Incitec Pivot (ASX:IPL, Financial), an Australian fertilizer and explosives manufacturer, was a top detractor for the period. In the first quarter of 2021, Incitec experienced some delays in reopening its Waggaman ammonia plant following a planned turnaround. The facility resumed operations in mid-April as management had expected. However, the company subsequently experienced some unexpected equipment issues, and the restart process halted on May 8, which is expected to further decrease full-year earnings by AUD 33-42 million. The timing of this additional disruption is especially disappointing due to the currently elevated price of ammonia. Incitec’s fiscal first-half results were also marred by the production issues at Waggaman as well as more minor issues at two ammonium nitrate (AN) plants in the U.S. However, the explosives business performed quite strongly as the U.S. proved rather resilient, despite Covid-19-induced declines on quarry and construction volumes and the structural decline of thermal coal. The Australian explosives business also performed quite well as technology sales offset planned price reductions and foundational contracts for the Moranbah AN plant reset. The company’s fertilizer business also generated improved earnings versus the prior year, thanks to higher commodity prices and strong plant reliability. While the collection of manufacturing issues is certainly frustrating, we believe the company is making progress in remedying them. Looking forward, Incitec’s financial performance should improve as a result of structural growth in explosives demand, higher commodity prices, cost reductions and improved manufacturing performance.
From David Herro (Trades, Portfolio)'s Oakmark Intl Small Cap (Trades, Portfolio) Fund second-quarter 2021 letter.
