Orica Announces Full Year Results

30th October, 1998

Orica Limited (Orica) today announced a profit after tax and abnormal items of $435m, a 230 per cent increase on 1997. The result, the highest in the company’s history, reflected the excellent value achieved from the sales of non core businesses.
Profit after tax and before abnormal items was down 15 per cent to $205m due to difficult trading conditions in virtually all businesses during the year. Earnings per share before abnormal items were down 7 per cent to 77 cents.

The directors declared a final dividend of 29 cents unfranked giving a total dividend for the year of 50 cents compared to 48 cents last year.

Orica managing director and chief executive officer, Philip Weickhardt said: "This has been a watershed year for Orica and much has been achieved. I consider our trading result to be a sound one considering the toughness of the market conditions. There is no doubt that the productivity improvements we have built into our operations over a number of years have helped us weather the worldwide economic difficulties."

Mr Weickhardt said that considerable progress had been made towards reshaping Orica around its nominated growth platforms of mining services, agricultural chemicals, consumer products and chemicals.

"Orica has a clear growth strategy and we have demonstrated our resolve to follow that strategy. We have invested heavily for long term growth and realised optimal value from the sale of non-core businesses. We will also make a major improvement to our plastics business through the proposed polyethylene joint venture with Kemcor.

"With clarity of direction and modest gearing, we are well placed to exploit some of the many excellent opportunities in front of us. Our challenge is to select the very best of them", he said.

HIGHLIGHTS OF THE YEAR

Some of the highlights in a tremendously busy year for Orica included:

• change of name to Orica Limited on 2 February 1998
  

• significant progress in reshaping the company, focusing on fewer but high quality businesses

• acquisition of ICI PLC's Americas and European explosives business, making Orica the world's leading supplier of commercial explosives

• total expenditure on acquisitions of $607m

• realisation of $635m from the sale of non core businesses

• increase from 5 per cent to 25 per cent of revenue from businesses outside Australasia

• significant improvement in profits from Australian Vinyls joint venture

• delivery of $240m cost savings and efficiency gains over the last three years

The purchase of ICI PLC's explosives interests was completed in May this year and performance of the business has met expectations to date, despite difficult conditions in the international mining industry. A number of strategic investments have already been made and the profit improvement initiatives are in progress.

"Acquiring the international explosives business was an enormous step in the repositioning of Orica. It presents us with tremendou s long term opportunities to capitalise on our position as the world's leading explosives supplier", Mr Weickhardt said.

OUTLOOK

There is considerable uncertainty about the world economy over the coming year. The outlook in some but not all of the company's markets is subdued with pressure on prices and volumes expected to continue in the face of reduced demand and strong competition.

While the company's profitability will be reduced by the sale of the profitable Pharmaceuticals and Technical Coatings businesses during 1998, this will be partially offset by lower interest costs, improved operating costs and efficiencies, and the acquisitions made during 1998. The company remains focused on developing the profitability of its core business platforms and improving the competitiveness of all its businesses.

PROFIT REPORT FOR YEAR ENDED 30 SEPTEMBER 1998

FINANCIAL RESULT

Orica Limited's profit after tax and abnormal items was up 230% to $435m from $132m last year.

Profit after tax and before abnormal items was $205m this year, down 15% from $242m in the previous corresponding period. The reduction was due to the market for many of the company's products softening over the year, as the impact of the Asian economic slowdown affected both our prices and the demand for key products by our customers. To some extent the price impact was ameliorated by the significant fall in the Australian dollar.

Earnings per share after tax and before abnormal items was 77 cents, 7% lower than the 83 cents earned in the previous year. After abnormal items earnings per share increased by 262% to 163 cents from 45 cents last year.

External revenue increased to $3,983m up 9% on $3,650m last year due to the revenue from the international explosives business acquired in May 1998; revenue from existing operations was in line with last year. Earnings before interest and tax (EBIT) was $396m, 8% lower than the $430m achieved in the previous year.

TAXATION

Tax expense for the year at $1.8m was significantly affected by abnormal items. These items comprised non taxable capital profits on the divestment of assets and certain businesses, some abnormal losses, together with associated restructuring and other adjustments.

INTEREST AND DEBT

Net debt at the end of the year was $801m compared to last year's debt of $659m. Net interest expense was $63m, higher than last year's $37m due to higher average levels of debt during the year. Refinancing of Orica's borrowings has resulted in the proportion of non-current borrowings increasing to 63% from 22% in September 1997.

Following the acquisition of International Explosives the Company's gearing (net debt to net debt plus equity) increa sed to over 50%. The sale of the Pharmaceutical business and Technical Coatings has reduced the gearing to 33% at 30 September 1998, near the bottom of the long term target range of 30 - 40%. Interest cover was a healthy 6.2 times.

The acquisition of new businesses and further development of existing businesses resulted in capital expenditure of $658m. There was an additional $150m of sustenance capital expenditure.

DIVIDEND

The Directors have declared a final dividend for the year of 29 cents per share, which will be unfranked due to a reduction in Australian tax paid this year. The total dividend for the year is 50 cents an increase of 4% compared to last year's dividend of 48 cents per share which was fully franked. It is anticipated that franking (at the 36% rate) of the dividend next year will be between 25% and 50%.

ABNORMAL ITEMS

The divestments completed this year have resulted in a significant abnormal profit. There have also been further abnormal costs incurred in a number of areas. These include costs associated with rationalising and restructuring businesses, particularly in the international explosives business, and the cost of implementing new computer systems. Also included are site remediation costs for waste removal associated with Botany and Cabarita and the writedown of various assets. The net result is an abnormal profit of $230m after tax.

SIGNIFICANT EVENTS

• The Company changed its name from ICI Australia to Orica on 2 February 1998 marking the end of a 70 year association with ICI PLC.

• At the 1997 Annual General Meeting Orica announced the strategy for its future as an independent Australian company. Orica will focus on four core businesses; Mining Services, Agricultural Chemicals, Consumer Products, and Chemicals. All businesses are capable of providing growth in long term shareholder returns.

• In developing the Mining Services business, the purchase of a substantial part of ICI PLC's explosives business in the Americas and Europe in May 1998, when combined with the existing Australian and Asian business, has created the world's leading commercial explosives business. Subsequently a proposed joint venture with GAN in Mexico was announced which will further strengthen this position.

• In line with the strategy, the past year has see n considerable progress in both rationalising the non-core assets and developing the core portfolio. In rationalising the non-core portfolio, Orica has sold the polypropylene and polypropylene films, technical coatings and pharmaceutical businesses. Orica has also closed the ethylene dichloride (EDC) business. The PVC business has been merged with Geon in a very successful joint venture. In May 1998 a proposed joint venture was announced of the polyethylene business with Kemcor. In total, the portfolio rationalisation has raised approximately $635m for reinvestment in the core businesses and to retire debt.

SUPERANNUATION

Contributions to the Australian defined benefit superannuation fund are expected to commence in the first quarter of 1999. In 1998 there were no contributions. The size of the contribution is currently under review by the actuary, but is anticipated to be $40m before tax in 1999 for the economic entity.

OUTLOOK

There is considerable uncertainty about the world economy over the coming year. The outlook in some but not all of the company's markets is subdued with pressure on prices and volumes expected to continue in the face of reduced demand and strong competition.

While the company's profitability will be reduced by the sale of the profitable Pharmaceuticals and Technical Coatings businesses during 1998, this will be partially offset by lower interest costs, improved operating costs and efficiencies, and the acquisitions made during 1998. The company remains focussed on developing the profitability of its core business platforms and improving the competitiveness of all its businesses.

BUSINESS PERFORMANCE

AGRICULTURAL CHEMICALS

Sales in the agricultural chemicals businesses decreased by 4% overall with prices down and volumes steady over the year. Demand for fertilizers was strong for most of the year but high rainfall and flooding in key market areas over the winter prevented fertilizer application ahead of the normally high volume spring planting season. While this had a negative effect this financial year it promises better conditions for the business at the start of the coming period. The fall in urea prices, which reached 7 year lows during the year, was a major cause of the lower profit this year. The Crop Care business, less affected by the weather, continued to perform well, maintainin g its market share and lifting profitability.

The businesses have remained focussed on many initiatives to improve productivity and costs. Further investment in the urea plant in Brisbane will lower costs and improve product quality, by producing superior granulated urea in place of lower value prill. Improvements have also been made to the distribution assets providing further efficiencies. Other projects are under consideration, such as the Southern Fertilizer Project where Incitec and BHP are investigating building a large ammonia/urea facility in South Eastern Australia.

CHEMICALS

The Chemicals business was affected by the slowdown in Asia, which reduced demand from customers and lowered prices for many of its products, leading to lower sales and profitability.

The Chlorine and Derivatives business started the year with very low caustic soda prices, and while prices have improved during the year the improvement was moderated by the threat of low priced Asian pr oduct entering Australia. The Surfactants business improved in the second half with the plant back on line after being shutdown for expansion in the first quarter. Valchem, a small textile chemicals business, was sold early in the second half. Chemnet, Australia's largest chemical trading business, increased its market share and its profitability despite lower chemical prices and margins. In February Chemnet acquired Supply Services an import and distribution business in New Zealand further strengthening its position. At the end of March the Botany ethylene dichloride (EDC) plant was closed, as it could no longer operate profitably. The Incitec Industrial Chemicals and Chemtrans businesses were less profitable than last year due to both lower demand and a planned plant maintenance shutdown reducing product available for sale. Incitec recently announced the sale of the Chemtrans business.

Studies are in progress for major investment in new, lower cost and more efficient Chlorine plants in Melbourne and Sy dney, replacing aging plants and underpinning its market position for the long term. The trading business will also continue to selectively invest in distribution assets to enhance its profit growth opportunities, further strengthening its position. Incitec has also continued to invest in its large ammonia plants and sulfur based plants as part of its strategy to improve profitability.

MINING SERVICES

The purchase of much of ICI PLC's explosives business in the Americas and Europe, when combined with Orica's existing Australian and Asian business, has created the world's leading commercial explosives business. Commercial explosives is one of the few areas where Orica has a natural claim to world leadership by virtue of its association with the Australian mining industry, itself world class. Orica has demonstrated its ability to supply the blasting needs of these demanding customers. This acquisition has added signficant assets and skills to an already strong base. Since the acquisition was completed on 1 May 1998 a number of actions have been taken to further develop this business. The proposed joint venture with GAN in Mexico has been announced and will add world class ammonium nitrate manufacturing capacity, well positioned to serve the rapidly growing Latin American market. The new organisation for management of the Canadian and US businesses will also lead to significant cost reductions. The Mining Services business has many opportunities for both growth and improvement to the existing business.

In Australia during the year the demand for the products and services from this business was reduced. The fall in gold price resulted in some mine closures and reduced demand for blasting services. Demand from the coal sector also fell particularly during the second half with lower volumes and pressure on prices reducing customers' sales and profitability. The South East Asian business continued to grow revenue despite the slowing economies, while the international businesses acquired in May performed in line with expectations.

The sodium cyanide business was also affected by the gold mine closures and additionally experienced a significant fall in cyanide prices. The reduced volume and prices contributed to a significantly lower profit this year after a particularly strong result last year.

PLASTICS

Prices for PVC and polyethylene fell significantly during the year and reached their lowest levels ever as reduced demand and significant new investments in Asia resulted in excess capacity in the region. Despite the unfavourable market conditions there has been considerable progress during the past year in improving the performance of the Plastics business. This was reflected in a 44% increase in trading profit this year.

Australian Vinyls Corporation, the PVC joint venture with Geon which commenced in August 1997, has contributed a significantly improved result as the expected synergies between the operations have been realised. This was achieved in spite of very low PVC prices. The improvement program will continue in the coming year providing further benefits.

The polyethylene business continued to show the benefits of the major initiatives undertaken over the past few years. However, prices for low density and linear low density polyethylene have now fallen to very low levels which reduced profitability particularly in the second half. In May 1998 Orica and Kemcor announced their intention to form a joint venture of their polyethylene businesses. The joint venture has received approval from the ACCC and is expected to commence before the end of the calendar year, providing benefits to both partners. Earlier in the year the company sold its polypropylene and polypropylene films businesses.

CONSUMER PRODUCTS

The Decorative Paints business grew its market share although profitability was lower than last year due to both a highly competitive environment and higher costs associated with product launche s.

Selleys also found market conditions more difficult this year with volumes flat and margins difficult to maintain. The technical coatings business was sold to PPG Industries in September 1998.

Following the sale of the technical coatings operations the Consumer Products business is focussed on leveraging its strong position in decorative paint, wood care, textured and powder coatings and handyman products. During this year the business has made several small acquisitions, strengthening its position in Powder Coatings through the purchase of the H B Fuller powder business and Wood Care with the addition of the Feast Watson wood care products.

Further investment was also announced in the development of the decorative paint production and distribution facilities at Rocklea, improving the productivity and cost base of the main decorative paint manufacturing facility.

ADVANCED SCIENCES

Sales for the Advanced Sciences segment were lower than last year due to the sal e of the Advanced Ceramics and New Zealand Pharmaceuticals businesses last year. Otherwise overall volumes and prices were largely unchanged. The Pharmaceutical business, which was sold in September 1998, continued its strong performance during the year. The Adhesives & Resins business, whose major products are sold to the wood panel industry, had a difficult year in both Australia and New Zealand. Reduced demand from Asia for wood panels led to lower volumes and prices. Polyurethanes however improved its performance. The Advanced Sciences sector will cease to be reported separately after this year.

CALENDAR