Group COO’s review
In 2016, Olam achieved a PATMI of S$351.3 million as against a negative S$114.9 million in the previous year, primarily due to improved operational performance and the absence of the exceptional losses that we had in 2015. The exceptional losses in 2015 had come largely from fair value losses on our equity investment in PureCircle, which was due to a conservative interpretation of an accounting treatment, with no change to total equity (including reserves) or cash flow. The remaining portion of the exceptional losses was a result of deliberate actions to optimise operations for future growth, including the buy-back of higher cost debt and restructuring cost for the Dairy operations in Uruguay. The buy-back of higher cost debt, which was part of our debt optimisation efforts that continued into 2016, resulted in a net exceptional loss of S$12.5 million for this year.
Stripping out these exceptional items, operational PATMI showed a strong 23.1% year-on-year growth to S$363.8 million, compared with S$295.6 million in 2015.
Sales volumes increased 15.3% as most segments registered higher volumes, while revenues grew 8.1% year-on-year despite higher volumes, with lower prices of some commodities, offsetting price increases in others.
Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) grew 10.8% year-on-year to S$1.2 billion, driven by growth in Confectionery and Beverage Ingredients and Food Staples and Packaged Foods, which offset lower contributions from other segments.
EBITDA from Confectionery and Beverage Ingredients was up 43.4% from S$284.0 million to S$407.3 million while Food Staples and Packaged Foods was up 55.7% from S$212.1 million to S$330.2 million. Edible Nuts, Spices and Vegetable Ingredients was down 15.7% from S$393.5 million to S$331.8 million and Industrial Raw Materials, Ag Logistics and Infrastructure was also down 27.0% from S$185.1 million to S$135.2 million. Commodity Financial Services (CFS) went down from S$10.6 million to a loss of S$1.6 million.
Our EBITDA was achieved on a higher invested capital of S$16.6 billion, which increased mainly due to the acquisition of wheat milling and pasta manufacturing assets in Nigeria, and peanut shelling assets in the USA, as well as various organic growth initiatives both in upstream and midstream value chain integration. Working capital has also increased on account of our volume growth, compounded by higher commodity prices, especially in cocoa, coffee and cotton during the year. The EBITDA on average invested capital ratio (EBITDA/IC) was 7.8%, down from 8.4% in the year, after the S$2.2 billion total increase in invested capital.
Strategic partnership with Mitsubishi Corporation
In 2015, we entered into a strategic partnership with Mitsubishi Corporation (MC) to collaborate in mutually beneficial business opportunities in Japan and across the world. MC is also our second largest shareholder with 20.3% interest in our company. In April 2016, we achieved our first partnership milestone by forming a 30/70 joint venture MC Agri Alliance (MCAA) to import and distribute sustainable, traceable agricultural products and food ingredients, including coffee, cocoa, sesame, edible nuts, spices, vegetable ingredients and tomato products, for the Japanese market. MCAA commenced operations on 1 October 2016.
Olam and MC have also set up a partnership committee to explore initiatives across platforms and regions in which we should collaborate. In addition to the 2 new Directors representing MC, Mr Katsuhiro Ito and Mr Yutaka Kyoya, who joined our Board in late 2015, we also have a few senior managers from MC joining our global management team as part of our partnership agreement.
Executing on our strategic plan 2016-2018
We continued to execute on our refreshed strategic plan going into 2018 through targeted organic and inorganic investments. During the year, we announced that we will invest US$150.0 million to set up 2 state‑of‑the-art animal feed mills, poultry breeding farms and a hatchery to produce day-old chicks in Nigeria. The first mill is expected to be commissioned in the second half of 2017.
During the year, we completed several acquisitions:
- 100.0% interest in Amber Foods, which owns wheat milling and pasta manufacturing assets in Nigeria, for US$275.0 million;
- 100.0% interest in Brooks Peanut Company at an enterprise value of US$102.1 million (post working capital adjustments on closing);
- palm and palm oil assets from SIAT Gabon for approximately US$24.6 million through Olam Palm Gabon (OPG), the 60/40 joint venture between Olam and the Republic of Gabon;
- remaining 50.0% interest in Acacia Investments (Acacia) from its joint venture partner for US$24.0 million; and
- 100.0% interest in East African coffee specialist Schluter S.A. for US$7.5 million.
Some of these investments will be discussed in further detail in the business segments that follow.
Summary of financial and operating results
Balance sheet analysis
In 2016, our total assets amounted to S$19.3 billion, comprising S$8.2 billion of fixed capital, S$8.5 billion of working capital and S$2.1 billion of cash. These were funded by S$5.8 billion of equity, S$6.0 billion of short-term debt and S$7.7 billion of long-term debt.
Compared with 2015, our overall balance sheet grew by S$1.7 billion due to the acquisition of the wheat milling and peanut shelling assets and working capital increase, as well as other capital expenditure (Capex) investments.
Working capital rose by S$222.1 million compared with 2015 with the increase in volumes after the acquisition of these businesses, as well as with higher prices of commodities, including dairy, sugar, cotton, cocoa and coffee.
Working capital efficiency stayed largely flat at 150 days as at end-2016 as higher inventory days, advances to suppliers and receivable days were compensated by longer trade creditor days.
Cash flow analysis
We recorded substantially higher net operating cash flows of S$1.0 billion for 201 6 compared with S$154.9 million a year ago. Free Cash Flow to Firm (FCFF) improved significantly from a negative S$2.1 billion in 2015 to a negative S$418.1 million in 2016 as improved net operating cash flows were met by a significant reduction in net Capex. Net Capex was S$1.4 billion as a result of the acquisition of the wheat milling and peanut shelling assets, and continued investments in upstream and midstream assets. Similarly, Free Cash Flow to Equity (FCFE) also improved from negative S$2.5 billion a year ago to a lower negative of S$765.8 million in 2016. As the table shows, our Free Cash Flow before Capex and investments is back to positive territory at S$651.7 million in 2016 and higher than that achieved in the last 3 years prior to 2015.
Optimising our debt portfolio
Our ongoing debt optimisation efforts, which started in 2014 and continued into 2016, further helped lower our effective borrowing rate from 4.8% in 2015 to 3.5% in 2016. This resulted in a reduction in net interest expense of S$45.5 million despite an increase in net debt of S$1.4 billion during the year. Various initiatives were taken to optimise the tenor and cost of debt by buying back higher-cost debt and by reducing the overall tenor of the debt portfolio.
Our credit spread across all tenors has come down. Spreads across short-term bilateral banking lines and revolving credit facilities came down while higher-cost, medium-term debt of the US$500.0 million 6.0% Convertible Bonds due 2016 was repurchased. We were also successful in bringing down the proportion of working capital funded by medium and long-term debt. This is now within our target of covering 25.0% to 35.0% of working capital needs through medium and long-term sources of funds.
Cash flow summary
Gradual reduction in cost of debt for new issuances
Net debt increased by S$1.4 billion as compared with 2015 while our equity position (before fair value adjustment reserves) grew by S$610.1 million to S$5,797.1 million after we issued the US$500.0 million Perpetual Capital Securities in July 2016. As a result, net gearing increased to 1.99 times from 1.96 times in 2015. Adjusting for readily marketable inventories (RMI) and secured receivables, our net gearing would be 0.73 times, unchanged from the year before.
(S$ million as at 31 December 2016)
We maintained sufficient liquidity to meet our working capital and capital expenditure requirements, with a total of S$16.8 billion in available liquidity as at 31 December 2016, including unutilised bank lines of S$7.4 billion.
Segmental review and analysis
For detailed segmental analysis, follow the links below.
- Edible Nuts, Spices and Vegetable Ingredients
- Confectionery and Beverage Ingredients
- Food Staples and Packaged Foods
- Industrial Raw Materials, Ag Logisitcs and Infrastructure
- Commodity Financial Services
- Value Chain Review and Analysis
- Principle Risks and Uncertainties