News & Media
Lower first half in line with guidance; strong demand underpins outlook for improved second half
07 May 2018
Melbourne: Orica (ASX: ORI) today announced a first half statutory net loss after tax of $229 million. Excluding individually significant items, net profit after tax for the first half was $124 million, down 37 per cent on the prior corresponding period (pcp). As previously advised on 1 March 2018, earnings were impacted by operational issues, with earnings before interest and tax (EBIT) of $252 million for the half, down 20 per cent on the pcp.
Orica CEO, Alberto Calderon, said, “The trend of underlying growth in demand continued during the half, with solid growth particularly evident in Australia and Indonesia. The stabilisation in prices seen in the second half of last year has also continued. Nevertheless, we are disappointed that the underlying financial performance in the first half was impacted by operational issues and we are working hard to increase manufacturing reliability, operational discipline and excellence. We are on track to deliver full year sales volumes at the upper end of guidance, and improved operational performance across all regions will support a stronger performance in the second half of the financial year”.
Key features of the HY18 result include:
- Improved volumes and firmer pricing drove a four per cent increase in sales revenue
- EBIT decline of 20 per cent to $252 million includes the impact of operational issues previously advised
- Individually significant items of $353 million
- Business improvement initiatives delivered net benefits of $35 million
- Integration of GroundProbe is well advanced
- Interim ordinary dividend of 20 cents per share, unfranked, represents payout ratio of 61 per cent.
Continued growth in demand and more stable pricing drove revenue growth of four per cent, with particularly strong demand in Australia and Indonesia. EBIT declined 20 per cent to $252 million, which included the impact of unplanned maintenance, continued challenges in the cyanide market and ongoing underperformance of the Minova business. We have made changes to our manufacturing team and while improvement in reliability will be gradual, we expect better performance in the next half and beyond. We have also appointed new management in the Minova business and the improved trading performance achieved in March is expected to continue.
In Australia Pacific and Asia, Orica’s largest region, volumes and revenues increased by ten and eight per cent respectively. EBIT declined by three per cent largely due to unplanned maintenance at Yarwun and Kooragang Island, and operational issues at the Burrup Technical Ammonium Nitrate Plant which resulted in additional sourcing and freight costs to ensure customer supply requirements were met. Our joint venture operating partner, Yara, is progressing repairs at the Burrup plant.
Volumes in North America were down three per cent but revenues increased by four per cent due to higher margin sales following the change in joint venture partner sourcing arrangements which came into effect in January 2017. Volumes were also impacted by extreme weather in the southern region. EBIT declined by ten per cent due to the anticipated impact of increased third party AN sourcing costs, effective from January 2017.
Volumes and sales revenue in Latin America were steady, but EBIT declined 36 per cent. This was due to continued pressure in an oversupplied market and inflationary impacts on overhead costs. The profit from an asset sale in the pcp further contributed to the decline. While the region remains challenging in the short term, we believe the medium to long term fundamentals are strong.
Volumes in Europe, Middle East and Africa (EMEA) remained in line with the pcp (up one per cent) while sales revenue declined three per cent. EBIT for the region declined 56 per cent, largely due to one-off costs associated with restructuring, operational issues at Gyttorp following the explosion last year, and increased write-offs of bad debts. These one-off costs will not be repeated in the second half and EBIT is expected to return to levels similar to that of the second half of 2017, supported by strong volume growth from recent new contract wins and further manufacturing and operational initiatives.
Sales revenue in Minova increased 13 per cent as progress was made in penetrating new market sectors in EMEA. Despite this, EBIT declined by $13 million, partly due to profit on the sale of a business asset of $8 million in the pcp. As a result of the slower than expected pace of recovery, a non-cash impairment of $204 million was made, including the write-down of all of the goodwill in Minova. A new management team commenced during the half and initiatives to improve margins, production efficiency and reduce overhead costs resulted in a positive trading result in March.
A new reporting segment, Auxiliaries, has been created for Nitro Consult and GroundProbe. GroundProbe was acquired in January 2018 and is a global market leader in the provision of critical monitoring and measurement technologies for the mining sector. EBIT for this segment was a loss of $1 million, which includes acquisition costs. The business is expected to deliver a positive contribution to the full year result.
Individually significant items
Individually significant items of $353 million post-tax included the following:
- A $204 million pre-tax impairment charge write-off to Minova goodwill
- A pre-tax increase of $115 million for the environmental provision for remediation at the Botany site. Detailed disclosure of remediation requirements for Botany has been made in Orica’s half year financial report. The increase to the provision reflects a change in management’s best estimate of the required duration of the Groundwater Treatment Plant
- $55 million adjustment to the value of US deferred tax assets resulting from a change in the US federal corporate tax rate
- Pre-tax impairments of $21 million to IT and other assets.
Capital expenditure of $128 million included investment in the new SAP system and the global Mobile Manufacturing Unit fleet, alongside maintenance shutdowns at the Kooragang Island and Yarwun plants in Australia. Capital expenditure for the full year is expected to be toward the top end of the range of $300 million to $320 million.
Orica’s policy is to target a total annual dividend payout in the range of 40 per cent to 70 per cent of underlying earnings before individually significant items. It is expected that the total dividend paid each year will be weighted towards the final dividend.
The Board has declared an interim ordinary dividend of 20 cents per share, unfranked. This represents a payout ratio of 61 per cent. The dividend is payable to shareholders on 2 July 2018 and shareholders registered as at the close of business on 1 June 2018 will be eligible for the interim dividend.
The outlook for the second half of FY18 remains unchanged from the update released on 1 March 2018.
Mr Calderon said, “The increase in run-rate required to achieve the second half uplift in performance has already begun. The second quarter results indicate we are on track to deliver a substantial uplift in the third and final quarters of the year, and we expect this momentum to continue into the next financial year. We remain positive that the majority of headwinds are behind us and we can capitalise on the improved outlook for volume demand and firmer pricing”.
Second half global AN volumes are expected to increase by around 10 per cent from the first half, and full year global AN volumes are expected to be at the upper end of the previously stated range of 3.65mt +/- 5 per cent. Significantly stronger EBIT is expected in the second half from:
- Continued volume growth, particularly in Australia
- Improved performance across all regions/businesses
- Positive contribution from the recently acquired GroundProbe business
- Improving manufacturing reliability.
The second half result will benefit from deferred contract renegotiations offset by lower forecast business initiatives.
We expect the stronger run-rate from the second half of the 2018 financial year to continue into the 2019 financial year, with:
- AN volume growth supported by positive commodity growth and mine plan outlook
- Firmer AN pricing
- Improved manufacturing reliability at Orica plants, however Burrup performance remains uncertain until a permanent fix is completed
- Full year contribution from GroundProbe.
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