. And then finally, as you mentioned, the lower ammonia prices do flow through. But that is something which is hard to predict because we've seen that trend start to reverse. Ammonia prices are now picking up again. So that will be a moving part of our TWC for 2024.

Great. And just 1 final one for me. On your outlook statement, you mentioned sort of expectations of an increase in EBIT. Are we right in thinking about that sort of towards in line with your, I guess, 5-year average of around 6% EBIT growth per annum or are we expecting a stronger '24 on '23?

Look, we will have an improved number in '24 against 23. I can maybe latest in March give you a better number because by then we are through all of our major turnarounds and we feel much more comfortable about the outlook. But expectation is that especially here in Australia, right, we are expecting a drier summer this year. That should be positive for our business. That should be positive for volumes and all of that should start to flow through. My focus in 2024 is not that much on volumes, it's more on quality of earnings. So it's about ramping up our technology offerings, ramping up digital and continuing to be commercially disciplined. All of that will flow through in terms of improved earnings in 2024.

Our next question comes from Niraj Shah from Goldman Sachs.

Just a couple from me. You've been very clear on the volume impacts of the turnaround. Any chance you could sort of help us quantify the earnings impacts associated with that 190,000-odd tonnes?

I think you'll have to do the math. I've given you the volumes, I've given you the schedule and if you look at the average margin at AusPac, I think you should be able to do that. For me, it's -- look, a lot of the increased cost through the rise and falls, we'll pass on obviously to our customers. But our rise and falls are indexed to market indexes and if we buy spot cargoes, we pay higher supply chain costs, we pay higher inventory carrying cost; not all of that can be passed on to our customers. So there will be an impact. In the end, you'll have to do the calc based on the volumes and the margins that we've had in 2023.

Let me maybe just ask you a different way. Is it reasonable to look at I guess the legacy Aus EBIT per tonne margins and the spread against that versus maybe other regions where you're more of a peer distributor just to get a sense on the impact on those volumes.

That's a good point because what we are missing our OMP volumes, our own manufactured volumes not traded volumes and obviously the margins are different on traded volumes versus OMP volumes here in Australia. So that's a good indicator, yes.

Okay. And then just finally for me. Can you just remind us of the phasing and potentially even the quantum of the proceeds from Deer Park from here that you're expecting?

My expectation is that sometime during the financial year 2024, we will finalize the sale. We have received $50 million, which is in escrow with us and we are in the very final stages of regulatory permits and everything else. As soon as that gets done and the deal is finalized and confirmed, we'll let the market know.

Next, we have John Purtell from Macquarie.

Just had a couple of questions. Sanjeev, just in terms of some general sort of thoughts around the demand environment. I appreciate your comments there. You've obviously sort of highlighted some pockets of weakness around in Europe on the Q&C side. But I suppose is the summary that you're still seeing solid demand overall? And obviously we hear a lot about productivity focus from the miners.

Absolutely, John. I mean that's a great summary. Underlying demand is very, very strong. If I talk to my customers and I ask them what are your 2 or 3 biggest challenges today? The first one they talk about is permitting more for brownfield and greenfield expansions; the second is resources so people, supply chain, that's a constraint; and the third, clearly is ESG. And then when we talk about solutions, we talk about solutions to help them manage inflation, better productivity, lower cost, the ESG footprint. So I mean all great opportunities for Orica, but underlying demand is very, very strong. We do see some weakness in thermal coal, which is not a surprise especially in North America, but that is coming because the arbitrage between coal and gas has opened up and obviously thermal coal is in structural decline over a longer period of time. Outside of that, we see pretty solid underlying demand across the portfolio.

And just a question for Kim. Just in terms of sort of going forward, are there any sort of targets or sort of I suppose ranges you can give us as far as working capital to sales as a percentage and appreciate ammonia moves around or sort of overall cash conversion in terms of a range that we might expect in a sort of normal year going forward?

You can see on Slide 12, we've got a fairly stable level of TWC in relation to DSO, DIH, et cetera. As you mentioned, our actual levels will be around with business growth with external pricing changes as well. But what we're focused internally on is that continuous improvement program on our inventory, running diagnostics, analytics as well as continued optimization in our payables and our receivables.

And just on cash conversion, I mean sort of I suppose we can sort of look at the history. But is that sort of as good as a guide as any there?

Yes. So we sort of average and target a cash conversion of 90% to 100% over time.

Next we have Daniel Kang from CLSA.

Just following on from RJ's recontracting question. As you complete this recontracting cycle by next year and start a new cycle in 2025, can you just comment on how we should think about margins either on an EBIT per tonne or EBIT margins post the completion of this recontracting cycle?

Look, once we finish with this 3-year cycle by end of 2024, we start on a new cycle in 2025. Now that's very, very attractive for Orica because that's when we have significant new product offerings. By then we have commercialized fully our wireless blasting, our 4D emulsions, the digital technology portfolio starts to mature and we continue to include those kind of new offerings over and above our traditional blasting services offering. So as a whole, Orica becomes that much more attractive and interesting as a supplier and then we have different kinds of conversations with our customers. As I said earlier in my answer to John, the couple of challenges our customers are facing is productivity and ESG. And most of the solutions that we have today, for example the lead-free detonator in Europe. This is regulatory driven and there's a ban on lead coming up in the near future. We are the first ones in the market with this product. So obviously customers will look for those kind of solutions that will help them to manage their own challenges. So I'm quite excited and look forward to that new cycle of 2025 onwards for the recontracting. We'll focus predominantly on the quality of earnings. That's the big focus going forward.

Just another quickly on technology adoption rates. Apologies if I've missed it, but can you talk about the adoption rates in second half '23? How does it compare to the 30% uplift in the first half '23? Maybe just some thoughts on growth rates into '24 and WebGen's contribution.

Look, the ramp-up has been significant. As 1 data point, we had our first successful -- the first time ever, the first successful WebGen 200 blast in the U.S. and this was very, very important as a milestone for us because that was necessary for us to prove to the regulators that the product is viable now and ready to go. Now that we've got the signoffs, we'll start to roll out WebGen 200 into the U.S. market. So I mean the scaleup potential is massive. Obviously we are still positioning the product as it rightly is as a high premium product so we'll not have initial impacts on scale. It will all be about getting the value propositions, the use cases in with our customers, embedding WebGen and then we'll start to scale that up. So it's pretty exciting. And I think the U.S. permissions and regulatory approvals were the last milestone for us and now we are ready to go full-fledged commercialization in all parts of the world in every market and we've been extremely successful building contracts. So next year is when we start talking about the big volumes that will start to flow through in terms of quality of earnings for us.

And can you comment about the broader technology adoption rates in second half '23?

Very, very high. So obviously our customers are getting good realizations, good netbacks on their commodity products. So there's a lot of eagerness and need to pay for premium products. We've seen this across the globe. We've had lot of successes in Asia, I called that out, Indonesia with 4D, the first commercial contracts for variable density emulsion. We've got a lot of success in Australia, but also in Latin America with WebGen. Africa has been huge in terms of technology offtake. Axis had its first major breakthroughs in Canada, in the U.S. and in Africa. So across the board, across our portfolio, we're seeing very strong pull for technology.

Next we have Reinhardt van der Walt from Bank of America.

I've just got another follow-up on the longer-term recontracting outlook. Sanjeev, you've mentioned that the Aussie market looks kind of balanced to tight. But as we get into the second half of this decade, could you say that the supply-demand balance goes back to something that looks like pre-Burrup sort of setup?

Reinhardt, difficult to say. It all depends on demand clearly and given the outlook that our customers are talking about if you look at iron ore, you're looking at the opening up with China, you look at the energy mix, demand for coal not onshore, but Australian thermal coal exports going into emerging markets and then you look at copper and lithium; the outlook is pretty strong. And if demand stays at that very, very strong level and you know that our industry, the service industry, always has to go through turnaround cycles. We have maintenance ups and downs, we have unplanned trips. I do expect that the market stays balanced. Now obviously imports is a factor and Orica has itself imported significant volumes in 2023. We'll also import volumes into Australia, but it's not easy to import. Even for us with our global reach and sourcing capability, it's a big challenge to get hold of ammonium nitrate at the right quality and the right commercial terms. So I do expect that the market stays balanced, but a big factor is going to be demand. And if demand, the macros tell us that emerging commodities as well as iron ore continues to be strong here in Australia, I do expect the market to stay balanced.

Got it. And maybe just on that point of ammonia imports, where are you seeing IPP at the moment here in Australia and can you give us a sense of how much of that price is made up of shipping costs?

Shipping costs have corrected downwards, which is good news for us because we do a lot of shipping of all our products and services all across the globe. It's predominantly product cost and then it's obviously the impact of the gas price. I think I called out the JKM index today is at USD 17 per MMBtu, which is quite high and that does not help with the cost competitiveness of ammonia or ammonium nitrate produced in Asia coming into Australia. Globally the same with Europe, energy prices are still quite high. I've seen gas prices in the U.S. go up to over $3.20 and this is pre-winter. So I do expect there will be further escalation. So it's first of all not easy to get your hands on product in terms of IPP. And then secondly, getting it in here; the logistics challenges, the port restrictions, warehousing issues, storage concerns, shelf life; makes it a bit of a challenge. I do expect IPP stays about the 4-digit number so about $1,000 today landed in Australia.

That's very helpful. And just maybe 1 final one. Can I just check on the guidance upgrade? Can you give us a sense of how much of that upgrade was driven by better than expected AN recontracting and how much of it was driven by maybe a change in your outlook for digital earnings or volumes?

It's a mix of everything. So it's quality of earnings, it's the benefits of recontracting that we have done that will flow through into '24, '25, '26 and then it's a scaleup of digital. Obviously commercial discipline is very important and then trying to mitigate our nonbillables in terms of managing salary inflation, cost inflation. So we're going to go hard next year on offshoring, outsourcing, leveraging our global business services in low cost markets. All of that will help us to mitigate the inflationary pressures. So if you put all of that together, that gives us confidence that we can improve on our returns on net assets for the next 3-year cycle.

Next we have Nathan Reilly from UBS.

Sanjeev, just wanted to zero in on the West Australian business if I could. Would you mind just talking through how you're seeing the market supply and demand dynamics in that particular market right now? And I'm also curious as to when you expect to start renegotiating the sales contracts that underpin production at Burrup?

So first, the good news. We've been capacity constrained at Burrup because there was a cooling tower outage. Just last week we commenced or we commissioned our new cooling tower. Now that's very important as we head into summer, temperatures at Burrup can be very, very high and then you cannot run plants at high load if you do not have adequate cooling. So the good news is the new cooling tower is now in place and this means Burrup can start to ramp up production. We need the volumes clearly because Australia is short on volumes. But the last 6, 7 months have been extremely challenging for us because we were running Burrup at low loads due to the restricted cooling facilities available there. So that's the first good news. Overall, the market in West in Australia given the growth in iron ore, given the commissioning of new mine sites with our customers has been pretty strong so demand is outstripping supply and obviously we were not making it easy with our constrained supply and it's expensive to get product into the Western Australian market. So I do expect that this balance will stay. The market will be balanced and Orica is able to leverage our network of Burrup, Yarwun as well as Kooragang Island to ensure that our customers get adequate supply. Recontracting for most of the Burrup business, which was not contracted long term, has already been done in '21, '22. So you'll see full year effects coming in into 2024. The major contract, which expires end of 2024, we will then hopefully recontract for the '25 calendar year. That's when the benefits start to come through.

Next we have Anthony Longo from JPMorgan.

Just a quick one on CapEx. I appreciate that the guidance is increasing year-on-year from '23 to '24 and certainly as a result of some of those turnarounds. But how should we be ultimately thinking about that CapEx profile through the cycle from then on? Is it something that should revert to maybe what we have seen in, say, FY '21, '22 levels or perhaps any color around that would be helpful?

Anthony, yes, I mean '24 is a special year because of the very heavy turnaround period. That will repeat again in 2030. So we'll have a bit of breathing space going forward so the sustenance capital will normalize. What will increase is growth capital because our business is growing; we have new wins, we have contract renegotiations, we have to mobilize more capital, people, equipment to cater to new business. So that will continue to grow and then the sustainability spend will continue to grow as we continue to decarbonize our operations. To balance that out, the maintenance capital will then come back to normal levels from 2025. So overall, the guidance will stay in that range. Maybe there'll be a slight creep upwards, but I don't expect too many changes to happen in the next 3 to 5 years.

Okay. Sorry, you just -- for a little bit so I missed some of that. In terms of the gearing ratios, I mean you're still well below the bottom end of the range and take your comments with respect to looking at opportunities in a number of areas. I mean how should we ultimately be thinking about the regearing of the balance sheet towards the bottom end of that range. Do you expect to be well below for a long period of time?

I mean look, we've talked about capital allocation and the use of capital. Obviously growth capital and sustainability and safety capital is critical so we will not constrain ourselves in that field. Maintenance capital, you need to spend significant money to run continuous and discrete operations, that will continue. We'll continue to keep dividend up as we have done over the last 3 years. So that's another outlay for the capital. And then obviously opportunities for inorganic growth. We are keeping powder dry. If there's a good opportunity that fits into our digital business or our chemicals business, then we will take a very close look at it. That's the current plan. I know there are lot of questions I'm getting on buybacks. Look, you never discount the fact that you would never ever do buybacks. But if I don't have better ideas for capital, then that's a discussion to be had another day, but that's not on the top most priority for our list of capital allocation if that helps.

Next we have Scott Ryall from Rimor Equity Research.

Sanjeev, I just wanted to ask you about Slide 18 and I don't believe you made a significant comment on it on your prepared remarks. But there's 1 of your strategic targets here with an orange or yellow next to it, which is on high growth mining chemicals markets. I was wondering if you could just give us a little bit more color around what are the chemicals that you think Orica has a competitive advantage in supplying to your mining customers, please?

Yes, that's correct. That's one of our orange traffic lights and not green for good reason. The current portfolio we have in mining chemicals consists of sodium cyanide for gold and emulsifiers that go into mining explosives. We are #1 in the world in terms of manufacturing specialty emulsifiers that go into mining explosives all over the world. We have 2 assets; one here in Australia, the one in a joint venture in the U.S. and we have the largest capacity and market share in the world for that business. That's a low volume, very high margin business and we are continuing to grow that business by adding capacity and also looking to build new capacities if there's opportunities in new parts of the world. So that's 1 growth area. The other one is sodium cyanide and unfortunately in FY 2023, our capacity was constrained because we had a major turnaround at Yarwun in the second half of the financial year. As a result, we had limited volumes to sell. And secondly, I did call out that the LatAm market for cyanide was a bit weak. But the good news is this year we have started strong so I do expect that to recover. Now that's what we have in the current portfolio. What we are looking for is to add to that portfolio either in terms of new capacities, I talked about emulsifier capacity elsewhere in the world, or to look at new chemistries that go into for example lithium extraction or copper purification. So flocculation chemistry, surfactant chemistry, emulsifier chemistry and that's exactly the portfolio we are looking for in terms of either partnering with chemical companies or trying to set up our own manufacturing base and that's work in progress. And that's why the traffic light there is yellow and not green.

And just on your very last point that you made there, what do you believe that you might be able to play in where your current manufacturing footprint will give you a competitive advantage perhaps in the manufacture of those chemicals?

That's a great question, Scott. I'll give you 1 example here in Australia. At Yarwun in the neighborhood of our ammonium nitrate facility, there is a new investment called Alpha HPA. Alpha HPA is a listed Australian company and they are building the first high purity alumina factory in the world with proprietary technology that goes into LED lighting and it also goes into coatings for the separator in the battery for e-mobility. Now Orica has joined partnerships. We've also acquired a stake in that company. We supply them feedstock from our Yarwun facility and they in turn are producing high purity alumina for this industry. Exciting business, first factory, they also have government grants and now today, we are a shareholder in that business. The expectation is that business will grow and hopefully we are able to also expand the footprint into other factories where we make ammonium nitrate. So that's just 1 example of using our existing manufacturing capability, the chemistry capabilities and providing closed loop manufacturing for emerging technologies and ESG-driven growth. That's just 1 example. So we look for more of these kind of examples to play in the battery materials space not to manufacture batteries, but to support the battery industry because there's a lot of chemistry that goes into that space.

Thank you. Thank you for all the questions. I would now like to pass back to Delphine Cassidy.

Thanks, everyone, for joining us. And once again, apologies for the technical issues at the start. Please feel free to come back to me if you have any further questions. I'll be available. But thank you all for your interest. Good afternoon.