Incitec Pivot says it is taking steps to reduce the risk associated with its fertiliser business, while continuing to focus on expanding its explosives business, especially in Asia.
Incitec Pivot on Tuesday lifted its annual profit by 10 per cent, but fluctuating prices and the strong Australian dollar resulted in a significant fall in the earnings of the fertiliser business.
The company’s net profit of $510.7 million for the 12 months to September 30 was up from $463.2 million in the prior fiscal year.
The bottom line was boosted by one-off items, which delivered a $106 million benefit in fiscal 2012, and a $67 million cost in fiscal 2011.
Net profit excluding one-off items was $404.7 million in fiscal 2012, down 24 per cent on the prior year’s profit of $530.1 million.
Earnings before interest and tax (EBIT) in the fertiliser business fell 40 per cent to $270.9 million, but earnings from explosives rose eight per cent to $399.9 million.
Incitec said European financial instability had significantly affected global trade and pushed down global fertiliser prices, which had fallen by up to 30 per cent within a month.
Shares in Incitec were 12.5 cents, or 4.3 per cent, higher at $3.035 at 1419 AEDT on Tuesday.
Chief executive James Fazzino said Incitec’s strategy was to take advantage of the industrialisation of Asia, particularly by focusing on explosives.
Mr Fazzino said explosives currently accounted for 60 per cent of Incitec’s business and generated more stable and predictable returns.
“If you like, we’re an explosives business that happens to have a fertiliser arm,” he told reporters.
He said the fertiliser business had still generated $270 million in earnings, albeit less than in the prior year, and a return on assets employed of 30 per cent.
“That (fertiliser) is a critical part of the (Incitec Pivot) business – it provides the cashflow to invest in explosives,” Mr Fazzino said.
Mr Fazzino said Incitec needed to lower the risk associated with fluctuating fertiliser prices, for example, by getting farmers to purchase fertiliser earlier.
“We are having a conversation with our customers now, saying: if you want the fertiliser, you’re going to have to commit in terms of the volume that you want and also the price that you’re going to pay,” Mr Fazzino said.
He said Incitec would also stop importing fertiliser if it considered that the risk associated with fluctuating prices had become too high.
Incitec expected demand for explosives from the mining sector in Australia to pick up.
“If you look over a longer period, we’re not of the view that the boom is over in Australia,” Mr Fazzino said.
“Clearly, Australia is very competitive still, and as our mining customers get productivity moving again, we’d expect to see the industry revert to long-term growth rates, but there’ll be a pause there.”
Mr Fazzino said that in the United States, the worst of the decline in demand for explosives from the coal sector had probably passed.
The explosives business in the US was expected to generate moderate earnings growth through the sale of higher volumes to the mining and metals sector, and the quarry and construction sector.
