Golden Agri-Resources Ltd

SGX:E5H

Earnings Call Transcript 2018-Q2

[Richard Fung, executive]

Welcome to the Interim Performance Presentation of Golden Agri-Resources for Second Quarter and First Half 2018. I'm here with our CFO, Raffy Concepcion, as well as our Head of Sustainability Communications, Shu Ling. I'm Richard Fung from Investor Relations.

I'd like to start with the executive summary, and what you can see here is that Golden Agri faced a challenging first half of this year, compared to last year, which was driven primarily by weaker palm oil prices, so we experienced margin compression in the downstream.

So if we move to the consolidated financial performance, you can see here the softer year-on-year results. This was actually across the segments, as we will discuss in a moment, but it was mostly due to the lower CPO prices.

The average selling price -- on the balance sheet, we see a slight increase in our debt, which was mostly driven by the larger inventories that required an increase in working capital facilities. Nonetheless, our gearing ratios remained at a healthy level.

Next are the segmental results. The plantation and palm oil mills, our upstream, did well in the second quarter. We saw a 16% increase in production, but first half was still slightly lower, compared to the first half last year and that is because we saw a very slow production in the first quarter of 2017 as a first response to the recovery in El Niño, which we were unable to match in the first quarter of this year. Nonetheless, we remain optimistic that we will see up to 10% growth in our production this year for the full year, compared to last year.

The revenue decrease was mostly driven by the weaker CPO price, as mentioned, but also because of inventory buildup that we saw at the end of June.

Next is our plantation area, and average age of our trees remains at 17 years, with a total planted area of about 500,000 hectares. Golden Agri increasingly focuses on the replanting of old estates and we are doing that with higher-yielding seeds, which will increase our production, regardless of the growth of our planted area. The replanting target for this year is between 10,000 to 15,000 hectares.

The next segment is the palm and lauric, our downstream, and those downstream operations were impacted by the market disruption caused by government interference in the commodity markets. We had the increase in import tax for palm oil in India twice in the first half, as well as the temporary suspension of export tax in Malaysia for palm, which made the Indonesia palm less competitive for that period.

And finally, the recent trade tensions between U.S. and China resulted in the 25% import tax on soybeans in China, resulting in lower soybean prices for the U.S. soybeans, which also brought down the vegetable prices, including palm.

So what made the impact stronger was the untimely purchase of feedstock and that was because of the festive season where we were expecting -- anticipating supply disruptions and higher prices, but because of the outside interventions, the opposite happened.

The final segment is the oilseeds and others, our China business. And because of the increase in import tax on U.S. soybeans, we saw the feedstock for our soybean crushing business -- the feedstock prices increased, which we were unable to fully pass on, resulting in lower margins.

Strategy and outlook. Golden Agri continues to focus on using technology as a competitive advantage, where we are looking at various digitizations, mechanization, automations to both increase productivity and reduce cost. And I already mentioned the research in higher-yielding seeds will guarantee the production growth for Golden Agri in the future.

On the downstream, we continue to enhance the focus on customers, where we are shifting from the emphasis on production to the emphasis on meeting the customer needs with customized products, and thereby improve margin.

And sustainability continues to be a focus of Golden Agri and allows us to stay at the very forefront in the industry on that.

For the outlook of the short term. In terms of the CapEx plan, we have a budget of $220 million, of which we spent $120 million in the first half. And the budget directs 50% to the upstream, mostly for the replanting with higher-yielding seeds and 50% to the downstream and that is for -- mostly for the logistic facilities to enhance the integration and the distribution network.

At the same time, Golden Agri is evaluating strategic options and potential business model restructuring to optimize the long-term profitability of our downstream. That includes the China assets that we still have.

Outlook. Outlook, yes, we do expect the CPO prices to have upside potential from here. That's mainly because of the positive developments on the biodiesel side, where the Indonesian government is further enforcing the B20 and also accelerating the B32 next year, which we believe will result in an increase in biodiesel consumption in Indonesia, up to 4 million kiloliters for this year. And combined with the increase in biodiesel exports because of the higher crude mineral price, we believe total production this year in Indonesia could reach up to 5.5 million tonnes -- yes, million kiloliters, sorry.

Okay, so that completes the commercial side of the presentation. The final slide is about our sustainability, which will be presented by Shu Ling.

[Shu Lim, executive]

Thank you, Richard. We continue to progress on traceability to the plantation. Last year, we achieved 100% traceability to the plantation for all GAR-owned mills. This year, we're focusing now on working with our third-party supplier mills to map their supply chain back to the origin.

So currently, we have -- about 50 third-party mills have started the TTP process, the traceability process, and 16 of those have reported 100% TTP as of Q2 2018.

The significance of this is that, A, we get to know the provenance of our raw materials; and B, we also increased our outreach to more of our supply chain. We get to know them better, we get to assess what gaps they have in terms of compliance with our sustainability commitments and then we're able to design appropriate intervention strategies to help them upgrade their practices.

In other news, GAR debuted on the FTSE4Good Index Series and this is one of those ESG indices, which are designed to measure the performance of companies demonstrating strong ESG practices.

So last year, GAR already debuted on the U.S. [indiscernible], which was the Dow Jones Sustainability Index, and the significance of all this is that we are being assessed annually on our ESG practices and we are able to show that we are meeting internationally recognized ESG standards in managing our social, environmental and governmental risk.

[Richard Fung, executive]

Thank you.