The Incitec Pivot (ASX:IPL) share price is lower today on full year results

The Incitec Pivot share price has dropped more than 4% this morning, despite releasing some positive news in its full year FY20 results.

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The Incitec Pivot Ltd (ASX: IPL) share price has slipped 4.40% today, following the release of its full year earnings for FY20 this morning. The Incitec Pivot share price is trading at $2.06 at the time of writing, despite some positive news in the financial results. 

Incitec Pivot manufactures and distributes industrial explosives, chemicals and fertilisers to the agriculture and mining industries.

What were the results?

The company reported revenue of $3.942 billion for FY20, up around 1% higher than the prior year. Revenue was $3.918 billion in FY19. 

Incitec Pivot recorded an earnings before interest, tax, depreciation and amortisation (EBITDA) of $375 million for FY20, up 23% on the prior year. This result excludes individually material items (IMI). These were worth an additional $88 million separately. The company attributed 94% of EBITDA to the explosives business, with 6% attributable to the fertiliser business.

Operating cash flow is up 31% on the previous year at $545 million. Net profit after tax is $188 million, an increase of 23% on previous year. Debt has been reduced, and the FY20 ratio (net debt/EBITDA) is reported to be 1.4x, a improvement from the FY19 result of 2.8x.

Incitec Pivot described its financial results as “resilient”, underpinned by technology and manufacturing performance. 

The company advised its brand, Dyno Nobel, was delivering explosive products extensively. In addition it had a competitive advantage with “the best premium technology” in the market today.

Incitec also reported that the technology was ideally suited for growth markets/sectors. Furthermore, company assets were strategically located close to quality customers.

Financial framework

Incitec Pivot has listed three key areas of focus within its ‘financial framework’. These include focus on balance sheet strength, free cash flow generation and targeting higher returns.

A focus on the balance sheet strength saw a reduction and maintenance of lower net debt through improved free cash flow. It also noted a commitment to maintaining an investment grade credit profile (S&P: FY19 BBB Stable, FY20 BBB Stable). It also noted that it was looking to simplify some hedging structures by 2022 for risk management purposes.

On the free cash flow side of things, manufacturing excellence was a pursuit. This was to drive plant reliability and capital spend efficiency.

A target here is higher returns. Capital light projects and those that returned cash faster drew a bias. The company stated that the technology progress it had made in Fy20 had positioned its business well for the future.

Quality customers and markets

The explosives business has diversified category exposure. Incitec said the company had exposure to some of the best mining markets in the world. Base and precious metals, quarry and construction and coal are on the list.

Incitec Pivot clients are some of the biggest names in the mining industry. These include BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG).

Future focus

Incitec Pivot said it was strongly focussed on the future, along with a commitment to safety through Zero Harm goals and projects. 

The company flagged potential significant upside in earnings over the next 3-5 years. This was outlined through a 5-step process.

  1. Resilient end markets: Resilient demand for product, despite COVID-19 interruptions
  2. Response plan: $60 million of EBIT uplift per annum expected by Fy22 as a result of cost cutting initiatives
  3. Explosives growth: Targeting technology-driven earnings growth of 10% by FY22
  4. Manufacturing excellence: The company has identified opportunities valued at $40 million to $50 million per annum that could potentially be achieved by FY22
  5. Fertiliser recovery: Noting a large distribution footprint and flagging a possible commodity price recovery, the company has recorded a 14% growth in domestic fertiliser sales volume. Additionally, it had flagged positive outlooks for future years.

Incitec Pivot share price

The Incitec Pivot share price has ranged between $1.84 and $2.23 for most of 2020, and has a long way to go to recover to pre-COVID levels. Toward the end of 2019, the Incitec Pivot share price reached heights of $3.68.

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