2000 AGM - Chairman's Address

21st December, 2000

My comments to you today reflect a year that delivered unsatisfactory profit results but also saw a continuation of the company putting steps in place for a strong future. The improvement in profit we had experienced in the first half of the 1999/2000 year, was swept away by losses in our Australian Vinyls business due to an unprecedented combination of factors. This resulted in a year of lower profits.

Let me address our progress and shareholder concerns.

As you know from previous AGMs and company reports, Orica embarked on a major restructuring of its business portfolio when it became an independent company, without ICI as a controlling majority shareholder in 1997. This major restructuring of the company was based on a rigorous assessment of our strengths and weaknesses in a competitive world market. Over the last three years we have invested over $1 billion in growing our core businesses including Explosives, where we are now the global leader, and also in new Chemicals, Fertilizer and Paints facilities where we are national leaders. At the same time we have made divestments totalling over $1 billion at extremely good value involving Surfactants, Pharmaceuticals, Technical Coatings, Polyurethanes and 18 smaller businesses, in addition to the formation of two large Plastics joint ventures. This process of change never ends, as today's announcement relating to our distribution arrangement with Zeneca shows. Philip Weickhardt will say more about that in his address. Reshaping a company is not a short term initiative. It takes a number of years to build a profitable world competitive business. This has been the experience of other Australian companies.

We have made major changes to our business portfolio, but it was our Plastics tail that bit us as a result of the last quarter losses in Australian Vinyls. Although we are intent on quitting our investments in Plastics, we are determined to do so at a time when we can achieve appropriate shareholder value. Our four core businesses are continuing their growth and I would refer you to their history of relatively non cyclical profit growth over the past ten years as shown on page three of our annual report.

Let's now look at the financial results for the year ended 30 September 2000.

Despite a number of negative external factors the company delivered a profit after tax and before abnormal items of $147 million, down 6% on the 1999 results. This year's profit after abnormal items was $114 million, down 39% from $186 million last year. The abnormals included an increase of almost $30 million (after tax) to provide for the destruction of historical waste at the company's Botany site in Sydney where we have been operating since the 1940s. Abnormal losses are unwelcome. However, it should be noted that in the last four years including this year, the net balance of abnormals declared by Orica as a result of the reshaping of our business portfolio and organisation, has been an overall profit of $116 million.

Orica's profit result should be viewed in the context of a challenging trading environment. World events not controlled by the company such as recent soaring energy costs and unfavourable weather including floods have intervened and impacted on the company. However, our pursuit of self help efficiencies and considerable reshaping of the company in line with our growth strategy has certainly helped us manage and minimise the impact of these external forces.

The directors have declared a final dividend of 19 cents a share, making the total dividend for the year 35 cents compared to 37 cents last year. The final dividend was paid last week - on 14 December - and was 25% franked. It is anticipated that for the coming year between 25 and 50 % of the dividend will be franked.

I would like to signal at this point a possible change to our dividend policy.

For a number of years, Orica has been unable to frank all of its dividend distribution. This has been for a variety of reasons, but mainly because of low tax payments within our Australian operations. This will continue to have an impact on our franking position. Orica is now a global company and increasingly its income will be earned outside Australia. We will be unable to attach franking credits to offshore income and therefore our overall franking position may never reach 100% again. As you are well aware, when Orica pays an unfranked dividend, investors often will pay tax on it at their marginal rate.

However, under the new tax system introduced last year following the Ralph Report, capital gains on securities held for more than 12 months are in effect taxed at only half marginal rates.

This is a major change and, in light of this, it is in the best interests of our shareholders for us to revisit our dividend pay-out policy with a view to maximising total shareholder returns.

We will be examining a number of alternative options over the coming months, bearing in mind the differing needs of our various shareholders. In this context I want to reassure shareholders that the Board does regularly address capital management and in particular the merits of a share buyback. The Board is currently of the view that the delivery of growth in shareholder value will be best achieved through appropriate investment in our core business platforms. We will of course continue to keep this matter under regular review.

Now I want to return to some points I touched on earlier regarding our determination to be world competitive in our core businesses.

The company is today more focused, more efficient and with lower costs than it was three years ago. We will continue to reduce costs and seek further efficiencies. Philip Weickhardt and his team have exceeded their current objective of reducing costs and improving efficiencies by a further $120 million over two years, achieving savings of $159 million. This has been achieved by a wide variety of initiatives including the introduction of a new centralised shared services organisation, which also managed the Year 2000 transition and the introduction of Australia's Goods and Services Tax. At the same time we have provided for future growth in our businesses with innovative products and improving market share. The launch of our first global Mining Services product with the i-kon digital energy control system, is an example of how we have developed our technology to put Orica ahead of competitors. We have built new Technical Research centres for Explosives in Denver Colorado, and for Paints in Clayton Victoria, and we have also become very active in e-Commerce, laying a foundation for improved customer performance and further cost savings. Philip will provide you with details of these exciting developments.

We have talented and committed people, and the leadership to deliver sustainable growth in the future. Our management and our people have made significant progress in reshaping the company and increasing productivity and efficiency. Their work is not always visible, and often occurs through the efforts of teams involved in many improvement projects across our company. A number of these projects were presented to employees across the company at our annual Excellence Awards two weeks ago, and a video showing highlights of this event can be seen if you are free to join us for refreshments after the meeting. What is even more important and gratifying is that some of the projects that were Excellence Awards winners from previous years have become strong contributors to this year's profit result.

I commented in my earlier introduction of the Board about the experience and background of individual Directors.

The members of our Board bring specialist expertise as well as diverse business experience to Orica and I will comment further on this later. The Board carries out a formal annual review of its performance against its responsibilities and also reviews the process and effectiveness of each of its board meetings. In the past 18 months the board has visited Orica sites in Victoria and Queensland and visited facilities in Canada and the United States during a one week Board visit to North America.

Let me now mention executive remuneration, an item on the agenda for later in the meeting, which I know can be regarded as contentious by some shareholders.

Our executive remuneration packages are designed to achieve better management and company performance. You will recall that Orica's long term incentives package of options and share rights, which was supported by shareholders in 1998, is based on meeting challenging performance hurdles. The Australian Shareholders Association has acknowledged that it is one of the better schemes around. The hurdles on the options are market related. Senior management will not begin to benefit from options unless Orica exceeds the total shareholder return (of share price growth and dividends) of at least half of the ASX top 100 companies, and do not get the full benefit unless Orica reaches the top quartile of the ASX100 companies. These hurdles are probably as tough as any listed Australian company. This is deliberate. If Orica's relative performance does not improve, our executives will not get these benefits. Over the past four years no Orica executive has had any benefit from options.

Orica is determined to deliver value to shareholders. Our vision of "Winning against the world's best" is understood by all employees, and is supported by long standing principles which include a strong commitment to values like quality, ethical behaviour, outstanding customer satisfaction, leadership, teamwork and particularly, safety, health and care for the environment.

Now to the outlook for 2001.

Predicting the future behaviour of some of the key parameters which affect Orica is always challenging and this year is particularly so. Every year our Agricultural Chemicals business has to contend with the vagaries of the weather which may be unfavourable but we and our farming customers cannot predict the outcome. This year we have the added uncertainties of the volatility of the Australian dollar, the future direction of world oil and gas prices, and whether Australia and the major economies of the world are simply slowing down (what is called a soft landing) or moving into a much sharper downturn (a so called hard landing). What is clear and is impacting chemical companies around the world including Orica this year, is that higher energy and feedstock costs and slowing economies are squeezing margins, offsetting the benefits of our cost savings. In addition, we are seeing a significant downturn in building and construction activity. Against these unfavourable movements, a weaker Australian dollar is on balance helpful to Orica and, of course, we are employing all the self help to manage our costs and efficiencies to best advantage.

Overall we expect a continuing profit growth of our four core business platforms. The results from our non core businesses however are expected to be disappointing. At Qenos the decision has been taken to permanently close non-economic plants at Altona in Victoria and this will require a write-off of the residual value of those plants. In addition, losses are currently being incurred at the Altona site as a results of strike action by some employees. In aggregate we expect our share of the Qenos loss to be approximately $10 million after tax.

At Australian Vinyls the results will be better than last year but below earlier expectations, because of their exposure to what is developing as a significant downturn in the building and construction industry.

So despite further growth in our core business our non core businesses continue to cause us financial difficulty. These businesses have been made significantly more competitive by the joint ventures we have formed and the actions we have taken. Over longer periods in the petrochemical cycle, these businesses can perform strongly, but, at other times such as now, their performance is disappointing. This is why we wish to exit these businesses, however we are determined to do so at a time which will achieve fair value.

Finally, I would like to express particular thanks to all our employees across the company as well as to my fellow board members, for their continuing effort and contribution during a challenging year, and to you our shareholders for your interest and attending today.

Ladies and gentlemen, this concludes my formal address and this is an appropriate time to introduce our managing director Philip Weickhardt.