FGV Annual Report 2016

ANNUAL INTEGRATED REPORT 2016 41 The Cluster continues to demonstrate the effectiveness of its marketing and distribution strategy after growing sales volume in the domestic segment by 24% during the year. Revenue accordingly increased 15% to RM2.66 billion compared to RM2.31 billion in the previous year. This was mainly due to an increase in sales volume from the Group's domestic segment and an improved average refined sugar selling price. However, the weakening of Ringgit against USD and a rise in raw sugar prices exerted significant pressure on margins, which subsequently compressed the Cluster's profit margins. In 2016, the Cluster reported a PBZT of RM151.81 million against RM363.05 million in the previous year. HIGHER SALES BUT WEAKER RINGGIT AFFECTS SUGAR PERFORMANCE Raw sugar prices have risen steadily from USD0.15 per lb in December 2015 to USD0.20 per lb in July 2016, representing an increase of 30% within a seven-month period. The rise in raw sugar price had a substantial impact on our financial performance as the cost of raw sugar accounts for 80% of our total production cost. At the same time, the Ringgit, which weakened 7-8% against the USD, further contributed to our raw sugar cost and raised overall operating expenses. On average, we spent over USD450.0 million on the purchase of raw sugar for the year. However, we managed to mitigate the impact from exchange rate volatility by locking all raw sugar USD requirements for 2016 below RM4.15 via our strategic hedging mechanism. The Cluster was also affected by the price cap placed on the selling price of domestic refined sugar in Malaysia. Fluctuations in costs and market volatility were subsequently absorbed by our refiners and affected margins in 2016. We welcome the government's decision to withdraw the refined sugar Approved Permit (AP) for industrial customers in 2016. The decision has translated into higher demand for refined sugar for industrial customers at prices that better reflect the market. OPERATIONAL REVIEW Managing Our Foreign Exchange (FOREX) Exposure Our key priority in 2016 was managing the cost of purchasing raw sugar and volatility of the forex markets. To enhance our capabilities in this area, we established MSM Trading International DMCC office in Dubai to monitor the raw sugar market and to make competitive purchases using strategic hedging mechanisms. It also helps us to penetrate the APAC market by giving us a presence in the MENA region, which represents a huge potential market for us. CLUSTER PERFORMANCE: SUGAR MOVING FORWARD One of our key strategic intents is to grow our regional market presence to provide greater balance to our portfolio of interests. Our plan is to develop local trading and distribution capabilities in South East Asia to create an outlet for our sugar products, and also to increase our access to the regional market. Preliminary works and feasibility studies are presently ongoing to determine how we can best make our entrance into these market. Work on our integrated sugar refinery in Tanjung Langsat, Johor is according to schedule with the ground breaking ceremony executed in March 2016. The refinery is on track for completion by the first quarter of 2018, and will add a further 1 million MT to our refining capacity by 2020. The additional capacity will not only ensure the stable supply of sugar in Malaysia but also give us ample room to grow our export market. Our existing refineries in Prai and Perlis will be refurbished when the Johor refinery is up and running. Raw sugar prices are expected to remain high until the end of the second quarter of 2017 with producers slightly bearish about output for the production season. Producers in Thailand are particularly pessimistic about their production volume for the 2016-2017 season which started in December 2016. Thai producers are estimating a production volume of 91.1 million MT, which is 3.0 million MT lower than the amount produced in the 2015-2016 season. MSM Holdings is the country's largest sugar refinery with an annual production capacity of 1.25 million MT. MANAGEMENT DISCUSSION & ANALYSIS