FGV Annual Report 2016

ANNUAL INTEGRATED REPORT 2016 37 CLUSTER PERFORMANCE: PALM DOWNSTREAM Our products warehouse is HACCP compliance. and lower profit margins, particularly for products constrained by a price ceiling such as the price of domestic cooking oil. OPERATIONAL REVIEW Oleochemicals Remain Resilient FGV oleochemicals unit Twin Rivers Technologies Holdings, Inc (TRT-US) delivered a resilient performance in 2016 despite volatile commodity prices and lower volumes shipped during the year. Both revenue and Profit Before Tax (PBT) met internal benchmarks despite increased competition in key product lines including the Oleic (Tallow), LauricFrac (Coconut) and Refined Glycerin markets. Mitigating the challenging environment were lower production costs due to cheaper natural gas as well as TRT-US' efforts in building effective commercial relationships and gaining entry into higher margin market segments. Profits were also helped by several yield improvement initiatives, water and sewer conservation measures and negotiated logistics cost. TRT-US successfully increased its glycerin customer base in 2016 after receiving the Safe Quality Food (SQF) certification in 2016. TRT-US also received Roundtable on Sustainable Palm Oil (RSPO) certification in the same year thus contributing to our overall Group thrust to become more sustainable. Oleochemicals are key products under our overall business strategy to offset volatility in commodity prices. We plan to explore other markets for expansion to further diversify our oleochemicals portfolio. The Cluster incurred a higher loss of RM104.68 million compared to RM62.51 million loss in 2015. This was mainly due to provision for impairment of its assets in foreign subsidiary of RM55.61 million and of its trade receivables of RM34.90million. The closure of a palmoil refinery in Sabah had also resulted in an impairment of RM18.63 million to the Cluster. Included in the Cluster's result last year was an impairment of RM40.24 million relating to intangible assets of its foreign subsidiary. This was further compounded by lower margin of RBDPKO from kernel crushing and refining activities and start-up losses due to a new refining plant for packed product business. In addition, lower share of results was recorded from its JV compared to last year due to fraud relating to stock losses and overstatements of receivables amounting to RM16.12 million. In 2015, included in the share of results were gain on disposal of its quoted investment and subsidiary amounting to RM29.0 million and RM12.0 million respectively. The lower result was partly mitigated by increase in contribution from US fatty acid business following the weakening of Ringgit and higher average commodity price. VOLATILE COMMODITY PRICINGAFFECTS PERFORMANCE The Cluster encountered margin pressures in both its overseas and local units due to the volatility of raw material prices. Supply of input stock such as CPO and PK was disrupted by a poor nationwide harvest due to the El Nino weather phenomenon that destabilised pricing. This resulted in a higher cost of production MANAGEMENT DISCUSSION & ANALYSIS