Orica eyes chemicals unit spin-off

Orica chief executive Ian Smith confirms company will likely exit its $1.2bn-a-year industrial chemicals business.

Orica chief executive Ian Smith has flagged more job cuts at the explosives maker, where he has brought in management consultants to perform cost reviews and confirmed the company will probably exit its $1.2 billion-a-year industrial chemicals business through a spin-off or sale.

Yesterday, the Melbourne company had its biggest one-day slump in 10 months after it missed first-half earnings expectations and downgraded full-year earnings guidance because of depressed coal prices and production that resulted in a 2 per cent drop in explosives demand.

The guidance downgrade said Orica expected to meet or exceed its 2013 full-year profit of $592.5 million, down from previous guidance that profit would rise.

Speaking after the earnings release, Mr Smith warned that if coal prices continued to fall, more production would be cut and Orica might report a drop in full-year earnings.

“The second half is contingent on the volumes we get out of coal,” Mr Smith told The Australian.

“If coal prices were to come off in the second half we expect that would impact the volumes of coal.”

Thermal coal prices have slumped about 12 per cent in the past six months and coking coal is down about 20 per cent, both because of global oversupply in the wake of boomtime expansions.

The lower explosives volumes led to an 8 per cent fall in first-half profit to $242.1m, despite a 1 per cent gain in revenue to $3.36bn.

But Orica boosted net operating cashflows by 11 per cent to $313m, illustrating some success in its recent focus on boosting margins, reducing capital spending and value-added explosives services. Price and volume pressure was likely to continue into the second half, Orica said.

The subdued result sent Orica shares down 85c, or 3.9 per cent, to a six-month low of $21.90 yesterday in their biggest one-day fall since July last year.

Mr Smith revealed that Orica had cut 1000 jobs in the past year and that there were more cuts to come.

On top of a review of its chemicals business, the explosives company has brought in consultants AT Kearney and McKinsey & Co to conduct cost and productivity reviews.

In February, Orica said all ­options were on the table in the chemicals review, from exiting the business to increasing investment.

“The most likely outcome will be a separation of chemicals from the rest of the business,” Mr Smith said yesterday, adding that the review could be finished before full-year results were out in November.

“What form that (exit) will take, either a demerger or whatever it is, is still to be determined.”

AT Kearney has been brought in to find ways to cut Orica’s procurement costs, while McKinsey has been charged with finding ways to improve the structure of the business.

An exit from countries where the company does not have a big presence and has high overheads is looming as one of the likely outcomes. Mr Smith said he was expecting the reviews to yield significant savings.