1999 - Chairman's Address to Orica Limited AGM
21st December, 1999
Orica is a company with ambitious plans for the future. These plans were outlined to shareholders in 1997, many features were implemented in 1998 and during 1999, and now, as we go into 2000, we believe many of the key elements are in place to achieve growth for shareholders.
Through divestments, acquisitions and joint ventures we have reshaped Orica around four core business areas which have been identified as being strengths and opportunities - and being capable of providing strong returns for Orica shareholders in the future.
The Board is very pleased with the progress management has made in reshaping the company and increasing productivity and efficiency. However, these changes have resulted in a short term reduction in earnings.
At our AGM last year we foreshadowed that Orica would lose earnings of $55 million from businesses we have divested, and would face additional costs of around $40 million as the company resumed paying superannuation contributions. Shortly after last year’s AGM, we also sold the Surfactants business, which added to the total earnings shortfall of more than $110 million.
Let’s now look at the financial results for the year ended 30 September 1999 and see how we performed.
In a difficult trading environment the company delivered a profit after tax and before abnormal items of $156 million, down 24 per cent from $205 million last year. This year's profit after abnormal items was $186 million, down 57 per cent as compared to $435 million last year. You will recall that the abnormal profit last year was boosted primarily by the very successful sale of the Technical Coatings and Pharmaceuticals businesses.
While our overall company profit was down compared to last year, the profit contribution from our continuing core businesses improved significantly by $55 million. Overall sales revenue increased from $3.94 billion in 1998 to $3.96 billion in 1999.
Orica's profit result represents a 10.9 per cent return on shareholder funds before abnormal items, down from 16.6 per cent in 1998. Despite falling this year, this performance is well above the return achieved at the bottom of the last cycle in 1992.
The directors declared a final dividend of 22 cents a share, making the total dividend for the year 37 cents compared to 50 cents last year. The final dividend was paid last week - on 17 December - and 8 cents a share was franked. It is anticipated that for the coming year between 25 and 50 per cent of the dividend will be franked.
As I have just said, we faced a total earnings shortfall of $110 million at the end of the 1998/1999 financial year. With the $55 million growth in earnings from our core businesses in 1999 before interest, tax and superannuation deductions, we have filled approximately half that earnings shortfall.
All of this was achieved in the context of a very challenging trading environment. Orica has been affected directly by record low world chemical prices and, indirectly, by a downturn in the business of some customers. This has been particularly so in the supply of commercial explosives and services to mining industry customers. We have also been impacted by the bottoming of the chemical industry cycle, which has resulted in excess production capacity in our region of the world. It is a credit to the expertise and commitment of our management and staff that we have improved sales and operating performance under these conditions.
Orica is meeting the challenges facing us. Management has comprehensively reviewed and is now slimming down our businesses and corporate service functions to provide a more effective and responsive organisation. This is in addition to the major restructuring of our business portfolio. We are well down the track of achieving the latest savings and benefits target of $120 million by September 2000. Management is continuing to initiate projects to help further improve efficiency, continue cost reduction and better meet customer needs. We are confident that the current improvement program puts Orica in a strong position when market conditions improve, and will result in better shareholder returns.
During 1999 Orica's management team completed many projects, with non core divestments realising $379 million and investments and commitments for future growth totalling $690 million.
This year we entered into joint ventures in our Explosives business in India, Germany and the United States which strengthen our international presence and provide a springboard for future growth. For example, the American joint venture with Nelson Brothers takes us into the high growth open pit mining market in key western states and also increases our sales volumes of ammonium nitrate and initiating systems.
Not all of our plans however, came to fruition this year. The final price we offered for full ownership of Incitec was overbid and our offer for the African Explosives business was not accepted. Both these outcomes were disappointing but resulted from the rigorous financial discipline we observe.
A comment about executive remuneration which I know is a contentious issue. Our executive remuneration packages are designed to achieve better management and company performance. You will remember that Orica’s long term incentives package of options and share rights, which you supported last year, is based on meeting challenging performance hurdles. A number of management options lapsed this year simply because the tough hurdles we previously set were not reached. I strongly believe that the Orica management compensation scheme, which also encourages growth in share ownership by senior executives as well as all employees, is an important feature of our revitalised, more focused company. I will say more about these compensation and ownership schemes later in the meeting.
Orica is a company with the will - and the ability to generate value for shareholders. Our vision of "Winning Against the World's Best" is clearly understood by employees, and is supported by long standing values which include a strong commitment to operate to the highest standards of safety, health and care for the environment.
Now to the outlook for 2000.
We are only two months into this year and it is a little too early to predict the outlook with any certainty. Company results to date are broadly in line with our expectations and we would expect this performance to continue if the improvements in the external markets we are beginning to experience are sustained. We are expecting profit growth from each of our four core businesses. In Explosives, whilst overall we expect further growth in profits, international profit improvement will be offset by a profit reduction from the Australian business. Incitec at their AGM last week also indicated a slow start to their year due to seasonal conditions.
Orica is in a strong financial position to grow its businesses. Our management team is working hard to make this happen with support from the Orica Board. The Board has worked diligently to assess and review the many initiatives on Orica’s improvement and growth agenda. I would like to thank my colleagues on the Board for their efforts and, on behalf of the Board, to extend our sincere thanks to management and all employees for their enormous contribution during another year of challenge and continuing change.
Ladies and gentlemen, this concludes my formal address. It is now time for me to introduce your managing director Philip Weickhardt.