OPERATIONS REVIEW PLANTATION

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1 OPERATIONS REVIEW PLANTATION OVERVIEW IndoAgri is one of the largest plantation owners in Indonesia with total land bank of 539,016 hectares, of which 213,328 hectares was planted as at December Oil palm remains our dominant crop with 183,113 hectares of planted area, followed by rubber 22,410 hectares. Other crops include sugar cane, cocoa and tea with a combined planted area of 7,805 hectares. We currently operate 18 palm oil mills in various locations across Sumatra and Kalimantan, with a total capacity of approximately 3.8 million tonnes of fresh fruit bunches (FFB) per year. Chart 1: CPO price (CIF N.W. Europe) US$/tonne 1,400 1,200 1, We also operate four crumb rubber factories, three sheet rubber factories, one cocoa factory, one tea factory and one sugar factory. Chart 2: Rubber price (RSS 3 SICOM) US$/kg 2008 REVIEW 2008 was an eventful year for oil palm plantation owners. CPO prices started the year strongly and stayed high through the first half of 2008 at above US$1,000 a tonne. Subsequently, prices fell in the second half of 2008 as the global financial crisis triggered a major correction in commodities prices, including CPO (see chart 1). Exacerbated by high palm oil inventories, CPO prices fell to US$503 a tonne as at year-end. Rubber prices followed a similar pattern, RSS3 rubber fetching as much as US$3.28 a kilogram in June but only US$1.38 a kilogram in December (see chart 2)

2 operations review plantation Overall, for the full year, our plantation division increased its sales by 154% against 2007 to reach Rp6.8 trillion (S$ 1.1 billion). This was due to volume growth, favorable CPO prices in the first half and positive contribution from Lonsum. The full year plantation division s segment profit (excluding fair value gain or loss on biological assets), rose 98% to Rp2.9 trillion. Profit margin however, edged down from 54% to 42% due to higher plasma fruit purchases which give lower margin, higher fertiliser costs and increased transport costs. Moving forward, we expect the production cost to ease from the 2008 level on lower fertiliser and fuel prices. For the financial year under review, the Group harvested 2.5 million tonnes of nucleus fresh fruit bunches (FFB), up 66% from last year. The substantial increase in FFB harvested was mainly due to the maiden full-year contribution from Lonsum of 1.02 million tonnes. The Group s 2008 FFB production per hectare (FFB yield) came in at 20.1 tonnes a hectare, slightly lower than 20.3 tonnes a hectare of The decline is attributable to a higher proportion of young oil palm trees as well as lower production in Lonsum s North Sumatra estates. CPO production increased 86% to 714,000 tonnes on the back of higher nucleus FFB production and higher FFB purchased from plasma and third party farmers. Oil extraction rate (OER) was relatively unchanged at 22.6%, compared to 22.5% in For the rubber production, the Group more than tripled its 2008 rubber output, from 7,903 tonnes in 2007 to 28,100 tonnes. The increase was due to full year consolidation of Lonsum s rubber production. Our acquisition of Lonsum has more than tripled the Group s mature rubber crop and quadrupled the rubber plantation area. In 2008, our planted oil palm area increased by 21,657 hectares. We also added 132,497 hectares of land bank through acquisitions during the year. As an integrated agribusiness group, our plantation estates are supported by strong R&D. We produced 25 million high quality and high yielding seed material for commercial sales and our new plantings in We ensure that our new plantings are planted with the highest yielding seed material. With the goal of becoming a world-class agricultural research & seeds breeding company in mind, we will continue to invest in R&D. To this end, Sumatra Bioscience entered into a joint venture company with Ghanaian Council for Scientific and Industrial Research (CSIR) to develop oil palm seeds for commercial use and our recent patent for the world s first F 1 hybrid oil palm marks a significant milestone in yield improvement science. Palm kernel production increased 95% to 166,000 tonnes in line with higher FFB processed kernel extraction rate (KER) of 5.3% was higher than 5.0% of INDOFOOD AGRI RESOURCES LTD. ANNUAL REPORT

3 operations review plantation 2009 OUTLOOK The sharp global economic downturn, led by the US financial crisis has been on an unprecedented scale. Given the uncertainty over the full extent of the financial crisis, it is too early to predict the full effects on the global economy in the next 12 months. However it is likely that CPO prices will remain soft in the next 12 months, as compared to Nonetheless, the long term outlook for palm oil demand remains positive given that currently: More than 85% of CPO is consumed for food, and there is increasing demand from China and India; Approximately 10% is for oleochemical production; and Biodiesel demand remains low at approximately 5%, but has the potential to grow given that CPO is a cheaper feedstock than competing vegetable oils. Increasing usage of palm oil mill effluent as fertiliser to mitigate rising fertiliser costs; and Improving crop yield and enhancing palm oil extraction rate. Our practices for promoting agricultural sustainability, field safety and enhancing production yields are as a result of our comprehensive plantation management expertise and long track record in oil palm plantation management. Finally, we can expect an annual increase in our CPO production as our immature plantings come on stream and also as we continue to expand our hectarage. Our immature oil palm plantations stand at 58,944 hectares as at end (see chart 3). Chart 3: Oil Palm Plantation Age Profile We will continue to expand our oil palm plantations. In addition, we also plan to expand our sugar cane plantation to 18,600 hectares and operate two sugar-processing factories by end % 7% 45% Further, we will continue to improve our agronomy practices such as in Good estate management and optimal application of fertiliser to increase efficiencies and production; 16% Immature 58, years 12, years 82,008 Above 20 years 29,829 Total 183,113 16

4 operations review plantation DIVERSIFICATION OF AGRIBUSINESS SUGAR BUSINESS The Group recognises sugar is an attractive industry in Indonesia, a net importer whose demand for this commodity is projected to continue rising with the growth of its population and its processed food and beverage industry, among other factors. The Group diversified into the sugar industry by subscribing, through its 90%-owned subsidiary, PT SIMP, for 60% of the enlarged share capital of PT LPI in July 2008 for a cash consideration of S$56 million. Rehabilitation program for PT LPI s 3,000 TCD Java sugar mill is ongoing and due to start operation in the 2009 s sugar cane harvesting season. During 2009, the main focus of the sugar division is to continue to build up the scale of the business in preparation for full operation in We will continue to expand new planting, build housing, road and office infrastructure, and construct our sugar processing mill, for completion in PT LPI has a total of 37,500 hectares land bank in South Sumatra. The Group intends to significantly expand the sugar cane plantation from 4,174 hectares as at end- Dec 2008 to 18,600 hectares by end To meet the higher sugar processing needs arising from our to-be-expanded plantation, we are constructing a 8,000 tonnes cane a day (TCD) sugar processing mill in South Sumatra, to be completed in We expect our sugar division to start notable contribution in 2011, when we would have achieved our targeted planted area of 18,600 hectares and completed the construction of our sugar processing mill in South Sumatra. As a start-up business division, the sugar cane division incurred minor losses in By the end of 2008, we had achieved planted area of 4,174 hectares, on track to our target planted area of 18,600 hectares by end-2011, or four times the planted area as of end-dec We produced 986 tonnes of sugar cane in 2008 which was sold to third parties pending completion of our own sugar mill. INDOFOOD AGRI RESOURCES LTD. ANNUAL REPORT

5 operations review plantation r & d OVERVIEW The Group s R&D capabilities received a boost with the 64.4% acquisition in late 2007 of Lonsum, which owns an advanced agricultural research centre, Sumatra Bioscience (formerly known as Bah Lias Research Station). Sumatra Bioscience (SumBio), established since 1983, has comprehensive research facilities for the analysis of soil, plant tissue, oil palm and latex. It has tissue culture, biotechnology, pathology and entomological laboratories. SumBio s advanced palm oil seed-breeding programme is capable of producing up to 25 million superior oil palm seeds per annum. In addition, the Group s Riau research and seed breeding facilities is currently capable of producing up to 8 million seeds per annum. Our seed breeding and R&D division strives to increase yields through plant breeding and best-practice agronomy and crop protection, and spearheads the Group s efforts at maximising per-hectare productivity and profitability. The Group s R&D focuses in four major areas: agronomy, in search of optimal crop management; breeding, which includes seed germination to produce superior planting materials; crop protection, to seek the best way to protect plants against pests and diseases, and data analysis, to store and analyse all data for future reference REVIEW In 2008, SumBio and our seed breeding centre in Riau produced a total of 25 million palm oil seedlings, a significant increase from 6 million in 2007 which included only 2 month production of SumBio. In May 2008, the Group entered into a joint venture agreement with the Ghanaian Council for Scientific and Industrial Research ( CSIR ) to create a joint venture company in Ghana to develop and realise the genetic potential of oil palm for the mutual benefit of both parties. Separately, SumBio announced in 2008 a breakthrough: achieving the world s first patent to produce F 1 oil palm hybrids. An F 1 oil palm seed is a first generation offspring of two distinctly different genetically uniform oil palms, each with two identical sets of chromosomes. The process is expected to significantly improve yields without genetic modification, based on historic yields from other F 1 hybrid crops. The Group expect to commercialise production by OUTLOOK 2009 In line with its commercialisation plans, the Group will increase the R&D budget and invest US$5 million to expand its existing R&D facilities. The expansion will increase R&D activities at SumBio by up to 10 times and bring about expanded capabilities in genomics, and tissue culture research to support the breeding work in progress. SumBio will continue to invest in its agronomy and crop protection divisions to ensure robust systems are developed for its customers to realise the genetic potential of its seeds. We believe that intensifying our investment R&D will bring substantial long-term benefits not only for the Group but also the industry. Ultimately, it will also benefit the environment in Indonesia, as improved yields lead to reduced pressure for land clearing. This would be a vital contribution to the sustainability of Indonesia s forests and biodiversity. 18

6 OPERATIONS REVIEW COOKING OIL & FATS OVERVIEW Our Cooking Oil and Fats (COF) Division manufactures and markets leading brands of cooking oil, margarine and shortening for both the Indonesia and export markets. A number of our edible oil products are household names in both Indonesia consumer and industrial markets, having been in the market since the 1990s. Our leading cooking oil brand, Bimoli was introduced back in Taking into account our other brands, Happy Salad Oil and Delima, we have a leading market share in the Indonesian branded cooking oil market. Aside from cooking oil, the Group s margarine and shortening products, branded under Simas, Palmia and Amanda, command a strong present in Indonesia consumer and industrial margarine and shortening markets. In August 2008, we co-branded Simas (introduced in 1979) and Palmia (introduced in 1990) as Simas Palmia to strengthen the image of our consumer margarine. Our success in selling cooking oil and margarine and shortening products is underpinned by a comprehensive distribution network of 120 distributors serving 230,000 retail outlets throughout the Indonesian archipelago. In 2008, approximately 88% of the Group s cooking oil, margarine and shortening sales volume was derived from the domestic Indonesian market. The expansion of our Medan refinery was completed in early 2009, more than tripling its capacity from 52,500 tonnes a year to 172,500 tonnes year. The construction of our 420,000 tonnes a year refinery in Tanjung Priok, Jakarta is targeted to be completed in early REVIEW 2008 was a commendable year for our cooking oil & fats division. Despite the difficult market conditions, our cooking oil sales volume grew by a strong 14% to 424,000 tonnes, driven by increased demand for consumer pack cooking oil in Indonesia, our successful product branding and effective marketing campaigns. Our margarine business, on the other hand, came in weaker than expected. Sales volume shrunk by 12% to 161,000 tonnes compared to 183,000 tonnes in 2007, this was in line with overall shrinkage in the domestic margarine market. Despite the lower margarine sales volume, 2008 cooking oil and fats sales increased by 49% from Rp4.4 trillion to Rp6.5 trillion, as a result of 14% volume growth in cooking oil sales and higher average selling prices. As a vertically integrated agribusiness, we operate four refineries located at the major cities across the Indonesia archipelago- in Jakarta, Surabaya, Bitung and Medan to produce cooking oil, margarine and shortening products. The refineries have a total processing capacity of one million tonnes a year. INDOFOOD AGRI RESOURCES LTD. ANNUAL REPORT

7 operations review cooking oil & fats Cooking Oil & Fats segment profit increased by 132% to Rp240 billion on higher revenue and margin expansion, as a result of our products pricing strategy and lower unit cost of production given the higher utilisation of our refineries. OUTLOOK 2009 We expect CPO prices to stay soft in 2009, which will lead to lower production costs of our cooking oil, margarine and shortening products. Given the financial crisis, we expect 2009 to be a very challenging year. However, with dominant market shares and strong brands, we are well positioned for the challenges ahead. Our key strategies and focus in 2009 will be: Strengthen brand identity and brand loyalty through enhanced product packaging and quality; Strengthen brand image of new co-brand Simas Palmia and core brand of Bimoli; Focus advertising and promotion support to raise awareness and brand image; Deeper penetration of distribution to increase product visibility as well improved after sales services; Focus on High Class Outlets (HCO) in line with HCO rapid growth, driven by the growth in supermarkets and hypermarkets in Indonesia. 20

8 OPERATIONS REVIEW COMMODITIES OVERVIEW The principal activity of the Commodity Division is the manufacture of crude coconut oil (CNO) from copra, the meaty inner lining of the coconut, for export to the Europe, United States and Asia. Our customers are manufacturing plants which produce oleochemicals such as fatty acids and glycerine. The oleochemicals are used in the production of detergents, personal care products, lubricants, solvents, and bioplastics REVIEW 2008 was a volatile year for prices of the world s commodities. Prices were high in the first half but weakened significantly in the second half. Despite the volatility, our commodity division remained profitable in Revenue increased 42% versus the same period last year, and this was largely attributable to the increase in the average selling price of copra-based and palm oil-based products. By-products from our manufacture of crude coconut oil, such as copra pellets, are sold to the animal feeds industry in overseas markets. The commodity segment s profit also came in higher at Rp51 billion (+204%) versus Rp17 billion in The Group has three copra crushing plants, located at Bitung in North Sulawesi; Moutong in Central Sulawesi and Tobelo, on the island of Halmahera in North Maluku province with a combined production capacity of 270,000 tonnes a year. OUTLOOK 2009 Given the uncertainties in the outlook for the global commodity market, we will retain our strategy, which is to secure back-to-back contracts from both our suppliers and customers to shelter us from price volatility whilst giving us a favourable margin. Our key initiatives include increasing the capacity utilisation of our copra crushing plants; explore new export opportunities by increasing our understanding of potential markets; and increase the level of marketing in those markets. INDOFOOD AGRI RESOURCES LTD. ANNUAL REPORT