Hey, good morning, all. Thank you for joining us here in the room, on the phone, and on the webcast. I will ask you to glance at the disclaimer. If we go to slide three. I am pleased to report that in the six months of the year, we have sustained our most important objective of no fatalities. Safety is and continues to be our first priority. Knowing and understanding our major hazards and embedding our key controls into standard work has strengthened our focus and efforts on fatality prevention. We are developing a robust management system and a continuous learning culture to systematically achieve and maintain improvements in our safety, health, and environmental performance. In February of this year, our Kooragang Island plant achieved 50 years on-site operation. This is not a milestone you achieve by chance.
The Kooragang Island site support of the local and broader Newcastle community is a real point of pride, not only for our team at the site, but for Orica as a whole. Countless community initiatives have benefited from Kooragang Island's corporate support and the support of our people, who generously donate their personal time and money to make the community in which we operate a better place. When I last addressed you at the 2018 full-year results in November, I said that improved operating leverage from the 2018 second half would underpin a stronger 2019 fiscal year result. I am pleased to say that this is clearly demonstrated in the strong performance in this half. AN volumes were up 3% with strong demand from coal market customers in Australia and good growth in Latin America and the CIS.
Sales revenue increased 12% from higher volumes and services and further adoption of Orica's new technology products. EBIT was significantly higher, up 20% from the 2018 first half, supported by a strong performance across all regions, including Latin America, which I will talk about later, improvement in manufacturing reliability, and sustainable overhead reduction benefits, including the headcount reduction that I spoke about last year. GroundProbe continues to deliver ahead of our expectations, and we are beginning to see improved performance from Minova. I will talk more about these businesses later on. We continue to focus on maintaining balance sheet strength. Gearing is at 38% and operating cash has improved. The board has declared an interim dividend of AUD 0.22, up AUD 0.02 from the first half of 2018 or 10%. This equates to a payout ratio of 50% of underlying earnings. Turning to the performance of the regions now.
Despite the severe weather conditions on the east coast of Australia in the first quarter, AN volumes were up 4% year-on-year. This was driven mainly from new businesses in the Pilbara and strong demand from existing customers, particularly Queensland, driven by increasing strip ratios and coal production. This has resulted in total AN market share in Australia, Pacific, and Indonesia increasing over the period. EBS detonator volumes also increased by some 20%, particularly in Indonesia, driven by demand and customer conversion. All of these factors have contributed to a 10% increase in revenue from the previous half. Higher uptake in services, improved manufacturing reliability, and increased penetration of Bulkmaster 7 in Australia supported 4% EBIT growth. You can see from the numbers we are reporting today that Orica's operating leverage is strengthening.
In this period, the previously disclosed contract pricing issues at the Burrup plant and our increased investment in plant reliability have to some extent offset the benefits of our improving operating leverage. Across the region, prices continue to firm. This trend is expected to continue over the next few years as demand and supply come into balance. This tightening of the market means that plant reliability is more important than ever. Based on the region's forward sales contract profile, we expect to see the benefits of improved pricing to largely start to come through 2021 and beyond. It is a reality that the current short-term issues with the Burrup plant continue to impact the region's result, and I will explain more about our progress in Burrup shortly. The outlook for the second half remains strong.
EBIT is expected to be higher from volume growth in line with normal seasonality, growth in EBS products, and contribution from new advanced products and service contracts. I would like to give an update on our progress on the Burrup plant. I am pleased to report that the rectification work is progressing to plan, and all critical components are currently being manufactured by suppliers. Two of the nine replacement heat exchangers have already arrived in Australia. Two of them are on a boat, and the remaining heat exchangers are due to delivery between now and August of this year. The absorption tower fabrication is on schedule, and all the long-lead materials for the rotating drums have been ordered. We are continuing to prioritize the long-term reliability of the plant over short-term production, and as a result, we now expect the plant to run at minimal utilization this year.
Having said this, I am pleased to say that the plant should be able to be running sometime, we expect to be running again sometime next week. Chris will talk about capital costs shortly. We expect the plant to be fully operational in the first half of FY 2020, and are forecasting overall equipment effectiveness for that year to be approximately 50%. We are seeing very strong demand in the Pilbara region, and we continue to view the Burrup plant as a strategic asset into the future. North America. North America has delivered a significant revenue and EBIT uplift this half. Whilst AN volumes remain stable overall, there was strong demand in Canada in the gold sector, which was offset by lower volumes in Mexico due to mine plan changes at a key customer site and some community problems that they have been experiencing.
There was lower activity in the quarry and construction market due to unfavorable weather conditions and tightening in the skilled labor market in the U.S.A. The forward outlook for this sector remains strong. EBS detonator sales increased by about 8%, predominantly in Canada and Mexico, due to stronger customer adoption of more advanced products. EBIT was up 7%, benefiting from improved manufacturing performance at Carseland and Brownsburg, higher services activity in the U.S.A., and improved emulsion and EBS conversion in Canada. Lower overheads and successful conversion of new technology trials have also contributed to EBIT uplift. Looking forward, services growth and a continued focus on technology offerings will continue to drive a strong EBIT performance. Now moving to Latin America. I'm very pleased with the performance of the Latin American region in this half.
As I mentioned last year, an operational review of the business commenced under the leadership of a new and experienced president. The findings were simple but critical. The benefits of this is evident in the earlier-than-expected recovery in business performance. Volumes were up 10% from the previous half, underpinned by strong growth in Colombia and Peru. This growth more than offset the volume decline in Chile from a partial contract loss in the second half of last year. cyanide volumes were lower due to customer mine plan changes. The EBIT contribution from this region was ahead of our expectations, despite the impact of the continued competitive pricing pressures and lower cyanide volumes. The benefits of lower overheads in the second half of last year also contributed to this result.
Volume growth is expected to continue into the second half. New services contracts, as well as cyanide contracts that come into effect in the second half, as well as effective cost control, will underpin the region's continued recovery. The long-term fundamentals in copper and gold, which accounts for most of the region's revenue, remain strong. Europe, Middle East, and Africa. In November, I said that the positive momentum from the second half of 2018 for EMEA would continue into 2019. It has. Sales revenue were up 12%, with strong ammonium nitrate volumes in key growth, including Kazakhstan, Russia, and Africa, that were partially offset because lower volumes in Turkey due to continued economic weakness in that country. Over 20% of the growth in EBS detonators as conversion continues to progress with higher market penetration in Africa and the Nordics, and increased cyanide volumes in Africa.
EBIT was up 56% from the first half 2018, underpinned by growth in the CIS from new and existing rock and ground customers, higher detonator sales across most of the region, services growth from new projects in the Middle East. Sustained overhead cost reduction benefits. Manufacturing performance has also improved as the Gyttorp plant progresses while its recovery following the explosion in May of 2017. We expect the momentum from first half to continue into the second half and beyond. Growth will be underpinned by higher volumes across the regions and a focus on EBS conversion and new technology offerings. Auxiliaries is Orica's monitoring business, which includes the recently acquired GroundProbe and Nitro Consult, a blasting consultancy business servicing the construction industry.
It is becoming a strategically important segment for Orica, providing us with an essential capability during times of heightened focus on mine productivity, as well as safety and regulatory compliance. GroundProbe has performed strongly since acquisition in January of 2018 from both a market share and financial perspective. It continues to increase market share, growing from around 55% to 66% of new sales and leases over the past 12 months. In the past few months, GroundProbe has gained market acceptance for our new laser technology with sales to both the underground mining sector and the important civil tunneling sector with contracts in Indonesia, Norway, and Australia. It has also deployed 20 new systems to tailings dams in Brazil, Indonesia, Australia, and Botswana. Orica existing channels have helped GroundProbe gain market traction in previously unserved markets, such as the civil tunneling market in Norway and the French-Canadian mining sector.
Orica support and co-location has facilitated the advancement of key strategies, such as the new remote monitoring center to be located in our Latam Orica headquarters in Santiago. From a financial perspective, GroundProbe's EBIT contribution to date is slightly ahead of the investment case and is expected to deliver a 10% ROINA as previously disclosed in its first full year of ownership, that being fiscal year 2019. The growth plans for the monitoring business are strong, including the growing global focus on safety monitoring on sites and further expansion into the tunneling sector. With GroundProbe's current run rate, along with the initiatives in the pipeline, we expect to achieve the 15% targeted return on acquisition within the next two years, earlier than the previously anticipated three to five years. Turning now to Minova.
We are finally starting to see some sustainable benefits from the turnaround that the new management team embarked on last year. Revenue has increased by 22% from a combination of increased market share, increased pricing, and higher demand from existing customers in America, Canada, Australia, and India. In addition to growing the top line, the team has worked hard on reducing its overhead costs substantially in our sustainable basis, and has also lowered its mixed manufacturing costs through plant rationalization. We expect the EBIT run rate to continue into the second half, and then increase from fiscal year 2020 and beyond from additional product offerings and entry into new markets. I will now hand over to our Chief Financial Officer, Chris Davis, to go through the financial performance.
Thanks, Alberto. Looking at the key financial metrics, sales revenue for the first half was over AUD 2.8 billion. This is up 12% from the prior corresponding period, with growth across all regions from a combination of volume and services growth, new contract wins, higher input commodity prices, and favorable FX. The stronger performance across all regions is reflected in the increase in underlying EBITDA by 15% and underlying EBIT by 20%. Underlying NPAT of AUD 167 million increased 35% over the prior corresponding period, driven by higher earnings. This has resulted in a similar increase in earnings per share to AUD 0.439. Statutory NPAT of AUD 33 million was impacted by individually significant items, which I will go through in the next slide.
The effective tax rates of 31.8% was slightly higher than the prior corresponding period due to an increase in non-allowable interest deductions and lower utilization of unbooked prior year losses. The higher effective tax rate is in line with our expectations. As a reminder, we flagged as part of our 2018 year-end results that rectification works were progressing on the Burrup plant. Following a detailed bottom-up review, a decision has been taken to derecognize certain assets that will be replaced, and as a result, we have written off AUD 155 million, which includes capitalized interest. In addition, as we have progressed with the phased implementation of our single SAP project, we have identified a further AUD 36 million of IT assets that will no longer be utilized within the business. Accordingly, these assets have been impaired. These one-off costs have been accounted for as significant items.
In total, the value of these significant items for the half year is AUD 191 million before tax or AUD 134 million after tax. Looking at the EBIT bridge at a high level, inflation on fixed cost overheads had an adverse impact of AUD 15 million, which is in line with our expectations. This was offset by FX due to the Australian dollar depreciating against the US dollar, favorably impacting earnings by AUD 7 million. Volume had a positive impact of AUD 13 million. This increase was mainly from new business and improved demand from customers in Australia, Latin America, and the CIS region. Specifically in the Australia region, AN growth was underpinned by strong demand from existing customers in Australia and new business in the Pilbara. In Latin America, volume growth in Colombia and Peru was strong, more than offsetting the lower volume in Chile from the partial contract loss in late 2018.
Higher demand in the CIS region was driven by new contract wins in the latter part of the 2018 financial year. In addition, there has been a 13% increase in Electronic Blasting Systems across most regions due to strong customer conversion to more advanced products. Net mix and margin had a negative impact of AUD 7 million. This was driven by the impact of previously disclosed contract pricing, lower margins from cyanide due to regional sales mix and new spot sales into Mexico, and continued sourcing and freight costs into the Pilbara while rectification works at the Burrup plant are being completed. This was partially offset by higher services margins across most regions, particularly on the East Coast of Australia and in EMEA. Global manufacturing impacts.
The positive AUD 19 million reflects improved performance across the continuous and initiating system network as we continue to focus on operating discipline and efficiency, as well as the non-repeat of the unplanned maintenance shutdowns at the Yarwun and Kooragang Island plants in the first half of last year. This was partly offset by the larger planned turnaround at the Yarwun plant and disruption of utility supply at the Bontang plant in Indonesia in the first half. In terms of the Burrup plant, Alberto has previously given a comprehensive update on the plant status. The negative AUD 3 million impact in the first half of 2019 represents increased administration overhead costs, in line with preparing the plant for full operation. This will continue to increase as the plant gets closer to being fully operational. Auxiliaries.
GroundProbe accounts for a large portion of the EBIT generated in the Auxiliaries segment, which also includes our Nitro Consult business. As Alberto mentioned, GroundProbe has had a strong performance in the first half and is on track to deliver the 10% growth target in its first full year of ownership. Nitro Consult, a blasting consultancy business servicing the construction industry, delivered a stable EBIT contribution in the half. Importantly, we are beginning to see the benefits of improved performance from the Minova business, which has seen an increase in EBIT of AUD 11 million over the prior corresponding period. Increased pricing, higher volumes, sustainable overhead reduction initiatives, and lower fixed manufacturing costs have contributed to this EBIT uplift, and we expect this to continue into the second half of the year.
In November last year, I mentioned that we expected to deliver an incremental AUD 25 million per annum in benefits as we continue to streamline the business. The positive AUD 13 million impact from reduced overheads includes the benefit from lower people costs following the restructuring activities that took place during the second half of the 2018 financial year. Turning now to capital expenditure. Our approach to capital expenditure remains unchanged. At all times, we will ensure that capital allocations related to safety and environmental obligations will not be restricted. All other capital requirements will be subject to financial metrics and a rigorous review and approval process. Growth capital has increased year-on-year due to ongoing investments in the Bulkmaster 7 mobile manufacturing units and spend on the Burrup rectification works.
In November, we stated that capital expenditure for this financial year would be around AUD 350 million due to higher sustaining spend on manufacturing plants, continuous investments in the replacement of our aging MMU fleet, and the SAP implementation ramp-up. We continue to expect that capital expenditure will be contained to AUD 350 million, excluding the impact of the capital required to replace the defective Burrup assets. Importantly, the joint venture has the right to call on a performance bond from the contractor. To date, the joint venture has called on and received AUD 90 million in cash proceeds. As is normal in these circumstances, the application of the performance bond is subject to an arbitration process. Therefore, a decision has been taken that as rectification works are undertaken on the plant, these costs will be reflected as capital expenditure.
The cash received to date will be recognized in our accounts as other liabilities until such time as a decision is made in the arbitration process. Looking at cash flow. Orica generated operating cash flow of AUD 184 million in the half, a significant improvement on the prior corresponding period. EBITDA of AUD 437 million was offset by net interest income and income tax paid, a decrease in non-trade creditors, and an increase in trade working capital to support increased sales activity and inventory levels in the Pilbara. Cash conversion, including sustenance spend, has improved to 72%. Excluding sustenance spend, this is at 91%, reflecting the increase in trade working capital that I previously mentioned. Net debt has increased AUD 119 million to AUD 1.8 billion, with gearing at 38.1%.
The increase in gearing is driven by the timing of the final dividend for 2018, a movement in exchange rates impacting US dollar-denominated debt, and the impact to shareholders' equity of the non-cash significant item adjustments I previously spoke about. At 38.1%, gearing remains within our revised target gearing range of 30%-40%. The target range has been reduced to better align with past performance and other key metrics against which the group monitors its performance. At these levels, gearing is well below our financing facilities covenant of 57.5%. We remain committed to maintaining a strong and flexible balance sheet through the cycle. With that, I'll now hand you back to Alberto. Thank you.
Thanks, Chris. We are maintaining our focus on our strategic priorities across the business with particular attention on improving our manufacturing performance. We previously spoke about the significant potential benefits in improving the performance of our plants. This is especially important at a time when prices are firming and the market is moving towards a supply and demand balance. We always knew that this would take time, and that we will continue to invest in our plants over the next few years. Improving the reliability and integrity of our continuous plants will reduce unplanned downtime and lower costs, as well as providing security of supply for our customers. Our improved turnaround management process has been highly effective, with turnarounds successfully completed at Bontang, Yarwun, and KAI over the first half, all within our anticipated timeframe and budget.
OEE performance for these plants has been impacted by the turnarounds, but has otherwise improved, and we are also seeing improved daily production rates as a result of the work that has been done. Carseland is currently undergoing a scheduled turnaround in the second half, with no further turnaround work planned across the continuous plant portfolio for the rest of the year. With the planned maintenance completed, we are expecting OEE across the portfolio to improve dramatically in the second half of the year. In response to growing demand in the Indonesian market, our plan to increase capacity at Bontang at minimal capital cost has progressed further, and we are currently anticipating that the project should be completed in the first half of 2021. Initiating systems. We are focused on ensuring that we are delivering the product that meet our customer needs in a timely, reliable, and cost-effective manner.
We commenced production of WebGen this year in response to growing market demand for more advanced products. We have also added an additional electronic blasting systems production line in Helidon. Ensuring our plants are making the right products does not only mean adding new products to our catalog, it also means not making the wrong products. At the full year, I spoke about our plans to rationalize our initiating systems product portfolio, and I am pleased to say that we have made the very good progress in the half. At the beginning of the program, Orica had more than 40,000 SKUs across the business. To date, more than 20,000 SKUs have been deleted. While many of the SKUs deleted were obsolete or had no recent sales, this is just the first phase of the project, and there is more work to be done.
The next phase of the program is harder and will take longer, but will also deliver much more significant benefits. We will need to work closely with our customers to ensure that we continue to meet their needs, as well as considering our production capacity, logistical requirements, and regulatory approvals. Ultimately, reducing our product portfolio will reduce complexity and duplication in our manufacturing facilities and supply chain. First and foremost, this will increase security of supply for our customers and better enable us to meet their needs. In addition to the changes, these changes will enable us to improve the utilization of our plants, reduce costs, and make a significant reduction in trade working capital. Customer adoption of technology solutions. There is a clear and accelerating trend from our customers wanting products and services that lift their productivity, and Orica is the leading provider of technology-based solutions.
After several years of investment in research and development, we have now successfully trialed and commercialized several key technologies to the market. One example where Orica has captured first-mover advantage and delivered clear market leadership is the development of our unique end-to-end true wireless blasting system, WebGen. Initial market entry focus on the underground sector, where WebGen has a compelling value proposition of safety, productivity, and increased ore recovery. We understand customers take time to familiarize with completely new ways of working, but we are making very good progress. To date, we have secured several commercial service contracts, and we are on track to undertake full-scale operational trials on a further 28 customer sites across all regions by the end of this fiscal year. I think two days ago, we did the first ever open pit wireless detonation in Latin America. That's also progressing well.
After the successful introduction of the technology underground, plans are in place for expansion into open pit applications in coal, iron ore, copper, and gold, as I just said. These trials will serve to refine and validate the value proposition in surface applications and secure long-term volumes in readiness for the next generation of WebGen. Rapid adoption is planned, which is expected to deliver a material EBIT uplift in the coming years. The next generation of BlastIQ was commercially released in October, with commercial agreements already in place across target regions, including the first customer utilizing the Bulkmaster BlastIQ fully integrated solution. This allows real-time data synchronization of blast hole data with explosive delivery, and together with WebGen, is an important step towards automating the drill and blast processes. Importantly, Orica is the only company in the world that has been able to deliver this game-changing technology.
As of March this year, we have placed 22 units of our smart large capacity Bulkmaster 7s on our customer sites. The rapid adoption rate in the iron ore, met coal, and thermal coal sectors reflect the broad appeal of Bulkmaster 7 benefits and the flexibility of its product configuration. While the Australian Pacific Asian region has led the development and introduction of the Bulkmaster 7s, Latin America is an attractive market with seven units planned for customer trials. These technologies are now entering a phase of rapid scale and adoption led by the regions with support from the central technology teams. Rapid adoption is the key to strong market participation and maximizing long-term financial returns. Turning now to the outlook.
At the FY 2018 results, I mentioned that the improved operating leverage from the second half of the last fiscal year would underpin a strong FY 2019 result based on various assumptions, which are included in the supplementary section of this results pack. This is evident in the underlying strength of the result in the first half after stripping out the AUD 3.5 million asset sale. With this in mind, the FY 2019 outlook assumptions remain unchanged, except for the lower utilization expected from the Burrup plant, which I covered earlier. FY 2019 underlying EBIT will be weighed to the second half with an approximate 45/55 split. Forecast stronger EBIT run rate in the second half of the FY 2019 is expected to continue into the FY 2020 based on the following assumptions.
AN volume growth supported by commodity growth and mine plan outlook, we have good visibility into that. AN pricing, which is expected to remain firm, improve reliability and operating efficiency across the manufacturing network. Further benefits from advanced product adoption and continuous services uptake. Burrup plant rectification works, which are expected to be completed in the first half, as previously indicated. This is, however, subject to no significant changes in the market regulatory and economic environment. Looking beyond FY 2020, we expect the positive momentum to continue, supported by solid demand and supply demand, as we've seen in Australia. Further operating leverage benefits, a fully operational and loaded Burrup plant, and rapid and further penetration of our next-generation technology product and services. With that, I open to questions. Thank you.
Thanks, Alberto. Richard Johnson from CLSA. Can I just ask you about the EBIT margins in the APA business in the first half, which were down a little year-on-year. Obviously mix has had an impact on that because there was no growth in emulsion. I was wondering if you could just step through what the other main moving parts were, please.
There was probably two that will be more permanent and two that are temporary. The more permanent we flagged in the half year, the last big contract renegotiation, that was flagged that for the year about AUD 25 million, that hit about AUD 14 for the year on a gross basis. We're also investing more on the manufacturing. There's about AUD 8 probably million to sustain that reliability. Those are permanent, but the temporary ones, those are weather-related. We did not affected as our competitors, but we're still about AUD 4 million for the half year over and above the normal, and then the Burrup sourcing piece. That is significant. If you strip up the temporary ones, we should be around at 20, approximately a 20% margin.
Right. Thank you.
In the long run, we should compare to that again. We should converge to that.
Great. This may be a question for Chris. I was just curious as to how we should think about the minority charge going forward.
The minority charge should sit at around about the AUD 12 million, AUD 13 million. What we've had in the half is on an intercompany loan in our Venezuela business has been obviously devalued on the FX there. There's a loss on the FX on the loan. Our minority partner picks up a portion, and as a result is it comes back for us in the minority interest line.
Great, thanks. Then just finally on the SAP investment. I know you touched on it, but I was wondering if you could sort of talk in a bit more detail around what cost-saving opportunities that investment has released and what the timing of those is. Then in a practical sense, what does it do to the group if you think about pre-SAP and post-SAP from an efficiency perspective?
Just a bit. The systems that we have in Orica is from 1990s. The current system, SAP, has only SAP as a name. It has about 50,000 customizations. Degree of manual intervention and Excel sheets and the degree of transactional work that we have to do in finance and HR is enormous. We don't have, not to say profit per SKU, even profit per products, we don't have. The impact that it will have in terms of not only information but supply chain management, manufacturing information and reliability, in terms of commercial mark to market, we will know the book on a daily basis. Today, it will take three or four weeks to know where the book is, the average book. The impact will be very significant.
We expect the last part, which is called Release 3B, to be live around the first quarter of 2020, calendar year 2020. After that, it will be 12 or 18 months of leveraging that investment. The full benefits of that investment in terms of having probably a much more efficient company continuing probably with growing the outsourcing in Manila, probably it will grow pretty significantly, so we will have any remaining transactional work in Manila. All the efficiencies in supply chain and other places would be felt in 2021. Probably that underpins why we were unusually talking beyond 2020. It's because we expect a lot of those benefits to be seen in 2021.
In 2020, we actually start seeing a bit of a cost because depreciation will come in at about an increase of AUD 20 million just from the SAP in 2020.
Alberto, thank you very much.
We'll now go to the phones.
Thank you. Ladies and gentlemen, if you wish to ask a question today via the phones, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question today comes to the line of Grant Saligari from Credit Suisse. Please ask the question.
Thank you, and good morning. I'd like to delve into, if I could, just the operational performance in a little more detail, because I think I agree with you, that's key here, and it's maybe something that Orica has had a little bit of critique in the past few periods. In that context, could you just run me through the deterioration that appears to have occurred in the TRIF or the safety record? Because safety is a pretty important indicator of controllables within a manufacturing environment. It looks to me, just on the headline numbers, that there's been quite a deteriorating trend in TRIF since 2017. Perhaps I'm not sort of normalizing or reading the figures correctly, so if you could expand on that, please.
Yes. If you decompose the numbers in APA of the TRIF, a significant increase has been on Asia region, and we believe it's much better reporting than, and more standardized and homogeneous reporting than anything else. If you just isolate the Australia region, it would be sort of similar of what it was. One measure we are tracking more than TRIF is significant injuries, because our whole sort of focus changed some years ago into prevention of fatalities. Again, the current status of the theory tells you that focusing on serious injuries, which is the one component of the TRIF, is critical in avoiding fatalities. That is stable at around 0.19. That was where it was 2018. That's where it is in the first half, 0.19. That for any company, that would be a pretty significant one.
Our increase has been in not the serious injuries, but in the other ankles and all of that. It has been, we believe, more a reporting issue in areas that previously had very, probably unusually low TRIFs.
Okay. That's helpful. If I could just on a similar theme, just draw your attention back to slide 21, where you're talking about equipment effectiveness. That's a really helpful slide. We can see there the improvements in Carseland and KI sort of fairly, I guess, stable above that 80%. With Bontang and Yarwun, which had the turnarounds during the period, would you expect them to be above 80% even in a turnaround year, or how should we sort of interpret their performance?
Bontang had this year not only the turnaround, but we suffered unfortunately from the feeding from our partners of the ammonia plant, and there were several unfortunate issues that really took a bit out of the OEE from causes that were not directly related to Orica. Even with turnarounds, Bontang should be on the 80%. It is a good plant and well-run plant, and it should get back to around that 320,000 tons and more right now probably it's running. We've actually been able to, in the past months, unlock another 10,000 of annual capacity just with that AUD 200,000 investment. I would expect that to be above 80% on a permanent basis. Yarwun is an older plant. If you exclude the turnaround, the OEE for this year would be around 78%. It should get to the 80% mark, Yarwun.
It is quite probably our more oldest and more complex plant and many things can go wrong. It's several nitric acid plants, as you know, so it makes it more difficult. I expect that plant to go to reach 80% excluding turnarounds. If you go to the KI and Carseland, they're in the 90% range of OEE. There's probably another indicator that just illustrates probably the improvements in manufacturing, and it is the average number of days of above the planned turnaround days. If you go back to 2011, 2012, 2013, 2014, we were usually on average about 25 to 30 days On average, above the planned days of turnaround. In 2014 or 2015 or 2016, that didn't matter because we had so much excess supply that you just didn't see the impact of that.
We felt the brunt of the impact of that in the first half of 2018. Now, if you look at for the past 18 months, we're averaging on a two to three days more than plan per year. The performance has gone again from 25 to two to three days. Even those two to three days harm us right now, and that's why we're happy to make a bit more investment in the reliability of the plants, because anything below 80% comes back to have a significant impact on our financials.
All right, agreed. Thank you. That's very helpful.
Your next question today comes on the line of Niraj Shah from Morgan Stanley. Please ask your question.
Hi, guys. Just the first one from me. Can I just clarify, Alberto, that you said, of the sort of AUD 25 million price reset impact this year, 14 was realized in the first half?
Roughly. You see that goes into that bridge that's at AUD 7. We also only a net of AUD 7 because we have all these value-adding services contracts, which were having a positive impact on the price line. We separated what is volume from price. That's why that column you see in AUD 7. There is embedded in that AUD 7, a negative in that reset of that large last contract.
Just further down that path, how much of that AUD 7 includes the additional Burrup sourcing cost? What was the year-on-year impact of that?
That would be on the volume part of the bridge, the sourcing cost. Let me go to Probably Chris can help me on that.
Included in there is about AUD 4 million for Burrup sourcing costs.
Okay, got it. Just the last one from me, Alberto. Obviously, sort of AUD 25 million price reset impact this year. How should we think about that line, I suppose, in FY 2020?
We don't expect to have any major negotiation in APA. That was the last of the contract that was out of the money. There is maybe something in North America that we expect, but it's of a different order of magnitude. It's much, much less, very small on 2020. Sort of the guidance has been, we don't have any major headwinds going into 2020 or 2021. What we have, if anything, is prices firming overall across the company. Tailwinds, and then just better leverage from improvement in SKUs and operating performance, and then Burrup fully operational in 2021.
Okay. Sorry, last one, apologies if this is a bit too broad, given all the work you're doing on operational performance, just to, I guess, simplify it, how many additional tons do you think you'll be able to make across your network next year versus, say, this year?
I don't have it from the top of my mind, if I look at just per plant, yeah, it will be more than 50,000 tons.
Okay. Thank you.
Maybe the team can come back to you.
Sure. Thanks.
Your next question comes to the line of Sophie Spartalis from Merrill Lynch. Please ask your question.
Good morning, team. Firstly, some accounting questions from me. In regards to depreciation, following the news of Burrup, can you provide some guidance as to the expected depreciation for 2019?
You're talking about the Burrup depreciation?
No, the group depreciation. It seems to be running between AUD 260 million-AUD 265 million over the last few years. Is that what we can expect coming into 2019 as well?
What we indicated in November that the depreciation would be up about 10% in 2019. I think on the half, it's up about 8%. We're still expecting about 8%-9% for the 2019 year. As we go into 2020, there's going to be an increase on Burrup as that comes in. I think we've always quoted the depreciation on Burrup at around about AUD 24 million. The only thing, Sophie, is that's not going to commence on the 1st of October. It'll commence once the plant is up and running and demonstrated reliable operations. That'll be sometime during the course of the second half of the year when the plant is up and running. When our single SAP project comes on board, there'll be a lift in depreciation of about AUD 20 million next year.
Okay, that's great. Just in terms of the tax rate, we saw a little bit of an uplift in the half. Do we carry that across to the second half as well?
Yes, you should.
Yeah. Something around the same. Close to 32%.
Okay. Just to reconfirm, Alberto, the earnings guidance that you provided, that's at the EBIT level?
It is at the EBIT level. I would, again, we're saying approximate, the other thing is we don't expect to repeat that AUD 3 million of the sale. I would reduce it again.
Sure. Just more of an operational question, just in regards to Yarwun, we've seen that the turnaround has been continuing, you mentioned previously that you expect that that should get up to that 80% level going forward. Just in terms of the contracts that are sort of due for renewal this year around that Bowen Basin, where do you see that incremental tonnage that you'll be able to produce from Yarwun being placed?
How I see it more in a medium term, obviously, is there's about 200,000 tons of Chinese tons right now being imported in Australia. Once Burrup is up and running, we will liberate a significant capacity from Yarwun to be able to place it in the market. Right now, the east is pretty much full, any ton that we can produce, we will be able to sell. That's how I would think about it more.
That ability to sell more tons out of Yarwun, do you see that coming from existing contracts, given increased material movements, strip ratios, et cetera, or do you see that coming from new contracts?
It would be from new contracts. A lot of the tons are probably from the Chinese that are going into smaller and medium operations with not longer-term contracts. We would expect to be able to cover a significant part of those tons. Again, if you look at how it works, the plants of CSBP and the plants of Dyno in the east are full. The marginal ton, once Burrup comes in, would come from Yarwun.
Okay. That's great. Thank you very much.
Your next question today comes on the line of Mark Wilson from Deutsche Bank. Please ask your question.
Thanks very much, Alberto. Just in relation to Burrup, what is the expected capital cost of the rectification works?
Mark, we're right now out in the market for the final EPCM. The numbers right now are not very firm, it would be around AUD 200 million. We have a performance bond of AUD 120, that would be around, probably for Orica, about an AUD 40 million CapEx. Again, these numbers are being firmed up as we speak.
Right. Okay. That performance bond, that was the USD 90 that was referred to before?
That was the total of the performance bond. It was AUD 20. As you know, we are in court, there's a lot of ifs up in the air. That would take a long time. Those trials take a long time. Let's say, assuming we got that first AUD 90, that it was challenged, and in the end, we were able to get the disbursements of the AUD 90. In a sort of working hypothesis, we get the AUD 120, and then it's around AUD 200 or plus. It would be around AUD 40. In the scheme of things, not that material for us. My most pressing objective is to get that plant reliably going. The cost of that plant not running is dwarfing any really capital cost that we may incur.
Yeah. Just in relation to that, can you just step through the timeframe? You've got the equipment on its way. You'll take extended downtime from August. Can you just sort of run through the timeline?
Timeline is the project team will get it. It takes about one month to clean and all of that, and then there's a handover, maybe September, maybe October. The problem is that we get into Christmas. Depending on when they get, there's usually a stoppage in Christmas. The project team will have it for some months. We don't know if it's four or five months. It depends how Christmas comes into it. Once it's reliably running, it hands back to the operating team. We are assuming that that will happen around, let's say, the first months of calendar year 2020, and that's why we're assuming that it's fully operational by April, let's say. That's the 50%, where you get the 50%.
Okay. That's great. Thanks, Alberto.
Your next question today comes on the line of Daniel Kang from Citigroup. Please ask your question.
Morning, everyone. Just had a few questions, if I may. Just on slide 15 of the pack. Noticed that the Burrup negative impact was AUD 3 million, and that's quite sharply lower than the AUD 26 million negative impact in FY 2018. Can you just talk us through the variance there?
This is versus the performance of the previous year. This is only related to the increase in operational cost of Burrup. Obviously, this is versus last year, because last year, Burrup wasn't working either. The impact to Orica is, it is obviously orders of magnitude higher than that. This is just a comparison of year to year. We have talked about that likely the impact on cash flows would be about AUD 40 million-AUD 45 million. Again, this is the comparison versus the previous half year.
Sorry, can I just add to Alberto's response there? Last year, given the magnitude of the amount we separated, you saw the AUD 26 million, of which roughly 50% was sourcing and 50% was increased administration costs. That is now effectively built into the base. If you look at this year, the increase is about AUD 3 million in administration overhead. As I mentioned earlier, the incremental sourcing tons is sitting in the margin of about AUD 4 million.
That is really helpful, Chris. Thank you for that. Just a simple question then. In terms of Burrup, what sort of losses did it make in the first half?
We do not go into sort of one pricing of contracts as all of that.
Never mind. The second question I had was, in terms of seasonality of profits, you've indicated 45/55 for this year. As we look into FY 2020, should we assume that seasonality would normalize back towards that 48/52 level?
Yes, around that. We'll give greater guidance, obviously, in the full year, it will not be skewed 45/55, no. It will be more towards traditional, we'll give more greater guidance in November.
No, absolutely. Makes sense. Just the last one for Chris. I guess we've got CapEx at about AUD 350 million this year. What should we be assuming going forward? Should we be around that level or at the lower range of about AUD 300 million-AUD 330 million levels in the past?
In November, when I spoke to you, I indicated it would be AUD 350 million for this year and then AUD 320 million for next year. Our revised outlook for next year is going to be about AUD 360 million, and that is driven by the increased spend that we are putting into our manufacturing plants to ensure that the reliability is there and a slight increase in the spend on our single SAP project.
Beyond that, we should just be moving back towards sustaining CapEx.
Beyond that, I think we'll be somewhere between the AUD 320 million and the AUD 360 million.
We may have to do a bit more on the continuous manufacturing plan, so that's something that we'll give more update in November.
Very good, guys. Thank you very much.
Your next question comes to the line of John Purtell from Macquarie. Please ask your question.
Good morning. How are you guys? Good morning. Can you hear us?
Oh, yeah. I thought it was a good question, but anyway.
Okay. Sorry. Look, just had two or three quick questions. Just again, following up on Burrup. Alberto, just to clarify the comment that in terms of outlook, that you're expecting 50% utilization. Are you expecting that across the whole of FY 2020? Are you essentially an assumption that it's close enough to 100% in the second half, or is it-
Yeah
50% after the plant starts up in the first half of 2020?
No. It should be close to capacity for six months. That's what it is.
Okay. Just the second one related to that, can you give us some color in terms of what's happening on the ground as far as Orica's operational involvement in the joint venture and the extent of that that's providing confidence that can be achieved in terms of your targets?
We have a project team on the ground. There's 32 engineers. It's led by Stuart Thatcher. Stuart Thatcher has been involved in Bontang, in Yarwun, and is probably one of our most experienced project guys in the company. We have several others, and obviously Yara has also sent their best engineers. I still talk to the CEO every month. Carlos Duarte, the President of Manufacture, talks to Tove, who's the President of Manufacturing of Yara, every week. There is a lot of alignment. That project team particularly is running very well. In particular, Stuart, I talk with him every fortnight, and obviously Carlos talks with him every week. I've had long conversations with him. He again continues to assure me this is technology we know. There is nothing strange about this. The issues were clear.
The big equipment, there should have been a quality sort of inspections while they were being built. That didn't happen. Basically, the issues of all of those equipments, the heat exchangers, the absorption column, the dry drums, were around cracks from the welding that you couldn't really fix them. That's why they have been manufactured in Germany, Italy, and France. He is confident that the plant will run again. He has Monte Carlo simulations of about 90% to underpin what I'm telling the market. Of course, there's a 10% that there's a delay of two or three more months. That's always maybe a 10% probability, but he's confident that there's nothing technology-based new or nothing that he doesn't really that is going to come out with a big part that he doesn't know. He's highly confident on that.
I'm just going on from my many conversations with Stewart.
Thank you. Just the last question. In terms of APAC, we saw your volumes up 4% and your revenues were up 10%. Obviously, you had prices down in Australia in terms of that contract you mentioned. It does appear quite a big differential, if you like, between volume and revenue outcomes. I just was interested in what was driving the extent of that difference, please.
There's permanent and temporary, but if you want the temporary ones, it's the Burrup sourcing, increased additional sourcing that Chris was talking about, and there was the weather impacts that were over and above the normal weather impact of about AUD 4 million. If you want to say, well, what is the probably more normalized EBIT margin? It's not 17.6, but around 20% EBIT margin. That's what it would look like. Obviously, there was permanent impacts of that big negotiation contract that was a four or five-year contract that was still of the prices of 2014, and that we well flagged it in November. That obviously impacted the margin. As we go forward into the future, that 20% is, let's say, excluding the temporary variables, it will be around 20.
We're confident that everything we're doing around technology and value adding should take it from there. I don't want to start going two or three years down up the line.
Okay, thank you.
Your next question comes to the line of Niraj Shah from Morgan Stanley. Please ask your question.
Hi, guys. Just a couple of follow-ups. One, apologies if I missed it, the KI gas contract obviously comes up in January 2020. Just came to get your thoughts on how that's going to play out in terms of financial impact next year.
We are now fully covered for gas until 2021. We are partially covered in 2021. It is, as you've seen, I have been in the market publicly saying how the insanity of the gas price situation in Australia. We do have pass-through in our contracts, but that doesn't mean that we do everything we can to try to protect our customers. That will go into a pass-through. Obviously, for us, it was critical to get the. Right now in Australia, it's not about even price, but getting the quantity was what was difficult. We have covered that well. The impact will be different. In Yarwun, we had already felt that impact in 2018. If anything, Yarwun was slightly lower than that. We won't see much impact in Yarwun.
In KI, there will be an impact, but that will just go into the normal rises and falls of our contracts.
Okay. Just to clarify in terms of, I guess, the EBIT bridge that we all look at next year, gas cost shouldn't be a material item then?
There's no more headwinds. We don't see any cost headwinds because anything that is coming up, it is in the pass-through.
Okay. Last one, just wanted to understand where we are with the anti-dumping, whether that's sort of showing up in market prices. Can you give your thoughts there as well?
Dumping has continued. I think with spending right now, the minister approval, the commissioner has given its final sort of regulatory statement. We are fully aligned and are fully agreeing with what the commissioner has said in the sense that there is very clearly demonstrated dumping coming from those three countries, from China, from Thailand and from Sweden. Yeah, we're happy with that outcome. What we have seen in any case in Australia is a firming of prices. What we've also clarified is that we basically don't have major negotiations in 2020. It's only about 6% that we'll negotiate. What we've said is that we should see some impact in 2021 and beyond.
Thank you.
Alberto, can I just ask about North America, which perhaps sometimes gets a little bit ignored?
Yeah.
You make the comment that AN pricing is still reflecting competitive pressures in the region. If I look at your average realized pricing year-on-year in the first half, it's significantly higher.
Yeah.
That's obviously a good outcome, but I was just wondering if you could sort of, kind of reconcile those two things.
A lot of it has to do, Canada is doing very well, it's part of the mix. There's also, in Canada, we have a lot of more EBS, more wireless. You're seeing the value added coming through.
Great. Thanks.
That's it. Okay. Thank you very much, all. Bye-bye