SIPEF : Half year results of the Sipef group per 30 June 2018

Press Release

Regulated information

Half-Year Results of the SIPEF groupas per 30 June 2018 (6m/18)

• •Palm oil production at our own plantations rose by 6.7% compared with the first half of last year, with a sharp rise in palm oil volumes in Indonesia (+10.4%) and the fall in production in the first quarter in Papua New Guinea was offset in full.

• •Stable but weaker palm oil market that currently quotes below USD 600 per tonne CIF Rotterdam.

• •Despite rising volumes and efficiency improvements, the lower prices for palm oil and rubber on the world markets reduced the gross profit from KUSD 57 472 in June 2017 to KUSD 47 008 (-18.2%) in June 2018.

• •Due to some non-operational elements such as negative exchange- (-KUSD 1 439) and tax effects (-KUSD 1 507), the net result, share of the Group, excluding one-off gains, was KUSD 17 391, which was 46.1% lower than in 2017.

• •Sale of the insurance activity BDM-ASCO was finalised in June with a one-off gain of KUSD 7 380.

• •As a result of the expected higher production volumes and the related lower unit cost prices for palm oil, the recurring profit for the second semester should exceed the recurring profit for the first semester.

• •With 66% of 2018 palm oil production sold at USD 715 per tonne CIF Rotterdam, premiums included, and the world market trend indicating little prospect of a quick revival in the second half of the year, we expect the recurring result for 2018 to be substantially lower than for 2017.

• •Expansion in South Sumatra, Indonesia continued steadily with already 9 749 hectares cultivated in Musi Rawas and the start of the limited expansion and replanting of Dendymarker.

1. Interim management report

1.1.

Group production

Group production

2018(in tonnes)

OwnThird partiesQ2/18

YoY%OwnThird partiesYTD Q2/18

YoY%

Palm oilRubberTeaBananas

71 303

16 714

• 88 017

  9.12%

  137 812

  28 390

  166 2022.89%

  1 831

• 0 1 831-12.43%

  • 4 125

    0

    • 4 125-6.76%

      590

• 0 590

  -0.17%

  • 1 185

  0

  • 1 1851.37%

  5 985

• 0 5 985

• -10.28%13 301

  • 0 13 301-10.20%

  2017(in tonnes)

  Palm oilRubberTeaBananas

  64 888

  • 15 772

    80 660

    129 160

    32 381

    161 541

    2 091

  • 0 2 091

    • 4 424

      0

      • 4 424

        591

  • 0 591

    6 671

  • 0 6 671

  • 1 169 14 812

  0

  • 1 169

  • 0 14 812

  After an exceptionally strong production year in 2017, with our own palm oil production up 14.9% over the first six months, we again recorded growth of 6.7% in our own plantations in the first half of 2018. This increase was uniform across each of the three mature production centres in Sumatra, Indonesia: the Tolan Tiga group (+7.6%), the more recent UMW/TUM group (+6.5%) and the Agro Muko plantations in Bengkulu (+9.4%). This growth is driven by generally favourable weather in Sumatra and the improved efficiency of young planted hectares, along with the limited additional volumes of the Dendymarker mill in South Sumatra, which was acquired last year.

  After rather low production in Papua New Guinea in the first quarter of 2018 due to a reduction in full fruit formation and the usual intense precipitation, which hampered harvesting and transport to the mills, the situation was fully normalised in the second quarter, with the -11.4% fall in production in Q1 fully made up for in Q2. As a result, combined production is now identical to what it was in the first half of last year (-0.7%).

  A similar upswing in production was seen with the smallholders in Papua New Guinea, where the -31.9% fall in production at the end of March was halved to a combined production at the end of June just -14.2% below the figure for the first half of last year. They usually take longer to respond to more positive agronomic conditions because of the higher average age of their plantings.

  Due to the sharp growth in volume in the second quarter, the -3.3% fall in total palm oil production for theSIPEFgroup at the end of March was converted to a combined rise of 2.9% by the end of June 2018.

  This trend was also observed to an even higher degree in the preceding production of fresh fruit bunches (FFB), which for the Group increased by 7.0% in our own plantations and by 3.9% for the total supply in the first six months. The additional harvest of the young plantings in Musi Rawas, which continue to be sold to non-Group mills for now, is the primary reason for stronger growth in fruits than in palm oil volumes.

Due to the timing of the wintering period in the first half of the year, we often see significant quarterly differences in Indonesian rubber production. For example, the -1.7% fall in production in the first quarter rose to -6.8% at the end of June. This fall is most noticeable in North Sumatra (-27.2%), due to the conversion of rubber areas to test fields for new oil palm seeds at the Timbang Deli plantation and the longer than expected recovery period after the wintering period at the Bandar Pinang plantation. However, the production in the renovated rubber plantations in Agro Muko, Bengkulu continues to rise encouragingly (+15.3%).

The tea plantations in Java, Indonesia again suffered from the changeable weather in the second quarter and exceptionally low minimum night temperatures were recorded in May and June, which meant that the fresh leaf growth remained under par. Limited parts of the plantation even experienced frost, a phenomenon that had never previously been observed in the mountainous environs of Bandung in Java. Even so, production remained stable (+1.4%) with an admittedly weak first half of last year.

However, the higher volumes of bananas in the second quarter, in line with the banana production in Ivory Coast the same period of last year, did not make up the arrears built up in the opening months of 2018 and, in spite of the growth of production in the newly planted Azaguié 2 area (+36.9%), the total volume of exported bananas was -10.2% less than it was in the first half of last year.

1.2.

Markets

Average market prices

In USD/tonne*

YTD Q2/18	YTD Q2/17	YTD Q4/17
Palm oil	CIF Rotterdam	663	734	715
Rubber	RSS3 FOB Singapore	1 702	2 274	1 995
Tea	Mombasa	2 605	2 801	2 804
Bananas	FOT Europe	1 034	872	899

* Jan- May: World Bank Commodity Price Data

June: SIPEF group best estimate

The second quarter started with high stocks in Malaysia on the back of a strong yield increase in production, but more damaging was the slower demand. India announced its increase in import duty of USD 100 per tonne for palm oil, leaving liquid oils unchanged. In general, slower demand was experienced in India due to its revamp of the monetary system in late 2017 and strong inflation, but palm oil suffered the most. Over a million tonnes of export was lost. During the second quarter, it was clear that yields in Malaysia had started to suffer, but at the same time production in Indonesia, particularly in Kalimantan, experienced a yield increase.

The petroleum market rallied to nearly USD 80 per barrel, while gasoil was touching USD 700 per tonne, and discretionary blending became economically viable. Exports of palm biodiesel surged at the end of the second quarter, but unfortunately, Indonesia has not shown any sign of increasing its blending behaviour. It was probably justified to wait until Ramadan was over but, even after the holiday break, there were no announcements about increasing the blending for 2018.

Another factor that certainly created a lot of uncertainty is the trade war beginning between the US and China. The US soybean market will suffer significantly and it will certainly impact palm oil negatively.

The stocks in Malaysia remained static, but relatively high, and Indonesia experienced a stock increase during the second quarter. Despite that, palm oil is globally well-priced; the lack of Indian demand is being felt and exports dropped each month in the second quarter; and we experienced a bear market throughout the second quarter. The palm oil market traded from USD 670 per tonne CIF Rotterdam at the beginning of the quarter and gradually dropped to USD 625 per tonne by the end of June.

Palm Kernel Oil (PKO) experienced further competition from coconut oil, which took back some market share it had lost three years ago. The fact that coconut oil has no sustainability premium attracted many end consumers. PKO traded from USD 1 000 per tonne to USD 850 per tonne CIF Rotterdam at the end of the second quarter.

The rubber market has been very boring and trading in a narrow range. The Chinese port stocks continued to grow, indicating slow physical demand, and this limited any upside. With Vietnam and Thailand coming out of wintering, fresh supplies pressed the market lower. Prices for SICOM RSS3 gradually dropped from USD 1 700 per tonne to USD 1 500 per tonne.

Tea production in Kenya has been increasing due to beneficial 'long rains' during the second quarter. Tea prices at the Mombasa auction gradually dropped, certainly due to the low demand during the Ramadan festivities.

1.3.

Consolidated income statement

Consolidated income statement
In KUSD (management presentation) Revenue Cost of sales Changes in the fair value	30/06/2018	30/06/2017
	139 973 -94 771 1 395 46 597 -16 306 - 361 29 930 1 089 -1 497 - 909 -1 317 28 613 -9 479 19 134 - 511 18 6230	157 017 -99 705 160 57 472 -14 930 1 007 43 549 784 -1 683 937 38 43 587 -12 391 31 196 3 100 34 29679 324
Gross profit General and administrative expenses
Other operating income/(changes)
Operating result
Financial income Financial charges
Exchange differences
Financial result
Profit before tax
Tax expenseProfit after tax
Share of results of associated companies and Joint ventures
Result from continuing operationsRevaluation gain acquisition PT Agro Muko

SIPEF - Kasteel Calesberg - 2900 Schoten RPR Antwerpen / VAT BE 0404 491 285

Gain on sale BDM-ASCO

Profit for the period

Result from continuing operations share of the group

Revaluation gain acquisition PT Agro Muko share of the group

Gain on sale BDM-ASCO share of the group

Share of the group

Consolidated gross profit

In KUSD (management presentation)	30/06/2018
Palm	44 819	96.2	51 731	90.1
Rubber	- 440	-0.9	2 713	4.7
Tea	383	0.8	345	0.6
Bananas and plants	1 319	2.8	1 966	3.4
Corporate en others	515	1.1	717	1.2
Total	46 596	100.0	57 472	100.0

7 380	0
26 003	113 620
17 391	32 250
0	75 182
7 380	0
24 771	107 432
%	30/06/2017	%

Total revenue fell to USD 140 million (-10.9%).

Revenue from palm oil fell by 8.4%. The slightly higher volumes were sold at a substantially lower price, the average world market price for crude palm oil in the past half year being USD 72 per tonne CIF Rotterdam, lower than in the same period last year.

Rubber revenue fell by 43.7% due to a combination of the lower production and the lower world market price for natural rubber.

Tea activities revenue fell by 29%. However, last year's turnover was significantly boosted by a large sale of stock. This fall, therefore, has no impact on the gross margin of the tea business, which is virtually identical to the margin achieved last year.

Revenue followed the lower volumes in the banana and flower activities.

The average Ex-works unit price for the palm segment (96.2% of the total gross margin) was virtually unchanged compared with the first half of 2017. That is because the general rise in costs (fuel, fertiliser and local wages) was largely offset by higher production and the devaluation of the rupiah in Indonesia (3.4%) and the kina in Papua New Guinea (1.9%).

The adjustment of fair value is due to the impacts on the valuation of:

- the stock of finished products at their market value rather than their production cost (IAS2);

- the measurement of the hanging palm fruits at their fair value (IAS 41R).

Gross profit fell from KUSD 57 472 in June 2017 to KUSD 47 008 (-18.2%) in June 2018.