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Edited Transcript of E5H.SI earnings conference call or presentation 13-Nov-18 1:00am GMT

Q3 2018 Golden Agri-Resources Ltd Earnings Media Call

Jan 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Golden Agri-Resources Ltd earnings conference call or presentation Tuesday, November 13, 2018 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Rafael Buhay Concepcion

Golden Agri-Resources Ltd - CFO & Executive Director

* Richard Fung

Golden Agri-Resources Ltd - Director of IR

* Shu Ling Lim

Golden Agri-Resources Ltd - Head of Sustainability Communications

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Presentation

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Shu Ling Lim, Golden Agri-Resources Ltd - Head of Sustainability Communications [1]

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Hi. Good morning, everyone. [Anu and Lucy], hi.

So this is Shu Ling from Golden Agri-Resources. And I am here today with Rafael Concepcion, the Chief Financial Officer of Golden Agri-Resources; and Mr. Richard Fung, the Director of Investor Relations; Ms. Lim Shu Ling, Head of Sustainability Communication for GAR; and Ms. [Helena] from Investor Relations as well.

And for today, we will have a briefing on the Q3 financial results. We will start or kick off with a presentation briefing by Fung Richard followed with a sustainability presentation by Lim Shu Ling and then we will -- then after have a Q&A session. Okay?

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Richard Fung, Golden Agri-Resources Ltd - Director of IR [2]

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Thank you, Shu Ling. So I would like to start with the executive summary. And the first set of results shows that we saw an improvement in our quarter-on-quarter results, so the third quarter results were stronger than the second quarter. Revenue was more or less the same but EBITDA increased by 13% and underlying profit, the core profit, increased by 129% to USD 38 million. And this was largely driven by the CPO output, the recovery of our plantations that resulted in a strong food production. And these results, this improvement was achieved despite the CPO price weakening by 13% over the third quarter.

The CPO price has seen a weakening trend for the most part of this year impacting our year-to-date results. As you can see, compared to last year, we see the lower EBITDA and that is mostly coming from the upstream, while the downstream saw stable performance in the third quarter.

So we'll now go through the consolidated financial performance and here you see in the right columns that we had an improvement quarter-on-quarter, but if you look at the 9-months results, then we see a decline. And I'll discuss in a bit more detail in the coming pages when we go by segment.

The FOB CPO price was USD 600 average price for the 9 months of 2018 compared to USD 689 in 9 months 2017, so that was a 13% decline. And for the quarter itself, we saw a 19% decline compared to third quarter 2017 and a 13% decline compared to second quarter 2018.

All right. So then the financial position, Golden Agri's balance sheet remains strong despite the challenging environment that we're facing today. We saw a slight decline in ratios coming mostly from the slightly increase in net debt coming -- mostly used for working capital and general corporate purposes.

Then we come to the segmental results. We start with the upstream, and here you can see the very strong recovery in fruit production by 27%, and the margin came down slightly -- the EBITDA margin came down slightly, mostly driven by the weaker CPO price, but we also saw an increase in inventory as the production volumes surged resulting from the seasonal increase in production.

The plantation area effects, and here we see Golden Agri's planted area stable at about 0.5 million hectares. We continue to replant our old plantations, meaning over 25 years old, and replacing them with the higher yielding trees that will continue to increase our production volumes even without expanding our planted area. The target for this year is 10,000 hectares and the plan is to further accelerate it going forward. The average age of our trees is now 16 years.

The downstream operations saw a complex environment due to the impact of government actions that impacted the industry such as the import tax increase on CPO in India, which reduced the imports into -- the imports from India and, at the same time, we also saw Malaysia temporarily suspending the export tax making the Malaysian palm products more competitive.

Finally, of course, we have the trade policies between the U.S. and China impacting the soybean price significantly, and thereby also the palm oil price. Nonetheless, we do continue to integrate the downstream operations. We continue to believe that the vertical integration of our operations is one of our major benefits, which will yield -- continue to yield positive results going forward.

The final segments, oilseeds and others, which is mostly our China business, and here we saw a good turnaround. The immediate impact of the 25% import tax in China on the U.S. beans impacted our margins negatively in the second quarter of this year, as you can see, but we were able to turn that around in the third quarter, allowing us to have a net positive contribution from the oilseed business for the year.

Then we come to the next slide about our corporate strategy and we have 3 pillars here. The technology continues to be a very important driver of our future business and we believe that, through the use of technology, we will be able to increase our productivity and lower our cost. We're looking at digitization, mechanization and automation can be primarily in the upstream using information to make better decisions about our foreign exchange management but also in the downstream energy space.

In terms of consumer, we are targeting the higher end of the market increasingly with higher value added products. And at the same time, the sustainability continues to be a primary focus for the company as Shu Ling will detail in a moment.

For this year, the growth strategy and outlook, the budget is USD 220 million, of which USD 110 million is for the upstream, which is mostly for the replanting with high-yielding seed. And in the downstream, it is mostly for the logistics facilities to further enhance the integrated operations.

So next, Shu Ling will discuss our sustainability effort.

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Shu Ling Lim, Golden Agri-Resources Ltd - Head of Sustainability Communications [3]

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Right. I just wanted to highlight a couple of initiatives in the sustainability area, and that is that we have progressed further on the traceability to the plantation for our third-party suppliers. As you know, we have set a time that ends 2020 for our third-party suppliers to report full TTP. And as of now, we have achieved full TTP for nearly 50% of the plant's supply chain, that means our own mill and third-party supplier mills. Around more than 50 third-party mills have been engaged like GAR so far in the TTP process, and about 17 of them are reporting 100% TTP as of Q3 2018. So this, of course, helps the foundation for us to share responsible practices with our supply chain can help it become more resilient.

And in other news, we are continuing our partnership to rehabilitate orangutans with the nonprofit Orangutan Foundation International, OFI. We plan to release, together with OFI, 60 orangutans back into the wild over the next 3 years. We have had a partnership with OFI since 2011, and we've actually released 100 orangutans in Central Kalimantan to date. Now, the updated program will actually include more community education on maintaining biodiversity as well.

And back to you, Raffy.

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Richard Fung, Golden Agri-Resources Ltd - Director of IR [4]

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Thank you, Shu Ling.

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Unidentified Company Representative, [5]

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Thank you.

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Unidentified Company Representative, [6]

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Thank you, Richard and Shu Ling. So I think we can start the Q&A session. If there's any questions from you, [Anu or Lucy]

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Questions and Answers

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Unidentified Analyst, [1]

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This is [Anu]. I'd like to ask Raffy, what are your thoughts on the El Niño? Are you concerned about that? Is that something that you are factoring in? And in terms of that, how will it develop? How will that affect production? And when can we see an effect?

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Rafael Buhay Concepcion, Golden Agri-Resources Ltd - CFO & Executive Director [2]

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Yes. Right now, there's no strong indication of an El Niño happening in the near term. So it's something that we continue to monitor, but so far we haven't really seen any conclusive evidence that it's coming very soon.

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Unidentified Analyst, [3]

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If it does develop, when would it likely affect production?

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Rafael Buhay Concepcion, Golden Agri-Resources Ltd - CFO & Executive Director [4]

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If it happens. Yes, well, if it happens, it, again, depends on the gravity of the El Niño, right? So in previous experience, for example, the last 5 years, it has happened in a number of years, but it did have a serious occurrence in the years 2015 and 2016 -- part of 2016. So -- and that's where, as you can see, the impact was very serious. It brought down our 2016 and 2017 yields way below the (inaudible) Although in 2017, we did see some recovery in the first half, but towards the latter part of 2017, again, the El Niño effect took place. But fortunately, if we focus on this year's results, it appears that our estates are back to normal health levels and hence the progress in yield recovery has been geared up. Having said that, if we really look against our historical performance, this 2018, is just somehow equivalent to the 2015 production. So as we can see from there, then there's still some expected growth in our production in 2019 as our plants or our trees get stronger.

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Unidentified Analyst, [5]

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Okay. So is it fair, basically, for now, we are not factoring in possibility of El Niño?

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Rafael Buhay Concepcion, Golden Agri-Resources Ltd - CFO & Executive Director [6]

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Yes. For now.

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Unidentified Analyst, [7]

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Okay. And just a follow-up on the question on production. What is your outlook for production this year versus a year ago? And also if you could share an outlook for next year.

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Rafael Buhay Concepcion, Golden Agri-Resources Ltd - CFO & Executive Director [8]

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Sure.

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Richard Fung, Golden Agri-Resources Ltd - Director of IR [9]

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Yes, certainly. So we have seen a strong recovery so far this year compared to last year, and we think we will see that in the final quarter of the year as well. So our guidance has been that our Golden Agri's production may grow up to 10% this year compared to last year. And we hold onto that guidance. So as Raffy just mentioned, our production volume is -- if we reach that level, it's only back to levels that we reached several years ago in 2015. In the meantime, we have seen the mature area of our plantations grow, which means that, in theory, we should be able to see more production from the plantations. And therefore, we still believe we can achieve positive growth next year as well.

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Unidentified Analyst, [10]

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Any indication for next year, will the growth momentum still be 10% or could it be even more?

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Richard Fung, Golden Agri-Resources Ltd - Director of IR [11]

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I think around 10% is probably a realistic target subject to weather conditions remain normal.

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Unidentified Analyst, [12]

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I've got one question. How do you sort of see the impact on palm oil demand from China if the trade tensions between the U.S. and China continue, say, for another 6 months or 12 months? Is that going to result in more demand, do you think?

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Richard Fung, Golden Agri-Resources Ltd - Director of IR [13]

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Yes. We believe this will have a positive impact on palm oil demand in the future in China if these trade tariffs remain. And the reason is that China has been relying, for the most part, on soybean oil for its vegetable oil requirement as opposed to the rest of the world, where palm is prominent. And because of these tariffs, China is likely to buy less -- much less from the U.S. But at the same time, the alternative sources will not be able to produce the same volumes that U.S. was selling to China. So the expectation is that China will rely less on soybean going forward, which means less soybean oil, and they are likely to supplement that shortfall with palm oil. So we do expect the palm oil demand in China to grow in the coming years if these tariffs remain.

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Unidentified Analyst, [14]

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And can we expect there may be some tightening in the difference between palm oil prices and soy oil prices?

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Richard Fung, Golden Agri-Resources Ltd - Director of IR [15]

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Yes. So globally, palm, on average, trades at a 10% to 15% discount to soy and that can vary, it can be up to double or it can be at par depending on the supply of soybeans and palm oil. So we do believe that the balance will (inaudible) towards palm and that could, on average, reduce the discount of palm to soy.

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Unidentified Company Representative, [16]

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Is there any more questions from [Anu] or also from [Lucy]?

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Unidentified Analyst, [17]

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Yes, I have a question in regards to the current palm oil prices. So the -- palm oil prices in Malaysia, the benchmark futures being where it is right near MYR 2,000, and it's very their cost of production for Indonesia and Malaysia. In your opinion, how far can prices fall before they find a floor? Do you have any under contractors? And do you think that these low prices could potentially hurt relatively?

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Richard Fung, Golden Agri-Resources Ltd - Director of IR [18]

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Yes, so the -- I think what we've seen over the last few years -- in recent years, is that around USD 500 tends to be the bottom price. If the price falls below USD 500, it is always for a very short period of time simply because demand will -- sorry, supply will lessen and there's really no alternative at that price. So therefore, we believe we are at the bottom of the -- or close to the bottom of the CPO price. And soft commodity analysts had a meeting, saying the same thing for a while now. I think in the short term, we simply see a downward pressure on prices or a ceiling, maybe, because of the seasonal increase in production. But once we get through that, I think, the -- most analysts agree that the fundamentals should result in a higher CPO price than where we are today. So of course, the Golden Agri results are still very much dependent on CPO prices, and I think that is reflected in our current results. But as the expectation is that CPO prices go up, then our results should improve accordingly.

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Unidentified Analyst, [19]

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All right. Okay, which means that you feel that CPO prices are close to bottom?

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Richard Fung, Golden Agri-Resources Ltd - Director of IR [20]

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That is correct, yes.

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Unidentified Analyst, [21]

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Okay. What factors do you -- can you think that could lift the prices further?

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Richard Fung, Golden Agri-Resources Ltd - Director of IR [22]

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Sorry, factors for what?

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Unidentified Analyst, [23]

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What are the factors that you think could possibly lift or raise the CPO prices?

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Richard Fung, Golden Agri-Resources Ltd - Director of IR [24]

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Yes. So on the supply side, we see that we expect soybean production to slow down because China is the largest buyer, and they are going to buy less soy, that's our expectation. And the soybean oil is the direct competitor of palm oil. On the demand side, we see the strong increase in biodiesel consumption because of the higher crude mineral prices, which is increasing the demand for palm oil. And that should also help to tighten the supply and demand situation and support the CPO price.

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Unidentified Analyst, [25]

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Okay. Any price outlook in the fourth quarter? Any range that you see trading it within?

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Richard Fung, Golden Agri-Resources Ltd - Director of IR [26]

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Yes. We expect prices to remain range-bound for the remainder of the year simply because of the increase in production towards the later part of the year due to seasonality.

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Unidentified Analyst, [27]

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Okay. Any levels that you can share with us?

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Richard Fung, Golden Agri-Resources Ltd - Director of IR [28]

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Yes. So range probably -- basically around the levels where we are today. Hopefully, slightly better, but we don't expect a dramatic move one way or the other for the remainder of the year.

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Shu Ling Lim, Golden Agri-Resources Ltd - Head of Sustainability Communications [29]

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Is there any more questions?

Thank you, [Anu and Lucy] for joining today's briefing, and we hope to connect with you again in the next 3 months.