Orica Revised Earnings Telecast

Orica staff present:

Chair: Mr Don Mercer, Executive Chairman
Mr Tony Larkin, Chief Financial Officer
Mr James Fazzino, Group Investor Relations Manager

Genesys:
Welcome to the Investor Relations teleconference for Orica Limited. Your lines will all be muted during the presentation until the question and answer period in about five minute’s time.

I must advise you that at this stage that in accordance with the Telecommunications Act this conference is being recorded as requested. I will now hand over to Mr Don Mercer.

Chair (Mr Don Mercer):
Good afternoon all. I am Don Mercer, as you know I am the acting Executive Chair of Orica. Present here with me today is our Chief Financial Officer Tony Larkin and our Investor Relations Manager James Fazzino.

You will have noted that the conference is being recorded and the reason for that is we are going to put a full transcript of it on our Orica web site just to ensure all of the market is informed.

You will have by now have seen the announcement we make to the Stock Exchange this morning. We like to believe that that was clear and concise. The point of the conversation now is not for me to make a presentation or to provide new information but rather to give you an opportunity to ask questions or to ask for supplementary information or in other words to clarify any issues that the announcement may have raised with you.

So with that introduction I will move us straight away to the conference phase of this call.

Genesys:
Should you wish to ask a question please press 1 4 on your telephone keypad or 1 5 to remove yourself from the question queue.

Frances Loo UBS Warburg:
Thanks very much. I just wondered whether you could give us a sense of in terms of the write-downs being taken what the pre tax amount of that will be?

Chair:
I will get our Chief Financial Officer, Tony Larkin to answer that question.

Tony Larkin:
Frances, in fact you will get a perverse view of this because the post tax number is higher than the pre tax number because we have chosen to write off some previously booked future income tax benefits. Particularly in the US and also a smaller amount in Indonesia.

Frances Loo, UBS Warburg:
Okay, and also while I’ve got you on the line Tony, can you indicate what the end value of the goodwill will approximately be. Are we looking at sort of writing that down, I think in terms of following the explosives transaction that the goodwill will actually increase in the balance sheet by about $200M or so?

Tony Larkin:
I am going from memory Frances and James could give you a better answer after we conclude. My guess would be that there would be about maybe $160M of intangibles left in the balance sheet which is to do with intellectual property rights, trademarks and that sort of thing.

Frances Loo, UBS Warburg:
Thanks. In terms of the commentary on the earnings forecast, which I guess, is fairly self-explanatory. Can you give us a little bit of an update in terms of initiatives and in terms of improving cash flow and how those might be affected by the earnings announcement today?

Chair:
We would like to make it very clear that our focus is very much on performance improvement in our businesses. In particular there is an opportunity for us to manage our working capital better will is going to help our cash position.

Frances Loo UBS Warburg:
Will any of that come through in the current fiscal year or are these initiatives that are much more likely to unfold during fiscal 02?

Chair:
Next month and the month after we are expecting some of this to show. Clearly if you want a longer-term effect then you are into the next financial year.

James Fazzino:
Frances we will have a better working capital number at year end than what we had at half year. With more work to do the following year.

Frances Loo, UBS Warburg:
Right. Don could you just clarify where you are at in terms of the search for a new CEO?

Chair:
We’re giving that, as you might imagine, first and most urgent priority. And all I can say to you is that we are progressing well and very encouraged with where we are.

Frances Loo, UBS Warburg:
Right, okay. My last question is just whether you can give us a little bit of commentary on a divisional basis in terms of where the operations have not quite performed up to scratch in terms of where we might normally expect them to perform. The second half period is normally seasonally a little bit stronger?

Chair:
The disappointments that we’ve had beyond what we have perhaps already advised you about, were in particular in the explosives business in North America where we have not made the improvements yet that we were looking forward to. Secondly in our consumer products and vinyls business in Australia again the performance has not been what we would have expected. And that’s been in part the severity of the downturn in the housing sector.

Frances Loo, UBS Warburg:
Okay thank you very much.

Paul Jensz, Solomon Smith Barney:
Thank you for your time gentlemen. My main question was really a follow up to the operational ebit. I am finding it strange in North America that you are still taking that number down with the gas price in America certainly coming down off the highs down to more like $3 per mmbtu. So can you maybe explain as to what is going wrong there?

Tony Larkin:
Paul there are leads and lags in terms of the rating at which price changes in gas flows through to us via ammonia and you would be aware that there is a disconnection between the movements in gas prices as against the movements in ammonia prices because there are supply and demand issues that create timing differences there. So we wouldn’t have yet seen all the benefits of this lower gas price of more recent months.

I think the other impact is that we’re still very much in the beginning phases of changing the basis of our contracts for the supplying of ammonia nitrates. We haven’t really achieved the margin improvements yet that we look forward to.

Paul Jensz, Solomon Smith Barney:
So in the next couple of years are you looking, has there been any structural change in North America that has been sort of unforseen. I am just trying to see structural change versus really just a padding out of this gas price issue and ammonia price issue we’ve had?

Tony Larkin:
No, there is no structural change that we are seeing Paul. We are trying change the construction of our long term supply contracts and believe that our major competitor in the US is behaving in a similar way. But structurally there is nothing we are seeing in the marketplace that would cause a permanent change in the performance of the business. It really is just a question of the rate at which the management of that business can recover the impacts of I guess the last 12 months and push ahead to grow or expand its margin.

Paul Jensz, Solomon Smith Barney:
Okay. Maybe just coming back domestically if I could have a follow up question. Can you maybe comment on did plastics make a profit this year and then maybe getting into agricultural chemicals and just suggesting whether that was up or down on last year?

Chair:
Plastics has been an area, as you know, of considerable concern to us. But I think you’d also be aware that at Qenos we have had quite unusual industrial relations disturbance. It has been a very disappointing year.

AVBC likewise has continued a pattern that we really don’t like at all. It is one of the reasons why we hare having a rethink about the carrying value of that business.

Tony Larkin:
AVC has lot a small amount of money at the ebit line Paul that’s really a combination of reduced volumes which is really reduced volumes across the full year together with a decline in PVC prices in the last two months which has tightened up the margins quite significantly.

In relation to agricultural chemicals nothing fundamentally has changed there. We are still expecting that it will produce a full year result which is ahead of last year.

Paul Jensz, Solomon Smith Barney:
Thanks for your time gentlemen.

Brendan Lyons, JB Were:
Thanks very much. I think we have covered a fair bit already but just a more detailed explanation of your plans for the AVC business. Obviously you have tried to float that business in the past, can you just indicate where its carrying value is and what your thinking is on that. And also whether there are any plans for any other asset sales within plastics or the other businesses?

Tony Larkin:
Brendan, I am sure you will understand that I am reluctant to disclose what the new carrying value is when we are going to go out into the marketplace and try and capture as much value for the business as we can and we don’t want to signal to the marketplace at this point in time. Because it would commercially disadvantage us.

Having said that, if we could sell this business tomorrow then we would. We have dedicated one of our senior managers to work with some external advisers on divesting this business. We will explore potential trade buyers in the Asian region principally but our advisers will also be looking for potential private equity buyers who might also have an interest in the business.

Brendan Lyons, JB Were:
And just a related question in regards to Qenos. There are still some restrictions on your shareholding there?

Tony Larkin:
There are in the sense of whether we can deal in those assets until about the middle of calendar 2002 which are associated with Exxon Mobil of course. We would have an option to sell to Exxon Mobil and only to them up until that period of time. We will explore that possibility but I am not personally optimistic that we would get a reasonably acceptable price but we will see what the talks produce. Beyond that both shareholders are committed to the sale of the business.

Brendan Lyons, JB Were:
Okay thanks very much.

David Grear, Macquarie Equity:
Just a question on the US explosives business. Is the timeframe for the improvement in that business any different than what was originally told around about two years at the last interim result. Has that changed, is that business now trading profitably?

Tony Larkin:
I don’t think the time has changed David. We’ve said that it will take time before we work our way through all of the longer term contracts because we need to wait in some cases for those cases to roll over for renewal in order to renegotiate the terms of them.

In terms of its performance, currently we would see the risk that it could make a small loss this financial year.

David Grear, Macquarie Equity:
Have there been any market share changes in that market, have you lost any share to Dyno or anything like that?

Tony Larkin:
No, probably it’s holding. We have picked up volume in places but we have conceded volume on other occasions when we felt that the prices on offer were unacceptable to us. We are not prepared to take business at any price. We’ve allowed some to slip to the opposition.

David Grear, Macquarie Equity:
Just a follow up question on consumer products. Has the drop off in paints been worse than in previous cycles?

Tony Larkin:
Probably nobody in the room has got all of the experience of the previous cycle David but I suspect that it’s similar rather than worse. I think our numbers would suggest that the earnings downturn is not as severe as it’s historically been. And a lot of it is associated with the trade side of the business, as in trade decorative paints and protective coatings.

Chair:
A lot of it is attaching to the downturn in housing more generally. We have had a particularly severe downturn in that and while the government initiatives have led to expected improvement it’s still at the stage of housing approvals It hasn’t yet flowed through into actual improvements in performance for us.

David Grear, Macquarie Equity:
How are your inventory levels on Dulux know?

Chair:
Not good.

Mark Cotton, Macquarie Equity:
Can I ask a question as well? Could you say what the other minor investments are?

Tony Larkin:
The one’s that we have written down?

Mark Cotton, Macquarie Equity:
Yes?

Tony Larkin:
Well there are a couple related to e-commerce investments, not material, both less than $10M. We also had spent some money in Mexico following the acquisition of the International Explosive business which was associated with gaining access to additional ammonia nitrate capacity but our proposed joint venture partner went into liquidation and the banks have been unable to deal with that plant. We think that opportunity has certainly passed for the time being and may permanently have gone because of the inability to deal with those assets.

Then there is a smaller amount relating to some future income tax benefits in the adhesives and resins operations in Indonesia that we have conservatively written down. It’s a business which has come from a loss up to break even but it’s a tough climate and we have just taken the conservative view.

Rohan Gallagher, Credit Suisse First Boston:
Good afternoon guys. Just a couple of questions. First of all could you comment with respect to the non-core ebit contribution, that is the combined ABC Quenos businesses. The second thing is, conscious of James’ comment earlier with respect to improved working capital, Tony can you give us an idea in terms of how the balance sheet’s looking in terms of gearing. The third question is probably skewed towards Don and is AVC enough, just selling AVC currently and what are your views on the current conglomerate structure. The fourth question, and I apologise for the number of questions, the fourth question is concerning the written down value of the businesses in which you are retaining, eg explosives, Qenos etc, and finally with respect to the market forecast earnings for FY 2002 are you comfortable with that or is there the risk of earnings coming in below the current consensus estimates?

Chair:
Do you want to take those in the order provided?

Rohan Gallagher, Credit Suisse First Boston:
Whatever is suitable Don.

Chair:
I think four of those questions were for Tony and one for me. Perhaps I’ll get my answer out of the way.

The non-core businesses as you would understand we have flagged and would like to divest. The core businesses are all very good businesses. We should run them better than we do and our short-term focus of attention is on actually getting them to perform.

Longer term there is a question over whether a company our size should have as many diverse businesses and that is an issue which needs to be thought through and I think you will find our new Chief Executive will be dealing with that in reasonably early course.

But for the time being the priority is not portfolio realignment so much as portfolio performance.

Tony Larkin:
Rohan just some other questions, on the non core side as I mentioned earlier, we are expecting the ebit line AVC will make a small loss as a consequence as I mentioned of lower PVC demand and prices.

Qenos has also lost money from two sources. One is that it’s had very severe industrial relations issues this year, one associated with the renegotiation of its enterprise agreement where it lost four to four and a half months of production from the alternative facility.

The other has been in relation to a maintenance turnaround, which has also been extended on its number 1 cracker at Altona as a consequence of industrial behaviour. This has extended that turnaround from a completion by late June to now we are hoping it is going to be completed by the end of August. And that exhibits the sort of union behaviour that we have seen at the Laverton construction site.

I should mention that in the case of the maintenance turnaround these are contract employees, or contractor employees, not our employees. So there has been quite a severe effect there.

We have taken much of the industrial relations impact into normal profit items. But I think when we’ve completed our full analysis of the year we will probably indicate that the true impact is much greater. Because not only have we been importing product to satisfy customer requirements in Victoria at a small loss, we have also lost the margin on what would have been our own production. So it’s been particularly severe and we don’t see this sort of damaging performance going forward.

In terms of gearing we’re currently expecting after the write downs we should be somewhat around the 40% on a debt to total capitalisation basis so that’s not problematical. It does reflect on a pre write down basis a reduction compared to where we are currently and that reflects the continued pressures that we have placed on containing capital expenditure and also on working capital reductions.

In relation to the 2002 forecast we have no reason to indicate to the market that it’s a forecast currently out of sync with our own views.

Rohan Gallagher, Credit Suisse First Boston:
Thank you Tony. Tony just on the unions, is there any sort of relief you can get whether it be insurance or having a go at the unions or anything like that? Or is that just lost money?

Tony Larkin:
I think the answer is no.

Rohan Gallagher, Credit Suisse First Boston:
Just finally with the respect to the write offs, has there been any review of environmental liabilities or anything associated with the write-downs?

Tony Larkin:
Not in a completely formal sense. But they are reviewed regularly enough for us to believe there is no further adjustments required in relation to environmental provisioning.

Rohan Gallagher, Credit Suisse First Boston:
Thanks gentlemen.

Mark Wilson, JP Morgan:
Good afternoon. I just want to clarify, looking at operational earnings what has really changed over the last four to six weeks given that the earlier guidance had been for profit there of $85- $135M on a pre I guess abnormal basis. And now we are looking at $60M for those businesses. What have been the significant changes there. I mean we’ve run through North American Explosives but there doesn’t appear to be anything new there. Likewise consumer products and plastics. Can you just sort of give a few more guidelines?

Chair:
Those are the headings if I might say so. They are just disappointing more than originally expected. The three headings that you should have as contributing to the change are: North American Explosives, the consumer products and the Qenos situation.

Mark Wilson, JP Morgan:
Okay, thank you.

Frances Loo, UBS Warburg:
I just have some follow up questions. The first one I guess is for Don. Just in terms of I am imagining that you are probably a fair way through the planning cycle for fiscal 02 now and wondered if you could give us the current up to date review in terms of where capex might shake out for the forthcoming year. The second question was whether you could give us an update in terms of the Chlor-alkali plant commissioning, whether there have been further delays and that process I think previously we’d sort of anticipated perhaps some time near the end of August in terms of that being resolved. And the third question was just in terms of the building cycle. Where we had started to see some of the lead indicators turn up and obviously there is no benefit to the company in the current financial year, but perhaps what sort of time lags might we expect. And whether you sort of see some improvement in terms of your indicator order book and sort of commentary there in terms of how the outlook is looking forward. Thank you.

Chair:
On the chlor-alkali side we do think that we’re going to see pretty well full performance during much of the next financial year. We are delayed with commissioning but that is proceeding now as expeditiously as is possible So imminent but not yet.

The building cycle really does give us greater expectations in relation to next year and we will wait to see it happen but all the leading indicators as you rightly suggest lead us to a stronger outlook, certainly than we have had this year. But if you measure these things by the sense of self confidence of the people in that business they are feeling pretty good about it.

The capital expenditure picture more broadly, there’s a sort of attitude issue here. Clearly in a business like ours there is a fair amount of sustenance capital, which does need to be invested on a continuing basis. From the point of view of anything beyond what is absolutely necessary you are going to see an organisation here which is very much tougher on the subject of capital than it has perhaps been hitherto. We are very concerned indeed to actually get balance sheet performance before we start spending any more money. And we really don’t anticipate doing anything ahead of demonstrating our ability to earn proper returns on our capital. That’s not to say we’ve lost our ambitions for growth longer term, but it’s a question of sequencing. We really must make perform the capital we have already spent and to that extent capital management and capital rationing and so forth are very much part of what we are looking forward to.

Frances Loo, UBS Warburg:
And in terms of an indicative level of where the sort of maintenance or sustenance type of capital level might be, is that a kind of 70% level or something like that?

Chair:
Give or take, you are looking at the depreciation level and probably a bit less.

Frances Loo, UBS Warburg:
Okay thanks.

Brendan Lyons, JB Were:
I just had a couple of follow up questions. If you could just give a little bit more detail on the second half performance for two of the businesses we haven’t talked about: the chemicals division and Australian Explosives operations?

Chair:
The chemicals business is actually doing extremely well and we’re most pleased with that. It’s probably the best performance in relation to expectations that we have got.

Australian Explosives is also doing reasonably well but I will perhaps give you a more detailed comment via Tony.

Tony Larkin:
Yes Brendan, the Australian Explosives business performance has turned up in the second half as we continue to recover market share. You recall that our market share probably dropped down to the mid 50% range and we would be above 60% now. Costs are a little tighter, prices are a little better, and demand is quite strong particularly in the Hunter Valley region. So it’s starting to turn the corner and rebuild it’s position as we expected.

I agree with Don that the chemicals platform has done particularly well

Brendan Lyons, JB Were:
Okay thanks very much.

Genesys:
We have no further questions at this stage Mr Mercer.

Chair:
That’s fine. In which case thank you everybody for their attendance and hope you found it useful.. Thank you all very much.

End of recording.