Group CEO perspective
2016 was an exceptional year. The ascent of populism, waning of the forces of globalisation, continued sub-par global growth, monetary policy exhaustion and the digital revolution presented many challenges for businesses to navigate.
These challenges underscored the need for businesses to stay the course with a clear and focused strategy, while at the same time acting on their capacity to rapidly adapt and remain relevant in times of such unprecedented and unexpected change. I believe Olam achieved this difficult and delicate balance in 2016.
We responded to these challenges by sharpening our focus and strengthening our efforts to accelerate the delivery of value to our shareholders. We made specific investment choices and capital allocation decisions in 2016 that will shape our future and ensure our continuing success. To this end, we continued expansion of our operational footprint – further growing our upstream plantation investments in almonds, coffee, palm and rubber and making new plantation investments in adjacent businesses such as pistachios, walnuts and black pepper.
We made a significant commitment to enter the animal feeds business in Africa. We successfully integrated transformational and strategic acquisitions such as the erstwhile ADM Cocoa business, McCleskey Mills, Brooks Peanut Company and the wheat milling and pasta assets from the BUA Group during the course of the year. With this, we demonstrated our ability to manage our business in-line with our strategy and with these wider global trends and challenges shaping the world we all live in.
In many ways, this year’s Annual Report is an extension of these trends, representative of the need to provide consistent transparency, while engaging with and delivering information and insight to an ever-broadening and important community of stakeholders.
This year our Annual Report narrative combines all 3 aspects of our economic performance, our people and social impact, as well as our environmental stewardship into 1 ‘book’, providing insight into elements of our business important to our stakeholders. Our theme, ‘Maximising Value and Purpose’, reflects the need to balance being both a value creating and purpose-driven business concurrently in order to build an enduring and sustainable business.
While it was a tough year for the agri-sector as a whole and our performance did not meet our goals in some respects, Olam performed well relative to many of our industry peers. We made good progress as we executed our plans in the first year of our refreshed 3-year strategic plan (FY16-FY18).
As explained in my CEO Review last year, we strategically prioritise our portfolio into 4 clusters, with each cluster having a set of common business imperatives. In addition, we also prioritise and treat Africa as a separate vertical with a special focus, given our Africa footprint and operating capability which is unique in our industry.
Our Cluster 1 businesses comprise 6 platforms, including Edible Nuts, Cocoa, Coffee, Grains, Spices and Vegetable Ingredients (SVI) and Cotton. In this cluster, we continued to build leadership positions in these priority businesses. During 2016, 4 of our 6 business units in this cluster – Edible Nuts, Coffee, Cocoa and Grains – performed strongly from a financial standpoint while at the same time improving their competitive and leadership positions in these markets. SVI and Cotton also improved their competitive position but did not achieve their financial performance goals, with underperformance in our United States tomato processing business affecting SVI, and underperformance in our United States cotton operations affecting our Cotton business.
Our Cluster 2 businesses, (Edible Oils, Rubber, Dairy, Packaged Foods and Commodity Financial Services), which include mostly gestating assets where we are establishing proof-of-concept and selectively scaling, continued to move towards becoming value contributing. Our Dairy business moved decisively forward with a significant reduction in losses in our Uruguay Dairy farming operations, material improvement in our Russian farming operations and strong out performance in the supply chain segment of our Dairy business.
For Cluster 3 (Rice, Wood Products and Sugar), where we seek to remain asset light and maximise returns, Sugar and Rice performed exceedingly well, while there was some underperformance in our Wood Products business, even though that business was profitable.
In Cluster 4 which includes Fertilisers and Gabon Special Economic Zone (GSEZ), where we are working to partially sell down our stakes or monetise select assets, GSEZ exceeded expectations for the year. We continue to engage with potential strategic partners with a view to deconsolidate our Fertiliser business.
Africa made a strong contribution to our overall performance for the year with broad based performance from all sub-regions where we are present, including West Africa, Central Africa, South and East Africa, as well as Middle East and North Africa. Cocoa, Coffee, Cotton, Edible Nuts and Grains businesses in Africa all performed better than plan in posting these record results from the region. This vindicates the special emphasis that we have placed on Africa and reflects our ‘winability’ there.
Our strategy rests on the power of a repeatable model centred around a strong core business, namely, supply chain management of agricultural raw materials and ingredients built around deep capabilities that include farmgate sourcing and origination capability, deep customer relationships, strong research and trading capability, manufacturing capability, inland and marine logistics capability, robust risk management skills, cost management and operational excellence capability, African footprint and operating capability and a unique entrepreneurial culture. We have continuously deepened, refined and adapted these capabilities over time and combined it in our business model in a way that has allowed us to repeat this over and over, from 1 product (cashew) to now 47 products over the last 27 years.
Strengthening this Core is akin to strengthening the core of your body – the central set of muscles that helps a body maintain its power, balance and overall health. This has helped us build leadership positions in our core business over time, and in 2016 we have continued to strengthen this Core.
In the last few years, we have expanded from this Core into New Cores in adjacent markets and value chain steps including selective expansion into upstream plantations and farming, selective downstream expansion into branded Packaged Foods business and entry into the Commodity Financial Services business. In each case we have leveraged some of the key capabilities in our core business while adding specific new capabilities that are required for us to succeed in the New Cores that we are developing for the future. For example, in the upstream expansion, we are investing to develop world class farming capabilities and being a leader in sustainability, including environmental and social stewardship. In the downstream Packaged Foods business, we have invested in building new capabilities in brand building and category management, developed deep customer insights through market research, built new product development capabilities and distribution capabilities in terms of reach, effectiveness and cost. Similarly, in the Commodity Financial Services business, we are building asset management capabilities and investing in developing third-party fund raising capabilities for the future.
We have also decided to selectively invest in Ag Logistics, including elevation and port facilities in Russia, Ukraine and Gabon as this is an enabler to our core business of trading and supply chain management. In many of these cases we provide the base/captive load to keep these facilities utilised given our own trading volumes in these locations.
Over the course of 2016, we became acutely aware of how digital technologies are fundamentally transforming the way we farm, live, work and consume. Digital is changing not only the way that we operate as companies, but also significantly changing the way we interact with our service providers, farmer suppliers, customers, communities, civil society and our employees. We have paid particular attention to developments in this area and set up a ‘Digitalising Olam’ Task Force (DTF) to enable us to seize the opportunities that this presents. We are evaluating 8 initiatives including a Farmer Services platform, Customer Services platform, Supply Chain of the Future, Farm of the Future, Factory of the Future, Trading of the Future, Sustainability platform and Farm Management Services. Five prototypes are under development and we are excited with the opportunities that these initiatives represent in transforming our business and potentially disrupting our industry. Through these initiatives, we want to create a ‘digital first’ culture in Olam.
Aligning our organisation to execute our strategy
Given this strategy, we have designed an organisational model that will enhance our capacity to execute this strategy. This is best understood against the backdrop of various kinds of assets and capabilities that our business has and the specific value they create. In this regard, our first objective is to ensure that we improve the performance of our business units and increase their ‘vertical value’. For example, our farmgate procurement network and deep customer relationships are vertical assets.
Our second objective is to design an organisation that will help us create ‘horizontal value’ through shared services, including Strategic Planning and Budgeting, HR, Finance and Accounts, Treasury, Investor Relations, Company Secretarial Services, Legal, M&A, Risk, Internal Audit and Compliance, Market Compliance, Manufacturing and Technical Services, IT, Corporate Responsibility and Sustainability, Tax and Corporate Communications. By ‘commonising’ and ‘standardisation’, adopting the same language and processes, we are able to develop state of the art capability on these common processes across the businesses creating ‘horizontal value’. This frees up the business teams to focus on their core activities with regard to managing their upstream farming investments, their core supply chain and trading business, and dealing with their customers where the business units can clearly add more value.
Our third objective is to create ‘diagonal value’ that helps us extract ‘One Company’ benefits and which allows us to act as both a single company and different businesses at the same time. Diagonal assets help vertical assets create horizontal value and help horizontal assets create vertical value. The various elements of the ‘Olam Way’, including our shared core purpose, shared governing objective, our shared vision, our shared spirit, our shared culture and values, and our core competencies, provide the glue that allows us to extract ‘One Company’ benefits where the whole is greater than the sum of the parts.
Our purpose is our enduring focus
The macro changes that the world is experiencing including the emergence of a post-globalisation era, potential challenges to free trade and open markets, accelerating geo-political uncertainty and continued capital superabundance have long-term implications for how businesses are led, organised, managed and financed going forward.
At Olam, we believe increasingly, it is the companies that are clear about their purpose that will be successful in the future. Our purpose of Growing Responsibly inspires everything that we do at Olam. Growing Responsibly underpins the fact that we are clearer than ever that Olam must be both a ‘value maximiser’ and a ‘purpose maximiser’ at the same time. We do not see these 2 objectives as being in conflict with each other and is therefore not an ‘either’, ‘or’ but a ‘both’ choice for us.
We are seeing businesses starting to shift from the dominant model of the last 50 years that focused on the primacy of the shareholder and therefore focused on shareholder value maximisation. While that will continue to remain an important deliverable going forward, we also need to pursue a concurrent purpose-driven model emphasising social and environmental stewardship that will enable us to create an enduring and sustainable business.
We have always balanced investing for the long-term while delivering on our short-term commitments to continue to earn the right to grow. To this end, we have successfully realigned our shareholder base with shareholders who understand and support our long‑term strategy, notably with Temasek Holdings and Mitsubishi Corporation as our 2 major shareholders.
Olam touches people’s lives every day from our customers and the consumers who use our products to the communities where we live and work, and the interface with the natural environment as we produce or source our various agricultural commodities. For example, we believe that 1 in 3 chocolate bars that people consume are made from cocoa beans handled by Olam, the amount of peanuts sourced and processed by Olam could serve 7.6 billion peanut butter sandwiches, we harvest and process enough tomatoes to top 3.2 billion pizzas annually, and the quantity of rice supplied by Olam could feed each person in the world with 3 servings. Our carbon footprint, water footprint and waste footprint in providing these goods and services is something that we are concerned about and we are focused on improving their efficiency. In this regard, our sustainability strategy is fully aligned with the United Nations Sustainable Development Goals (SDGs) which set out a vision for ending poverty, hunger, inequality and protecting the earth’s natural resources. These SDGs provide us with a framework and guide our actions so that we can participate in creating a better world that we all aspire to.
Focusing on issues that matter most
With this in mind, in 2016 we continued to drive our approach to sustainability by focusing on 7 material areas: Livelihoods, Land, Water, Climate Change, Labour, Food Security and Food Safety (see the table below for how these relate to our goals and policies). These are fundamental to our vision of achieving end-to-end sustainable supply chains by 2020, for which we have laid out clear, time bound goals.
Reviewing our progress in 2016, we have continued to improve our safety record and our carbon and water footprints, while the Olam Farmer Information System is providing unparalleled insights into the smallholder landscape which means we can target our interventions with this group all the more efficiently. In turn, this is helping to create an increasing number of enduring partnerships with customers, NGOs, development finance institutions and donors under the Olam Livelihood Charter (OLC) programme as we pursue our mutual goal of catalysing farmer livelihoods by improving their crop yields and quality of the crops produced. We accomplish this by providing farmers better market access, micro-finance, farm inputs and extension training. All of these initiatives help farmers, particularly the younger generation, see agriculture as a viable career. There has been some churn in the number of farmers participating in our OLC programme in 2016. Thousands of new farmers joined the OLC this year, while some others are no longer in our programme, resulting in a reduction of total number of OLC farmers compared to 2015. Nevertheless, the training and investments made into their communities have equipped the exiting OLC farmers to progress with their new buyers.
We continue to pursue and adopt international certification standards where available, such as FSC1 and RSPO2, while also strengthening our internal policies, standards and codes with input from our stakeholders. This year, for example, we are launching our Global Forest Policy. We engaged in a constructive dialogue with an NGO on our Palm and Rubber plantation operations in Gabon and our third‑party palm oil sourcing in Asia and reached an agreement that bridged our differing positions on these operations.
Working with our peers
Even in a highly competitive sector like ours, we have always felt that ambitious sustainability goals to tackle the major developmental challenges that confront our sector cannot be achieved by operating in siloes or on our own. I am encouraged that so many of our peers share this belief. At Olam’s Building Sustainable Futures Forum in 2016, the ground-breaking Global Agribusiness Alliance (GAA) was launched. This pre-competitive, voluntary, CEO-led private sector initiative demonstrates a growing commitment to establish collaboration and partnerships to help solve the seemingly intractable problems facing our sector including food and nutrition insecurity, water scarcity, impact of climate change and growing inclusively within planetary boundaries. While the enormity of these challenges cannot be underestimated, this industry-wide effort to solve them will hopefully result in making a significant impact in tackling these major developmental challenges. It will also offer considerable new opportunities to companies, not just in terms of enhancing customer stickiness as they look to us to help solve their supply chain issues and protect their reputations, but also unlock new streams of income. The recent report of the Business and Sustainable Development Commission (BSDC) released in January 2017, highlighted that addressing these sustainability challenges could potentially generate significant economic opportunities for enlightened businesses, possibly adding as much as US$12 trillion to the global economy.
People are our differentiator
The year in review demonstrated again that we have an extraordinary and dedicated team at Olam, across the breadth and depth of our businesses around the world. Retaining and attracting the best talent remains a priority. Our talent development programme and the introduction of our Aspire performance management system – saw us take the bold step of removing employee ratings entirely to focus on the appraisee’s development by ensuring a rewarding and engaging workplace – are helping us to build essential skills across our teams. We are focusing on managers having ‘continuing conversations’ that are ‘future focused’ with their team members for developing their capabilities and creating the basis for their retention and long-term career planning.
In 2016, we further strengthened the functions that create the horizontal value that help unify each of our vertical businesses. The ‘Olam Way’, our culture, values and purpose also create ‘diagonal assets’ that bind these vertical and horizontal assets together. I firmly believe we are now at a point where we can proudly say that we have built a unique organisation that not only supports but also enhances our delivery of our business and sustainability objectives.
The year ahead
In 2017 we will be entering the second year of our 3-year strategic plan. We continue to see significant opportunities for profitable growth in the agri-sector despite ongoing volatility. The major themes and priorities for our business will not change significantly in the coming year.
We will continue to invest in building leadership positions in our 6 prioritised platforms in Cluster 1, establish proof-of-concept and selectively scale our Cluster 2 businesses, remain asset light and maximise returns in our Cluster 3 businesses and partially sell down our stakes in our Cluster 4 businesses while Africa will continue to remain as a separate vertical focus.
We will continue to live and demonstrate Olam’s 3 key brand values of being an unrivalled expert, a change agent and transformer, and finally a trusted partner in our industry. We believe focus on these elements remains crucial to our success in a world where change is a constant.
Mr Kwa Chong Seng stepped down from Olam’s Board as its Non-Executive Chairman and Independent Director on 31 December 2016. Chong Seng’s tenure, first as Deputy Chairman from October 2014, and then as Chairman from October 2015 made a deep impact on Olam’s strategy and business. During this period, he played a critical role in forging the strategic partnership with Mitsubishi Corporation which is expected to accelerate Olam’s growth. He also oversaw several organic and inorganic growth initiatives that helped Olam to build market leading positions in its prioritised platforms. On behalf of Olam’s Board and Management Team I would like to express our deepest gratitude to Chong Seng for his stewardship, guidance and motivation of the Board and the Management Team during his tenure.
I am also pleased to welcome Mr Lim Ah Doo as our new Non-Executive Chairman and Independent Director with effect from 1 January 2017. Ah Doo has extensive experience in banking, natural resources, infrastructure development and emerging markets from both a banker and operator standpoints. His deep knowledge, insights and proven leadership will undoubtedly benefit Olam. The Board and I are delighted to have Ah Doo on board to lead Olam through its next phase of growth.