Co-Founder and Group CEO review
Olam has grown from a Company founded 26 years ago to a leading global agri‑business operating from seed to shelf, supplying food and industrial raw materials worldwide. In the 2014 CEO review commemorating our Silver Jubilee, I traced several key milestones along our remarkable 25‑year journey. In 2015, we celebrated another milestone, namely, our 10th anniversary of being listed on the Singapore Exchange (SGX). During these 10 years as a listed company, we have been tested and have emerged as a stronger company and a global leader in our sector.
In January 2015 we announced a change in our fiscal year, and consequently this review will cover the 18‑month period from 1 July 2014 to 31 December 2015 (FY15).
Strong execution, solid operating results
During this period, the world has seen significant macro‑economic volatility, declining global growth, collapsing resource prices, strengthening
US Dollar, growing terrorism threat, rising geo‑political tensions and escalating regional conflicts, mass migration and climate related disasters. Despite these considerable headwinds, we strengthened our core franchise, generated positive operational and financial outcomes and took decisive action to secure our long‑term future. We improved our global leadership position in key platforms, selectively seized acquisition opportunities and enhanced our impact and influence on the communities where we operate by ensuring responsible and sustainable growth.
For the 12‑month period between January and December 2015 (12M 2015), EBITDA grew by 1.5% to $1,122.8 million, while Operational PATMI, excluding exceptional items, grew by 20.1% to $346.2 million, compared to the 12 months in 2014. The strong operating results were driven by solid performances from the Edible Nuts, USA Spices and Vegetable Ingredients, Coffee, Cotton and Grains businesses. This was partly offset by the underperformance in the upstream dairy farming operations in Uruguay, lower margins in palm oil trading and refining, the adverse impact of currency devaluation on the Packaged Foods business in Africa and a lower contribution from the Special Economic Zone (SEZ) business.
We also took several measures during 2015 to reduce our overall borrowing costs and optimise our balance sheet. Firstly, in January 2015, we exercised our option to redeem all of the outstanding US$750.0 million 6.75% bonds due 2018. Secondly, in December 2015, we announced our intention to repurchase the US$500.0 million 6% Convertible Bonds due 2016 (read our overview here).
In addition, we raised a total of US$2.04 billion of debt during 2015 to refinance existing loans and change the borrowing mix and tenor of our loans to significantly reduce interest costs.
A more detailed review of the results for the year and the operating performance of the Group is contained in the Group COO’s financial and operating review.
During the period, we executed and delivered on seven key priorities as shown in the diagram below. Successful execution of these priorities has significantly strengthened our competitive position.
Stable shareholder base, strategic partnerships
One of our key objectives in the last two years has been to realign our shareholder base by attracting shareholders that better reflect the long‑term tenor of our strategy. The first step in achieving this objective was the successful completion of the Temasek‑led Voluntary General Offer (VGO) in May 2014 that made Temasek our majority shareholder. Our next step was to bring in Mitsubishi Corporation (MC) in September 2015 when they took a 20% equity stake in the Company through the issuance of new shares by the Company and the separate acquisition of secondary shares from the Kewalram Chanrai Group. We welcome MC as our second largest shareholder and more importantly, as a key strategic partner. Temasek Holdings continues to be Olam’s majority shareholder with 51.4% stake.
The partnership with MC and the changes to our shareholding structure have helped us raise additional equity growth capital (S$915.0 million), strengthen our capacity to pursue selective investment opportunities in the future and has underpinned our long‑term resilient shareholder base. This enhances our ability to take advantage of any opportunities that may arise in the current commodity down cycle, while maintaining a strong financial position.
In addition to becoming a major shareholder, MC and Olam are planning topursue a long‑term strategic partnership that leverages the strengths of both companies to broaden participation in the Japanese market and collaborate in mutually beneficial business opportunities around the world that are consistent and aligned with our strategy.
Consistent long-term strategy
Our overarching strategic focus in FY15 remained consistent. We have been highly selective in completing specific initiatives that are in line with our strategy, allowing us to reinforce leadership in our six prioritised platforms (see cluster 1 on ‘How have we prioritised our portfolio?‘).
During the year we also recalibrated our investment approach, focusing on fewer but bigger and more impactful acquisitions. Most notably we completed two major acquisitions – ADM’s worldwide cocoa business at an enterprise value of US$1,204.0 million on a cash free and debt free basis, which was integrated with our cocoa business to create Olam Cocoa, and McCleskey Mills, an American peanut sheller, for a cash consideration of US$178.0 million (S$234.7 million). In March 2015, we announced our participation in the Republic of Gabon’s (RoG) GRAINE outgrower plantation programme through a joint venture in which the RoG holds 51.0% equity ownership and Olam the balance 49.0%.
In November 2015, we announced that our Grains platform plans to expand into the animal feed and related businesses in Nigeria. The expansion involves investments in setting up poultry and fish feed mills, as well as hatcheries to produce day‑old chicks. This expansion builds on Olam’s existing strengths in origination of feed raw materials, sharing of port infrastructure, ocean freight capabilities and risk management skills. The Company is also very familiar with Nigeria and has strong execution capabilities there, having set up multiple green field and brown field projects in the country over the last 26 years.
Post 12M 2015, we announced the acquisition of Amber Foods, which owns the wheat milling and pasta manufacturing assets of the BUA Group in Nigeria, for a total enterprise value of US$275.0 million.
As part of our objective to reduce asset intensity and generate additional cash flow, we executed specific dispositions and divestments during the year. This included the sale of a 25.0% stake in our Packaged Foods business to Sanyo Foods of Japan. The Company received cash proceeds of US$167.5 million (S$219.0 million) and generated a capital gain of S$106.2 million to reserves. Sanyo Foods has already created significant impact in strengthening the business by sharing their innovation capabilities in developing new products reflecting evolving consumer preferences in Africa. In December 2015, Olam Palm Gabon (OPG), the 60/40 joint venture company between Olam and the RoG, entered into a sale of long‑term lease rights of land and a sale‑and‑leaseback of its palm plantation and milling assets for a cash consideration of US$130.0 million (Read more about our sale-and-leaseback model here).
Total land area is 20,030 hectares in Awala, Gabon, including 6,502 hectares of planted area. OPG retains the right to operate the sustainable palm plantation and mill in Awala and will therefore continue to participate in the production economics of the palm plantation without the asset intensity.
Our success over the last 26 years is in large measure attributable to having a clear strategic direction, a differentiated business model, a well‑diversified and balanced portfolio, the strength and depth of our talent pool, and our focus on sustainable and responsible growth.
Achieving profitable growth sustainably is the engine for creating long‑term value for our continuing shareholders. In our view, profitable growth must meet four qualifying conditions: grow top‑line; grow bottom‑line; earn more than our cost of capital, and grow sustainably. All these four qualifying conditions need to be met concurrently to deliver consistent and sustainable profitable growth.
The key to achieving these demanding goals is to first differentiate our business before we attempt to scale it. To this end, Olam has over the years built six points of differentiation:
- A focus on niche commodities and niche businesses with leadership positions (e.g. Edible Nuts, Cocoa, Coffee, Spices and Vegetable Ingredients, Cotton, Rice, Packaged Foods and Rubber)
- Defensible niche strategies in mainstream commodity categories (e.g. Grains: Africa Milling; Sugar: Refining, Indonesia and Milling, India; Palm: leadership in West Africa)
- A unique Africa footprint and operating capabilities (e.g. direct presence in 24 countries in Africa)
- A model to out‑origin our competition – buying from growers and village level agents at the farmgate (e.g. built a network of four million farmers)
- Value‑added solutions and services to customers (e.g. providing traceability guarantees, sustainable and certified raw materials, vendor managed inventory solutions, risk management solutions and proprietary market intelligence)
- A uniquely shaped portfolio –selective and diversified upstream, supply chain core, mid and downstream participation across products and geographies.
At Olam, we plan across two three‑year cycles, updating and refreshing these plans on an annual basis. In developing a winning strategy we need to answer two critical questions: 1) Where to play? and 2) How to win? In the last of the two three‑year planning cycles (FY10‑FY15), we deliberately chose the strategy of moving away from being a pure supply chain manager (asset light) to a selectively integrated player across the value chain (asset medium), in order to participate in the more attractive profit pools in the agri‑value chain and improve overall portfolio margins and returns. As anticipated, this has led to increased fixed capital intensity, negative free cash flows and lower returns in the near‑term. Performance has also been impacted by significant gestation (especially for upstream), as well as the steep learning curve on project execution and in building new organisational capabilities. While some of our investments have not gone as per plan and we have had to contend with their underperformance, overall, our investment track record has been good. Many of our investments have been concluded at attractive valuations (especially in the aftermath of the global financial crisis), which has given us access to attractive parts of the value chain and significantly improved our competitive position in the industry.
In 2013, we laid out a strategic plan with a focus on the twin goals of pursuing profitable growth and improved free cash flow. Since then we have successfully optimised the portfolio and released cash. We concluded 21 strategic initiatives in the last three years, releasing S$1,150.5 million cash and realising total capital gain of S$304.9 million.
In six short years (FY10‑FY15), we have built a differentiated and uniquely shaped portfolio in terms of products, geographic participation and selective value chain integration. We have also built a strong and experienced team with a proven track record, a strong entrepreneurial culture and distinctive capabilities, in particular in origination, plantation, manufacturing and a unique footprint in Africa. We are now well‑positioned to grow and deliver strong returns over the next several years.
As we refreshed our Strategic Plan for the next two three‑year cycles (2016‑2021), we began with a scan of the major trends in our industry which revealed no significant shifts in the agri‑sector over the past three years, though some trends are accelerating (e.g. sustainability). Overall, agri is a slow but steady growth sector. Within this, the larger players are growing because of globalisation and consolidation of supply chains. To drive growth, the industry has employed five growth vectors: new products, new value chain steps, M&A, new geographies and market share gain. The competitive landscape includes different archetypes of agri‑players in the industry – global diversified players, smaller diversified players, focused single commodity players and Asian diversified food companies. The global diversified majors continue to derive most of their earnings from traditional mainstream commodity markets (grains and oilseeds markets in the Americas).
Africa remains an attractive opportunity for us – the market has strong underlying demand growth and also an important supply source for our commodities. We have a strongly differentiated and well‑established competitive position in Africa.
Overall our business model is what makes us unique and differentiates us in the sector – leadership positions in niche categories, defensible niche positions in mainstream categories, unique Africa footprint and capabilities, and a broader upstream participation.
For the 2016‑2021 plan period, we used six criteria to inform our judgement on how to prioritise our portfolio and the basis for making key investment choices and capital allocation decisions between the various businesses:
- Address areas where performance has been inconsistent or did not meet expectations
- Double down on strong Business Units (BU) to scale up and strengthen leadership positions
- Be selective and focus new investments on areas where we have the highest winnability and returns
- Further streamline our portfolio and release cash from divestments
- Find the right investment balance between contributing and gestating businesses
- Assess and manage portfolio risks
Based on this approach, we have prioritised our portfolio into four clusters as shown below. Cluster 1 contains the six prioritised platforms – Edible Nuts, Cocoa, Grains, Coffee, Cotton and Spices and Vegetable Ingredients (SVI), all of which are in attractive markets where Olam has a strong competitive position. We intend to accelerate our investments in these six platforms to build global leadership.
Cluster 2 consists of five platforms – Packaged Foods business (PFB), Palm, Rubber, Dairy and Commodity Financial Services (CFS) all of which are in attractive markets, but our investments in these platforms are still gestating and therefore the model is still to be proven. We intend to scale up these platforms once we have more proof of concept.
Cluster 3 consists of three platforms – Rice, Wood, Sugar and Sweeteners which are smaller businesses (in terms of size of profit) for us, but with very high returns.
Cluster 4 consists of two platforms – Fertilisers and SEZ that are non‑core, and therefore we intend to deconsolidate these businesses and partially monetise these investments at the appropriate time.
Each platform in the four clusters has mapped out specific strategic pathways that they intend to execute over the next two three‑year cycles as shown below in the ‘Portfolio of the future: Strategic Plan’.
The Olam Way
Olam is today recognised as a serious contender in the global agri‑sector, having achieved leadership positions in many of our businesses. This success in a strongly contested industry did not come from following a conventional approach. At Olam, we do things differently and have succeeded in disrupting the status quo.
In 2015, we took the opportunity to align how we understand and communicate Olam to employees and external partners by launching ‘The World of Olam’ outlining who we are, our spirit and culture, what we stand for and what we do (and equally important, what we do not do). Within the World of Olam, there is a section called ‘The Olam Way’ which comprehensively guides us through our Governing Objective (Mission), Our Vision, Our Purpose, Our Spirit and Our Values. It also outlines our strengths and competencies, our competitive strategy, portfolio strategy, growth strategy and the importance of our people.
This will serve as a good reference and helpful guide for the current Olam team and for our prospective employees.
Growing Responsibly, engaging on global issues
Our strategy and differentiation extend to how we achieve profitable growth. Growing Responsibly is part of our DNA and describes how we do business.
We ensure profitable growth is achieved in an ethical, socially responsible and environmentally sustainable manner and in this reporting period we have brought this focus to life in many distinct ways.
During our Silver Jubilee year we announced and implemented further meaningful initiatives to demonstrate responsible growth in action. Highlights included the inaugural Olam Prize for Innovation in Food Security and the official launch of the Olam Scholarship Programme for African Change Catalysts.
We were also active at the COP21 meeting in Paris at the end of the year, demonstrating how global businesses can make a difference by calling on world leaders and our own sector to take up measures to tackle climate change and deliver food security. Olam is calling for world leaders to commit to a global carbon tax; support robust carbon off‑set mechanisms; make Green Bonds attractive and cost‑competitive investments; develop national land use plans; recognise the role of Public Private Plural Partnerships in helping emerging nations, particularly in terms of mobilising finance; and engage non‑state actors to actively contribute to national de‑carbonisation targets.
Our forest concession in the Republic of Congo (CIB) is supporting the Congolese Government in developing its Emission Reductions Programme to be submitted to the Forest Carbon Partnership Facility’s (FCPF) Carbon Fund, of which the World Bank is a trustee. The Programme will realise value from the country’s standing forests. CIB has been chosen by the Republic of Congo to be its strategic partner and key implementer thanks to Olam’s commitment to sustainable forest management.
As a global agri‑business, addressing food security is one of the main developmental challenges that Olam is concerned about. Too often, the issues surrounding food security are tackled by different groups of experts in siloes. As a result, they can seem insurmountable, so we are looking to build a Global Agri‑business Alliance to work together on common, ‘real world’ solutions, to be launched at our ‘Building Sustainable Futures’ Forum in September 2016.
2015 was a pivotal year with global agreements reached on both Climate Change and Sustainable Development. The United Nations launched 17 Sustainable Development Goals (SDGs) to be achieved by 2030, and Olam is an early leader in providing a private sector contribution in achieving these goals. We have chosen four goals to focus on as a Company – SDG 1, 2, 13 and 17.
We recognise that Olam is in a strong position to influence how these challenges can be tackled. We are working hard to do our part – increasing productivity and yield for smallholder farmers; contributing to nutrition through education; crop diversification and production of fortified packaged foods; improving water usage and irrigation efficiency including in areas where our operations face drought conditions, and being active in Public Private Partnerships that help to shape policy frameworks supporting inclusive and sustainable growth.
We are also working with the World Business Council for Sustainable Development (WBCSD) and Co‑Chairing their working group on Climate Smart Agriculture (CSA) and an active participant in their Low Carbon Technology Partnership Initiative (LCTPI).
Olam brand refresh
After extensive consultation with key stakeholders, we carried out a brand refresh exercise and re‑launched the Olam brand towards the end of 2015. The new Olam logo shows a plant growing out of nutritious soil, held in a circle representing the world. The re‑branding has created positive energy and excitement across the organisation and I am delighted with the consistent application of the new brand that I have seen during my travels to our various operations across the world. The new Olam brand confers a distinct identity that reflects the soul and essence of the company of being outward looking and always seeking to challenge the status quo.
While we expect tough trading conditions going forward, given the volatility and uncertainty in both the capital markets, as well as in the real economy, I have full confidence in the strength of our differentiated business model and strategy, combined with the high calibre of our Leadership and Management Team and the support of our Board to successfully navigate through these challenging times. I believe that every Olam business today rests on a strong foundation of deep competence, talent, a good configuration of privileged assets and a strong competitive position. This should stand us in good stead as we confront these major challenges and remain focused on delivering long‑term value to our continuing shareholders in a sustainable and responsible way.
Co-Founder and Group CEO