Group CEO review
2017 was a year marked by profound political and economic changes around the world. Key developments in areas including global trade, financial and capital markets, environment and climate change, geo-political contexts, and consolidation in the agri-sector continued unabated through the course of the year. I am pleased to report that against this challenging backdrop, Olam’s clear and differentiated strategy, coupled with key initiatives that we undertook to accelerate the delivery of long-term value to both our continuing shareholders and other key stakeholders yielded outstanding results.
We grew top line in terms of both sales volume and sales revenue by 56.3% and 27.6% respectively, improved bottom line with reported PATMI and Operational PATMI growing by 65.3% and 18.6% respectively, enhanced returns with ROE improving by 290 basis points to 9.0%, and EBITDA / Invested Capital improving by 40 basis points to 8.2%, delivered record free cash flows of S$1.5 billion in FCFF and S$1.02 billion in FCFE, and materially reduced net gearing from 1.99x as at end-December 2016 to 1.46x as at end-December 2017.
We also continued to invest for the future with gross capex expenditure of S$970.6 million in 2017 largely in our prioritised platforms. Nearly 24.7% or S$3.9 billion of our total invested capital of S$15.8 billion as of 31 December 2017 is still gestating or only partially contributing at this stage, laying a strong foundation for future profitable growth from these gestating investments. We have thus balanced both the short-term and long-term well.
In addition to investing selectively in a configuration of upstream (plantation), midstream (manufacturing) and supply chain assets, our progress in delivering these results is also a function of continually making important investments to build our capabilities, people and systems.
While we are pleased with these results and outcomes, we are prouder still that we have achieved this profitable growth in a more consistent, responsible and sustainable way. The progress made in all our businesses during the year, both in financial terms as well as our positive impact on people and planet, is proof that our commitment to maximising value and purpose concurrently is the right balance. Our sustainability initiatives in 2017 across our various businesses have offered us tangible benefits, including better pricing power, more customer stickiness, and a larger share of our customers’ wallet. At the same time, we have also positively impacted the communities where we operate and reduced our negative impacts on the environment. Specific examples of these sustainability initiatives are detailed in the review of the various reporting segments as well as the reporting on the various Capitals. We believe that putting sustainability at the heart of our business is fundamental to our strategy of building a business that is more consistent, sustainable and enduring.
In this regard, we believe that Olam must become more innovative and find new ways of doing things to better manage our impact on the 9 Planetary Boundaries1, and help achieve the 17 UN Sustainable Development Goals (SDGs), particularly SDG Goal 2 “End hunger, achieve food security and improved nutrition, and promote sustainable agriculture.” As a company, and indeed as part of the larger agri-sector, we need to find ways of producing more of the right kind of food using fewer resources in terms of land, water, farm inputs and elimination of waste to meet the rapidly growing global demand for food, feed, fibre and fuel. At Olam, we have recognised these challenges and have taken concrete measures to address them so that we, and our stakeholders, can continue to responsibly and profitably grow in the future.
1. Stockholm Resilience Centre
Key industry trends and Olam’s response
Trade and Contestability of Global Output
The new US Administration, which focused on tax reform, regulation and immigration issues in its first year in office, has now turned its attention to trade policy with potentially serious consequences for the global economy. In addition to the adverse impact of the US Administration’s immigration policy on the availability of farm workers, recent US trade actions including withdrawing from the TPP, re-negotiating NAFTA, re-negotiation of the Korea-US Free Trade Agreement, tariffs on solar panels and washing machines, tariffs on steel and aluminium, the USTR’s investigation of China’s industrial policies and technology transfer practices, and its recent launch of a WTO challenge against India over its export subsidies, have all been actions that have amplified uncertainty around global trade.
The reaction of China on imposing counter measures on US sorghum imports, and the threatened retaliatory action by the European Union, have all increased the odds of a potential trade war. The Canadian solar companies have since filed a lawsuit over these tariffs and the European Union along with China, Taiwan and Korea have claimed compensation for these solar tariffs from the USA. This global tit-for-tat on trade issues could disrupt many supply chains around the world. As far as the agri-sector is concerned, we believe targeted agricultural sector reciprocal tariffs (including on USA corn, soybean, rice, sorghum, dairy and cotton exports) could be the most likely counter measures adopted by countries like China against these US trade moves because it is relatively more easy to accurately size the retaliation as required in these agri-commodities and also because agri-commodity products are easier to substitute away from. The top 3 importers of US agricultural products, collectively accounting for 42% or US$58.7 billion worth of ag exports in 2017 are Canada, China and Mexico, with China alone accounting for more than 30% (US$14.9 billion in value) and Mexico accounting for 13% of all US ag exports1. Additionally, because these agricultural products come from rural districts in the USA which are more likely to have voted for the Republican Administration and Republicans in Congress, China, European Union, Mexico and other countries believe that tariffs on agriculture could potentially apply more political pressure on the US Administration. These developments could potentially shrink the role of the USA as a global ag supplier and allow its global customers to diversify away from US ag exports.
All of these measures and counter measures would result in reduced contestability of global output (global GDP that is free from tariffs, non-tariff trade barriers, and other forms of protection), slow down global trade and consequently pose a significant headwind for economic growth. In order to better navigate these trade issues, Olam is focused on staying diversified across key producing countries for the various commodities we supply. As a rule of portfolio selection, we participate in 80-90% of the countries that produce a given commodity. In addition, we are also increasing our participation in the domestic trade flows beyond our traditional focus on export trade flows in countries like China, India, USA, Mexico, Europe etc. We also contribute to advocacy that would help keep global markets more free and open, free from tariffs and non-tariff trade barriers.
Growing world population will continue to drive growth in food, feed, fibre and fuel demand. The current world population of 7.4 billion is expected to reach 8.3 to 8.5 billion by 2030 and 9.5 to 9.7 billion by 2050 under a medium fertility scenario2. Growth in the global middle class population estimated at 3 billion in 2015 (doubling from 1.5 billion in 2010) is expected to rise to 4 billion by 2021, with China and India alone accounting for a significant portion of that growth. Calorie consumption per capita is expected to increase 20% as populations in these developing economies transition from low income to middle income status3. Changes in dietary habits and shift in food consumption patterns from food staples and carbohydrates to protein and fat-based diets will also drive increased demand for food and feed raw materials. Increasing diversion of crops into biofuel manufacturing is also a new driver of demand. All of these demand side drivers will combine to increase demand for crops between 60% (on a calorific value basis) to 100% (on a total crop production basis) by 20504.
New market trends on the growth of functional foods, the aversion to artificial ingredients, the imposition of sugar sweetened beverage tax (e.g. in Mexico, South Africa, United Kingdom, Singapore, Malaysia etc.), fatty food tax (e.g. in Hungary), calorie information menu labelling, mandated dieting classes (the ‘Metabo Law’ in Japan requires overweight individuals to go to dieting classes), vending machine standards, the trend towards natural and organic, single origin produce, traceability to the farm, going local, slow food movement, ethical eating, importance of trust and transparency in the supply chain, eating on the go, on demand grocery and household delivery, pre-portioned meal kits and eating as a social experience are all beginning to revolutionise food consumption habits. New innovations to personalise diet planning and nutrition based on genetic makeup, gut bacteria, metabolism rates and body type along with tech-enabled personalised meal planning are gaining traction in some markets.
1. US Department of Agriculture; BCA research
2. UN Development
3. Pew Trust
4. World Resources Institute
Supply side trends, fragile ecosystems, natural and social capital impacts
Natural Capital impacts
On the supply side however, constraints on the availability of both arable land and water is likely to create growing imbalances between supply and demand for agricultural crops. Fragile ecological systems will exacerbate these supply side constraints. Agriculture, Forestry, and Other Land Use accounts for nearly 25% of the world’s Greenhouse Gas (GHG) emissions1.
Agriculture also accounts for 71% of all fresh water withdrawals2. Nearly 1 million square miles of tropical forest land could potentially be lost due to conversion of forests to food and feed production. Increasing demand for deforestation-free products from key stakeholders is growing. We have significantly exceeded the planetary boundary on biosphere integrity or biodiversity by losing more than 1,000 species for every million species year today, compared to the boundary condition of not losing more than 10 species for every million species year3. As a result, wild animal populations have roughly halved since 1970 and fragile ecosystems worldwide have been impacted by human activities. Clearly, businesses cannot function if ecosystems are degraded or out of balance, as they provide many invisible but essential services, including regulation of the climate and water cycle, air quality and flood protection. Demand for additional water for irrigation is estimated to increase by nearly 28% by 2015, while agriculture is estimated to contribute to more than 30% of all fresh water pollution4. Part of this pollution is contributed by nitrogen and phosphate loading as we become more input intensive in our farming activities to boost productivity. China today uses nearly 2.5 times more fertiliser per hectare as compared to Germany5. The consequence is that 80% of all Chinese surface water (rivers and lakes) and underground aquifers are polluted, in terms of their biological oxygen demand levels (according to WHO).
In addition, nearly US$1 trillion of economic losses are sustained, as more than one third of all food produced in the world that is intended for human consumption is lost or wasted at the point of production in developing countries and at the point of consumption in the developed regions6.
Social Capital impacts
The significant impacts of agriculture on social capital, including health and safety of workers given the use of chemicals, machinery and the working environment, forced labour including child labour issues (given that 60% of child labour worldwide is in the agricultural sector), forced resettlement of communities including indigenous people and the impact on these communities and their traditional livelihoods, are all key social risks associated with modern agriculture. In addition, rising production cost, workforce shortage, and ageing farmers pose significant additional risk in the agricultural value chain.
Nutritional challenges, with over 815 million people still going to bed hungry every day (undernutrition), over nutrition issues with increasingly more people obese than underweight, coupled with nearly 2 billion people suffering from various forms of malnutrition arising from micronutrient and vitamin deficiencies, the high prevalence of stunting and wasting amongst young children in developing countries, have all combined to increase the incidence of chronic diseases and the attendant pressures on global health systems to treat these adverse health impacts arising from a broken global food system.
At a societal level, in addition to now supporting 363,000 smallholder farmers under the Olam Livelihood Charter, our teams continue to play their part in trying to prevent disease in communities around our operations. Over 20,000 people in Africa benefitted from HIV/AIDS sensitisation, awareness and testing as part of these efforts. The scale of ill health in some communities such as those around our forestry concessions in Republic of Congo mean a far greater response is required than any one company can manage alone. Multi-stakeholder partnerships as described under Goal 17 of the UN Sustainable Development Goals must take even greater precedence. In this regard, we stepped up our collaboration initiatives in 2017 and forged relationships, partnerships and alliances with NGOs and civil society, development agencies, multi-laterals and customers including: Asian Development Bank (ADB), Bill & Melinda Gates Foundation, Business Sustainable Development Commission, Climate Smart Agriculture (CSA), Consultative Group for International Agricultural Research (CGIAR), Costco, Food & Agriculture Organisation (FAO), Food Reform for Sustainability and Health (FReSH), Global Agribusiness Alliance (GAA), Global Coffee Platform, International Finance Corporation (IFC), High Conservation Value Resource Network (HCV), Mars, Mastercard Foundation, Nestlé, Sustainable Rice Platform (SRP), The Nature Conservancy, The Forests Dialogue, The Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), University of California (UC Davis), Wildlife Conservation Society (WCS), World Business Council for Sustainable Development (WBCSD), World Cocoa Foundation (WCF) and World Resources Institute (WRI), amongst others.
We have zero tolerance for lack of adherence to any human rights violations and insist that the dignity of others is respected in our operations both across our direct and indirect supply chains. We are committed to and work hard to ensure that the 10 principles of the UN Global Compact are upheld. A new cross commodity Fair Employment Policy will be issued later this year to reinforce our efforts in this regard. We have more work to do to ensure greater levels of diversity amongst our employees, in particular increasing and better balancing the number of women in senior management positions in the company. While we can point to historical legacy reasons for up-country positions in tough emerging/ frontier markets mostly being held by men, we know we can and must do better to tap valuable skills by supporting and encouraging women to consider a broader range of roles within Olam and fulfil their potential.
2. World Development Indicators
3. Stockholm Resilience Centre
4. UN Water
5. World Bank
6. Champions 12.3
7. World Food Programme
Innovation in agriculture
The existing levers to increasing farm yields and productivity, including acreage expansion, higher fertiliser application rates, increased crop protection application rates, farm equipment size and horse power, adoption of GMO seed, etc. has more or less run its course. In addition, inflation in cost of production and farm wage growth, have put severe pressure on margins at the farm level. We need new productivity breakthroughs to sustain global agriculture.
Fortunately, rapid innovation in agriculture, including precision farming techniques, vertical farming, urban farming, development of alternative proteins and high tech food, advanced genetics, using IoT1 sensors to improve irrigation efficiencies, cloud seeding, waste packaging solutions, blockchain for food traceability and trust, robotic harvesting, widespread use of micro and long wingspan drones on the farms and other digital solutions are fundamentally transforming agricultural production landscapes.
1. Internet of Things
At Olam, we have both significant direct farming and plantation exposure with 2.4 million hectares of farming, plantations and forestry footprint, growing 26 different crops, large out-grower or contract growing programmes in addition to third party sourcing from smallholder farmers and agents. We need to therefore be at the top of our game in terms of leveraging technology to produce crops more efficiently and sustainably. Today, we are at the leading edge of building smart farms and ‘Farm of the Future’ to ultimately increase productivity, reduce costs and enhance sustainability of our supply chains.
Some of the key initiatives on how we are leveraging technology (many of which were adopted by us in 2017) to achieve this across our farming and plantation operations are shown below:
Clear and Differentiated Strategy
In 2017 we completed the second year of our 2016-2018 Strategic Plan. We have now entered the last year of this plan (2018). There was no change to our strategy in 2017. Our strategy is centred around a strong core, namely supply chain management of agricultural raw materials and food ingredients (origination, logistics, trading and risk management) and then selectively integrating across the value chain, including upstream (plantations and farming), midstream (manufacturing and processing) and downstream (packaged foods distribution). In line with our strategic plan in 2017, we continued to pursue growth in our prioritised platforms, worked to turnaround underperforming businesses, and nurtured our gestating assets to start contributing. As described in the overview section of this review and in the following Group COO Review these initiatives have yielded strong results.
In the second half of 2018, we will embark on our next 2 – 3 year strategic plan exercise for the two 3-year periods 2019-2021 & 2022-2024. This new strategic plan will be communicated in early 2019 once it is approved by our Board.
Our clear and differentiated strategy in terms of where we participate and how we win in our industry, has helped us achieve more consistent, sustainable and profitable growth over the current plan period. We are focused on the agri-complex but broadly diversified within it. We have built market leading positions in our prioritised platforms (Edible Nuts, Cocoa, Grains, Coffee and Animal Feed, Spices and Vegetable Ingredients and Cotton) and strategic niche positions in a number of other adjacent products, markets and value chain segments (Palm, Rubber, Wood Products, Packaged Foods Business and Ag Logistics in Africa, Rice in Asia and Africa, Sugar Milling and Refining in Asia, Dairy farming in Russia and Uruguay etc).
I had described our current strategy in detail in the CEO Review of 2015 and 2016 which is summarised here:
Evolution of Olam’s Business Model: Olam 2.0
In my CEO Review for 2015, I had described in detail Olam’s business model which we call ‘The Olam Way’. ‘The Olam Way’ forms the basis for the way we lead, organise, compete, grow and succeed in the marketplace. We compete on the basis of this business model and like other winning business models, we expect ours to achieve the unexpected, by helping us realise our Vision of ‘becoming the most differentiated and valuable global agribusiness by 2040’.
‘The Olam Way’ has 12 elements that together deliver 4 objectives for us: i) Setting the direction for the company; ii) Defining where to play and how to win; iii) Knowing who we are; and iv) Aligning the organisation to deliver our strategy. The current ‘Olam Way’ version Olam 1.0 has served us well for the last 28 years. The many changes and actions initiated over the course of the last 2 years is likely to result in Olam becoming by the end of 2018, a very different company from the Olam of 3 years ago. We now have an extensive upstream farming and plantation footprint; our midstream manufacturing footprint has grown 10-fold during this period, we are recognised as being leaders in sustainability, and our farmer/supplier and customer networks/engagement have given us a global edge in many of our products. All these initiatives and changes combined together has resulted in Olam 1.0 evolving into Olam 2.0. This is an evolutionary rather than a revolutionary change.
We have a broad consensus within the company for the need and importance of keeping ‘The Olam Way’ dynamic and treating it as an active and living document to be continually refined and strengthened so that it is always fit for purpose. As our business changes, ‘The Olam Way’ will continue to evolve with it. Olam 2.0 is this first major evolution of ‘The Olam Way’.
We have identified 6 key priorities in Olam 2.0 that will help us stay ahead and make Olam future ready: i) Focus on drivers of long-term value; ii) Put sustainability at the heart of our business; iii) Build operational excellence as a core competency; iv) Lead industry’s digital disruption and transformation; v) Enhance our culture, values and spirit; and vi) Realign and renew our organisation to execute our strategy.
1. Focus on drivers of long-term value
Research by Ocean Tomo LLC (one of the world’s leading Intellectual Capital Valuation, Management and Advisory Services firm) done on the S&P 500 companies for the last 45 year period shows that the market value of these companies over time is explained less by the value of their tangible assets and is increasingly determined more by the value of their intangible assets. The study shows that in 1975, 83% of the S&P 500 companies market value was explained by their tangible assets and only 17% by their intangible assets, whereas in 2015 only 16% of the S&P 500 market value was determined by its tangible assets and 84% was explained by their intangible assets.
To create value over the long-term, it has become increasingly clear that organisations need to actively manage a broader set of drivers beyond Financial and Economic Capital (equity, debt, tangible assets) that includes Manufactured Capital (the stock of the company’s factories, farms, equipment, etc.), Intellectual Capital (R&D, patents, copyrights, know how, organisational systems and processes, etc.), Intangible Capital (brand, reputation, know-how etc.), Human Capital (motivation and engagement of its employees, attrition rates, capability development, culture, spirit, capacity to innovate, etc.), Social Capital (relationship between the company and all its stakeholders including communities, government relations, customers and other supply chain partners) and Natural Capital (including the company’s carbon, water, waste footprint and the cost of these externalities). However, these broader set of long-term drivers and different forms of Capital that drive long-term value are not universally assessed in current reporting frameworks, even though they drive a significant portion of today’s market value.
There is a significant and increasing disconnect between today’s reporting formats and the drivers of long-term value for a few specific reasons: i) accounting profit and shareholder returns are disconnected because accounting profit is quick to recognise the short-term changes in revenues and costs, but does not account for the value likely to be derived from investments made for the long term. For example, at Olam (as described in the earlier sections of this review) we have invested significantly in sustainability, digitalisation and capability building initiatives, all of which will decrease our accounting profits, however it does not reflect the potential value that will be created from these investments; ii) we often measure and report what is easy rather than what is right, for example, inadequate reporting on intangibles; iii) the failure of companies to address idiosyncratic Environmental, Social and Governance (ESG) tail risks, which if materialised, diminishes future cash flows and increases the cost of capital; and iv) the timelines mismatch by co-mingling operating cost with different forms of long-term, gestating capital investments, which confuses the understanding of how well an organisation is investing to maintain or enhance its long-term competitive advantage. This is why we at Olam have now begun to value these broad set of drivers and measure the various forms of capital that drive long-term value for the company.
This Annual Report is the first in our journey to develop a new model of reporting that provides insight into how we create value over the long-term. It aims to communicate how we identify, invest in, develop, preserve and deploy key strategic assets including the various forms of Capital described above in line with our company’s purpose to create long-term value for all our stakeholders.
1. Please also see our GRI report on olamgroup.com.
2. Put sustainability at the heart of our business
At Olam, we have now firmly put sustainability at the heart of our business with 5 specific objectives in mind: i) it is the ‘right’ thing to do; ii) help increase agricultural production within the Planetary Boundaries, iii) to create differentiation and build competitive advantage; iv) to drive long-term value creation by reducing the risk to future cash flows because of an idiosyncratic ESG tail risk and by reducing the cost of capital because of a higher ESG orientation; and v) to inspire our employees by providing them meaning to their work.
Ensuring Olam grows responsibly has been a core tenet of how we have done business at Olam for several years and indeed ‘Growing Responsibly’ has been our Core Purpose since 2012. In 2017, we decided to refresh our Core Purpose. A good Purpose must answer 2 questions: 1) What are we on fire about? Why do we come to work every day? What is our Cause? What is the big problem that we are trying to solve?; and 2) How do we conduct our business? In order to answer the first set of questions above, we need to understand the problem that we are all trying to solve for in our industry.
As described under the Social Capital and Natural Capital impacts sections, agriculture faces the immense challenge of producing enough food and fibre for 9.5 billion people by 2050, while alleviating poverty, providing employment and decent livelihood opportunities in rural areas, while at the same time conserving natural habitats and biodiversity. Unsustainable conversion or over exploitation of forests and other natural habitats for food, feed, fibre and fuel, and other related purposes, threaten our natural life support systems including, soil, air, water, all living things and the global climate with serious implication for future generations. A response based mainly on doing less harm or focusing efforts to eliminate unacceptable practices such as deforestation at the scale of individual farms, or on incremental improvements by companies representing a small fraction of the supply chain, will not be enough to meet these challenges. Instead, we need to ‘Re-imagine Global Agriculture’, shifting away from destructive resource extraction and towards achieving a net positive impact at scale based on the creation and restoration of natural and social capital within living landscapes. That is why we have embraced ‘Re-imagining Global Agriculture: Growing Responsibly’ as our new purpose in 2017.
Our refreshed Corporate Responsibility & Sustainability (CR&S) Framework
To this end, we refreshed our global CR&S framework in 2017 to integrate our new purpose with our 10 new Material Areas, and the UN SDGs that these key material areas will impact. We have also now mapped and aligned our Material Areas (our focus areas) to the 9 Planetary Boundaries. In this exercise we added certain Material Areas that were missing from the Planetary Boundaries framework and removed certain other overlapping areas. Most importantly, we have now fully aligned our Purpose, the Material Areas, Planetary Boundaries and the UN SDGs in a coherent manner in our new CR&S Framework.
Achieving our new purpose is important for our shareholders, customers, farmers, Board, management and our 72,000 employees across the world.
In this context, we ramped up external stakeholder engagement in 2017, notably related to our palm and rubber operations, on definitions of deforestation and how the ‘trade off’ between alleviating abject poverty in agriculturally deficient areas while protecting vital natural capital can be managed. As a key part of our outreach, the Gabon team welcomed more than 50 NGOs and governmental, finance and multi-lateral agency stakeholders to our operations as part of The Forests Dialogue to discuss the challenges facing this highly forested nation. In parallel, we are working extensively to halt smallholder encroachment into forests. We have created large set asides (around 50% of the total concession area) of High Conservation Value areas in our palm and rubber plantations, and are protecting these areas at our cost and responsibility. Olam Cocoa was also a founding member of the Cocoa & Forests Initiative launched by The Prince of Wales’ International Sustainability Unit, working in partnership with the World Cocoa Foundation and IDH the Sustainable Trade Initiative.
Launching Olam AtSource: Delivering our sustainability vision
As part of our Purpose to ‘Re-imagine Global Agriculture’ we have launched Olam AtSource, our purpose-led platform to drive purchase and delivery of more sustainable agricultural products and ingredients with our customers. Delivered through an accessible digital portal, AtSource provides traceability through our supply chain, assurance, data and farmer narratives of real on-the-ground impact of our sustainability initiatives. It connects customers to the source of their supply, empowering our customers to have end-to-end sustainable supply chains, helping them to differentiate with their customers. In essence, it embeds the ‘Olam Sustainability Chip’ in our products and services.
AtSource products are available in 3 tiers tailored to supporting our customers ‘unique sustainability journeys. These 3 tiers provide a pathway for progression across 4 key dimensions: traceability level (e.g. country, farmer group, farm); footprint and impact information; types of sustainability initiative; and type of verification or assurance. Performance and impact are then tracked across 12 core sustainability topics including health and safety, food safety and quality, labour practices, diversity and inclusion (these 4 topics cover the people dimension), climate change, water use, forest protection and ecosystems and soil health (these 4 topics cover the planet or environment dimension) and economic viability, education, health and well-being, and nutrition and food security (these 4 topic cover the farmer livelihoods/social dimension).
The AtSource digital platform makes sustainability tracking and reporting easy. For example, customers can access maps and product journeys, environmental footprints, socio-economic metrics and tailored impact stories. Customers and Olam can also use the data to inform decision-making to compare performance and progress between farmer groups, develop more precise, and therefore efficient, sustainability programmes with base line data and better understand impacts and make adjustments e.g. use renewables versus fossil fuels.
AtSource is Olam’s commitment to a more transparent and sustainable agricultural products supply from the grass roots up.
3. Build Operational Excellence as a Core Competency
In order to successfully execute our strategy, we have acquired critical new competencies in plantation management, trading, operational excellence, digitalisation and sustainability, further developing our competitive advantage. We are now focused on building an Olam Operational Excellence Management System which we believe will be a critical capability to drive superior performance in a consistent way for the company. With this in mind, we took 4 major initiatives in 2017:
i) we set up a Capital Productivity Task Force (CPTF) to improve capital productivity and efficiency by focusing on building better project management execution capability. Our aim is to make sure that our capital projects are on-budget and on-time and focused on optimising working capital and reducing our cash-to-cash cycle time. This initiative resulted in a significant reduction in working capital employed in 2017 of S$1.24 billion;
ii) we set up a Cost Efficiency Task Force (CETF) to target significant cost savings across 8 cost drivers in a sustained cost management program over the next 4 years;
iii) identified key idiosyncratic drivers that drive variability of performance and minimise performance variance from plan. Given the inherent cyclicality and volatility in our industry, this discipline is very important to reduce performance variability; and
iv) developed a more effective governance system including an integrated business assurance system, an enterprise risk management system, strengthened the market and legal compliance functions, strengthened our anti-bribery and corruption (ABC Policy) and developed a new CR&S Framework. We believe that by developing Operational Excellence as a new core competency it will help us reduce error, increase speed, free up bandwidth, compound our learning and increase the predictability of our performance.
4. Lead industry’s digital disruption and transformation
Digitalisation is disrupting and transforming almost every sector in today’s world and fundamentally changing the way we live and do business. Digital disruptions are happening at both ends of our value chain. At the back end, we have the rise of platforms affecting origination (eg. Online Agri marketplaces) while at the front end, tech giants are crossing over into new business verticals (Amazon is a good example of this changing landscape with their purchase of Whole Foods). As outlined in my CEO Review for 2016, we embarked on the digital transformation of our business in 2016 and developed and tested a number of solutions for different parts of our business across 3 buckets in 2017: i) Olam Direct; ii) Olam Inside; and iii) Olam Forward. Our goal is to digitise our highest value supply chains end-to-end, both to drive cost efficiencies and capture additional value across the supply chain.
In 2017, we rolled out 10 digital initiatives including Olam Direct, Customer Service Portal, a Small and Medium Business e-Commerce Portal, Drone Image Analytics, Walk the Field mobile app, Digital Warehouse, Transact and Trace, Digital Procurement, Paperless Trade, Electric Motors Condition Monitoring, and Dryer Optimisation. We have seen promising results in many of these pilots that we rolled out in 2017 as shown below:
In addition, we are also pursuing the creation of an industry leading platform or marketplace that helps connect millions of farmers directly with Olam with fair and transparent price discovery while at the same time source their farm inputs and secure microfinance, insurance, etc. from different vendors and service providers. We are envisaging this to comprise a simple and usable mobile app for farmers to sell their produce on this platform, and for all of the other service providers to participate in this marketplace.
5. Enhance our Culture, Values and Spirit
Over the years, our 6 values and the everyday behaviours that institutionalise these values in the company have helped us build a distinctive culture, shaping how we work and setting the standards for what it means to be part of Olam. We have always competed on the basis of the organisational advantage that this unique culture has provided us. We are currently in the process of reviewing our existing values to see how they should be refreshed to remain relevant in Olam 2.0 and our evolving priorities. Key questions that we are asking in an extensive bottom up survey relate to which parts of our current culture should be preserved and which should we drop.
To reinforce our culture, we have updated our HR vision to “Building a high-performing and inspired workforce.”
Attracting, retaining and inspiring our talent remains a key focus for us. Upskilling national talent and creating rural communities where people want to live is essential. As we grow and scale our business, we need to make sure that our teams are better connected and to this end, we have stepped up our investments in social media and digital tools to better connect our team and encourage them to collaborate more.
Specific initiatives are also being taken to institutionalise the ‘Founder’s Mentality’ which underpins the spirit of the company. This includes a focus on attracting, retaining and developing talent through the Global Future Leaders programme at entry level and investing in the new Olam Learning Academy.
6. Realign and Renew our organisation to execute our strategy
We believe that Olam 2.0 will catalyse and re-energise our employees and our leadership team. They are inspired by our new Purpose. We are also taking steps to renew our top management teams, reviewing our current structure, and re-examining the role of the centre in decision making. We want to build on the success of our Communities of Practice ‘CoPs’ (on Upstream, Trading, Customer Engagement & Founder’s Mentality) and Task
Forces (Sustainability, DTF1, CETF2, CPTF3 and Integrated Reporting). These COPs and Task Forces have enhanced collaboration across the company and in many cases, have come up with game changing solutions that will serve the company well going forward.
One of the disappointments in 2017 was the dip in our employee engagement scores. Reasons vary but certainly volatile trading conditions and cost and capital efficiency drives add pressure to teams. Based on the engagement survey results, we are working on 5 areas to enhance engagement within our talent pool: i) Employer brand; ii) Career opportunities; iii) Learning and development; iv) Rewards and recognition; and v) Collaboration.
These 6 key priorities in Olam 2.0 will help us stay ahead and be future ready. While executing Olam 2.0 will have its challenges, these changes are highly energising and inspiring to our employees. These changes will be at the heart of enabling Olam to continue being an enduring, successful and responsible business. We believe that Olam 2.0 will help us change the company, and change our sector for the better. 2017 was an energising year for all of us at Olam, one that simultaneously offered both continuity and change – continuity with regard to our strategy, and change with regard to our evolving business model.
I close this review with a sense of gratitude and pride about Olam’s 72,000 strong team worldwide. During my frequent visits to our operations across our 66 countries, I see many of them in action and am always astounded by their capabilities, commitment, discretionary effort, character, experience and insights. I cannot emphasise how honoured I am to work at Olam and with all my fellow employees. I thank our shareholders for their continuing support and their endorsement of our strategy to focus on creating long term value and putting sustainability at the heart of our business. I would also like to thank our Board for their guidance, trust in the management and leadership team and our people, and their contribution in helping us build a more consistent, sustainable and profitable company. I also thank all our partners, including our farmers, other suppliers, customers and key service providers, bankers and creditors, in contributing to our success.
We have a strong business and a bright future. I am confident that we will deliver on our new Purpose of ‘Re-imagining Global Agriculture: Growing Responsibly’.
Co-Founder and Group CEO
1. Digital Task Force
2. Cost Efficiency Task Force
3. Capital Productivity Task Force