On the face of it the drought is so bad that major suppliers of inputs and services, such as fertilizer companies should be battling to make a quid.
Should be is the operative phrase in the case of the country’s biggest fertiliser manufacturer, Incitec Pivot, which yesterday sprang a major surprise with a sharp improvement in earnings for the six months to March.
The company reported an underlying net profit of $49.6 million. That was up 80 per cent excluding one off items. And IPL said it expected further earnings momentum in the future.
And including one off items net after tax profit was $57.2 million compared to $10.1 million in the previous six month period.
IPL shares rose sharply, up $2.63 to $55.38.
As always the best indicator is before tax and interest earnings (EBIT) and they were up 106 per cent to $83.9 million from $40.7 million.
IPL managing director Julian Segal said “We expect continued earnings momentum from the business efficiency program and strong global fertiliser prices to underpin manufacturing profitability”.
“However, this is tempered by the uncertain weather outlook, including the impact on irrigation allocations and the stronger Australian dollar.”
He later told a corporatefile open briefing that the result reflected greater business efficiencies and the contribution from Southern Cross,was acquired in August last year, which went a long way to softening the impact from the drought.
Mr Segal said “We’ve made a truly outstanding start to the year, particularly given the drought conditions on the east coast of Australia, not only this year but also the year before – we’ve had poor conditions for two years running.
“We’ve been able to deliver this result because of the strategies we’ve put in place and because they’ve been extremely well executed by our people.
“Our strategy comprises four themes that are complementary – we believe the “whole” creates more value than the sum of its parts.
“The first strategic theme is “lowest cost base” and in the first half our “Tardis” business efficiency program delivered an additional $21.7 million in benefits.
“The second theme is “owning the product,” demonstrated in the first half by the fact that Southern Cross delivered underlying earnings, before Tardis efficiencies, of $28.8 million and that we generated over 80 percent of first-half earnings from manufacturing.
“Our third strategic theme is “the trading model” and in the first half trade accounted for 28 percent of our sales, facilitating the final theme of our strategy, being the “supply chain value engine,” where we realised a $46 million reduction in working capital compared with the previous corresponding period, a cash benefit of 91 cents per share.”
Brokers believe IPL will earn around $159 million, up 92 per cent, with EBIT of $252 million (double the 2006 rate). All impressive but prices rises for some inputs and the lack of water situation in the huge Murray Darling basin are threats to the forecast. Mr Segal remains confident.
“As you’re aware, we earn two thirds of our profit in the second half, so it’s still very early in the year. We’re aware of the range of forecasts currently in the market, and believe the differences mainly arise from assumptions on global fertiliser prices and the exchange rate.
“In terms of the outlook, there are a number of positives. They include forecasts of a general easing of drought conditions and above-trend global fertiliser prices, albeit with a normal softening in prices after the US planting season finishes in about May.
“We’ll also have a full-year contribution from Southern Cross and continuing efficiencies from Tardis.
“On the negative side, the strong Australian dollar will offset some of the fertiliser pricing benefit and uncertain water allocations will impact sales into cotton markets in particular.
“The water problem isn’t restricted to the Murray Darling. Average rainfall this year will not be sufficient to replenish irrigation reservoirs and increase water allocations.
“Many irrigated crops, including irrigated pasture and horticulture, will be affected. Of course, it’s not as if we’re coming off full allocations last year, so it’s a relative position. But for some of our customers the situation is dire.
“Another negative is that we’ll forego about $10 million in manufacturing margin in the second half as a result of the planned Gibson Island maintenance shut-down in the first half.
“Our stock turnover tends to be 30 to 40 days, so the fact that Gibson Island didn’t produce in February/March means we don’t have manufactured product we’d usually be selling in April/May – we’ll sell imports this year. So year-on-year there’s a $10 million hole.”
