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Review of Group Performance
Overview: Despite higher production volumes of crude palm oil (CPO) and higher volume of edible products by our EOF division, the Group posted lower results in 4Q2018 mainly due to significantly lower profit in the Plantation Division arising from weak commodity prices. Our FY2018 results were likewise affected by lower commodity prices and also the timing of shipments of CPO.
CPO prices CIF Rotterdam in FY2018 was at an average of US$601 per tonne as compared to US$717 per tonne in 2017. This was due to the ongoing China-US trade war, the Chinese government has put tariffs on US soybeans and caused soybean prices to tumble. Along with the decreasing soybean prices, rising production and higher year end-stocks against a weakening global demand for palm oil have put CPO prices under pressure.
The Group's performance was further affected by foreign currency losses arising from the weakening Indonesian Rupiah, impact arising from business combination under common control using book value instead of fair value, lower profit contribution from joint ventures and fair value loss on biological assets. The Group reported a net loss after tax of Rp427 billion in FY2018 compared to Rp653 billion net profit after tax in 2017.
Revenue: The Group's revenue (after elimination of internal sales) increased 7% and to Rp3.8 trillion in 4Q2018 mainly attributable to sales growth in EOF Division and higher external sales in Plantation Division. On full year basis, the Group's revenue declined 11% on lower Plantation Division sales, but this was partly offset by sales growth in EOF Division.
Plantation Division continued to report strong production recovery in 4Q2018 with fresh fruit bunches (FFB) nucleus and CPO increasing 17% and 20% over 4Q last year. On full year basis, FFB nucleus and CPO production grew 9% respectively to 3,375,000 MT and 921,000 MT. Despite higher palm production, Plantations Division's FY2018 revenue declined 15% due to lower average selling prices of agriculture crops.
Gross Profit: Despite higher sales volume of palm products (i.e. CPO and palm kernel related products), 4Q2018 gross profit declined 42% mainly due to lower palm product prices (CPO -27%, PK -47%). On full year basis, gross profit declined 28% due to the effect of lower selling prices of palm products (CPO - 15%, PK -21%). Lower plantation gross profit in 4Q2018 and FY2018 was partly offset by higher profit contribution from EOF Division.
Selling and Distribution Expenses (S&D): The Group reported higher S&D in 4Q2018, increasing 21% over 4Q2017 mainly due to higher advertising and promotion expenses. On full year basis, S&D increased 3% over prior year.
General and Administrative Expenses (G&A): The Group reported lower G&A in 4Q2018 and FY2018 mainly due to lower salaries and wages and rent expenses.
Other Operating Expenses: Other operating expenses in 4Q2018 and FY2018 were lower compared to last year mainly due to the impairment of an available-for-sale investment (Heliae) and the write-off of an unrecoverable advance in 2017.
Foreign Exchange Gain/ (Loss): The foreign exchange impacts were principally attributable to the translation of US dollar denominated loans, assets and liabilities. The Group recognized foreign currency losses of Rp118 billion in FY2018 compared to Rp14 billion in FY2017. The higher loss was mainly due to the weakening of Indonesian Rupiah against US Dollar to Rp14,481/US$ as of 31 December 2018 versus Rp13,548/US$ as of 31 December 2017. The Group has reduced its USD loan exposure through repayment of certain USD loan facilities in 2018, lowering its USD loan mix to 10% or USD75 million as of end December 2018.
Share of results of Associate Companies: The Group recognized Rp8 billion loss from share of results of associate companies in FY2018 compared to Rp18 billion loss in FY2017. The improved results in 4Q2018 and FY2018 were mainly due to lower losses in FPNRL.
Share of results of Joint Ventures: The share of profit from joint ventures in Brazil sugar operations, CMAA was lower due to falling sugar prices. This was partially offset by a higher contribution from ethanol as CMAA increased ethanol production during the year. The Company's share of CMAA's profit was Rp29 billion in FY2018 compared to Rp139 billion in FY2017.
(Loss)/ Gain Arising from Changes in Fair Values of Biological Assets: The Group recognized a fair value loss of Rp31 billion in FY2018 compared to Rp35 billion gain in FY2017. The fair value loss in FY2018 was mainly due to lower selling prices of FFB.
Impact Arising from Business Combination Under Common Control: In July 2018, the Company's 50% joint venture, CMAA acquired Vale do Pontal Açucar e Alcool Ltda (UVP) through the issuance of new shares to the seller, JFLIM Participações S/A (JFLIM) based on an agreed amount of approximately BRL 75.9 million (equivalent to US$19.7 million). Post the issuance of new shares, CMAA will be 35% each owned by the Company and JF Family, and 30% by JFLIM. The Company will continue to adopt equity accounting for CMAA as UVP is jointly controlled by these 3 shareholders under the shareholder agreement. Based on the Group's accounting policy for business combination under common control, book value is applied in computing the dilution gain/ loss instead of fair value. As a result, the Company recognised a loss of Rp87 billion on the dilution from 50% to 35%.
Profit from Operations: 4Q2018 posted a lower profit from operations of Rp49 billion compared to Rp374 billion in 4Q2017. The decline was mainly due to lower gross profit, lower share of results from joint ventures, and biological loss. On full year basis, Profit from operations declined 61% over last year, owing largely to the same reasons and higher foreign currency loss.
Financial Expenses: The Group's financial expenses increased 27% and 11% in 4Q2018 and FY2018 mainly due to higher working capital facilities, and higher blended interest rate in line with the interest rate hikes by the US Fed and the Bank of Indonesia.
Income Tax Expense: The Group recognised lower income tax expenses in FY2018 in line with lower operating profit. However, the effective tax rates remained high mainly due to non-deductible expenses, write-off of expired tax losses and allowance of tax losses carried forward of Rp276 billion in FY2018.
Net (Loss)/ Profit After Tax: The Group reported net losses after tax of Rp362 billion in 4Q2018 and Rp427 billion in FY2018 compared to profits in the comparative period in last year. This was mainly due to lower results from operations and higher financial expenses.
Core loss (excluding forex, biological assets and plasma receivables impacts) was Rp186 billion in FY2018 versus a core profit of Rp657 billion in last year.Review of Financial Position
The Group reported total non-current assets of Rp30.4 trillion as of December 2018, compared to Rp30.0 trillion in the previous year. The slight increase was mainly due to (i) investment in a joint venture, Canapolis Holding S.A.(Canapolis) of approximately US$7.3 million. This was partly offset by a dilution impact of Rp87 billion arising from business combination under common control using book value instead of fair value for the acquisition of UVP; (ii) investment in an associate, Daitocacao of Rp105 billion; (iii) higher advances for plasma plantation project; and (iv) higher claims for tax refund. This was partly offset by lower deferred tax assets.
As of December 2018, total current assets of Rp7.1 trillion came in slight lower compared to Rp7.4 trillion in FY2017. The was mainly attributable to lower cash levels used for operations and working capital purposes, but partly offset by (i) higher inventories due to higher CPO and palm kernel oil and partly offset by lower sugar stocks; (ii) higher prepaid vat taxes; and (iii) higher trade and other receivables in line with higher edible oils & fats sales.
Total current liabilities increased to Rp9.0 trillion in December 2018 compared to Rp6.4 trillion in last year end. This was mainly attributable to (i) a net drawdown of Rp0.5 trillion of short-term facilities for working capital; (ii) higher portion long-term facilities falling due within the next 12 months of Rp1.7 trillion; and (iii) higher accrual of expenses and payables to third parties of Rp0.2 trillion.
The Group reported net current liabilities of Rp1.9 trillion in December 2018 as certain long-term facilities falling due within the next 12 months. These facilities are expected to be rollover and/or refinanced when they fall due.
Total non-current liabilities were at Rp7.6 trillion as of December 2018, declining 21% from Rp9.6 trillion in December 2017. This was mainly due to lower long-term loan facilities arising from payment of loan installments and maturities of certain long-term facilities.Review of Cash Flows
The Group generated lower net cash flows from operations in FY2018 of Rp1,148 billion mainly due to soft operating results.
Net cash flows used in investing activities in FY2018 was Rp2,217 billion compared to Rp1,708 billion in FY2017. The increase was mainly due to higher additions to property, plant and equipment of Rp322 billion and higher plasma projects of Rp134 billion. This was partly offset by lower investment in a joint venture and an associate company of Rp140 billion.
Net cash flow generated from financing activities was Rp338 billion. These were mainly related to proceeds from interest-bearing loans and borrowings to fund the operations.
The Group's cash levels decreased from Rp2,930 billion at end December 2017 to Rp2,229 billion at December 2018. The cash decline was mainly due to the usage of fund for capital expenditures and investments in a joint venture and an associate company during the year. The Group will continue to review financing options to lower its interest costs, as well as manage its cash flow through the tightening of collections and by minimising inventories.
The ongoing economic uncertainties arising from US-China trade tensions is putting a lot of price pressure on agricultural commodities. CPO prices will remain volatile with demand projected from key import markets like China and India, together with the relative price of crude oil which affects biodiesel demand. Our operations continue to be supported by the large domestic consumption and economic conditions in Indonesia.
The domestic palm demand is expected to be further supported by the roll-out of B20 (20%) biodiesel blending in September 2018 to both Public Service Obligation (PSO) and non-PSO sector and the Indonesian government's intention to accelerate the implementation of B30 biodiesel program in 2019.
We are progressively developing the immature estates and replanting older oil palm trees in Riau and North Sumatra. As a price taker, our plantations must always be a low-cost producer, and so we will continue to optimise the value chain, increase agricultural outputs, improve cost control and raise plantation productivity.