Response to ASX 30th March 1999 - Potential Exposure to Year 2000 Problems

Response to Australian Stock Exchange - 30 March 1999

ORICA YEAR 2000 BUSINESS READINESS

1. INTRODUCTION

Orica is an independent listed company with many Australian and international manufacturing operations. Through its various business units and subsidiaries, it supplies and manufactures industrial and specialty chemicals, agricultural chemicals and fertilisers, explosives and mining chemicals, plastics, paints and other consumer products.

The Orica response to the Australian Stock Exchange's (ASX) request for Year 2000 business readiness information covers businesses that comprise the Orica Group. These include Orica Explosives, Dulux, Selleys, Cabots, Chemnet, Spectrum, GBC, SHE Pacific, Chemicals and Plastics businesses, and joint ventures in which Orica holds a majority shareholding. Incitec Ltd, a publicly listed company in which Orica holds a majority shareholding, and Cropcare, a joint venture between Orica and Incitec, are covered in a separate response from Incitec. Similarly, Grow Force Australia Ltd, in which Orica has an indirect interest of 38% through its ownership of Incitec Ltd, is covered in a separate response.

Orica remains committed to its objective that its equipment and software will be Year 2000 ready and that business operations will not be significantly affected as a result of internal exposures. However, no company, Orica included, can control all aspects of achieving and maintaining Year 2000 business readiness. In particular no company can guarantee that critical suppliers, customers or essential services will not experience problems that might adversely affect its own ability to perform as normal.

To address this, Orica is undertaking a proactive program to determine whether its major suppliers of goods and services, and its critical customers are also developing plans to handle the Year 2000 changeover with minimal disruption.

The following specific information is provided in response to the ASX's enquiries (which are noted in italics).

2. POTENTIAL EXPOSURE TO YEAR 2000 ISSUE

(a) Assessment of Exposure

"Has your Company's assessment of its overall potential exposure to the Year 2000 problem changed materially from what the market has previously been told ? If it has, your response should describe the change."

No.

The main areas which Orica consider need to be addressed are listed below in (c). These areas have not changed materially from our previous advice to the ASX. Recent small business acquisitions and divestments have been taken into account in assessing the exposure.

However, it is Orica's assessment that the overall level of risk has been significantly reduced as our Year 2000 activities have progressed, and as substantially more of our business partners have been seen to be addressing the problem. This does not reduce our determination to continue to address the issue with urgency and commitment.

(b) " Has the Company initiated any material action to address the Year 2000 problem beyond actions previously disclosed to the market, or does it propose to initiate any such action ? If it has, your response should describe the action."

No(c) Areas of Exposure Identified

The main areas of exposure are considered to be :-

(i) Manufacturing Operations

(ii) Information Technology

(iii) Suppliers

(iv) Customers

(v) Legal

(vi) Financial

3. ORICA'S RESPONSE TO YEAR 2000 ISSUES

"Please provide details of your Company's progress in relation to its activities to address the Year 2000 problem, including the date by which your Company expects to have completed those activities."

(a) Overview of the Orica Year 2000 ProgramThe Orica Year 2000 Program is coordinated by the Orica Year 2000 Steering Committee, which is made up of senior managers and chaired by an Executive Director. Year 2000 progress is reported to the Board on a regular basis.

The investigation, risk assessment, testing and remediation activities are carried out by project teams within the individual businesses. A central team coordinates reporting from the businesses, distributes and communicates policies, and assists with the sharing of information and best practices.

All current Orica business units are included in the Orica Year 2000 program and all joint ventures and majority-owned subsidiaries are included in the internal reporting.

Since previously describing its Year 2000 status to the market in the June 1998 statement to the ASX, Orica has

• initiated actions to develop Business Continuity Plans (BCP) for the key processes in each business, aimed at possible Year 2000 risks.
• commissioned independent reviews of both the Australian and International businesses.

Final reports have yet to be received in relation to the independent reviews, however plans are in place to deliver improved outcomes in the areas of documentation recording, reporting procedures and resource allocation.

(b) Definition of Business Readiness

Orica is using the British Standards Institution's definition DISC PD2000-1 as the standard for all of Orica's Year 2000 business readiness activities.(c) Business Strategies

(i) Manufacturing Operations

This category covers all plant and equipment used to operate, monitor and control the manufacturing processes.

Inventories of affected equipment and the work required for Year 2000 business readiness have been prepared. The readiness of an item of technology is assessed for the safety, environmental, operational and commercial risks if that item fails or operates incorrectly. An experienced external company is assisting with the process. Site-based inspections are used to check the coverage and key site engineers are closely involved.

Status

Approximately 85% of the assessments have been completed. Testing of key systems has also commenced. This is approximately 55% complete and has a current target to be completed by the end of April 1999. To date, the assessment and testing programme has not found a significant amount of remediation work to be needed. Based on the levels of problems found so far being representative, remediation work has a current target to be completed by the end of June 1999.

Equipment supplied to customers is also undergoing assessment and testing.

(ii) Information Technology

Four major categories of information technology which may be affected by the Year 2000 issues have been identified. These have been addressed as follows:

(1) Core Business Systems

In 1998, installation of the SAP application package was completed for all major businesses, with the exception of Dulux, who have completed remediation and testing of their existing core inhouse system. Several smaller businesses use other vendor packages for their core processing. These have been upgraded as required, except where indicated in the table below.

The IT Help desk system has been assessed and internally tested.

(2) Non Core Business Systems

There are many applications classed as non-critical which nonetheless would lead to inconvenience if they were not Year 2000 ready. These include a large number of Lotus Notes applications.

Status

Business units have completed inventories of the remaining business applications. Applications have been risk rated, compared to the vendor's Year 2000 warranted software levels, and plans derived for addressing the cases of non-compliance. The upgrade or replacement work for the most significant "non-core" systems was completed by end January 1999, with the remainder scheduled for a target completion of June 1999. The major non-critical Notes applications have been checked by external Notes experts and remediated where needed.

(3) IT Infrastructure

Orica completed a major upgrade to its local area networks and workstation infrastructure across the major Australian and New Zealand businesses in September 1998.

Status

The Company's Standard Operating Environment (SOE) desktop infrastructure testing was completed in mid January 1999. The remaining minor upgrades needed are currently anticipated to be distributed before the end of April 1999. Businesses not included in the upgrade are planning to either adopt the SOE, or upgrade their key infrastructure as needed with a current target of June 1999.

(4) Electronic Communication

The wide area data network was upgraded during 1998 to be based on a managed service from AT&T, utilising Telstra Frame Relay facilities and Cisco routers. A Year 2000 compliance warranty has been provided by both AT&T and Telstra. Voice equipment has been risk assessed and appropriate measures will be taken where needed to cover base call functionality. External telecommunications service providers are being monitored closely as they continue their compliance activities, and contingency plans are in preparation.

(iii) Suppliers

Year 2000 business readiness is now a standard part of the purchasing terms and conditions in all businesses.

Dialogue with the suppliers of key goods and services is being sought to gain an understanding of the level of preparedness of each supplier, both in terms of diligent processes and progress, including any contingency plans they have. Essential infrastructure and emergency services are being handled centrally on behalf of the whole corporation.

Status

Suppliers have been risk rated across the company. Important suppliers were asked to indicate their Year 2000 readiness in 1998. Responses have been received for the majority, and the remainder are being followed up. Assessment of the responses is underway. This is currently targeted to be completed by June 1999, with the exception of the GBC business which expects to finish this in October 1999. Completion timing of this element of the program will be affected however by, among other things, the timeliness of supplier responses.

(iv) Customers

Standard communication packs have been prepared and are being issued to all customers in response to requests for information. The content of this communication is continually being reviewed and updated as appropriate.

Orica's potential exposure to customers who may face compliance difficulties is also being analysed. Key customers are also being contacted to assure Orica of their year 2000 readiness.

Status

Customer queries are being recorded. Orica businesses have started assessing key customers for their readiness and their expected contingency plans.

(v) Legal

Orica is involved in producing appropriate Year 2000 policies such as contracts, communication and document retention.

(vi) Financial

Financial risks may arise from Year 2000 issues. While the main elements of the Year 2000 project reduce the likelihood of major long term financial impact, the continuity plans will address potential cashflow impacts of consumer sentiment, our customers' contingency plans, and any abnormal production scheduling that might be needed. The legal measures are also partly addressed at reducing the financial risk from litigation.

d) Audit and Review Activities

Reviews by external consultants have been commissioned to compare Orica to industry best practices, and identify possible gaps in, and improvements to, the Year 2000 programme.e) Estimated Cost

Orica has either completed or has scheduled for completion a number of large system replacement projects, all of which have Year 2000 readiness as one of their key objectives. In addition to these projects, which in total cost in excess of $100M, projects specifically targeted towards the Year 2000 business readiness are estimated to cost approximately $20M, of which approximately 60% has been spent to date.

4. RESIDUAL RISKS AFTER ORICA'S ACTIVITIES TO ADDRESS THE YEAR 2000 PROBLEM ARE COMPLETED

"Are there areas of your Company's activities where, in your Company's assessment, material Year 2000 risks will remain after the Company's activities to address the Year 2000 problem are completed ? Examples might include dependencies on third parties such as utilities. If there will be remaining risks, your response should describe them."

Although the critical systems have been tested and Orica considers the probability of failure is low, like any other company, there is some risk that not every potential problem is detected. In addition, despite Orica's programme to assure itself of the readiness of its suppliers and major customers, their ability to continue to do business is not directly under our control.

The Orica businesses' Business Continuity Plans address both these types of residual risk by defining alternate strategies to continue to supply our customers, and maintain personal and environmental safety.

Even after the one-off activities are completed, reviews of vendor supplied information and adjustment of continuity plans will need to occur as circumstances change. Processes are also in place to ensure any new equipment, systems and suppliers are assessed to be Year 2000 ready.

Orica is aware of the legal risks of contractual non-performance, and the obligations for open and accurate representation of our year 2000 readiness position. Actions to reduce the risk and impact of future legal action include :-

A Communications Policy on Year 2000 issues that ensures that customer and investor Year 2000 readiness enquiries are answered in a planned, factual and open manner by authorised and knowledgeable people.

A review of existing contracts to identify any significant exposures.

The Year 2000 compliance requirement within the standard purchasing terms and conditions.

Secure retention of all documentation relating to Year 2000 activities.

5. BUSINESS CONTINUITY PLANNING

"Please describe your Company's contingency plan in relation to Year 2000 issues."

Each business has appointed a Business Continuity Planning Manager accountable for addressing the ability of the businesses to continue performing key business processes across and beyond the Year 2000 period. They report through the Year 2000 Steering Committee, as well as to their business management. A forum has been established for sharing information, ideas and plans.

Orica's key priorities in planing for business continuity are:

• safety and environment
• customer service
• financial stability and cash flow
• cost management

The focus is on our ability to maintain supply chain operation that meets our customers' needs. Each process needed to support this is being examined for the impact of plant, IT systems and supplies of raw materials or services. Alternate strategies are being evaluated to cover areas judged potentially at risk. Where relevant, they will be developed with our suppliers, customers and other business partners. We are also communicating with our key customers to enable us to plan for their contingency plans.

Status

Development of the plans is progressing in all businesses. It is currently expected that contingency plans will be available for review and testing by end May 1999, except for the Explosives International business which is currently targeting to complete this work by the end of July 1999. These plans will be subject to continuous review and revision as information and circumstances change.

Based on the outcomes to date of the Year 2000 Project and the ongoing program, the company has grounds to believe that its internal systems will be Year 2000 ready. The company however, cannot give an unqualified assurance that the Year 2000 issue will not affect the company's operations in some way.

This statement is a Year 2000 disclosure statement for the purposes of the Year 2000 Information Disclosure Act 1999. A person may be protected by that Act from liability for this statement in certain circumstances. This statement is authorised by Orica Limited.