Old Republic International
Annual Report 2017

Plain-text annual report

AnnuAl RepoRt 2017 o R I C A A n n u A l R e p o R t 2 0 1 7 A B N 2 4 0 0 4 1 4 5 8 6 8 ouR GlobAl pResenCe Major Manufacturing Sites Ammonium Nitrate Sodium Cyanide Ammonium Nitrate Emulsion Minova Packaged Explosives Initiating Systems Orica Global Presence Major Offices Technical Centres no.1 GLOBAL SUPPLIER OF COMMERCIAL EXPLOSIVES oVeR 11,500 EMPLOYEES SERVING CUSTOMERS ACROSS MORE THAN 100 COUNTRIES Orica Annual Report 2017 | 01 contents 02 04 About Us Chairman’s Message 05 Managing Director’s Message 06 25 26 27 28 31 54 55 56 57 58 59 60 Review of Operations Sustainability Board Members Executive Committee Directors’ Report Directors’ Report – Remuneration Report 2017 (Audited) Auditor’s Independence Declaration Income Statement Statement of Comprehensive Income Balance Sheet Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements 102 Directors’ Declaration 103 Independent Auditor’s Report 108 Five Year Financial Statistics 110 Shareholder Information IBC Corporate Directory 02 | Orica Annual Report 2017 ABoUt Us As the world’s largest provider of commercial explosives and innovative blasting systems, we provide expert services to the mining, quarrying, construction, and oil and gas markets. From commercial explosives and blasting systems, supply of sodium cyanide for gold extraction and expert ground support services, we have more than 11,500 people ready to support our customers across the globe. The way we do business is as important to us as the results we generate. We seek to build relationships built on honesty, collaboration and shared end goals. We’re guided by the values of our Charter to earn the trust of our stakeholders. In our business, delivery is everything. We’ve developed a flexible global supply chain of manufacturing plants, joint ventures and supply alliances. We operate in every major mining market, supporting customers across around 400 sites in more than 100 countries around the world. We’re known for our unmatched technology and expertise. We’ve built our reputation by taking the time to understand what drives our customers so we can create change that’s important to them. We do this with knowledge, expertise and technology that we believe is second to none. oUR cHARteR Our purpose Our purpose is to make our customers successful, every day, all around the world. We take pride in operating safely, responsibly and sustainably. Together, these enable us to grow and create enduring value for our shareholders. Our strategy We aim to be the trusted partner of choice for our customers, by creating, developing and delivering mining and civil blasting and ground control solutions that help them be more productive and manage their critical risks. We do this by bringing together: ƒ the best people; ƒ high quality products and services; ƒ safe, secure and reliable supply; and ƒ unmatched technology that creates value for our customers, today and tomorrow. “ We’re here to help our customers find success. It’s our expertise, scale and commitment to sustainable and safe solutions that ignites opportunities and creates enduring value.” Orica Annual Report 2017 | 03 We are committed to exCellenCe We take accountability for our business and for delivering outstanding results. ƒ We bring our best effort every day and trust our colleagues to do the same. ƒ We understand our tasks and how we contribute to Orica’s overall success. ƒ We look for ways to deliver higher performance and adapt swiftly to changing needs. Our values Safety is our priority. always tOgether we succeed The most important thing is that we all return home, safely, every day. Collaboration makes us better, individually and collectively. ƒ We care and take accountability for everyone’s safety and wellbeing, including our own. ƒ We recognise the risks we face in our work and follow all safety controls. ƒ We freely share information and ideas with our colleagues. ƒ We are a team. We take accountability and responsibility for our team’s performance. ƒ We speak up when we see hazards or causes of potential harm. ƒ We partner with our customers for a better understanding and result. We reSpeCt and value all We act with IntegrIty Our care for each other, our customers, communities and the environment builds trusted relationships. We are open and honest, and we do what is right. ƒ We are transparent in all our ƒ We treat everyone fairly, with dignity communications. and we value diversity. ƒ We work with our local communities to contribute positively. ƒ We find ways to minimise our impact on the environment in all our actions. ƒ We always demonstrate ethical conduct and sustainable practices. ƒ We are trusted because we do what we say we will. ORC0015 AR17_PFO.indd 3 14/11/2017 10:20 AM 04 | Orica Annual Report 2017 cHAiRmAn’s messAge Net Profit After tAx $386m “Change was a constant theme for Orica throughout 2017. Against an external backdrop of widespread economic and geopolitical uncertainty, declining prices and significant commercial headwinds, we have stabilised the business and delivered a sound result.” performance Statutory net profit after tax was $386 million, 13% higher than 2016 and earnings before interest and tax was $635 million, broadly in line with the prior year. Within the organisation, change has been the enabler that has helped deliver a steady result. Considerable financial benefits continue to flow from the business improvement program that is being embedded as a new way of working across the business. The new, disciplined approach to capital management adopted last year has resulted in a significant reduction in capital expenditure, and decisive action has been taken to strengthen our balance sheet. Last year we introduced a revised dividend policy that provides greater flexibility to ensure shareholder returns reflect the company’s position and market conditions. The Board has declared a final dividend of 28 cents per ordinary share, bringing the total dividend for the year to 51.5 cents per share. This equates to a 50% of underlying earnings and is an increase of 4% on the prior year. Safety was by far the most disappointing aspect of the company’s performance, with the fatality of an employee at a customer site in Peru and an accident at our Gyttorp manufacturing site in Sweden that resulted in the death of another employee. Safety is the Board’s paramount concern. Oversight of the management team’s overall approach to safety has been, and will continue to be, a pressing issue. The management team has made strong progress on identifying major hazards across every site, and in verifying key controls, and Board monitoring of this program will always be a priority. The Board closely reviews progress against the implementation of all elements of the company’s strategy. During the year, the Board visited operations in the Philippines and North America to get a first-hand view of our assets and people. The Board’s Safety, Health, Environment and Community Committee also visited Poland. While it is clear that management is delivering on its commitment to drive cultural change, operational discipline and improved performance, we know there is more work to do and more potential yet to be realised. During the year the Board also reviewed and revised each of the company’s governance policies. These policies not only form an important element of the control framework through which shareholders’ interests are served, they also set the foundation for our culture. For both Board and Management teams, the way we do business is as important as the results we generate. Strategy and Outlook Positioning our business to withstand continued external change and restore performance to the levels our stakeholders demand remains a central focus for the Board. While we are alive to the risks of the external environment, we also see opportunity. Our customers are increasingly focused on productivity. Rapid advancement in data analytics, automation and other new technologies are creating enormous potential for improvement in our customers’ value chain, including drill and blast. We have built our reputation by delivering value to customers through our leading technologies and expertise. In this environment of rapid change and progress, the opportunities for us have perhaps never been greater. While the cultural change and business improvement programs that are making a difference to our performance today remain a principal focus, our continued investment in our people and technology will consolidate our industry leading position and drive future value for our customers and all of our stakeholders well into the future. On behalf of the Board, I thank our shareholders for your continued support, and our Management team and employees for their contribution. Malcolm Broomhead Chairman mAnAging DiRectoR’s messAge Orica Annual Report 2017 | 05 “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.” BUSiNeSS iMProVeMeNt Net BeNefitS $127m Despite facing substantial headwinds during the year, we delivered a stable full year result with earnings before interest and tax of $635 million. This marks the first time since 2012 that our EBIT has been steady against the prior year and is a result of the steps we have taken to build Orica’s resilience. Explosives volumes for the year of 3.65 million tonnes were 3% higher than the prior year, in line with the recovering mining sector. Business improvement initiatives A focused and disciplined approach to managing the elements within our control delivered $127 million in business improvement benefits. These initiatives are not simply cost reduction programs; they are fundamentally changing the way we work at Orica, and will be sustained well into the future. It is about becoming a more efficient, more effective company through every part of the organisation. We have involved more than four thousand Orica people across the globe to consider all factors that create value, including initiatives that generate revenue, reduce costs, deliver improved trade working capital, and capital expenditure. The program has so far generated more than one thousand ideas and initiatives, with individual initiative benefits ranging from thousands of dollars to multi-millions, including beyond the 2017 fiscal year. We are embedding this in the organisation to go beyond a program to being a normal part of the way we do business. Safety and environment people and Culture In contrast, our safety performance was unacceptable. Two fatalities, one on a customer site in Peru and the other at our Manufacturing facility in Gyttorp, Sweden, were devastating and reinforce the importance of ensuring that safety is our priority. Following a comprehensive investigation, we ensured all lessons were captured and shared with the teams on the ground. Our major hazards initiative, focussed on identifying major hazards and verifying all key controls at every site, continues to make good progress, and visible safety leadership is being demonstrated by all levels of management. We recently launched our climate change policy, outlining the actions we are taking to reduce emissions at our major production facilities and plan for a low carbon future. We see this as our responsibility, as a global leader. The work we started in 2015 to build an enduring positive culture continues. We know that organisations with engaged, supported and performance-focused people are stronger companies, and the management team has made the internal health of Orica a key priority. We focused on building a more engaged workforce, and embedding Our Charter values. We sought the views of all our people to understand our progress and will use the feedback to continue to build effective interventions. Fostering a culture of respect and performance is key to Orica becoming a world class company. We strengthened our management team, bringing in new Executive talent from world-class organisations, ensuring we have the right leaders in place to deliver against our refined strategy. Our strategy capitalises on our great strength – innovation – a key competitive advantage and differentiator for Orica. This was demonstrated by the successful launch of our wireless blasting product, a world-first and unique offering in the industry globally. Our differentiated strategy, the reach and breadth of our business, the quality of our products and services, and the expertise of our people, give us every confidence in our ability to restore and sustain Orica’s performance. Outlook Looking ahead, while markets continue to stabilise and improve, we expect the headwinds we encountered in 2017 to extend into the 2018 financial year, as the last of our long term contracts are renewed at market price. While we remain conservative in our outlook, we will continue to focus on embedding business initiatives that make Orica a more efficient and effective business, and delivering enhanced shareholder value. We remain firmly committed on our journey to make Orica a world-class organisation in all respects. alberto Calderon Managing Director and CEO 06 | Orica Annual Report 2017 Review of opeRAtions Orica delivers sound 2017 financial result in difficult conditions. Statutory net profit after tax (NPAT) attributable to the shareholders of Orica for the year ended 30 September 2017 was $386 million. Summary group results ƒ Tragically, Orica had two fatalities during the year in Peru and Sweden ƒ EBIT before individually material items(1) of $635 million, down 1% on the prior corresponding period (pcp) ƒ NPAT before individually material items(2) of $386 million, down 1% on the pcp ƒ Ammonium nitrate volumes up 3% on the pcp at 3.65 million tonnes ƒ Net operating and investing cash flows(3) of $215 million, led by increased investment in plant turnarounds ƒ Capital expenditure of $306 million(4), up 16% on the pcp ƒ Net debt(5) of $1.4 billion and gearing(6) at 33% ƒ Final dividend of 28 cents per share, bringing the full year dividend to 51.5 cents per share Year ended 30 September Continuing Operations Sales revenue EBITDA (7) eBIt(1) 2017 A$m 2016 A$m Change % 5,039.2 5,091.9 896.3 908.1 635.1 642.2 (1%) (1%) (1%) Net interest expense (71.7) (84.3) (15%) Tax expense (164.0) (156.7) Non-controlling interests (13.2) (12.1) 5% 9% npat before individually material items(2) 386.2 389.1 (1%) Individually material items after tax – (46.3) (100%) npat after individually material items (statutory) 386.2 342.8 13% Note: numbers in this report are subject to rounding and stated in Australian dollars unless otherwise noted Orica Annual Report 2017 | 07 fy17 reVeNUe (A$) $5,039m fy17 NPAt (A$) $386m fy17 diVideNd 51.5c fy17 eBit (A$) $635m 08 | Orica Annual Report 2017 reView of oPerAtioNS coNtiNUed Business Summary revenue by Commodity 2017 A summary of the performance of the segments for the 2017 and 2016 financial years is presented below: 17% Year ended 30 September 2017 A$m Australia, Pacific and Indonesia North America Latin America Europe, Africa and Asia Minova Global Support Eliminations Orica group Year ended 30 September 2016 A$m Australia, Pacific and Indonesia North America Latin America Europe, Africa and Asia Minova Global Support Eliminations Orica group AN Tonnes(i) (‘000) Sales Revenue(ii) 1,322 1,565.2 EBITDA 461.1 1,121 1,362.8 223.8 17% 637 570 – – – 915.9 1,026.3 455.6 990.6 (1,277.2) 86.7 132.9 22.2 (30.4) 22% – EBIT 343.5 187.5 61.3 101.7 13.1 (72.0) – 3,650 5,039.2 896.3 635.1 Capital Expenditure 143.6 48.0 26% 20.7 30.1 9.0 54.6 4% – 6% 306.0 22% 16% Thermal Coal Coking Coal Iron Ore Q&C AN Tonnes(i) (‘000) Sales Revenue(ii) 1,204 1,544.7 1,166 1,360.0 920.0 1,141.3 406.5 882.0 615 556 – – – EBITDA 440.5 237.9 94.3 14% 151.7 15.2 9% (31.5) (1,162.6) – 9% 16% eBIt by region 2017 EBIT 315.1 196.5 2% 69.2 116.5 0.1 (55.2) – Capital Expenditure 2% 14% 113.0 44.4 20.2 36.5 5.6 43.2 49% – 9% 26% 26% 4% 6% 9% Copper Gold Other 49% Thermal Coal Coking Coal Iron Ore Q&C Copper Gold Other Australia Pacific and Indonesia North America Latin America Europe, Africa and Asia Minova 3,541 5,091.9 908.1 642.2 262.9 (i) Includes AN (ammonium nitrate) prill and solution as well as emulsion products including bulk emulsion and packaged emulsion 26% (ii) Includes external and inter-segment sales review of Operations Safety is the most critical priority for Orica. Tragically, there were two fatalities during the year. In February, an accident on a customer mine site in Peru resulted in the death of an employee. In May, another fatal accident occurred at the Gyttorp production facility in Sweden, resulting in the death of an employee. Full investigations were undertaken and a major hazards initiative program has been implemented focusing on identifying the few major hazards that could lead to serious harm. Our policies, standards and procedures define actions to achieve this aspiration by: always being mindful of risk; ensuring our people are capable and empowered; and focusing on always improving. Orica’s leadership team will continue to prioritise safety always. Ammonium nitrate (AN) volumes for 2017 were 3.65 million tonnes, up 3% on the pcp. Sales into coal markets across Australia and North America improved due to normalisation of mining practices and market growth. Demand from the gold sector remained stable and in line with commodity pricing. Activity in the Quarry and Construction (Q&C) market, particularly in North America, was up due to increased activity on infrastructure projects. Despite the higher AN sales volumes, sales revenue at $5 billion was down 1% on the pcp. This was due to a combination of lower input commodity indices impacting rise and fall arrangements, customer price negotiations and the appreciation of the Australian Dollar (AUD) against most major currencies. EBIT was $635 million, down 1% on the pcp. Australia Pacific and Indonesia North America Latin America Europe, Africa and Asia Minova Note: The above charts exclude Global Support and Eliminations Known headwinds as a result of contractual increases in raw material costs, in particular gas and ammonia, as well as the impact of pricing across explosives and cyanide products, have been offset by business improvement initiatives. Whilst foreign exchange has had an adverse impact on the translation of foreign denominated earnings into AUD the benefit of increased volumes from the Australia Pacific & Indonesia segment has contributed to EBIT. Orica Annual Report 2017 | 09 Explosives – volume/mix/margin Volume, mix and margin drove $19 million of incremental EBIT, largely from higher sales volume, in Australia Pacific & Indonesia. Continued diversification and market placement of premium products across all regions, including bulk emulsion and Electronic Blasting Systems (EBS), ensured a favourable product mix shift during the year. Margin was unfavourably impacted by the extended turnarounds at the Kooragang Island ammonia and Carseland AN plants which drove unfavourable sourcing costs of replacement product, as well as the incident at Gyttorp. Cyanide – volume/mix/margin Cost increases in key manufacturing inputs, particularly gas, have decreased cyanide margins. In addition, a planned turnaround of the Yarwun plant in March resulted in lower production volumes. Minova EBIT Minova achieved improved earnings, largely due to a profit from the divestment of a business in China, improved market conditions, particularly in Australia Pacific and US coal and construction markets and procurement savings from supply chain initiatives. Other Other includes the non-repeat of one off costs in 2016. Net business improvement The business improvement program is focused on embedding new ways of working that fundamentally make Orica a better business by buying better, producing more efficiently, and selling more effectively. This is starting to deliver real and material results, with initiatives across every part of Orica that generate revenue, reduce costs, and make us a more effective and efficient organisation. The net EBIT contribution from business initiatives in 2017 was $127 million, with sustainable benefits from: • Supply Chain, including third party product cost savings, network optimisation, transport & shipping efficiency • Product differentiation & service offering, including placement of advanced explosive and detonator products • Manufacturing plant optimisation • Overhead cost base efficiency Contract pricing The negative contract pricing impact of $54 million was slightly below expectations and aligned with current market conditions. Oversupply in domestic and global ammonium nitrate and cyanide markets has kept prices subdued compared to historical levels, however prices have stabilised over the past six months. The key contributor of pricing impacts during the year was the continued renewal and alignment of existing contracts to current market prices. Orica remains focused on maintaining a balanced outlook between retaining market share and securing plant loading. Material input costs Contracted increases in gas and ammonia prices reduced margins by $59 million from the pcp. FX & inflation on overheads Inflation on fixed cost overheads had an adverse effect of $29 million. The AUD exchange rate appreciated against most major currencies, adversely impacting earnings by $15 million in 2017. 642 (15) (29) (44) 19 127 (18) 13 9 635 (59) (54) EBIT 2016 FX & inflation on overheads Material input costs Contract pricing Net business improvement Explosives – volume/ mix/ margin Cyanide – volume/ mix/ margin Minova EBIT Other EBIT 2017 10 | Orica Annual Report 2017 reView of oPerAtioNS coNtiNUed AUstRAliA pAcific AnD inDonesiA Year ended 30 September 2017 2016 Change % Total AN & Emulsion Volumes Emulsion as a % of total volumes 1,322 59% 1,204 58% 10% 1pt 1% 5% 9% 1,565.2 1,544.7 461.1 343.5 440.5 315.1 9% revenue by Commodity 2017 42% Thermal Coal Coking Coal Iron Ore Q&C Copper Gold Other 11% 10% Total sales revenue EBITDA EBIT 16% 8% 4% Contribution from cyanide was unfavourable versus the pcp, primarily due to pricing pressure from increased competition, higher domestic gas prices impacting manufacturing costs and lower plant utilisation as a result of the scheduled plant turnaround. Price resets and contract renewals had a negative impact, however this was in line with expectations. The oversupply in domestic and global ammonium nitrate and cyanide markets continues to place pressure on pricing. Commodity exposure Thermal and coking coal represents the largest commodity exposure at 52%, reflecting Orica’s extensive customer footprint and positioning across Eastern Australia and Indonesia. Sales into this segment were up, as production has increased on the back of increasing demand and industry sentiment. Sales into gold markets remained steady as average gold prices have been relatively stable on the pcp. Demand from iron ore customers in the Pilbara has grown as production has increased on the back of stronger Chinese steel demand and production. Volumes Explosives volumes were up 10% (118kt), underpinned by stronger demand in both Australia and Indonesia. Australia benefited from strong demand from coal and iron ore miners, while Indonesian sales volumes increased across a range of commodities. Indonesia has benefited from contract wins since the second half of 2016, albeit at lower margins. Coal customers increased production in line with their existing capacity as metallurgical coal prices rose on the back of Chinese supply side reforms and environmental policies. Pilbara iron ore volumes were up as favourable demand and pricing movements led to increased activity and mining at higher strip ratios. Sales of initiating systems, both EBS and conventional detonators, increased broadly in line with AN demand improvement across the region. Cyanide volumes were slightly ahead of the pcp. eBIt performance drivers Whilst the Australia Pacific & Indonesia business has been impacted by known headwinds including increased raw material costs and further price resets and contract renewals in 2017, these have been more than offset by improved volumes from mine plan normalisation, and business improvement initiatives resulting in a 9% increase in EBIT on the pcp. Volume, mix and margin was overall favourable, driven largely by an increase in volumes and contract wins, business improvement initiatives reducing manufacturing and supply chain costs, and optimisation across the operational and support workforce. Contribution from explosives products was up, driven by higher AN sales volumes across key markets. Manufacturing costs at Kooragang Island were unfavourable versus the pcp due to higher gas costs and lower plant utilisation. Utilisation was down due to an extended plant turnaround, following unforeseen asbestos removal. This was partly offset by lower third-party ammonia input costs at Bontang and Yarwun. Orica Annual Report 2017 | 11 2016 Change % 1,166 39% (4%) 6pts 0% (6%) (5%) 1,362.8 1,360.0 223.8 187.5 237.9 196.5 revenue by Commodity 2017 Thermal Coal Coking Coal Iron Ore Q&C Copper Gold Other Price resets and contract renewals had the expected negative impact during the year, from both contract renegotiations finalised in the 2016 financial year with gold and copper customers in Canada, and new contract negotiations in 2017. noRtH AmeRicA Year ended 30 September Total AN & Emulsion Volumes Emulsion as a % of total volumes 2017 1,121 45% Total sales revenue EBITDA EBIT 21% 11% 28% 11% 4% 7% 18% Commodity exposure eBIt performance drivers Sales to the largest markets, Gold and Q&C, remained strong due to firm gold prices and continued strong activity in infrastructure projects, particularly in the US. Sales into ‘Other’ markets were up on the pcp due to a new AN bulk contract supplied from Carseland. The decrease in thermal coal reflects changes in joint venture partner sourcing arrangements. Volumes Overall explosives volumes were down on the pcp, driven by a decline in the US, as a joint venture partner sourced bulk AN directly from the manufacturer. US volumes were further impacted by indirect channels as a result of a contract loss during the year, however ongoing infrastructure activity in the US drove higher volumes into the Q&C market. Volumes in both Canada and Mexico were up against the pcp, underpinned by key contract wins and higher output at customer operations. Product mix was favourable across the AN portfolio, given higher sales of premium emulsion products into Q&C and Canadian markets. The impact of contractual headwinds from increases in the cost base and price impact of contract renewals were largely offset by business improvement initiatives and enhanced placement of advanced products and services offerings. The 5% decline in EBIT from the pcp was led by the unfavourable impact of foreign exchange from the weaker USD, and the extended Carseland plant turnaround. Volume, mix and margin was impacted in the second half by the extended turnaround of the Carseland plant, which was prolonged by the delay in external supply of utility services. This delay was caused by the extended closure of the neighbouring third-party supplier’s plant. A supply shortage of non-electric detonators, resulting from lower component production in Latin America further impacted margin in the second half, driving higher product substitution costs. Furthermore, committed contractual increases in third party AN product costs in the US also adversely impacted the cost base. This was partly mitigated by business improvement initiatives across procurement activities, efficiencies in logistics and a shift into more advanced products and services. 12 | Orica Annual Report 2017 reView of oPerAtioNS coNtiNUed lAtin AmeRicA Year ended 30 September Total AN & Emulsion Volumes Emulsion as a % of total volumes 2017 637 68% Total sales revenue EBITDA EBIT 915.9 920.0 86.7 61.3 94.3 69.2 2016 Change % 615 64% 4% 4pts 0% (8%) (11%) 7% 14% revenue by Commodity 2017 24% 7% 5% 43% Thermal Coal Iron Ore Q&C Copper Gold Other Price resets and contract renewals had a significant negative impact, despite a high contract retention rate, due to continued pricing pressure across the region given the oversupply of AN. Going forward, pricing is expected to remain challenging as supply in the region outweighs demand. Commodity exposure Copper and gold remain the key commodities for the region with stable copper and gold prices supporting activity in these markets. Sales to the thermal coal market were also up with the expansion of customer operations in Colombia, however this was offset by lower activity in the Q&C sector given market contraction across the region, particularly in Brazil. The economic and political instability across parts of the rest of the region led to lower GDP growth in those areas. Volumes Overall, explosives volumes were higher than the pcp, with varying results across the region. Operations in Colombia were up on the pcp, benefiting from the expansion of thermal coal customer operations following new capital investment. Volumes in Peru were down despite increased demand from existing customers, as a result of contract losses in 2016. Restricted activity in Venezuela stemming from recent economic challenges also negatively impacted volumes. Across the AN product portfolio there was a positive shift into emulsion products, boosted by successful value led customer propositions, specifically in Chile and Peru. Cyanide volumes were ahead of the pcp with higher operational demand in Peru from existing customers, as well as market share gains from new contracts. eBIt performance drivers Whilst volumes increased on the pcp, the impact of unfavourable product sourcing and plant costs, and pricing pressure on explosives contracts resulted in a decline in EBIT. Volume, mix and margin was favourable to the pcp as a result of increased product volumes and a technology-led upsell strategy of products and services. Business improvement initiatives across procurement activities and logistics also contributed to a favourable outcome. This benefit was offset by unfavourable product sourcing and plant costs following the closure of the Antofagasta packaged explosives plant in Chile in September 2016. As a result of the explosion at this plant, a full review of safety was performed at all plants in the region, leading to a decision to temporarily reduce the output from other plants to further improve safety standards. This has placed increased pressure on sourcing costs across North and Latin America as the region temporarily sourced alternative products. Orica Annual Report 2017 | 13 2016 Change % 556 88% 3% 2pts (10%) (12%) (13%) eURope, AfRicA AnD AsiA (eAA) Year ended 30 September Total AN & Emulsion Volumes Emulsion as a % of total volumes 2017 570 90% Total sales revenue EBITDA EBIT 1,026.3 1,141.3 132.9 101.7 151.7 116.5 19% 19% revenue by Commodity 2017 2% 13% Thermal Coal Iron Ore Q&C Copper Gold Other 30% 17% Price resets and contract renewals had a negative impact, largely in Africa as competitors sought to maintain and improve plant utilisation through lower pricing. Despite this, prices were maintained or improved across Europe and Asia. Pressure on cyanide pricing as a result of global oversupply has seen realised prices decreasing, thereby impacting cyanide margins. Commodity exposure eBIt performance drivers Sales into gold markets across Europe and Africa were ahead of the pcp, buoyed by stable gold prices. Sales into the Q&C markets were down due to lower demand from central Europe, the Middle East and Asia, impacted by divestment activities in 2016 as well as project delays and lower tunnelling activity respectively. Sales into coal markets increased due to a ramp up in production in Mozambique, and growth in Kazakhstan. Volumes Explosives volumes were up by 3% despite the divestment of central European businesses in September 2016. Europe’s operations benefited from the continued recovery in regional markets and from growth in existing customer operations, particularly in the Commonwealth of Independent States (CIS), Norway and Estonia. Despite the loss of a full service contract in the second half of 2016, robust demand in Southern Africa partially mitigated this impact. Following the completion of major projects in South East Asia, activity in tunnelling markets was lower this year, while a slow-down in customer mining activity impacted volumes in the Philippines. The lower tunnelling activity also impacted on EBS sales with volumes down on the pcp. Cyanide volumes were down on the pcp primarily driven by the loss of a 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 tunnelling markets and divestments in 2016 have adversely impacted EBIT. This has been partially recovered through higher volumes than the pcp and business improvement initiatives. Overall EBIT is down 13% versus the pcp. Volume, mix and margin was positively impacted by growth in AN and emulsion volumes in Southern Africa and Europe as a result of strengthening demand and increased market share respectively. Additionally, business improvement initiatives, including product rationalisation and supplier renegotiations have helped reduce the operational cost base. This was, however offset by the unplanned outage in Gyttorp following the tragic plant explosion in May 2017. As a result of this explosion a full review of safety was performed which resulted in lower plant utilisation and temporary higher alternate product sourcing costs. Additionally, the divestment of central European and Thai businesses in late 2016, lower cyanide volumes and margins, and the loss of a full service contract in Africa in 2016 had a negative impact against the pcp. 14 | Orica Annual Report 2017 reView of oPerAtioNS coNtiNUed minovA Year ended 30 September Steel products (‘000 tonnes) Resins & Powders (‘000 tonnes) Total sales revenue EBITDA EBIT 2017 129 127 2016 Change % 111 113 17% 12% 455.6 406.5 22.2 13.1 15.2 0.1 12% 46% >100% Diversification into non-coal markets and improving margins is critical to Minova’s long-term success and will remain key priorities going forward. The business has increased its cost base particularly to enhance commercial and technical capability, to underpin targeted market growth and the re-establishment of wider market presence. The business turnaround continues to progress, but at a slower pace than expected. Sector & Industry exposure Volumes Minova is a provider of chemical and mechanical earth control products, adhesives and ground support solutions for the underground mining, construction, tunnelling and civil engineering industries. Sales into the Australian coal market have strengthened over the pcp, on the back of regained market share. Conditions in the North American and European coal markets have remained difficult. This has been partially offset by diversification into non-mining markets and expansion into offshore markets, particularly India, aided by growth in the civil market. Overall revenue has grown over 12% compared to the pcp, as Minova wins new contracts and continues to rebuild the brand equity and customer confidence. Sales volumes were up over the pcp due to increased market share in the hard rock and coal businesses in Australia and in the construction and coal businesses in the Americas. Demand in Europe is lower as a result of rationalisation of the coal industry in Poland, the UK and Germany. performance summary EBIT performance has improved from the pcp, benefiting from the divestment of a business in China in the first half of 2017 of $8 million and lower depreciation expense. Australia operations continued to benefit from higher demand and recovery of market share for stabilisation and ventilation services with coal customers. Non-coal markets in Canada and Latin America have grown, while challenging conditions persist in the core US coal market which are constraining margins. Improving pricing and reducing input price exposure are key focus areas of this business segment. The European coal market has also negatively impacted results, despite stabilising results in non-mining markets across the region. Orica Annual Report 2017 | 15 2017 (72.0) 7.5 – (79.5) 2016 Change % (55.2) 30% 12.9 (15.0) (53.1) (42%) (100%) 50% global support Year ended 30 September EBIT Adjusted for: Net gain on asset sales Environmental provision adjusted eBIt eBIt After adjusting for asset sales and environmental provisions, Global Support EBIT was unfavourable to the pcp largely due to costs associated with business improvement initiatives that are being implemented globally throughout Orica. Asset sales in the year included the divestment of land at Bacong (Philippines). net interest expense Adjusted net interest expense of $102 million was lower than the pcp, aided by lower average net debt levels. Year ended 30 September Statutory net interest expense Adjusted for: Capitalised interest Unwinding of discount on provisions adjusted net interest expense tax expense 2017 71.7 30.8 (1.0) 101.5 2016 84.3 Change % (15%) 35.1 (3.3) 116.1 (12%) (70%) (13%) An effective tax rate of 29.1% (pcp: 28.1%) was higher due to an increase in taxable gains on the disposal of assets and an increase in non-creditable withholding taxes, particularly on foreign dividends. This was partially offset by Orica’s ability to utilise previously unbooked tax losses as well as lower derecognition of booked tax losses compared to the pcp. 16 | Orica Annual Report 2017 reView of oPerAtioNS coNtiNUed group Cash flow Year ended 30 September Net Operating cash flows Net Investing cash flows (excluding Chemicals sale) net Operating and Investing Cash flows(3) Dividends – Orica Limited Dividends – non-controlling interest shareholders adjusted net cash flows Cash flows from Chemicals sale Movement in borrowings and other net financing cash flows(8) net cash flows(9) performance highlights net Operating cash flows The Group delivered net operating and investing cash flows of $215 million. This reflects the continued focus on working capital and strict adherence to Orica’s Capital and Investment Management Framework. Group cash conversion at 66% has been impacted by higher sustaining capital spend as the result of scheduled plant turnarounds in Australia and Canada. Net cash generated from operating activities was underpinned by earnings across the year, offset by an investment in working capital. The operating cash flows in the pcp benefited from a significant reduction in working capital across the group. net Investing cash flows Net investing cash outflows comprised capital expenditure offset by cash inflows from divestments. These included the final proceeds from divestments undertaken in 2016 including land at Botany (NSW) and businesses in central Europe. Further cash inflows related to proceeds Debt Management and liquidity Interest bearing liabilities Less: Cash and cash equivalents Net Debt(5) Gearing %(6) Interest bearing liabilities of $1,958 million comprises $1,828 million of US Private Placements and $130 million of committed and other bank facilities. The average duration of drawn debt is 6.1 years (2016: 5.4 years). Undrawn committed bank facilities of $1,579 million, with total committed debt facilities of $3,530 million providing for a strong liquidity position. Gearing is at 32.7% and since September 2016, has reduced by 3.1 percentage points. 2017 466.4 (251.2) 215.2 (157.9) (7.1) 50.2 (3.6) 162.7 209.3 2016 Change % 777.9 (145.1) 632.8 (213.4) (12.3) 407.1 (30.8) (275.3) 101.0 (311.5) (106.1) (417.6) 55.5 5.2 (356.9) 27.2 438.0 108.3 from sales of a business in China, land at Bacong (Philippines) and Orica’s share in a business in the US. Capital expenditure on the Burrup plant was $28 million, with the final cash outflow in September 2017. Scheduled plant turnarounds were completed at Kooragang Island, Carseland and Yarwun Cyanide, with an aggregate capital expenditure of $59 million. Other key capital expenditure included works on the global Mobile Manufacturing Unit (MMU) fleet, spend on the new SAP system and the roll-out of the new Bulkmaster 7 model in Australia. 2017 1,957.8 516.9 1,440.9 32.7% 2016 1,877.4 328.0 1,549.4 35.8% Variance A$M 80.4 188.9 (108.5) (3.1pts) Orica Annual Report 2017 | 17 The chart below illustrates the movement in net debt for September 2017. Net Debt 30 September 2016 1,549 EBITDA (896) Trade & Non Trade Working Capital 85 Net Interest & Income tax paid 289 Proceeds from sales of PP&E (87) Non-cash items in EBITDA Foreign exchange 138 Sub-total 1,031 (52) 18 38 Capital Expenditure 306 Dividends Sub-total 1,502 Non-cash movement on Net Debt(i) Net Debt 30 September 2017 1,441 165 (61) (i) Non-cash movements on Net Debt comprise foreign exchange translation group Balance Sheet Net assets 30 September 2016 2,783 Trade working capital 46 Non-trade working capital 101 Fixed & Intangible assets Other net assets Net debt 35 (109) 108 Net assets 30 September 2017 2,964 18 | Orica Annual Report 2017 reView of oPerAtioNS coNtiNUed performance highlights Trade working capital(10) has increased by $46 million from September 2016, with debtors driving most of the increase. The Group remains focused on delivering sustainable improvement in working capital management initiatives. Non-trade working capital(11) increased by $101 million, driven by the non-cash actuarial gain of $33 million on the Group’s defined benefit pension plans, together with a $19 million reduction in environmental and decommissioning provisions. FY17 non-current assets include a receivable of $38 million for prepayments to the Australian Tax Office. The increase in fixed & intangible assets of $35 million was largely due to net additions of $317 million outweighing the depreciation and amortisation expense of $261 million and a foreign exchange translation of $21 million. Other net assets decreased by $109 million, largely from the impact of taxation and derivative financial instruments. Dividend The Board has declared an unfranked final ordinary dividend of 28 cents per share. The dividend represents a payout ratio(12) of 55% and brings the full year payout ratio to 50%. 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%. Burrup 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. risk Management Orica’s risk management framework is consistent with AS/NZS ISO31000:2009 Risk Management – Principles and Guidelines, and facilitates the ongoing assessment, monitoring and reporting of risks, which otherwise could impede progress in delivering our strategic priorities. Our risk management framework supports us in achieving risk management integrated it into our operations and culture so that we continue on our path to sustainable change. Understanding and managing our risks is everyone’s responsibility. Group Risk is responsible for designing the risk management framework, supporting its implementation in the business, and coordinating and aligning risk management activities across the Group. The effectiveness of Orica’s risk management framework is self-assessed and evaluated externally by independent parties, and is overseen by the Board Audit and Risk Committee. During FY17 we continued to review and improve the design and implementation of our risk management framework. Key achievements include: implementation of the Risk Management Standard to provide a common risk management process and language across the Orica Group, further embedment of risk management in strategy and 5-year business planning activities, and integration of risk management into strategic growth projects and Group-wide transformational programs. We updated our assessment and reporting of material risks, resulting in material strategic risks being reported to the Board and material operational risks being reported to the Board Audit & Risk Committee. These risks are monitored for changes in their exposure and are reported during the course of the year, along with their controls and plans to manage them. A summary of material risks that can adversely impact the achievement of Orica’s future business performance is provided in the following pages. During FY17 an external review of our risk management framework was completed and the results reported to the Board Audit & Risk Committee. The results of that review, as well as a self-assessment of our risk management practices, have been utilised to identify and implement improvements to our framework. Priorities for 2018 include: continued refinement of strategic and operational risk assessment and reporting, ongoing delivery of communication and training programs to broaden and build risk management capability in the ‘front-line’ business, enhanced integration and coordination with health and safety risk management activities, and opportunity assessments in new markets. In respect of FY17, the Board Audit & Risk Committee has reviewed our risk management framework and satisfied itself that it continues to be sound. Continuous Improvement Commitment Process C o n ti n u o u s I m 5. Monitoring and Reporting 1. Establish the context p r o v e m e n t People & Culture 4. Control Assignment 2. Risk Identification 3. Risk Assessment Continuous Improvement Tools & Technology Orica Annual Report 2017 | 19 employees and third parties in the operation and safe-handling of inventory and materials, and on the importance of identifying and managing major hazards and key controls. In FY16 we launched the Major Hazard Initiative to increase awareness of major safety hazards and to verify controls are effective. This initiative will transition to a sustainable process in FY18 via our SHES Management System. (v) regulatory Compliance As a global company with diverse operations, it is essential that we understand and comply with our regulatory requirements so that we maintain our license to operate. Core to this is our ability to comply with regulatory requirements in the areas of occupational health and safety, product security, competition, anti-bribery, corruption, sanctions and taxation. As a ‘manufacturer of ‘dual use’ products such as explosives and initiating systems, Orica has specific and heightened responsibilities to ensure we partner with and sell to organisations that will use our products for their intended purpose and act in an ethical manner. We work closely with industry, regulators and security agencies to ensure these responsibilities are met, to participate in industry investigations and to safeguard our global licence to operate. We have a program designed to manage the risk of non-compliance with competition, anti-bribery and corruption requirements including: screening, monitoring and reporting of customers, business partners, suppliers, and countries against related obligations and sanctions; delivery of anti-corruption training, and processes to monitor and report requests for bribery or duress payments; and the requirement for legal review of agreements with competitors, suppliers and customers. Misalignment with tax regulators on the treatment of transactions can have a material financial impact. To manage this risk we proactively engage with taxation authorities and legal representatives in various jurisdictions to enhance our understanding of our obligations. We have a tax strategy, policy and requirements in place which guide and govern our compliance with our regulatory requirements. For additional detail on a safe workplace, product stewardship and security, license to operate, climate change, ethical business practices and human capability please refer to our sustainability report. Material Business risks that could adversely affect the achievement of future business performance Through our risk assessment process, we have identified the following material business risks that may affect the future financial performance of Orica. They are not listed in any order of significance. (i) Macro-economic Global economic growth outlook is uncertain and may result in lower demand for commodities and subsequent reduced sales volumes. Our key inputs, particularly gas, are also linked to international traded commodities and are subject to the movements of the market that have the potential to increase our cost of production. Over supply of ammonium nitrate through increased capacity may also create a supply/demand imbalance which will result in margin erosion, lost customers and downward price pressure. Adverse foreign exchange rates can impact the cost of inputs and products and impact sales denominated directly or indirectly in foreign currencies. To manage these risks, operationally we have put in place measures to curtail production and renegotiate supply contracts to provide certainty in pricing and volumes. (ii) Markets A number of external factors may impact and change the markets in which we operate or in which we are seeking growth opportunities. Changing customer and competitive behaviours which can result in margin pressures, loss in customers and downward price pressures however may also result in demand for new products and applications. We are also exposed to changes in regulation and policy which can negatively impact our license to operate, impose additional regulatory requirements and cause significant business interruption e.g. increased trade protection measures. National and global efforts to transition towards a low carbon future may increase operational and compliance costs in the short term but result in a more fundamental change in the energy mix and drive innovation and technology adoption. We monitor and analyse external factors including global growth and industrialisation, political changes and industry and technology trends to assist with the management of existing operations and pursuit of new opportunities. (iii) Manufacturing and Supply Having a supply chain which enables us to source and deliver quality products and services in a safe and timely manner is key to delivering on our customer promise. Material risks which are inherent in our supply chain include a supply chain interruption and the production of poor quality products. An interruption to our supply chain may be driven by external events such as adverse weather conditions or natural disasters, if our key suppliers are unavailable to supply for a sustained period (e.g. trade restrictions), or we experience a major disruption in a key manufacturing site (e.g., accident leading to immediate shutdown, industrial action). To manage this risk we select, assess and monitor suppliers and business partners who meet our standards and have business continuity plans in place should an interruption occur. To manage the risk of poor product quality, we conduct trials and testing of new products, processes and suppliers, define contractual quality requirements, monitor ongoing performance of our suppliers, conduct quality assurance audits, and have quality control procedures in place for raw materials and finished goods. We continue to focus on our customer feedback mechanism as a way of measuring product quality and are further developing and implementing key quality requirements and processes at our manufacturing sites to support continuous improvement. (iv) Safety, health, environment and Security Orica operates within hazardous environments, particularly in the areas of manufacturing, storage and transportation of raw materials, products and wastes. Material safety, health, environment and security (‘SHES’) risks include: an explosion during the storage and transportation of explosives, a fire or explosion at a manufacturing site or storage location, loss of containment of toxic materials, and risk of raw materials or finished goods being used for illegal purposes. These risks can cause personal injury and/or loss of life, damage to property and contamination of the environment. They may also result in the suspension of operations and the imposition of civil or criminal penalties, including fines, expenses for remediation and claims brought by governmental entities or third parties. Core to managing our material SHES risks is our SHES Management System which is underpinned by the Orica Charter and the SHE Policy. These are supported by the Group SHES Standards and Procedures which mandate the required controls, systems and processes that must be in place to prevent and mitigate these risks. These include plant and equipment design specifications, maintenance programs, operator procedures, requirements for the transportation and storage of explosives, physical controls to safeguard our sites, assets and infrastructure, and emergency response and crisis management plans. We also manage these risks through our focus on safety culture which is based on visible and engaged senior leadership and encouraging employees and contractors to speak up when they see risks and hazards. Safety culture and behaviours are re-enforced through training our 20 | Orica Annual Report 2017 reView of oPerAtioNS coNtiNUed tax transparency reporting Orica believes that enhanced tax transparency is a critical element of ethical business behaviour. tax policy – Orica’s approach to tax Orica’s tax policy and approach to tax is published on orica.com. Some important aspects of that policy are set out in this report. As an Australian mining services company with global operations, Orica generates a substantial amount and variety of taxes across its jurisdictions including income taxes, stamp duties, employment taxes and other taxes. Orica also collects and remits a number of taxes on trust including employment taxes and indirect taxes such as GST/VAT. The taxes Orica pays and collects form a significant part of the economic contribution to the countries of operation. tax strategy and governance Orica’s tax strategy is reviewed by the Board of Directors annually. The tax strategy is aligned with the overall corporate strategy and supplements the Risk Management Policy. The Chief Financial Officer has oversight responsibility over the tax risk management framework. Operational and governance responsibility for the execution of the Group’s tax strategy rests with the Vice President Taxation, supported by a team of tax professionals. External tax expertise is used where required. The Vice President Taxation reports on tax matters bi-annually to the Board Audit and Risk Committee. Orica’s approach to tax is applicable across the Orica Group and is reviewed and updated annually. Compliance tax contribution summary Orica is committed to complying with all relevant revenue laws in a responsible manner, with all taxes properly due, accounted for and paid. A tax standard and relevant procedures are in place to ensure tax compliance obligations are managed. There is an in house global tax team that manages Orica’s tax affairs which is supplemented with external compliance support where required. Structure Orica does not support the use of artificial structures that are established just to avoid paying tax and have no commercial purpose. Orica will not enter into any tax avoidance activities. relationships with tax authorities Orica aims for open, transparent and respectful relationships with the Australian Taxation Office and other tax authorities globally. Orica seeks advance rulings from taxation authorities on transactions where appropriate. 14 13 Use of tax havens 95 Tax havens are not used for tax planning purposes. Orica has operations in countries that are ‘low tax’ jurisdictions. There is genuine operational substance in these locations, or the entities are dormant. 67 Orica’s overseas companies are subject to Australia’s international tax rules (Controlled Foreign Corporation rules). transparency Orica supports the ongoing global development of improved tax transparency to increase understanding of tax systems and build public trust. 48 On 3 May 2016, the Treasurer of Australia released a Corporate Tax Transparency Code. The Code was developed by the Board of Taxation in Australia and Orica has signed the Corporate Tax Transparency Code Register and 189 is committed to applying the principles and the details of the Code. 120 In 2017, Orica paid $189 million (2016 $139 million) globally in corporate income taxes and $48 million (2016 $49 million) globally in payroll taxes. Orica collected and remitted $120 million (2016 $101 million) globally in GST / VAT. The charts show 2017 corporate income tax paid in each region (including withholding tax and trade taxes), and an analysis of total tax paid by type. global Corporate tax and Wht on Income by region fy17 – $189m 13 14 67 95 Australia Pacific and Indonesia Europe, Africa and Asia Latin America North America global tax paid by type fy17 – $357m Australia Pacific and Indonesia Europe, Africa and Asia Latin America North America 48 120 189 Corporate tax GST/VAT Employer payroll taxes Corporate tax GST/VAT Employer payroll taxes In Australia, Orica paid $91 million (2016 $51 million) in corporate income taxes, $17 million (2016 $17 million) in payroll tax and $2 million (2016 $3 million) in fringe benefits tax. Orica collected and remitted $48 million (2016 $45 million) in GST and $92 million (2016 $97 million) in ‘pay as you go’ withholding taxes. a reconciliation of accounting profit to income tax payable Before individually material items: Accounting profit/(loss) before tax Prima facie income tax expense/(benefit) calculated at 30% on accounting profit Material non-temporary differences variation in tax rates of foreign controlled entities tax under provided in prior years de-recognition of booked tax losses taxable/(non taxable) gains on disposal of assets other foreign deductions non creditable withholding taxes non allowable interest deductions tax on foreign currency translation reserve transferred to income statement non allowable/(non taxable) share based payments (utilisation of unbooked prior year tax losses)/current year tax losses not booked sundry items Orica Annual Report 2017 | 21 Consolidated 2017 a$m Consolidated 2016 A$m 563.4 169.0 (38.6) 8.0 4.0 12.3 (23.0) 13.8 14.9 – 3.0 (6.4) 7.0 557.9 167.4 (35.1) 4.1 21.2 (3.9) (24.8) 9.9 13.1 (7.0) (1.4) 8.0 5.2 Income tax expense/(benefit) before individually material items 164.0 156.7 Individually material items: Individually material items before tax Prima facie income tax expense/(benefit) calculated at 30% on individually material items Material non-temporary differences variation in tax rates of foreign controlled entities settlement of Australian tax action impact of Chile plant incident non taxable profit on sale of shareholding in Thai Nitrate Company Ltd Income tax expense/(benefit) on individually material items Income tax expense/(benefit) Material temporary differences Deferred tax Tax payments more/(less) than tax charges Tax payments on matters in dispute with tax authorities Income tax paid per the statement of cash flows effective tax rate for australian and global operations Before individually material items: Australia Global operations (including Australia) – – – – – – – (4.6) (1.4) (0.2) 41.0 6.4 (4.1) 41.7 164.0 198.4 (26.9) 14.2 37.8 189.1 (55.0) (4.9) – 138.5 Notes Consolidated 2017 Consolidated 2016 1 34.5% 29.1% 44.3% 28.1% 1. The tax rate is the percentage of income tax expense to accounting profit/loss before tax (before individually material items) adjusted to exclude exempt dividend income. 22 | Orica Annual Report 2017 reView of oPerAtioNS coNtiNUed International related party dealings Orica prices its international related party dealings to reflect the substance in its operations in accordance with the ‘arm’s length principle’ as defined in the Organisation for Economic Co-operation and Development (OECD) guidelines and in accordance with the laws in both Australia and the countries in which it operates. Orica has transfer pricing procedures which govern the pricing of all international related party dealings. These procedures require all international related party dealings to be priced in accordance with the arm’s length standard. Orica maintains contemporaneous records to support the pricing of its international related party dealings and benchmarks and documents the outcome of its material dealings on an annual basis. The material international related party dealings impacting Orica’s Australian taxable income may be summarised as follows: ƒ The purchase of raw materials and finished products from related parties in Singapore and Indonesia. The products purchased are ammonia, caustic soda, bulk explosives and initiating systems; ƒ The sale of raw materials and finished products to related parties in Peru, Singapore, Chile, Papua New Guinea and New Zealand. The products sold include bulk explosives, packaged explosives, and initiating systems; ƒ The provision and receipt of services from entities resident in Singapore, Chile, Germany, the Philippines, the United States and South Africa. The nature of the services include general management, information technology, sales and marketing and logistics; ƒ The use of intellectual property held by a related party in Singapore. The nature of the intellectual property includes technical know how related to the manufacture of Orica’s products and the Orica name and trademarks; and ƒ The provision of contract research and development activities for a related party in Singapore. Orica has a treasury function based in Melbourne which provides loans and accepts deposits from in excess of 40 group companies at market interest rates. The material transactions are with related parties in Germany, Indonesia, Russia and New Zealand. It also has a subsidiary in Singapore which acts as the Group’s captive insurer. Australian Tax Return Data for 2016 Notes total income Taxable income @ Tax Rate Tax liability Offset reductions Tax payable (1) (2) (3) (4) 2016 A$M 2,629 95 30% 29 (23) 6 2015 A$M 2,802 270 30% 81 (24) 57 1. Total Australian income (includes sales, dividends, interest income etc.) before all expenses (for example, Interest, employee costs, depreciation etc.). 2. Taxable income after allowing for all deductible expenses and tax exempt income. 3. Australian Statutory tax rate. 4. Offset reductions of $23 million (2015 $24 million) relating to franking credits, foreign income tax and research and development. 2018 Outlook There will be a continued focus on business improvement initiatives that improve profitability and shareholder value. Key assumptions for FY18 are: ƒ Global AN product volumes in the range of 3.65 million tonnes ± 5%. ƒ 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 ƒ Increased investment in Technology R&D and IT of ~$40 million ƒ FY17 business improvement initiative benefits and expected FY18 new business improvement initiatives to offset above headwinds and support increased investment for the future ƒ Capital expenditure will be at the upper end of stated range of ~$300–$320 million. ƒ Increased depreciation and amortisation post Burrup commissioning. ƒ Effective tax rate (excluding individually material items) to be marginally higher than FY17. ƒ Following completion of the Burrup plant, interest will no longer be capitalised, resulting in an increased interest expense. Orica Annual Report 2017 | 23 footnotes The following footnotes apply to this results announcement: (1) Equivalent to profit/(loss) before financing costs and income tax in Note 1(b) within Appendix 4E – Preliminary Final Report (2) Equivalent to profit after income tax expense before individually material items attributable to shareholders of Orica Limited disclosed in Note 1(b) within Appendix 4E – Preliminary Final Report (3) Equivalent to net cash flows from operating activities and net cash flows used in investing activities (as disclosed in the Statement of Cash Flows within Appendix 4E – Preliminary Final Report), excluding Chemicals sale (4) Comprises total payments for property, plant and equipment and intangibles as disclosed in the Statement of Cash Flows within Appendix 4E – Preliminary Final Report (5) Total interest-bearing liabilities less cash and cash equivalents as disclosed in note 3 within Appendix 4E – Preliminary Final Report (6) Net debt / (net debt + total equity) (7) EBIT before individually material items plus Depreciation and Amortisation expense (8) Equivalent to net cash used in financing activities (as disclosed in the Statement of Cash Flows within Appendix 4E – Preliminary Final Report) excluding Dividends paid to Orica ordinary shareholders and non-controlling interests (9) Equivalent to net increase in cash held disclosed in the Statement of Cash Flows within Appendix 4E – Preliminary Final Report (10) Comprises inventories, trade receivables and trade payables disclosed in the Balance Sheet within Appendix 4E – Preliminary Final Report (11) Comprises other receivables, other assets, other payables and provisions (12) Dividend amount / NPAT before individually material items forward-looking statements This announcement has been prepared by Orica Limited. The information contained is for informational purposes only. The information contained in this presentation is not investment or financial product advice and is not intended to be used as the basis for making an investment decision. This announcement has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. No representation or warranty, expressed or implied, is made as to the fairness, accuracy, completeness or correctness of the information, opinions and conclusions contained in this presentation. To the maximum extent permitted by law, none of Orica Limited, its directors, employees or agents, nor any other person accepts any liability, including, without limitation, any liability arising out of fault or negligence, for any loss arising from the use of the information contained in this presentation. In particular, no representation or warranty, express or implied, is given as to the accuracy, completeness or correctness, likelihood of achievement or reasonableness of any forecasts, prospects or returns contained in this announcement. Such forecasts, prospects or returns are by their nature subject to significant uncertainties and contingencies. Before making an investment decision, you should consider, with or without the assistance of a financial adviser, whether an investment is appropriate in light of your particular investment needs, objectives and financial circumstances. Past performance is no guarantee of future performance. non-International financial reporting Standards (non-IfrS) information This report makes reference to certain non-IFRS financial information. This information is used by management to measure the operating performance of the business and has been presented as this may be useful for investors. This information has not been reviewed by the Group’s auditor. The 2017 Half Year Results presentation includes non IFRS reconciliations. Forecast information has been estimated on the same measurement basis as actual results. 24 | Orica Annual Report 2017 In early 2017 the Orica Board undertook its annual strategic review of long term market developments and emerging risks and opportunities for the business. One conclusion of that review was that the world is facing levels of uncertainty and potential instability not seen for a number of decades. In this environment, it is important that Orica focuses on getting the basics right, positively influencing what is in our control and building business resilience in the face of ambiguity. sUstAinABility Orica Annual Report 2017 | 25 These are just some of the highlights of the work undertaken in FY17. Further details are provided in the Sustainability Report. We are very excited about our continuing sustainability journey which clearly demonstrates our Charter values in action. For the coming year, Orica’s priority actions include the ongoing implementation of the Major Hazards Initiative, the release of a whole company position on Product Security, further progress on how we engage the communities that support our production sites and the outcomes of operational trials on carbon emissions abatement. That is why our commitment to Sustainability is so important. It encourages a culture and approach based on anticipating change and creating long term value. It also highlights every day to our people and leaders that our licence to operate cannot be taken for granted and that our behaviours must evolve apace with rising community and market expectations. In FY17 we have further refined our thinking on the material sustainability issues faced by Orica. Following consultation with key stakeholders and the outcomes of an independent assessment, we believe our key challenges can be summarised as: ƒ Workplace Safety ƒ Product Stewardship and Security ƒ Licence to Operate ƒ Climate Change ƒ Ethical Business Practices and Good Governance ƒ Human Capability The 2017 Orica Sustainability Report, which will be released by mid-December, will outline our key challenges, planning, performance and targets for each of these material issues. Unfortunately our FY17 performance on our highest priority – maintaining a safe workplace for our people – has been unacceptable for a second year. Tragically, there were two fatalities during the year. In February, an accident on a customer site in Peru resulted in the death of an employee. In May, another fatal accident occurred at a production facility in Sweden, resulting in the death of an employee. The grief that these tragedies has caused for families, friends and co-workers has been deeply felt. Full investigations have been undertaken into both incidents and a program has been implemented to ensure everyone at Orica understands the major hazards in their work, that the right controls are in place and adhered to at all times, and that all levels of leadership across the organisation are actively involved in hazard identification and in verifying the appropriate controls. Orica’s leadership team will continue to prioritise safety, always, in everything we do. On a positive note, this year’s Orica Sustainability Report includes the release of Orica’s Climate Change policy following many months of analysis across the business. The policy commits the business to on-going abatement of carbon emissions at our major production sites and heightened disclosure on our climate related challenges and opportunities. It also sets out our advocacy position to policy makers for a managed transition towards a net zero carbon future, particularly in the energy sector. The Sustainability Report includes insights into our internal scenario analysis and strategic planning processes. This information will enable all our stakeholders to better judge our preparedness for the future. In FY17 we have also seen progress in other areas including: ƒ Continued performance in the top quartile for All Worker Recordable Case Rate ƒ Roll out of an enhanced Ethics and Compliance Standard for screening customers ƒ Maintenance of our track record since 2014 of no significant environmental incidents ƒ Successful shipment of Hexachlorobenzene waste from our Botany site for destruction ƒ An Update to the Orica Code of Business Conduct ƒ Launch of Orica’s Human Rights in the Workplace Policy 26 | Orica Annual Report 2017 BoARD memBeRs Malcolm Broomhead BE, MBA Non-Executive Director of Orica Limited since December 2015 and Chairman as of 1 January 2016. Chairman of the Nominations Committee. Director of BHP Ltd & Plc. Former Chairman of Asciano Limited. Director of the Walter & Eliza Hall Institute, Chairman of the Australia-China Belt and Road Initiative Advisory Board and Council Member of Opportunity International Australia. alberto Calderon PhD Econ, M Phil Econ, JD Law, BA Econ Non-Executive Director since August 2013. Appointed Managing Director and Chief Executive Officer on 19 May 2015. Former Group Executive and Chief Executive of BHP Aluminium, Nickel and Corporate Development. Former Chief Executive Officer of Cerrejón Coal Company and Colombian oil company, Ecopetrol. Member of Investment Advisory Committee for New York Mining Fund AR Capital GP II Ltd. Maxine Brenner BA LLB Non-Executive Director since April 2013. Chairman of the Human Resources and Compensation Committee and member of the Board Audit and Risk Committee and the Nominations Committee. Director of Origin Energy Limited, Qantas Airways Limited and Growthpoint Properties Australia Limited. Former director of companies including Neverfail Australia Ltd, Treasury Corporation of NSW and Federal Airports Corporation. Former Managing Director of Investment Banking at Investec Bank (Australia) Ltd. Former member of the Takeovers Panel. Ian Cockerill BSc (Hons) Geology, MSc (Mining), MDP, AMP Non-executive Director of Orica Limited since July 2010. Chairman of the Safety, Health, Environment & Community Committee and a member of the Human Resources & Compensation Committee and the Nominations Committee. Chairman of BlackRock World Mining Trust plc and a Director of Endeavour Mining Corporation and Ivanhoe Mines Limited. Former Chief Executive Officer of Anglo Coal and Gold Fields Limited, and a former executive with AngloGold Ashanti and Anglo American Group. Former Chairman of the Leadership for Conservation in Africa, a not-for-profit organisation, Chairman for Conservation 360, a Botwanan conservation NGO dealing with anti-poaching initiatives. Former Director of Business Leadership South Africa, the South African Business Trust and the World Gold Council. lim Chee Onn BSc (Hons), MPA, D.Eng (Honorary) Non-Executive Director since July 2010. Member of the Safety, Health, Environment & Community Committee, Human Resources and Compensation Committee and the Nominations Committee. Chairman of the Singapore-Suzhou Township Development Pte Ltd and Board Member of the Monetary Authority of Singapore. Pro-Chancellor Singapore Management University, Member of the Council of Presidential Advisers (Singapore), and Director of the International Institute for Strategic Studies (Asia) Ltd. Former Chairman of Keppel Corporation Limited and Singbridge International Singapore Pte Limited. Karen Moses BEc, DipEd, FAICD Non-Executive Director since July 2016. Member of the Board Audit and Risk Committee, Safety, Health, Environment & Community Committee, and the Nominations Committee. Director of Boral Limited, Charter Hall Group, Sydney Symphony Limited, SAS Trustee Corporation and Sydney Dance Company. Former director of companies including Australia Pacific LNG Pty Limited, Origin Energy Limited, Contact Energy Limited, Energia Andina S.A., Australian Energy Market Operator Ltd, VENCorp and Energy and Water Ombudsman (Victoria) Limited. gene tilbrook BSc, MBA, FAICD Non-Executive Director since August 2013. Chairman of the Board Audit and Risk Committee and member of the Safety, Health, Environment & Community Committee and the Nominations Committee. Non-Executive Director of GPT Group and Woodside Petroleum. Deputy Chairman of the Australian Institute of Company Directors, Director of the Bell Shakespeare Company and a councillor of Curtin University. Former director of Aurizon Holdings and Fletcher Building. Former Executive Director of Wesfarmers Limited. execUtive committee Orica Annual Report 2017 | 27 alberto Calderon PhD Econ, M Phil Econ, JD Law, BA Econ Managing Director and Chief executive Officer Alberto was appointed Chief Executive Officer in May 2015, having been a Non-Executive Director since August 2013. Alberto is a former Group Executive and Chief Executive of BHP Aluminium, Nickel and Corporate Development. He is also a former Chief Executive Officer of Cerrejón Coal Company and Colombian oil company, Ecopetrol. Alberto is a member of the Investment Advisory Committee for New York Mining Fund AR Capital GP II Ltd. James Bonnor B.Com, (Econ, Mark) group executive and president, north america James was appointed Group Executive and President, North America in October 2015. He has more than 20 years of commercial and operational experience with Orica, including most recently Zone Executive Head, Americas, Orica Mining Services. James has also held a range of general management, sales, marketing and customer relationship roles and worked with customers across a range of international market segments in Australia, New Zealand and Latin America. eileen Burnett-Kant MEng Manufacturing Sciences and Engineering, MBA group executive, human resources Eileen joined Orica in March 2013 and holds the position of Group Executive, Human Resources with group-wide responsibility for the human resources function. Prior to joining Orica Eileen held senior roles in human resources and communication with Jetstar Airways and Wesfarmers. Eileen also gained experience in strategic consulting with McKinsey & Company and has deep experience in operational HR management and transformation. Darryl Cuzzubbo BEng (1st class Hons) Mechanical Engineering, Masters (Hons) Total Quality Management, MBA. group executive and president, australia pacific and asia Darryl was appointed Group Executive and President, Australia Pacific & Asia, effective in October 2017. He joined Orica in 2015 and held the role of Group Executive and President, Australia Pacific and Indonesia from 2016. Before joining Orica, Darryl had a 24 year career with BHP, where he held senior positions in group-wide functions as well as the Australian and South African coal and copper businesses with responsibility for operations, expansion projects and transformational change programs. Carlos Duarte BSc Aeronautical Engineering, MBA group executive, Manufacturing and Supply Carlos was appointed Group Executive, Manufacturing and Supply in October 2017 following more than 30 years at global oil and gas technology and services company, Schlumberger. During his time at Schlumberger Carlos held senior leadership positions including Vice President, Supply Chain, Vice President Manufacturing, and Vice President New Businesses. Kirsten gray BA/LLB (Hons), PDM group executive Corporate Services and Company Secretary Kirsten was appointed Group Executive Corporate Services and Company Secretary in October 2015. Kirsten has responsibility for the legal function, company secretariat, sustainability, government and community affairs. She joined Orica after a 20 year career with BHP, where she held senior global legal positions. Kirsten has deep experience in corporate governance, global mergers and acquisitions and general commercial law. angus Melbourne BEng (Hons) Mechanical Engineering, BSc Applied Mathematics Chief Commercial Officer Angus was appointed Chief Commercial Officer in October 2016 and has responsibility for strategic marketing and technology. Angus joined Orica in January 2016 following a 25 year career at Schlumberger where he held a number of senior roles responsible for research and development, engineering, manufacturing, operations and sales. Angus’s experience at Schlumberger included responsibility for explosives and perforating products research, development and manufacturing. Vince nicoletti BBus, MSc Mineral Economics, FCPA Chief financial Officer Vince was appointed Chief Financial Officer effective from 1 October 2017 with responsibility for finance, investor relations and audit and risk. Before joining Orica, Vince was Chief Financial Officer at diversified infrastructure group Broadspectrum. Prior to this he held a range of senior leadership positions at BHP including President, Energy Coal and Vice President, Strategy and Business Development (Energy Coal), CFO Aluminium and CFO Marketing and Commercial. Sebastian pinto BBA, MBA group executive and president, latin america Sebastian was appointed Group Executive and President, Latin America in August 2015. He joined Orica in 2010 as Marketing Vice President for Latin America with responsibility for directing the regional business strategy, including price and product management, market intelligence and customer relationships. Before joining Orica, Sebastian worked for Shell International Petroleum Company for 16 years in various sales, marketing and strategy roles in Latin America, England and USA. andrew rosengren MA Oxon, BE Mining (Hons), Grad Dip Finance group executive, Strategy, planning and Mergers and acquisitions Andrew was appointed Group Executive Strategy, Planning and Mergers and Acquisitions in September 2015 with responsibility for corporate strategy, long term planning, mergers and acquisitions, Minova and new growth businesses. He has more than 15 years’ experience in the mining industry, including with Rio Tinto in operational, development and corporate roles. Andrew has held senior roles in Boral Limited and was CEO of Fulton Hogan Australia prior to joining Orica in 2012. thomas Schutte B.Com (Hons) Acc, Chartered Accountant (SA) group executive and president, europe, Middle east and africa (eMea) Thomas was appointed Group Executive and President, EMEA with effect from 1 October 2017 after having held the role of Chief Financial Officer since September 2015. Before joining Orica Thomas spent 20 years with BHP where he held a number of leadership positions, including President and CEO Samancor Manganese Ltd, President Global Marketing and CFO of the Global Commercial Group. 28 | Orica Annual Report 2017 Directors’ report The Directors of Orica Limited (‘the Company’ or ‘Orica’) present the Annual Report of the Company and its controlled entities (collectively ‘the Group’) for the year ended 30 September 2017 and the auditor’s report thereon. Directors The Directors of the Company during the financial year and up to the date of this report are: M W Broomhead, Chairman M N Brenner Lim Chee Onn G T Tilbrook K Gray is Company Secretary of Orica. A Calderon, Managing Director and Chief Executive Officer (CEO) I D Cockerill K A Moses Particulars of Directors’ and Company Secretary qualifications, experience and special responsibilities are detailed in the Annual Report. Directors’ meetings The number of Directors’ meetings (including meetings of committees of Directors) and number of meetings attended by each of the directors of the Company during the financial year are listed below: Scheduled Board Meetings(1) Audit and Risk Committee(1) Human Resources & Compensation Committee(1) Nominations Committee(1) Safety, Health, Environment & Community Committee(1) Director Held Attended Held Attended Held Attended Held Attended Held Attended M W Broomhead(2) M N Brenner A Calderon(3) I D Cockerill Lim C O K A Moses G T Tilbrook 10 10 10 10 10 10 10 10 10 10 10 10 10 10 – 5 – – 1 4 5 – 5 – – 1 4 5 – 6 – 6 6 – – – 6 – 6 6 – – 6 6 – 6 6 6 6 6 6 – 6 6 5 6 – – – 5 6 2 5 – – – 5 6 2 5 (1) Shows the number of meetings held and attended by each director during the period the director was a member of the Board or Committee. (2) The Chairman of the Orica Board attends all Board Committee meetings as an ‘ex officio’ member of that Committee. (3) The Managing Director and CEO attends Committee meetings on an ‘as needs’ basis. Directors’ interests in share capital The relevant interest of each Director in the share capital of the Company as at 30 September 2017 and as at the date of this report is disclosed in the Remuneration Report. Principal activities The principal activities of the Group in the course of the financial year were the manufacture and distribution of commercial blasting systems including technical services and solutions, mining and tunnelling support systems to the mining and infrastructure markets, and various chemical products and services. Likely developments Likely developments in the operations of the Group and the expected results of those operations are covered generally in the review of operations and financial performance of the Group in the Annual Report. Review and results of operations A review of the operations of the Group during the financial year and of the results of those operations is contained in the Annual Report. Dividends Dividends paid or declared since the end of the previous financial year were: Final dividend at the rate of 29.0 cents per share on ordinary shares, franked to 27.6% (8.0 cents) at the 30% corporate tax rate, paid 9 December 2016. Interim dividend declared at the rate of 23.5 cents per share on ordinary shares, franked to 12.8% (3.0 cents) at the 30% corporate tax rate, paid 3 July 2017. Total dividends paid Since the end of the financial year, the Directors have declared a final dividend to be paid at the rate of 28.0 cents per share on ordinary shares. This dividend will be unfranked. $m 108.7 88.4 197.1 Directors’ report Orica Annual Report 2017 | 29 Changes in the state of affairs There were no significant changes in the state of affairs of the Group during the year ended 30 September 2017. Events subsequent to balance date Dividends On 3 November 2017, the Directors declared a final dividend of 28.0 cents per ordinary share payable on 8 December 2017. The financial effect of this dividend is not included in the Annual Report for the year ended 30 September 2017 and will be recognised in the 2018 Annual Report. The Directors have not become aware of any other significant matter or circumstance that has arisen since 30 September 2017, that has affected or may affect the operations of the Group, the results of those operations, or the state of affairs of the Group in subsequent years, which has not been covered in this report. Environmental regulations Orica seeks to be compliant with applicable environmental laws and regulatory permissions relevant to its operations. Where instances of non-compliance occur, Orica’s procedures require that relevant governmental authorities are notified in accordance with statutory requirements and internal investigations are conducted to determine the cause of the non-compliance to ensure the risk of recurrence is minimised. The Company has committed major investments, both in terms of capital and resources, to improve its environmental performance at key sites in addition to its general maintenance program. The Company is working closely and co-operatively with regulators and government agencies in relation to these initiatives, as well as enhancing community engagement and consultation. Environmental prosecutions Orica Australia Pty Ltd is the subject of legal proceedings issued by the Queensland Department of Environment and Heritage Protection in relation to an incident that occurred in September 2016 at its Fisherman’s Landing Ammonia Terminal. Orica is yet to enter a plea in relation to these proceedings. More specific details about Orica’s sustainability initiatives and performance, including safety, health and environment, can be found on the Orica website – www.orica.com/sustainability. Indemnification of officers The Company’s Constitution requires the Company to indemnify any person who is, or has been, an officer of the Company, including the Directors, the Secretaries and other Executive Officers, against liabilities incurred whilst acting in good faith as such officers to the extent permitted by law. In accordance with the Company’s Constitution, the Company has entered into a Deed of Access, Indemnity and Insurance with each of the Company’s Directors and, in certain instances, specific indemnities have been provided. No director or officer of the Company has received benefits under an indemnity from the Company during or since the end of the year. The Company has paid a premium in respect of a contract insuring officers of the Company and of controlled entities, against a liability for costs and expenses incurred by them in defending civil or criminal proceedings involving them as such officers, with some exceptions. The insurance contract prohibits disclosure of the nature of the liability insured against and the amount of the premium paid. Non-audit services During the year, KPMG, the Company’s auditor, performed certain other services in addition to its audit responsibilities. The Board is satisfied that the provision of non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: ƒ all non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed by the Board Audit and Risk Committee to ensure they do not impact the integrity and objectivity of the auditor; and ƒ the non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards. A copy of the lead auditor’s independence declaration as required under Section 307C of the Corporations Act 2001 is contained on page 54 of the Annual Report and forms part of this Directors’ Report. Details of the amounts paid to the auditor of the Company, KPMG, and its related practices for audit and non-audit services provided during the year are disclosed in note 23 to the Annual Report. 30 | Orica Annual Report 2017 Directors’ report Cover Letter (unaudited) to the Remuneration Report Dear Shareholder, The Directors of Orica Limited present the Remuneration Report for the year ended 30 September 2017. 2017 Performance and remuneration Key remuneration outcomes for the year are summarised below: STI Outcomes STI outcomes for Executives and Key Management Personnel (KMP) ranged between 48.5% and 72.7% of the maximum opportunity. In determining these outcomes, the Board balanced achievements in Net Profit after Tax, Cash generation outcomes and delivery of substantial benefits through business improvement initiatives, with disappointing safety performance. The Board has also taken into consideration the impact of the two tragic fatalities in Peru and Sweden in determining outcomes under Orica’s STI plan and made downward adjustments to STI outcomes for all Executives. LTI Outcomes No benefit has been derived from the Long-Term Equity Incentive Plan (LTEIP) awards tested this year. The performance condition for loan forgiveness was not met and the value of Orica shares was less than the outstanding loan balance at the end of the performance period. Accordingly, all shares were surrendered and forfeited to Orica in full settlement of the loan balance and no value was derived by Executives from this part of their remuneration package. The FY2014 award under the Long-Term Incentive Rights Plan (LTIRP), a legacy award held by some Executives, was also tested this year. The performance condition for LTIRP vesting was also not met and the awards lapsed. Fixed Remuneration Outcomes Executives’ fixed pay was maintained at the same level for the third successive year for Executives in the same role. As a result of a review of fixed remuneration by the Human Resources and Compensation Committee during FY2017, from 1 January 2018 fixed remuneration increases linked to the forecast inflation rate in the Executive’s country, will be made for Executives continuing in the same role (excluding the Managing Director & CEO). NED Fee Outcomes Non-Executive Directors’ fees were frozen for the seventh successive year. Changes to the Executive Remuneration Framework for 2018 As indicated to shareholders at the 2016 Annual General Meeting, the Board has undertaken a detailed review of the Executive Remuneration Framework. We engaged in a process of extensive stakeholder consultation to understand the expectations around the framework, both from an internal and external perspective, and are very grateful for the interest and level of feedback received during the process. Specifically, the review was intended to align key remuneration drivers with the ongoing turnaround of Orica under challenging market conditions. Our new management team has already implemented substantial changes that have successfully delivered approximately $127 million of net benefits. The next phase of the transformation is focused on 3 key imperatives: ƒ Optimising operating efficiency; ƒ Optimising capital efficiency; and ƒ Embedding those efficiencies to ensure sustainable value creation and long-term returns. Given these objectives, we have adjusted the metrics for the STI and LTI to reflect the primacy of these imperatives during the transformation period. Additionally, we received feedback that while the Remuneration Framework was sound, it could be improved in 3 key areas: ƒ Financial versus non-financial metrics: increased emphasis on financial metrics; ƒ Management shareholding: increased quantum and length of holding of shares held by management; and ƒ Transparency: simplified metrics to underpin key business objectives. We have reflected each of these elements in our revised remuneration structure, with a particular emphasis on increased equity accumulation and significantly longer holding locks for both STI and LTI equity. These are designed to promote an owner’s mindset, encourage longer term decision making and align remuneration outcomes to produce sustainable value creation. We refer you to Section 5 of the Remuneration Report for a detailed explanation of the changes. Your Directors believe that these changes will provide a competitive remuneration structure that strengthens the alignment of Executives with the long- term success of Orica and its shareholders. We therefore commend this report to you. Maxine Brenner Chairman, Human Resources and Compensation Committee Directors’ report – remuneration report 2017 (auDiteD) Orica Annual Report 2017 | 31 Contents Executive Remuneration Section 1: Introduction and FY2017 outcomes Section 2: Key Management Personnel Section 3: Remuneration Framework Section 4: Performance and outcomes Section 5: Remuneration changes for FY2018 Section 6: Remuneration tables and data Non-Executive Director Remuneration Section 7: Remuneration Policy, structure and outcomes Other remuneration information Section 8: Remuneration governance and other remuneration arrangements Executive Remuneration Section 1: Introduction and FY2017 outcomes This section summarises Orica’s overall approach to executive remuneration and provides a summary of FY2017 outcomes. Objectives The objectives of Orica’s Executive Remuneration Framework are to: ƒ attract, motivate and retain high calibre executive talent; ƒ align management interests with those of shareholders; ƒ incentivise superior performance against measures that are linked to shareholder value creation; and ƒ be clear and transparent. Current framework Orica’s Executive Remuneration Framework consists of 3 elements, namely Fixed Annual Remuneration (FAR), Short-Term Incentives (STI) and Long-Term Incentives (LTI). Within this framework: ƒ FAR is benchmarked to the median of an external market group to attract quality people who can deliver value for shareholders; ƒ STIs are designed to reward Executives for the achievement of strategic and operational measures; and ƒ LTIs are designed to align executive remuneration with returns to shareholders over the longer term. The manner in which FAR, STI and LTI operate together is described in greater detail in Sections 3 and 4. Orica has undertaken a comprehensive review of its incentive structures during FY2017, and changes will be implemented in FY2018. Further information on this review and the outcomes can be found in Section 5. (a) Financial outcomes for FY2017 Executive remuneration outcomes for FY2017 included no change in fixed remuneration, average STI outcomes of between 48.5% – 72.7% of maximum opportunity and no LTI payout. The table below provides a summary of the actual remuneration received for the performance year either as cash, other benefits or, in the case of prior equity awards, the value which vested. Unlike the statutory table in Section 6.1, which represents remuneration outcomes prepared in accordance with Australian Accounting Standards, this table shows the actual remuneration value received/receivable by current/continuing Executive Key Management Personnel. 32 | Orica Annual Report 2017 Directors’ report – remuneration report 2017 (auDiteD) Section 1: Introduction and FY2017 outcomes (continued) (b) Actual remuneration in FY2017 Name Executives (KMP) Alberto Calderon Thomas Schutte James Bonnor Darryl Cuzzubbo Tony Edmondstone Angus Melbourne Sebastian Pinto Total Annual remuneration paid in FY2017(1) $000 STI to be paid in cash(2) $000 Total cash payment $000 Prior year equity awards vested during year(3) $000 Total remuneration received $000 Other(4) $000 1,800.0 950.0 841.9 800.0 840.0 879.4 586.0 949.8 601.6 399.9 465.2 325.7 455.2 257.4 2,749.8 1,551.6 1,241.8 1,265.2 1,165.7 1,334.6 843.4 480.5 – 76.8 – 173.2 293.5 – 6,697.3 3,454.8 10,152.1 1,024.0 3.2 30.6 67.2 2.3 – 223.4 36.0 362.7 3,233.5 1,582.2 1,385.8 1,267.5 1,338.9 1,851.5 879.4 11,538.8 (1) Annual remuneration paid includes actual base pay received and superannuation (or equivalent pension) contributions. (2) In FY2017 STI will be delivered both in cash and deferred equity that will vest 12 months after the grant date. Details of the STI deferral are included in Section 3.5. (3) This contains deferred STIs from FY2016 that have vested and, in the case of Angus Melbourne, one third of the sign on grants made on commencement of employment which vested in FY2017. No LTI vested in FY2017. (4) Includes cash value of relocation assistance and other benefits provided (where applicable). Movements in annual leave and long-service leave balances have not been shown. Directors’ report – remuneration report 2017 (auDiteD) Orica Annual Report 2017 | 33 Section 2: Key Management Personnel This section outlines the Executives of the Company and Non-Executive Directors whose remuneration details are outlined in this Remuneration Report. (a) Names and positions of Executive Key Management Personnel The table below lists the Executives of the Company whose remuneration details are outlined in this Remuneration Report. These Executives, together with the Directors, are defined as Key Management Personnel (KMP) under Australian Accounting Standards. In this report, Executive KMP refers to the KMP other than the Non-Executive Directors. Non-Executive Directors have oversight of the strategic direction of the Company but have no direct involvement in the day-to-day management of the business. Name Role in financial year 2017 Commencement date in role Country of Residence Executive Director Alberto Calderon Managing Director and CEO 19 May 2015 Australia Executive KMP Thomas Schutte Chief Financial Officer 1 September 2015 James Bonnor Group Executive and President, North America 1 October 2015 Darryl Cuzzubbo Group Executive and President, Australia Pacific & Indonesia 1 October 2016 Tony Edmondstone Group Executive and President, Europe, Africa & Asia 1 October 2015 Angus Melbourne Chief Commercial Officer Sebastian Pinto Group Executive and President, Latin America Former Executive KMP 1 October 2016 1 October 2015 Date ceased to hold role Australia United States Australia Australia Singapore Chile Richard Hoggard(1) Group Executive, Manufacturing & Supply 1 December 2016 Singapore (1) Richard Hoggard was appointed as Group Executive, Safety, Health, Environment & Supply effective 2 December 2016 and ceased to be a KMP from this date. Particulars of Executives’ qualifications, experience and responsibilities are detailed in the Annual Report. (b) Changes in Key Management Personnel effective 1 October 2017 The following changes were made to Orica’s Executive structure effective 1 October 2017: ƒ Vincent Nicoletti was appointed as Chief Financial Officer; ƒ Thomas Schutte was appointed as Group Executive and President EMEA (Europe, Middle East and Africa); and ƒ Carlos Duarte was appointed as Group Executive, Manufacturing and Supply. Tony Edmondstone, Group Executive and President EAA, will leave Orica in early 2018 and ceased to be a reportable KMP from 1 October 2017 – refer Section 4.4. (c) Names and positions of Non-Executive Directors Key Management Personnel The Non-Executive Directors who held office during FY2017 are set out below: Name Directors Role in financial year 2017 Commencement date in role Country of Residence Malcolm Broomhead Non-Executive Director, Chairman 1 December 2015 Maxine Brenner Non-Executive Director Ian Cockerill Karen Moses Lim Chee Onn Gene Tilbrook Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director 8 April 2013 12 July 2010 1 July 2016 12 July 2010 14 August 2013 Australia Australia South Africa Australia Singapore Australia 34 | Orica Annual Report 2017 Directors’ report – remuneration report 2017 (auDiteD) Section 3: Remuneration Framework Orica’s Executive remuneration strategy is to attract, motivate, reward and retain Executives through a remuneration approach that drives performance, is competitive, globally relevant, aligns with shareholder interests and has a high perceived value. This section outlines the elements of the Executive remuneration framework in FY2017, Orica’s principles in relation to fixed and total remuneration positioning, total remuneration opportunity and the mix and key terms of Orica’s incentive plans. 3.1 Remuneration framework Orica’s Executive Remuneration Framework provides a combination of fixed remuneration and incentives intended to drive performance against both short and long-term Company objectives. The table below provides an overview of this framework and the specific performance linkages. Key terms of the short and long-term incentive plans are outlined in Section 3.5. Executive remuneration component d Fixed Annual e x i F Remuneration (FAR) Payment vehicle Performance measure Specific targets/ performance link Cash, superannuation & other benefits Short-Term Incentive Plan (STI Plan) Annual cash payment following release of end of year results. Business Objective 1 Safety, Health & Environment (SHE) Business and Personal performance objectives operate independently and the weighted result for each of the Business and Personal performance objectives are multiplied together to determine the final STI amount. Mandatory deferral of a proportion of STI paid into deferred shares. Deferred shares are subject to a continued employment condition for a 12 month period following award. n o i t a r e n u m e r k s i r - t A – All Worker Recordable Case Rate (AWRCR) – Safety Health and Environment Assessments – Overdue Actions Business Objective 2 Earnings measures – Earnings Before Interest & Tax (EBIT)(1) – Net Profit After Tax (NPAT)(1) Business Objective 3 Margin measures – Gross Margin – Cash Conversion Business Objective 4 Board discretionary component Personal Performance 3 personal objectives and Board discretionary component Regional, functional and/or financial objectives specific to KMP area of influence Current plan Current plan Current plan Current plan Long-Term Incentive Plan (LTIP) Historical plans Long-Term Equity Incentive Plan (LTEIP) and Long- Term Incentive Rights Plan (LTIRP). Both plans expired in FY2017. Grant of rights over Orica shares measured over a 3 year performance period Return on Capital (ROC) on 50% of rights granted Relative Total Shareholder Return (RTSR) on 50% of rights granted Average ROC of between 18.25% (threshold) and 22% maximum RTSR percentile ranking must be above median (50% vest) to 75th percentile and above (100% vest) Measures align Executives to shareholder outcomes (1) Before individually material items Key FY2017 outcomes No increase to FAR for Executive KMP in FY2017. Further discussion in report Section 3.2 Executive KMP STI outcomes were between target and maximum. Sections 3.5 and 4.2 Consistent with the previous year, the overall Business performance was reduced by the following to reflect the fatalities during the year ƒ CEO and Group Executive SHES: by 20% ƒ Group Executive and President LATAM: by 15% ƒ Chief Commercial Officer: by 15% ƒ other Executives: by 10% During FY2017 the FY2014 award under the LTEIP was eligible for testing. Sections 3.5 and 4.3 No loan forgiveness was available and no capital gains were made. Shares awarded were forfeited back to Orica. The FY2014 LTIRP award was also tested and forfeited. Directors’ report – remuneration report 2017 (auDiteD) Orica Annual Report 2017 | 35 Section 3: Remuneration Framework (continued) 3.2 Remuneration positioning Executive FAR is generally set with reference to the market median for Australian listed companies of a comparable market capitalisation to Orica (between 50% to 200% of Orica’s 12 month average market capitalisation). In addition, and particularly for roles located outside of Australia, additional sector or local industry specific data is taken into consideration in benchmarking Executive remuneration (where appropriate). 3.3 Remuneration opportunity Set out below is the current fixed annual remuneration, target short-term and long-term incentive grant opportunity for each of the Executive KMP in respect of financial year 2017. Executive Director A Calderon Current Executive KMP T H Schutte J K Bonnor(3) D Cuzzubbo T J Edmondstone A J Melbourne(3) S F Pinto(3) Former Executive KMP R Hoggard FAR(1) Target STI (% FAR) FY2017 LTI Right opportunity(2) (% FAR) 1,800,000 100% 180% 950,000 841,892 800,000 840,000 875,267 586,000 70% 60% 60% 60% 60% 60% 100% 100% 100% 100% 100% 100% 908,207 60% 100% (1) FAR includes base pay and superannuation. FAR is reviewed annually by the Board following the end of each financial year and adjustments are, in general, effective from 1 January of the following year. The amounts set out in the table above are the Executives KMPs’ fixed annual remuneration as at 30 September 2017. (2) The number of performance rights allocated is determined based upon the 5-day volume weighted average price (VWAP) of Orica shares at the time of award. Performance rights were allocated to Executive KMP under the FY2017 LTIP offer in December 2016. (3) For overseas based Executive KMP, salary reported is based on the salary figure in overseas currency converted at the average foreign exchange rate for the year. 36 | Orica Annual Report 2017 Directors’ report – remuneration report 2017 (auDiteD) Section 3: Remuneration Framework (continued) 3.4 Remuneration mix The Board considers that a significant proportion of Executive remuneration should be ‘at risk’ to provide alignment with the interests of shareholders and to drive performance against the Company’s short and long-term business objectives. The graphs below show the minimum, target and maximum remuneration mix for financial year 2017, based on the earnings of the MD & CEO and other Executive KMP(1)(2). Managing Director and CEO Minimum 100% Target 31% 16% 16% Maximum 21% 21% 21% 37% 37% % of total remuneration mix Other Executive KMP (average) Minimum 100% Target 44% 18% 9% 29% FAR STI (Cash) STI (Deferred) LTI FAR STI (Cash) STI (Deferred) LTI Maximum 31% 25% 13% 31% (1) Target remuneration mix assumes STI at target and a fair value calculation (as per AASB 2 Share-based Payment) of the long-term incentive (LTI) award at grant using an external valuation from PricewaterhouseCoopers. (2) Maximum remuneration mix assumes STI at maximum (two times target for the CEO) and LTI at grant value with no adjustment for fair value. % of total remuneration mix 3.5 Summary of terms and conditions of at risk components The key details of the Orica STI and LTI, are summarised below. Short-Term Incentive Long-Term Incentive Description Annual incentive plan delivered in cash and deferred shares (following a 12 month deferral period). Award of performance rights subject to a 3 year performance period. For the MD & CEO, 50% of any STI award is delivered in cash and 50% in deferred shares. For other Executives, two thirds of any STI award is delivered in cash and one third is delivered in deferred shares. Performance Conditions Business performance measures representing financial and non- financial conditions. Personal performance measures representing objectives specific to each Executive’s area of influence. For Executives there are two performance conditions: ƒ 50% of Rights granted are subject to a Return on Capital (ROC)(1)(3) performance condition; and Business and Personal objectives operate independently and the weighted result for each is then multiplied together to get the final result (see diagram below). Business Performance 0 –1.25 (Target 1) Personal Performance 0 –1.6 (Target 1) STI Target % FAR Details and weightings of the FY2017 performance conditions are outlined in Section 4.2. ƒ 50% are subject to Relative Total Shareholder Return (RTSR) performance(2). ROC was selected as it supports Orica’s continued focus on capital allocation. RTSR was selected to align Executive reward under LTIP with returns delivered to shareholders. The ASX 100 was chosen as the RTSR comparator group because, in the absence of a sufficient number of direct competitor companies, the ASX 100 represents the group of companies that Orica competes with for shareholder capital and executive talent. Directors’ report – remuneration report 2017 (auDiteD) Orica Annual Report 2017 | 37 Section 3: Remuneration Framework (continued) Short-Term Incentive Long-Term Incentive Performance period Performance is measured over the financial year preceding the STI payment date. Performance is measured over 3 financial years. Amount that can be earned Each objective has a minimum threshold below which no incentive is paid for that measure, and a maximum limit that caps payment (with straight line vesting applied between threshold and maximum). Level of performance Percentage of FAR received Below threshold 0% Between threshold and target Up to 60% (70% for CFO & 100% for MD & CEO) Target 60% (70% for CFO & 100% for MD & CEO) Above target Up to 120% (140% for CFO & 200% for MD & CEO) The number of deferred shares is based on the 5 day VWAP at the grant date after the annual results are announced. Vesting STI – Cash Component STI outcomes are determined by the Board at the end of the financial year. Financial measures comprising EBIT, NPAT, Gross Margin and Cash Conversion and safety measures comprising AWRCR, Process Safety, Risk assessment and audits are calculated based on the achievement against targets set at the commencement of the financial year. The Board confirms final awards based on overall Group and Personal performance. In accordance with the plan rules, the Board retains an overriding discretion in relation to payments (if any) under the STI Plan, regardless of whether any or all of the STI performance objectives have been satisfied. STI – Deferred shares Use of deferral is designed to further align Executive remuneration to shareholders’ interests by delivering an increased proportion of remuneration in Orica equity and providing the ability for entitlements to be forfeited for misconduct as required. Executives generally will forfeit all deferred shares if they cease employment with Orica by reason of termination for cause or resignation during the 12 month deferral period, which commences on the grant date. The number of Rights issued provides Executives, excluding the MD & CEO, a grant opportunity in face value terms of 100% of FAR (estimated 77% fair value equivalent). For reasons of transparency to shareholders and simpler communication to Executives, Orica uses a face value allocation methodology. For the MD & CEO, the number of Rights issued for FY2017 (as previously approved by shareholders) was a grant opportunity in face value terms of 180% of FAR. Using face value, the actual number of Rights issued to each Executive was determined by dividing their respective LTI potential remuneration (expressed as a percentage of FAR) by the 5 day volume weighted average price (VWAP) of Orica shares at the time of award. The number of Rights that vest is determined by performance outcomes compared with pre-determined Company performance measures. Performance condition – ROC (3 year average 1/10/2016 – 30/09/2019) Level of performance % of rights vesting Below 18.25% At 18.25% 0% 30% Between 18.25% & 19.25% Straight line vesting between 30% to 60% At 19.25% 60% Between 19.25% & 22% Straight line vesting between 60% to 100% 22% and above 100% Performance condition – RTSR (percentile ranking against ASX 100) Level of performance % of rights vesting Below 50th percentile At 50th percentile 0% 50% Between 50th and 75th percentile Straight line vesting 50% to 100% 75th percentile and above 100% Each performance measure has a minimum level of performance, below which no vesting will occur. If the minimum performance level is not achieved, the Rights subject to this performance measure will be forfeited. The performance condition is only tested once at the end of the performance period. Any Rights that do not vest following testing of the performance conditions at the end of the performance period will lapse. Access to dividends Executives receive dividends on unvested deferred Orica shares during the 12 month deferral period. Executives do not receive dividends on Orica LTI rights during the 3 year vesting period. 38 | Orica Annual Report 2017 Directors’ report – remuneration report 2017 (auDiteD) Section 3: Remuneration Framework (continued) Short-Term Incentive Long-Term Incentive Forfeiture of award An Executive will not be eligible for a payment if their employment is terminated due to misconduct or poor performance, nor in general if they resign before the end of the STI performance period. In limited circumstances approved by the Board, a participant may be awarded a pro-rata STI payment if they cease employment as a good leaver. Change of control Board discretion to pay some or all of the STI that may have been payable for that financial year. Unvested deferred shares would vest on change of control. If an Executive ceases employment with Orica due to resignation or dismissal for misconduct before the vesting date of the Rights, the Rights are forfeited and the Executive receives no benefit. In the case where an Executive ceases employment with Orica for any other reason such as retirement, redundancy, mutually agreed separation, ill-health etc., the cessation of employment provisions of the LTIP rules enable the Board to determine the treatment of unvested Rights. Board discretion to determine treatment of unvested rights. If it does not exercise its discretion, a pro-rata number of rights will vest only to the extent any performance conditions have been met on change of control. Source of shares It is the Board’s preference to buy shares on market or to utilise shares already held in trust so that the value of existing Orica shares is not affected. (1) ROC = EBITDA per year/Enterprise Value. EBITDA = Earnings from Continuing Operations Before Individually Material Items, Depreciation, Amortisation, net borrowing costs and Tax. Enterprise Value = Total Shareholders’ Equity + Net Debt (at end of each year during the performance period), refer to note 3 of the Annual Report. ROC is measured at the end of each financial year and averaged over 3 years following the end of the last financial year of the performance period(3). (2) RTSR is calculated by measuring a combination of share price appreciation and dividends re-invested to show the total return to shareholders over the 3 year performance period. Orica’s RTSR is then ranked on a relative basis with the RTSR performance against all companies in the ASX 100 (with no exclusions). The comparator group is determined by the constituents of the ASX 100 at the start of the performance period. Orica receives an independent report from Ernst & Young that sets out Orica’s TSR growth and that of each company in the RTSR comparator group. (3) The Board reviewed the unvested long-term incentive grant made in 2015 under the LTIP, to ensure that Executives did not gain an advantage as a result of the asset impairment in FY2015. The Board determined for the purposes of calculating ROC in relation to the 2015 LTIP grant, it is to be calculated on the basis of the unimpaired Enterprise Value i.e. the impairment ($1.692 billion) will be added back to Enterprise Value at the end of each of the 3 performance years (2015 – 2017). For the FY2016 and FY2017 grant (to be tested in 2018 and 2019) ROC will be calculated against the Enterprise Value as reported. Section 4: Performance and outcomes Orica’s remuneration outcomes are aligned to business results and shareholder returns. This section demonstrates how remuneration outcomes are aligned to Orica’s results for the year. 4.1 Overview of business performance The table below summarises key indicators of the performance of the Company, relevant shareholder returns over the past five financial years and the impact this has had on STI and LTI vesting outcomes, which shows that incentive awards vary with Orica’s performance. Financial year ended 30 September Profit/(loss) from Operations ($m) Individually material items – net expense ($m)(1) EBIT ($m)(2) Dividends per ordinary share (cents) Closing share price ($ as at 30 September)(3) 3 month average share price (1 July to 30 September) each year EPS growth (%)(2) NPAT ($m)(2) External Sales ($m) Cumulative TSR (%)(4) Average STI received as % of maximum opportunity for Executives (%) 2013 968.1 – 968.1 94.0 20.06 19.59 (8.4) 592.5 2014 929.7 – 929.7 96.0 18.90 20.56 0.5 602.5 2015 (1,195.0) 1,884.4 689.4 96.0 15.04 17.29 (30.0) 424.2 2016 637.6 4.6 642.2 49.5 15.20 14.12 (8.8) 389.1 6,885.2 6,796.3 6,123.2 5,091.9 (17.8) 27 (9.9) 49 (20.3) 32 (31.5) 39 2017 635.1 – 635.1 51.5 19.77 20.12 (1.7) 386.2 5,039.2 0.3 60 (1) This figure is before interest, tax and non-controlling interest. (2) Before individually material items. (3) The opening share price for financial year 2013 was $19.80. (4) Cumulative TSR has been calculated using the same start date for each period measured (1 October 2012). In calculating the cumulative TSR, 3 month average share prices (1 July to 30 September for each year) have been used. Directors’ report – remuneration report 2017 (auDiteD) Orica Annual Report 2017 | 39 Section 4: Performance and outcomes (continued) 4.2 Short-Term Incentive overview (a) Summary of FY2017 STI performance conditions and performance level achieved For FY2017, Business and Personal performance, target weighting of each component and performance level achieved are summarised below: Measure Performance Objective Business Performance SAFETY All Worker Recordable Case Rate (AWRCR)(2) Completion of scheduled Safety, Health & Environment (SHE) Assessments against specified SHE Management System(3) Overdue actions arising from corporate safety audits and assessments, major hazard assessment actions and severity 3+ incident actions EARNINGS Earnings Before Interest and Taxation (EBIT)(4) Net Profit After Tax (NPAT)(5) MARGIN Gross Margin percentage Cash Conversion percentage DISCRETION Payable at the Board’s discretion Average STI Personal Performance Individual measures based on initiatives and key project deliverables linked to sustainable improvement in company performance, including Board discretionary component Total STI Overall STI outcome(6) Weighting (at target) Performance level achieved(1) 8.33% 8.33% 8.33% 12.50% 12.50% 12.50% 12.50% 25% – – Performance level Threshold not met b/w Threshold & Target Target b/w Target & Maximum Maximum (1) Performance level achieved is shown prior to the adjustments made by the Board to reflect fatalities at a customer site located in Peru and our manufacturing site in Gyttorp, Sweden. (2) AWRCR measures number of employee and contractor recordable cases (injuries and illnesses) per 200,000 hours worked by employee/contractor. (3) SHE Assessments measures percentage completion of scheduled regional and site level self-assessments. For FY2017 H1, this was on the major hazards and control verification assessment. For FY2017 H2, this focussed on activities identified from the control verification assessment. (4) For STI purposes EBIT is defined as earnings from Continuing Operations before interest, tax and individually material items. (5) NPAT is defined as Net Profit After Tax from Continuing Operations before individually material items attributable to shareholders of Orica Limited. (6) Represents average STI outcomes for reportable Executives (compared to maximum STI opportunities). In analysing FY2017 outcomes, performance against each component is outlined below: During the 2017 financial year, the company continued to deliver substantial benefits through business improvement initiatives, offsetting previously flagged headwinds and some additional costs related to the fatalities during the year. Overall EBIT and Gross Margin performance were slightly below the targets set. Management achieved Net Profit after Tax (NPAT) at maximum reflecting reduced Net Debt and related interest expense. Cash Conversion was also achieved at maximum. Safety targets were set with input from the Board Safety, Health and Environment Committee and reflect Orica’s commitment to continuously improving safety performance. Overall safety performance against scorecard measures was between target and maximum reflecting completion of assessments and resolution of critical overdue actions related to Major Hazards being achieved at maximum and just below maximum respectively, and recordable case rate (AWRCR) outcomes being achieved between threshold and target. Reducing risk from major hazards and lowering lost time due to injury will remain key focus areas in FY2018. In determining overall business performance outcomes, the Board considered the impact of fatalities at a customer site located in Peru and our manufacturing site in Gyttorp, Sweden. Following management’s recommendation, the Board determined to zero out the recordable case rate (AWRCR) outcome and in addition, to reduce the award under the Board discretion element with the overall effect of reducing business performance outcomes by 20% overall for the CEO and Group Executive, SHES; 15% for the Executives in whose area of accountability the fatalities occurred (Group Executive and President, LATAM and Chief Commercial Officer); and by 10% for other Executives. These adjustments were consistent with those made last year, reflect the applicable level of management control by the CEO and other Executives over the causal factors of the fatalities, and our continued commitment to the safety of our people. Personal objectives for each Executive were determined and approved by the Board at the commencement of the financial year. In financial year 2017, these objectives related to strategic priorities of each Executive, including initiatives linked to improving earnings and trade working capital, customer retention, business growth strategies and enhancing Orica’s development and use of technology. Achievement against these Personal objectives was generally between Target and Maximum. Taken together, Business and Personal outcomes resulted in Executive KMP receiving awards of between 48.5% and 72.7% of maximum (averaging 60.2% of maximum) and forfeiting between 51.5% and 27.3% of their maximum opportunity (average 39.8%). 40 | Orica Annual Report 2017 Directors’ report – remuneration report 2017 (auDiteD) Section 4: Performance and outcomes (continued) (b) Short-Term Incentive outcome – FY2017 Details of the FY2017 outcomes for Executive KMP are set out in the table below. For the year ended 30 September 2017 Current Executive KMP A Calderon T H Schutte J K Bonnor D Cuzzubbo T J Edmondstone A J Melbourne S F Pinto Former Executive KMP R Hoggard(3) Maximum STI opportunity(1) $000 Actual STI paid in cash $000 in deferred equity(2) $000 Actual STI payment as % of maximum % of maximum STI forfeited Actual STI paid 3,600.0 1,330.0 952.1 960.0 1,008.0 1,041.1 648.8 949.8 601.6 399.9 465.2 325.7 455.2 257.4 949.8 300.7 199.9 232.6 162.8 227.6 128.7 52.8 67.8 63.0 72.7 48.5 65.6 59.5 47.2 32.2 37.0 27.3 51.5 34.4 40.5 1,072.27 369.5 184.7 51.7 48.3 (1) For Australian based Executives KMP, maximum STI opportunity is calculated on FAR inclusive of superannuation. For overseas based Executives, KMP maximum STI opportunity does not include the equivalent pension contributions. (2) Under AASB 2 Share-based Payment, STI paid to Executives as deferred equity is accounted for as a share based payment and expensed over two years. Accordingly, 50% of the value of the deferred equity arising from the 2017 STI outcome has been included in each Executive KMP’s share based payments expense in 2017 and the remainder will be included in 2018. (3) The table reflects 100% of the FY2017 remuneration of R Hoggard – however he was a reportable KMP for two months of the year. 4.3 Long-Term Incentive overview The table below summarises the Long-Term Incentive Plan awards tested in the current financial year together with awards that remain unvested. Grant FY2014 FY2014 FY2015 Plan LTEIP LTIRP LTIP LTIP LTIP Performance period Performance measures applicable to award FY2014 – FY2016 Availability of loan forgiveness is subject to: Outcome Forfeited ƒ Compound EPS growth condition (10% loan forgiveness at target) ƒ Relative TSR ranking against ASX 100 (10% loan forgiveness at target) FY2014 – FY2016 Compound EPS growth condition (100%) FY2015 – FY2017 Vesting of Rights is subject to: ƒ Average ROC (50%) ƒ Relative TSR ranking against ASX 100 (50%) FY2016 FY2017 FY2016 – FY2018 FY2017 – FY2019 As above As above Forfeited Not yet tested Not yet tested Not yet tested LTEIP was the previous loan based equity incentive plan. The FY2014 LTEIP award was tested in November 2016. The availability of loan forgiveness under the FY2014 LTEIP award was subject to two performance hurdles, namely Earnings per Share (EPS) growth and Relative Total Shareholder Return (RTSR) against a comparator group of the ASX 100 (determined at the time the LTEIP award was granted). As the compound EPS growth over the plan period was below the threshold performance level, and RTSR was below median against the comparator group, no loan forgiveness was applied. Executives achieved no capital gains on their shares and forfeited their FY2014 LTEIP shares in full settlement of the outstanding loan balances. There were no loans to Executives other than for the LTEIP plan and over the past five years, the LTEIP has provided no loan forgiveness benefit and has provided modest capital appreciation to LTEIP participants in two of the past five years. This aligns vesting outcome to Executives with performance outcomes for shareholders over that period. Further information on LTEIP can be found in note 19 to the Annual Report. Directors’ report – remuneration report 2017 (auDiteD) Orica Annual Report 2017 | 41 Section 4: Performance and outcomes (continued) There were no balances outstanding at 30 September 2017 and the following table shows movements of the non-recourse loans during 2017: For the year ended 30 September 2017 Current Executive KMP J K Bonnor T J Edmondstone Former Executive KMP R Hoggard Total Executive KMP Opening balance $ Repayments during FY2017(1) $ Closing balance $ Interest free value $ Highest indebtedness $ 835,825 876,950 835,825 876,950 1,109,873 1,109,873 2,822,648 2,822,648 – – – – 4,742 4,975 835,825 876,950 6,296 1,109,873 16,013 2,822,648 (1) Constitutes repayments following forfeiture of LTEIP options. The FY2014 award under LTIRP (a legacy award held by some Executives) was also tested this year. The EPS performance condition for LTIRP vesting was not met and all of the awards lapsed. 4.4 Arrangements for departing Executive KMP Group Executive & President, Europe, Africa and Asia Tony Edmondstone, Group Executive and President EAA, will leave Orica in early 2018. In addition to his statutory entitlements to accrued annual leave and long service leave entitlements at separation date, under the terms of his service agreement, he is entitled to a severance payment of $839,902 upon cessation of his employment equivalent to one times his average fixed remuneration over the past 3 years. Tony Edmondstone’s FY2017 STI payment has been tested in the same manner and payable at the same time as for other Executives. The Board determined that, notwithstanding his cessation of employment, in accordance with the termination provisions of the relevant LTIP plan rules applicable to all participants, Tony Edmondstone would continue to participate in the LTIP offers that remain ‘on foot’. Tony Edmondstone will not be eligible to receive a FY2018 STI payment or participate in the FY2018 LTI grant. Section 5: Remuneration changes for FY2018 This section outlines the changes to Executive short-term and long-term incentive remuneration effective FY2018. Changes to the Executive Remuneration Framework for 2018 As indicated to shareholders at the 2016 Annual General Meeting, Orica has undertaken a detailed review in conjunction with management and external stakeholders of the Executive Remuneration Framework to more closely align Executive remuneration to the Company’s strategic objectives and shareholders’ interests. The Board’s priorities are to ensure that our remuneration structures drive strong alignment with shareholder returns, are fit for purpose and aligned to Orica’s business strategy, are simple and transparent, and are globally competitive enabling Orica to attract and retain the best talent in the markets in which we operate. This review was conducted in the context of the ongoing turnaround of the Company in challenging market conditions, in which the new management team has implemented a substantial transformation program and successfully delivered significant net benefits in the first phase. The next phase of turnaround has commenced, which focuses on delivering sustainable business initiative improvements over the next 3 years through over 1,900 initiatives globally in order to enhance operating and capital efficiency, and embed those efficiencies for long-term improvement in capital returns. Alongside delivery of these improvements, Orica is continuing to focus on culture and engagement of employees to ensure that Orica can operate across its diverse business footprint safely and with integrity and respect for all stakeholders. Further, the review found that while on the whole, the current Framework has demonstrated alignment between performance and incentive outcomes and retaining a STI scheme is valuable during Transformation, the Framework could be improved in 3 key areas: ƒ Performance – moving to a much higher weighting for financial and business improvement outcomes. ƒ Transparency – simpler metrics that directly support and drive performance against transformation objectives. ƒ Management shareholding – building in greater shareholdings, held over a longer period, driving an owner’s mindset and long-term decision-making. 42 | Orica Annual Report 2017 Directors’ report – remuneration report 2017 (auDiteD) Section 5: Remuneration changes for FY2018 (continued) Overview of key changes The revised Executive Remuneration Framework for FY2018 is shown below. Further information on the key features of the revised Framework are summarised in the table overleaf. Detailed disclosure relating to the FY2018 Executive Remuneration Framework will be provided in Orica’s 2018 Annual Report. 0 1 2 3 4 5 Years FAR STI Perf. period: 1 year Perf. metrics • Safety • EBIT/Sales • Sales/Net Assets Cash award 50% (CEO), 66.7% (Other Executives) Equity award 50% (CEO), 33.3% (Other Executives) ExCo only • Personal/strategic goals STI deferral (1 year) STI holding-lock (3 years) LTI Perf. period: 3 years Perf. metric: RONA LTI holding-lock (2 years) Component Key features for FY2018 Rationale STI Scorecard ƒ A single STI scorecard (i.e. the personal scorecard multiplier ƒ The personal scorecard multiplier has been removed to no longer applies). increase the overall simplicity of the plan design, and the overweighting of personal over financial metrics. Performance measures ƒ Short-term metrics driving 3 key initiatives: safety, operational ƒ The new STI metrics are aligned to Orica’s efficiency and capital efficiency. ƒ Increased weighting towards financial metrics (performance measures and weightings at target performance are as follows): Metric Safety(1) EBIT/Sales(1) Sales/Net Operating Assets (NOA)(1) Strategic Initiatives Total CEO 25% 45% 30% N/A Other Executives 17.5% 31.5% 21% 30% 100% 100% (1) The targets applicable to safety and financial measures are based on the Executive’s role. Regional Executives will have 50% linked to Group and 50% to Regional performance. The Group Executive Manufacturing & Supply (M&S) will have 50% of safety performance linked to M&S performance and 50% linked to Group performance. The Sales/NOA measure for the Group Executive, Manufacturing & Supply and Chief Commercial Officer will be replaced with an alternative financial measure more closely aligned to growth and cost. The CEO and Group Executives will be assessed on Group performance only. ƒ Strategic initiatives for other Executives will include measures relating to ongoing transformation, systems and process improvements and strengthening Orica’s culture. strategic objectives: – Safety: Maintain focus on improving safety performance. Broadly these remain unchanged from FY2017 albeit focus has been extended to completion of Key Control Verifications resulting from Orica’s Major Hazards Program. – Operating Efficiency (EBIT/Sales): Sustainably increase productivity and devolve responsibility to regional businesses. – Capital efficiency (Sales/Net Operating Assets): Enhance returns on invested capital, deliver enabling technology, develop adjacency growth and optimise capital allocation. ƒ EBIT will apply given its transparency to shareholders. Net Operating Assets (NOA) will be determined based on rolling 12 month average assets. ƒ While not specifically included as an STI metric for the CEO, the Board will continue to measure progress against rigorous externally validated employee engagement and organisation health baselines and against plans to improve engagement and strengthen business conduct and compliance frameworks. Building and strengthening Orica’s culture, diversity and business conduct framework is a specific focus area for the Human Resources & Compensation Committee. Directors’ report – remuneration report 2017 (auDiteD) Orica Annual Report 2017 | 43 Section 5: Remuneration changes for FY2018 (continued) Component Key features for FY2018 Rationale Board discretion Term and deferral percentage ƒ Board discretion has been removed as a specific scorecard measure. ƒ The Board still has overriding discretion to adjust part or all of the remuneration outcomes and, consistent with 2016 and 2017, will consider adjustment of STI outcomes in the case of fatalities. ƒ In addition to the 1 year deferral period, a 3 year holding lock ƒ The new holding locks support on STI deferred equity post vesting will apply. ƒ This effectively results in a 5 year incentive arrangement (1 year performance period + 1 year deferral + 3 year holding lock). – longer term decision making and further alignment to shareholders’ interests, and – increased management shareholding – both in terms of quantum and duration. ƒ STI deferral percentage remains unaltered from FY2017 (50% for the CEO and 33.33% for other Executives). STI opportunity ƒ No change is being made to the current STI opportunity for the CEO or Executives. LTI Performance measure ƒ Return on Net Assets (RONA) for the Orica Group will apply as a single LTI measure. RONA will be calculated as annual EBIT/rolling 12 month Net Operating Assets (calculated on an average basis over 3 financial years). ƒ For the transformation period, the long-term incentive metric will be RONA, which is most closely aligned to the objectives of sustainable productivity improvement and efficient capital allocation, to enable long-term shareholder value creation. ƒ The combination of the RONA metric together with increased holding locks driving long-term shareholding will ensure that management and shareholders’ interests are aligned in growing Orica for the long term. ƒ The Relative Total Shareholder Return (RTSR) metric has been replaced with extended holding locks to increase alignment. RTSR was not valued due to the cyclicity of the industry, the difficulty of creating an appropriate comparator group and the lack of direct management control over this metric. The vesting schedule for the RONA performance condition is: ƒ RONA targets reflect the Board’s expectations for returns Targets and vesting schedule RONA Performance % of Rights vesting Below 13.6% At 13.6% No vesting 30% of rights vest Between 13.6% and 14.0% Straight line vesting between 30% and 60% of rights vest At 14.0% 60% of rights vest Between 14.0% and 14.7% Straight line vesting between 60% and 100% of rights vest At or above 14.7% 100% of rights vest Term ƒ In addition to the 3 year LTI performance period retained, a 2 year holding lock will apply to LTI shares post vesting ƒ This effectively results in a 5 year incentive arrangement (3 year performance period + 2 year holding lock) Opportunity (LTI grant value as % FAR) ƒ CEO: 215% FAR (increased from 180% FAR) ƒ Other Executives: 120% (increased from 100% FAR) through the current industry/market cycle, Orica’s Corporate Plan and Transformation Program. ƒ RONA targets are set to provide genuine opportunity for outperformance to be rewarded. ƒ For the FY2018-20 LTI grant, the RONA required for maximum (stretch) vesting is set to reflect recovery to RONA levels that generate long-term value for shareholders (i.e., recovery to 19% RONA within 5 years). Management must deliver average RONA aligned to FY2017 outcomes to achieve threshold vesting. To achieve target or above-target vesting for this grant, management must deliver EBIT growth that is significantly above the Board’s view of underlying explosives market growth and is in the 2nd quartile of EBIT growth rates achieved by ASX100 Industrials and Materials companies over the preceding 3-5 years. ƒ The new holding locks provide further alignment to shareholders and support long-term decision making given share price exposure. ƒ An adjustment will be made to the LTI opportunity for the CEO and Executives to maintain the current value of total remuneration taking into account incremental holding locks but discounting for dividends and other benefits of deferral. On an adjusted basis there is no change to remuneration. 44 | Orica Annual Report 2017 Directors’ report – remuneration report 2017 (auDiteD) Section 5: Remuneration changes for FY2018 (continued) Component Key features for FY2018 Rationale Remuneration Mix The graphs below show the revised minimum, target and maximum remuneration mix for financial year 2018, based on the earnings of the MD & CEO and other Executive KMP(1)(2). Managing Director and CEO Minimum 100% Target 29% 15% 15% Maximum 19% 19% 19% 41% 43% % of total remuneration mix Other Executive KMP (average) Minimum 100% Target 42% 17% 9% 32% FAR STI (Cash) STI (Deferred) LTI FAR STI (Cash) STI (Deferred) LTI Maximum 29% 24% 12% 35% (1) Target remuneration mix assumes STI at target and a fair value calculation (as per AASB 2 Share-based Payment) of the long-term incentive (LTI) award at grant based on the FY2017 external valuation from PricewaterhouseCoopers. (2) Maximum remuneration mix assumes STI at maximum (two times target for the CEO) and LTI at grant value with no adjustment for fair value. % of total remuneration mix Summary of other changes: The table below summarises other changes to the FY2018 Executive Remuneration Framework compared to the current FY2017 Framework: Short-Term Incentive Long-Term Incentive Feature Current Proposed Current Proposed Treatment of equity on cessation of employment (e.g., resignation, dismissal for misconduct) Termination of equity on cessation of employment (e.g., retirement, redundancy, mutually agreed separation, ill-health etc.) Malus Unvested deferred shares forfeited Unvested deferred shares forfeited Unvested deferred shares remain ‘on foot’ until the end of the deferral period Applies to unvested cash and deferred shares (during the deferral period) Vested shares remain under holding locks until the end of further 3 year period Unvested deferred shares remain ‘on foot’ until the end of the deferral period Vested shares remain under holding locks until the end of further 3 year period Applies to unvested cash and deferred shares (during the deferral period) but does not apply to vested shares subject to the holding locks Unvested LTI forfeited Unvested LTI forfeited Pro-rata unvested LTI remains ‘on-foot’ until end of 3 year performance period Vested LTI shares remain under holding locks until the end of further 2 year period Pro-rata unvested LTI remains ‘on-foot’ until end of 3 year performance period Vested LTI shares remain under holding locks until the end of further 2 year period Applies to unvested LTI Applies to unvested LTI but does not apply to vested shares subject to the holding locks Minimum shareholding requirement Shareholding equal to 100% FAR to be accumulated over six years from the end of calendar year 2016 or six years from the end of the calendar year in which an executive joins Orica. Whilst the minimum shareholding requirement has not been adjusted, target STI and LTI outcomes under the proposed framework would likely provide an equity holding in excess of 600% FAR for the CEO and over 300% for Executives over a 5 year period. Directors’ report – remuneration report 2017 (auDiteD) Orica Annual Report 2017 | 45 Section 6: Remuneration tables and data This section outlines Executive KMP remuneration (in accordance with the Australian Accounting Standards). 6.1 Executive KMP remuneration Details of the nature and amount of each element of remuneration of Executive KMP are set out in the table below: Remuneration outcomes presented in these tables are calculated with reference to the Corporations Act 2001 and relevant Australian Accounting Standards rather than the basis of take-home pay. Examples of what this means from a presentation of total package perspective are as follows: ƒ Part of STI awards are paid in deferred shares. These are recognised as an expense typically over two years, including the year of award. This year’s outcome includes expenses relating to this year’s and last year’s deferred shares. ƒ LTI awards are recognised over a performance period of 3 years, the value detailed relates to their assessed value when originally granted to the Executive KMP. Note the assessed value at grant can be significantly different to the value realised upon vesting if the share price moves materially. ƒ In some circumstances (LTEIP, LTIRP and LTIP plans) amounts that have previously been recorded as remuneration are reversed due to non-vesting of shares or rights where non-market based performance hurdles are not met. Short-term employee benefits Post- employment benefits Base (Fixed) Pay $000 Cash STI Payment(1) $000 Other Benefits(2) $000 Other Long-Term Benefits(3) $000 Super- annuation Benefits $000 Termi nation Benefits $000 Total excluding SBP* Expense $000 SBP Expense (4)(7) $000 Total $000 Current Executive Directors A Calderon 2017 2016 Current Executive KMP 1,780.3 1,780.6 949.8 710.0 T H Schutte 2017 2016 J K Bonnor(5) 2017 2016 D Cuzzubbo 2017 T J Edmondstone(6) 2017 2016 A J Melbourne(5) 2017 2016 S F Pinto(5) 2017 2016 950.0 950.0 822.2 850.9 601.6 440.7 399.9 235.6 820.3 827.0 874.5 637.4 538.9 523.9 325.7 263.1 455.2 230.5 257.4 193.1 Total Current Executive KMP 2017 2016 4,786.2 2,505.0 3,789.2 1,363.0 10.0 11.9 67.1 22.2 82.6 78.4 – – – – 13.9 9.4 19.7 19.4 – – 19.7 19.4 – – – – – – – 2,759.8 1,892.2 4,652.0 2,521.9 890.7 3,412.6 1,618.7 1,412.9 1,338.3 1,193.7 589.2 212.0 502.8 171.7 2,207.9 1,624.9 1,841.1 1,365.4 1,304.4 322.1 1,626.5 48.4 550.4 277.5 199.5 0.1 57.9 514.9 908.4 14.0 38.4 – – – – 27.9 47.8 19.7 13.0 4.9 14.6 47.1 45.8 111.1 92.8 839.9 2,068.0 1,691.9 1,612.1 1,082.0 521.1 279.7 712.3 488.5 2,589.1 1,971.6 2,324.4 1,570.5 843.5 820.7 327.6 (36.4) 1,171.1 784.3 – – – – – 839.9 8,785.0 2,975.1 11,760.1 – 6,201.2 1,115.5 7,316.7 780.3 465.2 39.2 – 19.7 46 | Orica Annual Report 2017 Directors’ report – remuneration report 2017 (auDiteD) Section 6: Remuneration tables and data (continued) Short-term employee benefits Post- employment benefits Base (Fixed) Pay $000 Cash STI Payment(1) $000 Other Benefits(2) $000 Other Long-Term Benefits(3) $000 Super- annuation Benefits $000 Termi nation Benefits $000 Total excluding SBP* Expense $000 SBP Expense (4)(7) $000 Total $000 Former Executive KMP R Hoggard(5)(8) 2017 2016 156.3 949.7 61.6 157.2 Total Executive KMP 2017 2016 Total 2017 2016 4,942.5 2,566.6 4,738.9 1,520.2 6,722.8 3,516.4 6,519.5 2,230.2 17.5 (2.4) 532.4 906.0 542.4 917.9 – – 27.9 47.8 27.9 47.8 – – 111.1 92.8 130.8 112.2 – – 235.4 1,104.5 64.7 289.7 300.1 1,394.2 839.9 9,020.4 3,039.8 12,060.2 – 7,305.7 1,405.2 8,710.9 839.9 11,780.2 4,932.0 16,712.2 – 9,827.6 2,295.9 12,123.5 * Share Based Payments (SBP). (1) Cash STI Payment includes payments relating to FY2017 performance accrued but not paid until FY2018. (2) These benefits include relocation costs, car parking, medical and insurance costs and movements in annual leave accrual (inclusive of any applicable fringe benefits tax). For overseas based Executives KMP other benefits include reimbursement of accommodation and health insurance. (3) This benefit includes the movement in long service leave accrual. (4) Refer to Section 3.5. This includes the value calculated under AASB 2 Share-based Payment to Executives which vest over 3 years. Value only accrues to the Executive KMP when performance conditions have been met. The Share Based Payments expense represents the amount required under AASB 2 to be expensed during the year in respect of current and past long-term incentive allocations to Executive KMP. These amounts are therefore not amounts actually received by Executive KMP during the year nor may they be payable to the Executive KMP at any other time if performance hurdles are not met. The mechanism which determines whether or not long-term incentives vest in the future is described in Section 3.5. (5) For overseas based Executive KMP, salary reported is based on the salary figure in overseas currency converted at the average foreign exchange rate for the year. (6) For further details on TJ Edmondstone’s severance payment refer to Section 4.4. (7) Under AASB 2, STI paid to Executives as deferred equity is accounted for as a share based payment and expensed over two years. Accordingly, 50% of the value of the deferred equity has been included in the Executives share based payments expense in FY2017 and the remainder will be included in FY2018. (8) FY2017 remuneration disclosure is pro-rated for the period R Hoggard was a reportable KMP. Directors’ report – remuneration report 2017 (auDiteD) Orica Annual Report 2017 | 47 Section 6: Remuneration tables and data (continued) 6.2 Summary of awards held under Orica’s LTI and STI deferred share arrangements Details of LTIP and LTIRP rights, sign-on rights, shares acquired under LTEIP and deferred shares awarded under the STI plan are set out in the table below: For the year ended 30 September 2017 Grant date Granted during FY2017 Vested Lapsed Value of instruments at grant date $ Balance at year end(2) Value of equity instruments included in compensation for the year $ Current Executive Directors A Calderon LTIP rights LTIP rights Deferred shares(1) Deferred shares Current Executive KMP T H Schutte LTIP rights LTIP rights Deferred shares(1) J K Bonnor LTIP rights LTIP rights LTIP rights Deferred shares(1) Deferred shares LTEIP shares D Cuzzubbo LTIP rights LTIP rights T J Edmondstone LTIP rights LTIP rights LTIP rights Deferred shares(1) Deferred shares LTEIP shares A J Melbourne LTIP rights LTIP rights Deferred shares(1) Sign-on Rights S F Pinto LTIP rights LTIP rights LTIP rights Deferred shares(1) Former Executive KMP R Hoggard(3) LTIP rights LTIP rights Deferred shares(1) Deferred shares LTEIP shares 30 Dec 16 22 Feb 16 1 Dec 16 1 Dec 15 30 Dec 16 22 Feb 16 1 Dec 16 30 Dec 16 22 Feb 16 23 Feb 15 1 Dec 16 1 Dec 15 21 Feb 14 30 Dec 16 22 Feb 16 30 Dec 16 22 Feb 16 23 Feb 15 1 Dec 16 1 Dec 15 21 Feb 14 30 Dec 16 22 Feb 16 1 Dec 16 12 Jan 16 30 Dec 16 22 Feb 16 23 Feb 15 1 Dec 16 22 Feb 16 23 Feb 15 1 Dec 16 1 Dec 15 21 Feb 14 192,742 – 42,237 – – – – 28,298 56,513 – 13,106 47,864 – – 7,008 – – 47,590 – 49,970 – – 7,824 – – 52,760 – 6,854 – 32,416 – – 5,741 – – 4,673 – – – – – – – – – 4,525 – – – – – – – 10,198 – – – – 17,758 – – – – – – – 11,534 – – – – – – – – – – – – – 36,096 – – – – – – – 37,872 – – – – – – – – – – – – 47,931 192,742 220,000 42,237 – 2,639,602 1,977,800 710,010 452,213 56,513 72,353 13,106 47,864 65,137 23,940 7,008 – – 47,590 28,560 49,970 63,975 40,840 7,824 – – 52,760 68,545 6,854 35,515 32,416 40,488 19,291 5,741 72,698 46,186 4,673 – – 773,946 650,453 220,318 655,497 585,582 309,425 117,811 72,322 292,378 651,745 256,754 684,339 575,135 528,061 131,538 155,803 306,763 722,548 616,220 115,220 670,352 443,937 363,987 249,336 96,509 653,555 597,119 78,566 171,655 388,241 580,257 482,014 355,005 – 170,134 158,524 110,159 144,096 142,714 35,596 58,906 – 21,562 143,271 62,574 150,437 140,168 60,724 65,769 – 22,623 158,836 150,180 57,610 231,845 97,589 88,708 28,684 48,254 26,547 11,446 6,547 – 4,772 (1) Deferred shares awarded on 1 December 2016 in respect of the FY2016 STI award. (2) No awards were exercised during FY2017. (3) SBP disclosure is pro-rated for the period R Hoggard was a KMP. 48 | Orica Annual Report 2017 Directors’ report – remuneration report 2017 (auDiteD) Section 6: Remuneration tables and data (continued) The number of Rights issued under the LTIP issued to Executive KMP and senior management and accounting values is detailed below: Grant date 10 July 17(1) 30 Dec 16 22 Feb 16 4 July 16(1) 23 Feb 15 Vesting date Number of rights issued Number of rights held at 30 September 2017 Number of rights held at 30 September 2016 Number of participants at 30 September 2017 Number of participants at 30 September 2016 30 Nov 19 98,410 96,649 30 Nov 19 1,712,055 1,659,139 – – 30 Nov 18 2,163,913 1,928,189 2,079,875 30 Nov 18 150,793 146,681 150,793 30 Nov 17 1,505,466 1,036,602 1,093,434 48 284 187 13 190 – – 215 14 200 Fair value of rights at grant $ 1,742,349 23,446,593 19,453,578 1,090,987 19,465,675 The assumptions underlying the rights valuations are: Grant date 10 July 17(1)(3) 30 Dec 16 22 Feb 16 4 July 16(1) 23 Feb 15 Price of Orica Shares at grant date $ Expected volatility in share price % Dividends expected on shares % Risk free interest rate % 20.68 17.68 13.84 12.39 19.85 25 30 30 30 25 3.00 3.75 5.50 4.50 4.00 1.73 1.96 1.80 1.62 1.88 Fair value per right ROC(2) Fair value per right RTSR(2) $ 19.35 15.87 12.04 11.23 17.92 $ 16.06 11.52 5.94 3.24 7.93 (1) A supplementary LTI offer was made in July 2016 and July 2017 to selected senior management other than Executives who joined Orica after the grant date of the main offer in February 2016 and December 2016. The terms and conditions of this supplementary offer are the same as the main offer. (2) For Executives 50% of Rights granted are subject to a Return on Capital (ROC) performance condition and 50% are subject to Relative Total Shareholder Return (RTSR) performance. (3) For senior management 25% of Rights granted are subject to a Return on Capital (ROC) performance condition and 25% are subject to RTSR performance and 50% are subject to service condition. The ROC and service condition rights had a fair value per right of $19.35 and TSR right of $16.06. Directors’ report – remuneration report 2017 (auDiteD) Orica Annual Report 2017 | 49 Non-Executive Director Remuneration Section 7: Remuneration Policy, structure and outcomes This section outlines Non-Executive Directors’ remuneration. 7.1 Overview of Non-Executive Directors’ remuneration and arrangements Fees for Non-Executive Directors (Directors) are set by reference to a number of relevant considerations: ƒ the individual’s responsibilities and time commitment attaching to the role of Director and Committee membership, ƒ the Company’s existing remuneration policies and survey data sourced from external specialists, and ƒ fees paid by comparable companies and the level of remuneration required to attract and retain directors of the appropriate calibre. Directors do not receive any form of performance based pay to preserve their independence. The current aggregate fee pool for Directors of $2,500,000 was approved by shareholders at the Company’s 2010 Annual General Meeting. The Company pays both superannuation and committee fees to the Directors out of the maximum aggregate fee pool. Committee fees are not paid to the Chairman of the Board. 7.2 Non-Executive Director fees and other benefits The table below sets out the elements of Directors’ fees and other benefits: Fees/benefits Description Board fees Main Board Chairman – Malcolm Broomhead Members – all Non-Executive Directors Committee fees Board Audit and Risk Committee (BARC) Chairman – Gene Tilbrook Members – Maxine Brenner, Lim Chee Onn (1 October 2016 – 31 January 2017), Karen Moses (appointed 1 February 2017) Human Resources and Compensation Committee (HR&C) Chairman – Maxine Brenner Members – Ian Cockerill, Lim Chee Onn Safety, Health, Environment & Community Committee (SH&E) Chairman – Ian Cockerill Members – Lim Chee Onn, Gene Tilbrook, Karen Moses (appointed 1 June 2017) Superannuation Superannuation contributions are made on behalf of the Directors at a rate of 9.5% being the current superannuation guarantee contribution rate. The Company makes contributions up to the Maximum Contributions Base to avoid imposition of the superannuation guarantee charge. Other fees/benefits Directors receive a travel allowance based on the hours travelled to a Board meeting. If travel to attend a meeting takes between 3 and 12 hours, the allowance paid is $2,500 per meeting. If travel time exceeds 12 hours, the allowance paid is $5,000 per meeting. Directors are also entitled to be paid additional fees for extra services or special exertions. 2017 $ Included in shareholder approved cap 510,000 170,000 Yes 45,000 22,500 45,000 22,500 45,000 22,500 Yes Yes No 50 | Orica Annual Report 2017 Directors’ report – remuneration report 2017 (auDiteD) Section 7: Remuneration Policy, structure and outcomes (continued) 7.3 Non-Executive Director remuneration Details of Non-Executive Directors’ remuneration are set out in the following table: Current Directors M W Broomhead, Chairman 2017 2016 M N Brenner 2017 2016 I D Cockerill(2) 2017 2016 K A Moses 2017 2016 Lim Chee Onn 2017 2016 G T Tilbrook 2017 2016 Former Directors R R Caplan, Chairman 2016 M Parkinson 2016 N L Scheinkestel 2016 Total Non-Executive Directors 2017 2016 Short-term employee benefits Post- employment benefits Directors fees $000 Committee fees $000 Other benefits(1) $000 Superannuation $000 Total $000 510.0 396.7 170.0 170.0 170.0 170.0 170.0 42.5 170.0 170.0 170.0 170.0 127.5 42.5 28.3 – – 67.5 63.8 67.5 67.5 22.5 – 52.5 60.0 67.5 67.5 – 11.3 11.3 0.3 – – – 34.9 41.5 – – 10.0 20.0 17.5 12.5 – – – 19.7 15.9 19.7 19.4 19.7 19.4 18.2 4.0 19.7 19.4 19.7 19.4 4.8 5.1 3.8 530.0 412.6 257.2 253.2 292.1 298.4 210.7 46.5 252.2 269.4 274.7 269.4 132.3 58.9 43.4 1,360.0 1,317.5 277.5 281.4 62.7 74.0 116.7 111.2 1,816.9 1,784.1 (1) These benefits include travel allowances and car parking benefits. (2) Other benefits for I D Cockerill include spousal travel (inclusive of any fringe benefits tax). Directors’ report – remuneration report 2017 (auDiteD) Orica Annual Report 2017 | 51 Other remuneration information Section 8: Remuneration governance and other remuneration arrangements Effective governance is central to Orica’s remuneration strategy and approach. This section outlines the key elements of Orica’s remuneration governance, Executive and Director share ownership, Malus and securities dealing policies and Executive service agreements. 8.1 Responsibility for setting remuneration The Human Resources and Compensation Committee (the Committee) is delegated responsibility by the Board for reviewing and making recommendations on remuneration policies for the Company, including, in particular, the policies governing the remuneration of Executives. Activities of the Committee are governed by its Terms of Reference, which are available on the Company’s website at www.orica.com. Amongst other responsibilities, the Committee assists the Board in its oversight of: (a) remuneration policy for Executives; (b) level and structure of remuneration for Senior Executives, including short-term and long-term incentive plans; (c) the Company’s compliance with applicable legal and regulatory requirements in respect of remuneration matters; and (d) approval of the allocation of shares and awards under the LTIP and General Employee Exempt Share Plan (GEESP). 8.2 Use of remuneration advisors during the year No remuneration recommendations were received from Remuneration Consultants as defined under the Corporations Act 2001. 8.3 Executive and Director share ownership The Board considers it an important foundation of the Orica Executive Framework that Executives and Directors hold a significant number of Orica shares to encourage Executives and Directors to behave like long-term investment owners. (a) Executives An Executive Minimum Shareholding Guideline was introduced from 1 January 2015 which requires Executives to build their shareholding so that they have a significant exposure to Orica’s share price performance. Executives must accumulate a minimum vested shareholding in Orica equivalent to 50% fixed remuneration (and 100% fixed remuneration for the MD & CEO) over six years from the end of calendar year 2016 for existing Executives or from commencement of employment for new appointments. It is anticipated that with the new Executive Remuneration Framework, at target vesting, the CEO will have at least 600% of FAR in shareholding with Executives at over 300% of FAR over a period of 5 years. (b) Non-Executive Directors To create alignment between Directors and shareholders, Directors are required to hold (or have a benefit in) shares in the Company equivalent in value to at least one year’s base fees. Such holdings must be acquired over a reasonable time using personal funds and includes shares held in superannuation accounts or other entities controlled by the Director. The table below sets out the number of shares held directly and indirectly by Directors and Executive KMP: Balance at 1 October 2016 Acquired(1) Disposed Balance at 30 September 2017 Number of shares & rights not vested Executive KMP A Calderon T H Schutte J K Bonnor D Cuzzubbo T J Edmondstone A J Melbourne S F Pinto Former Executive KMP R Hoggard 11,920 28,298 13,866 – – – – – – – 4,525 – 10,198 17,758 – 1,248 11,556 – – – 10,198 – – – 26,352 – 4,525 – – 17,758 – 454,979 141,972 143,949 76,150 162,609 163,675 97,936 12,804 178,302 52 | Orica Annual Report 2017 Directors’ report – remuneration report 2017 (auDiteD) Non-Executive Directors M W Broomhead M N Brenner I D Cockerill K A Moses Lim Chee Onn G T Tilbrook Total Balance at 1 October 2016 Acquired(1) Disposed Balance at 30 September 2017 Number of shares & rights not vested 30,300 6,039 16,138 8,000 11,000 9,000 93,645 – – 459 – – – – – – – – – 30,300 6,039 16,597 8,000 11,000 9,000 – – – – – – 72,794 24,064 142,375 1,419,572 (1) Shares acquired, including through the Dividend Reinvestment Plan (DRP). 8.4 Share trading policy and Malus Malus A Malus Standard was introduced in FY2015 which allows the Board to require any Executive to forfeit in full or in part any unvested LTIP or deferred STI award as a result of: (a) a material misstatement in financial results; (b) behaviour that brings Orica into disrepute or has the potential to do so; (c) serious misconduct; or (d) any other circumstance, which the Board has determined in good faith. In considering whether any adjustment is necessary in respect of any or all participants, the Board may take into account the individual’s level of responsibility, accountability or influence over the action or inaction, the quantum of the actual loss or damage, any impact on Orica’s financial soundness, the extent to which any internal policies, external regulations and/or risk management requirements were breached and any other relevant matters. Securities dealing All executives are required to comply with Orica’s Securities’ Dealing Policy at all times and in respect of all Orica shares held, including any defined employee share plans. Trading is subject to pre-clearance and is not permitted during designated blackout periods unless there are exceptional circumstances. In addition, Executives are prohibited from using any Orica shares as collateral in any margin loan or derivative arrangement. 8.5 Service agreements Remuneration and other terms of employment for Executives are formalised in service agreements. The terms and conditions of employment of each Executive reflect market conditions at the time of their contract negotiation on appointment or subsequently. The material terms of the employment contracts for the current Executives are summarised in the table below and subject to applicable law. Contractual Term Duration of contract Executives affected Conditions All Executive Permanent full-time employment contract until notice given by either party. Notice period to be provided by Executive All Executive 6 months. Notice period to be provided by Orica MD & CEO Other Executives Post-employment restraints All Executives [end of remuneration report — tag for page reference] 6 months. Orica may elect to make payment in lieu of notice. In the event of Orica terminating the service agreement, the MD & CEO will be entitled to receive a termination payment of 6 months’ salary in addition to the notice period. Should the MD & CEO’s service agreement be terminated by mutual agreement, 6 month’s salary is payable (in which case no notice is required to be given). 13 weeks (26 weeks for Tom Schutte). Should the Company wish to terminate any of the other Executives for convenience, the Company must provide the Executive a payment equal to 6 months of their average fixed annual remuneration over the preceding 3 years, unless otherwise specified in their employment contract. For a limited number of Executives, a payment equal to 12 months is required. Each Executive has also agreed to restraints and non-solicitation undertakings as part of their service agreements, which will apply upon cessation of their employment to protect the legitimate business interests of Orica. Directors’ report – remuneration report 2017 (auDiteD) Orica Annual Report 2017 | 53 Rounding The amounts shown in this report and in the financial statements have been rounded off, except where otherwise stated, to the nearest tenth of a million dollars, the Company being in a class specified in the ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 dated 24 March 2016. This Directors’ Report is signed on behalf of the Board in accordance with a resolution of the Directors of Orica Limited. M W Broomhead Chairman A Calderon Managing Director and Chief Executive Officer Dated at Melbourne 3 November 2017. 54 | Orica Annual Report 2017 auDitor’s inDepenDence Declaration Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Orica Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Orica Limited for the financial year ended 30 September 2017 there have been: i. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Alison Kitchen Partner Melbourne, Australia 3 November 2017 SIG_01 PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 26 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. income statement For the year enDeD 30 september Sales revenue Other income Expenses Raw materials and inventories Employee benefits expense Depreciation and amortisation expense Purchased services Repairs and maintenance Impairment of property, plant & equipment Outgoing freight Lease payments – operating leases Other expenses Share of net profit of associates accounted for using the equity method Total Profit from operations Net financing costs Financial income Financial expenses Net financing costs Profit before income tax expense Income tax expense Net profit for the year Net profit for the year attributable to: Shareholders of Orica Limited Non-controlling interests Net profit for the year Earnings per share Earnings per share attributable to ordinary shareholders of Orica Limited: Basic earnings per share Diluted earnings per share The Income Statement is to be read in conjunction with the accompanying notes to the financial statements. Orica Annual Report 2017 | 55 Consolidated 2017 $m 5,039.2 51.8 2016 $m 5,091.9 64.1 (2,229.1) (1,051.1) (2,272.2) (1,092.5) (261.2) (348.0) (160.9) (0.1) (272.8) (46.1) (123.2) 36.6 (265.9) (327.9) (157.6) (21.3) (274.8) (41.1) (104.3) 39.2 (4,455.9) (4,518.4) 635.1 637.6 28.2 (99.9) (71.7) 563.4 (164.0) 399.4 386.2 13.2 399.4 cents 102.7 102.0 29.6 (113.9) (84.3) 553.3 (198.4) 354.9 342.8 12.1 354.9 cents 92.0 92.0 Notes (1) (1) (1) (7) (14) (11) (2) (2) 56 | Orica Annual Report 2017 statement of comprehensive income For the year enDeD 30 september Net profit for the year Other comprehensive income Items that may be reclassified subsequently to Income Statement: Exchange differences on translation of foreign operations Exchange gain/(loss) on translation of foreign operations Net loss on hedge of net investments in foreign subsidiaries Net exchange differences on translation of foreign operations Sundry items: Net cash flow hedges Items that will not be reclassified subsequently to Income Statement: Net actuarial gain/(loss) Other comprehensive loss for the period Total comprehensive income for the period Attributable to: Shareholders of Orica Limited Non-controlling interests Total comprehensive income for the period Notes (11c) (11c) Consolidated 2017 $m 399.4 2016 $m 354.9 12.1 (118.0) (105.9) (111.6) (162.7) (274.3) (11c) 13.8 2.8 (11c) 23.4 (68.7) 330.7 322.1 8.6 330.7 (59.2) (330.7) 24.2 14.8 9.4 24.2 The Statement of Comprehensive Income is to be read in conjunction with the accompanying notes to the financial statements. Balance sheet as at 30 september Current assets Cash and cash equivalents Trade receivables Other receivables Inventories Other assets Total current assets Non-current assets Other receivables Investments accounted for using the equity method Property, plant and equipment Intangible assets Deferred tax assets Other assets Total non-current assets Total assets Current liabilities Trade payables Other payables Interest bearing liabilities Provisions Other liabilities Total current liabilities Non-current liabilities Other payables Interest bearing liabilities Provisions Deferred tax liabilities Other liabilities Total non-current liabilities Total liabilities Net assets Equity Ordinary shares Reserves Retained earnings Total equity attributable to ordinary shareholders of Orica Limited Non-controlling interests Total equity The Balance Sheet is to be read in conjunction with the accompanying notes to the financial statements. Notes (3b) (5) (5) (14) (7) (8) (11d) (5) (3a) (6) (3a) (6) (11d) Orica Annual Report 2017 | 57 Consolidated 2017 $m 2016 $m 516.9 607.3 58.4 538.4 63.8 328.0 565.4 122.3 517.8 44.4 1,784.8 1,577.9 97.6 184.6 2,741.5 1,577.1 323.1 76.5 5,000.4 6,785.2 795.5 264.3 24.3 187.9 25.3 28.9 188.1 2,725.3 1,558.8 408.3 108.5 5,017.9 6,595.8 778.8 282.4 321.7 166.1 41.8 1,297.3 1,590.8 3.9 7.2 1,933.5 1,555.7 397.3 88.5 101.2 2,524.4 3,821.7 2,963.5 484.2 70.2 104.5 2,221.8 3,812.6 2,783.2 2,025.3 (489.9) 1,247.1 2,782.5 0.7 (4a) 2,068.5 (565.8) 1,459.6 2,962.3 1.2 (13) 2,963.5 2,783.2 58 | Orica Annual Report 2017 statement of changes in equity For the year enDeD 30 september Ordinary shares $m Retained earnings $m Foreign currency translation reserve $m Cash flow hedge reserve $m Other reserves $m Non- controlling interests $m Total $m 2016 Balance at 1 October 2015 1,954.4 1,247.0 (69.7) (65.7) (81.4) 2,984.6 Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners, recorded directly in equity – – – 342.8 (59.2) – (271.6) 283.6 (271.6) Total changes in contributed equity 70.9 Share-based payments expense Dividends/distributions Dividends declared/paid to non-controlling interests – – – – – (283.5) – – – – – – 2.8 2.8 – – – – – – – – (4.3) – – Total equity $m 2,987.2 354.9 (330.7) 342.8 (328.0) 2.6 12.1 (2.7) 14.8 9.4 24.2 70.9 (4.3) (283.5) – – – 70.9 (4.3) (283.5) – (11.3) (11.3) Balance at the end of the year 2,025.3 1,247.1 (341.3) (62.9) (85.7) 2,782.5 0.7 2,783.2 2017 Balance at 1 October 2016 2,025.3 1,247.1 (341.3) (62.9) (85.7) 2,782.5 Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners, recorded directly in equity – – – 386.2 23.4 – (101.3) – 13.8 409.6 (101.3) 13.8 Total changes in contributed equity 43.2 Share-based payments expense Divestment of non-controlling interests Dividends/distributions Dividends declared/paid to non-controlling interests – – – – – – – (197.1) – – – – – – – – – – – – – – – 11.6 – – – 386.2 (64.1) 43.2 11.6 – (197.1) – Balance at the end of the year 2,068.5 1,459.6 (442.6) (49.1) (74.1) 2,962.3 The Statement of Changes in Equity is to be read in conjunction with the accompanying notes to the financial statements. 0.7 13.2 (4.6) 2,783.2 399.4 (68.7) – – (0.3) – (7.8) 1.2 43.2 11.6 (0.3) (197.1) (7.8) 2,963.5 322.1 8.6 330.7 statement of cash flows For the year enDeD 30 september Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Borrowing costs Dividends received Other operating revenue received Net income taxes paid Net cash flows from operating activities Cash flows from investing activities Payments for property, plant and equipment Payments for intangibles Payments for purchase of businesses/controlled entities and investments Proceeds from sale of property, plant and equipment Net proceeds from sale of businesses/controlled entities Proceeds from sale of investments Disposal costs from sale of businesses/controlled entities Net cash flows used in investing activities Cash flows from financing activities Proceeds from long-term borrowings Repayment of long-term borrowings Net movement in short term financing Dividends paid – Orica ordinary shares Dividends paid – non-controlling interests Payments for finance leases Proceeds from issue of ordinary shares Net cash used in financing activities Net increase in cash held Cash at the beginning of the year Effects of exchange rate changes on cash Cash at the end of the year Orica Annual Report 2017 | 59 Consolidated Notes 2017 $m 2016 $m Inflows/ (Outflows) Inflows/ (Outflows) 5,512.8 5,796.7 (4,823.6) (4,820.5) 28.2 (127.6) 34.5 31.2 (189.1) 466.4 (248.0) (57.9) (0.5) 37.3 13.1 4.8 (3.6) (254.8) 30.0 (147.3) 38.4 19.1 (138.5) 777.9 (211.3) (51.6) (3.8) 87.4 17.5 16.7 (30.8) (175.9) 1,638.4 3,551.4 (1,165.3) (3,686.0) (309.5) (157.9) (7.1) (1.5) 0.6 (2.3) 209.3 316.2 (8.6) 516.9 (139.9) (213.4) (12.3) (1.6) 0.8 (501.0) 101.0 260.8 (45.6) 316.2 (3b) (3b) The Statement of Cash Flows is to be read in conjunction with the accompanying notes to the financial statements. 60 | Orica Annual Report 2017 notes to the financial statements For the year enDeD 30 september Section A. Financial performance 1. Segment report 2. Earnings per share (EPS) Section B. Capital management 3. Net debt 4. Contributed Equity and Reserves Section C. Operating assets and liabilities 5. Working Capital 6. Provisions 7. Property, plant and equipment 8. Intangible assets 9. Impairment testing of assets Section D. Managing financial risks 10. Financial risk management Section E. Taxation 11. Taxation Section F. Global footprint 12. Investments in controlled entities 13. Non-controlling interests in controlled entities 14. Investments accounted for using the equity method and joint operations 15. Businesses and non-controlling interests acquired 16. Businesses disposed 17. Parent Company disclosure – Orica Limited 18. Deed of Cross Guarantee Section G. Reward and recognition 19. Employee share plans and Remuneration 20. Superannuation commitments Section H. Other 21. Commitments 22. Contingent liabilities 23. Auditors’ remuneration 24. Events subsequent to balance date 25. Investments in controlled entities About this report This is the Annual Report of Orica Limited (‘the Company’ or ‘Orica’) and of its controlled entities (collectively ‘the Group’) for the year ended 30 September 2017. It is a general purpose Financial Report which has been prepared by a for-profit entity in accordance with the requirements of applicable Australian Accounting Standards and the Corporations Act 2001 and complies with International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board. It has been prepared on a historical cost basis, except for derivative financial instruments, superannuation commitments and investments in financial assets which have been measured at fair value. It is presented in Australian dollars which is Orica’s functional and presentation currency. The amounts shown have been rounded off, except where otherwise stated, to the nearest tenth of a million dollars, in accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 dated 24 March 2016. Orica’s Directors have included information in this report that they deem to be material and relevant to the understanding of the financial statements. Disclosure may be considered material and relevant if the dollar amount is significant due to size or nature, or the information is important to understand the: ƒ Group’s current year results; ƒ impact of significant changes in Orica’s business; or ƒ aspects of the Group’s operations that are important to future performance. Disclosure of information that is not material may undermine the usefulness of the Financial Report by obscuring important information. In order to develop this Financial Report, management is required to make a number of judgements and apply estimates of the future as part of the application process of the Group’s accounting policies. Judgements and estimates, which are material to this report, are highlighted in the following notes: Note 5 Working capital Note 6 Provisions Note 7 Property, plant and equipment Note 8 Intangible assets Note 9 Impairment testing of assets Note 11 Taxation Note 20 Superannuation commitments Note 22 Contingent liabilities 61 61 65 66 66 68 69 69 70 73 74 75 76 76 81 81 85 85 85 86 87 87 88 88 90 90 92 96 96 96 97 98 98 26. New accounting policies and accounting standards 101 notes to the Financial statements SECTION A. FINANCIAL PERFORMANCE For the year enDeD 30 september Orica Annual Report 2017 | 61 Section A. Financial performance A key element of the Group’s current strategy is “to create sustainable shareholder value”. This section highlights the results and performance of the Group for the year ended 30 September 2017. 1. Segment report (a) Identification and description of segments Orica’s reportable segments are based on the internal management structure as reported to the Group’s Chief Operating Decision Maker (the Group’s Managing Director and CEO). The reporting segments are as follows: Reportable segments Products/services ƒ Australia/Pacific and Indonesia ƒ North America ƒ Latin America ƒ Europe, Africa and Asia ƒ Minova Manufacture and supply of commercial explosives and blasting systems including technical services and solutions to the mining and infrastructure markets, and supply of mining chemicals including sodium cyanide for gold extraction. Minova is a provider of chemical and mechanical earth control products, adhesives and ground support solutions for the underground mining, construction, tunnelling and civil engineering industries. ƒ Global Support Corporate and support costs which cannot otherwise be allocated to other segments on a reasonable basis, operation of the Botany Groundwater Treatment Plant and non-operating assets. 62 | Orica Annual Report 2017 notes to the Financial statements SECTION A. FINANCIAL PERFORMANCE For the year enDeD 30 september 1. Segment report (continued) (b) Reportable segments 2017 $m Revenue External sales Inter-segment sales Total sales revenue Other income (refer to note 1c)(1) Total revenue and other income Results before individually material items Australia/ Pacific and Indonesia North America Latin America Europe, Africa and Asia Minova Global Support Elim- inations Consoli- dated 1,518.7 1,199.1 874.9 980.6 452.1 13.8 – 5,039.2 46.5 163.7 41.0 45.7 3.5 976.8 (1,277.2) – 1,565.2 1,362.8 915.9 1,026.3 455.6 990.6 (1,277.2) 5,039.2 (2.0) 2.8 8.8 16.5 12.9 12.8 – 51.8 1,563.2 1,365.6 924.7 1,042.8 468.5 1,003.4 (1,277.2) 5,091.0 Profit/(loss) before financing costs and income tax 343.5 187.5 61.3 101.7 13.1 (72.0) – Financial income Financial expenses Profit before income tax expense Income tax expense Profit after income tax expense Profit attributable to non-controlling interests Profit after income tax expense before individually material items attributable to shareholders of Orica Limited Individually material items (refer to note 1d) Gross individually material items Tax on individually material items Net individually material items attributable to non-controlling interests Individually material items attributable to shareholders of Orica Limited Net profit for the period attributable to shareholders of Orica Limited Segment assets Segment liabilities Investments accounted for using the equity method Acquisitions of PPE and intangibles Impairment of PPE Impairment of inventories Impairment of trade receivables Depreciation and amortisation Non-cash expenses: share based payments Share of net profit of associates accounted for using the equity method – – – – – – – – – – – – 2,739.9 358.8 3.2 161.7 – 1.1 – 117.6 1.1 2.7 882.2 223.2 173.6 48.0 – 0.8 – 36.3 1.2 564.4 177.5 5.0 20.5 – 1.9 2.0 25.4 0.5 816.6 277.1 1.4 29.8 0.1 0.1 5.7 31.2 1.3 31.8 2.7 (0.6) 386.1 1,396.0 81.7 2,703.4 – 9.0 – 0.4 0.2 9.1 0.9 – 1.4 63.5 – 3.2 0.3 41.6 6.6 – – – – – – – – – – – – – 635.1 28.2 (99.9) 563.4 (164.0) 399.4 (13.2) 386.2 – – – – 386.2 6,785.2 3,821.7 184.6 332.5 0.1 7.5 8.2 261.2 11.6 36.6 (1) Includes foreign currency gains/(losses) in various reportable segments. notes to the Financial statements SECTION A. FINANCIAL PERFORMANCE For the year enDeD 30 september Orica Annual Report 2017 | 63 1. Segment report (continued) (b) Reportable segments 2016 $m Revenue External sales Inter-segment sales Total sales revenue Australia/ Pacific and Indonesia North America Latin America Europe, Africa and Asia Minova Global Support Elim- inations Consoli- dated 1,487.6 1,198.6 878.5 1,098.7 399.5 29.0 – 5,091.9 57.1 161.4 41.5 42.6 7.0 853.0 (1,162.6) – 1,544.7 1,360.0 920.0 1,141.3 406.5 882.0 (1,162.6) 5,091.9 Other income (refer to note 1c)(1) (0.9) 9.1 19.6 (7.5) 4.9 22.2 – 47.4 Total revenue and other income 1,543.8 1,369.1 939.6 1,133.8 411.4 904.2 (1,162.6) 5,139.3 Results before individually material items Profit/(loss) before financing costs and income tax 315.1 196.5 69.2 116.5 0.1 (55.2) – 642.2 Financial income Financial expenses Profit before income tax expense Income tax expense Profit after income tax expense Profit attributable to non-controlling interests Profit after income tax expense before individually material items attributable to shareholders of Orica Limited Individually material items (refer to note 1d) Gross individually material items Tax on individually material items Net individually material items attributable to non-controlling interests Individually material items attributable to shareholders of Orica Limited Net profit for the period attributable to shareholders of Orica Limited Segment assets Segment liabilities Investments accounted for using the equity method Acquisitions of PPE and intangibles Impairment of PPE Impairment of inventories Impairment of trade receivables Depreciation and amortisation Non-cash expenses: share based payments Share of net profit of associates accounted for using the equity method – – – – (21.3) – 16.7 (0.7) – – – (41.0) 2,676.4 858.0 406.4 4.2 146.9 1.3 0.4 1.3 125.4 (1.4) 197.0 176.0 44.4 – 1.6 0.3 41.4 (1.1) 533.8 156.0 837.7 269.4 372.3 1,317.6 84.6 2,699.2 4.8 19.4 18.6 1.8 13.9 25.1 (0.3) 2.2 27.3 1.4 3.8 10.6 35.2 – – 4.7 – 5.1 5.2 15.1 (0.3) 0.9 42.9 – 3.0 2.3 23.7 (1.2) 2.1 28.7 2.4 6.0 – – 29.6 (113.9) 557.9 (156.7) 401.2 (12.1) 389.1 (4.6) (41.7) – (46.3) 342.8 6,595.8 3,812.6 188.1 285.6 21.3 15.7 33.6 265.9 (4.3) 39.2 – – – – – – – – – – – – (1) Includes foreign currency gains/losses in various reportable segments and excludes profit on sale of shares in Thai Nitrates Company Ltd disclosed in individually material items. 64 | Orica Annual Report 2017 notes to the Financial statements SECTION A. FINANCIAL PERFORMANCE For the year enDeD 30 september 1. Segment report (continued) (c) Other income Other income Net foreign currency (losses)/gains Profit from sale of investments/businesses Net profit on sale of property, plant and equipment Total other income (d) Individually material items Profit after income tax includes the following individually material items of expense: Settlement of Australian Tax Action Profit on sale of shareholding in Thai Nitrate Company Ltd Impact of Chile plant incident Individually material items Individually material items attributable to shareholders of Orica (e) Geographical segments Consolidated 2017 $m 31.2 (7.3) 14.5 13.4 51.8 2016 $m 19.1 16.1 20.0 8.9 64.1 2017 2016 Gross $m Tax $m Net $m Gross $m Tax $m Net $m – – – – – – – – – – – – – – – – (41.0) (41.0) 16.7 (21.3) (4.6) (0.7) – (41.7) 16.0 (21.3) (46.3) (4.6) (41.7) (46.3) The presentation of geographical revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets. Australia United States of America Other(2) Consolidated Revenue Non-current assets(1) 2017 $m 1,351.6 714.7 2,972.9 5,039.2 2016 $m 1,307.0 712.2 3,072.7 5,091.9 2017 $m 2,400.9 396.9 1,815.3 4,613.1 2016 $m 2,279.4 410.2 1,828.4 4,518.0 (1) Excluding: financial derivatives (included within other assets and other liabilities), deferred tax assets and post-employment benefit assets. (2) Other than Australia and United States of America, sales to other countries are individually less than 10% of the Group’s total revenues. Recognition and measurement Sales revenue External sales are measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. External sales are recognised when the significant risks and rewards of ownership are transferred to the purchaser, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. Other income Profits and losses from sale of businesses, controlled entities and other non-current assets are recognised when there is a signed contract of sale. Dividends are recognised in the Income Statement when the right to receive them is established. Other income includes profit on sale of property, plant and equipment, profit from the sale of businesses and controlled entities, foreign currency gains/ (losses) and royalties. notes to the Financial statements SECTION A. FINANCIAL PERFORMANCE For the year enDeD 30 september 2. Earnings per share (EPS) (i) As reported in the income statement Earnings used in the calculation of basic EPS attributable to ordinary shareholders of Orica Limited Net profit for the period from continuing operations Net profit for the period attributable to non-controlling interests Total Weighted average number of shares used in the calculation: Basic earnings per share Effect of dilutive share options and rights Number for diluted earnings per share The weighted average number of non-dilutive options and rights that have not been included in the calculation of diluted earnings per share Total attributable to ordinary shareholders of Orica Limited Basic earnings per share Diluted earnings per share (ii) Adjusted for individually material items Earnings used in the calculation of basic EPS adjusted for individually material items attributable to ordinary shareholders of Orica Limited Net profit for the period Net profit for the period attributable to non-controlling interests Adjusted for individually material items (refer to note 1(d)) Total adjusted Total attributable to ordinary shareholders of Orica Limited before individually material items Basic earnings per share Diluted earnings per share Orica Annual Report 2017 | 65 Consolidated 2017 $m 2016 $m 399.4 (13.2) 386.2 354.9 (12.1) 342.8 Number of shares 376,153,022 372,408,452 2,511,185 373,273 378,664,207 372,781,725 1,584,498 3,554,358 Cents per share Cents per share 102.7 102.0 92.0 92.0 Consolidated 2017 $m 2016 $m 399.4 (13.2) – 386.2 354.9 (12.1) 46.3 389.1 Cents per share Cents per share 102.7 102.0 104.5 104.4 66 | Orica Annual Report 2017 notes to the Financial statements SECTION B. CAPITAL MANAGEMENT For the year enDeD 30 september Section B. Capital management Orica’s objectives when managing capital (net debt and total equity) are to safeguard the Group’s ability to continue as a going concern and to ensure that the capital structure enhances, protects and balances financial flexibility against minimising the cost of capital. This section outlines the principal capital management initiatives that have been undertaken, current year drivers of the Group’s cash flows, as well as the key operating assets used and liabilities incurred to support financial performance. 3. Net debt In order to maintain an appropriate capital structure, the Group may adjust the amount of dividends paid to shareholders, utilise a dividend reinvestment plan, return capital to shareholders such as a share buy-back or issue new equity, in addition to incurring an appropriate level of borrowings. Currently, Orica maintains a dividend payout ratio policy and expects the total payout ratio to be in the range of 40 to 70 percent of underlying earnings. It is also expected that the total dividend paid each year will be weighted towards the final dividend. Orica monitors debt capacity against a number of key credit metrics, principally including the gearing ratio (net debt divided by debt plus equity) and the interest cover ratio (EBIT excluding individually material items, divided by net financing costs adjusted for capitalised borrowing costs). These ratios together with performance measure criteria determined by Standard & Poor’s are targeted in support of the maintenance of an investment grade credit rating, which facilitates access to borrowings from a range of sources. The Group’s current target level for gearing is 35% to 45% and interest cover is 5 times or greater. Ratios may move outside of these target ranges for relatively short periods of time after major acquisitions or other significant transactions. In addition, the gearing and interest cover ratios are monitored to ensure an adequate buffer against covenant levels applicable to the various financing facilities. The gearing ratio is calculated as follows: Interest bearing liabilities (refer to note 3a) less cash and cash equivalents (refer to note 3b) Net debt Total equity Net debt and total equity Gearing ratio (%) The interest ratio is calculated as follows: EBIT (excluding individually material items) Net financing costs Capitalised borrowing costs Consolidated 2017 $m 1,957.8 (516.9) 1,440.9 2,963.5 4,404.4 32.7% 635.1 71.7 30.8 102.5 2016 $m 1,877.4 (328.0) 1,549.4 2,783.2 4,332.6 35.8% 642.2 84.3 35.1 119.4 Interest cover ratio (times) 6.2 5.4 (a) Interest bearing liabilities Unsecured Private Placement(1) Export finance facility(1) Bank loans(1) Other loans Lease liabilities(2) Consolidated Consolidated Consolidated 2017 $m Current 2016 $m 2017 $m 2016 $m Non-current 2017 $m Total 2016 $m – 11.9 – 11.2 1.2 24.3 292.0 15.4 – 12.7 1.6 1,827.5 1,498.6 1,827.5 1,790.6 29.7 71.5 3.6 1.2 45.9 – 9.0 2.2 41.6 71.5 14.8 2.4 61.3 – 21.7 3.8 321.7 1,933.5 1,555.7 1,957.8 1,877.4 (1) Orica Limited provides guarantees on these facilities refer to note 17 for further details. (2) $2.5m (2016 $5.9m) of property, plant and equipment is pledged as security for finance leases. In the event of default by Orica, the rights to the leased assets transfer to the lessor. During the current and prior year, there were no defaults or breaches of covenants on any loans. notes to the Financial statements SECTION B. CAPITAL MANAGEMENT For the year enDeD 30 september 3. Net debt (continued) (b) Notes to the statement of cash flows Reconciliation of cash Cash at the end of the year comprises: Cash Bank overdraft Reconciliation of profit after income tax to net cash flows from operating activities Profit after income tax expense Adjusted for the following items: Depreciation and amortisation Net (profit) on sale of property, plant and equipment Impairment of property, plant and equipment Net (profit) on sale of businesses and controlled entities Net (profit) on sale of investments Share based payments expense/(writeback) Share of associates’ net (profit) after adding back dividends received Unwinding of discount on provisions Other Changes in working capital and provisions excluding the effects of acquisitions and disposals of businesses/controlled entities (increase)/decrease in trade and other receivables (increase)/decrease in inventories decrease in net deferred taxes (decrease) in payables and provisions (decrease) in income taxes payable Net cash flows from operating activities Recognition and Measurement Cash and cash equivalents Orica Annual Report 2017 | 67 Consolidated 2017 $m 2016 $m 516.9 – 516.9 328.0 (11.8) 316.2 399.4 354.9 261.2 (13.4) 0.1 (10.9) (3.6) 11.6 (2.1) 1.0 2.3 (72.6) (20.3) 6.6 (69.9) (23.0) 466.4 265.9 (8.9) 21.3 (3.3) (16.7) (4.3) (0.8) 3.3 (1.5) 281.1 76.2 48.5 (237.1) (0.7) 777.9 Cash includes cash at bank, cash on hand and deposits at call which are readily convertible to cash on hand and which are used in the cash management function and are disclosed for the purposes of the Statement of Cash Flows net of bank overdrafts. The Directors consider the net carrying amount of cash and cash equivalents to approximate their fair value due to their short term to maturity. Cash flows are included in the Statement of Cash Flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the relevant taxation authorities are classified as operating cash flows. Interest-bearing liabilities Interest-bearing liabilities are initially recognised at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing liabilities are stated at amortised cost with any difference between cost and redemption value being recognised in the Income Statement over the period of the liabilities on an effective interest basis, unless they are liabilities designated in a fair value relationship in which case they continue to be measured at fair value (refer to note 10a). Amortised cost is calculated by taking into account any issue costs and any discount or premium on issuance. Gains and losses are recognised in the Income Statement in the event that the liabilities are derecognised. Borrowing costs Borrowing costs include interest, unwinding of the effect of discounting on provisions, amortisation of discounts or premiums relating to borrowings and amortisation of ancillary costs incurred in connection with the arrangement of borrowings, including lease finance charges. Borrowing costs are expensed as incurred unless they relate to qualifying assets. Where funds are borrowed specifically for the production of a qualifying asset, the interest on those funds is capitalised, net of any interest earned on those borrowings. Where funds are borrowed generally, borrowing costs are capitalised using a weighted average interest rate. 68 | Orica Annual Report 2017 notes to the Financial statements SECTION B. CAPITAL MANAGEMENT For the year enDeD 30 september 4. Contributed Equity and Reserves (a) Contributed Equity Movements in issued and fully paid shares of Orica since 1 October 2015 were as follows: Details Ordinary shares Opening balance of shares issued Shares issued under the Orica dividend reinvestment plan Shares issued under the Orica dividend reinvestment plan Shares issued under the Orica GEESP plan Balance at the end of year Shares issued under the Orica dividend reinvestment plan Shares issued under the Orica dividend reinvestment plan Deferred shares issued to settle Short-Term Incentive Shares issued under the Orica GEESP plan Balance at the end of the year (b) Reserves Recognition and Measurement Date Number of shares Issue price $ $m 1-Oct-15 370,113,526 18-Dec-15 3,318,655 1-Jul-16 1,497,325 – 30-Sep-16 374,929,506 9-Dec-16 1,246,245 3-Jul-17 863,276 – – 15.27 12.99 17.37 20.36 1,954.4 50.7 19.4 0.8 2,025.3 21.6 17.6 3.4 0.6 30-Sep-17 377,039,027 2,068.5 Foreign currency translation reserve: The foreign currency translation reserve records the foreign currency differences arising from the translation of foreign operations, the translation of transactions that hedge net investments in a foreign operation or the translation of foreign currency monetary items forming part of the net investment in a foreign operation. Cash flow hedge reserve: The amount in the cash flow hedge reserve represents the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred. Other reserves: Other reserves represents share based payments reserves and equity reserves arising from the purchase of non-controlling interests. (c) Dividends Dividends paid or declared in respect of the year ended 30 September were: Ordinary shares interim dividend of 20.5 cents per share, 48.8% franked at 30%, paid 1 July 2016 interim dividend of 23.5 cents per share, 12.8% franked at 30%, paid 3 July 2017 final dividend of 56 cents per share, 35.7% franked at 30.0%, paid 18 December 2015 final dividend of 29 cents per share, 27.6% franked at 30.0%, paid 9 December 2016 Dividends paid in cash or satisfied by the issue of shares under the Dividend Reinvestment Plan (DRP) during the year were as follows: paid in cash DRP – satisfied by issue of shares Consolidated 2017 $m 2016 $m 88.4 108.7 157.9 39.2 76.5 207.0 213.4 70.1 Since the end of the financial year, the Directors declared the following dividend: Final dividend on ordinary shares of 28.0 cents per share, unfranked, payable 8 December 2017. Total franking credits related to this dividend are nil (2016 $12.9 million). The financial effect of the final dividend on ordinary shares has not been brought to account in the financial statements for the year ended 30 September 2017 – however will be recognised in the 2018 financial statements. Franking credits Franking credits available at the 30% corporate tax rate after allowing for tax payable in respect of the current year’s profit and the payment of the final dividend for 2017 are $91.5 million (2016 $22.2 million). notes to the Financial statements SECTION C. OPERATING ASSETS AND LIABILITIES For the year enDeD 30 september Orica Annual Report 2017 | 69 Section C. Operating assets and liabilities This section highlights current year drivers of the Group’s operating and investing cash flows, as well as the key operating assets used and liabilities incurred to support delivering financial performance. 5. Working Capital (a) Trade Working Capital (TWC) Trade working capital includes receivables and payables that arise from normal trading conditions. The Group continuously looks to improve working capital efficiency in order to maximise operating cash flow. Inventories(i) Trade receivables(ii) Trade payables(iii) Trade working capital (i) Inventories Recognition and Measurement Consolidated 2017 $m 538.4 607.3 (795.5) 350.2 2016 $m 517.8 565.4 (778.8) 304.4 Inventories are valued at the lower of cost and net realisable value. Inventories have been shown net of provision for impairment of $21.6 million (2016 $33.9 million). Net realisable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and selling expenses. Cost is based on a first-in first-out or weighted average basis. For manufactured goods, cost includes direct material and fixed overheads based on normal operating capacity. For purchased goods, cost is net cost into store. (ii) Trade receivables The ageing of trade receivables and allowance for impairment is detailed below: Not past due Past due 0 – 120 days Past 120 days Consolidated Consolidated 2017 Gross $m 2017 Allowance $m 2016 Gross $m 2016 Allowance $m 565.9 38.1 53.2 657.2 – (0.2) (49.7) (49.9) 534.6 34.7 53.8 623.1 – (3.9) (53.8) (57.7) Recognition and Measurement The collectability of trade receivables is assessed continuously and at balance date specific allowances are made for any doubtful trade receivables based on a review of all outstanding amounts at year end. The net carrying amount of trade and other receivables approximates their fair values. Payment terms are generally 30 days from end of month of invoice date. A risk assessment process is used for all accounts, with a stop credit process in place for most long overdue accounts. (iii) Trade payables Recognition and Measurement Trade payables, including accruals for costs not yet billed, are recognised when the Group becomes obliged to make future payments as a result of the purchase of goods or as services are provided. Trade payables are normally settled within 60 days from invoice date or within the agreed payment terms with the supplier. Trade payables are non-interest bearing and include liabilities in respect of trade financing within the normal operating cycle of the business. The carrying amount of trade payables approximates their fair values due to their short term nature. 70 | Orica Annual Report 2017 notes to the Financial statements SECTION C. OPERATING ASSETS AND LIABILITIES For the year enDeD 30 september 5. Working Capital (continued) (b) Non-Trade Working Capital (NTWC) Non–Trade Working Capital includes all other receivables and payables not related to purchase of goods and is recognised net of provisions for impairment of $13.4 million (2016 $12.9 million). In the current year, other non-current assets include a receivable of $37.8 million for amounts paid to the Australian Tax Office (ATO) in FY2017. This amount represents 50% of the primary tax payable as per amended assessments which have been issued by the ATO in relation to the Australian tax audits as disclosed in note 11 Contingent tax liabilities. Recognition and Measurement Other receivables are carried at amounts due. Payment terms vary. A risk assessment process is used for all accounts, with a stop credit and follow up process in place for most long overdue accounts. Interest may be charged where the terms of repayment exceed agreed terms. The collectability of other receivables is assessed at balance date and specific allowances are made for any doubtful receivables based on a review of all outstanding amounts at year end. There are no individually significant receivables that have had renegotiated terms that would otherwise, without that renegotiation, have been past due or impaired. Critical accounting judgements and estimates In the course of normal trading activities, management uses its judgement in establishing the carrying value of various elements of working capital – principally inventory and accounts receivable. Provisions are established for obsolete or slow moving inventories and bad or doubtful receivables. Actual expenses in future periods may be different from the provisions established and any such differences would impact future earnings of the Group. 6. Provisions Current Employee entitlements(1) Environmental and decommissioning(2) Other Non-current Employee entitlements(1) Retirement benefit obligations (see note 20c) Environmental and decommissioning(2) Other Consolidated 2017 $m 2016 $m 92.3 69.4 26.2 187.9 15.2 218.1 146.1 17.9 397.3 60.1 61.1 44.9 166.1 43.1 253.0 173.0 15.1 484.2 (1) $49.2m (2016 $44.5m) was expensed to the profit and loss in relation to employee entitlements during the year. (2) Payments of $33.8m (2016 $32.4m) were made during the year in relation to environmental and decommissioning provisions. Recognition and Measurement A provision is recognised when the Group has a legal or constructive obligation as a result of a past event, it is probable that a future sacrifice of economic benefits will be required to settle the obligation and a reliable estimate of the liability can be assessed. The amount of the provision is determined by discounting the expected future cash flows at a pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as a finance cost. notes to the Financial statements SECTION C. OPERATING ASSETS AND LIABILITIES For the year enDeD 30 september Orica Annual Report 2017 | 71 6. Provisions (continued) Employee entitlements A liability for employee entitlements is recognised for the amount expected to be paid where the Group has a present legal or constructive obligation to pay this amounts as a result of past service provided by the employee and that obligation can be reliably measured. Liabilities for employee entitlements which are not expected to be settled within twelve months of balance date, are accrued at the present value of future amounts expected to be paid. A liability is recognised for bonus plans on the achievement of predetermined bonus targets. Environmental Estimated costs for the remediation of soil, groundwater and untreated waste are recognised when the there is a legal or constructive obligation to remediate and the associated costs can be reliably estimated. The timing of recognition of the provision generally coincides with the commitment to a regulatory or formal remediation plan. Where the cost relates to land held for resale then, to the extent that the expected realisation exceeds both the book value of the land and the estimated cost of remediation, the cost is capitalised as part of the holding value of that land, otherwise it is expensed. The amount of provision reflects the best estimate of the expenditure required to settle the obligation having regard to a range of potential scenarios, input from subject matter experts on appropriate remediation techniques and relevant technological advances. Decommissioning In certain circumstances, the Group has an obligation to dismantle and remove an asset and to restore the site on which it is located. The present value of the estimated costs of dismantling and removing the asset and restoring the site on which it is located are recognised as an asset within property, plant and equipment and depreciated on a straight line basis over its estimated useful life. A corresponding provision is raised where a legal or constructive obligation exists. At each reporting date, the liability is remeasured in line with changes in discount rates, timing and estimated cash flows. Any changes in the liability are added or deducted from the related asset, other than the unwinding of the discount which is recognised as a finance cost. Contingent environmental liabilities Contingent liabilities are possible obligations whose existence will only be confirmed by future events not wholly within the control of the Group. A contingent liability may also be a present obligation that is not recognised as it is not probable that an outflow of resources will be required or the amount of the obligation cannot be reliably measured. Environmental contingent liabilities In respect of historical and current operations, certain sites owned or used by the Group may require future remediation actions. For sites where the remediation actions are identified, agreed with regulatory authorities and reliable estimates are possible, provisions for estimated regulatory and remediation costs have been recognised. Sites with significant uncertainties relating to the following are disclosed as contingent liabilities: ƒ Sites where contamination is known or likely to exist however, the impact cannot be reliably measured due to uncertainties related to the extent of Orica’s remediation obligations or the remediation techniques that may be utilised; or ƒ Sites where known contamination exists but does not pose a current threat to human health or the environment, therefore no regulatory or formal remediation action is probable. Any costs associated with these matters are expensed as incurred, and disclosure of the significant uncertainties are included in the financial statements. Botany Groundwater remediation Orica’s historical operations at the Botany Industrial Park (NSW) resulted in the contamination of the soil and groundwater; however, due to the complex nature of the chemicals involved and its distribution (e.g. Dense Non-Aqueous Phase Liquid (DNAPL)), the lack of known practical remediation approaches, and the unknown scale of the contamination, a practical solution to completely remediate the contamination has not been found. Orica is working in close cooperation with the New South Wales (NSW) Environmental Protection Authority (EPA) to address the contamination. Specifically related to the remediation of DNAPL source contamination a reliable estimate of the costs to complete remediation is not possible given the lack of proven remediation techniques that can be effectively deployed at the site and uncertainty of the scale of the DNAPL contamination. During the year Management consulted with both internal and external remediation experts through a triennial strategy workshop to review developments in applicable technology, the level of assessed contamination and whether alternate remediation approaches could be implemented. Separate to the remediation of the source contamination, Orica has an obligation to contain and mitigate the effects of the contamination on the groundwater at the site. Orica and the NSW EPA entered a Voluntary Management Proposal (VMP) to contain the contamination while an effective remediation approach to the DNAPL source contamination is identified. Under the five-year VMP, Orica has agreed to operate a Groundwater Treatment Plant (GTP) as an intermediate containment measure. 72 | Orica Annual Report 2017 notes to the Financial statements SECTION C. OPERATING ASSETS AND LIABILITIES For the year enDeD 30 september 6. Provisions (continued) Contingent environmental liabilities (continued) Botany Groundwater remediation (continued) The GTP commenced operations in 2006 and since then the contaminant concentration in the groundwater entering the plant has shown a decrease of more than 80%. This reduction is largely attributable to dissolved contamination and is not considered a predictor of future performance. Work relating to obtaining a better understanding of the dissolution rates of the DNAPL source contamination, the impact of the treatment process and natural degradation processes, is continuing. The VMP includes requirements for ongoing assessment of progress of the remediation, as well as technologies that could be applied additionally or as alternatives to the GTP. The technology review process includes the triennial workshop referred to above. This consultation process, in particular with regulators and technical experts, is important because it provides information around the limitations of current technology and other uncertainties regarding the scale of the remediation of the source contamination which impacts Orica’s ability to reliably estimate the timeframe and costs for the operation of the GTP as an intermediate step. A sensitivity analysis was performed to determine the range of potential outcomes based on various factors, including consideration of multiple timeframes for operation of the GTP. Management assessed those outcomes to identify the most reliable measurement of the provision recognised in respect of the mitigation and containment of the effects of contaminated groundwater. Management’s judgements and estimates are set out as follows: ƒ Assumed a five-year rolling tenure based on the VMP timeframe agreed with the EPA. Management also considered shorter and longer time frames in making the determination, and concluded that a five-year rolling basis is an appropriate term, given the inherent uncertainty in any assumptions beyond that agreed period; ƒ Costs of the GTP are approximately $12 million per year based on the current scope of operations; ƒ A nominal risk-free discount rate of 2.1% (2016 – 3.5%) and an average inflation of 2.7% (2016 – 2.1%) in the calculation of the provision; and ƒ The net result of Management’s assessment is a provision of $63.3 million, being Management’s current best estimate of Orica’s obligation to contain and mitigate the effects of the contamination of the groundwater at the site through the operation of the GTP. Orica will continue to assess the assumptions used to estimate the economic outflows and will maintain engagement with experts in an effort to find solutions to remediate the source contamination, and reduce or cease operation of the GTP. Botany hexachlorobenzene (HCB) waste In respect of the Botany (HCB) waste, currently stored in containers at the Botany site, Orica has successfully completed a pilot trial to export the waste to Finland for permanent destruction through incineration processes with lower-level contaminated waste being destroyed locally. Consequently, the provision as at 30 September 2017 includes Orica’s best estimate of the costs to export the majority of the HCB waste to Finland and any local Australian destruction requirements. Other sites For other sites where Orica has recognised a provision for environmental remediation, estimate and judgement is required in determining the future expenditure required to settle the obligation due to uncertainties in the assumptions regarding the status of laws, regulations and the information available at certain locations. Changes in these assumptions may impact future reported results. Subject to those factors, but taking into consideration experience gained to date regarding environmental matters of a similar nature, Orica believes the provision balances to be appropriate based on currently available information. However, considering the uncertainties noted above additional costs may be incurred in future periods which are greater than the amounts provided. The total environmental and decommissioning provision comprises: Botany Groundwater remediation Botany (HCB) waste Burrup decommissioning Deer Park remediation Yarraville remediation Other provisions Total Consolidated 2017 $m 63.3 41.4 17.7 27.9 30.3 34.9 2016 $m 64.1 35.4 20.1 39.6 31.0 43.9 215.5 234.1 notes to the Financial statements SECTION C. OPERATING ASSETS AND LIABILITIES For the year enDeD 30 september Orica Annual Report 2017 | 73 7. Property, plant and equipment Consolidated 2016 Cost Accumulated depreciation Total carrying value Movement Carrying amount at the beginning of the year Additions Disposals Depreciation expense Impairment expense Foreign currency exchange differences Carrying amount at the end of the year 2017 Cost Accumulated depreciation Total carrying value Movement Carrying amount at the beginning of the year Additions Disposals Disposals through disposal of entities Depreciation expense Impairment expense Foreign currency exchange differences Carrying amount at the end of the year Land, buildings and improvements $m Machinery, plant and equipment $m Total $m 822.7 (297.9) 524.8 521.1 46.1 (13.9) (26.4) – (2.1) 4,292.9 5,115.6 (2,092.4) (2,390.3) 2,200.5 2,725.3 2,396.8 2,917.9 185.0 (38.1) (207.6) (21.3) (114.3) 231.1 (52.0) (234.0) (21.3) (116.4) 524.8 2,200.5 2,725.3 851.8 4,368.8 5,220.6 (293.3) (2,185.8) (2,479.1) 558.5 2,183.0 2,741.5 524.8 2,200.5 41.5 (0.2) – 223.3 (7.6) (7.4) (25.6) (192.3) – 18.0 558.5 (0.1) (33.4) 2,725.3 264.8 (7.8) (7.4) (217.9) (0.1) (15.4) 2,183.0 2,741.5 Included in the above are significant assets under construction (Burrup plant) of $553.3 million (2016 $529.9 million). Orica expects the plant to be fully commissioned in financial year 2018, with production progressively ramped up over the following 12 – 18 months to around 70% of the full capacity. Recognition and Measurement Property, plant and equipment is stated at cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the item and includes capitalised interest (refer to note 3). Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Critical accounting judgements and estimates Management reviews the appropriateness of useful lives of assets at least annually and any changes to useful lives may affect prospective depreciation rates and asset carrying values. Depreciation is recorded on a straight line basis using the following useful lives: Land indefinite Buildings and improvements 25 to 40 years Machinery, plant and equipment 3 to 40 years 74 | Orica Annual Report 2017 notes to the Financial statements SECTION C. OPERATING ASSETS AND LIABILITIES For the year enDeD 30 september 8. Intangible assets Consolidated 2016 Cost Accumulated impairment losses of goodwill Accumulated amortisation Net carrying amount Movement Goodwill $m 2,297.7 (1,203.6) – 1,094.1 Carrying amount at the beginning of the year 1,159.2 Additions Amortisation expense Foreign currency exchange differences Carrying amount at the end of the year 2017 Cost Accumulated impairment losses of goodwill Accumulated amortisation Net carrying amount Movement – – (65.1) 1,094.1 2,281.0 (1,187.7) – 1,093.3 Carrying amount at the beginning of the year 1,094.1 222.5 Additions Disposals through disposal of entities Amortisation expense Foreign currency exchange differences – – – (0.8) 6.9 (0.7) (2.3) (6.1) Carrying amount at the end of the year 1,093.3 220.3 Recognition and Measurement Identifiable intangibles Patents trademarks and rights $m Customer contracts and relationships $m Software $m Other $m Total $m 265.7 – (43.2) 222.5 237.4 8.6 (7.6) (15.9) 222.5 289.0 – (68.7) 220.3 67.4 – (67.4) – 2.2 – (2.2) – – 67.4 – (67.4) – – – – – – – 253.4 – (52.1) 201.3 204.3 30.6 (20.1) (13.5) 201.3 348.6 – (124.3) 224.3 201.3 54.4 – (31.6) 0.2 224.3 57.9 – (17.0) 40.9 30.1 15.3 (2.0) (2.5) 40.9 61.8 – (22.6) 39.2 40.9 6.4 – (9.4) 1.3 39.2 2,942.1 (1,203.6) (179.7) 1,558.8 1,633.2 54.5 (31.9) (97.0) 1,558.8 3,047.8 (1,187.7) (283.0) 1,577.1 1,558.8 67.7 (0.7) (43.3) (5.4) 1,577.1 Identifiable intangible assets with a finite life (customer contracts and relationships, patents, software, capitalised development costs, trademarks and rights) are amortised on a straight-line basis over their expected useful life to the Group, being up to thirty years. Identifiable intangible assets with an indefinite life are not amortised but the recoverable amount of these assets is tested for impairment at least annually. Unidentifiable intangibles – Goodwill Where the fair value of the consideration paid for a business acquisition exceeds the fair value of the identifiable assets, liabilities and contingent liabilities acquired, the difference is treated as goodwill. Goodwill is not amortised but the recoverable amount is tested for impairment at least annually. Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Critical accounting judgements and estimates Management reviews the appropriateness of useful lives of assets at least annually and any changes to useful lives may affect prospective amortisation rates and asset carrying values. notes to the Financial statements SECTION C. OPERATING ASSETS AND LIABILITIES For the year enDeD 30 september Orica Annual Report 2017 | 75 9. Impairment testing of assets Recognition and Measurement Methodology Formal impairment tests are carried out annually for goodwill. In addition, formal impairment tests for all assets are performed when there is an indication of impairment. The Group conducts an internal review of asset values at each reporting period, which is used as a source of information to assess for any indications of impairment. External factors, such as changes in expected future prices, costs and other market factors, are also monitored to assess for indications of impairment. If any such indication exists, an estimate of the asset’s recoverable amount is calculated. If the carrying amount of the asset exceeds its recoverable amount, the asset is impaired and an impairment loss is charged to the income statement to reduce the carrying amount in the balance sheet to its recoverable amount. The recoverable amount is determined using the higher of value in use or fair value less costs to dispose. Value in use is the present value of the estimated future cash flows expected to arise from the continued use of the asset in its present form and its eventual disposal. Value in use is determined by applying assumptions specific to the Group’s continued use and does not consider future development. The value in use calculations use cash flow projections which do not exceed 5 years based on actual operating results and the operating budgets approved by the Board of Directors. Fair value less costs to dispose is the value that would be received in exchange for an asset in an orderly transaction. In testing for indications of impairment and performing impairment calculations, assets are considered as collective groups and referred to as cash- generating units (CGU). Cash-generating units are the smallest identifiable group of assets, liabilities and associated goodwill that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets with each CGU being no larger than a segment. CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. The test of goodwill and its impairment is undertaken at the segment level. Key Assumptions Australia/Pacific and Indonesia North America Latin America Europe, Africa and Asia Minova Global Support Total Pre Tax Discount rates 2017 % Terminal Growth Rates 2017 % Goodwill 2017 $m Pre Tax Discount rates 2016 % Terminal Growth Rates 2016 % 13.4 – 16.0 10.9 – 16.0 8.9 – 16.0 0.0 – 3.4 1.7 – 2.7 0.0 – 6.0 8.2 – 19.7 0.0 – 14.9 8.0 – 24.4 1.1 – 8.2 377.2 142.4 137.7 245.2 190.8 13.8 – 15.5 12.7 – 15.5 11.7 – 13.8 0.0 – 5.5 3.2 – 5.5 0.0 – 6.4 8.2 – 20.2 (0.8) – 7.7 8.3 – 18.9 0.0 – 6.0 13.8 2.7 – 13.8 3.2 1,093.3 Goodwill 2016 $m 379.1 142.3 137.1 243.4 192.2 – 1,094.1 Critical accounting judgements and estimates Minova The carrying value of the Minova segment includes goodwill of $191 million. Based on the latest projected cash flows of the operation, the carrying value equals its value in use. The value in use calculations are sensitive to earnings forecasts, changes in discount rates and terminal growth rates. The carrying value of Minova is reliant on achieving significant growth in earnings. Continuing the diversification that has already commenced in 2017 into non-coal markets and improving margins are critical to Minova’s forecast long term earnings and underpins the future cash flow forecasts used to determine the recoverable amount. In 2017 Minova increased its cost base particularly in commercial and technical capabilities, to support targeted market growth and the re-establishment of a wider market presence. The business turnaround continues to progress. The business is forecasting for EBIT to return to approximately fifty percent of 2012 levels by the end of year five in the cash flow model. Any variation in the key assumptions of the Minova cash flows would result in a change in the assessed value in use. If the impact of the change had a negative impact, it could, in the absence of other factors require an impairment to goodwill. Key assumptions underlying the value in use are as follows: ƒ Growth in EBIT from $13.1 million in 2017 to $53 million in 2022 ƒ A weighted average terminal growth in line with local country economic forecasts of 2.5% ƒ A weighted average pre-tax discount rate of 14.9% 76 | Orica Annual Report 2017 notes to the Financial statements SECTION D. MANAGING FINANCIAL RISKS For the year enDeD 30 september Section D. Managing financial risks Orica’s Review of Operations and Financial Performance highlights funding and other treasury matters as material business risks that could adversely affect the achievement of future business performance. This section discusses the principal market and financial risks the Group is exposed to and the risk management program, which seeks to mitigate these risks and reduce the volatility of Orica’s financial performance. 10. Financial risk management Financial risk factors The Group’s overall risk management program seeks to mitigate risks and reduce the volatility of Orica’s financial performance. Financial risk management is carried out centrally by the Group’s Treasury department under policies approved by the Board. The Group’s principal financial risks are associated with: ƒ interest rate (note 10a) ƒ foreign exchange (note 10b) ƒ credit risk (note 10c) ƒ liquidity (note 10d) and ƒ commodity risk (note 10e) (a) Interest rate management Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates. The Group is primarily exposed to interest rate risk on outstanding interest-bearing liabilities. Non-derivative interest-bearing assets are predominantly short-term liquid assets. Interest bearing liabilities issued at fixed rates expose the Group to fair value interest rate risk while borrowings issued at a variable rate give rise to cash flow interest rate risk. Interest rate risk on long-term interest-bearing liabilities is managed by adjusting the ratio of fixed interest debt to variable interest debt. This is managed within policies determined by the Board via the use of interest rate swaps and cross currency interest rate swaps. Under the policy, up to 90% of debt with a maturity of less than one year can be fixed. This reduces on a sliding scale to year five where a maximum 50% of debt with a maturity of between five and ten years can be fixed. Beyond this, a maximum 25% of the debt with a maturity of between ten and twenty years can be fixed. The Group operated within this range during both the current year and the prior year. As at 30 September, the fixed rate borrowings after the impact of interest rate swaps and cross currency swaps were $1,113 million (2016 $940 million) and the borrowings designated in a fair value relationship were $714 million (2016 $558 million). Interest rate sensitivity Orica has exposure to interest rate movements in the underlying currencies it deals in. A 10% movement in interest rates without management intervention would have a $1.7 million (2016 $2.7 million) impact on profit before tax and a $1.1 million (2016 $1.9 million) impact on shareholders’ equity. (b) Foreign exchange risk management (i) Foreign exchange risk – transactional Foreign exchange risk refers to the risk that the value of a financial commitment, recognised asset or liability or cash flow will fluctuate due to changes in foreign currency rates. The Group is exposed to foreign exchange risk primarily due to significant sales and/or purchases denominated, either directly or indirectly, in currencies other than the functional currencies of the Group’s subsidiaries. As at reporting date, cross currency interest rate swaps entered into to hedge debt principal had a fair value gain of $5.0 million (2016 $53.3 million gain). Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the Balance Sheet date are translated to the functional currency of the entity at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the Income Statement. Non-monetary assets and liabilities that are measured at historical cost in a foreign currency are translated using the exchange rate ruling at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency of the entity at foreign exchange rates ruling at the dates the fair value was determined. notes to the Financial statements SECTION D. MANAGING FINANCIAL RISKS For the year enDeD 30 september Orica Annual Report 2017 | 77 10. Financial risk management (continued) In regard to foreign currency risk relating to sales and purchases, the Group hedges up to 100% of committed exposures. Anticipated exposures are hedged by applying a declining percentage of cover the further the time to the transaction date. Only exposures that can be forecast to a high probability are hedged. Transactions can be hedged for up to five years. The derivative instruments used for hedging purchase and sale exposures are bought vanilla option contracts and forward exchange contracts. Forward exchange contracts may be used only under Board policy for committed exposures and anticipated exposures expected to occur within 12 months. Bought vanilla option contracts may be used for all exposures. These contracts are designated as cash flow hedges and are recognised at their fair value. Exchange rate sensitivity The table below shows the Group’s exposure to foreign currency risk (Australian dollar equivalent) and the effect on profit and equity had exchange rates been 10% higher or lower than the year end rate with all other variables held constant. The 10% higher sensitivity represents the Australian Dollar strengthening against the other currencies. The analysis takes into account all underlying exposures and related hedges but not the impact of any management actions that might take place if these events occurred. The net exposure includes both external and internal balances (eliminated on consolidation). 2017 Cash(1) Trade and other receivables Trade and other payables Interest bearing liabilities(1) Net derivatives Net exposure Effect on profit/(loss) before tax If exchange rates were 10% lower If exchange rates were 10% higher Increase/(decrease) in equity If exchange rates were 10% lower If exchange rates were 10% higher 2016 Cash(1) Trade and other receivables Trade and other payables Interest bearing liabilities(1) Net derivatives Net exposure Effect on profit/(loss) before tax If exchange rates were 10% lower If exchange rates were 10% higher Increase/(decrease) in equity If exchange rates were 10% lower If exchange rates were 10% higher USD $m 1,844.5 154.7 (162.5) CAD $m 3.5 22.8 (32.1) (2,548.1) (198.8) 1,270.6 559.2 42.7 (161.9) 12.0 (9.9) 79.0 (77.6) USD $m 2,557.5 125.6 (190.3) (2,393.0) 456.1 555.9 5.6 (5.1) 46.1 (38.0) (0.1) 0.0 (12.6) 10.3 CAD $m 544.8 26.0 (27.8) (187.1) 44.2 400.1 (0.7) 0.5 31.9 (26.1) NZD $m 0.6 0.2 – (19.3) 2.4 (16.1) (0.1) 0.1 (1.2) 1.0 NZD $m 4.2 0.2 (0.2) (29.3) 3.6 (21.5) – (0.1) (1.6) 1.3 NOK $m 9.2 1.1 (1.1) (18.6) (63.0) (72.4) (0.2) 0.2 (5.7) 4.6 NOK $m – 0.4 (0.3) (17.4) (76.9) (94.2) (0.2) 0.2 (7.4) 6.0 SEK $m 126.2 1.7 (7.2) (41.0) 15.7 95.4 (0.6) 0.5 7.4 (6.1) SEK $m 176.1 2.1 (9.2) (44.6) 11.9 136.3 (2.2) 1.8 10.3 (8.4) EUR $m 800.8 22.8 (52.4) (891.1) 51.1 (68.8) (2.4) 1.9 (5.3) 4.4 EUR $m 956.7 19.1 (38.2) (812.9) 46.8 171.5 (2.3) 1.8 13.5 (11.1) GBP $m 337.7 29.6 (0.6) (151.5) 48.0 263.2 3.3 (2.7) 20.5 (16.8) GBP $m 336.1 20.4 (1.1) (150.6) 44.7 249.5 2.2 (1.8) 19.6 (16.0) (1) Includes internal deposits and interest bearing liabilities used for Group cash management purposes. (ii) Foreign currency risk – translational Foreign currency earnings translation risk arises primarily as a result of earnings generated by foreign operations with functional currencies of USD, CAD, PHP, BRL, MXN, NOK and CLP being translated into AUD. Derivative contracts to hedge earnings exposures do not qualify for hedge accounting under Australian Accounting Standards. However, Board approved policy allows hedging of this exposure in order to reduce the volatility of full year earnings resulting from changes in exchange rates. 78 | Orica Annual Report 2017 notes to the Financial statements SECTION D. MANAGING FINANCIAL RISKS For the year enDeD 30 september 10. Financial risk management (continued) Financial statements of foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated to Australian dollars at foreign exchange rates applying at the balance sheet date. The revenues and expenses of foreign operations, excluding foreign operations in hyperinflationary economies, are translated to Australian dollars at rates approximating the foreign exchange rates applying at the dates of the transactions. Foreign exchange differences arising on retranslation are recognised directly in a separate component of equity. Net investment in foreign operations Exchange differences arising from the translation of the net investment in foreign operations, and of related hedges are taken to the translation reserve. They are released into the Income Statement upon disposal. Hedging of exposures is undertaken primarily through originating debt in the currency of the foreign operation or by raising debt in a different currency and effectively swapping the debt to the currency of the foreign operation. The remaining translation exposure is managed, where considered appropriate, through forward foreign exchange derivative instruments or cross currency swaps. Gains and losses resulting from these hedging activities are recorded in the foreign currency translation reserve within the equity section of the Balance Sheet and offset against the foreign exchange impact resulting from the translation of the net assets of foreign operations. 32.5% of the Group’s investment in foreign operations was hedged in this manner as at 30 September 2017 (2016 47.0%). As at reporting date, derivative instruments designated as hedging net investment exposures had a fair value of $2.9 million liability (2016 $3.7 million liability). (c) Credit risk management Credit risk represents the loss that would be recognised if counterparties failed to meet their obligations under a contract or arrangement. The Group is exposed to credit risk from trade and other receivables and financial instrument contracts that are outstanding at year end. The creditworthiness of customers is reviewed prior to granting credit, using trade references and credit reference agencies. Credit limits are established and monitored for each customer, and these limits represent the highest level of exposure that a customer can reach. Trade credit insurance is purchased when required. Orica’s maximum exposure to trade and other receivables at 30 September 2017 is $765.0 million (2016 $716.6 million). In regard to credit risk arising from derivatives and cash, this is the credit exposure to financial institutions that are counterparties to derivative contracts and cash deposits, with a positive fair value from Orica’s perspective. As at 30 September 2017, the sum of all derivative contracts with a positive fair value was $70.8 million (2016 $90.4 million). The Group does not hold any credit derivatives to offset its credit exposures. (d) Liquidity risk management Liquidity risk arises from the possibility that there will be insufficient funds available to make payment as and when required. The Group manages this risk via: ƒ maintaining an adequate level of undrawn committed facilities in various currencies that can be drawn upon at short notice; ƒ using instruments that are readily tradeable in the financial markets; ƒ monitoring duration of long-term debt; ƒ spreading, to the extent practicable, the maturity dates of long-term debt facilities; and ƒ comprehensively analysing all forecast inflows and outflows that relate to financial assets and liabilities. Facilities available and the amounts drawn and undrawn are as follows: Unsecured bank overdraft facilities Unsecured bank overdraft facilities available Amount of facilities undrawn Committed standby and loan facilities Committed standby and loan facilities available Amount of facilities unused 2017 $m 88.2 88.1 2016 $m 122.0 110.3 3,529.8 1,578.6 3,618.0 1,767.0 The bank overdrafts are payable on demand and are subject to an annual review. The repayment dates of the committed standby and loan facilities range from 28 April 2018 to 25 October 2030 (2016 28 April 2017 to 25 October 2030). notes to the Financial statements SECTION D. MANAGING FINANCIAL RISKS For the year enDeD 30 september Orica Annual Report 2017 | 79 10. Financial risk management (continued) The contractual maturity of the Group’s fixed and floating rate financial instruments and derivatives are shown in the table below. The amounts shown represent the future undiscounted principal and interest cash flows: 2017 2016 1 year or less $m 1 to 2 years $m 2 to 5 years $m Over 5 years $m 1 year or less $m 1 to 2 years $m 2 to 5 years $m Over 5 years $m Trade and other payables 1,059.8 Consolidated Non-derivative financial assets Cash Trade and other receivables Derivative financial assets Financial assets Non-derivative financial liabilities Bank overdrafts Bank loans Export finance facility Private Placement Other loans Lease liabilities Derivative financial liabilities Financial liabilities Net outflow 516.9 665.7 1,415.6 2,598.2 – 74.4 16.2 86.7 10.9 1.2 1,438.2 2,687.4 – 97.6 354.6 452.2 3.9 – – 15.9 210.3 2.7 1.1 393.4 627.3 – – 539.4 539.4 – – – 15.2 634.8 – 0.1 – – 488.4 488.4 – – – – 1,462.8 – – 328.0 687.7 1,446.5 2,462.2 1,061.2 11.8 – 17.0 370.9 0.6 1.6 529.1 516.2 1,179.2 1,979.0 1,473.3 2,936.4 – 28.9 54.9 83.8 7.2 – – 16.7 70.9 3.3 1.1 80.1 179.3 (95.5) – – 536.6 536.6 – – – 32.0 752.7 10.6 1.1 519.5 – – 20.8 20.8 – – – – 1,053.9 – – 11.7 1,315.9 1,065.6 (779.3) (1,044.8) (89.2) (175.1) (639.8) (1,490.6) (474.2) (e) Commodity risk management Commodity risk refers to the risk that Orica’s profit/loss or equity will fluctuate due to the changes in commodity prices. At reporting date Orica has derivative contracts which are exposed to fluctuations in the price of Brent Crude Oil entered into to fix the price of future gas supply contracts. The table below includes Orica’s derivative contracts that are exposed to changes in Brent Crude Oil at 30 September and the impact of a 10 per cent change in observable prices (holding all other things constant) on profit/loss or equity based solely on Orica’s price exposures existing at the reporting date but does not take into account any mitigating actions that management might undertake if the price change occurred. 10% decrease in observable prices 10% Increase in observable prices Recognition and Measurement 2017 2016 Effect on profit/(loss) before tax $m Increase/ (decrease) in equity $m Effect on profit/(loss) before tax $m Increase/ (decrease) in equity $m – – (6.3) 6.3 – – (9.2) 9.2 Valuation of financial assets and liabilities (included within other on Balance Sheet) Derivatives are carried at fair value and categorised as Level 2 under AASB 7 Financial Instruments: Disclosures. The inputs are observable for the assets or liabilities, either directly (i.e. as prices) or indirectly (i.e. derived from prices). There has been no movement between levels since prior year. Valuation techniques include, where applicable, reference to prices quoted in active markets, discounted cash flow analysis, fair value of recent arm’s length transactions involving the same instruments or other instruments that are substantially the same, and option pricing models. Changes in default probabilities are included in the valuation of derivatives using credit and debit valuation adjustments. The fair values of forward exchange contracts are calculated by reference to forward exchange market rates for contracts within similar maturity profiles at the time of valuation. The fair values of cross currency interest rate swaps and interest rate swaps and other financial liabilities measured at fair value are determined using valuation techniques which utilise data from observable markets. Assumptions are based on market conditions existing at each balance date. The fair value is calculated as the present value of the estimated future cash flows using an appropriate market based yield curve, which is independently derived and representative of Orica’s cost of borrowings. 80 | Orica Annual Report 2017 notes to the Financial statements SECTION D. MANAGING FINANCIAL RISKS For the year enDeD 30 september 10. Financial risk management (continued) Offsetting financial assets and liabilities Financial assets and liabilities are offset and the net amount reported in the Balance Sheet where Orica currently has a legally enforceable right to offset the recognised amounts, and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. Orica also entered into master netting arrangements that do not meet the criteria for offsetting but allow for the related amounts to be set-off in certain circumstances, such as the event of default. Hedge accounting The Group uses financial instruments to hedge its exposure to certain market risks arising from operational, financing and investing activities. The Group holds financial instruments that qualify for hedge accounting under one of the three arrangements: Fair value hedges Cash flow hedges Net investment hedges What the financial instrument is designated to hedge? To mitigate the risk of changes in the fair value of its foreign currency borrowings from foreign currency and interest rate fluctuations. As a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecasted transaction. As a hedge of risk of changes in foreign currency when net assets of a foreign operation are translated from their functional currency to Australian dollars. Where are gains or losses on fair value movements of the financial instrument recorded? Discontinuation of hedge accounting Recognised in the Income Statement, together with gains or losses in relation to the hedged item. The effective portion is recognised in other comprehensive income. The ineffective portion is recognised immediately in the Income Statement. The effective portion is recognised in the foreign currency translation reserve in equity. The ineffective portion is recognised immediately in the Income Statement. The cumulative gain or loss that has been recorded to the carrying value of the hedged item is amortised to the Income Statement using the effective interest method. When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity. For a cash flow hedge arrangement that has a forecasted transaction that is being hedged, when the transaction occurs, the cumulative gain or loss is removed from equity and: ƒ included in the initial cost or other carrying amount of the non-financial asset or liability when the forecasted transaction subsequently results in the recognition of a non-financial asset or non-financial liability; ƒ reclassified into the Income Statement in the same period or periods during which the asset acquired or liability assumed affects the Income Statement, where a hedge of a forecasted transaction subsequently results in the recognition of a financial asset or a financial liability; ƒ recognised in the Income Statement in the same period or periods during which the hedged forecast transaction affects the Income Statement, when the transaction is not covered by the above two statements. Derivatives not in a designated hedge arrangement Financial instruments that do not qualify for hedge accounting but remain economically effective, are accounted for as trading instruments. These instruments are classified as current and are stated at fair value, with any resultant gain or loss recognised in the Income Statement. The Group policy is to not hold or issue financial instruments for trading purposes. notes to the Financial statements SECTION E. TAXATION For the year enDeD 30 september Orica Annual Report 2017 | 81 Section E. Taxation This section outlines the taxes paid by Orica and the impact tax has on the financial statements. Orica has operations in more than 50 countries, with customers in more than 100 countries. In 2017, Orica paid $237.5 million (2016 $187.4 million) globally in corporate taxes and payroll taxes. Orica collected and remitted $119.7 million (2016 $100.8 million) globally in GST/VAT. As Orica operates in a number of countries around the world, it is subject to local tax rules in each of those countries. Orica’s tax rate is sensitive to the geographic mix of profits earned in different countries with different tax rates, as tax will be due in the country where the profits are earned. Many of the jurisdictions Orica has operations in have headline tax rates lower than 30%. 11. Taxation (a) Income tax expense/(benefit) recognised in the income statement Current tax expense Current year Deferred tax Under provided in prior years Total income tax expense in income statement (b) Reconciliation of income tax expense to prima facie tax payable Income tax expense/(benefit) attributable to profit before individually material items Profit from operations before individually material items Prima facie income tax expense calculated at 30% on profit Tax effect of items which (decrease)/increase tax expense: variation in tax rates of foreign controlled entities tax under provided in prior years de-recognition of booked tax losses taxable/(non taxable) gains on disposal of assets other foreign deductions non creditable withholding taxes non allowable interest deductions tax on foreign currency translation reserve transferred to income statement non allowable/(non taxable) share based payments (utilisation of unbooked prior year tax losses)/current year tax losses not booked sundry items Consolidated 2017 $m 2016 $m 129.1 26.9 8.0 164.0 563.4 169.0 (38.6) 8.0 4.0 12.3 (23.0) 13.8 14.9 – 3.0 (6.4) 7.0 139.3 55.0 4.1 198.4 557.9 167.4 (35.1) 4.1 21.2 (3.9) (24.8) 9.9 13.1 (7.0) (1.4) 8.0 5.2 Income tax expense attributable to profit before individually material items 164.0 156.7 Income tax expense attributable to individually material items Profit/(loss) from individually material items Prima facie income tax expense calculated at 30% on individually material items Tax effect of items which (decrease)/increase tax expense: variation in tax rates of foreign controlled entities settlement of Australian Tax Action impact of Chile plant incident non taxable profit on sale of shareholding in Thai Nitrate Company Ltd Income tax expense attributable to profit/(loss) on individually material items – – – – – – – (4.6) (1.4) (0.2) 41.0 6.4 (4.1) 41.7 Income tax expense reported in the income statement 164.0 198.4 (d) Recognised deferred tax assets and liabilities Balance Sheet Income Statement 82 | Orica Annual Report 2017 notes to the Financial statements SECTION E. TAXATION For the year enDeD 30 september 11. Taxation (continued) (c) Income tax recognised in comprehensive income: Net gain/(loss) on hedge of net investments in foreign subsidiaries Cash flow hedges – Effective portion of changes in fair value – Transferred to Income Statement Exchange gains/(losses) on translation of foreign operations Actuarial benefits/(losses) on defined benefit plans Consolidated Deferred tax assets Trade and other receivables Inventories Property, plant and equipment Intangible assets Trade and other payables Interest bearing liabilities Provision for employee entitlements Provision for retirement benefit obligations Provisions for environmental and decommissioning Tax losses Other items Deferred tax assets Less set-off against deferred tax liabilities Net deferred tax assets Deferred tax liabilities Inventories Property, plant and equipment Intangible assets Interest bearing liabilities Undistributed profits of foreign subsidiaries Other items Deferred tax liabilities Less set-off against deferred tax assets Net deferred tax liabilities Deferred tax expense Consolidated 2017 Before tax $m Tax (expense)/ benefit $m Net of tax $m Before tax $m 2016 Tax (expense)/ benefit $m Net of tax $m (66.1) (51.9) (118.0) (165.8) 3.1 (162.7) (6.8) 26.6 12.1 33.4 (0.8) 2.0 (8.0) – (10.0) (67.9) (4.8) 18.6 12.1 23.4 (68.7) 4.7 (0.7) (111.6) (81.1) (354.5) (1.4) 0.2 – 21.9 23.8 3.3 (0.5) (111.6) (59.2) (330.7) 2016 $m (14.1) (0.4) 24.9 27.7 21.1 25.3 1.4 5.9 – (1.3) (1.3) – (7.4) (3.3) (5.0) 0.5 (19.0) 2017 $m (0.3) 2.3 4.8 (1.3) (2.9) (28.6) (0.2) (1.7) 9.9 3.2 5.2 0.2 29.6 (0.6) – (0.4) 7.7 2017 $m 2016 $m 15.5 14.4 54.2 1.3 42.9 89.1 25.7 43.8 55.5 164.4 2.4 509.2 (186.1) 323.1 7.3 213.0 16.5 – 18.6 19.2 274.6 (186.1) 88.5 15.2 16.7 59.0 – 40.0 156.3 25.5 52.1 65.4 167.6 7.5 605.3 (197.0) 408.3 7.1 183.4 17.1 29.1 19.0 11.5 267.2 (197.0) 70.2 26.9 55.0 notes to the Financial statements SECTION E. TAXATION For the year enDeD 30 september 11. Taxation (continued) (e) Unrecognised deferred tax assets Tax losses not booked Capital losses not booked Temporary differences not booked Tax losses not booked expire between 2018 and 2022. Recognition and Measurement Orica Annual Report 2017 | 83 Consolidated 2017 $m 64.2 87.5 204.9 2016 $m 57.0 88.0 219.7 Income tax on the profit or loss for the year comprises current and deferred tax and is recognised in the Income Statement. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at reporting date, and any adjustments to tax payable in respect of previous years. Under AASB 112 Income Taxes, deferred tax balances are determined using the balance sheet method which calculates temporary differences based on the carrying amounts of an entity’s assets and liabilities in the balance sheet and their associated tax bases. Current and deferred taxes attributable to amounts recognised directly in equity are also recognised in equity. The amount of deferred tax provided will be based on the expected manner of realisation of the asset or settlement of the liability, using tax rates enacted or substantively enacted at reporting date. A deferred tax asset will be recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets will be reduced to the extent it is no longer probable that the related tax benefit will be realised. Tax consolidation Orica Limited is the parent entity in the tax consolidated group comprising all wholly-owned Australian entities. Due to the existence of a tax sharing agreement between the entities in the tax consolidated group, the parent entity recognises the tax effects of its own transactions and the current tax liabilities and the deferred tax assets arising from unused tax losses and unused tax credits assumed from the subsidiary entities. 84 | Orica Annual Report 2017 notes to the Financial statements SECTION E. TAXATION For the year enDeD 30 september Contingent tax liabilities In the normal course of business, contingent liabilities may arise from tax investigations or legal proceedings. Where management are of the view that potential liabilities have a low probability of crystallising or it is not possible to quantify them reliably, they are not provided for and are disclosed as contingent liabilities. (i) Investigations and audits Consistent with other companies of the size and diversity of Orica, the Group is the subject of ongoing information requests, investigations and audit activities by tax and regulatory authorities in jurisdictions in which Orica operates. Orica co-operates fully with the tax and regulatory authorities. It is possible that Orica may incur fines and/or other penalties as a consequence of these investigations and audits. (ii) German Tax Action As a result of an income tax audit covering the 2005 to 2015 years, the German Central Tax Office has challenged Orica’s tax returns under laws which were announced in 2012 and introduced in 2013 in relation to a financing arrangement by Orica of its German group from 2005 onwards. The amount of the possible reassessment for the 2005 to 2015 years is approximately $94 million. Assessments for the period 2005 to 2008 have been received. Orica believes that the laws do not apply to these arrangements and in addition should not be applied retrospectively. (iii) Brazilian Tax Action The Brazilian Taxation Authority (BTA) is claiming unpaid taxes, interest and penalties of approximately $42 million for the 1997 financial year relating to an alleged understatement of income based on an audit of production records. Orica believes the auditor has misread those production records. ICI Plc, the vendor of the business to Orica, has been notified to preserve Orica’s rights under the tax indemnity obtained upon acquisition of the business which provides indemnity for amounts exceeding certain limits. The BTA has been granted a bank guarantee of up to approximately $42 million. (iv) Australian Tax Audit As a result of an income tax audit covering the 2010 to 2011 years, the Australian Taxation Office (ATO) has challenged Orica’s tax returns in relation to thin capitalisation valuations of land and buildings and intellectual property resulting in a denial of interest deductions. Assessments for 2010 to 2015 amounting to approximately $48 million have been received from the ATO. Interest and penalties for this period have been assessed by the ATO at approximately $23 million. Orica believes that the valuations are in accordance with the tax law and has lodged objections against the assessments. As part of the income tax audit for 2010 and 2011, the ATO has challenged the residence of a German subsidiary of Orica. The ATO considers that the subsidiary should be a resident of Australia. Assessments for 2010 and 2011 amounting to approximately $28 million have been received from the ATO. Interest and penalties for this period have been assessed by the ATO at $15.3 million. The amount of possible reassessment for the years 2013 to 2015, including interest, is approximately $14 million. The 2012 year is not open for amendment. Orica believes the subsidiary is a German resident and only German tax, not Australian tax, is payable on the relevant income. (v) Indian Tax Action The Indian Taxation Authority (ITA) is claiming unpaid taxes of approximately $14.6 million for the 2008 and 2009 years. The ITA disregarded the sales mix during the relevant years assuming the products sold were in proportion to the amounts held in closing stock. Orica disputed the tax assessments and the Commissioner of Appeals decided in favour of Orica in 2013. The ITA lodged a generic appeal in 2014. The matter is pending a hearing before the Indian Income Tax Appeals Tribunal scheduled for later in 2017. Critical accounting judgements and estimates The Group is subject to income taxes in Australia and jurisdictions where it has foreign operations. Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises liabilities for tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred tax provision in the period in which such determination is made. In addition, deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable profits are available to utilise those temporary differences and losses, and the tax losses continue to be available having regard to the nature and timing of their origination and compliance with the relevant tax legislation associated with their recoupment. Assumptions are also made about the application of income tax legislation. These assumptions are subject to risk and uncertainty and there is a possibility that changes in circumstances or differences in opinions will alter outcomes which may impact the amount of deferred tax assets and deferred tax liabilities recorded on the balance sheet and the amount of tax losses and timing differences not yet recognised. In these circumstances, the carrying amount of deferred tax assets and liabilities may change, resulting in an impact on the earnings of the Group. notes to the Financial statements SECTION F. GLOBAL FOOTPRINT For the year enDeD 30 september Orica Annual Report 2017 | 85 Section F. Global footprint Orica has a diverse spread of global operations, which includes controlled entities incorporated in over 50 countries, as well as entering strategic partnering arrangements with certain third parties. This section highlights the Group structure including Orica’s controlled entities, as well as those where Orica holds less than 100% interest. 12. Investments in controlled entities Recognition and Measurement The consolidated financial statements are prepared by combining the financial statements of all the entities that comprise the Group, being the Company (the parent entity) and its subsidiaries as defined in AASB 10 Consolidated Financial Statements. Consistent accounting policies are employed in the preparation and presentation of the consolidated financial statements. On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. If, after reassessment, the fair values of the identifiable net assets acquired exceed the cost of acquisition, the excess is credited to the Income Statement in the period of acquisition. The consolidated financial statements include the information and results of each subsidiary from the date on which the Company obtains control until such time as the Company ceases to control such entity. In preparing the consolidated financial statements, all intercompany balances, transactions and unrealised profits arising within the Group are eliminated in full. Refer to note 25 for the list of investments in controlled entities. 13. Non-controlling interests in controlled entities Non-controlling interests in shareholders’ equity at balance date is as follows: Contributed equity Reserves Retained earnings The following table summarises the information relating to non-controlling interests on a 100% basis. The amounts disclosed are before inter-company eliminations. Current assets Current liabilities Current net assets Non-current assets Non-current liabilities Non-current net (liabilities) Net (liabilities) Carrying amount of non-controlling interests Sales Revenue Net profit for the year Other comprehensive income/(expense) Total comprehensive income Profit allocated to non-controlling interests Other comprehensive income/(expense) related to non-controlling interests Total Dividends paid – non-controlling interests Cash flows from operating activities Cash flows used in investments activities Cash flows used in financing activities Net increase/(decrease) in cash and cash equivalents Consolidated 2017 $m 66.6 (12.3) (53.1) 1.2 495.2 268.0 227.2 393.6 621.1 2016 $m 66.6 (7.8) (58.1) 0.7 453.4 223.8 229.6 403.6 635.7 (227.5) (232.1) (0.3) 1.2 843.0 54.2 (10.2) 44.0 13.2 (4.6) 8.6 (7.1) 13.2 (8.5) (1.7) 3.0 (2.5) 0.7 840.9 69.9 (33.2) 36.7 12.1 (2.7) 9.4 (12.3) 1.7 (5.2) (13.1) (16.6) 86 | Orica Annual Report 2017 notes to the Financial statements SECTION F. GLOBAL FOOTPRINT For the year enDeD 30 september 14. Investments accounted for using the equity method and joint operations (a) Investments accounted for using the equity method The table below shows material investments (based on carrying values). All other investments are included in “Other”. Ownership Consolidated Carrying amount Name Nelson Brothers, LLC(1) Principal activity Balance date Manufacture and sale of explosives 30 Sep 30 Sep 30 Sep Nelson Brothers Mining Services LLC(1) Sale of explosives Southwest Energy LLC(1) Sale of explosives Other Various (1) Entities are incorporated in USA. Summary of profit and loss of associates: The aggregate net profit after tax of associates on a 100% basis are: Orica’s share of net profit after tax of associates is: 2017 % 50.0 50.0 50.0 2016 % 50.0 50.0 50.0 2017 $m 37.0 32.1 103.9 11.6 184.6 2017 $m 73.8 36.6 2016 $m 35.1 34.2 105.2 13.6 188.1 2016 $m 78.9 39.2 (b) Joint operations The Group owns a 45% interest of Yara Pilbara Nitrates Pty Ltd, the remaining shares are held by subsidiaries in the Yara International ASA group. The entity owns and will operate a 330,000 tonnes per annum industrial grade ammonium nitrate plant on the Burrup Peninsula (Western Australia, Australia). Orica expect the plant to be fully commissioned in financial year 2018, with production progressively ramped up over the following 12 – 18 months to around 70% of the full capacity. Yara Pilbara Nitrates will operate as a toll manufacturer, receiving a tolling fee from entities within the Group and the Yara group. The Orica and Yara group have rights to all of the economic benefits of the assets. The dependence of the manufacturing entity upon Orica and Yara for the generation of cash flows indicates that the parties have an obligation for the liabilities of the manufacturing arrangement and accordingly it is accounted for as a joint operation. (c) Transactions with associates Transactions during the year with associates were: Sales of goods to associates Purchases of goods from associates Dividend income received from associates Income received from leasing Interest income received from associates (d) Transactions with related parties 2017 $000 2016 $000 301,659 354,522 75,796 34,518 – – 61,714 38,361 1 4 All transactions with other related parties are made on normal commercial terms and conditions and in the ordinary course of business. Recognition and Measurement Associate entities Where Orica holds an interest in the equity of an entity, generally of between 20 per cent and 50 per cent, and is able to significantly influence the decisions of the entity, that entity is an associated entity. Investments in associates are accounted for in the consolidated financial statements using the equity method of accounting. Joint operations A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets and obligation for the liabilities relating to the arrangement. Orica recognises its share of any jointly held or incurred assets, liabilities, revenue and expenses in the consolidated financial statements under applicable headings. Orica Annual Report 2017 | 87 notes to the Financial statements SECTION F. GLOBAL FOOTPRINT For the year enDeD 30 september 15. Businesses and non-controlling interests acquired Acquisition of businesses and controlled entities The Group has not acquired any businesses or entities in either 2017 or 2016. 16. Businesses disposed Disposal of businesses and controlled entities The following businesses and controlled entities were disposed of: 2017: On 7 October 2016 Orica disposed of Minova (Tianjin) Co., Ltd (China). 2016: On 30 September 2016 Orica disposed of explosives businesses in Germany, Poland, Czech Republic and Slovakia. Consolidated Consideration sale price Cash disposed Net consideration Less further disposal costs including purchase price adjustments Net consideration(1) Carrying value of net assets of businesses/controlled entities disposed trade and other receivables inventories property, plant and equipment intangibles other assets investment payables and interest bearing liabilities provision for employee entitlements provision for retirement benefit obligations/curtailments provision for income tax foreign currency translation reserve Profit on sale of business/controlled entities 2017 $m 13.1 – 13.1 – 13.1 – 0.1 7.4 0.7 – – – – – – (6.0) 2.2 10.9 2016 $m 26.0 (8.5) 17.5 (10.6) 6.9 9.9 5.0 – – 0.2 0.9 (10.3) (0.7) (2.0) (0.5) 1.1 3.6 3.3 (1) Includes $3 million for the final settlement of the disposal of explosives businesses in Germany, Poland, Czech Republic and Slovenia which was sold on 30 September 2016. 88 | Orica Annual Report 2017 notes to the Financial statements SECTION F. GLOBAL FOOTPRINT For the year enDeD 30 september 17. Parent Company disclosure – Orica Limited Total current assets Total assets Total current liabilities Total liabilities Equity Ordinary shares Retained earnings Total equity attributable to ordinary shareholders of Orica Limited Company 2017 $m 988.3 2,554.3 158.5 165.4 2,068.5 320.3 2,388.8 2016 $m 1,488.2 3,554.3 167.9 1,117.9 2,025.3 411.1 2,436.4 Net profit for the year and total comprehensive income 106.3 425.1 The Company did not have any contractual commitments for the acquisition of property, plant or equipment in the current or previous years. Contingent liabilities and contingent assets Under the terms of a Deed of Cross Guarantee entered into under ASIC Corporations (Wholly-owned Companies) Instrument 2016/785, each company which is a party to the Deed has covenanted with the Trustee of the Deed to guarantee the payment of any debts of the other companies which are party to the Deed which might arise on the winding up of those companies. A consolidated balance sheet and income statement for this closed group is shown in note 18. Orica Limited has provided guarantees to Export Finance and Insurance Corporation and banks for loans relating to the Bontang Ammonium Nitrate plant. Orica Limited guaranteed senior notes issued in the US Private Placement market in 2003, 2010, 2013 and 2017. The notes have maturities between calendar years 2018 and 2030 (2016: between calendar years 2017 and 2030) (see notes 3 and 10). Orica Limited has also provided guarantees for senior committed bank facilities. 18. Deed of Cross Guarantee The parent entity, Orica Limited, and certain subsidiaries (Initiating Explosives Systems Pty Ltd, Orica Australia Pty Ltd and Orica Investments Pty Ltd) are subject to a Deed of Cross Guarantee (Deed) under which each company guarantees the debts of the others. By entering into the Deed, the wholly owned subsidiaries have been relieved from the requirement to prepare a financial report and Directors’ report under ASIC Corporations (Wholly-owned Companies) Instrument 2016/785. notes to the Financial statements SECTION F. GLOBAL FOOTPRINT For the year enDeD 30 september 18. Deed of Cross Guarantee (continued) A consolidated income statement and consolidated balance sheet is shown below: Summarised balance sheet Current assets Trade and other receivables Inventories Other assets(1) Total current assets Non-current assets Trade and other receivables Investments accounted for using the equity method Other financial assets Property, plant and equipment Intangible assets Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Interest bearing liabilities Provisions Total current liabilities Non-current liabilities Trade and other payables Interest bearing liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Ordinary shares Reserves Retained profits Total equity Summarised income statement and retained profits Profit before income tax expense Income tax expense Profit from operations Retained profits at the beginning of the year Actuarial losses/(gains) recognised directly in equity Ordinary dividends – interim Ordinary dividends – final Retained profits at the end of the year (1) Other assets include net tax receivables with Group entities outside the Deed of Cross Guarantee. Orica Annual Report 2017 | 89 2017 $m 2016 $m 188.3 143.0 96.3 427.6 18.0 2.8 179.0 133.2 9.1 321.3 5.3 2.3 5,821.6 6,874.2 746.3 271.2 202.9 7,062.8 7,490.4 475.5 0.9 135.4 611.8 0.4 3,454.3 158.5 170.1 3,783.3 4,395.1 3,095.3 2,068.5 575.6 451.2 3,095.3 175.1 (27.1) 148.0 484.2 16.1 (88.4) (108.7) 451.2 774.0 248.2 197.9 8,101.9 8,423.2 429.4 154.1 113.2 696.7 0.7 4,421.6 140.1 241.7 4,804.1 5,500.8 2,922.4 2,025.3 412.9 484.2 2,922.4 694.0 (76.3) 617.7 177.5 (27.5) (76.5) (207.0) 484.2 90 | Orica Annual Report 2017 notes to the Financial statements SECTION G. REWARD AND RECOGNITION For the year enDeD 30 september Section G. Reward and recognition Orica operates in more than 50 countries and has more than 11,500 employees. This section provides insights into the reward and recognition of employees, in addition to the employee benefits expense and employee provisions disclosed in the Income Statement and note 6 respectively. This section should be read in conjunction with the Remuneration Report, contained within the Directors’ Report, which provides specific details on the setting of remuneration for Key Management Personnel. 19. Employee share plans and Remuneration The following plans have options or rights (“instruments”) over Orica shares outstanding at 30 September 2016 or 30 September 2017: ƒ The Long-Term Incentive Plan (LTIP) (refer to Remuneration Report Section 3.5 and 6.2). ƒ Long-Term Equity Incentive Plan shares which are treated as options for accounting purposes. As at September 2017 there are no options outstanding. The 522,534 options outstanding as at September 2016 have lapsed during the year. ƒ Long-Term Incentive Rights Plan. As at September 2017 there are no rights outstanding. The 457,057 rights outstanding as at September 2016 have lapsed during the year. ƒ Sign-on Rights and Share Plans. Orica engaged PwC to value issued instruments. The valuations prepared by PwC use methodologies consistent with assumptions that apply under the Black Scholes option pricing model and reflect the value (as at grant date) of instruments held at 30 September. The inputs underlying the instrument valuations are: (a) the exercise price of the instrument, (b) the life of the instrument, (c) the current price of the underlying securities, (d) the expected volatility of the share price, (e) the dividends expected on the shares, and (f) the risk-free interest rate for the life of the instrument. (a) (i) Sign-on Rights For a select group of senior managers who join Orica post allocation of a LTIP grant (and who generally have forgone at-risk remuneration from their previous employer) rights may be allocated at the discretion of the Orica Board. Allocations are made on the following basis: ƒ Employees are granted a number of rights, which vest upon the satisfaction of a time based hurdle, generally aligned to their anniversary of joining Orica. ƒ The number of rights granted to each employee is based on either a specified percentage of their fixed remuneration, or a straight dollar value. The value is determined on an individual basis, but generally aligned to either their future LTIP grant percentage or the foregone at-risk remuneration from their previous employer. ƒ Each right is an entitlement to be allocated one ordinary share in Orica. ƒ Rights are unlisted and do not carry any dividend or voting rights. ƒ Shares allocated upon vesting of rights may be either newly issued shares or existing shares acquired on market. ƒ Holders of rights that leave the Group prior to the end of the performance period will, in general, forfeit their rights. The Board has discretion to allow a number of rights remain ‘on foot’ to be tested and vest if the holder leaves due to death, disability or other Board approved reason. Sign-on Rights allocations, values and related information is shown in the following table: Grant dates Vesting date 12 Jan 16–11 Aug 17 30 Jun 16– 2 Dec 19 (1) The inputs underlying the rights valuations are: Grant dates 12 Jan 16–11 Aug 17 Number of rights issued Number of rights held at 30 September 2017 Number of rights held at 30 September 2016 Number of participants at 30 September 2017 Number of participants at 30 September 2016 Value of rights at grant date(1) $ 76,261 70,934 66,909 4 3 1,035,257 Price of Orica Shares at grant date $ Expected volatility in share price % Dividends expected on shares % Risk free interest rate % Fair value per right $ 13.88-18.71 25-30 3.0-5.5 1.49-1.60 11.92-20.01 notes to the Financial statements SECTION G. REWARD AND RECOGNITION For the year enDeD 30 september Orica Annual Report 2017 | 91 19. Employee share plans and Remuneration (continued) (a) (ii) Sign-on shares At the discretion of the Board, a grant of restricted shares was made to two senior managers on joining Orica to compensate them for having forgone at risk remuneration from their previous employer. The restricted share allocation was made on the following basis: ƒ The employees were granted a number of shares, which vest upon satisfaction of a time based hurdle aligned to the date at which awards from their previous employers would have been released. ƒ The number of shares was determined based on the value of at risk remuneration foregone from their previous employers. ƒ Each share carries access to dividend and voting rights during the restricted period. ƒ If the employees leave the Group prior to the end of restricted period they will, in general, forfeit their shares. The Board has discretion to allow the shares to vest if the holder leaves due to death, disability or other Board approved reason prior to the vesting date. Sign-on share allocation, value and related information is shown in the following table: Grant dates 7 Jan 16–24 May 16 Vesting date 30 Aug 16– 1 Jun 17 (1) The assumptions underlying the rights valuations are: Grant dates 7 Jan 16–24 May 16 Number of shares issued Number of shares held at 30 September 2017 Number of shares held at 30 September 2016 Number of participants at 30 September 2017 Number of participants at 30 September 2016 Value of shares at grant date(1) $ 21,706 – 5,567 – 1 299,018 Price of Orica Shares at grant date $ Expected volatility in share price % Dividends expected on shares % Risk free interest rate % Fair value per right $ 13.61-14.04 30 0-4.5 1.67-1.98 13.01-14.04 (b) Key Management Personnel compensation summary As deemed under AASB 124 Related Parties Disclosures, Key Management Personnel (KMP) include each of the Directors, both executive and non- executive, and those members of the Executive Committee who have authority and responsibility for planning, directing and controlling the activities of Orica. A summary of the Key Management Personnel compensation is set out in the following table: Short term employee benefits Other long term benefits Post employment benefits Share-based payments Termination benefits Consolidated 2017 $000 2016 $000 12,481.8 11,897.9 27.9 247.5 4,932.0 839.9 47.8 228.2 2,530.8 950.0 18,529.1 15,654.7 Information regarding individual Directors and Executives compensation and some equity instrument disclosures as permitted by Corporation Regulations 2M.3.03 are provided in the Remuneration Report. 92 | Orica Annual Report 2017 notes to the Financial statements SECTION G. REWARD AND RECOGNITION For the year enDeD 30 september 20. Superannuation commitments Recognition and Measurement Contributions to defined contribution superannuation funds are recognised in the Income Statement in the year in which the expense is incurred. For each defined benefit scheme, the cost of providing pensions is expensed in the Income Statement so as to recognise current and past service costs, interest cost on net liabilities, and the effect of any curtailments or settlements. Actuarial gains and losses for post-retirement plans are recognised in other comprehensive income. The Group’s net liabilities in respect of defined benefit pension plans is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any plan assets is deducted. The discount rate is the yield at the balance sheet date on high quality corporate bonds or in countries where there is no deep market in such bonds, the market yields on government bonds that have maturity dates approximating the terms of the Group’s obligations. The calculation is performed annually by a qualified actuary using the projected unit credit method. (a) Superannuation plans The Group contributes to a number of superannuation plans that exist to provide benefit for employees and their dependants on retirement, disability or death. The superannuation plans cover company sponsored plans, other qualifying plans and multi-employer industry/union plans. Company sponsored plans ƒ The principal benefits are pensions or lump sum payments for members on resignation, retirement, disability or death. The benefits are provided on either a defined benefit or defined contribution basis. ƒ Employee contribution rates are either fixed by the rules of the plans or selected by members from time to time from a specified range of rates. The employer entities contribute the balance of the cost required to fund the defined benefits or, in the case of defined contribution plans, the amounts required by the rules of the plan. ƒ The contributions made by the employer entities to defined contribution plans are in accordance with the requirements of the governing rules of such plans or are required under law. Government plans ƒ Some controlled entities participate in government plans on behalf of certain employees, which provide pension benefits. There exists a legally enforceable obligation on employer entities to contribute as required by legislation. Industry plans ƒ Some controlled entities participate in industry plans on behalf of certain employees. ƒ These plans operate on an accumulation basis and provide lump sum benefits for members on resignation, retirement, disability or death. ƒ The employer entities have a legally enforceable obligation to contribute a regular amount for each employee member of these plans. ƒ The employer entities have no other legal liability to contribute to the plans. (b) Defined contribution pension plans The Group contributes to several defined contribution pension plans on behalf of its employees. The amount recognised as an expense for the financial year ended 30 September 2017 was $38.0 million (2016 $35.1 million). (c) Defined benefit pension plans The Group participates in several Australian and overseas defined benefit post-employment plans that provide benefits to employees upon retirement. Plan funding is carried out in accordance with the requirements of trust deeds and the advice of actuaries. The information within these financial statements has been prepared by the local plan external actuaries. Orica were assisted by Willis Towers Watson to consolidate those results globally. During the year, the Group made employer contributions of $23.8 million (2016 $28.2 million) to defined benefit plans. The Group’s external actuaries have forecast total employer contributions and benefit payments to defined benefit plans of $27.8 million for 2018. notes to the Financial statements SECTION G. REWARD AND RECOGNITION For the year enDeD 30 september 20. Superannuation commitments (continued) (c) (i) Balance sheet amounts The amounts recognised in the balance sheet are determined as follows: Present value of the funded defined benefit obligations Present value of unfunded defined benefit obligations Fair value of defined benefit plan assets Deficit Restriction on assets recognised Net liability in the balance sheet Amounts in balance sheet: Liabilities Assets Net liability recognised in balance sheet at end of year (c) (ii) Amounts recognised in the income statement The amounts recognised in the income statement are as follows: Current service cost Interest cost on net defined benefit liabilities Curtailment or settlement (gains) Total included in employee benefits expense (c) (iii) Amounts included in the statement of comprehensive income Actuarial gains/(losses) on defined benefit obligations: Due to changes in demographic assumptions Due to changes in financial assumptions Due to experience adjustments Total Change in irrecoverable surplus other than interest Return on plan assets greater than discount rate Total gains/(losses) recognised via the Statement of Comprehensive Income Tax (expense)/benefit on total (losses)/gains recognised via the Statement of Comprehensive Income Total gains/(losses) after tax recognised via the Statement of Comprehensive Income Orica Annual Report 2017 | 93 2017 $m 606.3 113.6 (501.9) 218.0 0.1 218.1 218.4 (0.3) 218.1 2017 $m 15.3 6.4 (1.9) 19.8 2017 $m 1.0 35.2 (7.8) 28.4 0.1 4.9 33.4 (10.0) 23.4 2016 $m 653.3 112.5 (512.9) 252.9 0.1 253.0 253.6 (0.6) 253.0 2016 $m 15.4 6.2 – 21.6 2016 $m (10.6) (83.7) (3.9) (98.2) 1.4 15.7 (81.1) 21.9 (59.2) 94 | Orica Annual Report 2017 notes to the Financial statements SECTION G. REWARD AND RECOGNITION For the year enDeD 30 september 20. Superannuation commitments (continued) (c) (iv) Reconciliations Reconciliation of present value of the defined benefit obligations: Balance at the beginning of the year Current service cost Interest cost Actuarial (gains)/losses Contributions by plan participants Benefits paid Settlements/curtailments Exchange differences on foreign funds Balance at the end of the year Reconciliation of the fair value of the plan assets: Balance at the beginning of the year Interest income on plan assets Actuarial gains Contributions by plan participants Contributions by employer Benefits paid Settlements/curtailments Other Exchange differences on foreign funds Balance at the end of the year 2017 $m 765.8 15.3 22.6 (28.4) 1.4 (54.3) (7.1) 4.6 719.9 2017 $m 512.9 16.2 4.9 1.4 23.8 (54.3) (5.3) (0.1) 2.4 501.9 2016 $m 747.7 15.4 28.3 98.2 1.9 (61.0) (23.0) (41.7) 765.8 2016 $m 556.0 22.1 15.7 1.9 28.2 (61.0) (20.8) (2.0) (27.2) 512.9 The fair value of plan assets does not include any amounts relating to the Group’s own financial instruments, property occupied by, or other assets used by, the Group. Comprising: Quoted in active markets: Equities Debt securities Property Other quoted securities Other: Property Insurance contracts Cash and cash equivalents 2017 $m 2016 $m 195.4 216.7 9.9 30.8 22.1 4.7 22.3 501.9 200.9 217.5 10.4 32.0 22.8 5.8 23.5 512.9 notes to the Financial statements SECTION G. REWARD AND RECOGNITION For the year enDeD 30 september Orica Annual Report 2017 | 95 20. Superannuation commitments (continued) The principal assumptions applied in determining the present value of defined benefit obligations and their bases were as follows: ƒ Rates of increase in pensionable remuneration, pensions in payment and healthcare costs: historical experience and management ‘s long-term future expectations; ƒ Discount rates: prevailing long-term high quality bond yields, chosen to match the currency and duration of the relevant obligation; and ƒ Mortality rates: the local actuaries’ designated mortality rates for the individual plans concerned. The weighted averages for those assumptions and related sensitivity information are presented below. Sensitivity information indicates by how much the defined benefit obligations would increase or decrease if a given assumption were to increase or decrease with no change in other assumptions. Rate of increase in pensionable remuneration Rate of increase in pensions in payment Discount rate for pension plans Weighted average of assumptions used Change in assumptions 2017 3.27% 2.56% 3.67% 2016 3.15% 2.30% 3.11% +1% $m 21 22 (83) –1% $m (18) (18) 103 The expected age at death for persons aged 65 is 87 years for men and 90 years for women at 30 September 2017. A change of 1 year in the expected age of death would result in an $17 million movement in the defined benefit obligation at 30 September 2017. Critical accounting judgements and estimates The expected costs of providing post-retirement benefits under defined benefit arrangements relating to employee service during the period are charged to the Income Statement. Actuarial gains and losses from post retirement plans, which can arise from differences between expected and actual outcomes or changes in actuarial assumptions, are recognised immediately in the Statement of Comprehensive Income. In all cases, the superannuation costs are assessed in accordance with the advice of independent qualified actuaries but require the exercise of judgement in relation to assumptions for future salary and superannuation increases, long term price inflation and bond rates. While Management believes the assumptions used are appropriate, a change in the assumptions used may impact the earnings and equity of the Group. 96 | Orica Annual Report 2017 notes to the Financial statements SECTION H. OTHER For the year enDeD 30 september Section H. Other This section includes additional financial information that is required by Australian Accounting Standards and management considers to be relevant information for shareholders. 21. Commitments Capital expenditure commitments Capital expenditure on property, plant and equipment and business acquisitions contracted but not provided for and payable no later than one year was $28.4 million (2016 $47.6 million) and later than one but less than five years was $0.9 million (2016 $0.2 million). Lease commitments Lease expenditure contracted for at balance date but not recognised in the financial statements and payable: no later than one year later than one, no later than five years later than five years Representing: cancellable operating leases non-cancellable operating leases Non-cancellable operating lease commitments payable: no later than one year later than one, no later than five years later than five years Consolidated 2017 $m 2016 $m 57.4 81.8 13.9 153.1 41.5 111.6 153.1 37.6 62.3 11.7 111.6 50.3 95.4 33.4 179.1 49.3 129.8 179.1 28.4 70.5 30.9 129.8 22. Contingent liabilities Contingent liabilities relating to environmental uncertainties are disclosed in note 6 and those relating to taxation in note 11. All others are disclosed below. (a) Guarantees, indemnities and warranties ƒ The Group has entered into various long term supply contracts. For some contracts, minimum charges are payable regardless of the level of operations, but the levels of operations are expected to remain above those that would trigger minimum payments. ƒ There are a number of legal claims and exposures which arise from the ordinary course of business. There is significant uncertainty as to whether a future liability will arise in respect of these items. The amount of liability, if any, which may arise cannot be reliably measured at this time. ƒ There are guarantees relating to certain leases of property, plant and equipment and other agreements arising in the ordinary course of business. ƒ Contracts of sale covering companies and assets which were divested during the current and prior years include commercial warranties and indemnities to the purchasers. (b) Other In 2013, the Polish Competition Authority brought down an adverse finding against 3 firms, including Minova Poland, in relation to the supply of ground support products to Polish coal mines during 2005 to 2010, fining Minova Poland $4.7 million. Orica appealed the adverse finding and the fine. In June 2017 the Competition court dismissed the decision, however the Competition Authority appealed the decision to a civil appeals Court. Orica Annual Report 2017 | 97 notes to the Financial statements SECTION H. OTHER For the year enDeD 30 september 22. Contingent liabilities (continued) Critical accounting judgements and estimates In the normal course of business, contingent liabilities may arise from product-specific and general legal proceedings, from guarantees or from environmental liabilities connected with current or former sites. Where Management are of the view that potential liabilities have a low probability of crystallising or it is not possible to quantify them reliably, they are not provided for and are disclosed as contingent liabilities. Legal proceedings The outcome of currently pending and future legal, judicial, regulatory, administrative and other proceedings of a litigious nature (“Proceedings”) cannot be predicted with certainty. Thus, an adverse decision in Proceedings could result in additional costs that are not covered, either wholly or partially, under insurance policies and that could significantly impact the business and results of operations of the Group. Proceedings can raise difficult and complex legal issues and are subject to many uncertainties and complexities including, but not limited to, the facts and circumstances of each particular case, issues regarding the jurisdiction in which each Proceeding is brought and differences in applicable law. Upon resolution of any pending Proceedings, the Group may be forced to incur charges in excess of the presently established provisions and related insurance coverage. It is possible that the financial position, results of operations or cash flows of the Group could be materially affected by an unfavourable outcome of those Proceedings. Proceedings are evaluated on a case-by-case basis considering the available information, including that from legal counsel, to assess potential outcomes. Where it is considered probable that a future obligation will result in an outflow of resources, a provision is recorded in the amount of the present value of the expected cash outflows if these are deemed to be reliably measurable. Warranties and Indemnities In the course of acquisitions and disposals of businesses and assets, Orica routinely negotiates warranties and indemnities across a range of commercial issues and risks, including environmental risks associated with real property. Management uses the information available and exercises judgement in the overall context of these transactions, in determining the scope and extent of these warranties and indemnities. In assessing Orica’s financial position, Management relies on warranties and indemnities received, and considers potential exposures on warranties and indemnities provided. It is possible that the financial position, results of operations and cash flows of the Group could be materially affected if circumstances arise where warranties and indemnities received are not honoured, or for those provided, circumstances change adversely. 23. Auditors’ remuneration Total remuneration received, or due and receivable, by the auditors for: Audit services Auditors of the Company – KPMG Australia – Audit and review of financial reports – Other regulatory audit services Auditors of the Company – overseas KPMG firms – Audit and review of financial reports(1) Other services Auditors of the Company – KPMG Australia – other assurance services Consolidated 2017 $000 2016 $000 3,521 – 1,809 5,330 25 25 3,772 – 2,151 5,923 42 42 5,355 5,965 (1) Fees paid or payable for overseas subsidiaries’ local statutory requirements. From time to time, KPMG, the auditors of Orica, provide other services to the Group, which are subject to strict corporate governance procedures adopted by the Company which encompass the selection of service providers and the setting of their remuneration. 98 | Orica Annual Report 2017 notes to the Financial statements SECTION H. OTHER For the year enDeD 30 september 24. Events subsequent to balance date Dividends On 3 November 2017, the Directors declared a final dividend of 28.0 cents per ordinary share payable on 8 December 2017. The financial effect of this dividend is not included in the financial statements for the year ended 30 September 2017 and will be recognised in the 2018 financial statements. The Directors have not become aware of any other significant matter or circumstance that has arisen since 30 September 2017, that has affected or may affect the operations of the Group, the results of those operations, or the state of affairs of the Group in subsequent years, which has not been covered in these financial statements. 25. Investments in controlled entities The consolidated financial statements incorporate the assets, liabilities and results of the following controlled entities held during 2016 and 2017 (non controlling direct interests shareholding disclosed if not 100% owned): Place of incorporation if other than Australia Name of Entity Place of incorporation if other than Australia Hunan Orica Nanling Civil Explosives Co., Ltd – 49% China Name of Entity Company Orica Limited Controlled Entities ACF and Shirleys Pty Ltd(c) Alaska Pacific Powder Company USA Altona Properties Pty Ltd(c) – 37.4% Aminova International Limited Ammonium Nitrate Development and Production Limited – 0.1% Anbao Insurance Pte Ltd Arboleda S.A ASA Organizacion Industrial S.A. de C.V. Australian Fertilizers Pty Ltd(c) Barbara Limited Beijing Ruichy Minova Synthetic Material Company Limited BST Manufacturing, Inc. Chemnet Pty Limited(a) CJSC (ZAO) Carbo-Zakk – 6.3% Controladora DNS de RL de CV Cyantific Instruments Pty Ltd(a) Dansel Business Corporation Dyno Nobel Nitrogen AB(b) Dyno Nobel VH Company LLC – 49% Eastern Nitrogen Pty Ltd(c) Emirates Explosives LLC – 35% Orica Hydraulics Inc.(a) Explosivos de Mexico S.A. de C.V. – 1.3% Explosivos Mexicanos S.A. de C.V. Hong Kong Thailand Singapore Panama Mexico UK China USA Russia Mexico Panama Sweden USA United Arab Emirates USA Mexico Mexico Indian Explosives Private Limited Initiating Explosives Systems Pty Ltd Jiangsu Orica Banqiao Mining Machinery Company Limited – 50.5% JV Minova Kazakhstan Limited Liability Partnership – 20% LLC Orica Logistics Mining Quarry Services SPRL(e) Minova Africa (Pty) Ltd – 25% (formerly Orica Mining Services South Africa (Pty) Ltd) India China Kazakhstan Russia Belgium South Africa Minova Africa Holdings (Pty) Limited (formerly Orica South Africa Holdings (Pty) Limited) South Africa Minova AG Minova Arnall Sp. z o.o. Minova Asia Pacific Ltd Minova Australia Pty Ltd Minova Bohemia s.r.o. Minova CarboTech GmbH Minova Carbotech Tunnelling Engineering (Shanghai) Company Limited(b) Minova Codiv S.L. Minova Ekochem S.A. Minova Holding GmbH Minova Holding Inc Minova International Limited Minova Ksante Sp. z o.o. Minova MAI GmbH Minova Mexico S.A. de C.V. Minova MineTek Private Limited Switzerland Poland Taiwan Czech Republic Germany China Spain Poland Germany USA UK Poland Austria Mexico India Chile Sweden Ukraine Fortune Properties (Alrode) (Pty) Limited South Africa Minova Mining Services SA GeoNitro Limited – 40% Hallowell Manufacturing LLC Georgia USA Minova Nordic AB Minova Ukraina OOO – 10% Orica Annual Report 2017 | 99 Name of Entity Orica Denmark A/S Orica Dominicana S.A. Orica DRC SARL Orica Eesti OU – 35% Orica Europe FT Pty Ltd(c) Orica Europe Investments Pty Ltd(c) Orica Europe Management GmbH Orica Europe Pty Ltd & Co KG Orica Explosives Holdings Pty Ltd Orica Explosives Holdings No 2 Pty Ltd Orica Explosives Holdings No 3 Pty Ltd(c) Orica Explosives Research Pty Ltd(c) Orica Explosives Technology Pty Ltd Orica Explosivos Industriales, S.A. Orica Export Inc.(e) Orica Finance Limited Orica Finance Trust Orica Finland OY Orica GEESP Pty Ltd(c) Orica Ghana Limited Orica Grace US Holdings Inc. Orica Holdings Pty Ltd(c) Orica Ibéria, S.A. Orica IC Assets Holdings Limited Partnership Orica IC Assets Pty Ltd Orica IC Investments Pty Ltd(c) Orica International IP Holdings Inc. Orica International Pte Ltd Place of incorporation if other than Australia Denmark Dominican Republic Democratic Republic of Congo Estonia Germany Germany Spain USA Finland Ghana USA Portugal USA Singapore Orica Investments (Indonesia) Pty Limited(c) Orica Investments (NZ) Limited NZ Orica Investments (Thailand) Pty Limited(c) notes to the Financial statements SECTION H. OTHER For the year enDeD 30 september 25. Investments in controlled entities (continued) Name of Entity Minova (Tianjin) Co., Ltd.(d) Minova Weldgrip Limited Minova USA Inc Mintun 1 Limited Mintun 2 Limited Mintun 3 Limited Mintun 4 Limited MMTT Limited Nitedals Krudtvaerk AS(e) Nitro Asia Company Inc. – 41.6% Nitro Consult AB Nitro Consult AS Nitroamonia de Mexico S.A de C.V. Nobel Industrier AS Nordenfjeldske Spraengstof AS(e) Northwest Energetic Services LLC – 48.7% Nutnim 1 Limited Nutnim 2 Limited OOO Minova OOO Minova TPS – 6.3%(a) Place of incorporation if other than Australia China UK USA UK UK UK UK UK Norway Philippines Sweden Norway Mexico Norway Norway USA UK UK Russia Russia Orica-CCM Energy Systems Sdn Bhd – 45% Malaysia Orica-GM Holdings Limited – 49% UK Orica Africa (Pty) Ltd Orica Argentina S.A.I.C. Orica Australia Pty Ltd Orica Australia Securities Pty Ltd(a) Orica BKM SASU Orica Belgium S.A. Orica Blast & Quarry Surveys Limited – 25% Orica Bolivia S.A. Orica Brasil Ltda Orica Caledonie SAS Orica Canada Inc Orica Canada Investments ULC Orica Caribe, S.A. Orica Centroamerica S.A. Orica Chile Distribution S.A. Orica Chile S.A. Orica CIS CJSC Orica Colombia S.A.S. South Africa Argentina Democratic Republic of Congo Belgium UK Bolivia Brazil Canada Canada Panama Chile Chile Russia Colombia New Caledonia Orica Investments Pty Ltd Orica Japan Co. Ltd Japan Orica Kazakhstan Joint Stock Company Kazakhstan Orica Logistics Canada Inc. Costa Rica Orica Mauritania SARL Orica Med Bulgaria AD – 40% Orica Mining Services (Namibia) (Proprietary) Limited Canada Mauritania Bulgaria Namibia Orica Mining Services (Hong Kong) Ltd Hong Kong 100 | Orica Annual Report 2017 notes to the Financial statements SECTION H. OTHER For the year enDeD 30 september 25. Investments in controlled entities (continued) Name of Entity Orica Mining Services Peru S.A. – 1% Orica Mining Services Portugal S.A. Orica Mining Services (Thailand) Limited Orica Mongolia LLC – 51% Orica Mountain West Inc. Place of incorporation if other than Australia Peru Portugal Thailand Mongolia USA Name of Entity OriCare Canada Inc. Oricorp Comercial S.A. de C.V. Oricorp Mexico S.A. de C.V. Penlon Proprietary Limited(c) Project Grace Orica Mozambique Limitada Mozambique Project Grace Holdings Orica Netherlands Finance B.V.(b) Netherlands Project Grace Incorporated Orica New Zealand Finance Limited Orica New Zealand Limited Orica New Zealand Securities Limited Orica New Zealand Superfunds Securities Limited NZ NZ NZ NZ PT Kalimantan Mining Services PT Kaltim Nitrate Indonesia – 10% PT Orica Mining Services Retec Pty Ltd(c) Place of incorporation if other than Australia Canada Mexico Mexico UK UK USA Indonesia Indonesia Indonesia Orica Nitrates Philippines Inc – 4% Philippines Rui Jade International Limited Hong Kong Sarkem Pty Ltd(c) Sprengstoff-Verwertungs GmbH Taian Ruichy Minova Ground Control Technology Co., Ltd(a) Transmate S.A. – 29.8% White Lightning Holdings, Inc Germany China Belgium Philippines (a) Liquidated in 2017. (b) In liquidation. (c) Small proprietary company – no separate statutory accounts are prepared. (d) Divested in 2017. (e) Merged in 2017. Orica Nitratos Peru S.A. Orica Nitro Patlayici Maddeler Sanayi ve Ticaret Anonim Sirketi – 49% Orica Nitrogen LLC Orica Nominees Pty Ltd(c) Orica Norway AS Orica Norway Holdings AS(e) Orica Panama S.A. – 40% Orica Philippines Inc – 5.5% Orica Portugal, S.G.P.S., S.A. Orica Qatar LLC – 40%(b) Orica Securities (UK) Limited Orica Servicos de Mineracao Ltda(e) Orica Share Plan Pty Limited(c) Orica Senegal SARL Orica Singapore Pte Ltd Orica St. Petersburg LLC Orica Sweden AB Orica Sweden Holdings AB Orica Tanzania Limited Orica UK Limited Orica US Finance LLC Orica US Holdings General Partnership Orica USA Inc. Orica U.S. Services Inc. Orica Venezuela C.A. Orica (Weihai) Explosives Co Ltd – 20% Orica Zambia Limited Peru Turkey USA Norway Norway Panama Philippines Portugal Qatar UK Brazil Senegal Singapore Russia Sweden Sweden Tanzania UK USA USA USA USA Venezuela China Zambia notes to the Financial statements SECTION H. OTHER For the year enDeD 30 september Orica Annual Report 2017 | 101 26. New accounting policies and accounting standards (i) Changes in accounting policies Except as described below, the accounting policies applied by the Group in the financial statements are the same as those applied by the Group in its consolidated financial report for the year ended 30 September 2016. The Group assessed and applied a number of new and revised accounting standards issued by the Australian Accounting Standards Board (AASB). The adoption of these standards has not resulted in any material changes to the Group’s financial statements and primarily impact disclosures. (ii) New accounting standards and interpretations issued but not yet adopted The following new accounting standards and interpretations have been issued or amended but are not yet effective. These standards are available for early adoption but have not been applied by the Group in this financial statements. The Group’s assessment of the impact of these new standards is set out below. ƒ AASB 9 (2014) Financial Instruments, AASB 2014-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2014) and AASB 2014-8 Amendments to Australian Accounting Standards arising from AASB 9 (December 2014) – Application of AASB 9 (December 2009) and AASB 9 (December 2010) AASB 9 Financial Instruments addresses the classification, measurement and recognition of financial assets and liabilities, sets out new rules for hedge accounting and introduces a new impairment model. This standard is applicable for annual reporting periods beginning on or after 1 January 2018. It will first apply in the Group’s Annual Report for the year ended 30 September 2019. Whilst the impact of the adoption of this standard is still being assessed, it is not expected to have a material impact on the Group. ƒ AASB 15 Revenue from Contracts with Customers and AASB 2014-5 Amendments to Australian Accounting Standards arising from AASB 15 AASB 15 modifies the way which revenue is recognised and provides for an increase in the disclosure requirements for the Group. The key principle is that an entity recognises revenue representing the transfer of goods or services to a customer in an amount that reflects the price that the entity expects to be entitled in exchange for those goods or services. The result is that revenue is recognised when control of goods or services is transferred rather than on the transfer of risks and rewards. This standard is applicable for annual reporting periods beginning on or after 1 January 2018. It will first apply in the Group’s Annual Report for the year ended 30 September 2019. Whilst the impact of the adoption of this standard is still being assessed, it is not expected to have a material impact on the Group. ƒ AASB 16 Leases AASB 16 Leases replaces the current leasing standard AASB 117 and contains significant changes to the recognition, measurement and disclosure of leases. Under the new standard, the present value of all the Group’s leases, excluding low value leases and short-term leases, will be shown as right of use assets and as lease liabilities on the balance sheet. This standard will have an impact on the Group’s earnings and shareholders’ funds at transition and in future years. It must be implemented retrospectively, either with the restatement of comparative information or with the cumulative impact of application recognised as at 1 October 2019 under the modified retrospective approach. AASB 16 contains several practical expedients. Under the modified retrospective approach, on a lease-by-lease basis, the right of use of an asset may be deemed to be equivalent to the liability at transition or calculated retrospectively as at inception of the lease. The financial impact of adopting AASB 16 has not yet been determined, however the following impacts are expected on implementation date: – Total assets and total liabilities will increase, due to the recognition of a “Right of Use Asset” and a “Lease Liability” grossing up the assets and liabilities in the Group’s Balance Sheet; – Interest expense will increase due to effective interest rate implicit in the lease, where the interest expense component is higher on early years on the lease; – Depreciation charge will increase as the right of use assets is recognised and depreciated over the term of the lease; – Lease rental expense will decrease due to the recognition of interest and depreciation noted above; and – Operating cash flow will be higher as repayment of the principal portion of all lease liabilities will be classified as financing activities. To date, work has focused on the identification of the provisions of the standard which will most impact the Group. In 2018, work on these issues and their resolution will continue and work on the financial reporting impacts will commence as well as assessment of likely changes to systems. This standard is applicable for annual reporting periods beginning on or after 1 January 2019. It will first apply in the Group’s Annual Report for the year ended 30 September 2020. 102 | Orica Annual Report 2017 Directors’ Declaration We, Malcolm William Broomhead and Alberto Calderon, being Directors of Orica Limited, do hereby state in accordance with a resolution of the Directors that in the opinion of the Directors, (a) the consolidated financial statements and notes, set out on pages 55 to 101, and the Remuneration report in the Directors’ Report, set out on pages 31 to 52, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the financial position of the Group as at 30 September 2017 and of its performance for the financial year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe the Company will be able to pay its debts as and when they become due and payable. There are reasonable grounds to believe that the Company and the controlled entities identified in note 18 will be able to meet any obligations or liabilities to which they are or may become subject to by virtue of the Deed of Cross Guarantee between the Company and those controlled entities pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Managing Director and Chief Financial Officer for the financial year ended 30 September 2017. The Directors draw attention to “About this report” on page 60 to the financial statements, which includes a statement of compliance with International Financial Reporting Standards. M W Broomhead Chairman A Calderon Managing Director and Chief Executive Officer Dated at Melbourne 3 November 2017. inDepenDent auDitor’s report Orica Annual Report 2017 | 103 78KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under ProfessionalStandards Legislation.Independent Auditor’s Report To the shareholders of Orica Limited Report on the audit of the Financial Report Opinion We have audited the Financial Report of Orica Limited (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: •giving a true and fair view of the Group’s financial position as at 30 September 2017 and of its financial performance for the year ended on that date; and •complying with Australian Accounting Standards and the Corporations Regulations 2001. The Financial Report comprises the: •Consolidated balance sheet as at 30 September 2017 •Consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, and consolidated statement of cash flows for the year then ended •Notes including a summary of significant accounting policies •Directors’ Declaration. The Group consists of the Company and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. Key Audit Matters The Key Audit Matters we identified are: •Carrying value of goodwill associated with the Minova segment •Accounting for environmental and decommissioning provisions •Accounting for uncertain tax positions Key Audit Matters are those matters that, in our professional judgment, were of most significance in our audit of the Financial Report for the current period. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 104 | Orica Annual Report 2017 inDepenDent auDitor’s report 79 Carrying value of goodwill associated with the Minova Segment ($191m) Refer to Note 9 to the Financial Report The key audit matter How the matter was addressed in our audit A key audit matter was the Group’s annual testing of goodwill attributable to the Minova Segment (Minova). Given the size of the balance and recent performance of Minova we exercised significant judgment in evaluating the audit evidence available. Minova’s performance in recent periods was impacted by a number of external factors. These factors include weaker volumes in global coal markets relative to historical trends, lower pricing in the USA and cost reduction mandates across the resource sector. The Group considered these external factors could indicate possible impairment of the goodwill. We focused on the significant forward-looking assumptions the Group applied in their value in use models including: •Forecast operating cash flows – Minova has experienced declining cash flows in recent years due to competitive market conditions and weaker volumes in coal markets and have not met prior forecasts, raising our concern for reliability of current forecasts. These conditions, coupled with the Group’s models being highly sensitive to changes in forecast operating cash flows, increase the possibility that goodwill may be impaired plus the risk of inaccurate forecasts or wider range of outcomes to consider. •Forecast terminal growth rates – in addition to the uncertainties described above, the Group’s models are sensitive to changes in terminal growth rates. This drives additional audit effort specific to the feasibility of the terminal growth rates and consistency with the Group’s strategy. •Discount rates – the determination of a discount rate applicable to underlying cash flows is a subjective exercise, and is influenced by the countries and environments that the cash flows are generated in. The Group’s modelling is sensitive to changes in the discount rate. Our procedures included: •We tested key controls in the Group’s valuation process including Board authorisation of cash flow forecasts and review and approval of the impairment assessment, by examining information presented to the Board. •We compared the forecast cash flows contained in the value in use model to Board approved forecasts. •We assessed the accuracy of previous Group forecasts for Minova’s cash flows to inform our evaluation of forecasts incorporated in the models. We noted previous trends, in particular where weakening demand and continuing lower prices in North America occurred and how this impacted the business, for use in further testing. We applied increased scepticism to forecasts in areas where previous forecasts were not achieved. •We challenged the Group’s significant forecast cash flow assumptions in light of competitive market conditions and weaker volumes in coal markets relative to historical trends to assess Minova’s capacity to achieve future cash flows. We used our knowledge of the Group, their past performance, business and customers and our industry experience to evaluate the feasibility of these plans. •We assessed the scope, expertise and independence of the external specialists engaged by the Group to assist the Group to determine the discount rates applicable to the operations which comprise Minova. •Working with our valuation specialists we also independently developed a discount rate range for key operations which form part of Minova, using publically available market data for comparable entities, adjusted for risk factors including country risk. We compared the discount rates applied by the Group for key operations to our acceptable range. •We considered the sensitivity of the models by varying key assumptions, such as forecast growth rates, terminal growth rates and discount rates, within a reasonably possible range, to identify those assumptions at higher risk of bias or inconsistency in application and to focus our further procedures. •We compared forecast terminal growth rates for the key operations which form part of Minova to published studies of industry and economic trends and expectations, and considered differences for the Group’s operations. •We assessed the value in use methodology applied by the Group to accepted market practices and our industry experience. •We assessed the disclosures in the financial report using our understanding of the issue obtained from our testing and against the requirements of the accounting standards. Orica Annual Report 2017 | 105 80 Environmental and decommissioning provisions ($215m) and contingent liability disclosures Refer to Note 6 to the Financial Report The key audit matter How the matter was addressed in our audit The estimation of environmental remediation and decommissioning provisions is considered a key audit matter. This is due to the inherent complexity associated with the Group estimating remediation costs, particularly for disturbance of ground beneath established structures and long term legacy matters,and for us in gathering persuasive audit evidence thereon. This complexity in estimating these provisions is influenced by: •The inherent challenges experienced by the Group in precisely determining the size and location of disturbance beneath established structures. •Current and potential future environmental and regulatory requirements and the impact on completeness of remediation activities within the provision estimate, including the activities which will be acceptable to the regulator. •The expected environmental remediation strategy and availability of any known techniques to remediate source contamination, in particular for treatment of Dense Non-Aqueous Phase Liquid source areas at Botany, New South Wales. •Historical experience, and its use as a reasonable predictor when evaluating forecast costs. •The expected timing of the expenditure given the long term nature of these exposures. Our audit procedures included: •Testing controls relating to the completeness of the Group’s identification of areas which contain disturbance and the related recognition and measurement of provisions, including the Group’s review and authorisation of cost estimates. •Testing the accuracy of historical remediation provisions by comparing to actual expenditure. We used this knowledge to challenge the Group’s current cost estimates and to inform our further procedures. •We conducted site visits and made enquiries of various personnel regarding the Group’s strategy for remediating certain source contamination where significant challenges currently exist to define an acceptable method of remediation. •We read correspondence with regulatory authorities to understand their views about acceptable remediation techniques and compared this with the assumptions made in the Group’s models. •We challenged the Group where provisions were unable to be made for source contamination about the existence of information which would enable a reliable estimate of the provision to be made. We compared this to our understanding of the matter and the criteria in the accounting standards for recording a provision. •We obtained the Group’s quotations for remediation work, as well as internal and external underlying documentation for the Group’s determination of future required activities, their timing and associated cost estimates. We compared them to the nature and quantum of costs contained in the provision balance. •We assessed the Group’s disclosures using our knowledge of the business and the requirements of the Accounting Standards. In particular, we focused on the disclosure of uncertainties associated with the provision or exposure. 106 | Orica Annual Report 2017 inDepenDent auDitor’s report 81 Uncertain tax positions and contingent liability disclosure Refer to Note 11 to the Financial Report The key audit matter How the matter was addressed in our audit The Group operates in a global tax environment and its corporate structure reflects the nature of global operations which is driven by acquisitions, transactions and the execution of the Group’s global strategy. This includes external sales in over one hundred countries. A number of the Group’s tax positions are presently subject to challenge by tax authorities. The ultimate outcome of these matters is inherently uncertain. Accounting for uncertain tax positions is a key audit matter due to: •The Group undertaking transactions in a number of tax jurisdictions which require the Group to make significant judgments about the interpretation of tax legislation and the application of accounting requirements, in particular in Australia and Germany. •The changing tax environment where there have been significant developments to improve transparency of tax arrangements. We used significant judgment, including involvement of our tax specialists, to assess the Group’s position with reference to tax legislation and in particular the likely outcome of the Group’s defense of its positions through legal appeal processes. Working with our tax specialists our procedures included: •We tested the Group’s controls for identification and assessment of uncertain tax positions. Our testing included challenging senior management and the Group’s taxation department, and inspecting correspondence with tax authorities and the Group’s external tax advisors for evidence of significant uncertain tax positions not identified by the controls. •We considered the Group’s methodologies, assumptions and estimates for significant tax positions and the likelihood of future tax outflows. Our evaluation was based on application of our knowledge of the industry, tax legislation and current regulatory focus areas, and recent rulings relevant to the uncertain tax positions. •We read correspondence with relevant tax authorities and considered both external tax and legal advice provided to the Group to check for any information which was contradictory to the Group’s conclusions. •We compared the Group’s accounting policy for recognition of tax provisions against the requirements of the accounting standards. •We compared the positions adopted by the Group to our knowledge of latest interpretations by tax regulators and court rulings to test the positions adopted for compliance with Accounting Standards. •We made independent enquiries of the Group’s external legal advisors. We compared their responses to the assessment made by the Group. •We assessed the Group’s disclosures in respect of uncertain tax positions against the requirements of the accounting standards and our understanding of the matters. Other Information Other Information is financial and non-financial information in Orica’s annual reporting which is provided in addition to the Financial Report and the Auditor's Report. The Directors are responsible for the Other Information. The Other Information we obtained prior to the date of this Auditor’s Report was the About Us statement, Chairman’s Message, Managing Director’s Message, Review of Operations, Board Members biographies, Executive Committee biographies, Directors’ Report and Five Year Financial Statistics. The Global Presence statement, Sustainability Overview, Shareholder Information and Corporate Directory are expected to be made available to us after the date of the Auditor's Report. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not and will not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Orica Annual Report 2017 | 107 82 Responsibilities of the Directors for the Financial Report The Directors are responsible for: •preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 •implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error •assessing the Group’s ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objective is: •to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and •to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_files/ar2.pdf. This description forms part of our Auditor’s Report. Report on the Remuneration Report Opinion Opinion In our opinion, the Remuneration Report of Orica Limited for the year ended 30 September 2017, complies with Section 300A of the Corporations Act 2001. Directors’ responsibilities The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibilities We have audited the Remuneration Report included in pages 5 to 24 of the Directors’ report for the year ended 30 September 2017. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPMG Alison Kitchen Partner Melbourne 3 November 2017 108 | Orica Annual Report 2017 five year financial statistics For the year enDeD 30 september Orica consolidated Profit & Loss Sales 2017 2016 2015 2014 2013 5,039.2 5,091.9 6,123.2 6,796.3 6,885.2 Earnings before depreciation, amortisation, net borrowing costs and tax Depreciation and amortisation (excluding goodwill) Earnings before net borrowing costs and tax (EBIT) Net borrowing costs Individually material items before tax Taxation expense Non-controlling interests Profit/(loss) after tax and individually material items Individually material items after tax attributable to members of Orica Limited Profit after tax before individually material items net of tax Dividends/distributions Financial Position Current assets Property, plant and equipment Investments Intangibles Other non-current assets Total assets Current borrowings and payables Current provisions Non current borrowings and payables Non current provisions Total liabilities Net assets Equity attributable to ordinary shareholders of Orica Limited Equity attributable to non-controlling interests 896.3 (261.2) 635.1 (71.7) – (164.0) (13.2) 386.2 – 386.2 197.1 1,784.8 2,741.5 184.6 1,577.1 497.2 6,785.2 1,084.1 213.2 1,937.4 587.0 3,821.7 2,963.5 2,962.3 1.2 908.1 (265.9) 642.2 (84.3) (4.6) (198.4) (12.1) 342.8 (46.3) 389.1 283.5 1,577.9 2,725.3 188.1 1,558.8 545.7 6,595.8 1,382.9 207.9 1,562.9 658.9 3,812.6 2,783.2 2,782.5 0.7 995.1 (305.7) 689.4 (82.1) (1,884.4) (119.3) (129.0) (1,525.4) (1,691.6) 424.2 356.1 1,895.1 2,917.9 203.5 1,633.2 671.6 7,321.3 1,285.2 244.1 2,150.7 654.1 4,334.1 2,987.2 2,984.6 2.6 Total shareholders’ equity 2,963.5 2,783.2 2,987.2 1,230.5 1,252.5 (300.8) 929.7 (115.8) – (187.9) (23.5) 602.5 – 602.5 349.3 2,137.3 3,794.9 208.0 2,388.5 310.5 8,839.2 1,775.8 181.5 1,997.0 485.8 4,440.1 4,399.1 4,263.0 136.1 4,399.1 (284.4) 968.1 (150.2) – (208.0) (17.4) 592.5 – 592.5 339.0 2,149.8 3,583.2 197.7 2,340.0 342.8 8,613.5 1,703.4 251.6 2,180.7 467.9 4,603.6 4,009.9 3,871.0 138.9 4,009.9 Five year Financial statistics Orica Annual Report 2017 | 109 Orica consolidated Number of ordinary shares on issue at year end (millions) Weighted average number of ordinary shares on issue (millions) Basic earnings per ordinary share – before individually material items (cents) – including individually material items (cents) Dividends per ordinary share (cents) Dividend franking (percent) Dividend yield – based on year end share price (percent) Closing share price range – High – Low Year end Stockmarket capitalisation at year end ($m) Net tangible assets per share ($) Ratios Profit margin – earnings before net borrowing costs and tax/sales (percent) Net debt (millions) Gearing (net debt/net debt plus equity) (percent) Interest cover (EBIT/net borrowing costs excluding capitalised interest) (times) Net capital expenditure on plant and equipment (Cash Flow) ($m) Net cash flow from (acquisition)/sale of businesses/controlled entities ($m) Return on average shareholders’ funds – before individually material items (percent) – including individually material items (percent) 2017 377.0 376.2 102.7 102.7 51.5 5.8 2.6 $21.03 $15.57 $19.77 7,454.1 3.67 2016 374.9 372.4 104.5 92.0 49.5 36.4 3.3 $16.92 $12.26 $15.20 2015 370.1 370.3 114.6 (342.3) 96.0 35.4 6.4 $22.56 $14.86 $15.04 2014 372.7 368.1 163.7 163.7 96.0 37.5 5.1 $24.78 $18.51 $18.90 5,698.9 5,566.3 7,044.0 3.26 3.65 5.03 2013 368.2 363.7 162.9 162.9 94.0 74.5 4.7 $27.31 $17.61 $20.06 7,386.1 4.16 12.6 12.6 1,440.9 1,549.4 32.7 35.8 6.2 210.7 5.4 (123.9) 11.3 2,026.1 40.4 5.8 (292.5) 13.7 14.1 2,236.7 2,334.2 33.7 36.8 6.5 (392.7) 6.0 (596.1) 9.5 (13.3) 658.7 0.4 (2.2) 13.4 13.4 13.5 11.9 11.7 (42.1) 14.8 14.8 16.9 16.9 110 | Orica Annual Report 2017 shareholDer information CAPITAL ON 3 NOVEMBER 2017 Share Capital Ordinary Shareholders Shareholders with less than a marketable parcel of $500 worth of ordinary shares Market price ORICA TOP 20 INVESTORS AS AT 3 NOVEMBER 2017 NAME 1 HSBC Custody Nominees (Australia) Limited 2 JP Morgan Nominees Australia Limited 3 Citicorp Nominees Pty Limited 4 National Nominees Limited 5 6 BNP Paribas Nominees Pty Ltd (Agency Lending DRP A/C) BNP Paribas Noms Pty Ltd (DRP) 7 Australian Foundation Investment Company Limited 8 Argo Investments Limited 9 AMP Life Limited 10 HSBC Custody Nominees (Australia) Limited (NT-Commonwealth Super Corp A/C) 11 The Senior Master of the Supreme Court (Common Fund No 3) 12 Citicorp Nominees Pty Limited (Colonial First State Inv A/C) 13 Gwynvill Investments Pty Ltd 14 ECapital Nominees Pty Limited (Accumulation A/C) 15 RBC Investor Services Australia Nominees Pty Limited (MBA A/C) 16 Carlton Hotel Limited 17 HSBC Custody Nominees (Australia) Limited GSCO ECA 18 Australian United Investment Company Limited 19 Equity Trustees Limited (ESF Aust Equity Portfolio) 20 BNP Paribas Nom (NZ) Ltd (DRP) 377,039,027 45,424 2,269 $21.37 ISSUED CAPITAL % 47.88 15.22 7.24 4.10 1.90 0.91 0.72 0.61 0.55 0.51 0.37 0.37 0.19 0.16 0.16 0.14 0.14 0.13 0.13 0.11 CURRENT SHARE BALANCE 180,510,227 57,380,942 27,291,876 15,443,579 7,156,528 3,414,560 2,711,626 2,307,983 2,086,057 1,926,542 1,395,824 1,378,311 711,574 618,908 610,660 541,764 522,453 500,000 494,102 397,161 307,400,677 81.54 SUBSTANTIAL SHAREHOLDERS AS AT 3 NOVEMBER 2017 The names of substantial shareholders in the company, and the number of fully paid ordinary shares in which each has an interest, as disclosed in substantial shareholder notices to the Company on the respective dates, are as follows: Date 2/3/17 7/4/17 Shareholder Harris Associates MFS Investment Management 13/4/17 Blackrock Group Shares 43,484,681 30,064,010 18,848,184 % 11.56 7.99 5.01 shareholDer inFormation Orica Annual Report 2017 | 111 INVESTOR CATEGORIES AS AT 3 NOVEMBER 2017 Range 0–1,000 1,001–5,000 5,001–10,000 10,001–100,000 100,001 and over Total Investors Securities 29,776 11,170,213 13,617 28,275,942 1,350 9,204,713 632 12,161,406 49 316,226,753 45,424 377,039,027 Issued Capital % 2.96 7.50 2.44 3.23 83.87 100.00 Dividend Reinvestment Plan The Dividend Reinvestment Plan (DRP) enables Orica’s fully paid ordinary shareholders having a registered address or being resident in Australia or New Zealand to reinvest all or part of their dividends in additional Orica fully paid ordinary shares. Applications are available from the Share Registrar. Consolidation of Multiple Holdings If you have multiple issuer sponsored holdings that you wish to consolidate into a single account, please notify the Share Registrar in writing, quoting your full registered names and Securityholder Reference Number (SRN) for these accounts and nominating the account to which the holdings are to be consolidated. Change of Name and/or Address For issuer-sponsored holdings: please notify the Share Registrar in writing if you change your name and/or address (please supply details of your new/previous name, your new/previous address and your SRN), or change the details online at their website at www.linkmarketservices.com.au. For CHESS/broker sponsored holdings: please notify your broker in writing if you change your name and/or address. Share Enquiries Shareholders seeking information about their shareholding or dividends should contact Orica’s Share Registrar, Link Market Services Limited. Contact details are located on the inside back cover. Callers within Australia can obtain information on their investments with Orica by calling the Investor Line on 1300 301 253. This is a 24 hour, seven days a week service. Before you call, make sure you have your SRN or Holder Identification Number (HIN) handy. You can do so much more online via the internet, visit their website: www.linkmarketservices.com.au. Access a wide variety of holding information, make some changes online or download forms. You can: ƒ Check your current and previous holding balances. ƒ Choose your preferred Annual Report options. ƒ Update your address details. ƒ Update your bank details. ƒ Confirm whether you have lodged your TFN or ABN exemption. ƒ Register your TFN/ABN. ƒ Check transaction and dividend history. ƒ Enter your email address. ƒ Check the share prices and graphs. ƒ Download a variety of instruction forms. ƒ Subscribe to email announcements. You can access this information via a security login using your SRN or HIN as well as your surname (or company name) and postcode (must be the postcode recorded on your holding record). 112 | Orica Annual Report 2017 shareholDer inFormation Corporate Governance Orica’s Directors and management are committed to conducting the Company’s business ethically and in accordance with the highest standards of corporate governance. Orica’s integrated governance framework is designed to ensure that decision-making processes are rigorous and robust and to support the creation of long-term value for shareholders. Orica’s 2017 Corporate Governance Statement and ASX Appendix 4G (Key to Disclosures – Corporate Governance Council Principles and Recommendations) was lodged with the ASX on the date of lodgement of this Annual Report and is available in the corporate governance section of the Orica website at www.orica.com/About-Us/Governance. The Corporate Governance Statement outlines how Orica Limited complies with each of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations – 3rd edition (March 2014). It was adopted by the Board on 3 November 2017. Orica Communications Orica’s website www.orica.com offers shareholders details of the latest share price, announcements to the ASX, investor and analyst presentations, webcasts and the Chairman’s and Managing Director’s AGM addresses. The website also provides further information about the Company and offers insights into Orica’s business. Orica’s printed communications include the Annual Report and Sustainability Report. We can provide electronic dividend statements, notices of meeting and proxy forms. Electronic transmission enhances shareholder communication, results in significant cost savings for the Company and is more environmentally friendly. Shareholders wishing to receive all communications electronically should visit the Share Registrar’s website: www.linkmarketservices.com.au to register their preference. Shareholders may elect to receive a copy of the Annual Report or notification by email when the Annual Report is available online at www.orica.com. If you do not make an Annual Report election you will not receive a copy of the Annual Report. If you wish to change your Annual Report election, please contact the Share Registrar or visit their website: www.linkmarketservices.com.au Copies of reports are available on request. Telephone: +61 3 9665 7111 Email: companyinfo@orica.com Auditors KPMG CoRpoRAte DIReCtoRy Investor Information Financial Calendar Registered and Head Office Orica Limited Level 3, 1 Nicholson Street, East Melbourne, Victoria Australia 3002 Postal Address PO Box 4311, Melbourne Victoria, Australia 3001 P +61 3 9665 7111 E companyinfo@orica.com Investor Relations P + 61 3 9665 7111 E companyinfo@orica.com Half Year Profit and Interim Dividend Announced Books Close for 2018 Interim Ordinary Dividend 7 May 2018 1 June 2018 Last date to participate in Dividend Reinvestment Plan 4 Jun 2018 Interim Ordinary Dividend Paid 2 July 2018 Full Year Profit and Final Dividend Announced 2 November 2018 Books Close for 2018 Final Ordinary Dividend 13 November 2018 Last date to participate in Dividend Reinvestment Plan 14 November 2018 Stock Exchange Listings Full Year Ordinary Dividend Paid 7 December 2018 Orica’s shares are listed on the Australian Securities Exchange (ASX) and are traded under the ticker ORI. Share Registry Link Market Services Level 12, 680 George Street Sydney, NSW, Australia, 2000 Locked Bag A14 Sydney South NSW, Australia 1235 Toll Free International +61 1300 301 253 1300 301 253 (Australia only) F +61 2 9287 0303 E orica@linkmarketservices.com.au W www.linkmarketservices.com.au Annual General Meeting The 2017 Annual General Meeting of Orica Limited will be held in the Grand Ballroom, Park Hyatt Hotel, 1 Parliament Square, East Melbourne Vic 3002 on Friday 15 December 2017 at 10.30am (AEDST). Website To view the 2017 annual report, corporate governance statement, shareholder and company information, news announcements, financial reports, sustainability report, historical information, background information on Orica visit the company website at www.orica.com. Cover: Monza Recycled contains 99% recycled fibre and is FSC® Mix Certified, which ensures that all virgin pulp is derived from well-managed forests and controlled sources. Monza Recycled is manufactured by an ISO 14001 certified mill. Text: Pacesetter Coated is an FSC® Mix Certified paper, which ensures that all virgin pulp is derived from well-managed forests and controlled sources. It contains elemental chlorine free bleached pulp and is manufactured by an ISO 14001 certified mill. ouR GlobAl pResenCe Major Manufacturing Sites Ammonium Nitrate Sodium Cyanide Ammonium Nitrate Emulsion Minova Packaged Explosives Initiating Systems Orica Global Presence Major Offices Technical Centres no.1 GLOBAL SUPPLIER OF COMMERCIAL EXPLOSIVES oVeR 11,500 EMPLOYEES SERVING CUSTOMERS ACROSS MORE THAN 100 COUNTRIES ORC0015 AR17_PFO.indd 2-113 14/11/2017 10:19 AM o R I C A A n n u A l R e p o R t 2 0 1 7 A B N 2 4 0 0 4 1 4 5 8 6 8 

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