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Overview: The Group reported weak 2Q2018 and 1H2018 results due to lower sales arising from the build-up of crude palm oil (CPO) inventory as of end June 2018 and weaker commodity prices. Rotterdam CIF CPO prices decreased 7% to an average of US$665 per tonne in 1H2018 from US$717 per tonne in FY2017. Rubber prices (RSS3 SICOM) also decreased by 16% to an average of US$1,680 per tonne in 1H2018 compared to US$2,001 per tonne in FY2017.
The Group's 2018 results were also further affected by a foreign currency loss arising from the weakened Indonesian Rupiah. This was partly offset by lower loss arising from changes in fair value of biological assets. The group reported net loss after tax of Rp99 billion and Rp46 billion in 2Q2018 and 1H2018 compared to profit positions in the comparative periods last year. 1H2018 core net profit (excluding forex and biological assets impacts) was Rp54 billion, declining 88% against 1H2017.
Revenue: The Group consolidated revenue (after elimination of inter-segment sales) decreased 18% and 23% respectively in 2Q2018 and 1H2018. This was mainly due to lower external sales contributions in Plantation and Edible Oils & Fats (EOF) Divisions. In particular, Plantation sales were affected by ~29,000 MT of CPO inventory build-up in 1H2018 compared to ~36,000 MT of inventory drawdown in 1H2017, and lower CPO sales to external parties.
Plantation Division's fresh fruits bunches (FFB) nucleus and CPO production recovered in 2Q2018, growing 8% over 2Q2017. On year-to-date basis, FFB nucleus increased 1% but CPO production declined 2% on lower purchase of FFB from external parties. Plantation Division reported 13% and 25% revenue decline in 2Q2018 and 1H2018 due to lower average selling prices and sales volume of CPO, palm kernel (PK) and rubber. Notably CPO sales volume were affected by the timing in CPO stock realisation.
EOF Division's revenue decreased by 6% in 2Q2018 and 1H2018 mainly due lower edible oils selling prices arising from lower CPO costs.
Gross Profit: The Group's gross profit declined 20% and 30% in 2Q2018 and 1H2018 respectively mainly due to the effects of lower sales volume and selling prices of palm products.
Selling and Distribution Expenses (S&D): The Group reported lower S&D in 2Q2018 and 1H2018 mainly due to lower distribution expenses and A&P.
Other Operating Income/(Expenses): The Group reported lower other operating income in 2Q2018 and 1H2018 mainly due to lower miscellaneous income. Other operating expenses came in lower than the comparative periods in last year mainly due to provision of unrecoverable advances in 2017.
Foreign Exchange (Loss)/ Gain: The foreign exchange impacts were principally attributable to the translation of US dollar denominated loans, assets and liabilities. The Group recognized foreign currency loss of Rp99 billion in 1H2018 compared to Rp20 billion gain in 1H2017. The foreign currency loss in 1H2018 was mainly due to the weakening of Indonesian Rupiah against US Dollar to Rp14,404/US$ as of 30 June 2018 versus Rp13,548/US$ at the end December 2017.
Share of Results of Associate Companies: The Group recognised Rp11 billion gain on share of results of associate companies in 1H2018 compared to Rp7 billion in 1H2017. The higher gain was mainly attributable to FPNRL whose main operations are a sugar business in the Philippines.
Share of results of a joint venture: In Brazil, our sugar operations under CMAA reported lower profit 2Q2018 and 1H2018 mainly due to lower selling prices and volume of raw sugar.
Gain/ (Loss) Arising from Changes in Fair Values of Biological Assets: The Group reported Rp11 billion biological assets loss in 1H2018 compared to Rp85 billion in 1H2017. The biological assets loss was mainly due to lower selling prices of FFB and partly offset by higher volume.
Profit from Operations: The Group recorded lower profit from operations in 2Q2018 and 1H2018, owing largely to lower gross profit and foreign currency loss. This was partly offset by positive net changes in fair value of biological assets.
Income Tax Expense: The Group recognizes lower income tax expenses in 1H2018 on lower operating profit. However, the high effective tax rate of 149% in 1H2018 was due to non-deductible expenses and the Company's unrealised foreign exchange loss, and the write-off of certain tax losses carried forward.
Net (Loss)/ Profit After Tax: The Group reported net losses after tax in 2Q2018 and 1H2018 compared to profits in the comparative period in last year. As a result, this led to attributable losses to equity holders in 2Q2018 and 1H2018.Review of Financial Position
As of June 2018, total non-current assets Rp30.2 trillion were slightly higher than the previous year end. The increase mainly due to investment in a joint venture, Canapolis Holding S.A. (Canapolis) of BRL 23.6 million (approximately Rp100 billion), investment in an associate, Daitocacao of Rp105 billion, higher plasma projects and higher advances and prepayments.
The Group reported a 16% increase in total current assets to Rp8.5 trillion as of end June 2018. The increase was mainly attributable to (i) higher inventories arising from higher palm products and fertilisers; (ii) higher advances for the purchase of raw materials (i.e. CPO) and prepaid expenses and prepaid taxes ;and (iii) higher trade and other receivables. This was partly offset by lower cash levels.
Total current liabilities were at Rp10.3 trillion as at June 2018, increasing 61% compared to last year mainly attributable to the drawdown of short-term working capital facilities, higher current maturities of long-term facilities and accruals.
The Group reported net current liabilities of Rp1.7 trillion in June 2018 arising from higher current maturities of long-term facilities. The Group expects to refinance these maturing facilities as they fall due.
Total non-current liabilities were at Rp7.4 trillion as of 30 June 2018, declining 23% compared to December 2017. This was mainly due to lower long-term loan facilities arising from payment of loan installments and higher current maturities of long-term facilities.Review of Cash Flows
The Group generated net cash flows from operations of Rp105 billion in 1H2018 compared to Rp510 billion in 1H2017 mainly due to lower profit from operating activities.
Net cash flows used in investing activities in 1H2018 was Rp1.1 trillion compared to Rp760 billion in 1H2017 mainly due to investment in a joint venture, Canapolis and an associate, Daitocacao, as well as higher funding for plasma projects.
Net cash flows generated from financing activities were Rp815 billion in 1H2018 compared to Rp372 billion in 1H2017. The increase was mainly due to the drawdown of short-term facilities to fund capital expenditures and working capital.
The Group's cash levels decreased from Rp2,930 billion at end December 2017 to Rp2,817 billion at June 2018.
The recent trade war has led to some uncertainty on agricultural commodity prices. As a diversified and vertically integrated agribusiness with a dominant presence in Indonesia, our operations continue to be supported by a positive domestic economic outlook and large domestic palm consumption. The domestic palm demand is expected to be further supported by the Indonesian government's intention to accelerate the implementation of B30 biodiesel program in 2019.
The Group will continue to strengthen the fundamentals and improve margins through better yielding crops, cost efficiencies and other innovations to improve productivity.