2002 AGM - Chairman's Address

This is the second year that I have had the honour of reporting to you as Chairman of Orica on the performance of your company.

Your board sees its primary role as the protection and enhancement of long term shareholder value. In this context, 2001 and 2002 could not have been two more contrasting years.

Last year I am sure you will recall was an exceptionally poor year and I made the commitment on behalf of your board and management to improve performance.

I am pleased to report this year that we have met that commitment. We have Delivered The Promise in terms of improved performance of your company and in returns to shareholders.

And while I say that 2002 was a good year, I want to make it absolutely clear that everyone at Orica recognises that this is just a first step the first chapter if you like in the story of recovery and development of your company.

Today, I want to review briefly 2002 and to make some observations on some key areas of responsibility for the board. In reviewing our performance in 2002, it is best to start with the fundamentals: the inherent strength of our four key business platforms and the quality of our people.

At last year’s AGM, I took some time in reconfirming the board’s faith in the value of our businesses and in the outstanding market positions held by each, either internationally in the case of Mining Services or locally in the case of Chemicals, Consumer Products and Agricultural Chemicals.

Following that thorough analysis last year, we recognised that there was a need to change the way the businesses were managed and operated including setting clear targets and measures. The results this year are consistent with the board’s belief that Orica has excellent businesses with people of high calibre.

Each of our four businesses in 2002 made an economic profit. That is there was a surplus after returning the cost of capital. This was achieved in an environment of variable market conditions through a strong focus on costs and margins.

The success of the businesses produced a profit before significant items for 2002 of $239.1 million compared with a profit of $62.3 million in 2001.

After significant items, the profit was $213.6 million, compared with a loss of $192.7 million in 2001. Responsible financial management has repaired the balance sheet with gearing at 31.3% and interest cover at 6.9 times, compared with gearing of 41.2% and interest cover at 2.7 times at the end of last year. The decision to write-down assets by $45.9 million after tax follows a rigorous review of carrying values and assures the integrity of reported asset values.

The write-downs included Qenos which continues to be of concern. Qenos has instituted programs to address profitability and performance did improve in 2002. It is scheduled for sale in the medium term and the further modest write-down reflects an exit or seller’s view of the business.

The performance of the company and the repair of the balance sheet has enabled us to return funds to shareholders through an increase in dividend, together with a share buy-back of up to 5% of issued capital.

The final dividend of 29 cents per share was franked to 7.5 cents per share. The total dividend for 2002 was 44 cents per share franked to 15 cents per share -an increase of 28 cents per share on last year’s dividend of 16 cents per share. The full dividend for 2002 equates to a dividend yield of more than 4%.

Dividends have been considered by the Board as part of its review of capital management. The board recognises the importance of at least maintaining the rate of dividend in terms of cents per share, of providing an appropriate dividend yield, of maintaining a p ay-out ratio of 50% or more, of distributing available franking credits and of using other tax effective distributions when franking is restricted. We will vary this approach only in exceptional circumstances.

The proposed on-market share buy back of up to 5% of issued capital is consistent with this approach on dividends.

The board sees the buy back as a tax effective way of returning funds to shareholders . It also redresses any creeping increases in our total issued capital which may result from the allotment of shares in executive remuneration programs and employee share schemes.

Executive remuneration is a matter which is a key responsibility for any board. There is an extensive disclosure of this matter in the Annual Report. However, let me make some brief comments. It is the broad policy of the company that the remuneration structure will support Orica’s philosophy and values, will reinforce both the short and long term objectives of the company, will provide a common interest between management and shareholders and will be sufficiently competitive to attract, motivate and retain people of high calibre.

In this process, we follow strict and transparent procedures and take independent advice in determining Executive Remuneration. At Orica, remuneration of senior executives is determined and reviewed by a separate board committee that does not include executives.

There have been a number of changes to our Executive Remuneration practices in the past 18 months. We have sought to align all executives within Orica to the single set of benchmarks which was established last year for our new CEO.

This ensures the entire executive remuneration structure, starting with the CEO is consistent and aligned to the performance of the company over the longer term and to the interests of shareholders.

Executives are allied to the interests of the shareholders through share-based incentive programs. The amount of benefit to the executives is directly related to the amount of benefit to the shareholders.

There are criticisms of the precise form of our arrangements and we acknowledge that. However, there is no doubt, in my mind, that the present arrangements were necessary given our circumstances 18 months ago and they serve us well at the moment.

Along with many other companies, we will be closely monitoring developments in this area. Our current arrangements are locked in for the five year period, 2001 to 2006. Work on successor arrangements will be undertaken in 2003. When we know what we want to do, disclosure to shareholders will be full. What I can tell you is that our careful restraint on use of equity will remain and the latest corporate governance standards will be fully reflected in what we do next. You need to be aware that we have a ceiling of 7.5 percent for the total of equity related remuneration arrangements for employees.

Similarly with Directors Fees, the board receives expert independent advice and survey data on fees paid by comparable companies. This information is considered against the level of remuneration required to attract and compensate directors of the appropriate calibre and the nature of their work and responsibilities.

It is necessary to provide flexibility to increase the number of directors on the board, to raise the level of fees paid to existing directors to reflect changes in comparable companies and to compensate for the phase out of the current retirement benefit allowance. Directors joining after 1 July 2002 receive no retirement benefit but a higher fee.

Therefore, at today’s meeting, we will be seeking the approval of shareholders t o increase the total aggregate amount of non-executive directors’ fees to $1.2 million. This will be the first increase since 1998 when shareholders approved an aggregate total of $750,000.

It is important that you appreciate that we do not intend to pay out immediately the amount that we are asking shareholders to approve. We are simply giving ourselves the headroom to make the changes I have described.

In the past year, we have recruited one extra non-executive director in Michael Beckett, who brings an international business perspective and familiarity with the global mining industry. I welcome Michael to his inaugural Orica AGM.

And now a word about Corporate Governance. I commend to you the substantial discussion on these matters in our Annual Report.
& amp; amp; lt; B R>We take a great deal of interest in emerging standards. Orica already has in place most requirements of what is referred to as Draft CLERP9 in Australia. Through the Corporate Governance Committee of the board, we keep constant oversight on the way we are working and look for opportunities to improve. So what is the future for Orica?

This year will be another with a strong focus on efficiency so we can optimise the performance of the existing businesses and demonstrate further to the satisfaction of shareholders that we are running the businesses to provide a superior return on their investment.

In addition, there are opportunities for growth by developing our profitable businesses and some of these opportunities have already been taken. For example, the purchase of Fernz and the expansion of Ammonium Nitrate production at Yarwun are good examples of low risk value creation.

Portfolio management has continued with the divestment of two businesses, Australian Vinyls and Crop Care. As I said earlier, Qenos is planned for sale.

As you may be aware, we have indicated our intent to support the merger of Incitec Fertilisers with Pivot Limited to form Australia’s biggest fertiliser company, Incitec Pivot Limited. We believe that this merger would provide substantial benefits to all companies involved. However, this matter is currently the subject of legal action and consequently, that is all I intend to say on this matter today.

Long-term strategy will be a priority of the Board’s considerations during 2003. We will be exploring opportunities that will define the growth path of your company in the years to come and I will be pleased to report to you on our progress at next year’s AGM.

Again, let me assure you that we will seek to grow only where we believe our performance criteria can be met and I have confidence that in the longer term, we will be a growth company focused on disciplined performance and shareholder value.

In looking at the more immediate future, I expect, in 2003, continued improvement over 2002 results. Clearly, there are a number of uncertainties which could effect our businesses. The drought in Australia and oil prices are two that spring to mind and Orica is not alone in corporate Australia in having concerns over the general international economic environment.

However, Orica has been successful in 2002 by focusing on those factors and those actions which it can control such as the continued implementation of our cost reduction program and the improving profitability of our international Mining Services operations and we will continue this approach into 2003.

The initial results from our businesses for the first couple of months in the 2003 Year, engender confidence in our outlook for the Full Year.

Managing Director , Malcolm Broomhead, will provide a little more detail for you in his address on this and many other matters and I would like to welcome Malcolm to address you now.