Orica’s profit shrinks on back of “challenging external conditions”

Orica, the world’s largest explosives maker, has reported a net profit after tax of $211M on a continuing operations basis for the six month period ended 31 March 2015, which is 3% lower than the prior corresponding period in the face of challenging external conditions.

Image credit: Orica webpage
Image credit: Orica webpage

The company said that Earnings Before Interest and Tax (EBIT) of $330M (down 9%) was impacted by lower net pricing across products and a shift in the regional mix across the portfolio, as well as reduced demand for ground support products.

“Market conditions are unquestionably difficult but Orica is continuing to take action to mitigate the impact of market headwinds to build a foundation for earnings resilience through the cycle. This is an ongoing priority,” said interim CEO Alberto Calderon.

“While the mining price boom has ended, Orica’s operations are more closely correlated to production volumes, which have remained steady. The diversity of Orica’s portfolio and customer offer continues to underpin performance by providing broad exposure across commodities, customers and geographies.”

The volatile market conditions saw Orica revise its sales guidance and hint at potential output cuts if demand continued to decline.

The company said that global explosives volumes are expected to be around 3.75 million tonnes – down from previous projections of somewhere between 3.8 million and 4 million tonnes – with explosives volumes lower in Australia and higher in the Americas.

Mr Calderon said Australian explosives volumes fell by 5% in the first half as a result of customer site closures and mine planning changes in Eastern Australia and customer cost focus at iron ore sites in the Pilbara.

He said the company achieved higher volumes in Latin America (up 9%) and growth in advanced blasting products and services revenue (up 17%) from projects in Brazil and Peru.

According to him, operations in Europe, Middle East and Africa delivered slightly higher earnings (up 2%)  compared to the prior corresponding period as a result of higher revenue generated by advanced blasting products and services, although explosives volumes were flat year on year and ground support volumes were lower.

Mr Calderon said the company-wide transformation program continued to progress strongly, with projects being rolled out across all areas, including supply, manufacturing, technology and customer facing functions.

“The initial financial returns from Orica’s transformation program are also now evident on the bottom line, with $79M of benefits achieved in the first half, offset by one-off costs of $64M. The full year contribution from the transformation process is expected to be in line with initial forecasts of $140M – $170M before implementation costs of $100M – $120M,” Mr Calderon said.

“We are focusing on unlocking further upside beyond 2015. Maintaining our focus on delivering the benefits of transformation to the bottom line is an important priority, as well as finding new opportunities for improvement.”

In the half year period, the company completed the supply contract renegotiations with 60% of its strategic supplier base and achieved optimisation of its manufacturing footprint and reduction of approximately 550 operational support roles.

The Orica Board has declared an interim dividend of 40 cents per share.

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