Good morning, ladies and gentlemen. Welcome to Orica's 2016 full year results. I welcome those in the room, those who are joining us via the webcast, and those who are joining us via the conference facilities. Presenting today, we've got Alberto, firstly, on Managing Director and CEO, followed by Thomas Schutte on the CFO, who will walk us through the financials. Alberto will come back again with the outlook and the going forward. We will open it up for questions at the end of the presentation, taking questions from the floor firstly, and then questions from the line. Thank you, and over to you, Alberto. Thank you.
Good morning, all. Thank you for joining us in the room, on the phone, on the webcast. I will ask you for your speed reading for the disclaimer. Let's start by obviously what the worst part of that we had last year, the fatalities in Antofagasta. Any fatality is unacceptable. These have shaken the organization. It's Marcelo Miguel, that's something that everybody's committed that we can't really have it, see it again happening. We have undertaken an extensive investigation. One of our leading executives spent there a month. What we've concluded, again, apart from the direct issues that happened, is that we need to have all of our major hazards with common standards. That's something that we will be pushing during our next six months. We're aligned to our customers' focus on safety, and we continue to be recognized as a good safety performer against our peers.
There is nothing of greater importance than ensuring all of our people return home at the end of each day. Safety is our most important value, and it will always be. As you all know, Orica is a truly global company with operations in over 100 countries and a significant commercial, environmental, and community footprint. Our license to operate in these regions is critical to our business. I'm pleased to say that we have had no significant environmental issues this year. Needless to say, there's always more to do. Turning to our financial performance, we delivered a solid result by managing all the elements within our control. AN volumes were above the guidance that we gave at the middle of the year. Overall, while it is a decline, it is a relatively small decline in the context of the external environment.
While we had a difficult first half, our second was better than expected. We continue to make progress on cost reduction and business improvements, which support our EBIT result, a decline of 6% to AUD 642 million. We are sometimes compared to the broader mining sector, and when compared to the major mining market, this is about a tenth of the impact felt by the large miners. That just underlines our resilience that we've spoken in the past. Despite the difficult environment, we have been able to improve our EBIT margin, which shows cost reductions have outpaced price reductions. Tom will talk later about the business improvements that have delivered net benefits within the increased revised range. Our close control of our capital expenditure has freed a significant level of cash.
We have funded all of our critical license to operate and growth requirements and still been able to come below our forecast. At the half year, we announced a change in our dividend policy to a payout policy skewed to the second half. We paid 40% in the first half, and the board has declared a dividend equivalent to 55% in the second half. This is really my first full year of results since becoming CEO, and that was almost 18 months ago. I thought it would be good to summarize the key initiatives that we have worked on that time. We started with a new operating model. It was clear that the company had to empower the regions. This is what we have done. We have improved transparency and streamlined reporting. All of this has been embedded now with standards and procedures for the functions and regions developed.
This has been a fundamental change for the business in organizational structure, ways of working, and in enabling a customer-centric approach. As for any good journey, you need to start with the right people. We have a highly experienced executive and senior leadership in place. Of the top 60 executives and senior leaders, over 70% are either new or promoted. It is quite a significant change. We're comfortable that we have the right people in place to take the company forward. Our charter will be the bedrock of the organization. We have developed a charter that aligns every person in the organization on our purpose, strategy, and most importantly, on the values and behaviors that will guide us in everything we do. The charter was developed from the ground up with the active participation of more than 3,000 employees. We have also increased the speed of business improvements.
We surpassed expectations, delivering AUD 76 million of net benefits. In a tough market, we have continued to defend our market share. While prices have continued to be weak, we have improved our EBIT margin. This is an important result in the difficult market conditions that we had to endure. On the capital front, with our shareholders, we spoke about the need to reestablish the capital disciplines and processes. This is now in place. We have investment committees, a new capital framework, standard disciplines for license to operate and growth expenditure. Now all expenditure is compared on a like-for-like basis. We have a new dividend policy that will be sustainable through the cycle. All of this enable us to reduce our gearing, and today we are close to where we want to be. Finally, Minova.
It has been a difficult turnaround. We are beginning to see the results with a positive cash flow and break-even EBIT this year. More importantly, we are now going into the non-mining sectors. We now have a significant pipeline in the non-mining sectors that will service this company well into the future. Let's start now with the four regions. In Australia, we were surprised in the weakness in January and February, which we talked about in the half-year results. However, in the second half, activity picked up. We increased volumes by 13% against the first half. While I certainly am not prepared to call an end to the downturn, there has been some stabilization. It does seem as if we have reached the inflection point.
We are not going to call what the cycle is going to do in the future, but at least we feel there is less volatility. The drop in EBIT year-over-year of around 11% was mainly due to continuing negative market prices, impact on prices and volumes. This was in line with what we flagged at the half-year results. We also mentioned six months ago that we would accelerate our efforts in delivering sustainable benefit improvements. These benefits, along with further reductions in overheads and the benefit of lower D&A, has resulted in an improvement in EBIT margin in the second half. This is a good result given that this region was the most impacted by volatile and a challenging macro environment. The shape of the contract profile is similar to last year. North America.
At the half year, we spoke about the lower coal volume into U.S. coal, especially in the Appalachian region, driven by energy substitution to lower cost natural gas, combined with a very mild winter. At that time, inventories were about 150 days. While it impacted volume, they were lower margin tons, and you can see it clearly in the graph that the loss of volume in North America has not affected our EBIT margin. Gold and quarry and construction markets were strong, and this with the improved product mix into the Canadian market, helped maintain EBIT margin in the second half. Onsite services increased by around 6%, with increased levels to our quarry and construction customers, as well as metal customers in Canada. Revenue from our advanced blasting sales also increased from 24%-26%.
Benefits from business improvements initiatives and further reductions in discretionary overheads helped protect the EBIT margin. In Latin America, while volumes was down 8% from last year, it has stabilized in the second half, particularly when compared to the 15% drop in the first half to second half of fiscal year 2016. Sales to gold customers now represent 23% of revenue on the back of firm gold prices. Copper sales now represent 44% of revenue. Both have strong mid and long-term fundamentals. This is a good position as the macros for both of these commodities remain strong. Unfortunately, EBIT in Latin America was down 29% from the previous year. Two factors explain that. We all have seen the instability in Venezuela, and we obviously have no control over this. We have been prudent and made provisions for assets in Venezuela.
That would explain most of the difference between the drop in volumes and the drop in EBIT. The second is the unfavorable inflation impact in our cost in Argentina and Venezuela. Both these factors materially reduced EBIT. Like all regions, benefit from business improvement initiatives and further reduction in overheads helped maintain EBIT margin. The region that's the benefit of the multi-region sort of worlds where we operate, where we were able to grow, was the new region of Europe, Africa and Asia, reflected by around a 10% increase in volumes in both the CIS and Africa. Cyanide volumes also increased off the back of stronger gold mine prices. Successful penetration of the higher margin EBS units up 30% versus the prior year, with particular strength in the Asia tunneling markets, also contributed positively. Revenue from advanced products and services increased from 17%-20%.
That's still and will continue to be one of the fastest-growing areas in the world for us. Finally, Minova. I'm very pleased with our progress on Minova. While it's certainly not a celebration point, we have arrested the decline. The business remains cash flow positive and finished at EBIT break even this year. There's a good pipeline of opportunities in the non-mining sectors. Two-thirds of new businesses in 2016 have been from hard rock and non-mining markets. However, the market remains tough with a 30% reduction in both steel and powders and resins in the year. I will now hand over to Tom to take us through the financials.
Thank you, Alberto, and good morning to everyone. Let me start off with the sales revenue first. Alberto spoke a lot about the tons, and I'll talk more about the AUD here. I'll start off with sales revenue of AUD 5.1 billion. All right. It would help if I do that. There we go. I'll start off with the sales revenue of AUD 5.1 billion, which is 10% down on a global basis compared with the corresponding period. This was primarily as a result of the continued volatility in the global market, and specifically, I'll highlight a few factors on this. Firstly, lower iron volumes in Australia, down 6% year-on-year, and this was primarily due to the demand for coal. Secondly, pricing for thermal coal and coking coal was lower during the earlier part of the year. These commodities account for around 51% of this region's revenue.
Thirdly, we saw a number of customers, particularly those with a higher cost per ton operations, undertake mine plan changes to reduce their short-term costs, or some of them actually closed their operations. However, on a more positive note, sales into the gold markets were steady, and they're buoyed by firm gold prices. In Australia, despite reduced demand from Asian steel producers, iron ore volumes remained strong, aided by their low cost per ton position. In North America, sales to the largest segments, gold and quarries and construction markets, remained strong due to high gold prices and the continued infrastructure spend across those regions.
On the other hand, sales to the thermal coal customers in the region reduced as a result of lower demand impacted by energy substitution to lower cost natural gas and some customer closures, as well as the closures in the Appalachians, which Alberto referred to early on in the discussion. Additional weakness in the copper and iron ore segment specifically to this area also impacted sales. In Latin America, revenue was down 13% year-on-year. But it is important to note, we haven't referred to it before, that cyanide volumes actually for this area was up 16%, buoyed by the demand for gold. In EAA, this was a good story. Good growth in gold markets across Africa and Asia, and further penetration into the niche higher margin tunneling business in Asia. Moving to EBITDA.
The group's results, while 7% lower than the prior corresponding period, was in line with what we forecast. Our NPAT of AUD 389 million was down, but also in line with a 6% reduction in EBIT. The full-year EBIT reduction of 6% compared to the revenue reduction of 10% actually reflects the resilience as well as the hard work, I think, that was done across the globe on cost efficiencies and business benefits and initiatives. I will talk more about these initiatives in my next slide of the presentation. The individual material items that you see on this slide was largely due to the Part IVA ATO tax case, which we actually disclosed in December 2015. The cost associated with the explosion that Alberto referred to in Chile is also in there, and the sale of the Thai nitrates company. Interest expense was pretty much in line with last year.
The drop in our interest cover to 7.6 times is a direct result of the reduced EBIT. That said, our cover remains very healthy, which is well above any of our banking requirements of about two, and even well above our own internal targets of around five. The effective tax rate is in line with what expectations were and estimated to be around that level going forward. Alberto touched on the dividend, and I will touch on the dividend later on, but the full-year payout ratio of 48% is within the range of 40%-70%, which is the range that we set when we changed the dividend policy around earlier this year. I think this new policy enables greater flexibility and ensures that our balance sheet remains strong throughout the cycle. We believe this is the most prudent approach and in the best long-term interest of our shareholders.
Business improvements. Throughout the group, we continue to drive efficiency and productivity improvements. These initiatives are about improving the efficiency and effectiveness across all parts of our business. Virtually no stone is and will be left unturned. At the half year, we had already achieved our original full-year target. Therefore, we increased our expected range from AUD 50 million-AUD 60 million, which is what we said last year, of net benefits to AUD 70 million-AUD 80 million in total at the half year. In total, we have delivered AUD 76 million of net benefits, and this is after around AUD 30 million of costs. Around 57% of those benefits are from supply chain efficiencies. These include things like the renegotiation of raw material contracts, plant and productivity improvements. The remaining 43% is from various operations and support cost programs.
These include, for example, the implementation of our shared service center function in Manila, which started about a year ago, nine months ago, and a further headcount reduction of around 630 people. As we have mentioned before, embedding these efficiencies into our business, it is ongoing and will actually be part of everyday business in Orica and everyone's focus. It will be sustainable and continue sustainable savings over time. The famous waterfall chart that we always talk about. Historical and current year self-help initiatives have helped balance the scales to some extent this year. Starting with our 2015 EBIT of AUD 685 million, if we remove the impact of FX and inflation on average of about AUD 28 million, the US dollar averaged around $0.73 for the financial year 2016, whereas it was around $0.78 in 2015, and inflation on average was just under 3%.
The AUD 46 million in net business improvement costs in 2015 is made up of about the AUD 81 million in transformation costs that we disclosed last year, less 20% of the AUD 175 million of benefits from last year. As we've always stated, around 20% of the benefits are non-repeatable. The one-offs in 2015 represent the additional environmental provision that we took up for Yarraville, and the one-off redundancy costs and net asset sales that we booked in 2015. That adds up to the AUD 33 million. The next three bars really reflect the market impact on our results. The AUD 75 million negative impact variance is a result of volume, mix, and margin impact.
This includes the mine closures that I mentioned earlier, some of the care and maintenance on certain mines, mine planning changes, these being changes to strip ratios, for example, on-site services, and the flow-on impact through to our own manufacturing operations. The pricing variance of AUD 86 million comprises the roll-through from FY 2015 price resets and renegotiations also from new incremental resets in FY 2016. At the half-year result, we actually flagged that this would be around AUD 85 million for the year. It's very much in line with our expectations and our indications earlier. The AUD 3.2 million impact on cyanide was mainly just due to pricing. The total market impact for 2016 was about AUD 164 million. I spoke earlier on my earlier slide on the AUD 76 million of business improvements that partially offset this.
It's important to note, though, that we were able to accelerate the program to deliver well within our revised forecast even, to offset around 45% of that market impact in the current year. We started off with a target, we accelerated, and we achieved the adjusted target. This, I believe, is actually quite a good result and gives me quite a lot of confidence that we can continue to deliver sustainable benefits going forward. Alberto will talk about this a bit later. As Alberto mentioned, Minova was not only cash flow positive, but delivered break-even EBIT this year with an improvement from the second half to the first half. This improved performance was driven by a lower depreciation following the impairment of 2015, but as well as expansion into new sectors, industries, and continued rigorous management of operational cost.
The other bar of the negative AUD 25 million is made up mainly of additional provisions that we took up for the Deer Park site, as well as the closure of Norway and increased provisions in Venezuela that Alberto referred to. CapEx. At the half-year results, we spoke about CapEx and our implementation of our capital and investment management framework. With the objective of ensuring a standardized and targeted capital expenditure methodology. It focuses basically on three things. One is the improved overall governance in relation to capital projects. The second thing is improving capital allocation and portfolio management of capital at both a regional and a group level. Thirdly, embedding a long-term approach to both sustaining and growth capital expenditure.
I'm pleased to say good progress has been made on the implementation of this framework, resulting in a 40% reduction in capital expenditure to AUD 263 million, which is also AUD 60 million below what we gave as full-year guidance before. Sustaining capital was down 25%. With a lower number of projects at manufacturing sites in line with the group's scheduled asset management program, and I'll talk about that. I'd like to reiterate that at all times, we will ensure that our license to operate CapEx is maintained, that our environmental commitments are met, and that most importantly, that our people are kept safe. Capital allocation for these purposes will not be subject to any financial metrics. Part of the reason for the reduction in sustaining CapEx this half year or this year is that we were focusing on the large turnaround programs, in Carseland and KI.
Turnaround programs, actually the large five-year maintenance programs that these facilities go through. There's a lot of preparation work that is needed, and it has to be completed with front-end loading in terms of project planning, and that's been critical to the success of projects being executed and delivered on time and on budget. The focus of the project teams was on that and preparing for that next year. The 2017 capital expenditure requirement is therefore expected to continue to be within the previous guidance that we've given, AUD 300 million-AUD 320 million. That then includes the spend on the scheduled maintenance programs at Carseland and Kooragang Island, as well as the remaining spend on Burrup, which you see moved out from one year to the next. Balance sheet. Working capital is always an area of focus for any management team.
This relates to both trade and non-trade working capital. In regard to trade working capital, we continue to work on revised inventory models with a relentless focus on debtors and payables. All liberated cash has been used towards debt reduction. Balance sheet management will continue to be our focus. May I remind you that the three debt reduction levers we continue to manage are, one, liberating cash through improved trade and non-trade working capital, liberating cash through managed capital expenditure, and then lastly, our new dividend policy, which manages our cash commitments to some extent. Whilst we have done well over the last 12 months to reduce our debt level and manage working capital downwards, I'd just like to mention that our working capital levels from the current will increase over the year, the coming year, due to the scheduled turnarounds that I've already mentioned.
This will also then translate through to debt. However, importantly, we're not expecting to go back to any of the prior levels that you've seen. Hence, all things being equal, we expect our gearing to settle in the mid-range of our target between 35%-45%. The dividend policy, we've covered off a little bit on that. As discussed at the half year, the board introduced this new dividend policy, 40%-70% payout ratios skewed towards the second half. Our final dividend of AUD 0.29 per share with a payout ratio of 55% takes our full year payout to 48%. We paid AUD 0.205 at the half. You'll see from the chart on the left, this year's payout ratio is pretty similar to the 10-year historic average. I'd just like to sum up beforehand back to Alberto.
Our view is that this is a solid result given the industry issues that we continue to face this year. We beat our targets on cost out and net benefits. We’ve liberated cash to reduce debt, and our balance sheet remains strong and is demonstrated to remain strong and flexible. Thank you.
Thanks, Tom. On the outlook. There are three main operational headwinds in FY 2017. We are forecasting around AUD 60 million of price resets over the period, which are a flow on from the FY 2016 resets plus some additional FY 2017 resets that we expect. About half and half. Yes, there are still price pressures, but they’re dwindling down as you may see. There will be a further negative impact in FY 2017 of around AUD 50 million-AUD 70 million from a couple of the previously negotiated material input contracts. These are not market or new headwinds. They had just been brewing on for some years. The gas agreement in Australia that was signed in 2013 will be effective in January 2017. As you all know, the gas price have moved since then. The cost will be reflective of current market prices.
That’s just how things are. Then there will be a step-up in the contract in North America that, it just had a clause that after five years, there would be a step-up. The combination of these two is around will hit us between AUD 50 million and AUD 70 million. Finally, there’s an increase in depreciation. It depends when finally Burrup comes into operation. But when it comes in, the depreciation hits at about AUD 2 million per month. Nevertheless, we are confident that these headwinds will be offset by FY 2016 business improvement initiative benefits, and let me just open that’s a combination of the costs that Tom mentioned, about AUD 30 million that will not repeat themselves, and about roughly half of the benefits were flow in a run rate into FY 2017. That’s part of it.
Then new business improvement benefits that we will be working in FY 2017, I will talk more about that later. I would call it a second generation of business improvements. The low-hanging fruits are over, but there’s still a lot of productivity initiatives, and I’ll speak a bit about that in the next section. In regards to Burrup, I am still comfortable about the long-term benefits of the plant. It is at least a 30-year asset and is situated in the fastest-growing iron ore market. There are some issues in the short term with the oversupply on the West Coast, which we will manage. We will take a disciplined approach in our decisions and won’t destroy value for our shareholders in the medium term.
We expect it to be EBITDA positive during fiscal year 2017, as we run it by campaign with the current contracts that we have. New business improvement initiatives. We are expanding and accelerating our business improvement initiatives in fiscal year 2017, focusing on opportunities in the commercial space, operations, our external spend, and through our supply chain. We achieved a lot in fiscal year 2016, but there are sustainably more opportunities throughout our business. I am confident that these self-help initiatives will help offset the market headwinds, as I said before. There are substantially more opportunities throughout the business that my new team has identified. When I first spoke to you as CEO, I said my preference was always to underpromise and overdeliver. I don't intend to put on targets.
However, that you get some idea of the types of new businesses improvement initiatives that we'll be able to deliver, let me give you some examples. We are turning over every stone in our organization to find opportunities for optimizations. This program is already launched. It's several months in the working, and the second wave will last another 18 or 24 months. Some examples of what will be hundreds of initiatives in our supply chain, for example, we can improve shipping utilization by ensuring consistent and efficient supply planning and consolidation of smaller shipments. Another example is in manufacturing, where we have identified opportunities to increase efficiencies in cyanide production through introducing processes and controls to reduce variability in daily production levels. Just to go a bit more into that idea, a perfect day in the cyanide line is 270 tons.
We have identified that in 200 days of the year, we were below 270. Variability is the enemy of production, and when you go from good to great, what you do is you take those 200 and push them back to 100 days, and obviously you get a significant improvement. Another one in operations in KI, for example, we can probably reduce gas spend significantly by improving gas usage efficiency through basic better processes. Again, we've mapped out the working that we have done, and we see high days of high production, and some were using 38 gigajoules per ton, others were using 36. The target there is to reduce it by 3% or 4%, again, with significant impact across our EBIT line.
These are just three of the many initiatives throughout every part of our business that we will focus on to deliver greater productivity and efficiency in fiscal year 2017 and beyond. We have done it in the past and will continue to do it into the future. Fiscal year 2017 outlook assumptions. While there have been some external optimism on market conditions, we remain conservative and will continue to focus on business improvement initiatives that improve profitability and shareholder value. We expect global explosive volumes to be around 3.5 million tons ±5% for the full fiscal year of 2017. Cyanide will be in line with 2016. We will continue to work on the turnaround in Minova and focus on improving its performance under the new structure. We expect it to continue to be cash flow positive.
I spoke about the headwinds and business improvement initiatives that will offset these in the previous slide, so I won't go into more detail. We, as a management team, are committed to ensuring that we will continue to deliver sustainable benefits to improve profitability, and Tom has already covered capital expenditure. To wrap it up, the actions that we are taking today in controlling the challenges that we face will see us emerge stronger through this down cycle and be in a far better position to take advantages of the opportunities when growth returns. Over our more than 140 years, we have worked hard to ensure that as an organization, we adapt to changing circumstances and shape our destiny, and that won't change regardless of where the cycle takes us. The market pressures are challenging now and in the short to medium term.
Despite that, there seems to be some stabilization in the mining world. Despite that, there seems to be some stabilization. However, we remain cautious and conservative. We are confident that we are focusing on the right things for both the downtime and the up cycle when it comes. We are continuing to control all the elements we can. We are transforming Orica into a leaner and more efficient organization. Efficiencies are being embedded in the business to counteract the cyclical declines in volumes and prices that our industry has experienced. We have worked hard to ensure that as an organization, we adapt to changing circumstances and shape our destiny over the years. Moreover, we are actively building a culture that supports our people and that ensures that we work collaboratively with each other and with our customers to create recognized value for us and for them.
We are deeply committed to our customers being at the forefront of everything we do while understanding our value to them is in the assurance of consistently safe, reliable, and quality products and services. Thank you, and I will now take your questions. We will start here in the room and then move to the phone and the web. Richard.
Thanks, Alberto. Richard Johnston from Citi. Can I just start by asking about margins in the Australian business or the Australian division? Are you confident now, notwithstanding the distortion you may get from Burrup in the short term, that you can hold margins where they are? In a sense, I guess what I'm asking is, are margins going forward going to be a function of price or volume?
I think that it's much more probable than not that we can maintain margins. I would say it like that. I think if we were able to maintain them or even slightly increase them last year, I think we're at an inflection point. That would be my expectation. Not increasing, but maintaining them.
You did mention that conditions in Indonesia are a little bit better over the year. I was just wondering if you could talk a little bit more about the performance of Bontang overall.
Bontang, it's the coal has actually also helped Indonesia. That plant probably has been the most benefit by the ammonia price. That really has given it a significant kick. It's still relatively marginal in our operations. I think it's fairly valued right now as it is in our books. We talk about AUD 10 million to AUD 20 million of EBIT. I think that's still a good guidance on that.
Great. Thanks. Finally, just one for Tom. On your growth CapEx guidance, obviously you've got the remainder of Burrup coming in, but thereafter, does it drop away again? Because presumably you don't have any significant CapEx on growth projects on, let's say, a three-year view.
Growth CapEx, obviously, I don't think we have any really large, big-ticket items on growth. We do have a whole pipeline of growth projects that are way above the 20% runoff cutoff that we've said. They tend to be smaller, substantially smaller, and at any point in time, we can switch them on to do what needs to be done. We did spend some growth CapEx this year, you would have seen. With our ranking profile, if we don't do anything on a specific project, it still goes into the pipeline and can be executed at any point. The main focus this year, especially towards the latter part of the year, was really actually using the project teams to prepare themselves for these turnaround programs. A lot of pre-planning and front-end loading is going into those.
At any point in time, once those are completed, we can then move people's focus to other areas. Of course, we will be doing some next year of the smaller ones. We haven't switched them off totally.
Great. That's very helpful. Thank you.
Yes.
It's Paul Jensz from PacPartners. Just two quick questions, Alberto. Firstly, on return on net assets, I see it's at 14%. Can you make some comment about where you see that moving in the next couple of years? Because that's obviously a key focus.
Yep. Look, it will move gradually. Obviously every project we now approve has to have run of higher than 20. That will take some time to filter in. Projections are of a slowly increasing path, is the projections.
Okay. Thank you. The second one is, can you make some comments about the split of earnings in the services side versus, I suppose, the margin in Ammonium Nitrate? Or maybe how Orica looks at that now, because that used to be a major focus, moving it into the services area. Maybe two-part question. How do you view your earnings in services versus Ammonium Nitrate, and how you see the trends?
Let me indirectly answer one thing. What we haven't seen was the unbundling. We see ourselves as our customers do value the complete package. That includes whatever adds most value to them. By that we mean, that we probably have shifted a little. Our idea for us is not to sell the most value products for us, it's what makes more sense for our customers. If that is Electronic Blasting Systems, that's fine. If that is the type of operation is more efficient with cheaper non-electric, so be it. I think that's probably the focus is on complete packaged services, not services, but services on AN. What we do see is that AN probably is the more focus of analysts as the one that is more exposed to competition.
The other quality still prevails in all the rest, which is basically Initiating Systems. That is still our end. It depends on customers. Probably some where you have seen some pullback is we don't believe today that we're going to go hard rock on ground for every customer. Every customer is different. In some, in Russia, we have wonderful operations of where we deliver rock on ground. In Chile, we do too. Others, we support our customers, it's more listening to them and provide what they want. That is the main game. We can go to the phones.
Thank you. Your next question comes from Mark Wilson with Deutsche Bank.
Thanks very much, Alberto. Just to clarify, the AUD 30 million cost to achieve the benefits in fiscal 2016, were they essentially redundancies?
I'm sorry. The what?
The AUD 30 million in costs to achieve.
Are they?
It's all. No, it was the cost to achieve the AUD 76 million. You can split it in AUD 106 million, then there was a cost of AUD 30 million. Yeah, part it is redundancy. Part of it is just capital cost or whatever to achieve an improvement. We didn't split it up. The important part is that that AUD 30 million obviously doesn't repeat itself into 2017.
Great. Thank you. If I were to look at your waterfall chart on slide 15, the AUD 25 million other costs, are they also one-off, won't be repeated, and separate from the AUD 30 million?
Tom, there's a bit of an echo, yeah.
Those costs could be because, in essence, they take out their provisions for a bad debt, for example, was part of that, and an additional provision on Deer Park. We do look at these environmental provisions every year, and we have a consistent ongoing provision rate for them. I would actually not take them out as just one source, because every year we do a revision and I think last year we also put some AUD 30 million through to Deer Park, and we continue to do that every year. That's a summary of all those types of provisions. You must remember, we do have quite a lot of older, I won't call them older stranded sites, which are sites that are managed by head office and not actually lying in any of the regions.
Some of these sites, we have to remediate, we've got water treatment plants, we've got all sorts of things like that go there. We have to increase or decrease from time to time, depending on the surveyor's feedback and so on these sites. That's included in those numbers.
Sorry, just to clarify, within the AUD 25, I know you mentioned closure of the Norway site as well as the Venezuelan provision. They are clearly one-off.
Yes, of course, they are one-off. That's correct.
Yeah. How much would they be in aggregate?
We don't disclose that separately. Probably the Venezuelan one, in the early 20s.
Okay, thanks very much.
Just under. We did put the net business improvement benefits on a net basis on the AUD 76.
Yeah, great. Thanks, Alberto.
Your next question comes from Ramoun Lazar with UBS.
Hi, Ramoun.
How you going?
Good.
Just to clarify again, just on Mark's question, because the line was just a bit hard to hear. The gross transformation benefit in 2016 was AUD 106 million. Is that right?
Yeah, that's right.
Okay. I guess just given you've outlined the headwinds into 2017, it sounds like you need about AUD 140 million or thereabouts of cost outs to offset those headwinds. I'm just curious, where do you think those cost outs lie, or which part of the business do you think provides the potential to take more cost out?
I don't know how you made the calculations, Ramoun, we probably see it differently. There's about AUD 30 million of costs, and there's about half of the benefits will go into next year, as you know, because of the run rate. There's about, give or take, I don't know, about AUD 70 million that will flow into the next year through a combination of both. That will offset about half of the headwinds.
Okay.
You have what we're roughly saying is that there's another AUD 70 that would be compensated with net benefits from the new business improvements. Given our track record of delivering more than that every year, that's why I said that we were confident that we could achieve that.
Okay. All right. That's helpful. Thank you. Then just the potential increase in AN volumes in 2017, just keen to get an understanding, Alberto. If that were to come, which region do you think has the greatest potential for a volume turnaround?
Actually, the guidance is for flat, Ramoun. That's, again, us probably not calling that end of the cycle. If you look at the trends, we're seeing some positive trends in the EAA. We are sort of also seeing in the last month some interesting growth in the east side of Australia. Probably that would be two that I highlight. But overall, our guidance is for flat volumes.
Okay. Thank you. That's helpful.
Your next question comes from Andrew Johnston with CLSA.
Oh, good morning, gentlemen. A question first up on the gas contract in the U.S. I note that back when you made the announcement that it indicated that future prices on that contract would be based on a combination of inflation and gas or market prices for explosive products. Yet when I look at both of the gas prices in the U.S. and AN prices in the U.S., they look like they've been falling for the last couple of years. I'm just trying to understand why we're now seeing a step-up in that price.
It was how the contract was negotiated. That was before our time. It just had a step-up. The guidance that was given, whatever many years ago was, you're right, it was tied to gas prices, and it's been a very good contract, but it just had a step-up in changes in conditions negotiated, and we just have to deal with it.
Sure. Okay. Obviously that disclosure is not your fault, so we shouldn't blame you for that. Going forward, are there other step-ups that are going to affect that contract? Is it also appropriate to still consider that contract as being linked to the gas price or CF's market price for explosive products?
It is still a very good contract. It is correct to link it to gas prices. It will still sit probably between the top of the first quarter and second quarter of costs. Yeah, we have a very good relationship with CF. There is no other step-up that we know, and we've seen that contract, so there's no more surprises. Overall, in our commitment to being transparent to market when there's significant issues, we point them out, and that's what we did this time. I don't think, to the best of our ability, I see any more surprises into the future.
Okay.
You never know, but I don't see them today.
Sure. No, I appreciate that. Just to be clear, you're saying that it's not linked to market price for explosives, it's linked to the gas price?
Yes.
Okay, great. All right. That's my understanding.
Get back. Probably they'll think I get back if I'm wrong, but my understanding is that the basic link is to gas prices.
Okay, terrific. Thank you. On the business improvement initiatives, is that something that's being undertaken-
You have to talk closer. Sorry.
Sorry. Is that better?
Yep.
Okay, on the business improvement initiatives, is that a program that's being run internally or is that a program for which you have consultants in the business implementing that program?
This second wave is a program run internally. Obviously we have some outside help, it is a program. It is, let's say, a separate new sort of what I call second generation that will last, again, for some time now.
Okay. To be clear, are there bonus payments linked to the consultant based on the initiative improvements that are achieved?
I think we disclose, again, these type of things. There's some arrangements there. Yeah.
Okay. Finally, Tom, I'm just wondering whether you're able to provide more detail on the working capital improvements. I mean, that was a pretty impressive improvement in the last 12 months. I know you flagged that that will be reversed a little in the next period, is it possible for you to segment where that improvement in working capital, is it particular regions? Is it particular types of contracts or types of customers? Is there any more detail you can provide there?
Okay. I mean, Ramoun, you can see that it's actually spread across inventories, debtors, and payables, I mean, that's how one actually takes on working capital. On payables, we've been moving, as I mentioned, I may have mentioned it at the half year Shall I call it industry standard with regards to payables? Many of our large customers and other players in the industry have led the way and set new standards in payables, and we've just followed that. If you look at something like debtors, we spent a lot of time on overdues, then, of course, inventory levels. As I mentioned, we did run it hard.
Some of that will have to, by default, go up because when the Carseland and KI facilities get maintained, they actually go down for 4 to 6 weeks, and we've got to build inventories ahead of time, for example, for that. Working capital remains a continued focus. We look at stock replenishment models. These are mathematical models that one looks at with regards to stock replenishment, buffer stocks, and so on and so forth. My sense is there's more maturity that needs to come into that, after that, we'll establish, shall I say, a cadence in the organization or a run rate in the organization or an average working capital utilization. That work is still continuing or will continue during the course of next year.
Yeah. You expect that to settle in somewhere between the 6% and 9% of revenue?
I'm not going to give a target on that. It's very difficult to give a working capital target like that, Ramoun. These things move and swing around depending on our sales increase and decrease and so on. I'd like to do some more work on that before I put a target out on that.
No problems. Great. Thanks very much.
Your next question comes from Keith Chow with JP Morgan.
Good morning, Alberto and Tom. A couple of questions from my end. Just the first one on the pricing resets. Through the years, through FY 2015, 2016, and into 2017, it seems as though there's always been a flow-through of price resets from one period to another. I just want to take it a year further and ask about FY 2018 and how much of the AUD 60 million of negative price reset impacts in FY 2017 will ultimately flow through to 2018, and when it actually stops.
If only we knew. Look, we don't have that estimated. The guidance that we're saying is that we're seeing it dwindling down. I think we are at the bottom in the East for many reasons. We're slightly below IPP. I would think this is a less and a less issue. The new ones that we forecast in 2017 are 30. I would think that in 2018, that number should be not larger than that one. Honestly, you don't know. It's very difficult to do something 18 months, 24 months into the future. But if we are past the inflection point like we are, that's what we would expect.
Okay. Alberto, presumably those price resets are principally related to the Australian business?
They have been most of them. There has been some in the U.S., not much, and not probably in the rest. A little bit also in Latin America. Yeah, most of it were in Australia in terms of impact.
Okay, thank you. Tom.
If you look at it just broadly. Look at revenue and look at volumes, you will see that the difference between revenue and volumes across the whole company is about 5%. That roughly gives you that overall. Obviously, that tells you the strength of our IS prices, but it's a relatively subdued impact when you look at it like that. Sorry, you were going to ask, Tom?
Yeah, sure. Tom, just a quick question to clarify on an earlier one on CapEx. Just to put it simply, in terms of staying in business CapEx, what do you think the sustainable level is? I know you pointed to AUD 300 million-AUD 320 million of total CapEx in 2017. Beyond that, what do you think the underlying sustainable or sustaining CapEx should be for the business?
If one looks at all the work that we've done on capital to date and some of the historical spend and some of the optimization work that can be done still in this space, I'm at this stage pretty confident that AUD 300 million-AUD 320 million for capital should be very comfortable for this company to maintain for a period of time, depending on what immediate growth things would come out going forward. We're not starving the company at that level. It approximates depreciation, which is sitting on AUD 265 million this year, will go up to AUD 285 million or AUD 300 million, depending on the Burrup commissioning. Approximate that over a long period of time around depreciation, I think should be quite safe from an external estimation perspective.
Okay. Part of that, Tom, that AUD 360 million, say, or approximation of depreciation over time, part of that is growth CapEx as well. You're talking about a total CapEx number, sustaining and growth, which approximates.
The sustaining CapEx will obviously go up and down depending on what you do in the year. This coming year, the ratio of sustaining CapEx will go up substantially. Because all the work that we've basically doing in the coming years, apart from the small growth stuff that was asked in an earlier question, will all be sustaining CapEx. Once that's done, the year after that, we'll have a look at what there is. There's maintenance that has to be done on nitric plants and all sorts of stuff, which is all that kicks into the year 2018. The sustaining CapEx goes up and down as and when you need to spend on it, to be able to retain your license to operate and of course, retain your facilities.
Okay. Just very quickly, the last one on the AUD 50 million-AUD 70 million of price impacts. Just to confirm that that'll be principally in North America, where those costs will be taken?
No, half of it. There's part in Australia. That's the Australia contract of gas.
Okay. Sure. Okay.
That goes to market prices. Again, as an economist approximation, half and half.
Okay. Thanks very much.
Your next question comes from Andrew Scott with Royal Bank of Canada.
Good morning, gents. Just a couple from me. Firstly, maybe for Tom, just I wonder if you could quantify the level of benefits you will have had during the year from the decline we've seen in the ammonia price. I imagine you've had a fairly meaningful benefit from the timing and the lags on the pass-through there.
Sorry, you just have to repeat the question. I couldn't hear you at all.
The impact of the ammonia price. The ammonia price reduction, it will impact probably most significantly in KI. It's the current market, sometimes it's difficult to pass through prices, and they only pass in through time. Remember, we're highly contracted. Our profile is roughly to be contracted one year out, about 80%, then 70%, and then 50% in the third year. That will take time. I don't see any significant impact in 2017. It will benefit us. We are an organization that is short ammonia, and it will benefit us in the medium term.
What about FY 2016, Alberto? I mean, we should have been in a fairly meaningful benefit as you got the ammonia price coming through in the second half here. I'm just wondering if you can help us quantify what you saw.
As I said, I would say that in Bontang it's about AUD 10 million. Remember, we produce ammonia for KI. In Australia, the impact is not as high. In the U.S., we have contracts that are based on gas and not ammonia. Carseland, it has a different type of contract, very good one, but different with Agrium. It depends on the regions of the world. It's not an obvious impact in the short run.
Okay. If I can maybe just ask that a different way. If we sort of focus on that waterfall chart, just where would the cost relief that you're getting from ammonia occur and, specifically I'm getting at the supply chain efficiencies, I presume wouldn't include any just commodity price benefits that you're getting there?
No, they're not. No. All the supply efficiencies are in just buying better. We wouldn't put anything that is price related or cycle related. They are sustainable benefits in, for example, benefits are we asking for above spec. We have a spec of diesel and we are actually buying way above the spec. Just getting back to spec, that will be classified as a procurement one. There's others where we just probably have non-order invoices, so we're not being efficient. There was a big one on when we switched between ammonia base and gas base in the U.S., and that gave us big benefits. We don't classify as benefit anything that is, price of oil goes down, that's not a sustainable benefit.
A lot of the stuff actually sits in the margin, and we actually don't strip the margin down line by line because I can give you the whole chart of accounts, which is 1,000 or more. We don't want to do that. In essence, it all sits in the margin bucket, which is various different ways in which one actually reduces procurement costs, for example. On some of the ammonia, some parts of it is passed through, but not all our contracts have that. I'm not actually going to give a split on what portion we hold, what portion we don't hold on ammonia. What Alberto said is true, is if you fundamentally look through Orica, you'll see that Orica is a company that's structurally short ammonia.
That's a good point. You take most of our regions, we have improved EBIT margin. That would be there, sitting there.
No, that's perfect. I just wanted to clarify it wasn't in that benefits line. Just one more, if I can. Apologies if I did miss this, at the half, you stressed your contract renewals and that you're running at 100% for your contract renewals, and you sort of detailed some of the new tender percentages that you've won. I wonder if you can make some comments for the second half.
We had a very high percentage of renewals overall in the East. In the West, we did lose two contracts. All in all, if you take the Australian year in value, I'm not going to give you the exact value, but I can tell you that we started with X number of hundreds of millions, and we ended with roughly the same. Between what we got new and some things that we lost in the West that has been quantified in Boddington, and there was a 35,000 Rio emulsion that's been neutralized with all the wins. You take all in all, we were able to maintain our market share. That is for 2016. For 2017, we already know what is happening because most of it is contracting, we're expecting actually to increase our market share in Australia by 2%.
Okay. That's great. Thank you, gents.
Your next question comes from John Purtell with Macquarie.
Good morning. I just had a couple of questions. Firstly on the business improvement program. Coming back to the AUD 106 million of gross benefits for the year. At the halfway mark, it was AUD 57 million, sort of not obvious that there has been an acceleration in those benefits in the second half. I am just trying to sort of understand then the logic for that run rate effect into 2017, whether perhaps, we did see an improvement through the sort of fourth quarter there, it is not obvious that there was an acceleration in the second half, which would then flow through on an incremental basis in 2017.
No. Well, there was. Also, with regards to the cost breakdown, the cost as well, you have to look at the two together, Ramoun. At the halfway mark, we basically said it would double up for the year.
There has been no acceleration. I do not know if I understand your question. Everything that we implemented in the second half will have an impact.
It will have a delay impact.
All in all, there is some delay. We're saying it's not all of the AUD 100, it's about half of it that is having a flow impact. It's about a third of the AUD 100 is having an impact, and then the costs around.
I don't know how you do that exact calculation.
Yeah
We also run with projects that have actually started kicking off in the second.
Yeah.
Second half of the year. We could see at that point that it was gonna run through. Not all projects are started at the same time, running through at the same time. You actually start off with different projects at different stages. I'm not sure if I understand your question correctly, but certainly in the second half of the year, there were a whole range of new initiatives that were kicked off that actually flowed through into the following year.
Okay. No, that helps. Thank you. Second question, just around Burrup, sort of in two parts. If you can just provide any color around when you expect beneficial production on Burrup to occur. Secondly, Alberto, in the release, it is mentioned that Orica is currently evaluating all options for the plant. If you're able, elaborate if you can, at a high level, what some of those options might be.
There's technical and operational commercial things that we're working on. One, on the technical, every plant has teething problems. This plant is still with the project team. It hasn't been passed to the production or operating team. That's scheduled to happen sometime in February, we don't know. We don't control that operation. It will happen sometime. It's within the next months, we don't know exactly when. That determines one of the uncertainties that we have. When the plant, it will go into a campaign mode in any case, even when it's under production. We can run, we have the tons, about 110,000, 120,000 tons that can run for the next, let's say, for the fiscal year and probably in a 12-month time, and that would be about a break even in terms of EBITDA.
Commercially, there are tenders going in 2017 for 40,000, in 2018 for 180,000, and in 2021 for about 180,000. We're obviously looking forward to participating in those tenders. We don't have any of the first two, again, we'll see how we fare. One thing that we have flagged is we won't destroy value to our customers. We didn't build this plant to lose money, we'll be very disciplined.
Okay. Thank you.
Your next question comes from Grant Saligari with Credit Suisse.
Thank you. I also have a couple of questions on the price resets. Could you indicate to what extent the price reset is from older contracts coming down to the current market price, versus the market price itself continuing to fall, please?
It's much more renewal of contracts and then just resetting to the existing market price. Probably in the last, I would say, eight or nine months, there has been very little reopening of contracts. It's just a natural renewal of contracts and old contracts that were three years ago. That's probably what we're still seeing.
If we looked at the average across the contract profile, how far or to what extent is that above the current market price?
The last time I looked at, we were pretty close to that. I haven't looked at it lately. Unfortunately, our systems are not great. We're working on that. Part of the investments we're going to make on CapEx is on to improve our systems. The last time we had this evaluated, we were getting quite close. On that sort of the confidence when we say we do know that there's some large contracts, and that's the AUD 30 million we know we're putting onto 2017. Apart from that, I think that's why we don't expect much more. The answer is, apart from that, we seem to be pretty close.
You mentioned earlier, I think, that pricing currently was below IPP. Was that the comment that you made, and if so, what factors are driving that, please?
In the East, we are slightly. If you look at the market, there's really three producers, and that's where 90 whatever, 5% or 7% of the market operates, which is what IPL has, the CSBP plant, and ourselves. CSBP is trying to be seeing what's happening. Obviously, there's a new plant in Burrup that we all know. They're trying to expand in the East. They have about AUD 180 freight, obviously, their variable costs are very low. They basically are the ones that have lowered the price slightly below IPP. That's really what's been happening. At the same time, we're at the limit of their costs, and that's where we think we are close to the floor, we'll see.
That's helpful. Thank you.
Your next question comes from Nick Robison with Morgan Stanley.
Hi, thank you. Just wanted to confirm, in relation to the two contracts that you lost in the West, when do you actually lose those tons?
In about a year. We still have them for fiscal year 2017.
Okay. Just want to confirm the campaign run that you referred to for Burrup, were you saying it was EBIT break even or EBITDA break even?
EBITDA break even. That's when we put in the headwinds. We put the headwinds of depreciation. Depreciation is about AUD 2 million per month from the moment it goes into operation. Currently, it's scheduled to be around February.
Okay. Yeah, just want to make sure I'd heard that right. Lastly, just the turnarounds for Kooragang Island and for Carseland. You don't seem to be outlining an EBIT cost of doing those. I was just wondering why there's no cost.
Can I just answer that? It's also included in our margins, really, but essentially the only real significant cost, or not significant, the only real cost that you can see other than the CapEx is the build of working capital.
Sure.
Remember, excess supply.
The rest of it is already included. Thereafter that you sell and you immediately catch up.
Yep.
Sure. I guess everyone that does a turnaround of a plant, generally, they outline a reasonably chunky decline in EBIT.
Yeah.
There's plenty of fertilizer plants and iron plants that go around down around the year, and it usually costs you tens of millions of AUD in terms of EBIT. Just wondering why.
No. We've got that built in. We're not disclosing it separately.
Okay.
You have that when you have restrictions of supply. When you're supply long, I don't know where the EBIT comes in.
We've got capacity.
We have capacity.
You told us that Carseland's running at 98%. It's loaded. You're not going to be building a substantial amount of inventory. If you take it down for six weeks, its average utilization's going to drop a fair bit. That's going to be a margin drag.
We don't see it that way. As obviously we all know, we don't see things the way you do in many other fronts.
Okay. All right. Thank you.
We are showing no further questions on the line. I'll now hand back to Mr. Calderon.
Thank you all. Thank you all for coming in today.