Golden Agri-Resources Ltd

SGX:E5H

Earnings Call Transcript 2019-Q3

[Richard Fung, executive]

We'll start with the executive summary. And the third quarter, we were happy to see a quarterly improvement, and that was mostly driven by the rebound in production from our plantations, which increased by 25%. And as a result, we saw the EBITDA increase by 8 -- by 38% compared to the previous quarter to $107 million, and that brings us to a 9-month EBITDA of USD 305 million. This is still lower than last year, however, mostly because of lower CPO prices compared to last year as well as full year order 9-month production so far.

The lower EBITDA coming from the upstream was partly compensated by the downstream, which saw its EBITDA more than double compared to last year, and we'll give you the detailed figures in a moment.

And in terms of our strategy, we continue to focus on the integrated business model to enhance our competitiveness and also make us less dependent on the CPO price.

The CPO price continues to be the strongest driver of our performance. The good news here is that we recently saw a significant increase in CPO price and we believe this is driven by improving supply and demand fundamentals. On the CPO side, we see production slowdown, that is because of the driver, the conditions that we saw earlier this year and also the lower application of fertilizer by smallholders due to the low CPO prices that we've seen.

On the demand side, we still see the B30 biodiesel policy in Indonesia as the primary catalyst, and this seems to be on track to be implemented by January next year which will give a strong boost to demand, as I'll set out in a moment as well.

So we then move to the P&L slide. And yes, here, you can see the 9-month 2019 results being impacted by the lower CPO prices compared to last year. But fortunately, we see the stronger quarter-on-quarter performance, where we saw the underlying profits turn positive, but still slightly negative for the first 9 months.

Balance sheet remains fairly constant. We saw the total debt, yes, more or less at the same level. And net gearing increased slightly from 0.42x at the end of last year to 0.49x for the first 9 months of this year.

And then we move to the segmental results, starting with the upstream. And here, you can see the very strong rebound in production. So fruit production increased by 22% compared to the previous quarter, and palm products' output by 25%. However, for the full 9 months, compared to the first 9 months of last year, we're still 5% lower.

We then move to the plantation area. And the planted area and the mature area, they stay fairly constant as we are not expanding into new areas. But we are actively replanting our old plantations with new-generation trees, that will have higher yields than the previous tree. So that's why we believe we will continue to see production growth for Golden Agri coming from the same planted area.

The replanting progressed to 6,400 hectares for the first 9 months compared to 3,100 last year, so we believe we are well on track to replant between 10,000 to 15,000 hectares for this year.

Then the other segment is the downstream, the palm, laurics and others. And here, we saw an improvement in margin by 1.7% for the first 9 months and -- compared to the first 9 months of last year. And we believe that the Indonesian biodiesel program will continue to contribute to this margin.

Strategy and outlook is next. In the upstream, as I already mentioned, the focus is on the replanting with higher-yielding seeds. But at the same time, we are also looking at cost reduction through the yield improvement, but also by cost efficiencies in other areas through, for example, mechanization and automation. But at the same time, of course, we keep a strong eye on the sustainability aspect of the industry, which we will also discuss in a moment.

In the downstream, we continue to leverage our assets by extending the product and services portfolio and better servicing our clients and thereby achieving better margin.

Outlook, as I just discussed, we remain confident that the outlook for the CPO price is positive, given the strong demand and supply fundamentals.

And on the demand side, as I mentioned, a major factor is the Indonesian biodiesel program. So we've been successful in the B20 implementation since September last year, and that is expected to result in a biodiesel production of 6.6 million kiloliters for this year, a significant increase over the 4 million last year. And then with the implementation of the B30 from January next year, we believe this will increase the consumption to over 9 million kiloliters next year.

And the final slides discusses our sustainability efforts, which will be presented by Shu Lim.

[Shu Lim, executive]

So for this quarter -- this last quarter, we're happy to report further progress on our efforts to achieve traceability to the plantation. So currently, we have about -- we have full TTP for nearly 70% of the palm supply chain, that means for GAR-owned mills and third-party mills together. 69 third-party mills have reported full TTP and there are around 190 taking part in the exercise. So we're confident that we are on track to achieve the 100% traceability to the plantation for the palm supply chain at the end of 2020, as we have targeted.

Moving on. There was a return of fire and haze in the -- especially in the months between July to September and October. So in that period, in those 3 months, July to September, we had around 1,700 hectares of our area was affected by fires, although that's still very low in terms of total area. So that's about only 0.3% of GAR's total area. And it's actually mainly caused by external parties clearing land with fire.

Now actually, independent third parties like Global Forest Watch, have reported that actually over 85% of the fire that's in that period were actually outside palm oil concessions.

For ourselves, GAR remains vigilant and we continue to adhere very strictly to the Zero Burning Policy, and we are also working with villages around our concessions who are under the Desa Makmur Peduli Api program on long-term fire prevention. And we also are looking to explore and encourage collaboration with the government on such programs as part of a private-public partnership.

We're also happy to announce that we are taking part in an industry initiative on radar monitoring of deforestation. And we are supporting and funding the development of a new publicly available radar-based forest monitoring system. It's called the Radar Alerts for Detecting Deforestation, or RADD, and it will make it easier and more transparent to see deforestation in near real time. It's developed by Wageningen University and Satelligence and facilitated by World Resources Institute. Thank you.