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Management disciplines deliver solid 2016 Orica full year result
04 Nov 2016
Melbourne: Orica (ASX: ORI) today announced statutory net profit after tax (NPAT) of $343 million for the year ended 30 September 2016 (prior corresponding period: a loss of $1,267 million), after individually material items of $46 million1 (net). Before one off items, NPAT2 for the period was $389 million, 7% lower than the pcp. The 2016 financial year continued to be affected by significant market volatility. Against this backdrop, Orica delivered earnings before interest and tax of $642 million, a 6% decline on the pcp.
Safety is Orica’s priority, always, but tragically 2016 was marred by two fatalities in an explosion at our packaged explosives manufacturing plant in Antofagasta, Chile, on 10 September. A thorough investigation into the accident was instigated, and the Executive Committee has launched a Group-wide program focusing on ensuring common safety standards, with consistent application for major hazards. This will be a key priority for FY17 and beyond.
Other key components of the 2016 financial result include:
- Total ammonium nitrate (AN) product volumes of 3.54 million tonnes (pcp: 3.76 mt)
- Underlying EBITDA3 of $908 million (pcp: $978 million)
- Business improvements delivered incremental net benefits of $76 million
- Capital Expenditure of $263 million (significantly below the forecast provided at the 2016 interim results of approximately $320 million)
- Gearing of 36% (pcp: 40%), reflecting the significant reduction in net debt to $1,549 million (pcp: $2,026 million)
- Net operating and investing cash flows up 80% at $633 million, underpinned by our new disciplined capital management approach, continued management of working capital and the generation of operating cash
- Final ordinary dividend of 29 cents per share (55% payout ratio), franked at 8 cents per share, and representing a full year payout ratio of 48% and a final combined dividend for the financial year of 49.5 cents per share.
Orica CEO Alberto Calderon said: “The 2016 fiscal year continued to be affected by challenging and volatile market conditions. By continuing to actively manage all the elements of our business that are within our control, we were able to significantly offset market impacts to deliver a strong result.
“Margin management has been a core focus across every region and business, and our ability to maintain or increase margins across every region and business in the second half, in very challenged markets, is encouraging. Importantly, business improvement initiatives delivered net benefits across every region, as we continued to deliver supply chain efficiencies and labour and operational productivity improvements.
"Our focus on business improvement initiatives is now embedded in our business and will be simply a new way of working across every part of Orica. In FY17 we will continue to focus on: reducing external spend, including manufacturing input costs and corporate overheads; maximising supply chain efficiencies, such as cost controls, operational consistency, and inventory management; embedding working capital disciplines, including standardising payment terms and better management of receivables; and operational optimisation, which includes improving utilisation rates and labour productivity. Through this expansive program, we expect to continue to deliver market off-sets throughout the next year and beyond,” he said.
A decline in EBIT across Australia Pacific & Indonesia (API) region, North America and Latin America was due to a decrease in volumes off the back of lower demand, with weather impacts also affecting North America and Latin America volumes.
Europe, Africa and Asia volumes were in line with the pcp, with EBIT up 4% against the same period. Increased demand from Africa, the CIS and Turkey offset weaker markets elsewhere.
Margins were maintained or improved in every region in the second half of the year, as well as in Minova.
The Minova turnaround is progressing well and despite a challenging market environment the business was EBIT positive at year end.
Business improvement initiatives
The Company’s continued focus on optimising its operations and embedding efficiencies across the organisation delivered net benefits of $76 million, partly offsetting market impacts and significantly outperforming the forecast of $50 million to $60 million provided in the pcp.
Key initiatives have included:
- Further rationalisation and optimisation of AN and initiating systems network
- Improvement in plant productivity
- Procurement savings
- Further, sustainable reduction in headcount
- A substantial improvement in trade working capital ($304 million, 40% lower than pcp), as a result of a reduction in receivables, a reduction in inventory held, offset by lower levels of outstanding creditors.
The program of work will continue throughout FY17, with further benefits expected.
With the introduction of a new capital and investment framework, the Company now has greater discipline in capital decisions. As a result of the new disciplines, capital expenditure was reduced by more than 40% to $263 million, and return on net assets (RONA) increased to 14%, from 12.4%. All capital expenditure relating to safety, environment or regulatory requirements was approved during the period.
“Our new approach to capital discipline ensures any capital expenditure relating to safety, environment or regulatory requirements is prioritised always, while other capital expenditure is ranked and prioritised to ensure a strong balance sheet and investment grade credit rating are maintained, while also delivering sustainable shareholder value and returns,” Mr Calderon said.
At the 2016 half year results in May, Orica announced that the Board had introduced a payout ratio dividend policy with a range of 40% to 70%, to enable greater flexibility and ensure that shareholder returns reflect the Company’s position and market conditions throughout the cycle.
The Board has declared a final ordinary dividend of 29 cents per share (55% payout ratio), franked at 8 cents per share, and representing a full year payout ratio of 48%. This represents a final combined dividend for the financial year of 49.5 cents per share. The dividend record date is 11 November 2016 and is payable to shareholders on 9 December 2016.
Burrup Technical Ammonium Nitrate (TAN) Plant
A strategic decision was taken in 2012 to enter a joint venture with Yara (operator) for the Burrup TAN plant (Orica has a 45% economic interest with marketing rights).
Commissioning issues relating to the plant are currently being addressed by the operator, and Orica is currently evaluating all options for the plant for the delivery of economic returns. Commissioning plans, focusing on a ramp up in production, will be in line with market demand.
The Burrup TAN plant is a 30 year plus asset situated in the Pilbara region in Western Australia, a market that is expected to grow over the next five years.
While there has been some external optimism on market conditions, we remain conservative and will continue to focus on business improvement initiatives that improve profitability and shareholder value. Key assumptions for FY17 are:
- Global AN product volumes in the range of 3.5 million tonnes, +/- 5%.
- Cyanide volumes expected to be in line with FY16.
- Minova focused on improving performance under the new structure, and expected to remain cashflow positive.
- Headwinds of approximately $60 million expected from price resets; $50 million to $70 million from previously negotiated material input contracts; and increased depreciation and amortisation post Burrup commissioning. These headwinds are to be offset by FY16 business improvement initiative benefits and expected FY17 new business improvement initiatives.
- Continued focus on capital discipline will see FY17 capital expenditure in the range of $300 million to $320 million (including scheduled maintenance at Kooragang Island and Carseland and remaining Burrup spend).
- Effective tax rate (excluding individually material items) to be marginally higher than FY16, and interest expense will also rise following completion of the Burrup project.
1 $41 million expense for settlement of Australian tax action (announced at half year results in May 2016), $16 million benefit from the sale of Thai Nitrates Company, and a $21 million expense in relation to the Chile plant explosion in September 2016.
2 From continuing operations
3 EBIT from continuing operations before individually material items plus Depreciation and Amortisation expense from continuing operations
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