Incitec Pivot Ltd’s first-half net profit may have been down just 1% before material items at $169.8 million ($171.1 million in the previous corresponding half), but its not the story, nor was the 41% fall after material items to $99.6 million.
And, comments from acting CEO, James Fazzino, that this was a solid result in a difficult market, might also be true, but again are not the story.
The real story is in the slashing of the interim dividend by almost 80%, from 10.2 cents a share to 2.1 cents.
It’s done that to conserve cash (as has every company which has cut returns to shareholders).
IPL shares fell, then ended up 5.1% at $2.47 as investors bought the company’s reasoning for the dividend cut and possible earnings downgrade.
IN a statement Mr Fazzino said: “In line with prudent financial management, the dividend pay-out ratio is being reduced from the range of 55-65% to 20-40% of NPAT.”
The company said it had entered into an underwriting agreement with the UBS Australia to underwrite the 2009 interim dividend to the extent not taken up by IPL shareholders under the DRP.
With the slashed dividend and a 2.5% discount on the DRP, the underwriting of the plan is another sign of a company battening down the hatches.
Mr Fazzino said that difficult trading conditions in all sectors of the business were expected to persist over the next six months.
“Given the current volatility in the markets in which we operate, in particular global fertiliser prices and exchange rates, forecasting is challenging. Our approach is to update the market on the key variables and provide earnings sensitivities to movements.
"This allows investors to form their own views on our likely earnings,” he said.
He pointed out that earnings for the full year will be 15% lower that previously said if the lower prices for phosphate and the higher value of the Australian dollar persist.
“Spot fertiliser prices have declined since March, and the Australian dollar has strengthened. Both movements are negatives for IPL.
"“In February 2009, (in ASX Announcement – 2009 Update) we noted that, assuming that the then current market conditions prevailed and taking into account the difficulty in forecasting full year earnings, we expected our earnings would be adversely impacted.
“At that time, taking the spot di-ammonium phosphate (DAP) price of US$360 per tonne and spot urea pricing of US$300 per tonne and the then current Australian dollar/US dollar exchange rate of 70 cents, we expected 2009 NPAT (excluding individually material items) of $450 million.
“If we were to do the same calculation today, substituting the current spot prices and exchange rate (DAP US$310 per tonne, urea US$250 per tonne and exchange rate, 75 cents) as at 11 May 2009, then NPAT would be $380 million,” the acting CEO said in the statement to the ASX.
The company took an after-tax charge of $70.2 million and of that, $34.6 million resulted from writing down the value of phosphate-rock prices on Incitec’s books to net realisable value, after demand for fertilisers slumped and prices fell.
A further $20.5 million charge related to the integration of Dyno Nobel explosives business, and $11 million was written off for the early closure (at a date to be fixed) of the Cockle Creek superphosphate plant, on Lake Macquarie in NSW.
Earnings Before Interest and Tax (EBIT) in the half was $272.2 million, up 9% increase on the previous corresponding period of $250 million.
The company said its robust balance sheet position "is demonstrated by sound credit metrics and cash and undrawn committed financing facilities of $600 million in place at balance date.
Mr Fazzino, said it was a "solid result in a period heavily impacted by the global financial crisis and during which demand for our products was down in all sectors, some by more than 50%.
“The result demonstrates the benefit of bringing together two complementary businesses – fertilisers and explosives – and was essentially driven by the focus of our people on managing ‘the controllables’ such as safety, customer relationships and efficiencies.
“The mix of earnings in the period was 53% fertilisers and 47% explosives, demonstrating the value of the Dyno Nobel acquisition,” Mr Fazzino said.
Mr Fazzino said IPL had addressed the fall in demand for single superphosphate (SSP) by bringing forward the previously-announced closure of SSP manufacturing at the Cockle Creek facility and ending SSP manufacturing at Geelong from 30 June 2009.
The closure at Geelong means 29 positions in manufacturing will become redundant from Geelong’s current total workforce of approximately 80.
