Olam Q2 Profit Nearly Triples on Strong Food Business Performance

14 Aug 2015 --- Olam International has reported that its net profit for the second quarter surged 197.6 per cent, mainly due to a spike in earnings from its food units. The Singapore-based agricultural firm said that its second-quarter earnings rose 6.1 percent.

Olam, which handles products including edible nuts, coffee, cotton and packaged foods, posted earnings before interest, tax, depreciation and amortisation (EBITDA) of S$285.1 million ($204 million). Net profit of S$94.7 million was more than double the figure from a year earlier.

Sales volumes and revenues declined 17.0% and 16.4% respectively as part of the Company’s strategy to grow in prioritised platforms while reducing volumes or exiting lower-margin businesses.

The results included a net loss of S$19.2 million on the fair valuation of biological assets compared to a net gain of S$17.1 million in Q2 2014.

For H1 2015, Olam demonstrated its strong underlying fundamentals as Operational PATMI increased by 48.3% year-on-year to S$223.7 million. Reported PATMI declined 70.6% from S$428.0 million a year ago to S$126.0 million largely because of the previously reported exceptional items during the two periods. In H1 2014, Olam booked net exceptional gains of S$277.2 million from the revaluation of Olam’s stake in PureCircle Limited and the sale-and-leaseback of its Australian almond assets, while H1 2015 included a net exceptional loss of S$97.7 million mainly from the buyback of bonds, which is expected to generate cost savings of S$55-60.0 million annually over the next three years.

EBITDA grew 1.9% year-on-year to S$615.2 million as growth from three of its five business segments was offset by a decline in contribution from the Food Staples & Packaged Foods and Industrial Raw Materials segments.

Sales volumes and revenue were lower by 25.7% and 13.8% respectively than a year ago as Olam continued to execute on its business strategy and grow in prioritised platforms while it reduced volumes or exited from lower-margin businesses.

The results included a net loss of S$33.9 million on the fair valuation of biological assets compared to a net gain of S$8.4 million in H1 2014.

Olam has completed 20 strategic initiatives under its strategic plan announced in April 2013, which released cash of S$966.1 million, generated a P&L gain of S$125.2 million and added S$154.2 million to capital reserves. This includes the sale of a 25.0% stake in the Packaged Foods business to Sanyo Foods, which was completed in Q1 2015, releasing cash of S$219.1 million and adding S$106.2 million to reserves.

Olam’s Co-Founder, Group Managing Director and CEO, Sunny Verghese said: “Our strong performance despite the current depressed macroeconomic climate is testament to our disciplined focus on executing our strategic plan. We continue to expand selectively in prioritised platforms while reducing our presence or exiting from lower-margin businesses.”

“We remain focused on pursuing profitable growth and are excited by the growth opportunities offered by the transformational acquisitions of McCleskey Mills, which has already started to contribute to earnings, and of ADM’s cocoa business, which is expected to be completed in Q4 2015.”

Olam’s Executive Director of Finance and Business Development, A. Shekhar said: “We are pleased with the overall execution against our plan and the fact that most of our platforms continued to deliver EBITDA growth in H1 2015. We stay focused on taking decisive actions to manage the few underperforming profit centres, especially the Dairy farming operations in Uruguay. Besides driving profitable growth, we also delivered positive Free Cash Flow to Firm during this period despite having a larger Capex outflow on account of the acquisition of McCleskey Mills. We are making good progress on our debt optimisation, which has clearly contributed to the improved bottom line performance.”

The Edible Nuts, Spices & Vegetable Ingredients segment posted a 6.5% year-on-year growth in revenue in H1 2015 despite a 9.4% decline in volumes as prices of almonds, hazelnuts and cashew increased. The lower volumes were primarily due to lower tomato paste and dehydrated vegetable volumes in the US following the closure of a plant in California, and lower cashew volumes from the closure of the processing plant in Nigeria.

EBITDA grew 16.4% over the previous corresponding period as the almond business and the Spices & Vegetable Ingredients business in the US continued to show strong growth. Earnings from the consolidation of MMI offset the underperformance of the Argentinean peanut business that was caused by lower prices and the adverse impact of currency.

The Confectionery & Beverage Ingredients segment recorded a 17.6% increase in revenue and a 17.1% increase in combined volumes from Cocoa and Coffee as cocoa prices increased compared to H1 2014. EBITDA grew by 8.9% with increased contribution from both Cocoa and Coffee.

Food Staples & Packaged Foods volumes and revenue fell 35.1% and 41.0% respectively on the back of the deconsolidation of the Grains business in Australia and the discontinued operation in South Africa.

The Grains milling business in West Africa, the Sugar trading and the Rice distribution business performed well during the period. However, segment EBITDA declined by 14.9% due to reduced volumes from the discontinued operations, continued underperformance of the Dairy farming operations in Uruguay and the impact of currency devaluation on the Packaged Foods business in Nigeria and the Palm refining business in Mozambique. The segment also recorded a lower contribution from its SIFCA associate due to lower palm prices.

Given the continued underperformance of the Dairy farming operations in Uruguay, Olam has decided to further restructure this business and defer its planned processing investment there. These actions are likely to result in a one-time restructuring cost in H2 2015.

Despite the recent volatility in the commodity and currency markets, Olam believes its diversified portfolio with leadership positions in many segments provides a resilient platform to navigate these uncertainties.