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Review of Group Performance
Overview: The Group reported revenue growth of 5% in 3Q2017, but profit attributable to equity holders declined 37% mainly attributable to lower selling prices of palm products, higher operating expenses and foreign currency fluctuations. Our 9M2017 result remained positive with 19% revenue growth and 31% increase in attributable profit.
The Group's palm oil output recovered from the El-Nino drought with 9M2017 FFB nucleus and CPO production increasing by 12% and 9% yoy to 2,317,000 tonnes and 626,000 tonnes, respectively. Despite higher production, Rotterdam CIF crude palm oil (CPO) prices remained relatively firm at an average of US$722 per tonne in 9M2017 compared to US$686 per tonne in 9M2016. Rubber prices (RSS3 SICOM) recovered strongly to an average of US$2,136 per tonne in 9M2017 compared to US$1,554 per tonne in 9M2016, which was supported by tighter supply arising from higher rainfalls in Thailand.
Revenue: The Group reported consolidated revenue (after elimination of inter-segment sales) of Rp3.7 trillion in 3Q2017, increasing 5% over 3Q2016 on higher sales contribution from the Plantation Division. On year-to-date basis, the Group achieved 19% revenue growth to Rp12.3 trillion driven by higher sales from both Plantation and Edible Oils & Fats (EOF) Divisions.
Plantation Division achieved a 3% revenue growth in 3Q2017 on higher sales volume of palm products (i.e. crude palm oil ("CPO") and palm kernel ("PK") related products), but partly offset by lower selling prices of palm products and lower sugar sales. 9M2017 revenue grew 21% over the same period 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.
EOF Division's revenue declined slightly by 2% in 3Q2017. On year-to-date basis, revenue grew 10% on higher sales of edible oil and stearin products.
Gross Profit: The Group's gross profit declined 11% to Rp748 billion in 3Q2017 due to the effects of lower selling prices of palm products and higher palm production costs arising from higher fertilizer application, as well as lower sugar sales. On year-to-date basis, gross profit increased 19% to Rp2,466 billion on higher sales volume and selling prices of palm products, but partly offset by lower profit contribution from EOF Division and the sugar operation in Indonesia.
Selling and Distribution Expenses (S&D): The Group reported higher S&D in 3Q2017, increasing 35% over 3Q2016. 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. On year-to-date basis, S&D increased 9% for similar reasons.
General and Administrative Expenses (G&A): The Group reported higher G&A in 3Q2017 and 9M2017 mainly due to higher salaries and employee benefits.
Other Operating Income: The Group reported higher other operating income in 9M2017 mainly attributable to research services.
Other Operating Expenses: The Group recognised lower other operating expenses in 3Q2017 and 9M2017 which were mainly due to lower plasma expenses and amortised cost adjustment of plasma receivables. This was partly offset by provision of unrecoverable advances.
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 Rp21 billion and Rp2 billion in 3Q2017 and 9M2017 respectively as the Indonesian Rupiah weakened slightly against US Dollar during the year. Whereas in 2016, the Group recognised foreign currency gains of Rp40 billion and Rp191 billion in 3Q2016 and 9M2016 as the Indonesian Rupiah strengthened against US Dollar.
Share of Results of Associate Companies: The Group recognised Rp4 billion profit from share of results of associate companies in 9M2017 compared to Rp38 billion losses in 9M2016. The improved results arose from profit contribution from Roxas, the largest integrated sugar business in the Philippines and 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: The Group reported higher contribution from its sugar operation in Brazil, CMAA, reversing from a loss position of Rp72 billion to Rp97 billion profit in 9M2017. The significant improvement was principally due to higher selling prices, higher production and lower foreign currency impacts.
Gain/ (Loss) Arising from Changes in Fair Values of Biological Assets: The Group reported Rp39 billion biological assets loss in 9M2017 mainly attributable to lower selling prices of FFB and sugar cane compared to December 2016.
Profit from Operations before Biological Assets Gain/ (Loss): Profit from operations declined 35% in 3Q2017 on lower gross profit, higher operating expenses and foreign currency fluctuations. This was partly offset by improved results from CMAA. On year-to-date basis, profit from operations grew 38% in 9M2017 on higher contribution from Plantation Division and improved results from associates and CMAA. This was partly offset by negative effects from foreign currency fluctuations.
Income Tax Expense: The Group recognised lower income tax expenses in 3Q2017 on lower operating profit. In 9M2017, income tax was higher in line with higher operating profit. Effective tax rate in 9M2017 remained high at 42% due to non-deductible 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): 3Q2017 NPAT declined 37% on lower operating profit as explained above. On year-to-date basis, the Group's NPAT grew strongly by 74% over 9M2016. Core profit excluding the effects of foreign currency fluctuations and changes in fair values of biological assets was Rp553 billion in 9M2017 compared to Rp50 billion in 9M2016.
Review of Financial Position
Total non-current assets increased to Rp30.0 trillion at end September 2017 compared to Rp29.7 trillion in December 2016. The increase was attributable to share of profit from CMAA, 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 30 September 2017, total current assets were Rp7.0 trillion at end September 2017 compared to Rp6.8 trillion at December 2016. The increase was mainly attributable to higher prepayments relating to salaries and benefits, higher prepaid income tax and cash levels. This was partly offset by lower biological assets relating to agriculture produce.
Total current liabilities were Rp5.0 trillion at end September 2017, increasing 8% or Rp0.4 trillion over December 2016. This was mainly attributable to higher trade payables relating to purchases of raw materials and fertilizer, as well as higher short-term working capital facilities. This was partly offset by lower advances from customer and lower income tax payable.
As of 30 September 2017, total non-current liabilities came in Rp10.8 trillion, slightly 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 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 Rp1,279 billion in 3Q2017 and Rp1,817 billion in 9M2017 mainly due to improved working capital.
Net cash flows used in investing activities in 3Q2017 and 9M2017 were Rp566 billion and Rp1,354 billion respectively, 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 partly from bank borrowings.
Net cash flows used in financing activities were Rp652 billion and Rp280 billion in 3Q2017 and 9M2017 respectively. These were related to repayments of short-term facilities and payment of loan installments, as well as payment of dividends to shareholders.
The net cash increase in 9M2017 was Rp183 billion, increasing the Group's cash levels from Rp2,405 billion at end December 2016 to Rp2,590 billion at end September 2017.
Agricultural commodity prices remain volatile driven by mixed fundamentals and global developments. Among others, the recovery of palm output from the El-Nino drought, higher supply forecasts for other competing vegetable oil, slower demand growth from key markets such as China and geopolitical uncertainties. In addition, the EU, the third largest palm import market, has recently voted to apply stricter regulations over certified and sustainable vegetable oil and to phase-out the use of vegetable oils such as palm oil, soy and rapeseed for biofuels by 2020. Nonetheless, longer term palm prices are expected to be supported by slower production growth arising from slowing down of new plantings.
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 the areas of infrastructure and social security, and large domestic consumption. Notably, Indonesia has overtaken India as the largest palm consumer since 2016, consuming around 15% of global palm supplies. We continue to enhance our operational capacities to capture the growth opportunities, as well as proactively improve operations, increase yields, raise productivity and control costs.