Good morning, ladies and gentlemen. Welcome to Orica's 2017 full year results. We welcome those here in the room, those on the webcast, and those who've joined us through our teleconference facilities. Presenting today is Alberto Calderon, our CEO Managing Director, who will take us through the overview and the performance of the business, followed by Thomas Schutte, the CFO, who will give us the financial performance overview. We will then take questions from the floor and from our teleconference facilities. Over to you, Alberto.
Thank you, Delphine. Good morning to you all in the room, and the webcast, on the phone. We have a quick disclaimer, which I would ask you to read. Then I will start with safety. What is it? Oh, this. Yep, thank you. During the year, we lost two of our people to workplace accidents, one on a customer site in Peru and the other one at a manufacturing facility in Gyttorp, Sweden. Let me be clear in saying that any fatality is unacceptable. There is nothing more painful than coming to terms with losses like this. You can be assured that the entire management team is prioritizing our focus on safety. Following both of these accidents this year, we undertook comprehensive investigations to understand the root causes.
It was found that a significant contributing factor to each of these fatalities was that processes that were put in place to protect us from injury were not being followed. Obviously, this is never acceptable. We're making it clear through every level of the organization that this will not be tolerated. We are also ensuring a clearer and deeper understanding across Orica of our risks. To that end, we implemented a Major Hazards Initiative focusing on identifying the few major hazards that could lead to serious harm. Good progress is being made on verifying all key controls at every site. Defined standards and procedures are in place that must be adhered to at all times.
I have given all our employees my personal commitment and support to raise any issue that they believe leads us to unsafe work or if they see dangerous gaps in our procedures and processes. I am determined to uphold Orica's safety culture and demonstrate that it is a culture in which each one of our 11,000-plus employees around the world understand and follow our safety standards, procedures, and processes all the time. Our TRIFR benchmarks were well against industry standards. It's not relevant when our colleagues are fatally injured. In terms of our broader sustainability agenda, we have launched our Climate Change Policy outlining the actions we are taking to reduce emissions at our major production facilities and plan for a lower carbon future. We see this as our responsibility as a global leader.
In 2017, the mining sector began to recover from the severe downturn that began in 2015. This marks the first time since 2012 that our EBIT has been stable against the prior year and is a result of the steps we have taken to build Orica's resilience. Despite facing substantial headwinds during the year, we delivered a stable full-year result with earnings before interest and tax of AUD 635 million. Explosive volumes for the year of 3.65 million tons were 3% higher than the prior year, in line with the recovering mining sector, particularly in the Australian, Pacific, Indonesian region. On the price side, the oversupply in domestic and global ammonium nitrate and cyanide markets in the past years led to a reduction in prices. However, we have seen prices stabilize over the past six months.
The impact on revenue that we are seeing is the consequence of old contracts being renewed at the current market prices. At the half-year results, I said that we would continue to expand and accelerate our business improvement initiatives in fiscal year 2017, focusing on opportunities in the commercial space, operations, our external spend, and through our supply chain. I am very pleased that we have delivered net benefits of AUD 127 million this year, which has offset all the price resets and input cost headwinds that we flagged last year. We expect to continue to deliver significant sustainable benefits in the years to come. I will talk more about this later in the presentation. The balance sheet remains strong, with gearing further reduced to just under 33%. Maintaining a balance sheet with about 30% gearing through the cycle is something that we are comfortable with.
We have increased the final dividend by 15%. Tom will talk more about this. Tom will talk more about the dividend. Final dividend is AUD 0.28 per share. Total dividend per share for the year of AUD 0.515, an increase of 4% from last year, and a payout ratio of AUD 0.50. Turning to the performance of each region now. The API region, our highest margin region, contributed just under 50% towards the group EBIT. Volume was up 10% per growth, driven by contract wins and increased demand across both Australia and Indonesia, with particularly strong demand from iron ore miners off the back of stronger prices for those commodities. Sales of initiating systems also increased in line with the AN volumes, and cyanide volumes were ahead of the PCP.
While this region has been impacted by known headwinds, including increased raw material costs and further price resets and contract renewals in 2017, these have been more than offset by improved volumes from mine plant normalization, contract wins, and business improvement initiatives, resulting in a 9% increase in EBIT this year. EBIT margins increased from 20%-22%. Our pricing position on negotiation of contract extensions and renewals has stabilized over the past six months. In regards to Burrup, mechanical commission of the plant has been completed with the plant meeting all environmental requirements. All the necessary Commonwealth approvals to commence production have now been received, with the final state government approval expected in the first half of fiscal year 2018. Our operational plans for that plant remain unchanged, and we will commence campaign production in line with market demand. North America.
In North America, sales to the largest markets, gold and quarries, remain strong due to firm gold prices and continued strong activity with key contract wins in infrastructure projects, particularly in the U.S. Volumes in both Canada and Mexico were also up, underpinned by key contract wins and higher output at customer operations. Overall explosive volumes were slightly lower this year, mainly due to a joint venture partner sourcing bulk AN directly from the manufacturer as per the early signed contractual agreement effective in January this year. Removing the impact of this, volumes were up around 7% in North America. North America had the highest headwinds in relative terms this year, which were mainly due to the contractual input cost increases on 2013 negotiated contracts. The North American team worked hard to deliver substantial business improvements initiatives to offset these headwinds.
The stronger Australian dollar and extended maintenance shutdowns of our Carseland manufacturing facility due to issues with our supplier reduced EBIT and EBIT margin, being marginally lower this year. Removing the impact of this, EBIT was up by just over 3%. Moving now to Latin America. Overall explosive volumes were up with varying results across the region. Colombia was up, benefiting from mine expansions, offsetting volume reductions in Peru and Argentina. Across the IAM portfolio, there was a positive shift into emulsion products boosted by successful value-led customer propositions, specifically in Chile and Peru. Cyanide volumes were also up with higher operational demands in Peru from existing customers, as well as market share gains from new contracts. In regards to EBIT, at the half year results, I said that we expected to close much of the 20% gap in the second half, basically that's what happened.
Business improvement initiatives across the regions and improved mix of increased products, volumes, and service partly offset the impact of the unfavorable product sourcing and plant cost following the closure of the Antofagasta packaged explosives plant in Chile, and price resets in explosives and cyanide reflective of pricing pressures in current markets. This resulted in EBIT being slowed down for the year by 11% compared to the previous year, but basically flat second half on second half. Europe, Africa, and Asia. Across this multi-regional business, explosive volumes were up 3%, with a continued recovery in regional European markets and from growth in customers' operations in CIS, Norway, and Estonia. Following the completion of major projects in Southeast Asia, activity in the tunneling market was lower this year.
Lower plant utilization and higher produced sourcing costs following the fatal explosion at Gyttorp, reduced volumes in Asia, and lower cyanide volumes negatively impacted EBIT. The impact of Gyttorp lowered tunneling activity, and the divestment of the German and Asian business in 2016 had about a AUD 19 million negative impact on EBIT. Higher volumes and business improvement initiatives offset some of these negative impacts, resulting in a 13% reduction in EBIT. Now turning to Minova. The business has stabilized and turned the corner in terms of revenue up to 12%. Sales into the Australian coal market have strengthened. Conditions in North America and European coal markets have remained difficult. Current prices in the North America coal segment are destroying value and hence will be an area of particular focus. We will continue to diversify into non-mining sectors.
While the business is now delivering positive EBIT, the pace of recovery is lower than expected. As I mentioned 12 months ago, we invested in improved front-end sales, marketing, and distribution capabilities to support revenue growth, which it has, but it has yet to translate into higher profit. The business is now subject to an intervention, and we will update the market on its progress. Before handing to Tom, let me just summarize how I view the results. I think we are about 75% of our EBITI, which is in Australia and North America. I think results are pretty encouraging both this year and how it builds up into the next years to come. I think Latin America and EMEA did a reasonable job. They would be more stable without those headwinds. About 70% of our engine, I see it as a very credible result and encouraging into the future.
I will now hand over to Tom to go through the financial performance.
Thanks, Alberto. The 2017 sales revenue of just over AUD 5 billion was similar to the prior period, despite volumes being up by 3%. This was due to a combination of three factors. Firstly, lower input commodity indices impacting rise and fall arrangements. Secondly, the consequence of old contracts being renewed at current market prices. That said, I think Alberto mentioned earlier that we have seen prices stabilize in the last six months. Then thirdly, the appreciation of the Australian dollar against most major currencies. Both EBIT and EBITDA stabilized and were similar to the prior period. EBIT for the year was AUD 635 million against AUD 642 million in the comparative period, and EBITDA AUD 896 million this year against AUD 908 million in the last. This is a sound result, especially given the headwinds that we have faced throughout this year.
NPAT, before individually material items, of AUD 386 million was also in line with the previous period. The change in NPAT, post individual material items, relates to the ATO tax case, which we disclosed to the market in December of 2015. Importantly, despite interest in relation to Burrup being expensed in the last quarter of this year, the interest expense was 15% lower than the previous period due to lower average net debt levels. This has resulted in our interest cover increasing to 8.9 times, against 7.6 times for the same period last year. Our cover remains healthy, which is well above any banking covenants, as we have mentioned in the past, of around two, and well above our own internal targets of around five.
The effective tax rate of 29.1% was slightly higher due to an increase in taxable gains on the disposal of assets and an increase in non-creditable withholding taxes, particularly on foreign dividends. Going forward, we expect the effective tax rate to be slightly higher than 2017 due to lower foreign tax deductions. As Alberto mentioned just a couple of minutes ago, the board has declared a final dividend of AUD 0.28 per share. That takes the total dividend in 2017 to AUD 0.515 per share versus 2016 of AUD 0.495 per share. This is an increase of around 4% from the 2016 dividend. This represents a payout ratio of 50% versus 47.6% for FY 2016. This is in line with the new dividend policy announced last year of 40%-70% range. It has increased year on year in line with our new dividend policy.
If I then skip to the EBIT bridge. Starting with our full year result of last year, AUD 642 million, we now firstly look at the impact of FX and inflation on our overheads. Inflation on our fixed overhead costs had an adverse impact of around AUD 29 million, with the largest impact in Latin America, and this is also our highest inflation rate area and quite consistent with historical numbers. We expect inflation to be at similar levels than these going forward. The average Australian dollar exchange rate appreciated against most major currencies that Orica is exposed to, and this has had an adverse impact of around AUD 15 million, in line with our expectations actually at the half. The average Australian to US dollar rate for 12 months to September this year, for your information, was around 76.2, compared with 73.6 in the previous period.
This predominantly actually impacted the North American business, which was driven by the appreciation of the Australian dollar to the US dollar. Moving on now to the headwinds. We previously flagged that these would be in the range of AUD 50 million-AUD 70 million negative impact related to the commencement of the new gas contract in Australia and the step-up in material input costs of two supply agreements that we had in North America. The impact of these for this year was AUD 59 million. There will be approximately around AUD 10 million of this to flow through to 2018, as these headwinds were actually effective from 1 January 2017 and not the full year. We also flagged that it will be around AUD 60 million of impact in price resets and contract renewals, partly from annualized 2016 resets and some from FY 2017 renewals.
For the year, this was around AUD 54 million. Slightly lower than we had expected, which is good, but due to some renewals actually being deferred into 2018. We have consistently said that these headwinds on costs and the impact of pricing and contract renewals will be offset by the business improvement benefits. We said that for two results releases so far. I am pleased to say that actually we have delivered AUD 127 million in net improvements this year. Alberto will talk a little bit more about the types of business improvement initiatives a little bit later. Turning now to some changes in the market. We are beginning to see some early signs of stabilization in the market, with some resumption of normalized mine plans and strip ratios at some of our customer sites.
We're also importantly seeing customers now trending more towards a value-add type and a value-accretive type discussions rather than just purely price that we saw maybe a year, a couple of years ago. The AUD 19 million improvement in EBIT was largely from higher sales volume, as you could see, particularly in the API region, and a positive change to mix and margin from premium products right across all regions. These benefits more than offset the negative impact due to higher sourcing costs following the Gyttorp explosion and the cost of the extended turnarounds at KI and the Carseland plants. Much of the AUD 18 million negative impact in cyanide was due to an increase in key manufacturing inputs, particularly gas, and lower utilization at the Yarwun plant during this plant turnaround.
Minova contributed AUD 13 million this year in EBIT. This was largely due to a profit from the divestment of the business in China, some improved market conditions as Alberto flagged, and supply business initiative benefits. The other category of positive AUD 9 million, which is lying in other, is made up of non-repeat costs incurred in 2016 and a couple of smaller items. All in all, this is a good result, with the expected headwinds having been offset by business improvement benefits. Now turning to the CapEx. We continue to have a disciplined approach to capital management. As mentioned over the past few results, at all times do we ensure that CapEx related to safety, environmental obligations, and license to operate conditions are met, and we ensure that that capital is in essence not subject to pure financial metrics, but also various other measurements.
Sustaining CapEx of AUD 226 million mainly related to the planned maintenance shutdown programs at KI, Carseland, and Yarwun manufacturing sites. There's also been some spend of new MMUs in the API region. Contribution to the construction of the Burrup plant in these numbers was about AUD 29 million, and this is the final cash contribution of this project. Good progress is being made on the SAP project, with the first release actually successfully going live and being completed this year. It was on time and below budget. A total of AUD 29 million was spent in that space. Our debt. At the half-year results, I mentioned that we would expect cash conversion for the year to be lower than 2016. We actually also alluded to it this time last year. The reason for this are twofold.
One, higher absorption into working capital as a result of a very strong push in 2016. Secondly, higher sustenance capital that we spent in 2017 on the major turnaround programs at Kooragang Island and Carseland, as well as some increased spend in the SAP project. Going forward, we actually expect this to be above 80%, which is in line with what we had said in the past as well. During the first half of this year, we successfully refinanced AUD 398 million issue of a 10-year fixed rate senior unsecured notes in the U.S. private placement market, which has increased our debt maturity profile to 6.3 years. Our strong cash flow and favorable FX impact has resulted in the net debt being reduced to AUD 1.4 billion and gearing of just under 33%.
Maintaining a balance sheet of about 30% gearing throughout the cycle is something that we're quite comfortable with. Before I hand back to Alberto, in summary, we have made good progress on delivering substantial business initiatives this year to offset any headwinds. More importantly, there are more benefits to be delivered in the next years, in the next few years. Our disciplined approach to capital expenditure will continue to protect our balance sheet and thereby ensuring our balance sheet remains strong. With that, I'll now hand back to Alberto.
Thanks, Tom. At the 2016 full year results, I said that in 2017 we will be deliver business improvement initiatives to offset a number of known headwinds of somewhere around AUD 120 million expected during the year. We have done that, of which the majority is sustainable. The business improvement programs is focused on embedding new ways of working that fundamentally make Orica a better business by buying better- Producing more efficiently and bringing more value to our customers. We now have over 1,900 initiatives classified as L4, or in other words, highly probable to deliver benefits which have been generated and owned by over 1,000 Orica people across the whole business. The supply chain benefits and some of the early benefits that we achieved to date are sustainable. Initiatives over the next few years will focus more on manufacturing efficiencies and commercial efficiencies, which obviously take a bit longer.
We have built a robust risk management and governance framework around the program. This not only ensures that the initiatives are going to the bottom line, but we continue to build capacity and embed behaviors to deliver long-term sustainable results. Continuously evaluating and improving our customer relationships is a key pillar to us, Orica strategy, ensuring we become a more customer-centric organization. 12 months ago, we launched Orica's Voice of the Customer program globally so that we can better understand our customer needs, improve customer service, but more importantly, enable us to close the loop on issues more quickly and effectively by combining customer insight and delivering our core customer promise focused on safety, reliable supply, quality, and delivering value every day. We create deeper, stickier customer relationships providing a key competitive advantage in the market.
Since we launched the program, we have continuously achieved a favorably net promoter score, which is higher than the comparable industry benchmark. This is reflected in the fact that over 90% of our contracts were retained this year. Additionally, we have made significant inroads into competitor-held accounts and greenfield contracts, which are being won on the full service and support offering and not on price. We're also starting to commercialize our game-changing technologies. We have successfully completed trial in WebGen 100, a critical precursor to automating drill and blast loading with proven safety and productivity improvements and greater reliability. We are now expanding this product into the Latin American region. I spoke about BlastIQ at the half-year results, which is an integrated field information system that improves blasting performance by linking modeling and design with field operations and delivery.
We have seen a 35% increase in licenses globally since H1 2017. Both technologies are aligned with our customer long-term goals around automation and data-enabled blasting optimization, leading to significant productivity gains. Early results show that these technologies will be key enablers to delivering even greater productivity for our customers' operations in the future. Our applied technology program delivers continuous improvements to products and services based on direct customer feedback. For example, our differentiated Global Booster and Bulkmaster 7 smart delivery system, both manufactured here in Australia, are poised to deliver success for our customers. We have had successful trials completed in the API region over the past six months with results including increased safety, efficiency, quality, and security of supply, as well as reduced total cost of operation. A win for our customers and a win for Orica. Turning now to the outlook for fiscal year 2018.
We are forecasting volumes to be around 3.65 million tons ±5% with improvements across all regions. Probably the expectation is more on the plus side than on the minus side. We expect the volume recovery in API to continue from higher customer activity, particularly across the eastern surface coal market in response to firm demand for high-quality thermal coal to support domestic power generation in Indonesia and India and increasing strip ratios in iron ore. On average, we expect the remaining regions to recover in line with GDP or slightly above GDP. While market sentiment and prices continue to improve and stabilize, we expect some of the headwinds we encountered in 2017 to extend into the 2018 financial year. We believe that we're close to the end of the headwinds that we routinely faced over the last three years.
We expect around AUD 50 million-AUD 55 million impact from pricing due to contract rollovers and fiscal year price reset flow on. As mentioned earlier, prices have stabilized over the past six months, so the impact in 2018 is mainly from contract rollovers as part of the normal pattern. There will be also around AUD 10 million flow on impact from fiscal year 2017, increase input costs from previously negotiated contracts. We expect the business initiative benefits in 2018 to offset these headwinds, but more importantly, enable us to now start investing into the future. Given that the environment has stabilized in fiscal year 2018, we will increase our investment in technology R&D and IT to around AUD 40 million. We will very importantly book this as operating expenditure and not as traditionally as capital expenditure.
The focus of the investment in technology is to further advance the digitization and automation of our blast operations to create value for our customers and incremental returns for Orica. The convergence of many developing technologies such as cloud and edge computing, artificial intelligence, and robotics applied to the blasting space will enable the rapid optimization of blasting outcomes for our customers and the automation of operations for productivity and safety. Let me just do a brief comment on outlooks. What we try to do with outlooks is create the most predictability in our company. If you look at what we did a year ago, we gave you the price resets we expected, the contract impact we expected, how we were going to offset it.
If you fast-forward 12 months, basically things turned out as expected, we had some new things in Forex and probably on impacts on the turnarounds, basically turned out as expected. We're trying to embed that predictability in the same thing for the outcome of 2018. The only probably new piece of information, because if you read the bulk of analyst reports, the price resets were forecasted and the impact of the contracts were expected. It's just AUD 40 million. We see it as good news. We see it as confidence into the future of investing, into the future of technology. It's probably the only company that is doing it. We're quite excited by that future in R&D and in specifically what I counted of this convergence of technologies in cloud and edge computing and artificial intelligence.
The market may disagree right now and seems to interpret it as bad news. Again, time will tell. Just again, from our part, we're quite excited by this future and again, looking for predictability in our results. Capital expenditure will be towards the upper end of our stated AUD 300 million-AUD 320 million range, mainly driven by the implementation of the SAP project. To wrap up, throughout the year, we continued to face substantial headwinds, including contractual increases in raw material costs, foreign exchange impacts, and price resets as long-dated customer contracts were renewed at current market prices. Despite these challenges, our continued focus on core disciplines and a program of business improvement initiatives enable us to deliver a sound result. Looking forward, we will continue the cadence of embedding business initiatives that will make Orica a more effective and efficient business.
We remain positive that we have now overcome the majority of the market and internal headwinds and are at a position where we can start using the initiative benefits to invest for the future, in our people, in technology, and to drive more value for our customers. More importantly, we will continue to maintain a strong and flexible balance sheet, which will enable continued profitable growth in Orica, all of which will deliver strong shareholder returns. Thank you. I now open to questions.
Thank you. If you wish to ask a question, please press star one on your phone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Mark Wilson from Deutsche Bank.
Thanks very much, Alberto. Was just wondering if you can run through the impact of the detonator explosion in the period, what action you've had to take, and how quickly you can recover the foregone earnings there.
The direct and indirect impact for the fiscal year 2017 is around AUD 9 million. We should recover about, I would say, 70%-80% of that in fiscal year 2018. We still have some increasing costs because we've moved to some production and manual presses. Yeah, I would say about 70% or 80% of that will be recovered in 2018.
Okay, great. Maybe just a similar analysis there in Latin America.
Sorry? Oh, I'm sorry. For Latin America, the impact overall was about AUD 12 million. A big part of that was also the impact of self-insuring that we do, and it's absorbed by the region. We should have most of that disappearing in 2018.
Okay, thank you very much.
Thank you. Your next question comes from Niraj Shah from Morgan Stanley. Please go ahead.
Good morning, guys. Just a quick one on Burrup. Just curious, based on sort of current demand that you see, to what extent do you expect Burrup to be loaded going into FY 2018? And could you just talk us through the EBIT profitability impact of that?
What we've said is in the next year, Burrup will be EBITDA positive. Mildly EBITDA positive is what we expect, but EBIT negative. We don't know exactly because, as you've seen, FMG in the last quarter increased their strip ratio by about 40%. We don't know how that will develop, and so that will affect it. Let's say we will be between 30%-40% loaded during the next 12 months. What we've said is during the next two years, we'll participate in tenders of about 400,000, 380,000 tons that are basically Roy Hill, BHP, and Rio Tinto. We would expect to win a percentage of that that will have the plant fully loaded in about two to three years. That's the current plan. Again, in terms of depreciation, the numbers is about AUD 2 million. Of depreciation.
That will go through the bottom line in 2018, so mildly EBITDA positive.
Got it. Thank you. Secondly, do you think you could quantify the EBIT impact from the extended plant turns at Carseland and KI?
Look, a number that I can give you overall is there is about AUD 30 million of impact of all of those in manufacturing that we will not see again in 2018 and beyond.
Got it. Thank you.
Thank you. Your next question comes from Daniel Kang from Citigroup. Please go ahead.
Good morning, everyone. I just have a few quick questions. In regards to markets overall. You've mentioned that markets are starting to improve. Can you quantify or discuss the potential benefit from mix improvements in 2018 and going forward? Other two quick questions of guidance on price resets. You mentioned a further negative of AUD 50 million-AUD 55 million, but prices are starting to stabilize. Just wondering if it's too early to expect price resets to be flat or even positive in FY 2019. Just lastly, on the Breakaway business improvement initiative. Great effort to guide that they should offset the headwinds of 2018, which I calculate to be over AUD 100 million or thereabout. Are you able to provide some guidance as to Breakaway benefits in FY 2019? Thanks.
Okay. Volumes. What was exactly the volumes thing? Overall.
You could say much mix improvement.
Sorry. Just overall, what is our expectations on volumes overall?
No.
Yeah. Our guidance, we said it'll be on the positive end. It will grow, but it's the uncertainty. We're not sure. There's a lot of contracts up across the world. I don't know, if you want to pinpoint a number, maybe with GDP, something along 2%. That would be something along that maybe 70,000, maybe 90,000 tons up. If you want for your model, around AUD 200 per ton. That will be that. In terms of Project Breakaway, which is your third question, what we've said in the past is we believe we can continue the cadence into 2019 and 2020. If you look at how it's structured, right now, a lot of it comes from commercial, but we think commercial will still be probably providing in the future, maybe not 50%, but 30%, but manufacturing will step up.
That manufacturing, we will see the benefits in 2019 and 2020 of what we're doing today. That rough number on a net basis of AUD 100 million, we think we can continue it for some years as a rough guidance into the future. In terms of prices, what we try to say in our results is, look, this 2018 is the last of the old contracts that were set before price declines. We do not expect that in 2019 and beyond. This is all driven by the fact that, let's say, China doesn't collapse or anything.
If the current conditions of the commodity world sort of continue, and let me say, we call it a P80 or P90, and that means a world where the thermal coal stays above AUD 50 and iron ore stays above AUD 50, that most of you analysts believe that that is the case, and we believe that too. In that world, the miners would not change their mine plans, and hence, we would not see any significant changes to the current market prices that have, as we said in the past, stabilized over the past six or eight months. With that in mind, as you said, we would think that these would be the last of any significant headwinds in 2018 and 2019.
We should not see those type of headwinds, neither contractual, nothing that we obviously know our contracts, so there's nothing that we foresee that would hit that, neither in price resets. On the contrary, we probably expect to see the continued tailwinds in terms of volumes and in terms of Project Breakaway, in terms of productivity improvements.
Thanks for that. My first question was actually on mix. Are you seeing much improvement in terms of your sales mix to your customers as markets start to recover?
There has been something in Australia which is interesting. That is related. You could also see a lot of improvements in EBS, that mix is as customers move to focusing more on productivity versus cost reduction. They've gone to more advanced again from non-electric to EBS and to probably higher-end explosives. Yes, we have seen that improved in the mix, which adds more value to our customers.
Thanks very much.
I don't know how that will continue to go, but my feeling is that, as I said before, customers will continue to focus on productivity improvements and sustainability in the long run versus cost at all costs, which is what was happening two years ago.
Got it. Thank you.
Thank you. Your next question comes from Sophie Spartalis from Merrill Lynch. Please go ahead.
Oh, good morning. I've got a few questions. Firstly, Minova, you delivered an EBIT of AUD 13 million. Can you just split out what would the profit be if we took out the divestment of the business in China, please?
I think the business in China was
About nine
AUD 9 million. Yes, that was a significant part of that, of the Minova was that. That's why we flagged that probably that's an area where we've seen slower growth than I would have wanted. It is EBIT positive. It was EBIT negative the previous year. We have seen significant increase in revenue. On a monthly basis, revenue has gone by about average 30%-40%. Unfortunately, that hasn't translated into EBIT like we would have wanted to. That's why we flagged that things are going slower than we would have liked.
Okay, great. Then just in terms of Yarwun, there was some expectation that that second train was going to start up. I guess, excuse me if I'm wrong, but I haven't seen any commentary to suggest that. Can you just walk through why the decision wasn't made to put on the other train in Yarwun?
It has been made. In about four weeks, we will have available 100,000 more of production. Yes, it has been made, and we'll probably be using it. We are seeing things tightening up in the East, and that's why we put that into operation. Maybe we didn't flag it because it didn't have any impact in 2017. Yes, it will be ready to go in four weeks.
Okay, great. Then just in terms of, you talked about your carbon strategy across your manufacturing operations. Can you just talk through how much CapEx is involved in ensuring that they're up to standard and the cost profile impacts of implementing such a strategy?
Nothing that would get us out of the range of AUD 300 million-AUD 320 million. They're more initiatives of pretty low CapEx and with high impact, nothing that would take us out of that range.
Okay. Then just a final question. In terms of the business improvements, how do you define adding value to customers, which accounted for 20% of the benefits that you announced?
That is more around what I talked about when you switch, for example, from non-electric to EBS. When you prove to a customer that moving to a high-end explosive with better quality detonators, we're going to be able to add value. Even though their cost increases, their profits increase by more. That's what we define that. A big part of Breakaway has been really focusing on how we prove to the customer that by getting more sophisticated products, if I may say so, they're going to be better off. That has been a big part of when you look at our overall results, our contract quotation, we say more than 90%, and it's actually significantly higher than 90%. We've been able to win contracts from greenfields, contracts percentage from brownfields without competing on price. That is the way we have been doing it.
All of this is tied sort of into the same thing. More investment in technology, more investment into proving, and that's basically BlastIQ on a real-time basis, how we add value. That's all part of the same sort of program of customer-centric investment in technology, adding value.
Okay. Is that more Australia-centric or you can apply that across the globe?
In Latin America, it's done well, and in North America, too.
Okay.
A big part of the gains have been in Australia. You can see EBS going all in many parts of the world.
Great. Thanks, Alberto.
Thank you. Your next question comes from Scott Ryle from Rimor. Please go ahead.
Thank you very much. Alberto, I was wondering if you could tell me, just talk me through what happens or what you specifically do in the instance of a fatality in the business. I can tell you're very frustrated about the performance there, what do you actually do? Do you get on a plane and go to the location, be with the family, all that sort of stuff, please?
If I look at this year, like I said, the big disappointment was on safety, and probably Minova would have been, but it's a small part. The safety is the biggest one. The latest fatality in Gyttorp, I did visit the mother and the father and the brother and that, yeah, it's even difficult to talk about that. It's just something that is nothing worse than that, I have to tell you.
Yes. Oh, sure.
This mother has to live with that for the rest of her life.
Yeah.
Yes. What happened, and if you look at the past years, even we've went back at 35 years down the road, we have about 55 fatalities with explosives. What that means is that you cannot be at the things that can kill you cannot be very good. You have to be perfect, and you have to be perfect every time. We're not the only ones. The miners have went through, or I think Escondida, for example, after a couple of fatalities, did the same thing. Actually they started this whole thing of focusing on the few things that really can kill you or severely injure you. They're not that many, although you would think, oh, you deal with explosives. Now, in every site, there are a limited number of activities that are very dangerous.
The other ones, yes, they can be dangerous, but not to that level. That's what we call major hazards initiatives. We got to make sure that we have identified them, that everybody understands it on the site, and that the procedures, that there is no shortcuts. There's something called normalization of deviations. It was after the Challenger, actually, tragedy, that there was a lot of this sort of terminology came into the market, into our space. It was what happens when you take shortcuts slowly and then sort of a deviation becomes normal. That, I would say, has affected our operations in the past years, 10 years, something like that.
We have to be sure that for the critical few things that can injure you, there is no deviation, and everybody does it 100% of the time, and that the procedure is sufficiently clear that it can be followed. That is the focus. I'm quite confident that in time, if we persevere on this, we talked about 30,000 verifications on our major hazards across our 450 sites, we will be able to aspire to zero harm. It's a challenging issue that we are just, again, every day, we wake up with that in mind. It is a key area of focus of the whole management team and my focus going into the future.
Okay, understood. Thank you. Very comprehensive answer. Could I then switch gears a little bit to your API division? Just help me out with my maths a little bit here. Your ammonium nitrate sales or volumes are up 10%. Your EBS volumes are up 10%. Even if I add back all the AUD 54 million of contract repricing into the API division, which I know is not going to be the case, but if I added all of that back, then I'd get revenue growth of 5%. Where are you seeing in addition to what you've disclosed there, the volumes up, the EBS up 10%, and the pricing resets. What's softer than the 10% volume increases that you're seeing? Please.
An important part is what has done very well also is Indonesia. Indonesia, it would be of the, let's say, roughly 100,000 tons, maybe 35 or 40 would be in Indonesia. Those are much lower margin tons than in Australia. You can't just do the same margin sort of calculation. I think that if you do that should probably put your calculations back in sync. I would use as about half of the impact of price resets and half of the impact of contracts were in API.
Okay. Great. It's more a mix. You've had very strong support in Indonesia-
Indonesia and that-
which is lower price
Having said that, we're quite pleased with the recovery. It's the first time since 2012 that API goes up, and it went significantly up. As I said, as I look into the future, both Australia and North America, which is about 75% of our business, have similar trends going into the future and without the headwinds.
Okay, great. Thank you. That's all I have.
Thank you. Your next question comes from John Purtell from Macquarie Group. Please go ahead.
Good morning, Alberto. Just had a couple of questions. Just the first one in terms of price impacts. Just as far as your outlook comment goes, there was probably some expectation that the rate of those price impacts would be less negative in 2018. They're expected now to be at a sort of similar level of negative quantum in terms of rate of change. Just interested in terms of what regions those relate to. You've got cyanide in the mix there as well. You did mention some deferral and some contract renewals too from 2017, presumably into 2018.
Thanks, John. There's about Roughly about half of that number was already happening in 2017 second semester impact. Then you have the new one. Actually the new ones in 2018 is much less than the trends that we have seen in the past. It's the last of the contracts that were negotiated at higher prices. That's probably as much as I could tell you on pricing. There was about AUD 10 million of that was going to happen in 2017 and didn't happen. We just pushed it into 2018 by how these things are happening. That probably 2017 should have been a bit higher and 2018 a bit lower.
Okay, thank you. Just the second question, in terms of the additional AUD 40 million spend on R&D and technology, how do you think about getting a payback on that and what sort of timeframe you might expect to get a payback there and the benefits of this? Does this enable you to push more EBS, to push more blast-based services? How does it actually manifest?
The first thing is that all of those have to go to the investment committee and have the thresholds of RONA of 20% that we've sort of said in the past. Look, half of that is around 4S. The more that we look at the current status of our systems and what we will be able to do with 4S, we already have released one that went live on 4S and all the company right now has purchase contracts in system and are following it on that in the new release. As we look, releases two and three will happen in 2018 and 2019. That I really see it as the only way that we can sustain in the future all of the benefits of Project Breakaway. The rate of return of that is enormous and quickly.
I can't tell you, well, it's going to be a direct EBIT of this magnitude. I can tell you that without that, we would not be able to sustain. It would just be too many fronts on sustaining it all. You make sure that all contracts in the system when you renew them have again the protection of whatever benefits you have had in the past and so on and so forth. That investment, we feel pretty confident of its returns. We'll see them in 2019 already. The other one is R&D and it is this BlastIQ and wireless where we're concentrating. We're again very confident. Wireless already was deployed in the past six months in two mines in North America and it's being deployed in Latin America. Our customers, that will be we're by the only company that has that type of technology.
We clearly see during the next three years as a differentiator. So I can't tell you that in two years we'll recover three years, but I'm pretty confident that the returns will be much higher than the 20%. Tom?
If I can just add there, Alberto. Typically on the R&D we are looking at product commercialization through the normal phases that everybody would be aware of and in the earlier phases we need to expend it. That's what this is referring to. Then as soon as you can actually do the full quantification of product commercialization, you then capitalize from there. Typically we also look at in this space at our RONA over a three-year RONA, a two to three-year RONA in the investment committee.
One thing probably to clarify, we did a whole review of what we've in the past capitalized and what we haven't. We have adopted, again, Tom and his team have adopted a more probably, we would say traditional, but you could also argue conservative approach, the more type of oil exploration. That's the technology slumber sort of approach that we're having where once you're successful in exploration, you can even revert capitalization, but initially you expense it. We could have done it differently and have that AUD 40 million all into capital. I don't think that that's the best thing for the company and well that's what we're there for, to try to do what we believe is the best for the company. We understand that that has created some noise, but that's just how we see things.
For us, again, as I repeated earlier, it's a quite exciting prospect that being able to invest in an area that we firmly believe will deliver great benefits to us, to Orica.
Thank you. Just one last one if I can. Just a question for Tom in relation to Burrup. Just to clarify, was there three months of additional interest and D&A expensing in 2017, so a nine-month incremental effect in 2018?
Yes, there's three months, AUD 9 million in the interest line. The depreciation I think will start only now.
Thank you.
Thank you. Your next question comes from Grant Saligari from Credit Suisse. Please go ahead.
Thank you. Just a couple if I could. Just first of all, on the East Coast in the first half you were talking about a fertilizer initiative with UAN production out of Yarwun. Just wondering whether that's going ahead or whether any progress has been made in that, please.
Yes, that's going ahead. We have a team working on that. We've had quite good receptivity by, let's say, the agricultural sort of customers in the Eastern region. Yes, we're proceeding with investments on that, and we actually did, I think our first sale of ammonia into some agricultural farm. That is continuing as we stated six months ago.
Okay. Just secondly on the transformation benefits with the input costs. I'm wondering whether there's a substantial or a material contribution from freight rates and ammonia in those numbers, and how you would feel about the sustainability of that contribution going forward.
Let me answer you with an example that is very important. One of the important initiative that I flagged six months ago was a contract that we had in Mexico with a provider of AN to us. What our team did is that they went inside the contract of ammonium nitrate and saw that that customer bought ammonia at a price of Tampa plus 70. Our purchasing power allows us to buy at Tampa plus 10. They went back to the customer and said, "Okay, we've renegotiated this." The customer sort of used that and now we are buying at Tampa plus 10. What we put in as Breakaway benefit is the AUD 60. We do not put any benefit on the reduction of prices of ammonia. There is nothing in Breakaway that is related to the prices of commodities.
I know that many large miners do that, they bank all the reduction in petrol. We do not do that. When we talk about sustainable benefits, it is because the margin has been reduced, not because ammonia has come down. Similarly for freights, if there is any efficiency in the freight because we're using larger ships or because we are loading them better, that goes into Breakaway. If it's because the freight tariff went down, that is not a Breakaway benefit. We are very, let's say, rigorous in what defines a Breakaway benefit, it has to be sustainable, it can't be cycle related.
Okay. Thank you for the clarification.
Richard. Somebody from Who actually came here.
Thanks, Alberto. Not sure this is on, but if it is, I just going to return to volume quickly, please. If you adjust the API number, excuse me, in 2017 for Indonesia, you're still going to get mid-single digit % growth in Australia in the second half. I'm just trying to think of a reason, I can't to be honest, as to why you won't continue at that sort of rate in 2018, and that's in Australia.
Why we would-
Why you wouldn't. You had mid-single digit Australian growth in volumes in the second half.
Yeah.
I'm trying to understand why it wouldn't be the same in 2018.
I think, yeah, Australia is half of the business, but that would probably be a good estimate for Australia.
Great. Thanks. I know you made reference to the price-
That's a good reference for Australia. Probably the rest of the world will be GDP, to be honest.
Okay.
There's also some wins, some contracts, that's where we're a bit maybe too conservative. Yeah. On expected, we will be within that range. Probably, as I said, on the positive end of the range. If you want to pick a pinpoint one, it could be what you said on API and GDP for the rest.
That's helpful. Thanks. Then just on pricing, I know you said about half the pricing reset, I think it was 2017, was in API.
Yeah.
Would that be the same in 2018 for the AUD 55 million you talked about?
Roughly, yes. The rest between Latin America and EMEA. North America is very small, it's a much more stable market.
Great. Thanks. Just finally on Minova, I know you had the asset sale profit, but you also had incremental costs in the first half, which I think were about AUD 6 million off the top of my head. Should I read into your comments around Minova that you can actually take some of that cost out again, or is that not the case?
That is a fair point. It's annualized about AUD 9 million. The thing is, we put that 9, and that's a good point. We've seen the revenue uplift. It hasn't really traduced into EBIT because at the same time, we put some cost into the business in sales that we had to, but we haven't seen the benefits of that EBIT. What we will be addressing in the next 3 months is, did we put them too fast? Should we just make some corrections, or do we have confidence that those AUD 6 million or AUD 8 million that we put into the business will, let's say, be transformed themselves into profits within a reasonable amount of time. There is a quite significant sort of analysis during the next 3, 4 months.
We should tell you in May the outcome of that sort of review, by then we'll have a new president, which we're out in the market right now.
That's very helpful. Thank you very much.