Olam's Q2 Profit Falls 13% as Sales Volumes Drop

14 Feb 2014 --- Olam International Limited, a leading agri-business operating across the value chain in 65 countries, today reported its Q2 FY2014 and H1 FY2014 results with significant progress on the implementation of its strategic plan.

For the six months ended December 31, 2013 (“H1 FY2014”), Earnings Before Interest, Tax, Depreciation and Amortisation (“EBITDA”), Olam’s key metric for operating performance, improved 5.4% to S$564.8 million from the same period last year, reflecting margin expansion and improved operating efficiencies. The Group reported an 8.5% reduction in Profit After Tax and Minority Interests (“PATMI”) to S$180.5 million, while Operational PATMI, which excludes exceptional items, declined 2.6% to S$174.6 million. Sales volumes were down 5.3% in H1 FY2014 as compared to H1 FY2013, which had shown a record 71.9% growth over the prior period (H1 FY2012). These results include an overall reduction in the fair value of biological assets by S$44.2 million, from a net gain of S$32.2 million in H1 FY2013 to a net loss of S$12.0 million in H1 FY2014. The decline in Operational PATMI was primarily driven by higher depreciation and amortisation expenses at S$110.6 million compared to S$83.9 million in H1 FY2013 and an increase in tax expenses to S$27.4 million as compared to S$18.0 million (excluding exceptional items) for the prior corresponding period.

For the three months ended December 31, 2013 (“Q2 FY2014”), EBITDA was up 0.9% to S$315.9 million. PATMI was down 12.5% to S$134.9 million. Excluding exceptional items, Operational PATMI for Q2 FY2014 declined 5.2% to S$129.0 million. These results include an overall reduction in the fair value of biological assets by S$37.5 million, from a net gain of S$22.1 million in Q2 FY2013 to a net loss of S$15.4 million in Q2 FY2014. The decline in Operational PATMI was primarily driven by higher depreciation and amortisation expenses at S$49.8 million compared to S$40.0 million in Q2 FY2013 and an increase in tax expenses to S$19.6 million as compared to S$11.9 million (excluding exceptional items) for the prior corresponding period.

The Group showed significant improvements on its free cash flow generation with increase in net operating cash flows to S$582.3 million (H1 FY2013: S$511.1 million), reduction in fixed capital investments to S$262.4 million (H1 FY2013: S$469.6 million), lower increase in working capital to S$574.9 million (H1 FY2013: S$816.2 million) and continued execution of its strategic initiatives to unlock value and release cash.

Net gearing was 2.06 times at H1 FY2014, which was lower than the 2.21 times gearing at H1 FY2013.

Olam’s Group Managing Director and CEO, Sunny Verghese said: “We are pleased with the progress made in the first half of FY2014, both in terms of operating performance as well as execution against our four strategic priorities and six key pathways identified in our strategic plan. This is reflected in the EBITDA growth and improved cash flow generation for the period.

“We will continue to work on all these pathways to achieve our twin goals of pursuing profitable growth and generating positive free cash flow on a sustained basis.”

Olam has announced 10 strategic initiatives, of which five were completed as at end-H1 FY2014. These five completed initiatives have released cash of S$134.1 million, generated a P&L gain of S$36.1 million and added S$14.2 million to capital reserves. Out of these amounts, S$47.8 million of cash, S$5.9 million in P&L gains and S$14.2 million addition to capital reserves from two of the five completed initiatives were recognised in H1 FY2014.

The remaining five initiatives, which are expected to be completed in H2 FY2014, are likely to release further cash of approximately S$312.4 million, generate a P&L gain of approximately S$39.8 million and add approximately S$2.3 million to capital reserves. (A summary of the initiatives are described on pages 5 to 7 of the Management Discussion and Analysis.)

Olam’s Executive Director of Finance and Business Development, A. Shekhar said: “The performance during the first half was a mix of strong performance from Edible Nuts, Spices & Vegetable Ingredients, Wheat milling, Sugar refining, Dairy and Cocoa supply chain businesses, which was offset by below par performance in the upstream Dairy and Wood Products businesses.

“We are encouraged by the overall performance in this first year following the announcement of our revised strategic plan. The ability to grow our EBITDA by 5.4% on lower volumes is reflective of our focus on margin improvements from existing investments and extracting operating efficiencies across the business. This demonstrates the competitive position built across several of our platforms and gives us further confidence that we will meet our growth targets for FY2014 and beyond.”

The Edible Nuts, Spices & Vegetable Ingredients segment registered a year-on-year volume growth of 2.3% and EBITDA growth of 27.0% in H1 FY2014. The almond and dehydrated onion businesses were the key contributors, with the US tomato processing business also seeing a turnaround. The US vegetable ingredients business also performed well during the period. Businesses in the segment which underperformed were the upstream peanut business in Argentina and the mechanical cashew processing operations in Nigeria.

The Confectionery & Beverage Ingredients segment saw a marginal decline in volume of 2.8% and a 13.0% decline in revenues because of a steep decline in coffee prices. EBITDA grew 6.8%, led by higher contribution from the Cocoa supply chain and the midstream soluble coffee business.

Sales volume for Food Staples & Packaged Foods fell by 5.5% and revenues declined by 8.5% mainly due to lower volumes and prices for its Grains and Rice businesses after an exceptionally strong H1 FY2013. EBITDA declined by 16.8% due to a combination of lower Grains and Rice volumes, lower Rice margins and continued operational challenges in the upstream Dairy business.

The Industrial Raw Materials segment saw volumes drop 11.9% while turnover declined by 18.1%. EBITDA increased 19.4% mainly on the back of better Cotton volumes and margins than a year ago. While the Cotton business registered good growth, the restructuring of the Wood Products business and reduced participation in Fertiliser tenders impacted overall growth in the segment.

Commodity Financial Services narrowed its EBITDA loss to S$8.5 million in H1 FY2014 from a S$16.8 million loss in H1 FY2013.

Mr. Verghese said: “I believe we are on track to generate earnings growth and achieve positive free cash flow to firm for the full year FY2014. We will continue to stay focused on executing our three year strategic plan.”