Group COO’s review
Most of our business segments delivered strong performance during the year, with Edible Nuts, Cotton, Ag Logistics and Infrastructure being stand-out performers. This, together with our focus on divesting non-core assets, lowering capital expenditures and optimising our working capital enabled us to deliver strong cash flows.
We posted a 65.3% increase in PATMI to S$580.7 million (2016: S$351.3 million). This was driven by exceptional gains from divestments, an improved operating performance and lower taxes after adjusting for higher depreciation and amortisation, and net finance charges.
We booked a net exceptional gain of S$149.2 million for 2017 and this came mainly from the S$121.2 million gain from the partial divestment of 50.0% interest in Far East Agri Pte. Ltd. (FEA), the sugar refinery business in Indonesia, as well as S$34.2 million gain from the sale of farmland assets in the USA, which was partially offset by the S$6.2 million cost provision made for the wage settlement agreement in the USA for the Spices and Vegetable Ingredients platform. The prior year 2016 had a net exceptional loss of S$12.5 million, which was due to the buyback of high coupon bonds.
Without these exceptional items, Operational PATMI grew by a healthy 18.6% to S$431.5 million (2016: S$363.8 million).
Sales volume was up by a robust 56.3% as compared with 2016 as we saw volume growth across all segments, within which the Grains and Edible Oils platforms were the most significant contributors during 2017. Revenue growth was more modest at 27.6%, due to changes in product mix as well as lower commodity prices.
Our operating performance, in terms of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA), grew 10.4% or S$125.1 million higher year-on-year to S$1.3 billion. Most of our business segments posted an increase in their EBITDAs, with growth led by Edible Nuts, Spices and Vegetable Ingredients, followed by Industrial Raw Materials, Ag Logistics and Infrastructure, Food Staples and Packaged Foods, and Commodity Financial Services (CFS).
Edible Nuts, Spices and Vegetable Ingredients achieved a 32.1% growth in EBITDA from S$331.8 million in 2016 to S$438.4 million in 2017. Industrial Raw Materials, Ag Logistics and Infrastructure reported a 45.9% increase in EBITDA from S$135.2 million to S$197.3 million while Food Staples and Packaged Foods was up 8.9% from S$330.2 million to S$359.7 million. CFS turned in a positive EBITDA of S$4.8 million against a loss of S$1.6 million in the previous year. The improvement in EBITDA helped offset lower contribution from the Confectionery and Beverage Ingredients segment which was down 19.5% from S$407.2 million to S$327.7 million.
More importantly, the growth in EBITDA was achieved on a reduced invested capital base compared to 2016 and therefore we were able to lift the EBITDA on average invested capital return from 7.8% to 8.2% in 2017. Invested capital came down by 4.9% from S$16.6 billion in 2016 to S$15.8 billion in 2017 and this was mainly a result of a 13.0% reduction in working capital deployed, despite our higher volume (56.3%) and revenue growth (27.6%). While most of the reduction in working capital was aided by lower commodity prices, a significant part of the reduction was on account of various working capital optimisation initiatives undertaken across businesses.
We continued our targeted fixed capital investments in prioritised platforms to complete our committed investments and extract full value from our upstream and midstream assets. Net capital expenditures (Capex) outflow was lower on account of the capital release from divestments.
Strategic Plan Progress
We made very good progress in the execution of our 2016-2018 Strategic Plan. In fact, Olam met most of its key priorities set for 2017, as set out in the Plan. We delivered improved Operational PATMI and EBITDA/IC for 2017, as well as positive Free Cash Flow to Firm (FCFF) of S$1,484.4 million and Free Cash Flow to Equity (FCFE) of S$1,020.4 million by end-2017 – which is a record achievement by our Group. We executed on the following initiatives to release cash and improve cash flow generation:
- Associated company GSEZ sold 25.0% stake in its subsidiary company GSEZ Mineral Port to Meridiam in September 2017 and also sold concession rights to operate the new Owendo International Port in Gabon to Bolloré Group in October 2017. Post these transactions, GSEZ repaid its shareholder loan of €66.0 million (approximately S$104.0 million) to Olam in the second half of 2017.
- We sold 5,100 acres (approximately 2,100 hectares) of edible nuts farmland assets in California, USA, to Farmland Partners Inc. for a cash consideration of US$110.0 million in December 2017. In addition to the cash release, a net gain of US$25.0 million (S$34.2 million) was booked as exceptional income in 2017.
- We divested 50.0% stake in FEA, which owns sugar refining company PT Dharmapala Usaha Sukses, to Mitr Phol for US$100.0 million as part of our strategic partnership agreement with the company to enter into sugar milling in Indonesia. The transaction resulted in a one-time gain of US$88.5 million (S$121.2 million) based on the written down carrying value of the assets for 2017.
- We also set up 2 task forces to improve cost and capital efficiency: While we have focused on making investments in prioritised platforms, we have been looking at working capital optimisation initiatives to extract more cost and capital efficiencies across all our operations.
We also made significant progress in turning around underperforming businesses and ensuring gestating businesses reach full potential:
- Dairy farming in Uruguay continued to report improved financial and operating results year-on-year;
- The rice farming business in Nigeria has completed its restructuring and started to report better results from the second half of 2017;
- Restructuring is underway to address cost structures and product mix strategies at Olam Tomato Processors in the USA; and
- Packaged Foods restarted production of juices and beverages in Q3 2017 in its new factory. (Production of juices and beverages had ceased in April 2016 following a fire incident.) A refreshed strategy, which addresses issues such as product differentiation, branding, distribution and cost optimisation, was implemented during the year.
Even as we focused on improving our capital efficiencies and cash generation, we have not sacrificed our long term growth objectives across our 6 prioritised platforms.
The growth initiatives in 2017 included the following:
- Edible Nuts: Expansion of acreage in almond, walnut and pistachio in the USA and Australia;
- Spices and Vegetable Ingredients: Upstream pepper farming in Vietnam and Brazil;
- Cocoa: New powder facility in the USA;
- Coffee: Expansion of soluble coffee capacity in Vietnam and Spain and continued investments in coffee plantations in Laos, Zambia, Tanzania and Brazil;
- Grains: Expansion of wheat milling capacity in Ghana and Nigeria; construction of animal feed mills and hatchery in Nigeria; and
- Cotton: Continued investments in integrated cotton ginning in Africa.
Summary of financial and operating results
Balance sheet analysis
In 2017, our total assets amounted to S$18.2 billion, which comprised S$8.6 billion of fixed assets, S$7.3 billion of working capital and S$2.0 billion of cash. These were funded by S$6.6 billion of equity, S$4.7 billion of short-term debt and S$6.9 billion of long-term debt. Our equity position improved by S$777.3 million mainly due to the exercise of warrants and higher retained earnings.
Compared with 2016, our overall balance sheet shrank by S$1.1 billion as working capital fell with lower inventory levels and lower commodity prices during 2017. Fixed capital went up by S$463.7 million primarily due to the Capex we made over the past year.
As mentioned, working capital came down significantly with reduced stock levels and lower commodity prices. Overall cycle time came down from 150 days in 2016 to 97 days in 2017. The change in product mix, lower commodity prices and working capital optimisation initiatives taken to improve inventory management helped reduce overall inventory days. Reduced supplier advances and receivables days also contributed to a shorter cash conversion cycle.