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Edited Transcript of E5H.SI earnings conference call or presentation 27-Feb-19 1:00am GMT

Full Year 2018 Golden Agri-Resources Ltd Earnings Presentation

Mar 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Golden Agri-Resources Ltd earnings conference call or presentation Wednesday, February 27, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anita Neville

Golden Agri-Resources Ltd - VP of Corporate Communications & Sustainability Relations

* Richard Fung

Golden Agri-Resources Ltd - Director of IR

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Presentation

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Richard Fung, Golden Agri-Resources Ltd - Director of IR [1]

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We will start off with the executive summary and presentation, and then after that, there will be time for Q&A.

So 2018 was a challenging year as one of the key drivers for the industry is the CPO price, and unfortunately, the CPO price saw a declining trend throughout the year. Nonetheless, Golden Agri once again proved its resilience, and actually was able to see quarter-on-quarter improvements in third and also fourth quarter despite the continuing lower CPO prices.

And a major contributor to that was the plantation growth after the weak year of 2016, resulting from the El Niño in 2015, we've seen very strong double-digit improvements in '17 and '18. And we saw our production output increase by 12% last year to slightly over 3 million tonnes.

Downstream contribution also increased in the fourth quarter, and that was a result of the increased benefits that we are getting from the vertically integrated operations as well as the increase in biodiesel sales that I'll discuss in more detail in a moment.

We continue to focus on technology innovation and enhancements. And we think that we'll continue to drive the competitive edge of Golden Agri.

In terms of outlook, we believe we are at a turning point for the industry this year after 2 years of very strong production growth and in fact, a production surplus for edible oils. We think it will turn into a deficit for this year, which would be positive for the CPO pricing.

On the supply side, we believe that palm oil production growth will slow down after 2 years of very strong growth through the biological cycle of the tree, the so-called tree stress. And the major competing oil, the soybean oil, we also expect production growth to slow down, due to the tariff disputes, making soil as attractive to grow as well as unfavorable weather conditions in South America, which are expected to reduce production of soybeans as well.

On the demand side, it's really the very strong development of biodiesel that we've seen. Last year, an estimated 40 million tonnes of biodiesel was consumed, representing over 20% of total production of edible oils. And in this -- Indonesia plays a very important role, last year, contributing 6 million kiloliters and expected to achieve more than 8 million for this year.

So the next slide is about the consolidated financial performance. And here, you can see year-on-year weaker results because of the lower CPO price. But again, quarter-on-quarter, we did see improvements. And this was mostly contributed by the palm and lauric business. And the palm and lauric business enjoyed a fair value gain on financial assets, which followed from the adoption of IFRS 9.

Balance sheet remains robust for Golden Agri. We were able to maintain our debt levels and also our net gearing was stable at 0.42x.

Based on last year's results, the Board proposes a final dividend of SGD 0.58 per share, and this would be 30% of the underlying profit for last year, which would be similar to what we've paid out in previous years and in line with our dividend policy, which is to pay out up to 30% of underlying profits.

We now move to the segmental performance. And the first segment is the upstream, the plantation and palm oil mills. And again, the financial result is impacted by the lower CPO prices, but a mitigating factor was the strong production growth, fruit production increased by 10% and the palm product output increased by 12% year-on-year. Quarter-on-quarter, we saw slightly weaker production, but this can simply be explained by the seasonality effect.

Plantation area is next. Golden Agri's plantation area maintains at more or less the same level. We saw a slight reduction due to our replanting activities. And we completed replanting of 10,500 hectares last year, and we expect to further increase that this year. The replanting is an important program for Golden Agri because it allows us to replant our old trees with new-generation higher-yielding seeds that will allow us to increase our production even if we do not expand our planted area.

And the second segment is the palm, laurics and others. And here, we see the increasing benefits from our integrated business model that allows us to have better relationships with our customers, allowing us to sell a broader portfolio of higher value-added products directly in the destination markets.

So despite the declining CPO price, we saw EBITDA margin improve year-on-year because of the additional contribution coming from biodiesel as well as the destination sales, as I mentioned. We also had the removal of the export levy in Indonesia and finally, the fair value gain on financial assets from the adoption of IFRS 9.

Then we come to the strategy and outlook. As Golden Agri continues to focus on 3 major pillars there, first one being technology. And here, Golden Agri has a history of operating in a technologically advanced manner. And we think that we can further extend that lead by putting significant effort into further use of technology in our operations through the digitalization, mechanization and automation on the upstream, the harvesting site, the replanting with high-yielding seeds, as I mentioned, and also the use of Big Data analytics to further enhance the precision agriculture, which means maximum output with minimal inputs.

Then on the customer side, as I mentioned already, the downstream is really focusing on, on the one hand, broadening the product portfolio with high value-added refined products. And on the other hand, enhancing the relationship with our end users, allowing us to sell higher margin services and solutions.

Sustainability is an area where Golden Agri also continues to make significant strides, as will be explained by Anita in a moment.

The growth strategy and outlook. For this year, the CapEx budget is $250 million, which is in line with the budget we had last year. This year, the emphasis is a bit more on the upstream, where we expect to spend $160 million, and that is due to the increase in replanted hectarage that we are planning. And in the downstream, it continues to be the focus on enhancing the integrated operations and using technology to increase efficiencies, with a projected CapEx of 100 million.

Outlook. I already discussed this during the introduction, where we believe that the current macro environment is conducive to higher CPO pricing.

And the major catalyst for that is on the next slide, the biodiesel, specifically, the Indonesian biodiesel program. Biodiesel in itself, as I mentioned, was 40 million tonnes last year, which was a growth of 10%, and we expect this growth to continue.

Specifically from palm, palm contributed 35% to the biodiesel feedstock last year, and Indonesia played a major role in that, with outperforming the targeted 5.7 million kiloliter by achieving 6.0 million last year, and we came from only 3.4 million in 2017. So this is a significant acceleration.

And so Indonesia was able to fully implement the B20 biodiesel program since September 2018, and we expect to move into the B30 program latest by next year, which will further increase the biodiesel production.

Consumption in Indonesia alone was 4 million tonnes last year -- 4 million kiloliters, sorry. And this is expected to grow to 6.2 million kiloliter by this year based on the B20 program.

Next, Anita will explain our sustainability progress.

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Anita Neville, Golden Agri-Resources Ltd - VP of Corporate Communications & Sustainability Relations [2]

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Thank you, Richard. Good morning, everyone. We have continued on our path towards sustainable palm oil production, focusing in a few core areas I want to draw your attention to. Particularly, our focus continues on sector transformation within our own supply chain, where we are moving steadily towards our target of full traceability to plantation by 2020.

We now report full traceability to plantation for 62% of our palm supply chain, 54 of our third-party mills have reported full TTP and more than 150 are taking part in our traceability-to-plantation exercise. I'll remind you that GAR itself has been fully traceable to plantation to its mill since the end of 2017.

In addition to focusing on plantation traceability, we're also working to support smallholders who make up a significant proportion of the Indonesian production. We're doing this mostly by focusing on innovative financing programs to enable replanting. To date, we've helped some 1,400 independent smallholders in Riau and Jambi, secure loans to enable them to replant with high-yielding seed and support their livelihood whilst those trees come to maturity. Those loans are equal to about IDR 240 billion. We further support those farmers with good economic practice, training and support and obviously offtaking their fruit.

Fire prevention, particularly, as we move into -- as Richard mentioned, the mild El Niño period, remains an important part of our operational practice and our outreach to communities. We were lucky or pleased to have virtually 0 fires in our own areas in 2018, and we also were able to extend our long-term fire prevention program to a further 15 villages, bringing the total to 32 villages in our most fire-prone areas, where we offer this program and support.

Biodiversity is another key area of focus for the palm sector as a whole. We renewed our decade-long partnership with Orangutan Foundation International, OFI, and aim to release another 60 orangutans by 2020. We have already released more than a hundred through this collaboration.

It's always gratifying to us when we are recognized for our efforts in what is a fairly competitive marketplace when it comes to corporate sustainability. In 2018, we were the recipient of several awards recognizing our efforts in corporate sustainability and governance. I'd like to particularly point out our winning the Singapore APEX Corporate Sustainability Award, our Best Supply Chain Reporting Award at the 2017 Asia Sustainability Reporting Awards, or ASRA. We were also shortlisted as finalist for those awards and hope to pick up more accolades next week at the ceremony. And we were runner up in Most Transparent Company Award in Agribusiness at the SIAS 19th Investors' Choice Awards.

We are continuously reporting and disclosing on a number of different indices. Last year, we debuted on the FTSE4Good ASEAN 5 and Developed Indexes. We continue to be a member of the SGX Sustainability Index. And we ranked sixth by the NUS-CGIO for best practices in sustainability reporting. It is an important way for us to benchmark our performance against others in the sector and industry more broadly. Thank you.

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Richard Fung, Golden Agri-Resources Ltd - Director of IR [3]

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Thank you, Anita.