FGV Annual Report 2016

ANNUAL INTEGRATED REPORT 2016 31 CLUSTER PERFORMANCE: PALM UPSTREAM Our OER decreased marginally to an average of 20.68% (2015: 20.91%) due to malformed bunches developed as a result of prolonged droughts. The lower yield from our plantations was also due in part to the execution of FGV's aggressive replanting programme. While we achieved our 2016 replanting target of 16,320 Ha, the exercise also meant lower FFB harvested. However, we believe that this is an important strategic trade-off as the replanting programme will help us reach our targeted age profile by 2020. Replanting also helps to improve FFB evacuation infrastructure including facilitating the mechanisation of our processes to ensure greater efficiency of plantation activities going forward. OPERATIONAL REVIEW Strengthening Our Core During the year under review, the Cluster focused on operational optimisation and implemented cost saving initiatives to cushion the impact of low FFB production on its profits. The Cluster has restructured the plantations from two (2) zones to seven (7) zones to further strengthen estate operations and enhance field supervision. The Cluster did not undertake any M&A activities in 2016. Instead, the Cluster focused on rationalising its portfolio of assets to improve efficiency and profitability. Four (4) mills were identified for rationalisation in 2017. In addition, we have ceased operation of FNI Biofuel Sdn Bhd, a pellet plant which was non-performing. We are also in the midst of divesting our interests in a JV company, Sahabat Renewable Fuel Ventures Sdn Bhd. On 24 October 2016, we successfully commissioned a biomass power plant in Jengka, Pahang belonging to FTJ Bio Power Sdn Bhd. The power plant generates electricity from empty fruit bunches and started supplying power to the national power grid during 2016. We continue to rely on technology such as Unmanned Aerial Vehicles (UAV) to provide more accurate geographic information for estate design and planning purposes. In 2016, we completed UAV mapping of approximately 222,846 Ha. Our mills produce more than 2.5 million MT of CPO annually. The Cluster recorded a PBZT of RM360.96 million in 2016 as compared to RM358.51 million in 2015. This was mainly due to lower fair value charge in LLA of RM68.28 million in 2016 compared to RM224.86 million in 2015. Excluding LLA effect, the segment's profit was down by 26% to RM429.24 million from RM583.37 million last year. Lower contribution from the upstream operations mainly attributed to decrease in FFB production from 4.63 million MT to 3.91 million MT in 2016 despite higher average CPO price realised of RM2,560 per MT compared to RM2,210 per MT realised in 2015. Oil Extraction Rate (OER) achieved was lower at 20.68% compared to 20.91% achieved in the previous year. The result was further impacted by impairment on four (4) palm oil mills amounting to RM19.81 million due to rationalisation exercise carried out and additional of amortisation of bearer plant of RM16.70 million following the acquisition of Yapidmas during the financial year. EXTREME WEATHER DISRUPTS PRODUCTION The prolonged drought due to El Nino in 2016 has severely impacted the FFB production in Malaysia. Malaysia Palm Oil Board (MPOB) recorded a CPO production decrease of 13% YoY to 17.3 million MT. All three (3) regions inMalaysia reported lower CPO production, with Peninsular Malaysia recorded the highest drop of 15.7%, followed by Sabah (-15.3%) and Sarawak (-3.2%). The extreme weather caused by El Nino also disrupted our FFB production in 2016, which registered a 15% drop to 3.91 million MT from 4.63 million in 2015. In tandem with the weak FFB supply nationwide, CPO production for 2016 fell 14% to 2.66 million MT compared to the previous year's of 3.10 million MT. MANAGEMENT DISCUSSION & ANALYSIS