FGV Annual Report 2016

FELDA GLOBAL VENTURES HOLDINGS BERHAD 28 MANAGEMENT DISCUSSION & ANALYSIS More information about the financial statements is available on page 145 The Group's financial performance was partly assisted by the decrease in the fair value charge of our LLA of RM68.28 million compared to RM224.86 million in 2015 and change of accounting policy for bearer plants. In summary, our financial performance in 2016 was affected by four (4) key challenges namely the lower CPO production, higher raw sugar costs, impairment losses incurred in Palm Upstream and Palm Downstream segments and losses suffered by jointly controlled entity. More detailed information on the individual performance of our business clusters is available in the segmental analysis found on pages 30-51 of this report. OPERATING IN A CHALLENGING ENVIRONMENT We realised early in the year that 2016 was going to be challenging for FGV. It was therefore my immediate priority upon my appointment as GP/CEO last April to put in place a Transition Plan with five (5) priorities to manage our business and financial position in 2016. The outcomes of the initiatives are detailed in the table below: Priorities 2016 Outcomes Focus on Core Business • Produced 3.91 million MT of FFB from internal estates • Processed 12.88 million MT of FFB to produce 2.66 million MT of CPO at an average production cost of RM1,595/MT • Replanted 16,320 Ha of our plantations in line with our 2016 target • Restructured our estates into seven (7) zones from two (2) zones to enhance management and supervision of plantation activities • Concluded a collaboration arrangement to export planting materials to Indonesia at a projected volume of 1 million germinated seeds annually Cost Management • Achieved administrative cost savings of RM131.37 million • Increased fertiliser application by RM51.0 million and yet managed to reduce palm estate cost by RM36.80 million without compromising Good Agricultural Practice (GAP) No Mergers & Acquisitions (M&A) • Signed Mutual Termination Agreement with Eagle High Plantation in December 2016. The deal has been taken up by FIC Properties Sdn Bhd, a wholly-owned subsidiary of Federal Land Development Authority (FELDA) Product and Market Development • Introduced new Ganoderma tolerant planting materials, namely the Yangambi GT-1, Palma Gro and Palma Shield • Expanded cooking oils market to the Philippines and Indochina • Commenced the export of specialty fats to China and Russia Governance and Sustainability • Implemented policies on Gifts and Entertainment, Assets and Personal Interest Declaration, and Sustainability • Received ISO:14001 Safety and Health Certification and ISO:9001 Quality Certification in 2016 • Completed the internal audit of 16 mills and their supply base in preparation for RSPO certification audit • FGV's application for a separate RSPO membership was approved The following is an overview of our key results and their contributing factors. Group Revenue: +11% YoY • Higher average CPO price by 15.8% (2016: RM2,560 per MT; 2015: RM2,210 per MT) • Sugar Sector revenue increased by 15.2% (2016: RM2.66 billion; 2015: RM2.31 billion) • Higher average price of Crude Palm Kernel Oil (CPKO) and Refined, Bleached and Deodorised Palm Kernel Oil (RBDPKO) by 66.6% and 50% respectively Group PBZT: -42% YoY • Higher CPO production cost (ex-mill) price by 18% (2016: RM1,595 per MT; 2015: RM1,353 per MT) due to lower utilisation factor • In 2015, the lowest raw sugar price recorded was US Dollar (USD) 0.13 per pound (lb) and it reaches almost USD0.25 per lb in 2016, a significant increase of 92%. It is suspected that the raw sugar price will hike further in 2017 due to the world sugar deficit • Impairment loss and provision of Mutual Separation Scheme (MSS) due to the closure of four (4) palm oil mills and the closure of a palm oil refinery in Sabah of RM52 million • Impairment on receivables and assets of RM90 million at Palm downstream Statement • Significant loss in share of results from a Joint Venture (JV) company amounting to RM23.61 million (2015: profit of RM22.60 million) mainly due to misappropriations at its subsidiary GROUP PRESIDENT/ CHIEF EXECUTIVE OFFICER'S MESSAGE