R.E.A. HOLDINGS PLC - ANNUAL REPORT 2012 Secretary and registered office R.E.A. Services Limited First Floor 32-36 Great Portland Street London W1W 8QX Website www.rea.co.uk Registered number 00671099 (England and Wales) Contents Officers and professional advisers 2 Maps 3 Summary of results 4 Key statistics 5 Chairman’s statement 7 Review of the group 16 Directors 59 Directors’ report 60 Corporate governance 67 Directors’ remuneration report 74 Directors’ responsibilities 79 Directors’ confirmation 80 Auditor’s report (group) 81 Consolidated income statement 83 Consolidated balance sheet 84 Consolidated statement of comprehensive income 85 Consolidated statement of changes in equity 85 Consolidated cash flow statement 86 Accounting policies (group) 87 Notes to the consolidated financial statements 94 Auditor’s report (company) 122 Company balance sheet 124 Movement in total shareholders’ funds 125 Accounting policies (company) 126 Notes to the company financial statements 127 Notice of annual general meeting 134 1 Officers and professional advisers Directors Solicitors R M Robinow Ashurst LLP J C Oakley Broadwalk House M A Parry 5 Appold Street D J Blackett London EC2A 2HA I Chia D H R Killick Auditor Deloitte LLP Secretary and registered office 2 New Street Square R.E.A. Services Limited London EC4A 3BZ First Floor 32-36 Great Portland Street Registrars and transfer office London W1W 8QX Capita Registrars The Registry Stockbrokers 34 Beckenham Road Mirabaud Securities LLP Beckenham 33 Grosvenor Place Kent BR3 4TU London SW1X 7HY 2 Maps as at 31 December 2012 EAST TabangTabangg z KKALIMANTANALIMANTTANAN z K MuaraMuara AncalongAncalong e d d S a e n n er y g en iv i S tekan R u K r R e M p iv M e a l r a R i v e r z r BontangBontang z KKembangembang JJanggutanggut B e l a y a n R M iv ah e ak r am R iv e M r ah akam River z KKotaota BangunBangun TTenggarTenggarongenggarongz W SamarindaSamarindaW BBalikpapanalikpapanapann MAKASSARMAKASSAR STRAITSTRAIT 0 10 20 30 40 50 kkmm M methane capturecapture plant PHILIPPINES oil mill stoneone quarryquar W MALAYSIAMALAAYYSIA W transhipmenttranshipment terminal SingSinSingaporeingapore z SamarindaSamarinamarinda Q CDM PT Cipta DaviaDavia Mandiri KKalimantanalimantann Q KKSKKS PT Kartanegara KumalasaktiKumalasakti SumatraSumatra JakJakartaarta Q KMS PT Kutai Mitra Sejahtera INDONESIA Q PBJ PT Putra BonganBongan Jaya Q PBJ2 PT PersadaPersada Bangun JayaJa ay JavaJava Q REAK PT REA KaltimKaltim Plantations Q SYB PT Sasana YudhaYudha Bhakti 3 Summary of results for the year ended 31 December 2012 2012 2011 Change $’000 $’000 % Revenue 124,600 147,758 - 16 Earnings before interest, tax, depreciation, amortisation and biological gain 1 38,083 70,818 - 46 Profit before tax 30,558 64,173 - 52 Profit for the year 17,703 45,614 - 61 Profit attributable to ordinary shareholders 11,342 40,453 - 72 Cash generated by operations 2 55,110 59,854 - 8 Earnings per ordinary share (diluted) in US cents 33.9 121.0 - 72 Dividend per ordinary share in pence 3 7.0 6.5 + 8 Average exchange rates 2012 2011 2010 2009 2008 Indonesian rupiah to US dollar 9,392 8,790 9,078 10,356 9,757 US dollar to pound sterling 1.59 1.61 1.55 1.56 1.84 1. See note 5 to consolidated financial statements 2. See note 36 to consolidated financial statements 3. Paid in respect of the year 4 Key statistics for the year ended 31 December 2012 20121 20111 2010 2009 2008 Allocated area - Hectares Mature oil palm 26,688 25,415 21,984 18,736 16,487 Immature oil palm (prior years) 2,051 3,318 8,850 8,171 9,032 Oil palm development (current year) 8,055 8,351 1,249 4,083 2,781 36,794 37,084 32,083 30,990 28,300 Reserve area 2 65,391 60,614 62,680 83,828 86,541 Total 102,185 97,698 94,763 114,818 114,841 Production - Tonnes Oil palm fresh fruit bunch crop - group 597,722 607,335 518,742 490,178 450,906 Oil palm fresh fruit bunch crop - external 64,014 34,146 20,089 13,248 6,460 661,736 641,481 538,831 503,426 457,366 Crude palm oil 151,516 147,455 127,256 118,357 105,597 Palm kernel 30,734 28,822 24,614 23,740 20,846 Total palm products 182,250 176,277 151,870 142,097 126,443 Oil extraction rate 22.9% 23.0% 23.6% 23.5% 23.1% Kernel extraction rate 4.6% 4.5% 4.6% 4.7% 4.6% Yields - Tonnes per mature hectare Fresh fruit bunches 22.4 23.9 23.6 26.2 27.3 Crude palm oil 5.2 5.5 5.6 6.2 6.3 Palm kernel 1.0 1.1 1.1 1.2 1.2 Total palm products 6.2 6.6 6.7 7.4 7.5 1. Before implementation of proposed exchange of land areas subject to overlapping mineral rights. 2. Includes conservation areas, roads and other infrastructure and areas available for planting and under negotiation. For the reasons stated on page 28 of the “Review of the group” section of this annual report, planned oil palm development is no longer disclosed separately but is included within the reserve area. 5 Crude palm oil monthly average price 1400 1200 1000 800 US $ / tonne 600 400 200 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Share performance graph 200 REA Ordinary FT All Share Index 100 0 2008 2009 2010 2011 2012 6 Chairman’s statement Introduction Revenue for 2012 at $124.6 million was less than in 2011 ($147.8 million) with the reduction reflecting lower The “Review of the group” section of this annual report revenue from both the agricultural operations ($122.1 gives detailed information intended to assist shareholders million against $129.5 million) and the coal operations in understanding the group's business and strategic ($2.5 million against $18.2 million). In the agricultural objectives. Because the review is designed to provide a operations, this was the result of the trading factors reasonably complete and self-contained description of referred to above while, in the coal operations, it was the the group, it does, in many places, repeat what has been direct consequence of the suspension of the coal trading said in the reviews of the group contained in previous activities. annual reports. This “Chairman's statement” endeavours to be less repetitive and to provide a synopsis of the more Excluding movements on agricultural inventory, cost of significant matters noted in the review, with particular sales attributable to the agricultural operations amounted emphasis on developments that occurred during 2012 or to $59.5 million against $51.3 million. The increase are in prospect. reflected continuing cost inflation and cropping on a larger area. Under normal circumstances, it could have Results been expected that the increased cost of sales would have been offset by increased crop volumes but the Group profit before tax for 2012 at $30.6 million was combination of weather factors and village issues resulted some 52 per cent lower than the $64.2 million reported in the 2012 crop falling significantly short of budget and, for 2011. with most components of cost of sales being fixed costs, there was no commensurate reduction in cost of sales. In The significant fall in profits as compared with 2012 the coal operation, cost of sales reduced from the prior reflected the weather impact on crops in the first half and year $16.7 million to $4.0 million in line with the reduction the effect of lower CPO and CPKO prices during the year, in trading activity. combined with what will hopefully prove to be non- recurring losses arising from the decisions taken in IFRS fair value adjustments, aggregating $0.3 million in relation to the coal operations and from the village issues 2012, were significantly below the aggregate described under “Community relations” below. The adjustments of $11.4 million reported in the preceding following table provides estimates of the effect on profit year. The net gain from changes in the fair value of before taxation as respects each of the items concerned: biological assets ($6.0 million against $7.4 million in 2011) reflected the further development of the group’s $’m Agricultural operations plantations while the loss arising from changes in the fair Trading items: value of agricultural produce inventory ($5.7 million Value impact of lower prices on crop harvested (12.6) against a profit of $4.0 million in 2011) was the product Value impact of reduced crop due to weather (5.6) of a small reduction in inventory volume over 2012 and Village disruptions: the fall in CPO and CPKO prices during the year Value impact of reduced crop (5.7) exacerbated by the need to allow for a discount on the Value impact of reduced prices due to high FFA oil (6.6) closing inventory to reflect the high FFA content of that inventory. Coal operations Losses (4.1) Administrative expenses for 2012 amounted to $18.9 Provision against concessions (3.0) million against $17.0 million in 2011. The increase was in (37.6) 7 Chairman’s statement continued part the result of inflation, but also reflected costs of 64,014 tonnes of FFB from smallholders and other third management transition, costs incurred in connection with parties (2011: 34,146 tonnes). the resolution of village issues and a further provision of $1.0 million for additional funding of the group’s UK Rainfall across the estates averaged 3,241 mm for 2012, pension scheme following a recent triennial actuarial similar to the level of 3,414 mm for the previous year.