While outgoing Orica (ORI) chairman Peter Duncan told shareholders at his last annual meeting yesterday of his "disappointment" over the group’s first fall in underlying profit in 12 years in 2012-13, he and CEO Ian Smith also told the meeting that the company is looking to correct that via a review of its non-mining chemical businesses – a move that includes quitting them.
The euphemism of a "review" of the business, is really a nice way of saying selling them, or even closing them down.
Given the way quite a few companies are "exiting" parts of their businesses exposed to the dollar (think cars) and weak domestic demand, you’d have to say a sale or worse is very much on the cards.
If that happens it will be a signal event in the history of the company.
At the same time both men were hesitant to forecast anything in the way of an earnings target for 2013-14. All shareholders got was the usual stuff about cautious optimism for the year.
Orica posted a net profit before materially significant items of $601.6 million in the 12 months to September 2013, down 7.5% on the $650.2 million recorded in the previous corresponding period.
But it was hardly the end of the world given the problems in the coal mining, parts of the iron ore, gold and base metal mining industries as companies of all sizes chopped costs and forced suppliers, like Orica, to share the pain.
Mr Duncan told the AGM the poor result was largely affected by $29 million in restructuring costs as a result of integrating its Minova ground support into the mining services business.
"While the outlook is more optimistic, I won’t sidestep the reality that this business has so far failed to live up to expectations," Mr Duncan said.
Orica’s non-mining chemicals business – which slid saw an 8% fall in earnings in 2012-13 as a result of manufacturing pressures in Australia (and it must be said, pollution and poor controls in Sydney and Newcastle) was now undergoing a strategic review, he said.
However Mr Duncan said manufacturing performance was improving in "all areas".
ORI 1Y – Orica looking to downsize and exit some chemicals
And Mr Smith said after the meeting that Orica had commissioned external appraisal of its non-mining chemicals business in 2013. Orica was "now using that information to assess how it sits within the company, whether we pursue a different direction with chemicals, or whether we actually change the proportion of capital going towards chemicals…all of those things are on the table," he was quoted as saying.
The non-mining chemicals business supplies the food, cosmetics and automotive sectors, among others. It makes plastic pool pump containers, plastic to go around cables that are being laid for the national broadband network, and supplies chemicals such as sulphuric acid to big industrial plants around Australia. It also imports and wholesales chemicals.
Mr Smith said the business generates annual earnings of around $100 million.
"The core of chemicals at the moment is under some pressure because of what’s happening with heavy industry in Australia," Mr Smith said.
Of course the big question for Orica and companies like it with trade exposed businesses is whether the 15% fall in the value of the dollar in the past 9 months will be sufficient help to keep them competitive.
A bigger problem for Orica is the sluggish state of the coal industry here and in countries such as Indonesia. Orica, and other companies have spent a lot of money building explosives and especially ammonium nitrate plants manufacturing operations to feed much higher levels of demand from the coal sector in particular (and also gold and base metals mining).
Orica shares edged up 17 cents to close at $23.45 in the weaker overall market. Investors liked the news of the review.
