What Investors Should Know About Olam International Ltd’s Latest Earnings

Olam International Ltd (SGX: O32) released its first quarter earnings on Friday. With operations in some 65 countries, the company is a global integrated commodity supply chain manager which engages in the sourcing, processing, packaging, and merchandising of agricultural products.

There are five main business segments for the company, which are classified as follows: Edible Nuts, Spices & Vegetable Ingredients; Confectionery & Beverage Ingredients; Food Staples & Packaged Foods; Industrial Raw Materials; and Commodity Financial Services. With this as a backdrop, let’s dig into Olam’s latest results.

Financial highlights

For the quarter ended 30 September 2014, revenue had declined just slightly by 0.5% year-on-year to SS$4.3 billion. This happened despite a 14.6% decline in sales volume for Olam to 3.134 million metric tons (MT); the drop in volume had occurred as a result of the company’s discontinuation/restructuring of lower margin businesses.

EBITDA (Earnings before interest, taxes, depreciation & amortisation) had dropped by 11.9% to S$219.4 million due mainly to “adverse price movements” in the company’s hazelnuts and dairy businesses. “[E]xecution challenges” in Olam’s upstream dairy-related operations also weighed in.

But due to lower depreciation expenses and lower finance costs (read: lower interest expenses), Olam had managed to see its PATMI (profits after taxes and minority interests) decline by just 2.9% from S$45.6 million a year ago to S$44.3 million.

Although the decline in Olam’s bottom-line seems tiny, it should also be noted that the company’s results for the quarter contained a one-off gain of S$12.1 million (in relation to Olam’s sale of a dairy processing facility in Côte d’Ivoire). If that one-off gain were stripped away, Olam’s operational PATMI would have seen a 29.4% year-on-year decline to S$32.2 million instead.

Olam’s progress on strategic initatives

In April 2013, Olam had launched a strategic plan to simplify its business structure and improve the production of free cash flow to firm (FCFF). On that note, the company has since announced 18 initiatives and completed 14 of them in FY2013 (financial year ended 30 June 2013) and FY2014. In the first quarter of FY2015 (the one that I’m discussing now), the sale of the aforementioned dairy processing facility counts as number 15 – it clocked a one-off gain of S$12.1 million for Olam and released S$31.5 million in cash.

All told, the 15 completed initiatives have released S$635.4 million in cash, generated S$106.1 million in profit, and added S$16.5 million to Olam’s capital reserves. The remaining three initiatives “are expected to close within this financial year” and would likely release an additional S$313.1 million in cash for Olam.

Olam’s target for its strategic plan was to release cash totalling S$1.5 billion by FY2016. So, there’s still some way to go before the company hits that mark.

Interestingly, despite Olam’s strategic plan’s goal to increase FCFF, the company’s FCFF for the quarter came in at a negative S$54.6 million. That compares against a FCFF of S$46 million in the corresponding period a year ago. One quarter doesn’t make a trend, but Olam’s ability to generate meaningful FCFF through the course of FY2015 would be something for investors to keep an eye on as it’s a sign of how capable management is at delivering upon their targets.

Financial position

Olam ended its first quarter with net debt (total borrowings minus total cash) of S$8.055 billion, a 10% increase from the net debt position of S$7.338 billion seen a year ago. But even though Olam’s net borrowings had grown, the company’s balance sheet had improved in some other aspects; Olam’s net debt to equity ratio had decreased from 1.93 to 1.85.

Given the company’s high borrowings, how the debt-situation evolves in the future should still be closely watched by investors as debt can be detrimental if used in the wrong way.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.