Reporting Format and Financial Year-End
One of the strategic priorities identified in the Strategic Plan for 2014-2016 is to promote a better understanding of Olam’s business by enhancing stakeholder communication.
As a part of that initiative, we have taken steps towards simplifying investor communication and providing relevant disclosure in line with what the users of financial statements require.
With this objective in mind, we have introduced a quarterly Management Discussion and Analysis (“MD&A”) statement from November 2013 onwards which includes business commentary, key operational and financial highlights as well as a detailed review of the financial performance.
In January 2015, we announced a fiscal year-end change from 30 June to 31 December. The change will enable us to align our fiscal year to comply with the Group consolidation and reporting requirements of our majority shareholder. With this change, the Company’s 2015 fiscal year was from 1 July 2014 to 31 December 2015. The Company now follows a January to December fiscal year.
EBITDA and EBITDA/IC as key financial metrics
Up until FY2013, we had measured and tracked our profitability in terms of Gross Contribution (GC) and Net Contribution (NC) per tonne of product supplied. However, NC and NC per tonne could not adequately capture or communicate the underlying financial performance as the fixed asset intensity of the business increased, particularly as we expanded into the upstream and midstream segments. Accordingly, from FY2014 we discontinued the reporting of GC and NC metrics.
In order to track and measure progress against our targets as stated in the Strategic Plan, we have introduced 2 key financial metrics since FY2013 – Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) and EBITDA on Average Invested Capital (EBITDA/IC), presented for the Group as well as across business segments and value chain segments.
Absolute EBITDA as a metric is a good indicator to track our progress towards our goal of generating free cash flows on a sustainable basis. EBITDA/IC provides a better visibility and link between the growth in earnings (as reflected by the growth in EBITDA), and the capital invested in each business segment and value chain segment. As the IC captures both the fixed and working capital directly attributed to the business segments and value chain segments, EBITDA/IC is a close proxy for Return on Invested Capital (ROIC).
The MD&A features EBITDA on a quarterly basis as the main metric of financial performance and this is presented for all 5 business segments(Edible Nuts, Spices & Vegetable Ingredients, Confectionery & Beverage Ingredients, Food Staples & Packaged Foods, Industrial Raw Materials and Commodity Financial Services). EBITDA by value chain segments(Upstream, Supply Chain and Mid/Downstream) will be presented on an annual basis.
While the MD&A provides the IC on a quarterly basis for all 5 business segments, IC by value chain segments (Upstream, Supply Chain and Mid/Downstream) will be presented on an annual basis. This is because, given the impact of seasonality on our business, as well as the fact that the working capital component of IC can vary significantly across quarters, tracking EBITDA/IC on a quarterly basis might not provide a meaningful analysis. Hence, the EBITDA/IC is more meaningful if it is analysed on an annual basis for both business and value chain segments.
To facilitate the comparison of financial performance against prior years, EBITDA and EBITDA/IC are presented for the period from 2012 to 2015. (See Resource to view or download the excel file carrying these metrics as well as financial statements for this period. Other historical metrics for the period from FY2005 to FY2014 based on the 30 June fiscal year-end can also be viewed or downloaded from Resource.)