Indofood hit by currency devaluation

- Last updated on GMT

Related tags: Currency

Indofood, Indonesia's biggest food company, has reported 2004
profits severely hit by the devaluation of the rupiah, but remains
hopeful of an upturn in 2005 following efforts to reduce its
exposure to exchange rates and the spin off of one of its
subsidiaries, writes Chris Jones.

The company said that net profits were down 37 per cent on the year before at IDR378.1 billion, mainly due to a IDR296.9 billion hit from exchange rate movements. The rupiah depreciated by 8.9 per cent against the US dollar during the year.

The problem for Indofood is that it has substantial foreign debts - $317 million at the end of December 2004 - on which it has to pay interest in dollars, making it particularly affected by the devaluation.

But the company said that it was continuing to look at ways of refinancing its debt in order to minimise its exposure to foreign exchange rates, adding that it had already bought back $85.2 million of its $280 million 10.4 per cent Eurobond issue and redeemed in full a $30 million, 10.1 per cent issue.

This will go some way towards improving the company's finances in 2005, but trading conditions are likely to remain tough, as they were in 2004. Revenues for 2004 were flat at IDR17.9 trillion, largely due to increasing competition in its core markets.

Noodles, flour and edible oils & fats nonetheless remained the principal drivers of sales growth at Indofood, contributing IDR15.3 trillion or 85 per cent of its sales. Noodles volumes rose slightly during the year (from 9.8 billion packs to 9.9 billion) while flour volumes rose 8 per cent to 2.4 million tons. Branded cooking oils sales volumes grew 7 per cent to 310,000 tons.

The group said it had also significantly reduced its presence in the market for low-margin crude palm oil, with volumes in 2004 of 243,600 tons compared to 873,100 tons in 2003.

With the exception of its baby foods division, all of Indofood's other smaller operating divisions, including snack foods, biscuits, ingredients and packaging, posted year-on-year sales volume growth ranging from 3 to 8 per cent, the company said.

"Looking at 2005 as another challenging and highly competitive year, the new management continues its initiatives to defend the company's market leadership, and to take greater advantage of its economies of scale,"​ Indofood said in a statement.

With this in mind, it announced a number of initiatives for 2005 designed to strengthen the company's performance, including the planned spin-off and IPO of Bogasari, its wheat flour division, which is expected to be completed in the second or third quarter of the year.

Bogasari is the largest flour miller in Indonesia and operates the largest flour facilities in the world, according to the company, with two flour mills (in Jakarta and Surabaya) producing up to 3.6 million tons a year.

The division also includes a pasta manufacturing operation in Jakarta, a flour bag packaging operation in Citeureup, West Java with an annual capacities of over 100 million flour bags, and some maritime assets.

Most of the wheat flour produced by Bogasari is used for the production of Indofood's noodles and baked goods, with the balance being sold primarily to biscuits and snack producers and for household use, selling under the Segitiga Biru, Cakra Kembar and Kunci Biru brands.

The recent deregulation of the Indonesian flour industry has enabled Bogasari to move beyond the simple role of milling towards producing, marketing and distributing its own brands, increasing its revenues substantially. As a result, the spin off of the division into a separate company makes perfect sense, not least because the resulting company will have a full order book from the outset, as it continues to supply all of the flour requirements of Indofood.

Related topics: Business, East Asia, China

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