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19 December, 2001
Thank you Chairman, Ladies & Gentlemen,
As Mr Mercer has said in his introduction, my name is Malcolm Broomhead. By way of brief background, I have training in engineering and business and I come from a background which includes experience in the mining, construction and finance industries.
I am very much a new boy in your Company, having been your Managing Director since September. My mission here is to firstly restore value to the various businesses which Orica owns and then continue to grow the value of shareholders investment in the Company. I am totally dedicated to that task and whilst the road ahead will no doubt contain its fair share of obstacles, you can be assured that my full efforts will be aimed at that single but vital goal.
This morning I would like to provide you with my first impressions of Orica and then outline my 3-point plan based around efficiency, culture and strategy for restoring our performance.
1. IMPRESSIONS OF ORICA
I came to Orica because this is a Company with some fundamentally very good assets – we have the leading worldwide market position in Explosives, the great Australian consumer brands of Dulux and Selleys. Orica’s Incitec is the leading fertiliser producer in Australia and we are the number one chemical producer and trader in this country.
As well as that, Orica has some excellent people – competent, well trained and dedicated. To be certain, we need to change some of the ways we do things but the fundamentals are there for creating a very successful Company.
Of the things we need to change, the most obvious and urgent is our cost structure and this point leads me into the 3-point plan that I have for the future of Orica.
2. 3-POINT PLAN
1. Efficiency
The first leg of our recovery program is to realise the potential of the existing businesses within Orica by making them much more efficient.
The philosophy being followed in this phase is to take each part of the Company to look at what only that part can do and then do only that; for example, in the corporate area, funding the Company, setting the overall strategy, group acquisitions and divestments, financial, accounting and corporate governance – these are things that can only be done by the corporate centre, it doesn’t make sense to do them elsewhere in the organisation. Anything else tends to be either checking or duplicating what should be done in the business units, so let’s not do that unless there is a short term need to do so. By that I mean, if the capability of other parts of the group needs supplementing until they come up to full speed.
On this basis, it became clear to us what our minimum requirements were to run the Company, so we have stopped doing a number of superfluous or non value-adding things.
The result has been that we have been able to reduce costs substantially throughout the group, resulting in cost savings totalling $70 million in net profit after tax terms this year, and an annualised saving of $95 million after tax in an ongoing sense. This is in addition to the underlying profit from our businesses which itself will improve significantly this year. Trading conditions for the first 2 months have been strong in all parts of our business, which means that we are off to a good start.
Many of these cost efficiencies have resulted in positions being made redundant and people leaving the Company. A number of these people have given long and dedicated service to Orica and I would like to acknowledge their contr
ibution. I feel regret tha t they have had to leave the Company and we are providing what assistance we can to help them in this important transition period in their lives.
The quick and decisive action we have taken has been a necessary part of rebuilding a strong future for the many thousands of on-going Orica employees, shareholders and other stakeholders. Orica has good systems for assessing our people and wherever possible, we have sought to retain high potential people, some of whom have changed their roles in the new organisation.
Over 800 people will be leaving the Company as part of this efficiency process. Of the 800, over 720 will have left by the end of this week, so we are on track to deliver the full savings for 9 out of the 12 months in this financial year.
In addition to operating cost reductions, we have restricted capital expenditure to only what is necessary to maintain existing plant and equipment. We anticipate that this sustaining capital will total $135 million in the 2002 financial year. Some additional new capital totalling approximately $80 million is unavoidable due to commitments already made (for example, to complete the new Chloralkali plants at Laverton and Botany, and to complete the acquisition from ICI of the Indian Explosives business). We may also participate, where possible, in rationalisation of the domestic fertiliser industry.
Looking forward to the financial year 2003, there is a clear need for extra ammonium nitrate capacity in Australia. This is a part of our business which produces good economic returns and we plan to expand our manufacturing capacity to meet the growing requirements of our customers in this market.
The goal of the cost and capital efficiency focus is to ensure the Company returns an economic profit to shareholders. By economic profit I mean a profit that not only meets the needs of our bankers, but also meets as an absolute minimum, the market return required by shareholders on the total funds which have been invested in the Company.
Cash flow and a stronger Balance Sheet are also very important considerations for Orica, particularly at this time. Focus on these factors will enable us to strongly grow earnings per share this year.
2. Culture
I would now like to turn to the issue of our Company’s culture. By culture I mean the behaviours, attitudes, values and key success factors the people in the Company follow on a daily basis as we go about our business.
I passionately believe that individual behaviours are crucial to the success or otherwise of any business enterprise. Assets, products even ideas are inert and lie fallow until people do something with them. It is how this is done and with what attitudes, values and focus they do it which really makes the difference and adds the value.
Imagine the power of having everyone’s work behaviours and values in alignment. Imagine how much better it is to work in an organisation where it is quite clear what the Company expects of you, and what you can expect of the Company.
I believe it is possible to achieve this environment within Orica and, in so doing create a much more performance orientated culture.
There are many things which Orica does well – our commitment to safety is world class. Our product stewardship and environmental focus is something we can all take pride in, as is our technical excellence. These are things we need to keep. But to these we need to add commercial and financial accountability at all levels of the organisation in order to achieve the full potential from the assets within the Company
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Culture takes time to change and ongoing commitment to maintain. This is a long-term process - but is vital to ensure we build on the efficiency gains we are making, and it is an important part of attracting and retaining high calibre people.
3. Strategy
Turning now to the strategic direction of the Company, I would like to divide this discussion into two parts – the immediate issues and the medium term strategies.
In the short-term, our aim is to maintain the existing business mix and to improve the performance of those businesses such to provide healthy economic returns consistent with their strong market and brand positions.
This strategy is necessary in order to both improve shareholder value and to restore market credibility in Orica’s ability to perform.
A stronger and more robust company will also give confidence to our customers of our ability to continue to service their needs in a professional and value-adding manner. Our future depends on maintaining and growing good relationships with our customers in all parts of our business.
Some parts of the portfolio may be sold (for example, the Australian Vinyls business) and as I mentioned earlier we may, if possible, participate in any rationalisation of the fertiliser industry. By and large, we believe that there is huge value to be created by firstly improving the returns from our existing businesses. In particular, we must urgently improve our North American explosives business and work is underway on that front now.
In essence, if we look at our business in two ways – firstly, from the point of view of return on assets, secondly, we look at growth in revenue. Our current strategy is to increase the return on assets – we believe far more value will be created by improving the returns on the existing funds employed within the Company than by continuing to try to grow the size of the Company at this stage.
Once a satisfactory return has been gained, then the Company will look at growing through additional investment but only in those areas which have a proven track record in providing economic profits for shareholders.
The major strategic question which will then face the Company in the medium term will be what businesses will form the appropriate portfolio mix for the next phase of earnings per share growth. This portfolio question will take some time to decide. The performance improvement exercise we are currently going through will help clarify which parts of the group should be grown, which parts should be run for cash and which parts should be divested, as well as pointing the way for possible new businesses which the Company might look to acquire.
3. MILESTONES
What then are the milestones you should look for in order to judge whether this recovery program for your Company is on track during 2002?
1. We will keep you informed regarding our cost-cutting and efficiency program so that you can monitor progress, particularly in the easily measurable areas such as redundancies.
2. The half-year profit announcement will give further guidance; however, it should be noted that the first half is always lower than the second half due to seasonal effects and the cost savings will have only been in place for three months. The second half will feel the full benefit from these initiatives.
3. In particular, our performance in the North American explosives market will be an important indicator.
4. Other market
i nd icators include the building cycle, foreign exchange rate movements and international commodity price changes.
4. CONCLUSION
In conclusion, let me say that whilst the recent recovery in Orica’s share price has hopefully given heart to investors, I understand that for many of you the current performance is still not satisfactory. However, I am confident that following the threefold plan of efficiency, culture and strategy is the best way of restoring value and building a strong base for shareholder wealth creation.
I look forward with conviction and enthusiasm to a positive and vibrant future for our Company.
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