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Orica delivers sound 2017 financial result in difficult conditions
06 Nov 2017
Melbourne: Orica (ASX: ORI) today announced a sound full year result, with statutory net profit after tax (NPAT) of $386 million, 13 per cent higher than 20161. Earnings before interest and tax (EBIT) of $635 million was in line with the prior corresponding period (pcp).
Orica CEO Alberto Calderon said: “Throughout the year we continued to face substantial headwinds, including contractual increases in raw material costs, foreign exchange impacts and price resets as long dated customer contracts were renewed at current market prices. Despite these challenges, our continued focus on core disciplines and a program of business improvement initiatives enabled us to deliver a sound result. In fact, this is the first year since 2012 that Orica has delivered a steady EBIT result against the prior year.”
Safety is the most critical priority for Orica. Two accidents in the year tragically led to the deaths of two employees – one at a customer site in Peru and another at an Orica manufacturing facility in Sweden. The management and oversight of all major hazards has been reviewed and updated across every Orica site. Orica’s leadership team will continue to prioritise safety always.
Key features of the 2017 Result include:
- Total ammonium nitrate (AN) volumes of 3.65 million tonnes, up 3 per cent on the pcp
- EBIT before individually material items of $635 million, down 1 per cent on the pcp
- NPAT before individually material items of $386 million, down 1 per cent on the pcp2
- Statutory NPAT of $386 million, up 13 per cent on the pcp
- Business improvement initiatives delivered net benefits of $127 million
- Capital expenditure of $306 million, up 16 per cent on the pcp, but well within our previously stated annual range of $300 million to $320 million
- Net operating and investing cash flows of $215 million (pcp $633 million)
- Net debt of $1.4 billion and gearing at 33 per cent (pcp 36 per cent)
- Final ordinary dividend of 28 cents per share (55 per cent payout ratio), unfranked, and representing a full year payout ratio of 50 per cent and a total dividend for the financial year of 51.5 cents per share, an increase of 4 per cent on the pcp.
“While the mining sector has begun to recover and mine plans are beginning to normalise, the 2017 year continued to be challenging, with substantial headwinds across every region. In this environment, increasing our AN volumes and delivering significant net benefits from our business improvement initiatives, has been a very good result,” Mr Calderon said.
Business improvement initiatives
Business improvement initiatives offset the known headwinds experienced during the year, including increases in raw material costs that cannot be recovered from existing contracts (in particular, gas and ammonia), as well as the impact of low pricing across explosives and cyanide products, and the impact of the Australian dollar exchange rate rising against most major currencies.
The program in generating these initiatives has involved more than four thousand Orica people across the whole business, with varied and wide-reaching initiatives designed to improve the way Orica operates.
“The business improvement program is focused on embedding new ways of working that make Orica a better business by buying better, producing more efficiently, and bringing more value to our customers. This is starting to deliver material results, with initiatives across every part of Orica that generate revenue, reduce costs, and make us a more effective and efficient organisation,” Mr Calderon said.
Volume and EBIT performance across the four regions was mixed, although total AN and emulsion volumes increased in every region except North America.
In Australia Pacific and Indonesia, Orica’s largest region, total AN and emulsion volumes were up 10 per cent against the pcp, driven by increased demand across both Australia and Indonesia, with strong demand from Australian coal and iron ore miners off the back of stronger prices for those commodities. Sales of initiating systems also increased in line with AN demand, while cyanide volumes were ahead of the pcp. Improved sales volumes and business improvement initiatives drove a 9 per cent increase in EBIT on the pcp.
Across North America, overall explosives volumes were 4 per cent lower than the pcp, driven mainly by a US joint venture partner sourcing bulk AN directly from the manufacturer. However, we had increased volumes in Canada and Mexico as a result of new contract wins and higher output at customer sites, as well as increased volumes into the US quarrying and construction sector. EBIT declined 5 per cent, led by the unfavourable impact of foreign exchange from a weaker US dollar, and an extended maintenance shutdown of our Carseland manufacturing facility.
Overall explosives volumes across Latin America were up 4 per cent against the pcp, while cyanide volumes were 13 per cent higher than the pcp. The experience across the various countries in the region was varied, with Colombia volumes up as a result of the expansion of customer operations, while volumes in Peru decreased as a result of contract losses in 2016. While overall volumes increased across Latin America over the period, EBIT fell by 11 per cent as a result of higher sourcing costs associated with replacement product and price resets on contract renewals.
Across Europe, Africa and Asia, explosives volumes increased 3 per cent against the pcp, aided by the recovery in regional European markets and from growth in customers’ operations, particularly in CIS, Norway and Estonia. Volumes in Africa benefited from strong demand in Southern Africa. Reduced activity in South East Asian tunnelling markets and a slowdown in customer mining activity in the Philippines negatively affected volumes. Cyanide volumes in the region fell as a result of a lost contract in Africa. Lower plant utilisation and higher product sourcing costs following a fatal explosion at Gyttorp in Sweden, together with weaker cyanide volume and margin, lower activity in niche tunnelling markets and divestments in 2016 have adversely impacted EBIT, which decreased 13 per cent against the pcp. Higher overall volumes across the region and business improvement initiatives partially mitigated the decline.
Minova’s turnaround continues, albeit at a slower pace than initially expected. Volumes and EBIT both increased substantially versus the pcp, with steel products volumes up 17 per cent, resins and powders 12 per cent higher, and EBIT improved across every region. A strong pipeline of opportunities exists as Minova continues to expand into complementary markets and segments.
Capital expenditure of $306 million was well within the previously stated annual range of $300 million to $320 million. This included scheduled maintenance shut downs and turnarounds at Kooragang Island, Carseland and Yarwun Cyanide manufacturing facilities.
Capital expenditure on the Burrup plant was $28 million, with the final investment made in September 2017. Mechanical commissioning of the plant has been completed with the plant meeting all environmental requirements at nameplate capacity and design efficiency. All the necessary Commonwealth approvals to commence production have now been received, with final State government approval expected in the first half of FY18. Operational plans remain unchanged, with a focus on campaign production in line with market demand. The Burrup plant is a 30 year asset, strategically located in the Pilbara region in Western Australia, a market with a strong growth profile.
Orica’s dividend policy of a payout range of 40 per cent to 70 per cent enables flexibility and ensures that shareholder returns reflect the Company’s position and market conditions.
The Board has declared an unfranked final ordinary dividend of 28 cents per share. The dividend represents a payout ratio of 55 per cent and brings the full year payout ratio to 50 per cent. The dividend is payable to shareholders on 8 December 2017 and shareholders registered as at the close of business on 15 November 2017 will be eligible for the final dividend. It is anticipated that dividends in the near future will be franked at a rate of no more than 35 per cent.
“In 2017 the mining sector began to recover from the severe downturn that began in 2015. We expect this recovery and the normalisation of long term mining plans that it implies to continue in 2018. However, there will be a lag before this makes a material difference to the services sector,” Mr Calderon said.
There will be a continued focus on business improvement initiatives that improve profitability and shareholder value.
Key assumptions for FY18 are:
- Global AN product volumes in the range of 3.65 million tonnes ± 5%.
- FY17 headwinds to extend into FY18:
- ~$50 - $55 million impact from contract rollovers and FY17 price resets flow on; and
- ~$10 million flow on impact from FY17 increased input costs from previously negotiated contracts.
- Increased investment in operating expenditure in Technology R&D and IT of ~$40 million.
- FY17 business improvement initiative benefits and expected FY18 new business improvement initiatives to offset above headwinds and support increased investment for the future.
- Capital expenditure will be at the upper end of stated range of ~$300 - $320 million.
- Increased depreciation and amortisation post Burrup commissioning.
- Effective tax rate (excluding individually material items) to be marginally higher than FY17.
- Following completion of the Burrup plant, interest will no longer be capitalised, resulting in an increased interest expense.
1 FY2016 Results included Australian Taxation Office Part IVA dispute settlement of $41 million, $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 There were no individually material items in FY2017.
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