2002 AGM - Managing Directors Address

20th December, 2002

Thank You Chairman

Ladies and Gentlemen

I’m proud to be standing here today to in effect represent the 8000 staff and employees of Orica from throughout the world who have responded to the challenge in the past 12 months to deliver a year like 2002.

In short, Orica has restored considerable value for shareholders in 2002. The result as outlined by the chairman confirms the progress that we have made over the last 12 months in turning the company around, it underlines the quality of our assets and the commitment of our people.

The changes of the last year produced an outstanding result for Orica in 2002 an increase from $62 million in 2001 to $239 million this year, before significant items. Responsible financial management has repaired the balance sheet enabling an increase in the dividend and a share buy back, which Don has mentioned. From a shareholders’ perspective, Earnings Per Share is up 282% to 86 cents per share and return on shareholders’ funds has been restored to a more acceptable 18%.

These numbers demonstrate that Orica is in a much different position today than when we gathered together 12 months ago. However, one thing hasn’t changed. That is our belief in the inherent value of our businesses and the excellence of our people. That’s why I am confident about the on-going success of your company.

Last year, I committed to restore and then grow the value of the businesses. That too hasn’t changed. We know that it won’t be easy. In fact, Year Two will be harder than Year One but we don’t resile from the task of maintaining the momentum that this financial year, just past, carried us to the top performing stock in the ASX 100.

Our businesses – Mining Services, Chemicals, Agricultural Chemicals and Orica Consumer Products –are supported by sound fundamentals giving us an ability to generate substantial value for shareholders.

All of our businesses are Number One in their chosen markets. We manufacture leading brands that consumers trust. We have developed and produce technologically-advanced products. We have strong asset positions that give us the lowest cost position in our markets.

We maximise these strengths through an approach that focuses on low risk value creation, sound capital management and emphasis on efficiency.

The story of 2002 is very much about our implementation of the three-point plan of Efficiency, Culture and Strategy.

In summary, Efficiency is about a focus on costs and margins, ensuring the best use of capital, making Orica competitive and fit for purpose. Culture is about the foundation for efficiency and continuing performance improvement to ensure the benefits are sustainable. Strategy is about the decisions in the next couple of years and beyond.

All three elements … efficiency, culture and strategy …. are inter-related and continuous. For example, our focus on efficiency and cost control will never stop and will be assisted not only by the on-going development of the performance-based Culture but also, through strategic decisions now and into the future.

In reviewing 2002, the outstanding result was underpinned by our focus on Efficiency. The cost reduction program has produced a step change in the cost base of our businesses and our corporate centre. 100% of the cost savings have dropped to the bottom line, a tribute to the efforts of our people.

The emphasis on efficiency will continue through 2003. We are now focusing on a number of areas like procurement, logistics and supply chain management, and impro ving the production processes in our plants.

Our culture program will promote the behaviours necessary to ensure we retain the savings from prior years and build on them in future periods.

Culture is an often misunderstood but critical part of business. I believe it is the most unrecognised area of management in Australian business today. I want to explain why we consider culture so important at Orica.

Culture is simply the important few behaviours and principles that are necessary for people to deliver the organisation’s strategies and goals. There are many behaviours among any group of people but the culture represents those crucial ones that cannot be compromised.

So I believe it is vital to define those key behaviours, what’s expected and what’s unacceptable, measure them and hold people accountable for delivering them. People are then clear what the company expects of them and what they can expect of the company. This builds trust and gets ownership and alignment among all employees.

It’s not just making the organisation a better place for people to work. It represents one of the big step changes in productivity and performance because people want the company to improve, they want to contribute to it and they want to be part of a winning team.

People must be involved from the outset so I went around to each of our businesses and talked to over 1000 of our people. I explained the minimum financial targets for our businesses but more importantly, I listened. I wanted to know from them “What do we do well and what don’t we do well? “If we are going to be a great company, what are we going to need to change?”

From this came the development by the employees themselves of the four principles that now form the basis of the new Orica culture. The principles are Safety Health and Environment – Ensuring our Future, Commercial Ownership – Run the business as if it’s your own, Creative Customer Solutions – Think differently, deliver swiftly and capture the value, and Working Together – Success as a team and success as an individual.

We have Safety Health and the Environment, as our first principle. As an explosives and chemicals business, Safety, Health and Environment are essential to our success. It’s intrinsically important that people come to work and don’t get hurt. This is an area where Orica has been world class for many years and can be used as an internal benchmark in demonstrating what we are capable of achieving in the other areas.

Two of our other principals are commercial ownership and creative customer solutions, and to us these are really important if we are to be a commercially-orientated and performance-based company. We’ve put a lot of training into them, we’re setting targets, and getting people involved.

The final principal is working together, breaking down those silos that exist in any organisation, in an effort to stop waste, improve communication, increase sharing of ideas and also to leverage our talent. We’re giving people clear objectives, rewarding people when they achieve them and holding them accountable when they don’t.

We have started putting these principles and behaviours into the performance management system and that is “where the rubber really hits the road”. It is very important to hold people accountable both in a positive and negative sense. People hate working in an organisation where non-performers get away with it ‘or where there seems to be no fairness in the reward system.

We have rolled out the principles and behaviours to all of our 8,000 employees who have been involved in Deliver The Promise workshops. It’s gratifying to see that ‘Deliver the Promise’ is now part of the language of our organisation and it’s been a big motivational contributor to our result this year.

In addition, workplace initiatives, linked to the new culture, are delivering cost savings and revenue growth.

These behavioural changes will underpin our performance and ensure that the productivity improvements of the past year will form the basis for sustainable growth in shareholder returns.

Our long term strategy for future growth is an increasing focus of the board and management, as Don has said. In any case, our broad strategic goal is to deliver excellent year on year earnings per share growth.

The graph illustrates our approach to delivering this EPS growth. On the vertical axis is economic profit on funds employed. On the horizontal axis is revenue growth. The arrows demonstrate our strategy.

First, we will move up the vertical axis, ensuring all of our businesses generate an economic profit . Our focus is on cost and capital efficiency to drive year on year improvement and much has been achieved. Our culture program will ensure we retain these improvements.

The horizontal axis illustrates growth. We will pursue growth only in businesses that are economically profitable and then only if the growth is economically profitable.

So how have we gone against this strategy?

The next series of slides best encapsulate our business philosophy and the progress we have made against our minimum target in financial performance of 18% Return On Net Assets which, we say, is equivalent to a breakeven economic profit.

This slide shows the position of our businesses last year. On the vertical axis is RONA and the 18% target, which is our minimal financial target, is highlighted by the horizontal black line. The width of the bars indicates the size of the business in terms of sales revenue. As you can see, only two businesses were producing an economic profit in 2001.

Now look at this year with the 2002 returns shown in orange. We have made good progress in all business. Our businesses fall into three categories: Grow, Fix, Exit.

The first category is businesses that earned the right to grow. Second are those that are demonstrating they have the potential to meet our economic criteria and we are fixing. The third category contains those businesses that won’t meet the targets and we are exiting for fair value.

Importantly we have moved four businesses from ‘fix’ to ‘grow’ since the first half of 2002. We have also sold two of the three businesses in the exit category.

The businesses in the grow category have earned the right to grow by producing returns exceeding 18%. MIEX is the exception and I’ll come to that later.

You should note that ‘right to grow’ is not an ‘approval to grow’ and we will support only low risk projects that give returns in excess of our financial hurdle rate.

For example, we are growing Australia/Asia Mining Services via expansion of our Yarwun plant in Queensland. For a spend of less than $10 million, we can increase capacity by around 12% and displace some of the current imports of Ammonium Nitrate into Australia. The transaction is Earnings Per Share positive in year one and immediately meets our financial criteria.

Another “grow” businesses is Chemnet, our Au stralasian chemical import and distribution business. It is the growth engine of Chemicals Group. The acquisition of Fernz Speciality Chemicals increases Chemnet’s revenue by 50%. This acquisition also meets our financial targets and is Earnings Per Share positive.

Our Australian Fertiliser business and European Explosives businesses broke through the RONA threshold in 2002.

As I mentioned earlier, MIEX is the exception for this category. It still in the commercialisation stage and hence produces negative returns at the moment. However, we believe this revolutionary water treatment business has good commercial potential and the project took some positive steps during the year. Some of you will have noticed the MIEX display stand outside and those of you who are interested, may wish to have a look after the meeting.

In the “fix” category are two businesses, North America Mining Services and ChlorAlkali. We have made good progress in both these businesses during this year.

For example, North America is one of the highlights of the 2002 results. At year end, the business is more than half way on the journey to an 18% RONA.

The final three businesses – Qenos, CropCare and Vinyls – are in the exit category and indeed we sold Crop Care and Vinyls during 2002.

I won’t dwell on Qenos except to say that it has earnings volatility due mainly to the polyethylene cycle. The write-down of our investment reflects this exit or sellers’ view.

All of this leads me to be positive looking forward to 2003 and beyond. Next year, we have said that we anticipate low double digit earnings growth. This is based upon the full year cost savings from 2002 as well as the further efficiencies in 2003, also continued improvement in North America and the benefits to flow from some growth such as the Fernz acquisition.

This is subject to two caveats: worsening drought impacting the demand for fertilisers and oil price rises impacting on the price of Qenos feedstocks and chemical prices generally.

So far this year, Mining Services, Chemicals and Consumer Products have produced good results for the first couple of months while Agricultural Chemicals is being effected by its normal seasonal bias and some further impact of the drought, which, of course, is the worst for a century.

Oil prices are also affecting Qenos' result.

On the other hand, a feature has been the successful Fernz acquisition and its subsequent integration. From Day One, the results have reflected the benefit of effective planning and execution.

So in summary, we have made admirable progress in laying a foundation for the new Orica. We have strengthened Orica’s fundamentals via a step change in the cost base of all of our businesses and there is further efficiency to come.

We have repaired the balance sheet and whilst we are no longer constrained in this area, we will be disciplined in our capital management. The share buy back reflects our confidence in further earnings growth from our current portfolio of businesses and shows we are serious about disciplined capital management. We are not afraid to return excess funds to shareholders or conversely to go to our owners if more capital is required in the future.

Finally, there are some low risk growth opportunities emerging in our profitable businesses.

This has been a very good year however, as the chairman has said, it is but the first step in a long journey – there is much still to be done to improve and grow your excellent company.

Thank You