Chairmans Speech to Shareholders 30 April 1999

Good morning ladies and gentlemen and welcome to our Sydney shareholders information meeting.

This meeting, which follows the release of our financial results for the first half year, gives our New South Wales shareholders the opportunity to hear directly about what your company is doing and how we are progressing.

But first, before commenting on the company’s first half year performance for 1999, I would like to introduce my fellow directors and I will ask them to stand up in turn.

On my right and your left …

Tony Daniels
Geoff Heeley
Catherine Walter
Tony Larkin
Philip Weickhardt
Company secretary Richard Kneebone
Don Mercer
Graeme Liebelt
Brian Healey
Peter Clinch, who is based in the United States and unfortunately cannot be here today.

Orica has a dedicated team of directors with extensive business, financial and international experience. Details of the individual background of our directors are shown on pages 28 and 29 of the Orica annual report and also on our Internet site.

Before returning to the business of the day I would like to say a few words about the present business environment.

For well over a year now we have witnessed a period of great economic uncertainty around the world – particularly in Asia. This has affected industry and Orica directly by lowering prices and, indirectly, by affecting the business of our customers. Whilst shares in the financial, telecommunications and internet companies have been enjoying a strong run on the Australian and world stock exchanges, industrial companies like Orica have mostly experienced a downturn. Many Australian manufacturing companies are suffering a similar experience and, of course, our mining industry customers are also affected by the global softening of commodity prices.

Orica has not stood by impassively in this challenging environment but, as you will hear, has been active in restructuring our business portfolio and continuing with many self-help initiatives to improve our efficiency and further reduce costs.

Now to our results.

For the first half of this financial year we delivered a profit after tax and abnormal items of $96 million, down from $106 million in the previous year. This year’s profit after tax but before abnormal items was $65 million, down from $113 million last year.

The lower profit is due to three significant factors. The first is the loss of profits from the divested businesses of pharmaceuticals, technical coatings and surfactants which reduced profit before abnormal items by over 15 per cent. The second factor is the resumption of superannuation contributions of $20 million in the first half year. And the third is that prices of key chemical products reached historical lows.

The directors have declared an interim dividend of 15 cents per share, compared with the 21 cents per share interim dividend paid last year. The dividend will be 40 per cent franked due to the reduction in Australian tax paid.

Sales were up 12 per cent to $2.0 billion in 1999 compared to $1.8 billion for the corresponding period in 1998, primarily as a result of the international explosives business which has largely offset lost sales revenue from divestments mentioned earlier. However, offshore sales were up 54 per cent to $609 million.

Our gearing of 33 per cent at the end of 31 March this year compares with 37 per cent at 31 March 1998, and is close to the lower end of our long term target range of 30 to 40 per cent. This gives us flexibility to invest in new projects which add shareholder value.

At last year’s Annual General Meeting I said that we believed the outlook for Orica would be subdued due to pressure on prices, and volumes and strong competition. What we have experienced are plastics and chemicals prices reaching record lows around the world as a result of the current cyclical downturn. Our customers in the mining sector are suffering and this, in turn, has put pressure on our margins. The fertilizer industry has also been affected with the price of urea at a historic low.

We know there will be a chemicals upturn …. but in the meantime what are we doing about the current situation?

Firstly, following our emergence as an independent Australian company we developed a new free standing strategy to take Orica forward. This strategy involves a major reshaping of our businesses to be competitive internationally.

In pursuing this new strategy we have – even in the few months since our 1998 Annual General Meeting - witnessed some significant events.

We sold our Surfactants business to Huntsman for a profit of $35 million after tax as part of our ongoing program of rationalising non-core assets.

We launched a takeover bid just prior to the Annual General Meeting to acquire the outstanding shares of our partly owned subsidiary, Incitec Ltd. Our final and unconditional offer which was recommended by the independent directors of Incitec was overbid by Futuris, and Orica’s shareholding increased only marginally from 73 to 76 per cent. As before we will continue to work with the team at Incitec to deliver benefits for all shareholders.

And this month, we reached agreement with Kemcor (the Exxon/Mobil joint venture) to merge our respective polyethylene, polypropylene and synthetic rubber businesses which are based at Botany, New South Wales, and Altona, Victoria.

We continue to make progress in implementing our strategy which the Board believes will deliver increased shareholder value, and provide us with a robust and competitive group of chemically-based businesses.

Secondly, through a rigorous approach to cost reduction and efficiency improvement we are continuing our commitment to improve our competitiveness. Our managing director Philip Weickhardt will talk about this shortly. Orica is going through a period of considerable change - not only in business shape, but also in our internal organisation and in the way we operate in a more competitive world.

In this challenging environment the Board decided that our staff compensation and incentive policies needed review - and a new remuneration policy was agreed to by shareholders at the December Annual General Meeting.

Through our new compensation and incentive share option and share acquisition plans I believe Orica has come up with something that is leading edge in Australia. The changes have been welcomed by many shareholders and the Australian Shareholders Association has described our new plans as best practice.

Our thinking behind the plans is simple. First, our compensation should be sufficiently competitive to attract, motivate and retain high performance employees. Secondly, long term incentive schemes should be based on challenging performance hurdles to encourage and reward outstanding performance. The hurdles we have now set will require Orica shares to outperform the majority of the top 100 companies in Australia. These plans, together with our policy for senior executives to own and hold a significant number of Orica shares, will better align management interests with those of shareholders.

As you can see, our drive to lift company performance is, and will be ongoing. At the same time we remain uncompromising in our commitment to safety, quality, providing outstanding customer satisfaction, and developing leadership and teamwork in our people.

Now to the outlook for the remainder of 1999.

There is considerable uncertainty about the world economy. The outlook in some but not all the company’s markets continues to be highly competitive, with pressure on prices and volumes expected to continue due to reduced demand and significant global overcapacity. We will continue our drive to improve costs and efficiencies to offset the reduced profits from the pricing pressure we are under. The company remains focused on improving the profitability and competitiveness of its core business platforms, and the growth opportunities we have in place will more than offset the profits from the businesses we have sold.

I would now like to hand over to Philip Weickhardt who will talk about our business initiatives and Orica’s performance over the past six months.

Thank you.