Welcome to Orica's 2016 half-year results. Presenting today, we have Alberto Calderon, our MD and CEO, followed by Tom Schutte, our CFO. We will have plenty of time for questions after that. We'll take questions from both the floor, the webcast, and those online. We will take questions from the floor first. Then we'll move it to those on the line. Without further ado, I hand it over to Alberto.
Thanks, Delphine. Good morning. Thanks all for coming, those of you on the web and on the phones. Today, we will talk about four big topics. First one will be a summary of the results and also an overview by each of the four regions. Tom will go into details on the financial results. He will cover the bridges. You can extrapolate from those results. I will talk about what we have been doing in the past 12 months and especially in the last six, which is what we can control on costs, on efficiencies, and other sort of relevant topics. The fourth will be the future outlook and then some comments on the critical coal market, both in Australia and the U.S. As always, we start with safety. It is not only about safety, it's an indicator of performance.
It indicates that a company's in control. We're happy to again report another good semester on safety. All the indicators are trending in the right direction. Top quartile performer on the ASX. I'd probably just highlight on one area that we're focusing is on critical risks. The company does cover them well, but there's now a centralized sort of. It's part of the mandate of the SHE corporate function to track. Then of all the executives to ensure that all of the critical risks on the company, that are not many by definition, so the top 30 or something like that, are in control. That's a particular area of focus. Let's now move to the summary of the results. The last months, I don't have to tell any of you here, have been more challenging than we thought.
I think I would add most challenging than probably most of us thought. In particular, what was interesting, obviously everything is interesting after the facts. As January and February, the whole stock market in the world was collapsing and the commodities world was suffering, our clients across the whole world were becoming very tentative. January and February were particularly weak months. March, we saw a recovery in March and April. Versus six months ago when we said, "Well, if the prices behave like the forward curve, we believe this will happen." They were significantly, as we saw, below the forward curve. Hence a bit more weakened than we thought. Nevertheless, in spite of that and the overall drop in volumes in 9%, because of all the self-help initiatives and cost control, EBIT only dropped by 4%.
We think it's a resilient result in the middle of significant market environment. I think somebody who we're very happy that agrees with that view is Standard & Poor's, who just put out their announcement. Tom will cover it more in detail, but basically they've said they have left our ratings unaffected. The volume's down by 9%, as I said. However, the added value services still we keep pushing that. More than 80% of the revenue comes from down the hole or more than that. That's also good to see that. EBIT AUD 317. NPAT, we did have the hit of the taxes that Tom will talk about that. On the other side, business improvements, we will see that surpass. We basically reached in the half year our target for the full year.
Capital expenditure is something that we've worked significantly and we'll talk through the presentation about that. We'll also talk about a new dividend policy that is in place and the interim dividend, which is a 40%. We now have a new policy where we're following much in line with the whole market, a payout ratio between 40%-70%. The board has declared a dividend of AUD 0.205. Now let me move to the regions. We start with Australia, Pacific, and Indonesia, AN volume down 9%. I would like to clarify, however, that half of that volume was contracts we lost about 15 months ago and that are well-known by the market. The contracts by Peabody and Thiess explain about 25,000 of the roughly 50,000 tons. The other 4.5% is mine closures, mine maintenance, and changing mine plans.
That's part of the sort of tougher times that I alluded before. On the other hand, the good news, we have been able to, all the contracts that have been for renewal and tender, we have been able to win 100% of them. That has, in part, those net contract wins has impacted positively. On the downside, the price resets have been slightly more than we had envisioned. 70% of the price resets were in FY 2015, 30% have been in this half year. Business improvements have been significant in the region, about AUD 16 million. Advanced products, we continue to push them in the region. I would probably highlight, in particular, EBS. We've been able to increase the share of surface coal, which is an interesting indicator.
In spite of the difficulties of coal, customers are open to solutions that add value and not the cheapest solution. That's an important signal for us. All in all, an EBIT down 24% in Australia, Pacific, and Indonesia. We now move to North America. There, the volume down was 5%. The direct explanation is more the warm winter. We will see that at the end of the slide, but it is something that, again, impressed me in what I've seen. The critical regions for us were down in power generation by 15%. It wasn't only that coal is being substituted by gas, it was the overall power generation. There was a double hit on the sector. In spite of that, we were able to hold our own, and volume was down a mild 5%.
You have the impact of volume and customer mix around AUD 15 million. On the contract side, net contract wins in the past 12 months, so well performance on the sales side. Modest price resets of AUD 6 million. Good progress on business improvements of about AUD 13 million. EBIT was up in North America 18%, but we caution that was a one-off improvement cost that was put in last year. Roughly on a like-for-like basis, EBIT was flat in North America. We go to Latin America. There, the headline number looks significant, 15%. It needs, like in all these numbers, a caveat. The bulk of that was Collahuasi that was lost in 2014 at the end, and it had impact basically in late 2015. That was a contract we lost some time ago.
We also were impacted by the Drummond train closure in Colombia because of safety issues. If you compare, however, H2 of last year to H1, Latin America is roughly flat. The message there is we're particularly, let's say, not distressed by that volume reduction. If we look at the last 12 months, Latin America is performing well. EBIT down was 8%, but for the next six months, we think Latin America will continue to perform quite well. We go lastly to the last region, which is the new EAA, Europe, Africa, and Asia. Basically, volumes flat, and then excluding one-off items of last year, EBIT flat. This is the region where we think in the future growth will come from. It's the newest region in the world, newest team, but they're performing well. On the contract side, 100% of contract renewals are in the first half.
Interesting business improvement benefits. That's the region of the world where EBS grew the most, and that it comes from tunneling, both in Asia and in Europe. A significant increase in sales of EBS. Finally, before handing over to Tom, we talked about the market volatility. This chart starts in our end of the year when we last met. We were basically expecting prices to be slightly on the up or flat. That didn't eventuate. You see at some point in the months, we had iron ore down 25%, copper down 15%, and oil down 33%. That did spook our customers. We did feel the impact. Things feel a bit better now, but as you can see from our outlook, we're assuming that things will not get sustainably worse but will remain tough for the foreseeable future. With this, I hand over to Tom.
Thanks, Alberto, good morning to everyone. Alberto spoke a bit earlier about the market conditions and the volatility since we last spoke to yourselves. Given that, I have to say that I feel that this is a credible set of results, really focusing on delivering constantly to our plan that we originally set about, other than market conditions, and trying to control things that we actually can control as far as possible. With that, if we go to the financial results itself. I'll start off with the sales of AUD 2.6 billion, which is about 9% down on a global basis compared to the prior corresponding period. This decrease was primarily as a result of this continuing volatility that we just spoke about. Lower AN volumes in Australia, about 9% down year-on-year.
That was due to the low demand from both on the coal and the base metals side of the business. The price resets that we flagged with the market at last year at the full year results had the predicted flow-on impact on this half. I'll comment a bit on that a bit later. Revenue in North America, this was impacted mainly by the weaker coal sector, which I think many of you have spoken about before as well and asked questions. This was in the U.S. Volume in the U.S. down about 14%. This was offset to some extent by some good growth in Canada. There was a price reset impact year of about AUD 6 million for this region.
Revenue in Latin America, Alberto mentioned a bit earlier, down 15% year-on-year. This was pretty much actually, if you look through the numbers, in line with the second half of last year, sort of indicating that the rate of decline seems to have stabilized to some extent if you compare these two halves. Volume and revenue adversely affected due to the market challenge, but look through that if you'll see that both EBIT and EBITDA outcomes reflect a level of resilience that we mentioned before. This was undoubtedly supported by all the hard work done across the regions of the globe on cost efficiencies and business initiatives. I'll talk more about these business improvement initiatives in the next slide. The individual material item of the year, this Part IVA of the ATO tax case, we disclosed this to the market in December of 2015.
It was AUD 41 million in the final numbers. I think we disclosed the original number of 36. There's some movement on interest on that one. Our interest cover are we at 7, which is above our banking requirements and of about 2, and above our internal targets as well of 5. The tax increase from 22%-27%, we did discuss some of that as well at the full year, and as noted during that period, this was mainly due to a reduction in foreign tax deductions. There was a prior year undercharge and then a reduction in non-taxable profit from asset sales that had happened in the previous year. This level of 27% is probably good for going forward. Last, of course, we should remember though, that the change in geographic mix of our product also has an impact on our effective tax rate.
This would play out in terms of the geographic mix in which we sell. Alberto touched briefly on the dividend policy and the interim dividend. The payout ratio of 40%-70%, and basically this supports the historic payout average of 58%. Whilst the interim dividend may be at the lower end of this range, I think it is necessary to ensure prudent management of our balance sheet and specifically our debt levels. You would have seen the S&P announcement earlier today, specifically talks about FFO to debt. We will use the cash effectively to prop that up going forward. Let me move to the waterfall chart. This is a familiar chart. It's similar to what we showed at the full year.
After adjusting the EBIT of AUD 330 million for one-offs, benefits and FX impact, we get an adjusted EBIT of around AUD 376 million, just to give you a measurement point. Alberto went through the regional market dynamics earlier, which is the AUD 50 million customer negative volume mix, I'm not going to spend too much time on that. The pricing resets and contract renewals that were negotiated in FY 2015 flowed through to this year negatively to the tune of about AUD 43 million. As mentioned, a substantial amount of that was already due to resets that had happened in the last year and actually then equalized in this year. We expect, though, that this would be about AUD 85 million for the full year, which just to point out to you is more than the guidance we'd given you at the full-year results.
Cyanide volumes, up in Latin America, offset by some weakness in Africa. Along with price pressures, I think there's a marginal impact on EBIT. The market environment for Minova for this business actually remained quite tough. Resins and powders were down around 24%, and the steel was down around 40%. However, I just want to mention, I think this business remains cash flow positive. We're only six months actually into the restructuring since we spoke to you last time. I think this team is making good progress on this turnaround. Alberto has a slide about this a bit later as well. Total negative market impact, if you look on the slide at the top, about AUD 120 million. Slightly worse than we had expected when we last spoke. In order to offset the slightly worse impact, additional business improvement initiatives were initiated quite quickly.
I'll talk about that in the next slide as well. If you look at the last once off there, the AUD 13 million is a benefit that we got from the sale of property and equipment, which is largely related to the Botany sale. Let's spend some time on the business improvement benefit. We're happy to say that we're above target, above the numbers that we had given you last year, and pretty much in the six months achieved what we said last time we would achieve in the year. We continue to drive efficiency through the group through productivity improvements. These initiatives are about improving our efficiency and as well as our effectiveness across all parts of the business. Value being delivered from reviewing sourcing activities, leveraging scale to deliver improved processes, and labor productivity and optimizing manufacturing processes across the global footprint.
This is much broader and deeper than the previous transformation program that we used to report on in the past. We've expanded that to some extent. At the start of the year, we forecast the incremental net benefits to be achieved for the financial year to be AUD 50 million-AUD 60 million for the year, and we've achieved 52 already. Based on what we've delivered this half, we basically expect the full year benefit to be around AUD 70 million-AUD 80 million. To give you a bit more granularity, actually, on these benefits for this half. About one third of the benefits are from supply chain efficiencies and about two-thirds from operations and support cost program. In procurement, we continue to achieve cost reductions through the contract negotiations and general tenders on inputs into bulk explosives and Initiating Systems.
We've continued to rationalize and optimize our extensive AN and IS networks in America and Africa specifically, increase cargo sizes, better utilization of charter vessels, and so on. We've also established a global shared service center in the Philippines. This will enable, as you all know, standardize and increased efficiencies on transactional activities. We're still early days in that establishment, we still got a way to go. Work is continuing on embedding the operating model right across the organization. This means the duplicated roles that were performed at the center in the past and between the center and the regions are being removed and organizational layers are being flattened in the organization. From a staff strength perspective, we are on target to achieve further reductions.
Over the last two years, we have reduced our numbers by around 10%, bringing our total head count to roughly the 12,000 level. I have to say, I think we're pleased with the progress that we've made in this space in delivering sustainable benefits to Orica. Reality tells you that these programs never stop. There is always more to do, delivering these efficiencies and productivity improvements will become part of everyday business at Orica. Looking at some balance sheet metrics, the debt position. This slide looks at the net debt position. It's the same slide as well that we showed at full year. As I'll take you through the cash flow movements on the left-hand side and then the movement of the net debt on the right.
For the six months ended the 31st of March, we've generated around AUD 132 million of net operating cash flows, had cash outflows of around AUD 123 million and net financing cash outflows of around AUD 161 million. Let's just focus on the AUD 132 million, the operating cash. There are two areas to note here, namely sort of a tie-up of about AUD 59 million in trade working capital. One of the things I spoke about when we met six months ago was that is our focus on working capital. That said, our debtors have improved substantially. Our inventory levels have remained roughly flat. This outflow is largely to do with trade creditors, we are addressing that as we speak. Stronger processes are basically being embedded within the business to see that we get a sustained improvement in credit payment terms.
That should eliminate the absorption over the longer term. Non-trade working capital, around AUD 43 million, has seen an absorption of cash driven largely by non-trade creditor spend on environmental obligations and employee redundancies. Therefore, after generating about AUD 450 million of EBITDA, paying interest taxes and removing the non-cash items and foreign exchange, the net operating cash flows into the six months, AUD 132 million. Decisive action has been taken to ensure that CapEx is focused on key priority areas to drive value for Orica in future. The last couple of slides that I have will focus specifically on capital. We have been able to reduce the capital expenditure, which certainly helped if you do this calculation.
Alongside the net financing cash outflows driven by 2015 final dividend payment of AUD 162 million, you can see that our resultant gearing in the end ended up on about 43.1%, which is within our range. Our stated range historically has been 35%-45%. Looking at the waterfall on the right, you'll see the first three bars show what I've just discussed alongside the positive impact essentially then on net debt due to a U.S.-denominated debt conversion. You'll see that our debt position roughly stayed the same from September to now. Just to reiterate that the new dividend policy here will go a long way towards us in the initial period addressing our debt level. As promised, let me look at capital. As I mentioned as well, a couple of things coming into this role as CFO.
One of the absolute primary things that I wanted to look at was a disciplined approach to capital. We wanted to sort of reevaluate our whole capital management process and ensure that growth capital delivers value through the cycle to shareholders. We've done a lot of work on this actually in the past months, and I'd like to spend some time on this. Putting this a bit into perspective. Over the last five years, Orica has spent around AUD 3 billion on CapEx, of which approximately a third, AUD 1 billion, was on sustenance CapEx. Removing the AUD 675 million of Burrup, which is pretty much assets under construction, this leaves around AUD 1.2 billion of growth capital. Even at a reasonable runoff, say 18%, this should have delivered about AUD 200 million of EBIT. Now, realistically, that is not the case.
What we've now done is implemented a completely new and different rigorous capital investment management framework to ensure that we have the standardized and targeted CapEx methodology. It focuses firstly on improving overall governance in relation to the capital projects in total, improving capital allocation portfolio management at a regional level, right across the group, secondly. Thirdly, embedding a bit of a long-term approach to both sustaining and growth CapEx. This will be governed then by a formalized investment committee, which has already been established, and terms and references and standards, how to standardize RONA calculations and so on and so forth, which is already in place. We've also aligned the externally reported capital expenditure categories. We now only have two categories, which is growth and sustenance.
We've removed that category we spoke about last, which was customer-facing capital, largely because it spans both growth, like new customer contracts, and sustenance, like the renewal of equipment on existing customer sales. Really difficult to manage within those categories, much better to go back to the conventional categories. Growth covers major growth, as you see there, contractual growth, and improvement growth. Each of these subcategories will need to meet a set of financial metrics, including NPV and RONA. This will apply to sustenance efficiency and business risk reduction as well. If you look at the sustenance capital on the slide, you'll see the sustenance efficiency and business risk categories have also got RONA calculations attached to them. We look at CapEx capital spend that's categorized as regulatory compliance, which enables safety, health, environment, community type CapEx, and business risk reduction CapEx.
That's all classified under sustenance. Given the critical nature of this specific category, these will not be subject to financial metrics. They are, however, ranked based on regulatory and risk drivers using a basic risk driver matrix. To put it simply, I think any capital expenditure will firstly address critical business risks and meet regulatory requirements, secondly, focus on the growth part of the business and generate higher returns within the constraints of what we can afford. Later in the presentation, I think Alberto will show you another graph. It talks a bit on the ranking and capital profile going forward. Before I close on the slide, I just want to once again reiterate that strengthening the balance sheet is of critical and high importance. A strong, sound balance sheet, paramount.
We're in a cyclical part of the business, this is just the environment we've got to operate in. It will provide us some level of robustness against this volatility and security through the cycle and flexibility to take advantage of opportunities should they arise. I think the summary is we'll just work the cash harder to keep on reducing debt. Given the new methodology, we've actually managed to reduce capital. I mentioned at the full-year results that the capital shouldn't be higher than 2015. However, we've reduced the capital to around AUD 320 million, is our expectation for the year. Just to note, though, that that includes about AUD 80 million of Burrup. Should be the last of the Burrup CapEx.
If we take the Burrup out of that equation and really have a look at the capital that we can actually initially control, taking into consideration as well the flow over from prior year CapEx that's being done at this point in time, we've actually managed to reduce the capital by 35%. On a go-forward basis, the capital expenditure should be in line with the full cost depreciation and amortization, which we've got on around AUD 285 million-AUD 300 million. That'll be the level within, I think, we will comfortably be able to manage Orica. I do like to note, though, that in 2017, we will incur some sustenance expenditure on the five-year turnarounds of both Carseland and Kooragang Island, we'll talk more about that at the full-year results.
I think controlling the things that we can control is important, doing this in a structured fashion around capital is what we're focused on. With that I'd like to just hand back to Alberto to do the conclusion for the day.
Thanks, Tom. This is a summary of the action that we have taken in the last 12 months in self-help initiatives, as Tom mentioned. We've done this to protect our EBIT margins, and that has been successful in the sense that we're able to maintain or even slightly increase them. We've protected our cash flows and our value by having a disciplined approach to capital allocation and reducing capital by 35%. We have strengthened the forward contract profiles both in North America and in Australia, and across the world we're hence been able to protect our market share. Finally, we spoke about that last time, but we continue to progress in our operating model. We have the right team in place, the right operating model, the right policies and standards, and hence we have been able to increase the efficiency and the accountability, and eventually the performance.
We now look at the Minova. Minova, it's early on in the process, but personally, I'm quite happy with how things are progressing. The team has been able to cut costs by about AUD 14 million. The big issue has been North America, and we think that in about one or two months that will start being cash positive. You look at the volumes adjustment in the details, the bulk of it has been in North America. At the same time, that has been necessary to turn around that business into positive. Australia is doing well. Europe continues to be well, and the other thing that you notice is a turnaround in the trend. H2 of last year was the worst, and that was where we were going downhill. At least there's a slight uptick in EBITDA.
The business continues to be cash positive. More important, as you look into the future where we're tackling, we're participating in businesses that have been abandoned. About two-thirds of new business is either hard rock or non-mining markets. Take again, Australia only, we're participating in a pipeline of about AUD 100 million of new contracts. You again take into account the industry consolidation, that should overall improve the competitive environment, the market type of environment for us. More directly, we've been welcome and invited by customers who obviously want to have a, especially with the new market structure, a more robust Minova. That should keep improving. We're early on, but we're quite happy with the progress. We now go to Burrup commissioning, that is going well, too.
When you talk to the experts, the critical part when you turn on one of these plants is the first production of nitric acid, and that has gone well. It's well progressed as always. They're still in progress, but we now know it does produce nitric acid. I was quite happy hearing that. We should have the handover from the contractor in the second semester of 2016, and then a normal production ramp-up that will take between 12 and 18 months. Burrup, in the end, is well situated in the fastest growing. We still, whatever the difficulties in the mining world, it is in a unique niche and all analysts are expecting that growth of about 8% in the next five years. It is a 30-year asset, and we intend to make the most out of it. Probably I will add something to this.
We are quite happy to have a strengthened and renewed long-term relationship with FMG in the area, and it's a contract that will underpin that commissioning of that plant. You have seen that we've outperformed in the business improvement area. Where and why? It's that the focus after the first sort of wave of low-hanging fruits, we go now to the more difficult but probably more interesting ones of efficiencies, increasing asset utilization, and debottlenecking the different areas of the operation. This is an example. This is a project called Project Aegis of what we're doing in the area of Initiating Systems. We first started by what our customers wanted and understanding deeply what is it that they value in our Initiating Systems that have, as you know, quite high margins, and it's safety, reliability, and quality.
That reliability in particular is important in security of supply and in local assembly. You have seen, and this is consistent with that we've signed a 10-year agreement with Thales, which will see us substituting Chinese and Philippine imports of Boosters for domestically produced at lower cost and better quality. That's just an example of where we're moving. What you see in the graphs, I'll start with the lower graph, which is an example of the type of debottlenecking. This is Gyttorp, our plant in Sweden. What we're putting in place will allow to double the production capacity in a space of three years. That will in turn lower unit cost by about 15%. That's just an example of the type. How is that possible?
Basically, we're maximizing the automated capacity by reducing SKUs and by focusing the competitive advantage of highly automated Maybe high wages, but highly automated plants in Gyttorp and Brownsburg in Canada. We maximize the automated part, and then we move the manufacturing, the non-automated part, the labor-intensive, to lower wage areas like Chile or Mexico and Bulgaria. All of that, you see, we've started this program in 2015. It had an AUD 20 million impact. We've already met that in 2016, and we're forecasting close to AUD 40 million of business improvements only from this project, Aegis. That is progressing well. What else is under our control? Tom talked about this disciplined approach to capital. I spoke to many of you of the need to reintroduce in the company a disciplined way of allocating capital.
I'm quite happy with this process because one thing I do not ascribe to is the club of cutting 20% across the board, either in OpEx or in CapEx. What happens with that is that you cut good projects or you cut good costs, which are the first ones to go. It's more difficult. Sort of the bad ones tend to hide better. I'll tell you a story of this. What is this graph you see? Basically, Tom's team, working with manufacturing, ranked all of the projects, 850 projects, with a consistent ranking. That ranking separates by growth and by license to operate, environmental or health or safety. It's the same type of ranking, and then you can have a maximum of 300 points. It's sort of, in a way, conceptually simple.
The ones on the left are the ones that you must do. They're the ones at 300 points. On the y-axis, but on the right, we're measuring cumulative investment. At some point, you cut where you have either your restriction on capital or your hurdle of return on assets. Right now, we probably have more projects that have returns greater than 20% than cash, so we cut it at the level that you've seen. This way, we ensure that all projects are done. What I can tell you is that all projects that either have to be done for my license to operate are being done, and then all projects by far are exceeding all new projects, are exceeding the 20% hurdle of return on net assets.
That's a graph like we would like to see, and we would. I can assure you it will be in the future. That's really not the graph that happened in the last 12 months. Before we had this, you see those on the right-hand side, those ones. Tom doesn't know I'm going to say this, but I'll say it anyway. You see that these score only 10 points. After doing this, we found that we had done AUD 50 million of those projects. It just understates how critical it is to have a centralized ranking system to be able to really improve capital allocation. That was something that was desperately needed, and I'm quite happy that this system is in place now. Tom spoke about the new dividend policy, so I won't linger on except saying it is the ratio between 40 and 70.
It will be weighted towards the final dividend, towards the final year dividend. The framework is quite simple. We want to maintain our credit rating. We want to fund license to operate and high return on asset investments. Finally, we want to maximize return to shareholders. You can see that as Tom spoke about the S&P, that approach has been ratified and implicitly supported by not changing our rating by S&P. In sum, we've made good progress over the last 12 months. We have that new operating model in place with clear accountabilities. We have won 100% of contracts all in the four regions of the world. This means, and it's probably important of the operating model, there's regional accountability, but there's also central visibility.
That new marketing and technology has a role to ensure that we are competing in all regions of the world on a consistent basis, and that has been happening. We have surpassed sustainable business improvement expectations and basically met in half a year our target for the full year. Our EBIT margins have been maintained, and let me stress that actually slightly increased. Basically, yes, we've been hit on revenue, but we're able to even overcompensate with reduction in cost. We've introduced capital discipline. We're pursuing manufacturing efficiencies in a second wave of business improvements. The Minova turnaround is going well. All of this has allowed us, and let me probably I didn't emphasize enough, our EBIT for the six months is 316 versus 330. Very close to one year ago, and that's, again, what we define as a quite credible result.
As we look forward, there's a lot of interesting information in this slide that I leave to you. What I'd like to say is, yes, coal in the U.S. is in long-term decline, but the short-term impact is even more steeper than the long term. That short-term impact comes basically from the warm winter. From that, clearly, you will see that 15% reduction in power generation. On top of coal being hit, it was indirectly hit like all gas by a very warm winter. What we see now is that there's 100 days of inventory in all the power generation plants. That very high level of inventory has really reduced more than proportional our sales in those coal regions. It will take some time as those filter out through the system.
There's no doubt that the higher cost Appalachian coal has been hit, as you can see in the second graph, in explosives. It has been cut by about 60%, the explosive in the Appalachian region. Other regions are more resilient, like Powder River and Illinois, and they have been hit by this warm winter. As those inventories sort of filter through the system, we expect some level of stabilization. Not only us, but basically the analysts expect that some level of stabilization. Again, the region most hardly impacted is Appalachian coal. I know many of you have expressed concerns about that, so that's why we put out our EBIT exposure to Appalachian is less than 1% of group EBIT. Quite marginal from our point of view. If U.S. coal is in long-term decline, Australian coal has a different sort of fundamentals.
This captures the forecast by Wood Mackenzie, IEA, Exxon, and BP. They all have, even Exxon, who is probably the most bearish of all and has declined CAGR every year until 2035, is seeing Australia going up. It's easy to understand why. Just look at what's happening in Indonesia, what's happening in India, and what's happening in other regions of Asia, and even in China. There is still some, you can pick your pick, but there's some coal growth in the Australian region in the next 20 years. Now let me go to the outlook, and I'll read this part. Market conditions deteriorated more than anticipated since the full year results. Market dropped in the beginning of the year, creating volatility and nervousness in the mining market.
At some point through the first two months of the year, iron ore had dropped by 25%, oil by 33%, and copper by 15%. This in turn impacted our explosives volumes in January and February, which were 20% lower than the fourth year monthly average. In spite of that, there was a recovery in March and April. We expect global explosives volumes to be around 3.45 million tons, ±100,000 for the full fiscal year of 2016. Price resets will have approximately AUD 85 million of negative impact this year, around AUD 25 million more than we expected. However, we did deliver around AUD 20 million more in business improvement benefits, and we expect to deliver that in the full fiscal year. It is expected that the market will remain challenged for the foreseeable future. Regardless, our continuous focus will be on business improvement initiatives, capital discipline, and customer relationships.
The last slide, as we look forward, we will continue to control what we can. We will continue to work on reduction in the cost base, in increased manufacturing efficiencies, in improving cash conversion, reducing debt, and strengthening the balance sheet. We will continue to significantly improve capital allocation to ensure that all new projects have a north of 20% return on assets. Why is that? Because so that when the cycle turns again, and all the analysts are focusing that, but we all know those who have been in the sector long enough, at some point, the cycle will turn upwards. If it's in 6 months or 12 months, nobody knows, but it will come, and we will be ready for it, and we can ensure that we'll deliver significant returns to our shareholders. Thank you. With this, we'll open to questions.
Good morning, Alberto and Tom. It's Ramoun Lazar from UBS. Just a couple of questions. Just trying to work out your EBIT bridge for the second half. You sort of given the impact on a full year basis for price, and the cost outs and the associated sort of flow-through in the first half. Just wondering on volume, given the expectation is a similar decline in the second half as the first, should we sort of assume that the EBIT impact will be around that AUD 50 million that you saw in the first half from volume declines? In your bridge, you've got a volume and mix decline of AUD 50 million to EBIT in the first half.
Just wondering if you can give us some indication of what that will be in the second half, given your guidance around volumes.
Tom?
I think if you look at the-
Anyway.
Sorry?
Go ahead.
We're not really giving full guidance. I think if you look back and we look at seasonality, roughly we look at this on a 50/50 basis. I hope I'm answering your question in terms of the impact from first half to second half on EBIT.
I think, Ramoun.
Is that-
Let me, yeah. I talk about in each section of the impact of mine closures and, for example, in Australia, I would imagine it would be something similar to that, yeah.
Okay. Then just on the pricing impacts, just wondering what your line of sight is there. You've obviously increased the impact from AUD 60 million to AUD 85 million. Then there's obviously a bit that's contracted in 2017 and 2018. Just wondering what your line of sight is there on potential further repricing issues as you come to renegotiate the rest of those volumes next year and the following.
You look, in Australia, we said it's 70%, and that's where the bulk of them have been. There has been some new, probably some larger contracts. My sense is that it's that rate of decline will continue. My senses were close to the bottom of that. There will still be some more, but at a much lower, let's say. The first derivative is quite reduced. We're close to the end of it, is my opinion. Certainly all of the high base contracts that we had of AUD 900 or AUD 800 are gone.
Yes.
What are guys, John Purtell from Macquarie. Just had two questions, and probably just similar to Ramoun's question there, just in terms of seasonality, but this time on volume. In the past, we've typically seen volume stronger in the second half in Australia and North America on a seasonal basis. Your guidance implies pretty flat volume sequentially. Just what you're seeing there in terms of the seasonality of the business.
Look, if you look at 2015, actually, there was that seasonality. The answer is it's been around between 48/52 and 50/50. A lot of the seasonality of previous years, not on volumes, but on EBIT was more one-offs. We're being cautious. It's just quite uncertain, it's more cautious than anything else.
Yeah.
I would use anything around that 48/52 to 50/50.
Yeah, that's right. That's what I answered earlier.
Great. Just a second question, in general, what are you seeing around customer behavior? You're seeing some customers trading down, some customers trading up. I know your volumes were down a fair way in emulsion in Australia, but your EBS volumes are up there.
Look, just in Australia, it's important, the volumes, just to put things in perspective. Australia, 9% volume is down, but half of it was 15 months ago. It's sort of, they're holding on. If I look at exclude that, they're holding on better than I thought, especially, for example, in coal, the fact that we're selling more EBS is an interesting one. Remember six months ago, there was a lot of things on unbundling. The tenders are unbundled, but the awards are bundled. Why? Because customers want accountabilities. I've mentioned in particular the renewed long-term relationship with FMG. That was an interesting sort of negotiation. We both, again, think it is a win-win, but that's an example of the type of things in a very important contract for us.
Look, times are tough, but even the customers show more resiliency than what one would think.
Alberto, Andrew Scott from RBC, just wondering if you could talk about North America and particularly that quarry and construction market a little bit. There's a comment there that you're seeing some growth. A little bit vague, but maybe sound a little bit less than some pretty positive comments that we're hearing from the U.S. participants over there in the quarry market itself. If you could just talk about what you're seeing in those markets there, and as coal does look a little bit weaker, do you try and shift the business mix to focus on that segment a little bit more?
First of all, as you see, because there's a lot of misunderstanding on that market. I've seen somewhere analysts saying that actually, even I thought it was for IPL, but that the quarries markets was going down, and it was mentioned that it was because train, something related to train sort of things. The fact of the matter is that I think 90% of quarries in the U.S. are close to the place and are transported by truck and not by trains. The overall, we're seeing increases in the quarry market, and there is in the medium and longer sort of trends is encouraging because of this Highway Act and other things. It is doing well. It's not that you can shift. We do everything that we can, but it is an area that is doing well.
One area that was probably hit a bit more than I would have thought in North America was copper, where there was a lot of caution and there was shifting of high probably cost to other areas of some of our global customers to other areas in the world. They were mildly hit by some mine closures in copper. It was more spread across. But even then, again, the final result was a 5% decline in volumes. I'm going to bore you, but it's tough but resilient. What can I say? That's what we really see.
Just one more, if I can, just Indonesia and the Bontang market, maybe if you talk a bit about the volume trends there, particularly with Barrick coming on. You had talked previously about maybe looking at putting some other products out of that plant, maybe shifting some fertilizer. I know that market's not been particularly attractive either, but has that been shelved for now, or is it still something that's under active consideration?
No, it's not. It is in discussion. I actually was in Indonesia, like five or six weeks ago, and we're trying to increase across all the areas of the company asset utilization. There were some conversations there. The fertilizer will take more time, but there are other sort of areas that we're exploring and some alliances that we're exploring. The interesting thing in Indonesia is the coal market has been more impacted because the quality of coal is not as good as the Australians, so they have been impacted. On the other hand, the plus side for us is ammonia. That is a totally short ammonia-based plant. That has really come into the bottom line. Probably our EBIT, even though some coal reduction of demand in the plant and hence asset utilization, the overall impact will be positive because of the price of ammonia.
Bontang we will keep, as we said, out of Australia. We are looking in the medium and longer term to increase the asset utilization. For the time being, it's going to continue after Burrup is on to be cash positive, and it has the headwinds from the ammonia reduction of about AUD 150.
We will take some calls from the phone now.
Thank you. To ask a question via the telephones, please press star one on your telephone keypad. That's star one for a question. We do now have our first question from the line of Grant Saligari from Credit Suisse. Please go ahead.
Thank you. Just a couple from me, if I could. In terms of the change in your volume guidance, could you just expand on where the guidance is changing mainly, please, first?
If you look at the numbers, the big decline has been in Australia, basically overall, and that probably will continue to be so. I think, as I said, Latin America has probably stabilized or will more especially versus H2.
Okay. I was surprised just your earlier comment, I think you said that you expressed some confidence in Latin America, which sort of surprised me given the performance this half. Just wondering if you could expand on that, please.
Yeah, it was that the impact, Collahuasi was a very large contract, and that, again, we lost it at the end of 2014, but its impact was felt we were still selling in H1 of 2015. The bulk of that 15% reduction was the Collahuasi and also some impact on something that is exogenous, which was that Drummond in Colombia was restricted from operating its train line during the day because of some legal rulings by the community, some legal proceedings. When I discount those two, if I look at H2 and H1 and then H2 again, we're seeing a relatively resilient environment. It's mainly exposed to coal, gold, which is doing pretty well. It's exposed to copper, which has a much better fundamentals in the longer term. The coal customers that we have are quite strong in the region.
That's where I say, yes, that's 15%, but that's more old news rather than any new news.
Just finally from me, if I could just clarify on the outlook statements. You've given obviously the pluses and minuses with the contract renewals, the cost saves, the D&A. It seems that the volume impact is not explicitly in those statements, or perhaps you could clarify that for us.
I didn't understand the question.
Sorry, I'll repeat it. You've got some pluses or minuses in the outlook, for example, minus AUD 85 million negative impact from price resets and contract renewals.
Yeah.
Does that include the impact of reducing your volume guidance to the 3.45, or is there a volume impact in addition to that?
No, no. If you look at the bridges, you look that there is a volume impact, and there is a price impact, and they are separate. Here we are talking about the price impact. Look at it, and it is separated. This is just subject to same volumes, the price impact. That was the same price impact that we talked about, AUD 42 million. It is equivalent to that one in the bridge.
Okay. We should add a volume impact to that.
Which is that volume impact, yes, of about 9% in the second semester.
Okay. Thank you.
We now have our next question from Keith Chow from JP Morgan. Please go ahead.
Good morning, gentlemen. A couple of questions from me. First one, Alberto, I think last results you mentioned some potential strategy initiatives around Minova potential sale process in the pipeline if that business is going to be turned around. It seems as though you're being reasonably successful or you have been reasonably successful in doing so. Just wondering if you can give us a bit of color around the potential go-forward position for Minova.
Look, as I said, the turnaround process had just started, what I would probably say is that it has validated our initial beliefs that this business has much more potential and has possibility to top many more markets than what was happening. Until we have that in place, it's really difficult to value it. I've said we're not going to hold on this forever, but we're certainly not going to sell it at a price that is not the right one. With that in mind, I see nothing in the short run or medium term, to be honest. The focus of the team, the focus of Scott and his CFO is to make the most out of this business. That's probably where all of our headspace is.
Okay, great. Thank you.
It's separated. It has its own management team. It doesn't really add significant amount of senior management time because of how the regional model is done. I do obviously talk every fortnight with Scott, and Scott reports into James for North America. There's some issue of management time, but really not much. I think they're doing a very good job. It's early days, so I'd like to see where we are in about a year.
Okay, great. Just one for Tom. Tom, I think if you have a look at the trade creditors for the period, obviously impacted the cash performance by the tune of AUD 137 million. You mentioned very briefly that there are stronger processes being implemented at the moment to arrest the creditor impact. Should we be expecting a further reduction in trade creditors towards the end of the year before that balance actually stabilizes?
Well, I can answer that. The answer to that is no. We obviously spending a lot of time on that process to arrest that change. We're looking at working capital in a holistic manner. Specifically, as I said, our debtors was the first one, which has improved. Our inventory is also, there's some project on the go with regards to restructuring that in terms of its number and what the correct number should be. Thirdly, the creditors or the payables on its own as well. Yes, I don't think you should see any further deterioration for sure.
Okay. Thanks very much.
We now have our next question from Paul Jens from PAC Partners. Please go ahead.
Just two questions. First one to Alberto, just on the unbundling of the contracts. Are you able to give us some indication there? Value add was obviously one of the key strategies of Orica there. Can you give us a sense as to how much of your contracts are now unbundled, or are they all still bundled? I suppose your value add strategy around that, please.
Basically, I think 97% of our contracts are bundled, something like that, 95. As I said, the tenders maybe come unbundled, but the awards, everything that we've won probably has been in this past 12 months, has been bundled. There's a reason for that. Probably I didn't explain myself well. Customers don't like, let's say, the loss of accountability that comes from unbundling. They do want, and they're more careful on the pricing. They want to understand each of the segments on the pricing, and that is fine. In the end, when a shot goes bad, you want to know whose responsibility. When you split it, you lose that. There's a lot of evidence to support that.
Just to clarify there, Alberto. Are they actually getting now two bills, one for the, I suppose, the product?
It's a tender-
Yeah
process, they award it bundled, which means everything to one customer.
Okay. They're not getting two bills. They're just getting one bill?
It's one bill. Yeah.
Okay. The final one, I apologize if it's been mentioned before, but it's a bit late on the call. Are you able to clarify the utilization rates of the major plants at this point with, I suppose, Bontang we've mentioned a few times and Yarwun and Karratha, please?
Yes. KI is in the 90s, 93%. Bontang is about 72%-75%, something like that.
Carseland?
Carseland is 98%, from memory. Yarwun, I think in the 80s.
Okay. Just, you mentioned Burrup before the FMG contract. Are you able to talk about how much of, say, the 17 volumes are contracted now?
What we've said again is that this plant, we're not sure when it comes into operation. Sometime, we believe, because it's going well in the second semester, that we will load it in the 12 to 18-month period. At the end of the 18-month period, we should be, we hope to be around the 70% mark that allows it to operate it continuously. That's what we've said to date, that's about 24 months from now. There's a lot of things that we don't have visibility on strip ratios on that we believe they're going to be higher. We're not putting any forecast so much in advance.
Okay. Thanks.
We're quite happy with that. Quite significant.
Thanks for your straightforward answers. Thank you.
As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. We now have our next question Ben Chan from Evans & Partners. Please go ahead.
Morning all. Alberto, just to clarify a comment you made about ammonia before and Indonesia being short. I was always under the impression that most of your exposure to ammonia was sort of incorporating your pricing. In previous years or being under different management regimes, we'd seen the impact of ammonia price lag in earnings bridges. I suppose my question is, with ammonia falling as it has in this period, are we to expect Has that been a big benefit in this half that will reverse? Or is it sustainable because you haven't actually linked those to selling prices?
You're talking about the rise and falls, and it depends on the regions, because we do have rise and falls, but eventually, if the price of ammonia, and it's clear that it's a structural decline, it's not a temporary decline. Eventually, when you have contract renewals, the price of AN has its own dynamics of supply-demand. Obviously, when you are a fundamentally short company of ammonia like you are, like we are, in time, we will be benefited by that. Bontang has shorter contracts. A lot of it is spot in Indonesia. That will come in quicker into the bottom line, and that's what's happening. That's the first one whose impact goes straight to the bottom line of ammonia. In other places where we're also short, so KI is different because we're gas backed.
Burrup eventually will be related to, remember we buy at ammonia at index, so we will be benefited in Burrup. Carseland, we just have a very good contract over there. It depends, but overall, we're positively impacted, and as in time, the benefit will be felt more because of your implicit in your question of the rises and falls.
Cool. Just to clarify, Carseland has been a benefit this period, and with CF, I know that was linked to ammonia, to gas as well, that's been a benefit too?
Carseland, because it will be benefited, but we have a very favorable price over there. Probably it's a different formula. Probably the benefit will but not be as high. On our CF, we're exposed to gas.
Just to follow up just on the previous question, actually, you talked about the unbundling. Could you make some general comments just about the components of the AUD 85 million price reset between AN and the services, in the context of the tendering in two separate components?
The bulk of it is AN.
Cool.
That is an imbalance. AN explosives in general.
Yep. Thanks.
Actually, margins and everything, all the other one, even on EBIT and all of that, we don't disclose at that level, but everything is stable. It's the AN component.
Thanks.
Richard Johnson from Citi. Alberto, can I just ask a little bit about the Australian division and particularly the volume mix, because I see that the AN volumes are actually up half on half or year-on-year, beg your pardon, but with all the pressure coming through on emulsion. I wonder if you can talk a little bit around that. Secondly, will we see the same sort of mix in the second half? If that unwound a little bit, then maybe it might help margins a little bit in the second half, presumably.
This is more related to just the volumes where we got reduction more than anything else. We haven't seen a deliberate switch probably anywhere. There's a certain stickiness for some reason of mines. There is reason. It's related to weather, but other price to price. It's also in North America, for example. In some areas, it's much more AN. Nelson Brothers is all emulsion. There's a certain stickiness to that. What I can tell you is there's no switch because of price. It's more where we decline more than anything else. It's more a consequence than an input.
Alberto, it's Mark Wilson from Deutsche. I was just wondering if you could elaborate on the cost-out exercise, just where the outperformance is coming through by region and broader product perspective, and how far through this process are we currently?
Roughly, there's between up to now, about 40% has been in supply and procurement, then you have headcount, then you have efficiencies. As you go forward, I think you're going to start seeing a greater percentage on efficiencies. We have another round of procurement, and the same thing that happens to us from the customers, I would probably say it's going to be something like 35%, 35%, and 30%. Headcount at some point you start reducing the rate, then we'll still have procurement and efficiencies.
Okay. There's no more questions on the phone.
Okay. Thank you very much all.