Morning, ladies and gentlemen. Thank you for joining us today at our 2023 full year results presentation. We do apologize for the slight delay. We've just had a couple of technical issues, which have now been sorted out. In the room with me today, we've got Sanjeev Gandhi, our CEO and Managing Director, Kim Kerr, our CFO, and also joining us in the room is Germán Morales, Group Executive and President, AusPac. We'll have plenty of time for questions after the presentation, so feel free to queue up, and we'll get to your questions in a timely manner. Before we start the presentation, can I please ask you to take a moment to have a look at the disclaimer on slide two? Thank you, and with that, I hand it over to Sanjeev.
Thank you, Delphine, and welcome everyone. Starting with our number one priority, safety. I'm pleased to report that this year we achieved our safety targets and have remained fatality-free in FY 2023. For a second consecutive year, we have achieved a reduction in our serious injury case rate. Although our safety numbers tracked well this year, we remain vigilant and always strive for continuous improvement when it comes to safety. I'm also pleased that we've had no serious environmental incidents since FY 2018, and our loss of containment target has continued to decrease, remaining below our own targets. Finally, on to people and community. Our people are our number one asset, and retaining our talented and diverse workforce and attracting new talent remains a priority. This year, we have made a significant progress on gender diversity, with nearly 35% of women in senior leadership roles.
Continuing to improve this is an area of focus. We will undertake targeted actions for women in senior roles in 2024 and improve the overall representation of women in our workforce globally. Fostering a strong culture is also a key priority at Orica. Our high inclusion index score of 87% significantly outperforms global high-performing manufacturing and mining peers. This is the result of executing our global diversity, equity, and inclusion strategy across our global operations. We are also on track to achieve our five year community investment target of at least AUD 15 million by 2025, having contributed more than AUD 10 million since 2021. This includes investments made through the Orica Impact Fund, regional contributions, and matched payroll giving. Turning now to slide five.
Just stop and they just want to fix it. A lot of echo coming through, apparently. Can I just take it?
Sorry, for all those on the call, I've got a few messages from all of you saying that there's a bit of an echo coming through. Can I just ask you to be patient with us? We'll pause it for a couple of minutes and get this tech issue sorted out. Apologies. Please stay online.
It works. Excellent!
Thanks, Delphine. About that technical problem, in the interest of time, I'll jump straight to slide six and talk about our results and take it from there. As we continue to successfully execute our refresh strategy, I'm very pleased with the substantial uplift in our performance, and more importantly, the quality of earnings that the team has delivered. This is despite the ongoing volatility in the external environment and extreme weather conditions in some regions. Global supply constraints persisted this year and are expected to remain in the near term. Our global manufacturing and supply networks, and our ability to leverage our purchasing scale and logistics capabilities ensured continued security of supply to our customers. This is truly one of Orica's competitive advantages. We delivered double-digit growth across sales, earnings, and net profit, and from an EBIT perspective, this is the highest underlying EBIT since 2014, a nine-year high.
Underlying earnings on continuing operations were up 24% on strong customer demand, continued commercial discipline, and increased earnings from our advanced technology offerings. If we remove the impact of the Russian operating business, which we exited in the prior year, the growth in underlying earnings was 29%. A very strong result indeed. Return on net assets has improved by 120 basis points, from 11.4% in 2022 to 12.6% in 2023, which is at the upper end of our target range of 10.5%-13%. At the half, we mentioned our focus on improving trade working capital and operating cash flow. I'm pleased that our trade working capital improved at the end of the year. Stronger earnings also led to significant improvement in operating cash flow.
In manufacturing, all our major scheduled turnarounds were completed safely, on time, and on budget. This is an important step as we continue to optimize our global manufacturing and supply network. Gearing is below the 30%-40% target range at 18.6%. Our prudent balance sheet and approach to capital management positions us well to support further business growth and deliver improved shareholder returns. The board has declared a final unfranked dividend of AUD 0.25 per ordinary share, within target payout ratio at 55%. This brings the total dividend for the 2023 financial year to AUD 0.43 per share and a payout ratio of 53%. Turning to the regional performance on slide seven. I'm pleased to report that earnings increased in all segments compared to last financial year, starting with Australia, Pacific, and Asia.
Commodity prices and mining activity across the region remained robust. Demand and supply for AN continued to be balanced across the region. Security and flexibility of supply remained a key customer need, and Orica was able to leverage our strong global supply network. High demand for Orica's products, together with continued commercial discipline, drove earnings performance and structural improvements in contracts. In AusPac, Orica continued to strengthen market position across coal, metal, and quarry and construction segments, with high retention rates and new wins. Growth in Asia remained strong, and commercial discipline resulted in increased earnings, particularly in Indonesia. Technology adoption also increased. In Indonesia and Australia, successful 4D trials at multiple sites started to convert to commercial contracts. There was also a significant uplift in WebGen sales in Asia. Turning now to North America.
While market fundamentals for most commodities in the region remained strong, activity in the United States and Canada was impacted by extreme cold weather, forest fires, and a hurricane in Eastern Canada. Mining activity in Mexico was impacted by prolonged industrial action late in the financial year. Rising interest rates and inflation impacted operational costs, as well as limited project investments in parts of the United States. Against this challenging backdrop, North America delivered resilient earnings performance. Improved quality of earnings were driven by strong EBS conversion, technology growth, commercial discipline, and cost management initiatives. This was partly offset by increased freight costs due to the extreme weather and prolonged industrial action. The region also progressed with the strategic transitioning of its commodity base. Revenue growth was strong in metals and Q&C markets in FY 2023.
The growth in Q&C continued to be supported by the significant infrastructure investments by the U.S. government. I just want to spend a minute on the announcement from last week. Orica is a joint plaintiff in a lawsuit filed in the United States on October 21, 2023, U.S. time, against CF Industries, regarding contractual disputes under an ammonium nitrate purchase agreement for the supply of ammonium nitrate and related products for use by Orica's business across North America. The next day, on October 22nd , 2023, CF Industries filed a separate lawsuit in the United States regarding contractual disputes of this agreement. Orica will, as it always has done, continue to comply with our contractual obligations. We can confirm there is no impact to our product supply in North America during litigation, and our contractual agreements with our customers in the region will continue to be met.
As legal proceedings are ongoing, I am unable to provide any further information or discuss this matter in further details today. We will provide any relevant updates to you in due course, if they occur. Now, moving on to Latin America. We have seen strong overall mining activity in the region, particularly in southern Peru. Significant AN supply interruptions due to the ongoing Russia-Ukraine conflict continued in 2023. The current restrictions on the Panama Canal capacity added an extra level of complexity. Security of supply remained Orica's competitive advantage. We were able to ensure supply continuity to our customers from alternative supply sources, albeit at higher costs. Underlying earnings were strong due to commercial discipline and continued technology penetration, as demand for technology and premium products continues to grow. We continued to progress with global manufacturing optimization activity in the region.
The Lurin site is on track to be the major supplier for Orica's mining customers, both for North America as well as for Latin America. Now on to the EMEA region. Mining activity was stable in Europe and Central Asia, and there is a strong continued focus on ESG. In the Middle East, Saudi Arabia is investing heavily in infrastructure development projects and strongly incentivizing mining investments in gold and copper. Robust commodity prices drove strong mining activity for gold, copper, and other future-facing commodities across Africa. However, the weak economic outlook and high inflation in Northern Europe continued to impact Q&C activity there. I'm very pleased with the significant EBIT improvements in this region, despite the loss of volume and earnings from the Russia business last year. Excluding the impact of Russia, the regional underlying earnings more than doubled.
This was driven by strong growth from Africa, Southern Europe, Middle East, and Central Asia. New business in Africa will help to deliver growth, improve earnings, and increase our exposure to future-facing commodities. A highlight for the region was the launch of the world's first lead-free non-electric detonator range, Exel Neo, in Europe. This lead-free non-electric detonator range creates a safer and more sustainable product by removing lead while maintaining the same consistent and reliable product performance. Finally, turning to digital solutions. This is the first full year result for the new segment. We continue to see favorable external conditions for this segment. Demand for software, sensors, and data science continues to increase as ore bodies are increasingly becoming harder to find and extract against a backdrop of high commodity prices and increasing ESG obligations and commitments.
Customers are continuing to seek operational efficiencies across the mining value chain, and unlocking the value of digitization and automated workflows is key to achieving these efficiencies. Digital solutions had a very strong year, doubling their earnings in 2023, with significant improvements in margin. This was driven by growth across all three sub verticals, namely Oreb ody Intelligence, Blast Design and Execution, and GroundProbe. Annual revenue from recurring contracts remained stable within our targeted range of 60%-70% of segment revenue. The integration of Axis is progressing to plan. Axis entered new markets in Canada, Africa, and the U.S. in the second half of the financial year. The digital solutions business has been identified as one of Orica's key growth verticals as we continue to build and invest in the next generation of digital technologies and solutions beyond our blasting coal.
Innovation continues to be a focus, and this year we have released 15 new digital features with a focus on artificial intelligence-based solutions to support our customers. As the industry and our customers look to solve their biggest challenges through partnership, we are excited to announce today a new collaboration with a industry technology leader in the resource industry, namely Caterpillar. Orica and Caterpillar have signed a memorandum of understanding to explore opportunities to integrate key elements of their respective domain strengths. The initial focus will be on potential integration between Orica's RHINO, Blast IQ, and FRAGTrack technologies with Cat MineStar Terrain technologies from Caterpillar.... The goal of this integrated workflow is to provide customers with high-fidelity rock property information, enabling significant improvements to on-bench safety, drilling and blasting program accuracy, and productivity, along with higher quality blast outcomes that generate enhanced mill performance.
In the future, the two companies intend to extend their collaboration to optimization of the entire value chain from mine to mill. This approach aligns with both organizations' ambitions to create sustainable solutions and services that will build the momentum for more intelligent and solution-driven mining ecosystems. Technology and innovation are ingrained in Orica's DNA and have been for almost 150 years. It remains one of our key competitive advantages. This slide shows the more than 20 new products we have released to our customers this year across both our core blasting businesses and digital solutions, which expands well beyond blasting. We continue to lead the market in delivering customer-driven innovation across the entire value chain to meet our customers' most critical needs and challenges. These include safety and security.
We aim to reduce or completely remove safety risks for our customers and reduce the need for human intervention across the mining and infrastructure industries. As examples, WebGen, our wireless blasting system, and Avatel. Sustainability and climate change. We are harnessing our technology to help customers improve social and environmental outcomes for our customers. As examples, Cyclo, Exel Neo, and lower carbon intensity products in our portfolio. Enhanced productivity. Our new technologies and solutions are enabling the customer to think and mine differently and operate more efficiently and responsibly. As an example, 4D and Blast IQ. Maximize recovery. We focus on precision and insights across the value chain to help achieve better recovery rates and reduce energy usage for our customers as the chase more complex and harder to access ore bodies. Example, Axis Mining Technology and OREPro 3D.
Importantly, because we have developed these technologies and value propositions in collaboration with our customers and the broader industry, the industry is both recognizing and accepting Orica's commitment to innovation and adopting our technologies at an ever-increasing rate. In September this year, Orica was recognized by the Australian Financial Review as the most innovative large company in Australia, and our unique Avatel automated blasting technology took the number 1 most innovative technology in the resource category. We were also recognized in FY 2023 by Mining Magazine, taking home two awards for our revolutionary blasting technologies, including WebGen, the wireless blasting system, for operational and safety excellence, and 4D bulk explosive system for drill and blast excellence.
A fitting recognition for our people, our partners, and customers, and for our commitment to delivering smarter solutions to solve shared industry challenges and ultimately fulfilling our purpose of sustainably mobilizing the Earth's resources. We will continue to bring new and disruptive innovation to our customers and expect adoption of these new solutions to accelerate even further into the future. I now hand over to Kim to give you an update on the financials.
Thanks, Sanjeev. I'll move to the key financial metrics shown on slide 10. As Sanjeev stated earlier, we have delivered improvements across our key financial measures. We have delivered a AUD 134 million increase in underlying EBIT to AUD 698 million, which I will cover in more detail on the next slide. Our statutory net profit after tax of AUD 296 million includes the impact of previously announced significant expenses in the order of AUD 73 million after tax, relating to the loss on sale of the Türkiye business, our exit from Venezuela, and the earn-out relating to the acquisition of the Axis business.
Our net operating cash flow of AUD 899 million reflects higher earnings, net of associated taxes, cash freed up from the significant reduction in trade working capital in the second half of the year, partly offset by the impact of higher interest rates on financing costs. Our earnings per share before individually significant items of AUD 0.812 is an increase of AUD 0.048 per share. Turning to the EBIT bridge on slide 11. Underlying EBIT of AUD 698 million was a 24% increase against the prior year or a 29% increase after we removed the FY 2022 earnings from our Russian operations, which we exited in September 2022. The impact of the movement in the Australian dollar on the translation of our foreign currency denominated earnings had a positive impact of AUD 28 million.
Higher volumes had a positive impact on EBIT of AUD 44 million. Ammonium nitrate volumes were slightly higher due to increased mining activity, driven by strong commodity prices and Orica's continuing ability to provide security of supply to our customers. Sales volumes of our premium electronic blasting systems continued to increase as new customer contracts ramped up and customers continued to shift away from conventional detonators. The EBIT benefit in manufacturing was AUD 21 million due to increased volumes at our continuous plants, as well as the non-repeating costs in FY 2022 relating to alternate sourcing of ammonium nitrate during the Castlemaine plant turnarounds in North America. The largest contribution to our improved earnings performance was mix and margin, which contributed AUD 56 million to the EBIT increase. Customers have continued to shift to our premium products.
We have achieved increased penetration with our blasting technology offerings, and ongoing commercial discipline with our customer and procurement contracts is ensuring that we are delivering appropriate returns. Earnings from mining chemicals were down AUD 14 million due to lower production volumes at our Yarwun plant in Australia and lower demand for cyanide in Latin America. Digital solutions, our new reporting segment, contributed an additional EBIT benefit of AUD 28 million compared to the prior year. Growth in adoption of digital technologies, the introduction of new solutions, and contribution from the newly acquired Axis Mining Technology business, saw earnings increase across all subverticals in the digital solutions segment. Global support costs have increased AUD 8 million, primarily due to inflation and increased non-billable employment costs. Turning now to Slide 12, Trade Working Capital.
Our trade working capital balances peaked in the second half of the year before improving significantly to end the year at AUD 643 million, a AUD 41 million decrease from the prior year. The AUD 200 million reduction in our trade working capital since the half year was driven by our ongoing inventory optimization program, which delivered a reduction in stock volumes as we responded to the easing of supply constraints. Declining ammonia prices also contributed to the reduction in both inventory and debtors. Our trade working capital balances will fluctuate over time to ensure they are aligned to our operating conditions as we invest in further growth and given our exposure to external market conditions.
We remain focused on optimizing our investment in trade working capital over the cycle, such as through continued assessment of our supply chain network, ensuring appropriate inventory volume is maintained in the right location to support our customers, and through programs aimed at continuous improvement in our receivables and payables management. Turning to capital on Slide 13. We prioritize capital allocation for safety, environmental, and asset maintenance, followed by growth capital prioritized by return. Total capital expenditure for the year was AUD 439 million. We invested AUD 260 million in sustenance capital expenditure. This reflects spend on major planned turnarounds at Bontan, Kooragang Island, and Burrup, as well as on customer-facing assets. We remain committed to decarbonization and supporting sustainability initiatives.
In FY 2023, we invested a further AUD 37 million on sustainability projects, predominantly relating to the tertiary catalyst abatement technology installed at our Kooragang Island plants and being installed at Yarwun in FY 2024, as well as prill tower scrubber being installed at Kooragang Island to reduce particulate emissions. We invested AUD 142 million in growth capital expenditure to target customer growth opportunities, particularly in Australia and Africa, to further develop our digital technologies and to continue work optimizing our discrete manufacturing network. I will now talk to Slide 14, Balance Sheet and Liquidity. Our year-end net debt was AUD 923 million, and our average drawn debt tenor was 5.9 years, which was up from 4.3 years at the end of last year, as a result of the refinancing activity we undertook earlier in the year.
Our year-end gearing ratio was 18.6%. This remains below our stated range of 30%-40%, which we consider prudent in the current external environment, and which also ensures our balance sheet is well-placed to support our stated growth ambitions. Turning now to dividends on Slide 15. As Sanjeev mentioned earlier, our improved earnings performance has translated into increased dividends to our shareholders. The board has declared a final dividend for FY 2023 of AUD 0.25 per share, unfranked, representing a dividend payout ratio of 55% on second half earnings. This brings total dividends declared for FY 2023 to AUD 0.43 per share, a 23% increase against FY 2022. With that, I will now hand back to Sanjeev.
Thanks, Kim. We are deeply committed to the continued execution of our strategy and to deliver enduring returns for our shareholders and broader stakeholders. At the core, we continue to pursue organic growth from blasting and by expanding Orica's presence across future-facing commodities and emerging markets. Beyond blasting, we are accelerating customer adoption of our new technologies and demonstrating our strengths and capabilities in providing integrated digital workflows from mine to mill. Mining chemicals continues to present new growth opportunities for our business. Turning now to Slide 18, which summarizes our performance against our strategic targets in 2023. We continued to make good progress across our financial and non-financial metrics in the financial year 2023. Having met all of our financial targets, we have been able to deliver improved shareholder returns this year.
We continue to make significant progress towards a simpler, more efficient, and more sustainable organization, which will help deliver future value for our shareholders and broader, broader stakeholders. While the contribution from chemicals this year was lower than last year, we remain of the view that with 150 years of knowledge in chemistry, we can and will capture new opportunities in this high-growth market. We have updated our three-year average RONA target to 12%-14% range from the 10.5%-13% from last year. While I'm pleased with our improved performance on safety in 2023, there is always more to do to keep our people and environment safe. We will target improved safety performance and serious injury case rate next year and continue to focus on keeping our people safe at all times. Turning now to Slide 19.
As updated at our recent Sustainability Investor Day, there are a number of substantial turnarounds scheduled in 2024, particularly in the first half. These turnarounds are necessary to ensure that we maintain safe and reliable manufacturing operations, that our manufacturing utilization remains high, and we maintain supply security for customers. I want to spend a couple of minutes on these turnarounds due to the relatively high numbers scheduled for this year and the impact on production. The first major turnaround is the six yearly ammonia plant turnaround at Kooragang Island... due to the complexity of work to be executed, this turnaround is being completed in two discrete events in October this year and February 2024. But fortunately, perhaps as we speak today, the ammonia plant is now ready for startup, and hopefully, we will have production running then from tomorrow.
This will result in approximately 60,000 tons reduction in ammonia production, which roughly equates to 120,000 tons of ammonium nitrate, which we will be missing at Kooragang Island this year. This will be fully mitigated through imports of third-party ammonia into both Yarwun and KI, and therefore, we don't expect any noticeable impact to our customers. However, as you can see on the chart on the right, the cost of ammonia is rising. This will have a financial impact in the first half of FY 2024 due to the lagging impact of the flow-through of the rise and fall product price adjustments, as well as increased ammonia purchases to cover production shortfalls. We will also be installing an emissions abatement system on the prill tower at Kooragang Island.
This will be completed over three discrete events, with two in the first half of this year. Production will be down for approximately eight weeks over these three events and will have an estimated AN production impact of around 40,000 tons. Upon completion, the system will eliminate all particulate emissions from the prill tower, which will satisfy the site environmental protection license requirements, reducing all residual environmental impacts for the site. These turnarounds in KI have been spaced across the year to minimize the impact on AN supply. This will be covered both from internal as well as from third-party sources. The other planned major turnaround in the first half is at the NAP 3 ammonium nitrate two plants at Yarwun. We will also be installing a tertiary abatement system at the Yarwun NAP 1 plant in the second half.
This will impact AN production capacity by approximately 30,000 tons. Following this installation, it is expected that the annual greenhouse gas emissions from this site will reduce by approximately 200,000 tons of carbon dioxide equivalent per year. This new investment in tertiary abatement continues to underpin our updated targets to net zero. The last planned turnaround in FY 2024 will be at the NAP 1 and 2 and the ammonium nitrate plants in Carseland. This has been scheduled for the second half to align with the adjacent ammonia plant shutdown. Statutory compliance work will be brought forward as mitigation to minimize the requirements for future outages. Now, turning to outlook for financial year 2024. As mentioned earlier, I'm really pleased with the quality of earnings that has underpinned the substantially improved results in 2023, and I expect this will continue into 2024.
The 2024 financial year EBIT from continuing operations is expected to increase on the PCP, attributable to strong demand for our products and services from continued anticipated growth in global commodities, increased adoption of blasting and digital technology offerings, further benefits from commercial discipline. This will partially be offset by the major six-yearly ammonia plant turnaround and prill tower scrubber installation at Kooragang Island. And then we will always continue to face these inflationary pressures, higher energy costs, and increasing geopolitical risks, and this will remain an ongoing challenge. Earnings will be more skewed to the second half compared with FY 2023, due to the heavy planned turnaround schedule in the first half, as well as the normal seasonality.
CapEx is expected to be within the range of AUD 410 million-AUD 430 million, driven by the turnaround schedules, depreciation and amortization to be slightly higher than the PCP. Net finance costs are expected to be in line with FY 2023, subject to interest rate movements. The effective tax rate is expected to be around 30%. We will continue our disciplined approach to organic and inorganic growth opportunities. Looking forward, we expect the three-year average RONA range from FY 2024 to 2026 to be in the range of 12%-14%, up from the 10.5%-13% from the prior year. In June 2024, Orica will celebrate its 150th year anniversary. This is an important milestone for our business and an exciting opportunity to celebrate our history, our people, and our exciting future.
Founded in 1874 as a supplier of explosives to the Victorian goldfields in Australia, Orica has grown to become a leading publicly owned company listed on the Australian Securities Exchange, operating across more than 100 countries across the world. As you can see from the timeline, there have been several transformations through our journey. Orica has since evolved into one of the world's leading mining and infrastructure solutions provider that it is today, while maintaining its proud tradition of safety, leadership, innovation, and quality, all enshrined in our brand today. We are continuing to make progress on the execution of our strategy. Our customers' appetite for new technology and our refreshed strategy sets us on a clear pathway to drive organic growth from blasting technologies and to accelerate the adoption of our new technologies and digital solutions portfolio from mine to mill, growing beyond blasting.
Our financial position is prudent in the current volatile external environment. With our strong balance sheet and disciplined capital management, Orica remains well positioned to take advantage of strategic growth opportunities. We remain committed to accelerating our sustainability agenda, helping our customers achieve their targets while remaining competitive in a low-carbon future and delivering value for our shareholders and our stakeholders. Thank you. With that, we'll open up for questions.
Thank you.
... We will now conduct the Q&A session. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by as we compile the Q&A roster. Just a moment for our first question, please. First, we have Brooke Campbell- Crawford from Barrenjoey. Please go ahead.
Yeah, good morning. Thanks for taking my questions. Just the first on the first half, FY 2024 EBIT. Just given the significant turnarounds that you've talked through on the slides, can you just maybe characterize what your growth aspirations are there in the first half, please? Thanks.
Thanks for that, Brooke. Look, we'll be volume constrained in the first half, clearly, especially here in Australia. Given the fact that we are missing what? Approximately 200,000 tons, if you just add up the numbers that I've mentioned earlier. The focus, clearly in FY 2024 is going to be on quality of earnings, on margin management, and obviously on the commercial discipline that we have been trying to bring into the organization. So the bottom line is we'll be volume constrained in the first half because of the turnarounds, and we'll leverage our global network as well as third-party sourcing to ensure that our customers do not get disrupted.
Okay, that's, that's fine. And then just second, when you talk to strategic growth opportunities, in your sort of final remarks, do you mind just sort of elaborating on what's most of interest at, at the moment and confirm whether or not you're, you're looking at any targets, at the moment as well? Thanks.
Thanks, Brooke. Look, the strategy that we've outlined in 2021 states that we'll focus on growing our exposure to future facing commodities. You see that in our product portfolio. Now, copper becomes really big and important for us. We have now started looking at opportunities in lithium, especially here in Australia, which is quite exciting. And the other growth driver, strategic growth driver is our presence in emerging markets. We've seen significant success in Africa. You saw that in our results in the EMEA region. LatAm continues to be a very, very attractive opportunity for us, and then emerging markets in Asia, like China and India, are very attractive. And then clearly, our digital solutions portfolio, this is the first full year. You've seen that we've already, in this year, launched 15 new products.
We're going to now continue to leverage AI and all the new technologies and come up with new mine-to-mill, end-to-end solutions in terms of offering, you know, smarter solutions to our customers here. That's an attractive strategic area of growth. And finally, mining chemicals. We have not talked too much about mining chemicals, but there are clearly some interesting opportunities out in the market, and we'll continue to explore them if it makes sense for our company.
Thanks for taking my questions.
Thank you. Just a moment for our next question, please. Next, we have Richard Johnson from Jefferies. Please go ahead.
Thank you very much. Sanjeev, can you talk a little bit about the general availability or supply availability of AN globally, at the moment? And have you seen much change in recent months?
Thanks, Richard. No, not too much change. The market... I would define the market as kind of balanced. Obviously, there's seasonality. The seasonality comes from, you know, the peak ag season, and then we are in the low season for ag, the planting season in the Western Hemisphere. It's also dependent, obviously, on gas price and ammonia price inputs. And as you have seen, ammonia, the Tampa Index, as well as JKM, have started to move upwards again, as we enter the winter in the Western Hemisphere. So I would say it is balanced. Now, we are obviously a major purchaser of third-party ammonia and ammonium nitrate, as you know.
We are dealing with a lot of different supply sources, and I can tell you it's not easy to source the molecule at the right price and in the right location. And then there are other constraints, for example, supply chain constraints. I talked about the Panama Canal capacity restriction. I've talked about, you know, trying to get ships and charters at the right price in the right schedule. So it's an ongoing challenge. It's not an easy product to handle, as we all know. So I would say that the market continues to stay balanced to tight, depending on which region of the world you're talking about.
That's great. Thanks. You've been very clear about the timing of the recontracting cycle and the impact on 2024. I was wondering if I could just roll forward a year and to 2025. I just wanna make sure I understand. There's obviously one big one that rolls, but really, what proportion of the book will adjust in fiscal 2025?
So, Richard, I've always said that we have, on an average, you know, between 10%-30% of our contract book rolling off every year. We did pull forward a lot of contract renegotiations and extensions in the last two years because customers were looking for security of supply. We wanted visibility on our ammonia and gas demands. We've been very successful. So most of the heavy lifting has been done in 2021, 2022, and the early part of 2023. The benefits of that, obviously, on a full year basis, will flow into 2024. That will help with quality of earnings next year. For next year, we'll be at the lower part of that range of 10%-30%, because as I said, most of the big work has been done already.
We'll be closer to 10% recontracting rather than 30% or 40%. Then in 2025, the book again starts to roll over. We'll start that three to five year cycle of recontracting again in 2025. 2025, again, there'll be a lot of work done, and then we'll move again to the upper range of the recontracting cycle, and that should then bring us further momentum going into the second half of this decade.
... Got it. That's very clear. Thank you. And then finally, it sounds like Mexico continued to be difficult in the second half. I just wondered if you could give us an update on how it stands today, because it's obviously quite an important business for you in North America.
Absolutely. We had a major account with the, with the, IR issues for an extended period of time. The good news is last week we, we've restarted operations there. So the expectation is, outside of October, we should hopefully not see any other material impact for the rest of the year in Mexico. It's a very, very important business for us. We've been very successful there, but unfortunately, in the last financial year, in the first half, we had a major strike at our supplier. In the second half, we had a strike at one of our major customers there. So I'm hoping for a smooth year in 2024.
That's great. That's it from me. Thanks very much.
Thank you. Our next question comes from James Wilson from Jarden Australia. Please go ahead.
Hi, guys. Thanks for taking my questions. Just firstly, on the North America business, are you able to talk to us about how you think pricing discussions evolve in North America heading into next year? Conscious that sort of the ag outlook there is softening a little.
No, happy to do that, James. Look, when I talk of global recontracting, it includes our North American contracts, and we've been very, very successful, predominantly in Canada, and also in Mexico. The U.S. business, for Orica is predominantly exposed to Q&C and civil infrastructure business. Here, the industry standard is normally 12-month contracts, which roll over every year. So we'll start now in November, December, recontracting for the next 12 months for the next calendar year. And, look, given that, you know, material shortages and inflation came through also for us in North America, we've been quite successful with the recontracting and security of supply still remains a big concern, for that market.
What really helps us is our technology offering, because we are then able to, you know, supplement our traditional blasting opportunities with all the new technologies that we offer, and that's been a big, big success for us in the U.S. markets.
Great. Thanks. And then just my next question, Sanjeev, is on working capital. Are you able to just give us some color on how much of that working capital unwind over the second half was driven by a lower ammonia price and the value of inventories, as opposed to the volume of inventories that you're keeping in your stocks?
Predominantly, the major part of that benefit came from reduced inventories because we got a better grip on global supply chains. I've talked about this in the past, that we moved away from two predominant suppliers for our third-party purchases to a portfolio of suppliers. We had to get their supply chains lined up. We had to get them experience in exporting. Some of our new suppliers did not have that experience. So we've set up a totally new supply chain now, and that has given us the confidence to start pulling back on safety stocks. Now, having said all of that, and given that we have these major turnarounds in the first half of the year, we do keep a bit of buffer inventory so that we do not stock out any customers.
But most of that unwind came from a lower safety stocks and inventory carrying. It also helps that we have been running our discrete manufacturing, so our downstream manufacturing optimization. That has helped us to also reduce, you know, intermediate inventory between sites, which means that, you know, we are holding overall within the value chain, less inventory, and that's an ongoing activity. So we'll continue to do that, this whole regional hub-and-spoke model for our EBS manufacturing and for our non-electric manufacturing. That is also giving us significant benefits. And then finally, as you mentioned, the lower ammonia prices do flow, flow through, but that is something which is hard to predict because we've seen that trend start to reverse. Ammonia prices are now picking up again.
You know, that will be a moving part of our TWC for 2024.
Great. Thanks, Sanjeev. And just one final one from me. On, on your outlook statement, you mentioned sort of expectations of an increase in EBIT. Are we right in thinking about that sort of towards in line with your, I guess, five-year average of around 6% EBIT growth per annum, or are we expecting a stronger 2024 on 2023?
Look, we will have an improved number in 2024 against 2023. I can maybe, latest in March, give you a better number, because by then we are through all of our major turnarounds, and we feel much more comfortable about the outlook. But the expectation is that, especially here in Australia, right? We are expecting a drier summer this year. That should be positive for our business, that should be positive for volumes, and all of that should start to flow through. My focus in 2024 is not that much on volumes, it's more on quality of earnings. So it's about, you know, ramping up our technology offerings, ramping up digital, and continuing to be commercially disciplined. All of that will flow through in terms of improved earnings in 2024.
Great. Thanks for that.
Thank you. Our next question come from Niraj Shah from Goldman Sachs. Please go ahead.
Hi, good afternoon. Just a couple from me. You've been very clear on the volume impacts of the turnaround. Any chance you could sort of help us quantify the earnings impacts associated with that 190-odd thousand tons?
Yeah. Thanks, Niraj. I think you'll have to do the math. I've given you the volumes, I've given you the schedule, and if you look at the average margin at AusPAC, I think you should be able to do that. For me, it's... You know, look, a lot of the increased costs through the rise and falls will pass on, obviously, to our customers. But our rise and falls are indexed to market indexes, and if we buy spot cargoes, we pay a higher supply chain cost, we pay a higher inventory carrying cost. Not all of that can be passed on to our customers. So there will be an impact. In the end, you'll have to do the calc based on the volumes and the margins that we've had in 2023.
... let me maybe just ask you a different way. Is it reasonable to look at, so I guess the legacy Aus, EBIT per ton margins and, and the spread against, of that versus maybe other regions where you're more of a pure distributor, just to get a sense on the impact on those volumes?
That's a good point, because what we are missing are OMP volumes, our own manufactured volumes, not traded volumes. And obviously the margins are different on traded volumes versus OMP volumes here in Australia. So that's a good indicator, yes.
Okay. And then just finally from me, can you just remind us of the phasing and potentially even the quantum of the proceeds from Deer Park from here that you're expecting?
My expectation is that sometime during the financial year 2024, we will finalize the sale. You know, we have received AUD 50 million, which is in escrow with us, and, you know, we are in the very final stages of regulatory permits and everything else. As soon as that gets done, and the deal is finalized and confirmed, we'll let the market know.
Appreciate it. Thanks.
Thank you. Next, we have John Purtell from Macquarie. Please go ahead.
Oh, good day, Sanjeev and Kim, hope you're well. Just had a couple of questions. Sanjeev, just in terms of the, some general sort of thoughts around the demand environment, appreciate your comments there. You've obviously sort of highlighted some pockets of weakness around in, in Europe on the Q&C side, but I suppose, is the summary that you're still seeing solid demand overall, and, and obviously we, we hear a lot about productivity focus from the miners.
Absolutely, John. I mean, that's a great summary. Underlying demand is very, very strong. If I talk to my customers and I ask them: What are your two or three biggest challenges today? The first one they talk about is permitting, more for brownfield and greenfield expansions. The second is resources, so people, supply chain, that's a constraint. And the third, clearly, is ESG. So, you know, and then when we talk about solutions, we talk about solutions to help them manage inflation, a better productivity, lower cost, the ESG footprint. So, I mean, all great opportunities for Orica, but underlying demand is very, very strong. We do see some weakness in thermal coal, which is not a surprise, especially in North America, but that is coming because the arbitrage between coal and gas has opened up.
Obviously, thermal coal is in structural decline over a longer period of time. Outside of that, we see pretty solid underlying demand across the portfolio.
Thank you. Just a question for Kim. Just in terms of sort of going forward, are there any sort of targets or sort of, I suppose, ranges you can give us as far as, you know, working capital to sales as a percentage, and appreciate ammonia moves around, or sort of overall cash conversion, in terms of a range that we might expect in a sort of normal year going forward?
Yeah, for sure. Thanks, John. You can see on slide 12, we've got a fairly stable level of TWC in relation to DSO, DIH, et cetera. As you mentioned, our actual levels will move around with the business growth, with external pricing changes as well. But what we're focused internally on is that continuous improvement program on our inventory, running diagnostics, analytics, as well as continual optimization in our payables and our receivables.
Thank you. And just on cash conversion, I mean, sort of I suppose we can sort of look at the history, but is that sort of a as good a guide as any there?
Yeah, so we sort of average and target a cash conversion of 90%-100% over time.
Got it. Thank you.
Thank you. Next, we have Daniel Kang from CLSA. Please go ahead.
Good morning, everyone. Just following on from RJ's recontracting question. As you complete this recontracting cycle by next year and start a new cycle in 2025, can you just comment on how we should think about margins either on a EBIT per ton or EBIT margins, post the completion of this recontracting cycle?
Yeah. Thanks. Thanks, Daniel. Look, once we finish with this three-year cycle by end of 2024, we start on a new cycle in 2025. Now, that's very, very attractive for Orica because that's when we have, you know, significant new product offerings. By then we have commercialized fully our wireless blasting, our 4D emulsions, the digital technology portfolio starts to mature, and we continue to include those kind of new offerings over and above our traditional blasting services offering. So, you know, as a whole, Orica becomes that much more attractive, and interesting as a supplier, and then we have different kinds of conversations with our customers. As I said earlier, in my answer to John, the couple of challenges our customers are facing is productivity, and ESG.
Most of the solutions that we have today, for example, the lead-free detonator in Europe, this is regulatory driven, right? And there's a ban on lead coming up in the near future. We are the first ones in the market with this product. So obviously, customers will look for those kind of solutions that will help them to manage their own challenges. So I'm quite excited and look forward to that new cycle of 2025 onwards for the recontracting. We'll focus predominantly on the quality of earnings. That's the big focus going forward.
Thanks, Sanjeev. Just another quick query on technology adoption rates. Apologies if I've missed it, but can you talk about the adoption rates in second half 2023? How does it compare to the 30% uplift in the first half 2023? Maybe just some thoughts on growth rates into 2024 and WebGen's contribution. Thanks.
Yeah, look, the ramp up has been significant. As one data point, we had our first successful—the first time ever, the first successful WebGen 200 blast in the U.S. And this was very, very important as a milestone for us because that was necessary for us to prove to the regulators and that the product is viable now and ready to go. Now that we've got the sign-offs, we'll start to roll out WebGen 200 into the U.S. market. So, I mean, the scale-up potential is massive. Obviously, we are still positioning the product as it rightly is a high premium product, so we'll not have initial impacts on scale.
It'll all be about getting the value propositions, the use cases in with our customers, embedding WebGen, and then it'll—we'll start to scale that up. It's pretty exciting, and I think the U.S. permissions and regulatory approvals were the last milestone for us, and now we are ready to go full-fledged commercialization in all parts of the world, in every market. We've been extremely successful at building contracts. Next year is when we start talking about the big volumes that will start to flow through in terms of quality of earnings for us.
Oh, thanks, Sanjeev. Can you comment about the broader technology adoption rates in second half 2023?
Very, very high. So but obviously, our customers are getting good realizations, good net backs on their commodity products. So there's a lot of eagerness and need to pay for premium products. We've seen this across the globe. We've had a lot of successes in Asia. I called that out, Indonesia, with 4D, the first commercial contracts for variable density emulsion. We've had a lot of success in Australia, but also in Latin America with WebGen. Africa has been huge in terms of technology offtake. Axis had its first major breakthroughs in Canada, in the U.S., and in Africa. So across the board, across our portfolio, we're seeing very strong pull for technology.
Thank you, Sanjeev. Pass it on.
Thank you. Next, we have Reinhard van der Walt from Bank of America. Please go ahead.
Hi there. Good morning, folks. Thanks for taking my question. I've just got another follow-up on the longer-term recontracting outlook. Sanjeev, you've mentioned that the Aussie market looks kind of balanced to tight, but as we get into the second half of this decade, could you say that the supply-demand balance goes back to something that looks like a pre-Burrup sort of setup?
Right, difficult to say. It all depends on demand, clearly. And given the outlook that our customers are talking about, if you look at iron ore, you're looking at the opening up with China. You look at the energy mix, demand for coal, not onshore, but Australian thermal coal exports going into emerging markets. And then you look at copper and lithium, the outlook is pretty strong. And if demand stays at that very, very strong level, and you know that our industry, the service industry, always has to go through turnaround cycles. We have maintenance ups and downs, we have unplanned trips. I do expect that the market stays balanced. Now, obviously, imports is a factor, and you know, Orica has itself imported significant volumes in 2023.
We'll also import volumes into Australia, but it's not easy to import. Even for us, with our global reach and sourcing capability, it's a big challenge to get a hold of ammonium nitrate at the right quality and the right commercial terms. So I do expect that the market stays balanced, but a big factor is going to be demand. And if, you know, demand, the macros tell us that emerging commodities as well as iron ore continue to be strong here in Australia, I do expect the market to stay balanced.
Got it. Perfect. Thank you. And maybe just on that point of ammonia imports, where are you seeing IPP at the moment here in Australia? And can you give us a sense of how much of that price is made up of shipping costs?
Shipping costs have corrected downwards, which is good news for us because we do a lot of shipping of all our products and services all across the globe. It's predominantly product cost, and then it's obviously the impact of the gas price. I think I called out the JKM index today is at $17 per MMBTU, which is quite high, and that does not help with the cost competitiveness of ammonia or ammonium nitrate produced in Asia coming into Australia. Globally, the same with Europe. The energy prices are still quite high. I've seen gas prices in the U.S. go up to what, over $3.20, and this is pre-winter, so I do expect there will be further escalation.
So it's first of all not easy to get your hands on product in terms of IPP. And then secondly, getting in here, the logistics challenges, the port restrictions, warehousing issues, storage concerns, shelf life makes it a bit of a challenge. I do expect IPP stays above the four-digit number, so about $1,000 today, landed in Australia.
That's very helpful. Thank you. And just maybe one final one. Can I just check on the guidance upgrade? Can you give us a sense of how much of that upgrade was driven by, you know, better than expected AN recontracting, and how much of it was driven by maybe a change in your outlook for digital earnings or volumes?
It's a mix of everything, so it's quality of earnings. It's, you know, the benefits of recontracting that we have done that will flow through into 2024, 2025, 2026, and then it's a scale-up of digital. Obviously, commercial discipline is very important and then trying to mitigate our non-billables, in terms of managing salary inflation, cost inflation. So we are going to go hard next year on offshoring, outsourcing, leveraging our global business services, in low-cost markets. All of that will help us to mitigate the inflationary pressures. So if you put all of that together, that gives us confidence that we can improve on our, returns on net assets for the next 3-year cycle.
... Perfect. Thanks a lot. I'll pass it on.
Thank you. Next, we have Nathan Reilly from UBS. Please go ahead.
Thank you. Hey, Sanjeev, just wanted to zero in on the Western Australian business, if I could. Would you mind just talking me through, you know, how you're seeing the market supply and demand dynamics in that particular market right now? And I'm also curious as to when you expect to start renegotiating the sales contracts that underpin production at Burrup.
Yeah, thanks, Anthony. So first, the good news. You know, we've been capacity constrained at Burrup because there was a cooling tower outage. Just last week, we commenced or we commissioned our new cooling tower. Now, that's very important as we head into summer. Temperatures at Burrup can be very, very high, and then you cannot run plants at high load if you do not have adequate cooling. So the good news is the new cooling tower is now in place, and this means Burrup can start to ramp up production. We need the volumes clearly, because Australia is short on volumes. But the last six, seven months have been extremely challenging for us because we were running Burrup at low loads due to the restricted cooling facilities available there.
So that's the first good news. Overall, the market in Western Australia, given the growth in iron ore, given the commissioning of new mine sites with our customers, has been pretty strong, so demand is outstripping supply, and obviously we were not making it easy with our constrained supply. It's expensive to get product into the Western Australian market. So I do expect that this balance will stay, the market will be balanced, and Orica is able to leverage our network of Burrup, Yarwun, as well as Kooragang Island, to ensure that our customers get adequate supply. Recontracting for most of the Burrup business, which was not contracted long term, has already been done in 2021, 2022, so you'll see full year effects coming in into 2024.
The major contract, which expires end of 2024, we will then hopefully recontract for the 2025 calendar year. That's when the benefits start to come through.
Great overview. Much appreciated. Thank you.
Thank you. Sorry, just a moment, please. Next, we have Anthony Longo from JP Morgan. Please go ahead.
Hi, Sanjeev. Hi, Kim. Just a quick one on CapEx. So I appreciate that the guidance is increasing year on year from 2023 to 2024, and certainly as a result of some of those turnarounds. But how should we be ultimately thinking about that CapEx profile through the cycle from then on? Is it something that should revert to maybe what we have seen in, say, FY 2021, 2022 levels, or perhaps any color around that would be helpful.
Thanks, Anthony. Yes, I mean, 2024 is a special year because of the very heavy turnaround period. That will repeat again in 2030. So we'll have a bit of breathing space going forward. So the sustenance capital will normalize. What will increase is growth capital, because our business is growing. We have new wins, we have contract renegotiations. We have to mobilize more capital, people, equipment to cater to new business. So that will continue to grow, and then the sustainability spend will continue to grow as we continue to decarbonize our operations. To balance that out, the maintenance capital will then come back to normal levels from 2025. So overall, the guidance will stay in that range.
Maybe there'll be a slight creep upwards, but I don't expect too many changes to happen in the next, three to five years.
Okay, great. Sorry, you've just for a little bit, so I missed some of that. In terms of the gearing ratios, I mean, you're still well below the bottom end of the range, and take your comments with respect to, you know, looking at opportunities in a number of areas. Well, I mean, how should we ultimately be thinking about the regearing of the balance sheet towards the bottom end of that range? Is that... Do you expect to be well below for a long period of time?
I mean, look, we've talked about capital allocation and the, and the use of capital. Obviously, growth capital and sustainability and safety capital is critical, so we will not constrain ourselves in that field. Maintenance capital, you need to spend significant money to run our continuous and discrete operations. That will continue. We'll continue to keep dividend up, as we have done over the last three years, so that's another outlay for the capital. Then, obviously, opportunities for inorganic growth. We are keeping powder dry. If there's a good opportunity that fits into our digital business or our chemicals business, then we will take a very close look at it. That's the current, that's the current plan.
I know there are a lot of questions I'm getting on buybacks. Look, you never discount the fact that you would never, ever do buybacks, but if I don't have better ideas for capital, then that's a discussion to be had another day. But that's not on the topmost, you know, priority for our list of capital allocation, if that helps.
No, that's great. That's exactly where I was going, but, appreciate that. Thank you.
Thank you. Next, we have Scott Ryall from Rimor Equity Research. Please go ahead.
Hi there. Thank you. Sanjeev, I just wanted to ask you about slide 18. And I don't believe you made a significant comment on this on your prepared remarks, but there's one of your strategic targets there with an orange or yellow next to it, which is on high-growth mining chemicals markets. I was wondering if you could just give us a little bit more color around what are the chemicals that you see-... Orica has a competitive advantage in supplying to your mining customers, right?
Yeah, thanks, Scott. Yeah, that's correct. That's one of our orange traffic lights and not green for good reason. The current portfolio we have in mining chemicals consists of sodium cyanide for gold and emulsifiers that go into mining explosives. We are number one in the world in terms of manufacturing specialty emulsifiers that go into mining explosives all over the world. We have two assets, one here in Australia, the one in a joint venture in the U.S., and we have the largest capacity and market share in the world for that business. That's a low volume, very high margin business, and we are continuing to grow that business by adding capacity and also looking to build new capacities if there's opportunities in new parts of the world.
So that's one growth area. The other one is sodium cyanide, and unfortunately, in FY 2023, our capacity was constrained because we had a major turnaround at Yarwun in the second half of the financial year. As a result, we had limited volumes to sell. And secondly, I did call out that the LatAm market for cyanide was a bit weak. But the good news is, this year we have started strong, so I do expect that to recover. Now, that's what we have in the current portfolio. What we are looking for is to add to that portfolio, either in terms of new capacities, I talked about emulsifier capacity elsewhere in the world, or to look at new chemistries that go into, for example, lithium extraction or copper purification.
So flocculation chemistry, surfactant chemistry, emulsifier chemistry, and that's exactly the portfolio we are looking for in terms of either partnering with chemical companies or trying to set up our own manufacturing base. That's work in progress, and that's why this, the traffic light there is yellow and not green.
Just on your very last point that you made there, what do you believe that you might be able to play in, where your current manufacturing footprint will give you a competitive advantage, perhaps in the manufacture of those chemicals?
That's a great question, Scott. I'll give you one example here in Australia. At Yarwun, in the neighborhood of our ammonium nitrate facility, there is a new investment called Alpha HPA. Alpha HPA is a listed Australian company, and they are building the first high-purity alumina factory in the world with proprietary technology that goes into LED lighting, and it also goes into coatings for the separator in the battery for e-mobility. Now, Orica has joined partnerships. We've also acquired a stake in that company. We supply them feedstock from our Yarwun facility, and they, in turn, are producing high-purity alumina for this industry. Exciting business, first factory. They also have government grants, and now today we are a shareholder in that business.
The expectation is that business will grow, and hopefully, we are able to also expand the footprint into other factories where we make ammonium nitrate. And so that's just one example of using our existing manufacturing capability, the chemistry capabilities, and you know, providing closed loop manufacturing for emerging technologies and ESG-driven growth. And that's just one example. So we look for more of these kind of examples to play in the battery material space, not to manufacture batteries, but to support the battery industry, because there's a lot of chemistry that goes into that space.
Okay, great. Thank you. That's all I had.
Thank you. Thank you for all the questions. I would now like to pass back to Delphine Cassidy. Thank you.
Thanks everyone for joining us, and once again, apologies for the technical issues at the start. Please feel free to come back to me if you have any further questions. I'll be available, but thank you all for your interest. Good afternoon.