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Review of Group Performance
Overview: The Group reported higher palm outputs for full year 2017 with nucleus FFB increased by 4% to 3,109,000 tonnes in FY2017. For the commodity prices, Rotterdam CIF crude palm oil (CPO) prices stayed firm at an average of US$717 per tonne in FY2017, increasing 2% over FY2016. Rubber prices (RSS3 SICOM) also recovered 21% to an average of US$2,001 per tonne in FY2017, which was supported by a tighter supply arising from higher rainfalls in Thailand.
In 4Q2017, the Group recorded lower revenue and profit mainly due to lower contribution from the Plantation Division and 4Q16 included a one-off gain. On full year basis, total revenue grew by 9% mainly due to higher sales contributions from the Plantation and EOF Divisions, while net profit after tax declined 18% to Rp653 billion. The decline was mainly attributable to lower gross profit arising from higher palm production costs, negative effects from foreign currency fluctuations, changes in fair values of biological assets and the absence of a one-off gain.
Revenue: In 4Q2017, the Group revenue declined 16% to Rp3.6 trillion due to lower sales from the Plantation Division. On full year basis, the Group reported revenue of Rp15.8 trillion, increasing 9% over FY2016 on higher sales contribution from both Plantation and Edible Oils & Fats (EOF) Divisions.
Plantation Division reported a 10% revenue decline in 4Q2017 on lower sales volume of palm products (i.e. crude palm oil ("CPO") and palm kernel ("PK") related products) and lower sugar sales, this was partly offset by higher selling prices of palm products. FY2017 revenue grew 12% over last year, reflecting mainly the effects of higher sales volume and average selling prices of palm products, but this was partly offset by lower sugar sales. Our sugar production in South Sumatra reported a 25% decline mainly due to high rainfall in 2016 and 2017 which affected the sucrose content and harvesting activities. In addition, the extended harvest period in 2016 also affected the cane yield for the current season.
EOF Division's revenue growth by 5% in 4Q2017 and 8% in FY2017. This was mainly due to higher sales of cooking oil and margarine products. The improvement was attributed to competitive pricing and heightened marketing activities such as brand campaigns and tactical promotions.
Gross Profit: The Group's 4Q2017 gross profit declined 49% to Rp729 billion due to the effects of lower sales volume of palm products and higher palm production costs arising from higher fertilizer application. On full year basis, gross profit decreased 8% to Rp3,195 billion on higher palm production costs and lower profit contribution from sugar operation in Indonesia.
Selling and Distribution Expenses (S&D): The Group reported higher S&D in 4Q2017 and FY2017, increasing 15% and 10% over the comparative periods in 2016. This was mainly due to higher advertising and promotion expenses and other selling expenses relating to promotions to drive sales, as well as higher freight cost arising from CIF shipment.
General and Administrative Expenses (G&A): The Group reported lower G&A in 4Q2017 mainly due to lower of salaries and employee benefits. On full year basis, the higher G&A was mainly attributable to higher salaries and employee benefits and rent expenses.
Other Operating Income: The Group reported lower other operating income in FY2017 mainly attributable to a Rp107 billion claim from a contractor for a significant delay in the completion of a turn-key project recognised in 4Q2016.
Other Operating Expenses: The Group recognised higher other operating expenses in 4Q2017 due to allowance impairment of an available-for-sale investment (i.e. Heliae). This was partly offset by lower provision of unrecoverable advances and net change in provision for uncollectible and changes in amortised cost of plasma receivables. On full year basis, other operating expenses were slightly declined against last year.
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 losses of Rp12 billion and Rp14 billion in 4Q2017 and FY2017 respectively as the Indonesian Rupiah weakened against US Dollar during the periods. Whereas in FY2016, the Group recognised foreign currency gains of Rp94 billion as the Indonesian Rupiah strengthened against US Dollar.
Share of Results of Associate Companies: The Group recognised Rp18 billion loss from share of results of associate companies in FY2017 compared to Rp67 billion losses in FY2016. The improved result was mainly due to the discontinuation of equity accounting for Heliae due to loss of significant influence since Oct 2016. The Group has now recorded Heliae as an available-for-sale financial asset.
Share of results of a joint venture: In Brazil, our sugar operations under CMAA had a record year crushing 4.1m MT of cane, achieving over 100% of its operating capacity. The Group recognised higher contribution from its 50% interest in CMAA, reversing from a loss position of Rp33 billion in FY2016 to Rp139 billion profit in FY2017. The significant improvement was principally due to higher selling prices, higher production and lower foreign currency impacts.
Gain Arising from Changes in Fair Values of Biological Assets: The Group reported Rp35 billion biological assets gain in FY2017 compared to Rp219 billion in FY2016 mainly attributable to lower selling prices and lower production volume of growing produce for palm trees (i.e. FFB).
Profit from Operations: The Group recorded a 68% decline in 4Q2017 profit from operations, owing largely to lower gross profit and the absence of a one-off gain. The profit decline was partly offset by lower foreign currency losses.
On full year basis, profit from operations declined 26% on lower gross profit, negative effects from foreign currency fluctuations and the absence of a one-off gain. This was partly offset by the improved results from associates and CMAA.
Income Tax Expense: The Group recognised lower income tax expenses in 4Q2017 and FY2017 on lower operating profit. However, the effective tax rate in FY2017 remained high at 43% due to nondeductible expenses, the write-off of certain tax losses carried forward and losses from certain entities which are not available for set-off against profit from other group's entities.
Net Profit After Tax (NPAT): 4Q2017 NPAT declined 73% on lower operating profit as explained above. On full year basis, the Group's NPAT declined by 18% over FY2016. Core profit excluding the effects of foreign currency fluctuations, changes in fair values of biological assets and a one-off gain was Rp640 billion in FY2017, increasing 37% over FY2016.Review of Financial Position
Total non-current assets increased slightly to Rp30.0 trillion at year end 2017 compared to Rp29.7 trillion in December 2016. The increase was attributable to share of profit from CMAA during the year, and investments in associates of Rp104 billion in PT Indoagri Daitocacao (Daitocacao) and Rp245 billion in Asian Assets Management Pte. Ltd. (AAM). This was partly offset by lower property, plant and equipment, income tax refunds, and lower advances for projects.
As of 31 December 2017, total current assets were Rp7.4 trillion compared to Rp6.8 trillion at December 2016. The increase was mainly attributable to higher trade and other receivables, higher biological assets relating to agriculture produce and cash levels. This was partly offset by lower advances and prepayments and inventories.
Total current liabilities were Rp6.4 trillion at end December 2017, increasing 37% or Rp1.7 trillion over December 2016. This was mainly attributable to higher trade payables relating to purchases of raw materials and fertilizer, and drawdowns of short-term working capital facilities to support the refinery and sugar operation and certain long-term facilities maturing in 2018. This was partly offset by lower advances from customer and lower income tax payable.
As of 31 December 2017, total non-current liabilities came in Rp9.6 trillion, lower than Rp11.0 trillion at end December 2016. This decline was mainly due to lower long-term loan facilities arising from payment of loan installments and the maturity of certain long-term facilities in 2018, lower amounts due to related parties and lower deferred tax liabilities. This was partly offset by higher estimated liabilities for employee benefits which was determined based on the actuarial calculations in accordance with the provisions of the Indonesian Labor Law.Review of Cash Flows
The Group generated positive net cash flows from operations of Rp132 billion in 4Q2017, but this was significantly lower than 4Q2016 due to lower profit from operations and higher working capital during the quarter. On full year basis, net cash flows from operations of Rp1,949 billion were slightly lower than Rp2,036 billion in FY2016.
Net cash flows used in investing activities in FY2017 were Rp1,726 billion, which comprised principally (i) capital expenditure relating to additions of property, plant and equipment, and bearer plants; and (ii) investments in associates, Daitocacao and AAM. These investing activities were mainly funded by cash generated from operations and partially from bank borrowings.
Net cash flows generated from financing activities were Rp295 billion in FY2017. These were related to proceeds from interest-bearing loans and borrowings to fund the operations.
The net cash increase in FY2017 was Rp518 billion, increasing the Group's cash levels from Rp2,405 billion at end December 2016 to Rp2,930 billion at end December 2017.
Agricultural commodity prices will continue to remain volatile driven by mixed fundamentals and global developments. 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. The ongoing fiscal reforms in Indonesia in the areas of infrastructure and social security, and large domestic consumption with Indonesia being the second largest consumer of palm oil globally, will continue to support our operations.
The Group will continue to strengthen the fundamentals and improve margins through better yielding crops, cost control measures and other innovations to improve productivity.