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Interview: Olam International


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Olam International Limited, a global integrated supply chain manager and processor of agricultural products and food ingredients, will be announcing its results for the third quarter ending 31 March 2012 on Tuesday, May 15.

Before the group announces their latest numbers, Biz Daily had the chance to talk to the management as they shared about Olam’s growth strategy and how it intends to capitalise on business opportunities in the longer term.

What accounts for the 11.6‐per cent drop in 2QFY2012 net profit? What are you telling investors in the wake of this profit decline?

The reason for the 11.6-per cent drop in the headline profit number is because the profits in 2QFY2011 contained one-off exceptional gains of S$33.6 million. These gains being non-operational and non-recurring in nature were not part of the 2QFY2012 profits.  Net profit actually grew by 14.9 per cent in 2QFY2012 over 2QFY2011 if these exceptional items are excluded for a direct comparison between these two periods.

The profit growth of 14.9 per cent is a very creditable performance in the context of significant challenges faced by the industry during a period of extreme volatility and tough market conditions.

 

Industrial raw materials contributed lower to your earnings while the other business segments (i.e., food staples, edible nuts and spices, and confectionery and beverage) fared well. Has this report card led you to re‐examine your business segments, maybe strengthen some weak spots and further enhancing the stronger ones?

The Industrial Raw Materials segment which comprises Cotton, Wool, Rubber, Wood Products and Special Economic Zone project, accounted for 22.4 per cent of revenues and 16.8 per cent of volumes in 1HFY2012.  This segment is relatively more recession sensitive compared to the food related segments (Edible Nuts, Spices & Beans, Confectionery & Beverage Ingredients and Food Staples & Packaged Foods).

The contribution from this segment is lower in 1HFY2012 mainly because of our Natural Fibres (primarily cotton) and Wood Products businesses. The overall cotton industry was impacted by extreme volatility and difficult market conditions coupled with a drop in demand due to the slowing down of the economy. Both these factors led to a sharp fall in prices, eroding basis and heightened counterparty risk – a perfect storm of conditions which led to a compression in our operating margins. We believe as a physical supply chain manager and one of the largest Cotton players globally, we are better positioned to weather this storm and capitalise on any market opportunities that the crisis may bring.  The Wood Products business continues to be impacted by the after-effects of the 2008-09 global financial crisis which led to a slackening of demand which continues to this day.

 

You are a sizable commodity trader. But most of your recent acquisitions have been on production and farming. What’s the strategy behind this?

Our long term corporate strategy is to selectively integrate 1) upstream in excess-return opportunities targeting specific countries which we believe will have a long-term comparative advantage to produce agri-commodities; and 2) midstream in value-added processing initiatives that offer excess returns, while 3) concurrently investing in our core supply chain and value-added services business to take it to full potential and 4) leveraging latent assets and capabilities which we built up over the last 22 years.  The key objective is to achieve relevant scale vis-à-vis major players in our industry by targeting Net Profit After Tax and Minority Interest (PATMI) of US$1 billion and a net margin increase from 2 per cent to 4 per cent by FY2016. We are targeting to achieve these without any further equity dilution.

 

Tell us more about your recent acquisitions – the biscuit manufacturer in Nigeria and the dairy and grains farming company in Russia – what do they have to offer on the table?

Our investment in 75 per cent stake in Rusmolco, Russia gives us the platform to invest in upstream dairy farming assets in low cost origins and participate in the large, growing local market for dairy products.  It also provides us with the opportunity to invest in upstream grains farming where Russia is attractive due to its strong domestic and export demand and its comparative advantages in primary production.

Our acquisition of Titanium Holdings, which owns Nigeria’s second largest biscuits and candy franchise, enables us to access these two large, fast growing packaged foods categories in a country that is second largest in Africa in packaged foods consumption.  It also offers us significant sales and distribution synergies with our current packaged foods portfolio as well as back-end supply chain synergies in sourcing, logistics and asset utilisation.

 

Any acquisition targets in the near future?

We are currently pursuing various growth initiatives to execute our growth strategy which involve both acquisitions and greenfield investments.  We are currently in negotiation with various parties on such opportunities and will update the market if any of these were to materialise.

 

With acquisitions and ventures here and there, how’s your leverage level so far? How diverse are your funding sources? Banks in Europe are cutting down funding to commodity trading assets, how are you affected by this?

Our leverage (Net Debt to Equity) has come down from 2.22 times as of 30 June 2011 to 1.95 times as of 31 December 2011.  As we continue to invest selectively in upstream and midstream growth initiatives, our leverage is expected to range between 2 and 3 times as we execute the planned initiatives.

We have pre-emptively raised funds both equity and debt over the past year to fund our capital investments. Our debt profile has been diversified across tenors and sources to match the gestation profiles of our longer term investments and to avoid over-exposure to any one source of funds.

Today our loans range from short term working capital facilities all the way to perpetual securities and we access funds from diversified sources such as bilateral bank facilities, syndicated loans, convertible bonds, unrated bonds, medium term notes, perpetual bonds and Islamic financing.

European bank loans account for only 5 per cent of our loan portfolio.  We have not experienced any reduction in lending from these banks.

 

You operate in 65 countries. How do you deal with each country’s regulations given the fact that food and agriculture are usually the most protected local industries?

One of our rules of participation in agricultural products is to diversify our sourcing (where we will be present in all key origins that account for at least 85 per cent of global production) so that any potential restriction of supply from one country can be mitigated by sourcing from other origins.  We also mitigate any potential risk from government actions on imports and exports by positioning our locally based subsidiaries for imports, exports and local trade operations.

 

What’s the greatest risk you’re facing so far? And how do you plan to address it?

The greatest risk has been the recruitment and retention of global talent in Olam.  Over the last several years, we have been successful in attracting and nurturing global talent that is capable of executing our growth objectives.  So the challenge is to continue to provide them with opportunities to build their capabilities and careers across multiple businesses, geographies and functions.  We also try to promote and strengthen an empowering and a people-sensitive work environment.

 

Can you share with us your earnings visibility? How confident are you going forward?

We are building leadership positions across our portfolio.  The portfolio will be well balanced with three product platforms contributing at least US$100 million each, seven platforms contributing between US$50-100 million each and four platforms contributing under US$50 million each.  This is where our US$1 billion PATMI will come from.  Our portfolio will also be unique shaped and well balanced from a value chain contribution perspective.  By FY2016, Supply Chain will contribute 33 per cent of total earnings, Midstream processing and downstream will contribute 42 per cent and Upstream 25 per cent.

We are confident in achieving these targets as we have built a portfolio that is resilient against economic cycles and volatile commodity markets and this has helped us deliver consistent and sustained profitable growth.  This is a result of having 1) a recession resistant portfolio where 80 per cent of our business comes from food where demand is inelastic and less recession sensitive; 2) a diversified and well balance portfolio across 20 products, more than 65 countries and selective integration across the value chain; 3) our participation as supply chain manager which reduces the volatility of earnings; 4) strong liquidity profile; and 5) deep management bench-strength to execute our growth strategy.